Northern Orion Resources: Two plays in one
Usually investing in mining companies means having to choose between a junior company that is working to get a mine up and running, and a more stable, mature miner that is already in production.
With the former, you get more risk, at least until the final permit is received, the mining plan finalized, equipment in place, and ore being processed. Of course, that can often mean greater leverage to metal prices. With the latter, you know what you’re getting in terms of output from the mine, but that typically limits any blue-sky financial upside for investors.
But then there’s Northern Orion Resources Inc. (TSX: NNO, AMEX: NTO), which allows you to put money into both types of play with one stock. The Vancouver-based miner has a minority position in a major gold and copper mine in Argentina that, after a decade of production, is only half-way through its estimated lifespan. And investors also get exposure to the nearby—and soon-to-be-developed—Agua Rica project, which contains copper, gold, and molybdenum.
The stock is now recovering from giving up some 12% in early May due to earnings for the first quarter in 2007 coming in under estimates. But given that the cause was due to temporary setbacks - lower-than-expected recovery, shipment delays, and a higher-than-expected royalty payment - the stock at a recent price of C$5.67 looks attractive, especially once you factor in that the miner is a possible take-over target.
Alumbrera
Northern Orion has a 12.5% ownership position in the Alumbrera project, with Goldcorp Inc. (NYSE: GG) having a 37.5% position, and Xstrata PLC (LON: XTA) the remaining 50%. Located some 700 miles northwest of Buenos Aires, Alumbrera is a massive mine. The project covers almost 13,000 acres, directly employs about 1,800 workers, and is served by all-weather roads and air transport. One of the lowest-cost copper and gold producers in the world, Northern Orion’s share of production is some 50-million pounds of copper and 75,000 ounces of goal a year. The mine has been in production since 1997, and its mine life extends to 2016, promising healthy cash flow for another decade.
Agua Rica
The Agua Rica deposit is located just 20 miles east of Alumbrera. The deposit has a drill-defined inventory of 21.8 billion pounds of copper, 13.3 million ounces of gold, and 1.7 billion pounds of molybdenum. The mine is expected to be in production by late 2010 or early 2011. Forecasts put annual production at an average of 150,000 tonnes of copper, 125,000 ounces of gold, and 16 million pounds of molybdenum, with an estimated mine life of 23 years. Future sales are completely unhedged, meaning maximum leverage to the price of copper, gold, and molybdenum.
In addition, there are several other factors that support the notion that Northern Orion is headed higher.
1) Positive trends for both copper and gold prices. In particular, copper prices have more than tripled since early 2003, to around $3.30 a pound. And while the U.S. construction industry—which accounts for almost half of all U.S. copper consumption—is slowing, copper is likely to be a hot commodity in much of the rest of the world. Japan’s economy is recovering and the auto industry—a major user of copper—is improving. India has strong demand for wire rod. And in China, investment in infrastructure means intensive use of wire and cables, and the auto sector (which is growing at 25% a year) has a big and growing appetite for auto wire.
Over the same period, gold has jumped from under US$345/oz. to over $650 currently, after hitting a ten-year high of US$725.75 in early May 2006. Gold is often talked about in the press as a safe harbor in troubled times, but what's at work here appears to be something much more fundamental. New deposits coming on-stream are fewer and farther between, while demand from new areas - including China's and India's rapidly growing middle classes - continues to increase.
2) Mining the "metal of the day." The share price will likely also get some support from the anticipated production of Molybdenum at Alumbrera. As one analyst puts it, there is an “…ongoing strong investment appetite for molybdenum exposure.”
3) Ongoing wave of consolidation. Given its size and proximity to Alumbrera, many see Agua Rica as strategic. In a recent note, BMO Capital Markets analyst Nawojka Wachowiak wrote, “We continue to believe that the most economic development scenario is the development of the project using the existing infrastructure at Alumbrera.”
The company recently announced earnings for the first quarter of 2007 of US$0.06, when analysts were expecting around US$0.08. Lower copper recovery played a role, according to Salman Partners, as did a higher-than-anticipated royalty payment.
Looking ahead, Raymond James recently reiterated its C$6.50 target. Tom Meyer, mining analyst with the brokerage house, points out that the shares are undervalued when compared to Ivanhoe Mines Ltd. (NYSE: IVN). On a price to net-asset-value (NAV) basis, Ivanhoe trades at 1.10X, while Northern Orion trades at just 0.75. Salman Brothers has a target price of C$6.00, and BMO Capital Markets US$4.25.
And those targets will likely prove quite conservative should Agua Rica go into play. This looks all the more likely given the possibility for infrastructure being shared with Alumbrera. While it’s never wise to invest solely in the hope of a take-over, analyst Tom Meyer of Raymond James wrote recently that “…we believe C$6.50 would be a fair ‘starting point’ under an acquisition scenario… .”
Here’s a snapshot of Northern Orion’s two key projects:
