Portfolio Update: Adding to My Best Ideas (February 07, 2016)

by FI Fighter on February 8, 2017

in Precious Metals Updates

When it comes to gold mining stocks, in a universe comprised of so many different companies, quite honestly, there are really only a few ones that check off most of the boxes… You can forget about finding the “perfect gold stock” because, well, it probably doesn’t exist…

Having said that, a name that I have been following for awhile now is Orca Gold (ORG.V/CANWF). Orca Gold is one company that I feel has the ingredients in place to satisfy most of the things that I look for in a gold stock.

So, most recently, I added 15,500 shares of CANWF @ $0.3261/share (~C$0.43/share).

I now own a total of 100,000 shares of Orca Gold (ORG.V + CANWF).

What makes the Orca Gold story so compelling?

Experienced and Proven Management Team

Orca Gold is backed by an experienced and proven management team that has “been there and done that” before…

For anyone not familiar with the Orca Gold story, the same management team in charge now (CEO Rick Clark, President Hugh Stuart, and COO Kevin Ross) previously ran Red Back Mining, which owned and developed the Tasiast mine, located in Mauritania (West Africa).

From Orca Gold.

The former Red Back management team was instrumental in helping navigate Tasiast all the way through to the finish line — Discovery, development, and sale of the asset to Kinross Gold for $7.1 billion USD in 2010.

With Orca Gold, management is trying to replicate its magic again, only this time in Sudan (Northern Africa).

Prospective Gold Belt

The main allure for both investors and management teams involved in early-stage exploration stories is the allure of making the next major discovery. Oftentimes, this can still be accomplished for prospectors searching across regions that have already been well explored and poked around for decades (e.g. Abitibi Greenstone Belt located in Ontario, Carlin Trend in Nevada), in places that have only in recent times started to emerge on the radar (e.g. Birimian Greenstone Belt in West Africa, Guiana Shield in South America), and perhaps even more exciting, venturing far off into distant lands that have really yet to see much (if any) modern day exploration…

A small portion (Burkina Faso) of the Birimian Greenstone Belt, shown below, illustrates just how well endowed with gold mineralization this prospective region is.

From Savary Gold.

The above graphic clearly explains why so many junior start-ups have staked claims and setup shop in places like: Burkina Faso, Côte d’Ivoire, Ghana, Mali, Senegal, etc.

After all, “If you want to find gold, it’s probably not a bad idea to search where others have found it before (in abundance)…

In the case of Orca Gold, we are going with the latter scenario here (new terrain), and embarking out to the Arabian-Nubian Shield

From Aton Resources.

So as you can see above (Orca is even mentioned on here!), yes, there has been a good degree of exploration/development work done across the Arabian-Nubian Shield (it’s definitely NOT virgin grounds), and in fact, there are even companies such as Cetamin (CEY.L) out here, who own and operate the Sukari mine in Egypt that has made it all the way through to commercial production… Plus, we’re talking about being near the vicinity of Egypt here… a region well known for its pyramids and pharaohs, which have always kind of been synonymous (associated) with gold throughout history…

Despite it strong ties and links to gold, the Nubian Shield (particularly in Northern and East Africa) has been largely underexplored using modern day mining techniques (however, there is a ton of artisanal mining activity that takes place in countries such as Sudan), so it’s probably safe to say that there is still a ton of gold out there waiting to be discovered…

Large Land Package

So far, we’ve got the right management team in place and we’re looking for gold in the right neighborhood… The next thing we need is a ton of land in order to enhance our odds of finding something good…

From Orca Gold.

The Block 14 concession Orca has picked up spans 3,750 km2, and already hosts discoveries (Galat Sufar South in 2012, Wadi Doum in 2014), and a priority target (Liseiwi). The map above shows that Orca still has a bunch of prospects that need to be drilled, and the red dots (artisanal workings) are leading the way to all this gold…

Because the land package is so large and prospective, the best may still be yet to come…

Viable Project with Robust Economics

As investors/speculators, we ALWAYS want to protect our downside as best we can, while still exposing ourselves to a ton of upside potential with our investments… When it comes to early-stage exploration, I don’t care how good the geology and science are perceived to be (theory), the proof will always lie in the drill bit (reality)…

So, sometimes it’s a trade off we have to make — If we get into a story too early on and the drill fires up DUDS, well, good luck, because the stock will probably tank immediately following the press release highlighting the disappointing assay results… On the other hand, if we wait too long to get into a story and it’s already been too well drilled out and proven, of course the stock won’t be trading at a steep discount any longer… Well, that’s how things usually work in the marketplace, but sometimes certain stories can fly under the radar for longer than expected…

In the case of Orca Gold, any investor just getting interested in the story now, will be walking into a scenario where the Block 14 project already has a published Preliminary Economic Assessment (PEA) attached to it, and the company is working towards releasing a Pre-Fesibility Study (PFS) later in Q1 of this year…

From Orca Gold.

orca-pea

The initial PEA shows an annual production of 73,000 oz/year, over a Life of Mine (LOM) of 16 years… Currently, the annual production is being held back due to water throughput being constrained, limiting operations to just 1.8 Mtpa (conservative estimate used for the PEA), which the company is trying to increase in the PFS… If successful, the LOM should be reduced to ~10 years, which should help bump output to over ~100,000 oz/year, and greatly improve the project economics (shown below).

From Orca Gold.

orca-sensitivity

At $1,200/oz gold, the Block 14 PEA shows an after-tax NPV (7%) of $128 million, and an after-tax IRR of 22%, which are already economical and robust… Still, we should expect to see some improvement in these number when the PFS is completed.

Further, Block 14 is well drilled out, already hosting over 2 million ounces of total indicated + inferred gold resource.

From Orca Gold.

orca-resource

Most recently, Orca released a mineral resource update.

With such a large land concession and lots of prospects still to be drill tested, I’m optimistic that Orca will be able to continue growing the mineral resource over time.

As it stands today, the current combined gold ounces found in Galat Safar South and Wadi Doum should already be sufficient enough to put into commercial production.

From a risk vs. reward perspective, you’ve got to like that…

Attractive Valuation

But no matter how “great” a company is, ultimately, it all comes down to price. How does the popular saying go again?

Price is what you pay, value is what you get.

From Orca Gold.

From the most recent Corporate Presentation, we can see that the company current has C$9.5 million in the bank… At the time of writing, shares of ORG.V were trading at C$0.42/share. Plugging in the 113M shares, we arrive at a market cap of ~C$48 million.

Oh, let’s just keep things simple (like we always do here) and just round it off to C$50 million. This would give us an enterprise value of C$40.5 million

Not too bad right?

Certainly, I’ve seen far worse in the junior mining space… In some crazy cases, you’ll have gold companies with no NI-43-101 defined resource in place trading at higher market caps/enterprise values than Orca currently is…

It is what it is…

From Orca Gold.

With a PFS due just around the corner, you could even argue that Orca still hasn’t received a proper re-rating for all the progress that they have made to date…

I know it’s comparing apples vs. oranges, but even within my own portfolio, I own shares of a silver exploration company, Defiance Silver (DEF.V) that is trading at roughly the same valuation as Orca… and they don’t even have a PEA out, let alone a PFS that’s just about near completed…

Just trying to put things in perspective here…

 

Anyway, I think shares of Orca Gold are currently very cheap, so here’s another box that gets checked off…

Tight Share Structure

Another important consideration to take into account is a company’s share structure… Not all mining stocks are created equal, and you really want to be careful getting into a stock that has way too many options/warrants issued out… Especially if they are near/in-the-money, as this will certainly create significant overhang on the stock and prevent it from blasting off into outer space…

Here’s Orca’s current share structure.

Orca has about ~114 million shares issued and outstanding, and ~124 million shares fully diluted…

At this stage of the game, I think that’s actually pretty damn good! Yes, the majority of options are currently in-the-money, but there’s less than ~11 million of them in total… That’s really not that much… Plus, with ~C$9.5 million of cash, the company should easily have enough funds to get through the PFS, and maybe even through most (if not all) of the DFS… Well, probably not, since I’m assuming a good portion of those funds will be used for further exploration and drilling… Still, Orca is plenty cash strong right now, and that’s always a good place to be…

If you want an example of some pretty bad dilution, look no further than to IDM Mining (IDM.V), another junior gold exploration/development stage story.

From IDM Mining.

Damn, ~112 million warrants… And about ~410 million shares fully diluted! Yikes!

That’s a lot of overhang…

I have no agenda or reason for ripping IDM Mining, and that’s NOT at all what I’m trying to do here with the mention above… I’m just making a basic comparison to a similar peer in the junior gold space, nothing more… and that’s something everyone needs to do as they perform their own due diligence and research into these stocks… So, I’m NOT hatin’, I’m just trying to tell it like it is… And when it comes to share structure, Orca Gold has a pretty tight and impressive one!

That’s a major positive for Orca there…

As far as future cap raises go, we should be pretty safe in 2017… That is, unless the company wants to get super aggressive and fast-track the projects and drilling… Still, the key takeaway here is that Orca isn’t strapped for cash, so investors should be safe from a highly diluted (desperate) cap raise that is always most damaging for “value creation”…

Strong Shareholder Support

So, who are the main players with the DEEP POCKETS who are backing this company up and writing the stiff checks?

From Orca Gold.

Zebra Holdings (Lukas Lundin), Ross Beaty, and Management & Board currently make up the Top 3 of Orca shareholders…

So, you’ve got mining legends and billionaires Lukas Lundin and Ross Beaty supporting the Orca story… and as mentioned at the beginning of this article, an experienced management team that has already proven to be successful before in a past (similar) endeavor… In this line of business, you really can’t ask for much more (or do any better) than that… And with the track record and success these guys all have of developing and later selling off companies/assets at market premiums, you’ve really got to like the odds that lightning will indeed strike again…

My good buddy, Nick (MiningBookGuy) seems to agree with me that having the right Major Shareholders in place is kind of a BIG (MASSIVE) deal!

The last time Lukas Lundin and Ross Beaty got tangled up in the same venture (Kaminak Gold; KAM.V), the company later went on to get acquired by Goldcorp (GG) for $520 million.

 

C’mon guys, let’s make it happen again for Orca!

 

Oh, and what do you know, now it looks like Kinross Gold (KGC) has entered into the fray as a Major Shareholder! The following press release made last week, announced that Orca has acquired some exploration assets from Kinross off in Côte d’Ivoire.

With early-stage/development plays in the junior mining space, we as investors/speculators are ALWAYS looking for companies/projects that have a good chance of being bought out by a major/mid-tier producer… With Kinross now in the mix, I can’t see how this is anything but positive for the Orca story moving forward…

Geographical Diversification

With mining, we are dealing with fixed assets that are permanently affixed to the earth… In other words, there’s no chance of moving a gold deposit elsewhere, so things such as geopolitical risks must be taken into careful consideration… Whenever possible, it’s always nice to get into companies that have multiple assets spread across many countries/jurisdictions, in case anything too crazy happens in one specific place…

In the case of Orca Gold, prior to the just announced acquisition of exploration projects from Kinross Gold, the company only had ONE project, located in Sudan.

But with this most recent deal, we are learning the following…

From Orca Gold.

With the signing of the SPA, Orca intends to expand its exploration programmes into what is one of the most prospective but least explored countries in Africa, complementing its flagship Block 14 Gold Project in the Sudan. 

Upon the closing of the Acquisition, Orca will:

  • issue 10,633,169 common shares in the capital of Orca to Kinross, which will be subject to a statutory hold period of four months, representing 8.6% of the post-Acquisition share capital of Orca;
  • grant to Kinross a right to maintain its proportionate equity interest in the Company through participation in Orca’s future equity financings, provided that Kinross maintains a minimum equity interest in the Company of at least 5%;
  • grant to Kinross a 2-year right of first refusal on any subsequent disposal of the Exploration Assets, in whole or in part, by Orca;
  • grant to Kinross a right of first offer on the Exploration Assets to take effect upon the expiry of the aforementioned 2-year right of first refusal; and
  • grant to Kinross a 2% net smelter return royalty on any product mined and sold from the Exploration Assets.

The acquisition by the Company of these highly prospective licences and applications from Kinross complements the applications already made by Orca in Côte d’Ivoire for licences covering 789km2. The combination of Kinross’s licences and applications with Orca’s licence applications represents a strategic exploration portfolio in Côte d’Ivoire (See Figure 1 below).

Commenting on the transaction, Rick Clark, CEO and Director of Orca, said, “The addition of the Kinross Ivorian exploration assets to our portfolio not only complements Orca’s own licence applications in this highly prospective jurisdiction, but also helps the Company realize shareholder value through geographic and geopolitical diversification. We welcome Kinross as a significant shareholder of Orca going forward. Orca’s management has enjoyed a long business relationship with Kinross and we look forward to working with Kinross to close the Acquisition and fast track an aggressive exploration program in Côte d’Ivoire.

 

Wow, once this deal closes, Orca will have a 1-2 punch of both Sudan AND Côte d’Ivoire!

I ain’t no geologist (and never will pretend to be), but I do know that Côte d’Ivoire is a prospective country for gold!

From Orca Gold.

So, not only has the upside potential made possible through early-stage exploration increased significantly with the addition of some new assets, but Orca has also managed to diversify itself into a new country, Côte d’Ivoire, and help insulate shareholders from just putting all their eggs into one basket alone…

I gotta say, I’m pretty excited for the company to finalize the transaction and hopefully launch a drill campaign on some of these Ivory Coast projects later this year!

Red Flags

If you’ve made it this far, you might be thinking, “Geez, FI Fighter, you sound like a total Orca Gold homer… There must be something wrong with the story that you’re not telling us…

As is ALWAYS the case with any investment, yup, there ain’t no such thing as a perfect story, and Orca Gold is no exception!

For realz, if Orca Gold was the “perfect gold company”, well, for sure it wouldn’t be trading at such an attractive valuation (~C$50 million market cap)… and thus it would no longer be “perfect”, or an attractive buy…

So, what are some of the red flags with Orca Gold?

Straight off the top, the first one that comes to my mind is geopolitical risks…

Sudan.

Now, that’s a pretty scary place where not many investors dare to go…

Up until most recently, the US had trade and financial sanctions in place…

From Al Jazeera.

The United States has announced the end of a 20-year economic embargo on Sudan, lifting trade and financial sanctions in an effort to foster ties with the Sudanese government.

The announcement made by outgoing President Barack Obama’s administration on Friday comes after an executive order to permanently repeal a range of sanctions as a result of Sudan’s efforts to improve security in the region.

For the first time in two decades, Sudan will be able to receive imported goods and services from the US, as authorised by the US Department of the Treasury.

The lift will also release frozen Sudanese property and assets held in the US, and permits the trade with the oil and gas industry in Sudan.

 

That’s a positive development, but like most things, it’ll take a bit of time before the majority of investors can open their minds up to the possibility of investing in a place like Sudan…

 

The next potential red flag for Orca that I’m monitoring closely is infrastructure (particularly access to water), since the Block 14 project is located to the north of the capital of Khartoum, way out in the desert and in the middle of nowhere… ~200 km away from the Nile River.

As I mentioned earlier, the PEA was constrained to using 1.8 Mtpa (due to conservative water throughput estimates used), which is right now capping the annual gold production at 73,000 oz/year (over LOM).

In 2014, a single borehole drilled intersected water bearing sandstones.

From Orca Gold.

The company is currently drilling bore holes to confirm commercial flow rates and more will be known once the PFS is released… At this stage, it’s not so much that the total volume of water needed to sustain Block 14 through its LOM operations is the concern, but it’s more to do with whether or not the company can increase throughput from 1.8 Mtpa to a more desired 2.3-2.4 Mtpa.

Outside of jurisdiction risk (Sudan) and water throughput questions (that should be answered with the PFS), I don’t see any other real obvious red flags with Orca Gold that would be a “showstopper”… Of course, if I discover anything in the future, I’ll be sure to report back with an update!

With any investment, if we dig deep enough, I’m sure we will unravel many things (even if they are subtle) that we wish were improved…

Anyway, that’s all that I’ve got for now…

Summary

It’s really not easy trying to survey through the vast universe of mining stocks, attempting to pick out the ones that we think “make the cut” and belong in our portfolio. With Orca Gold, it’s certainly not a perfect gold company by any means, but it’s got many of the things that I look for and it checks off most of the boxes:

  • Experienced and proven management team (formerly with Red Back Mining who hit a homerun for shareholders, selling the Tasiast mine to Kinross for $7.1 billion USD).
  • Exploring for gold in a very prospective gold belt (Arabian-Nubian Shield).
  • Large 3,750 km2 land package (lots of exploration potential) in Sudan.
  • Viable project (Block 14) with robust economics. At $1,200/oz gold, the Block 14 PEA shows an after-tax NPV (7%) of $128 million, and an after-tax IRR of 22%. Over 2 million ounces of gold in total resource (indicated + inferred) and growing…
  • Attractive valuation, ~C$50 million market cap, ~C$40.5 million enterprise value. Well funded with C$9.5 million cash.
  • Tight share structure, with ~114 million shares issued and outstanding and ~124 million shares fully diluted.
  • Strong Major Shareholder backing, with support from Zebra Holdings (Lukas Lundin), Ross Beaty, and Kinross Gold.
  • Geographical diversification into Sudan AND Côte d’Ivoire.
  • Further exploration upside potential with recently acquired new exploration projects in Côte d’Ivoire.

 

So, there you have it… As is typical, I like to look at things from a risk vs. reward perspective…

 

In the case of Orca Gold, I think the pros greatly outnumber the cons, which is why I’m a strong buyer here and will probably look to add to my position in the coming months…

 

Full Disclosure: I own 100,000 shares of Orca Gold (ORG.V and CANWF). I never give out any kind of investment advice, ever! I am only sharing with you what I am doing with my own money. Please do your own research and due diligence as ALWAYS before making any kind of investment decision!

 

Fight On!

{ 14 comments… read them below or add one }

1 Roadmap2RetireNo Gravatar February 8, 2017 at 5:16 am

You make a very strong case for Orca. Its been on my reading list and never got around to it. Gotta pay attention to companies, esp when Ross Beaty is an investor 🙂

Thanks for sharing and best wishes
R2R

Reply

2 FI FighterNo Gravatar February 9, 2017 at 5:11 am

Sabeel,

Yup, Orca is one of my favorites in the gold space, and certainly the Ross Beaty factor only further supports/validates the bullish stance.

If Ross Beaty is buying, I’m at the very least listening…

Cheers!

Reply

3 Dividends 4 FutureNo Gravatar February 8, 2017 at 5:31 am

Very compelling case for Orca, I like mining stocks and might have to put a little bit on the “high risk, don’t look, risk of heart attack” portfolio”

Reply

4 FI FighterNo Gravatar February 9, 2017 at 5:09 am

D4F,

Yup, mining stocks are high risk, so it might be a good idea to set reasonable expectations upfront… The volatility will be off the charts.

Happy hunting!

Reply

5 SriniNo Gravatar February 8, 2017 at 8:12 am

Jay,
Orca & SSP has been the only additions for me in 2017 but in small qty’s compared to the qty i bought in 2016. I plan to ride this out through the entire bull cycle.

I bought another small lot today @0.44 after seeing ur post. Thanks for the nudge 🙂

Thanks
Srini

Reply

6 FI FighterNo Gravatar February 9, 2017 at 5:08 am

Srini,

Orca and Sandspring are two of my favorite plays in the gold sector! Glad to have you aboard both of those stocks. I certainly followed your lead into Alexco Resource last year 🙂

Hope your portfolio continues to shine in 2017!

All the best!

Reply

7 TTNo Gravatar February 8, 2017 at 11:13 am

Thanks for sharing your thoughts! I was little worried because you had a little break in writing (at least for mining stocks) 🙂

I know that your not giving financial advice but what would you do if you had a similar situation. Im little short on cash so if I wanted to invest I need to sell something.

Im thinking of selling Aton resources because I’ve been dissapointed in their latest financings, they have a legal proceedings on going and their resource estimates arent that great. Its hard to think any positives right now. Do you think that its most likely a good time to sell or is the stock so depressed that it makes it bad time to sell?

I have about 3% of my portfolio invested in Orca and would like to double it. Aton (~3% also) is the only company that I’m thinking off selling. Would you do the swap for todays prices? 🙂

Appreciate any thoughts!

Reply

8 FI FighterNo Gravatar February 9, 2017 at 4:58 am

TT,

Aton Resources is still pretty early stage, although I would completely agree that the most recent financings left a lot to be desired (full 5 year warrants, OUCH!). Still, at the current market cap, I would tend to believe that the upside potential far outweighs the risk… I could see shares languishing around C$0.06 for awhile, until the next set of drill results, and/or the spot price of gold shooting up.

Currently, I own about 3x more Orca than Aton, and I’m comfortable with that split… If anything, I’d be looking to buy more Orca right now (I’m bullish on the new exploration projects), but I wouldn’t be tempted to sell Aton at these low prices… The initial resource at Hamama West is just a starting point, and although it wasn’t especially impressive, Aton has got a large land package with district potential, so I’m hoping eventually they can get to a multi million oz Au eq resource, which is hopefully also economical… Oh, and hitting some massive sulphides would be pretty cool too! 🙂

Cheers!

Reply

9 ScottNo Gravatar February 8, 2017 at 11:49 am

Jay,

Nice write up. Thanks for sharing!

On a seperate note, what do you think of the dilution fund raising by Galaxy Resources yesterday?

Reply

10 FI FighterNo Gravatar February 9, 2017 at 5:05 am

Scott,

Thanks! In terms of Galaxy Resources, the cap raise was necessary for the development of their flagship Sal de Vida brine deposit in Argentina… When it comes to brines, I’m personally not the biggest fan since I realize how long they take to bring to market, and the amount of expertise it takes to get it done right… I’ll probably be long out of the lithium trade before this project is even 1/2 through construction…

But they raised at a decent price, when the stock was bullish and sentiment favorable… So, good for Galaxy and I wish them and their shareholders the best.

Cheers!

Reply

11 TTNo Gravatar February 9, 2017 at 12:34 am

My cash problem got solved overnight as my third largest holding is being acquired by Nokia 😀 but still, I would like to hear your thoughts about Aton resources from risk and reward perspective 🙂

Reply

12 FI FighterNo Gravatar February 9, 2017 at 5:02 am

TT,

That’s awesome! Congrats on the big win there!

Aton Resources is one of my favorite spec (high risk) junior gold stocks atm… Market cap is trading at peanuts and they’ve certainly got a large and prospective land package. Expenses should be quite low operating out in Egypt as well, so hopefully the new management team in place will put the new funds to good use and manage it wisely, which has been the company’s biggest problem in the past.

We’ll see where things go from here… I’m excited for the 2017 drill program at both Hamama and Abu Marawat.

Take care!

Reply

13 ErikNo Gravatar February 14, 2017 at 2:03 pm

Somebody needs to tell Fidelity and the Office of Foreign Assets Control that these sanctions have been lifted! Unable to purchase this stock.

Reply

14 FI FighterNo Gravatar February 14, 2017 at 4:21 pm

Erik,

Sorry to hear about that! Perhaps you can try another broker? A foreign global account works as well… I use Schwab Global personally.

Cheers!

Reply

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