Orion Minerals a ‘rare’ opportunity with huge upside, says top South African broker

Emerging base metals company Orion Minerals (ASX: ORN) is a “rare investment opportunity” whose share price “may at least double” on a one-year view
16th August 2019
Resources Rising Stars

Emerging base metals company Orion Minerals (ASX: ORN) is a “rare investment opportunity” whose share price “may at least double” on a one-year view, according to a new research report issued by top South African broker Vunani Securities.

In a comprehensive 25-page report, the Johannesburg-based broker has issued a BUY recommendation for Orion (which is also listed on the JSE), describing its 70%-owned Prieska copper-zinc project in the Northern Cape as “world-class” with the ability to generate “large amounts of free cash”.

A recently completed Bankable Feasibility Study for Prieska indicated a post-tax real NPV10% of A$380 million, with the study highlighting “low capital intensity, short lead time, low costs and exceptional returns”.

“The Prieska project centres on the establishment of a 200ktpa copper-zinc mine in the shadow of the former Prieska Copper Mine, which mined the same orebody from 1971 to 1991, delivering 2.5x dividend returns despite persistent low copper and zinc prices over the duration of the mining activity,” wrote Vunani’s mining analyst, Hurbey Geldenhuys.

“Our valuation confirms the ZAR4 billion (A$380 million) valuation for a 10-year project, but building a mine with a 10-year life is not the investment case, in our view,” he wrote.

The Vunani team believes that near-mine exploration results together with demonstrated potential to find additional satellite orebodies means Prieska may have a much longer life.

“We believe the orebody will sustain free real cash flows of ZAR1.2 billion (A$114 million) per annum for at least 20 years at the projected production, grades, costs and recoveries.”

The broker says that a capital raise to development the mine could result in the number of shares on issue doubling in the near term, resulting in a 1-year target price of ZA60cps (~A6c), with the “fair value” of the company estimated to be ZA150cps (~A14.2c).

That compares with the Company’s last closing price of 2.6c on the ASX.

Vunani says that while Orion Minerals has no direct peer comparison in South Africa (and will be the only base metal miner on the JSE once in production), it does have a very similar peer on the ASX in MOD Resources (ASX: MOD).

MOD Resources is currently being acquired by leading mid-tier copper miner Sandfire Resources (ASX: SFR) via a scheme of arrangement in a transaction worth A$167 million which is due for completion in October this year.

“MOD Resources’ T3 Project BFS and the Orion Prieska Project BFS are similar in many ways, most notably indicating low cost, quick payback, high margin operations,” says Geldenhuys.

“On a peer analysis we conclude that Orion is significantly undervalued at a market capitalisation of around A$60 million.”

He notes that Orion’s share price is today only marginally higher than the levels it was when it was drilling to establish Ore Reserves.

“We believe there is a large mismatch in the value of the company and the increase in information and reduction of risk,” he says.

“This mismatch cannot be ascribed to the lack of meeting milestones, but perhaps the market is not fully appreciating the short timeframe in which these milestones have been reached.”

Geldenhuys also notes that the quality of Orion Minerals’ project remains unappreciated with the company “largely off the investment radar screen in South Africa” – a situation that “presents a rare investment opportunity”.

“It will be the only direct base metal exposure for investors on the JSE,” Geldenhuys notes.

“We believe the share price at around SA30cps (A2.6c) presents an excellent investment opportunity.

“We believe the share price may at least double to SA60cps on a one-year view, but that the fair value of the company, taking its cash generating capacity into account is ZA150cps (A14.2cps). BUY.”

To read a full copy of the Vunani Securities report on Orion Minerals, click here.


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