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Oroco Resource Corp: Large Copper Optionality with Near-Term Development Drivers

DISCLAIMER: Any written content contained herein should be viewed strictly as observation, analysis & opinion and not in any way as investment advice. No compensation was received for this report. Visitors to this site are encouraged to conduct their own due diligence.

Oroco Resource Corp. (OCO) is a TSXV listed mineral exploration company with a large copper asset located in Mexico. Specifically, the 85.5%-owned Santo Tomas is a 7.57B lb (8.56B CuEq lb) copper porphyry project located in the center of 8,908 hectares of contiguous mineral concessions in Sinaloa State. A Preliminary Economic Assessment (PEA) is expected to be published next month in October. That said, ahead of the official PEA publication, we use an in-situ value of $0.03/CuEq lb to derive a pre-PEA valuation for Santo Tomas. Factoring minor corporate adjustments and given a marginal estimated value for the secondary Xochipala asset, our 1.0x in-situ derived NAV forms the basis for our 12-month target of C$1.45 per share. This represents upside of +107% from the most recent close. We note that near term milestones such as the publication of the PEA and a subsequent financing will further de-risk the project and prompt a valuation methodology refresh (DCF derived NAV), and with it a likely increased valuation multiple. Shares of Oroco Resources currently trade at 0.48x discount to our in-situ derived NAV.

The Santo Tomas property is located in the municipality of Choix, in the northern area of Sinaloa State, in Mexico. The total property comprises a total of 1,172.9 hectares of concessions in the western portion of the Sierra Madre mountain range. The property is easily accessed by way of paved highway, 160km from the Pacific Ocean port of Topolobampo.

Exploration on the Santo Tomas property dates back to the early 1900s by way of artisanal miners. Between the late 1960s-early 1970s, drilling was conducted over a strike length of 4.0km by ASARCO and Tormex-Penoles. A MRE was completed in 1993 by Exall Resources Ltd with test work a year later indicating 90% copper recovery rates using standard concentration methods (resulting in 28% copper concentrate). A further MRE was completed in 2011 by Thor Resources LLC. Along with the funding of $30M in expenditures and given much legal work and the acquisition of concessions from a private group and third parties, Oroco gradually increased its ownership in the project to the current 85.5% (the March 2020 acquisition of Altamura Resource Corp. essentially gave Oroco outright control of Santo Tomas). Today, the outstanding ownership balance is largely held by strategic partners. Oroco currently has option agreements in place to increase its ownership percentage even further.

As per recent exploration, between July 28, 2021 and continuing through March 28, 2023, Oroco completed 76 diamond drill holes totaling 48,481m of Phase 1, core drilling.

Note that seven of those holes (5,116m) were drilled for exploration purposes at the Brasiles prospect and have been excluded from the most recent mineral resource estimate (MRE). That said, the updated, NI-43-101 compliant MRE was announced on May 3, 2023. Highlighted by 487.3M tonnes of 0.36% copper equivalent (CuEq), the Indicated resource was all contained within an economic pit shell, containing an estimated 3.864B CuEq.

Oroco’s entire updated drill hole database (with MRE excluded holes) contains 166 new and legacy drill holes (RC and diamond drill holes) totaling 69,556m with lithological logging data and 29,992 copper assays. The MRE was a considerable upgrade to the historical resource as previously estimated in 2020. Moreover, the updated MRE confirmed the high potential of the project which remains open to the north and south. Further resource expansion will include conversion of the Inferred resource to an Indicated classification. That said, at 8.56B lbs, the global CuEq resource ranks among the largest deposits located in the Americas:

Though dating back to 1994, a Pre-Feasibility Study (PFS) was previously completed by Bateman Engineering out of Tuscon, Arizona. The PFS envisioned a 120,000 TPD operation producing up to 300M lbs of copper (plus quantities of gold and silver) per year via conventional, open-pit mining. Using that as a benchmark, we more conservatively model a theoretical LT 100,000 TPD operation ($1.50B initial capex) producing an average ~210,000 lbs of net copper annually (or ~220,000 lbs CuEq), over a 20 year LOM. With cash costs averaging an estimated ~$1.70/lb, we see a project generating an after-tax IRR of 18.5% and an after-tax NPV8% of $1.35B. Though theoretical in nature, given our assumptions (including $3.85/lb LT copper) the Santo Tomas economics would rank near comparable PEA/PFS level projects such as Yellowhead (Taseko Mines), Taca Taca (First Quantum) and Galore Creek (Teck Resources, Newmont Mining) on an average annual copper production vs after-tax IRR basis.

Moreover, stressing the theoretical nature of our model, we provide sensitivities for a range of variables including TPD (intervals between 80,000-120,000), discount rates (6%-10%) and LT copper pricing ($2.85/lb-$4.85/lb). Not as well that as seen from the theoretical values below, all values within the various matrices below represent a 1.0x DCF derived NAV multiple. Owing to the still very junior nature of the company, we feel that a multiple closer to 0.3x would be justified to better reflect the pre-production, financing and development still needed for a project of this magnitude.

Following the expected PEA release in October, a financing will very likely ensue followed by an estimated 18 month drilling period to convert/upgrade the Inferred resource to the Indicated category. It is estimated that approximately 25,000m of additional drilling would be needed for a full Pre-Feasibility Study (PFS).

As per our current Santo Tomas valuation (85.5%), we use an in-situ value of $0.03/CuEq lb which prompts our derived 1.0x NAV valuation estimate. That said, our 12-month price objective equates to C$1.45 per share equating to approximately +107% upside from the most recent close.

Note that we give minimal value to the wholly-owned Xochipala gold asset which encompasses 193 hectares located in the Morelos National Mining Reserve. Based on similar gold in ore bodies previously discovered on the very same Guerrero Gold Belt, Xochipala also has the potential to generate gold reserves in excess of 1.0M+ ounces. For now however, the clear focus is rightfully on Santo Tomas. Though just about every smaller cap copper explorer/developer is deemed to be undervalued on a current P/NAV or EV/Resource basis, we feel that given Oroco’s current status as still pre-PEA, the valuation discount is that much more pronounced among peers. Moreover, given that Santo Tomas’ large copper deposit lies in Mexico (as opposed to the copper hotbeds of Chile/Argentina) the Oroco story is still very much under the radar at this point. Oroco shares currently trade at a o.48x discount to our NAV estimate.

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