Despite the POG showing a lot of strength recently by pushing up against resistance, I think this correction might continue at least $30 lower. That would bring it back to the short term rising trend line drawn through the Jan, Feb and April lows and that keeps it trending up short and medium term. The main reason I think that it could correct to that trend line is that there has recently been a combination of physical buying by the Indians ahead of an unknown upcoming GST on gold to replace other taxes on gold. The total tax is now expected to be similar to before but the stocking up by jewelers will probably now lead to lower physical demand by them over the next few months. Also for now the spec buying ahead of the Comey testimony and other short term events may also be done and is now unwinding. That will likely be offset as usual by Chinese buying on the correction lower to provide support again.
Having said that, during the last couple of days, while gold has been correcting, the buyers in ORR appear to have stepped up a bit. Despite closing flat on Thursday, the stock was higher most of the day and that continued on Friday bucking the trend of most other gold stocks correcting with gold.
ORR didn't rally with the producers so has less reason to correct now but there is more to it than that. While a higher gold price is good for sentiment and longer term obviously very good for ORR, shorter term ORR is going to be better off with a flat or lower POG. A lower POG greatly increases the odds that we will move to at least 51%. A NPV of US$200M on the FS will make the decision ours and we get the extra 26% at a bargain price $US5mill upfront plus another $US10mill capped 2% net smelter royalty. That would be a big positive. ORR is already cash funded to pick up the extra 26% as well as funded to complete the full FS. As long as gold stays low, not only do we get to choose to move to 51% but if we get the 51%, then picking up the remaining 49% becomes a very realistic possibility - one the instos may be looking for? Obviously the lower the POG over the next 6-9 months as the JV ownership decisions are made, the lower the price ORR is likely to pay to pick up the last 49% if it comes to that.
So while a higher POG long term would be great for ORR, I would prefer to see it take a little longer and that might even help ORR's short term share price - if other investors agree with my point of view and it would certainly help with ORR's longer term upside through acquiring a larger share of the project at a low cost.
While a $US200 mill NPV might not sound impressive, first we need to translate that to AUD and that brings it up to $270mill. 51% of that is $135mill and if we move to 100% we would own the full $270mill NPV. The thing to remember with NPV is that it factors in 100% of negative upfront cash flow for capex but factors in steadily decreasing amounts of the positive cash flow from earnings. The project is likely to deliver over $1bill earnings on the PFS numbers but despite that, the NPV could be under $200mill due to the discount rate applied on future cash flows.
However when you look at producers, very few, if any, trade on their NPV. Many instead trade on PE ratios varying from around 9 for SBM, through 15 for RRL, 18 for NST, and 24 for EVN. NCM enjoys a ratio of an incredible 38 but that is in a league of its own.
The point is, a lower NPV will be good for us to increase our share of the project but it certainly does not cap the upside for the sp and the mc to say $A270mill on a US$200 mill outcome in the FS.
Using the PFS AIC of US$858 and $1250 POG, LOM ave production of 213koz and applying the full 30% tax rate, the project annual cash profit should be around A$80mill. A multiple of just 10 would see a mc at around $800 mill. A multiple of 15 would give a mc of $1.2bill. There would likely be further dilution to move to 100% but there would still be very good potential upside assuming just a flat POG at $1250 to move to an eventual mc around $1bill if we move to 100%.
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