Ken Gerbino comments on NTO: Northern Orion:
There are so many solid values today with plenty of upside why even look at grassroots exploration plays. Northern Orion (NNO–TSX, NTO-AMEX) for instance has a market cap. of US$320 million and a minimum resource of 10 million oz of gold and 18 billion lbs. of copper at their Agua Rica property. That means the stock sells for $32.00 per oz of gold and the copper is free, or just 1.8 cents per pound for the copper and the 10 million ounces of gold are free. They also own 12.5% of the Alumbrera copper/gold mine (the second largest gold mine in South America) which should throw off $50-60 million or so as their share of cash flow annually for 6-8 more years. So, you pay 6x cash flow for the stock, and totally separate from that you also own one of the largest and richest copper-gold deposits in the world…Aqua Rica…where $50 million has already been spent on the property.
The grade is well above average and I might add that from the drill logs I inspected on my visits to their offices starting back in 1995, I believe the deposit is a lot larger and richer than management can claim because of all the new regulations. This deposit easily is in the top 5 best copper-gold deposits in the world when considering size and grade. You have Grasberg, Antamina, Pascua-Valadero, OK-Tedi and then Agua Rica.
These are some back of the envelope calculations, but giant base metal producer, Noranda, will spend $850 million putting El Morro in Chile into production. Agua Rica is 25% larger, has 28% higher grade and cash costs per pound will be 15¢ versus 52¢ for El Morro. Agua Rica would cost only $300-$400 million in capital expense.
Also, El Pachon in Argentina, will cost Noranda $950 million in capital expense and produce copper at 58¢ per pound and produce 500 million pounds per year versus Agua Rica which will produce 845 million pounds equivalent per year. At $1.00 copper, Agua Rica will cash flow before tax $591 million a year. That means a buy-out for $1.5 billion plus the $300 million capex is paid off in 3 years. At $1.25 copper, make that two years. Fully diluted, NNO has 163 million shares outstanding so that would be $9.20 per share buy-out for just Agua Rica. Throw in $76 million cash from fully diluted in-the-money options and warrants and discount their future cash flow from Alumbrera of approximately $200 million, and you could add another $1 to the $9.20. That leaves you a $10.20 U.S. target as a real price tag, considerably higher than the current $2.94 U.S. stock price.
In 2003, Noranda had an $.80 realized copper price and total corporate cash flow of $1.23 per share. A buy out of Northern Orion for $1.5 billion, or 75 million shares of Noranda (@$20 a share) would be immensely accretive to Noranda shareholders. At $1.00 copper Noranda would gain an additional after tax cash flow of $1.12 per share. Even at $.80 copper (copper is now at $1.30), Noranda would gain an additional after tax cash flow of $.81 per share.
Bottom Line: Noranda issues 25% more shares and increases its cash flow by 66% at $0.80 copper. Their shareholders would have to love it. Northern Orion is a buy-out candidate that will allow the new owner to build a mining dynasty for the next 40-50 years. We own this stock and believe it will have considerable upside. |
