ord: where are we?

I think all of the previous points are valid, re; progress. In a couple of earlier posts I mentioned that certain tasks needed to be completed in order to bring a project or indeed any corporate activity to delivery. This obviously still holds true as it’s the fact of the matter. However it’s also true that we should have clarity around the current state of these tasks. Without clarity, we are forced to guess when things will be delivered. It also doesn’t help credibility or share price for that matter. In no way am I saying we are heading down this path but there are some developments which are surfacing that I am not entirely comfortable with. Here is a summary:

ORD is in an unfortunate position of having close to zero capital in terms of an exploration company. As at Q3 end, the cashflow statement showed a net cash out flow of $329 000. Had it not been for exercise/issue of shares the outflow would have totalled $484 000 for the Qtr. This brought us to 2.5Mill as at Q3. Assuming the same rate of burn we’ll be looking at 2.1Mill (Q4) or at an estimate, 1.9 Mill as at the date of the release of the Q4 (Dec) cashflow statement. If we take this one step further (again assuming the same amount of burn) we’ll be looking at around $1.7Mill as at Q1 cashflow statement. The amount of cash we have will last us until year end, but it means burning at the current rate; and the current rate equates to doing nothing (slightly crude explanation i.e no drilling, no expenses above the current burn). This is a concern as we need funds to drill and explore. The reason why I say ORD is in this unfortunate position is because a lot of other explorers and juniors alike are fully funded. I can sight numerous local examples. Some minnows have tens of millions in cash. Funds are very important to ORD, as it provides for project advancement. It is the sole reason - in my opinion – why we are, where we are. Eg: SJ, if we had the money, we would have drilled earlier. Current contracting delays aside, if we had the money and the plan we could have drilled the area last year. Or even the year before. The company has held this asset since inception. I also talked about SJ in an earlier post and I believe there needs to be a cut-off decision made on its future as we cant just sit on it. It’s a terrible use of operating cash, and this also applies for the CF assets.

The cash position is something that management has always known about and hence they have set about trying to conserve cash whilst extracting value from existing assets. If they are capable of doing this, its an excellent strategy. This is the benefit of having multiple projects and opportunities on the run. An example of this in practice is using funds from GRAM JV approval to fund SJ drill. An example of this not in practice is the current situation. As you can see there is impact from GRAM-approval delays on SJ progress. There is also no mitigation as the drill has been costed at $1.5Mill. Going back to my cash position analysis; if we were to outlay the funds now it would put the company at risk.

And thus, the strategy has been to extract value rather than burn cash at bank.

Suplejack (SJ) and gold assets:

One thing is clear to me. Unless we do a capital raising this year, SJ is not going to get drilled. In recent talks with the company, a capital raising has been floated but it really is just an idea. The board have given little thought to when or the structure, indicating that it is not a priority. If it were to happen it would amount to 10-15% of the current outstanding capital. This is just my opinion, as its not on the boards radar at the moment.
Having talked about this with the company there is another option. ORD is in the final stages of announcing a new project. I don’t know the specifics, but it will be Asian based and it will comprise Asian based investors looking for corporate experience – enter ORD. We have the connections and skills to bring the project online. How the project will be acquired is still yet to be finalised but it will be consistent with the deals ORD has done in the past (ref: Caledon option). The only difference is that the gold asset will be producing at as estimated 12-24 months, thus giving ORD some prospect of earnings relatively soon. I say relative, with respect to ORDs SJ and WW gold projects.

Now, you may say that this is just another project ORD has acquired and like all other projects it carries the same issue – i.e how is it going to be funded etc. It’s a good question. One option that is available to the company is to bundle SJ, WW, and the new ‘asian’ asset into a separate entity. i.e a spin-off. The cornerstone investors would then have the opportunity to invest or fund the exploration campaign across the Australian assets. The bundled entity would be floated on the ASX and ORD would retain a shareholding. Again my opinion, but lets wait and see what comes of this. There have been numerous examples of this being done very successfully in recent years. A good example is TRF, which spun-out IFE (Iron Ore assets). IFE is going gang-busters at the moment at a time when the market is flooded with iron. If executed successfully a well run company/entity can succeed no matter what the operating environment looks like. I would definitely support a spin-off as it is consistent with the strategy. It is also in-line with a vision that ORD re-structure itself as a holding company, a view which is held by some large shareholders.

I am expecting a few decisions and announcements by Q1 (Pete on new Asian asset site in Feb, followed by technicians and geologist in the next month), and complete clarity on company position around June.

CF-GRAM:

I have completely written-off this asset, including the benefits of the JV approval. Something has to be done with it soon and I am expecting an announcement Q1-end. Its eating into valuable cash from upkeep and the company cannot afford to hold onto it. There are a couple of reasons why I believe a tough decision needs to be made:

1. Maintenance costs/upkeep for something that is sitting there – get rid of it, and current cash could probably last us until early 2013.

2. Evidence, with the change in leadership and government structure in China indicates that things are taking longer to get done. Over the long term the re-structure is expected to improve investment (external), but in the short-term we are seeing delays. This is not segregated to ORD – I’m seeing it in other Chinese backed companies (globally). This all equates to delay or further delay on JV approval.

3. $7.8Mill is not even in the same ball-park of a figure that would be required to delineate a JORC resource. The key question is, why do it? I know GRAM would be asking the same question, particularly in this environment.

With some business nous, ORD should be able to extract some value from it by terminating the agreement and on-selling it to an interested party.

LAOS:

The Yuqida resource will come in before Q1-end. If we are to believe my estimates previously provided we should see 300MT (total), or close to it.

I have again changed my estimates on IPO date. I hope I am off on this by I cant see it being done this year. There is just too much to finalise before this can be delivered, and as you can appreciate, an IPO is no small undertaking. A BFS will need to be completed and this piece of work will kick-off post Q1 or near to this date. In my experience BFS documents and study range between min. 4-12months. Its the end-state document, much like a business-case. This will need to be completed before IPO and should sufficient project economics/return. It should define an IRR based on a selection of inputs. This will help the IPO and market, better understand the projects size and potential. The key point is that it has to get done FIRST. Formalised funding, and offtakes will need to by signed post this milestone. At this stage we may MOUs.

The timing of the IPO is also significant to ORDs other activities. Consistent with the strategy the IPO would have realised enormous value for ORD via its retained shareholding (circa 10-15%). Part of it could have been sold to fund other projects but given the IPO delays this will not materialise. Additionally, I don’t believe ORD would sell part of the holding until SARCO had been bedded in. It would be a bad look on ORD’s part if it was part-sold as soon as the company came onto market. Also, ORD could possibly lose out on substantial value appreciation. Once SARCO begins production the SP should be much higher than the IPO price and hence it would be better to sell at this point. You can see how timing impacts on company progress, and the general theme that cash is pinning ORD down.

Caledon-option:

Like CF, I have written-off any value associated with it for similar reasons. In this environment it is going to be very hard to attract partner investors to exercise the option, and/or on-sell it. Additionally, ORD do not have time on their hands as GRAM will want exercise so we cant just hold it indefinitely. Again, I am expecting a decision on it before June this year.

ORD exercising the option itself is, in my opinion, not an option. Its too far-fetched for reasons previously documented.

With all this said, I am very happy with where we are at because I know the company is aware of the risks. The issue around clarity in terms of all their activities is something they are working on and I believe we will get successive announcements over the coming months (to June) that will help build confidence.