Oroco:Broker"s Pick in Resource WorldFROM THE JUNE 2011 ISSUE OF RESOURCE WORLD magazine. Pg 29
POSITIVE ECONOMICS POINTS TO EARLY PRODUCTION
Oroco Resource Corp. [OCO-TSXV] is a junior gold explorer with two significant projects in Mexico. The most advanced is the Cerro Prieta Project in Sonora State, near the town of Magdalena, where I recently paid a visit. The second project is the Xochipala Project in Guerrero State, in an area of multi-million ounce gold deposits and a recent world class drill intercept by New Strike Resources.
Oroco has been quietly working for the past five years to bring the Cerro Prieta Project forward. A news release dated December 15, 2010 announced outstanding economics for this modest gold production project in a Preliminary Economic Assessment. It modeled a base case gold price of US $l,000/oz and an US $18/ oz silver price with a 5% discount rate which resulted in a Net Present Value of $45.75 million and a payback period for a modest capital expenditure of $22.2 million of only 0.84 years. In my experience, payback periods of three years or less are good, and a 0.84-year payback is as short as I can ever recall. The internal rate of return has been estimated at 92% which is also extremely good.
The company is working full speed ahead on arranging a gold loan for almost the entire capital cost as well as securing surface rights, various mining permits and arranging a turnkey construction contract. If all goes according to plan, construction will start this summer, and the project will commence operation within 12 months after that.
The Cerro Prieta Project is a relatively simple open pit, heap leach, mining plan, on the site of a historic underground gold mine that operated before the Mexican Revolution of 1910. It has an estimated resource of 3,740,000 tonnes of measured resources grading 1.10 grams gold/tonne and 15.82 grams Silver/tonne, as well as lead and zinc values. Indicated resources are 11,000,000 tonnes of 0.71 grams gold/tonne and 11.82 grams silver/tonne, as well as lead and zinc values. Gold recoveries are estimated at 77% for gold and 5% for silver.
I like two aspects of the project in particular. The first aspect is its location, in Sonora State, close to all major infrastructure required for mining, including road access, nearby water, electricity and skilled labour. The second aspect I like is the potential to expand the project to a higher production rate and longer mine life once commercial operation is achieved. The company's approach has been to move towards production immediately, before the full potential of the area is fully assessed. This may spark some debate in the market place, but in light of US $1,500/oz gold, it is hard to argue that the significant cash flow, which is prospective from the mine, should be delayed. I agree with the decision because I have observed market success by other modestly scaled Mexican precious metals projects in the past year.
While Cerro Prieta moves towards production, Oroco will turn its exploration efforts towards expanding the resource at Cerro Prieta and importantly, at Xochipala. This is an area that has attracted majors such as Goldcorp and Teck: as well as some high profile juniors like New Strike. I think it is probably the most exciting gold exploration area in Mexico right now, and will likely result in significant market attention when and if Oroco commences drilling there. The concession they own certainly has the right characteristics for a significant gold deposit.
It is the combination of prospective cash flow combined with significant blue sky potential that makes Oroco my Broker's Pick of the month.