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Oroco Resource Corp's (OCO) much anticipated Santo Tomas Preliminary Economic Assessment (PEA) was released yesterday and the strong results certainly point to the economic viability for continued development of the project. Given that we now have a certain level of understanding for both process methodology, associated costs and resulting economics, we can now with a certain level of confidence establish a 12-month target using a full NPV8% DCF valuation model. Our resulting 0.25x NAV8% price objective equates to +215% upside from the most recent close as we put to rest our previous (and much less detailed), pre-PEA $0.03/lb valuation based objective. As the Santo Tomas project continues to de-risk, barring a continued slowdown in the copper market (recall that copper futures have declined by -5.7% YTD), we see the risk being on the upside for gradual multiple expansion as the story becomes more known.
The just-released PEA represents a monumental achievement in Oroco’s corporate history. The report encompasses 27,382 copper assays from 68 diamond drill holes (totaling 43,063m) and 90 legacy reverse circulation diamond drill holes (21,075m, for a total of 64,138m in 158 drill holes) covering the project’s North and South Zones. In short, the PEA envisions a 20.1 year LOM operation producing a total of 4,749M lbs of payable copper. Assuming a LT copper price of $3.85/lb along with $13.50/lb Molybdenum, $1,700/ounce gold and $22.50/ounce silver, a pre-tax NPV8% of $2.33B for Santo Tomas was estimated (or $1.24B post-tax).
We also note that an updated Mineral Resource Estimate (MRE) was announced, encompassing the North Zone and South Zone. These zones display similar mineralization styles but are physically separated by localized post-mineralization faults and material currently defined as waste due to a lack of drilling. Mineral resources are reported above an effective cut-off grade of 0.15% Cu and constrained by an economic pit shell. The previous resource estimate had an effective date of April 27, 2023. Note as well that the pit constrained resource includes 387.98MT at 0.34% copper in the Indicated category along with 459.70MT at 0.297% copper in the Inferred category.
As per costs, the initial capital cost was estimated at $1.339B with sustaining and expansion capital amounting to $1.134B. On a C1 by-product basis, the average annual cash cost over LOM was estimated to be $1.66/lb of copper. As pre-process design, recall that the Q2/2022 metallurgical test work program demonstrated the ability to produce a marketable copper concentrate using a conventional flotation process flowsheet. Levels of molybdenum in bulk concentrates were sufficient to produce a marketable molybdenum concentrate using conventional Cu-Mo separation flotation techniques. We stress that the PEA has now placed Santo Tomas economics 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.
As per our estimates, we take a more conservative view underpinned by LOM payable copper production amounting to 3.930B lbs at a C1 cash cost of $1.72/lb. Other areas of discrepancy includes LOM grades and recoveries. Ultimately, our production profile looks as follows:
Ultimately our own estimates for Santo Tomas (85.5%) yield different yet comparable economics: a pre-tax NPV8% of $1.892B (IRR of 22.8%) along with an after-tax NPV8% of $1.037B (IRR of 17.2%). Note as well that our project valuation is underpinned by our LT copper price forecast of $4.35/lb. Our Santo Tomas sensitivities and NAV calculation consist of the following:
On back of the PEA, we expect that a financing will very likely ensue followed by an estimated 12-18 month drilling period to convert/upgrade the Inferred resource to the Indicated category. It is estimated that approximately 20,000m of additional drilling would be needed for a full Pre-Feasibility Study (PFS). As per our current Santo Tomas valuation (85.5%), we use a 0.25x NAV8% target multiple which forms the basis for our 12-month price objective which equates to C$2.15 per share (rounded). Underpinned by our LT copper price estimate of $4.35/lb, our price objective equates to approximately +215% upside from the most recent close. Oroco shares currently trade at 0.08x NAV which is comparable to numerous PEA level copper developers.