Oroco just announced a game changing news. It finally acquired 65 percent of Santo Tomas Copper Project. This news was part of the financial statements that were released on Sedar on Friday. On Monday, an official press release will probably come out before the market opens.
I suspect the volume will explode. In my opinion, the stock should go to CAD $0.40 from the current CAD $0.20. Whether it will or not, we just have to wait and see.
For months, people have been skeptical about Oroco’s ability to get a world class copper project like Santo Tomas. Here is just a few comments that I collected.
“Dozens of companies in the resource space make wild assertions about their asset value. of course, few are accurate or pay off. A $5mm market cap company will be worth BILLIONS in a few years? Color me skeptical…”
“Oh buddy, you’re succumbing to wild promoter talk. No interest. Find me something real and I’m happy to review!”
“Dream on pumper..”
Ok, so let’s take a look at what Oroco has and how it translates into valuation.
If you recall, there are two parts to Santo Tomas property. Main property and surrounding properties. In February 2018, Oroco acquired 77.5 percent of Papago 17 concession which is the surrounding property. Yesterday, it acquired 65 percent of the Main property. So it total, the company owns about 57 percent of the entire Santo Tomas property. With incremental spending, Oroco can earn up to 81 percent in the entire property. But for now let’s just stick with 57 percent.
Santo Tomas has about 8 billion pounds of copper. This is based on historical drilling over the last 20 years or so. Based on recent acquisitions of copper projects, mining companies pay about US $0.07 per pound. Before the takeout, juniors trade at about US $0.025 per pound. So based on that here is Santo Tomas’ value.
Take out value: 8 billion x US $0.07 = US $560 million
Trading as public company value: 8 billion x US $0.025 = US $200 million
Because Oroco owns 57 percent of it, this translates into
US $560 million x 57 percent = US $320 million
US $200 million x 57 percent = US $114 million
How does this translate into value per share?
US $320 million / 135 million shares = US $2.37 or CAD $3.08
US $114 million / 135 million shares = US $0.84 or CAD $1.10
The reason why I said that the stock price should reach CAD $0.40 (instead of CAD $1.10) is because Oroco will have to update the engineering report. The prior report which has 8 billion pounds of copper was done before the industry implemented NI 43-101 standard. However, now that the company owns the asset, it will work on updating it.
Also, the news states that Oroco will own 65 percent of unregistered interest in Santo Tomas main property which means that the legal dispute still has to be completed. I am not going to get into it here but this legal dispute is pretty simple. Oroco owns the asset but the legal dispute prevents it from transferring/selling it to another party. It is kind of like a lien that has to be removed. You can study the legal dispute at santotomascopper.com.
So two things will prevent the stock from trading at CAD $1.10: non-compliant engineering report and legal dispute. Considering that the probability of completing these two items is 99.9 percent, I figured CAD $0.40 would be appropriate price.
THERE IS MORE UPSIDE
While going from CAD $0.20 to CAD $1.10 and eventually CAD $3.08 is a big upside, this is just a base scenario. Remember how I said that Oroco will be able to increase its ownership to 81 percent based on incremental spending? Well that incremental spending is supposed to increase the size of the deposit too.
Because Santo Tomas has been in legal dispute for so many years, there has barely been any significant drilling done. Also, the property has significant inferred resource which does not count into the 8 billion pounds calculation. That inferred resource can be reclassified into measured and indicated (with closer drilling) thus increasing the number of pounds. Based on my conversations with friends geologists, the number of pounds could reach 14 billion and even 25 billion. Of course, we can ignore this upside since there is enough upside just from the current number, but let’s just see what is possible.
14 billion x US $0.07 x 81 percent = US $800 million
25 billion x US $0.07 x 81 percent = US $1.4 billion
To get to this number will require money spend on drilling but this is the point. This is what Oroco will do to earn 81 percent interest in the entire project. By that point, the company will probably have 200 million shares since the raised money will come from dilution.
US $800 million / 200 million = US $4 per share or CAD $5.20 per share
US $1.4 billion / 200 million = US $7 per share or CAD $9 per share
In summary, CAD $1 to $3 is a conservative upside and CAD $5 to $9 is a realistic but more aggressive upside where a lot of things have to go right. One last thing that I want to add is that starting on Monday, the company will finally be able to market the company to a wider audience. Before it couldn’t do it because it didn’t own the asset. This is a game changer.
Disclosure: Long Oroco