Orko First of all, let me say that I'm long 55K shares at an average of $2.45 so I am deeply underwater on this. Thursday was highly unpleasant.
As much as many want to paint a rosy picture, there certainly is the possibility that this could be a long process. Hopefully it's not, but I'm bracing for it, along with the fact that the stock could go significantly lower in the short term, Maybe sub $1 if the stars do not align. If that happens I'm down another $25K to potentially $50K which is pretty ugly. I expect the stock to open very hard on Monday morning and I just cannot bring myself to sell into that kind of action. I will probably take my chances and hold preparing for the worst case scenario over the short term. I hope I'm wrong. I still believe that my upside from these levels is close to 2-3 times my downside over the next 18-24 months and while there are a few stocks I'd like to own I don't believe they offer up much more than that for me and there is certainly risk in those as well.
There are a number of reasons why I'll probably hold. I spoke to Ben Whiting at Orko on Thursday for about 15-20 minutes and was told a number of interesting things. Reality may well be somewhere in the middle of PAA's ultra conservative PEA and the info you get from Orko; if so, I'm reasonably comfortable with that.
When I spoke with George Cavey at PDAC I genuinely believe that Orko felt that PAA would make a move for them. The exercise of insider options with no insider sales and movement of shares by Devji recently would seem to reinforce that. Ben Whiting told me that PAA made absolutely no offer for Orko; they simply withdrew from the joint venture. Now you can read that one of two ways: 1) there is something wrong with the project or 2) PAA is tapped out at this time, extended (maybe overextended) with the Mine Finders deal and all the screw ups on Navidad as well as problems with a couple of their existing mines. I honestly believe (and if I'm wrong I am going to potentially pay a pretty big price) that it is the latter. PAA closed at a 52 week low on Thursday, similar to Orko, so there was no celebration in PAA land over their withdrawl from the JV.
I just reread all the Orko press releases from 2009 on Sedar. PAA had nothing but positives to say about the project until the PEA, which many feel to be, as I said, ultra conservative. Let's look at a couple of points. Unless I'm mistaken, even the PAA PEA valued Orko at around $2.25 share at $25 silver. That's with about 75 million ounces of silver taken out of the resource estimate. Add half that back in and it bumps the valuation on takeout up considerably. There were $65 million in management fees in the PAA PEA. Remove those: that's an additional 50 cents a share. Ben Whiting also told me there were contigencies in the PEA for underground structural reinforcement with respect to the newly constructed mine (sorry I'm not a miner-he had a specific terminology for that) on 100% of the mine when he feels that the geology is such that not more than 20% of the mine would need that kind of work. There were other efficiencies relating to cyanide and processing that could have been used in the PEA that he also mentioned PAA completely ignored in their submission last year. In other words, there would appear to be a number of ways to present this in a new PEA to dramatically increase the value of the project relative to the PEA that PAA submitted, which we've all discussed ad nauseum over the past year.
Then there's the issue of actually drilling and proving up additonal reserves. Whiting told me that over the past few years PAA only drilled 5 of 17 holes in areas that he thought would prove to be productive. I guess you could read that a couple of different ways. He also told me that he would recommend to Orko managment that they do reverse circulation drilling (less expensive than diamond drilling but not quite as conclusive in proving up the resource) in an area of La Preciosa that he essentially feels is low lying fruit very close to the surface and very easy to get at. I believe that he may have suggested that also to Pan American but I can't say that definitively as I didn't take notes on our conversation. In an event, I got the impression that this type of drilling may be a possiblity over the coming months and before Orko presents a revised PEA through AMEC. All of this obviously takes time and money but Orko appears to be reasonably well funded over the short term (say 8 months to a year) at least.
I've worked in sales for 35 years. Now, again, I could be wrong, but in my conversations with both Mr. Cavey and Mr. Whiting, I never really felt that I was being "sold", that this was "promotion". They both seemed to be pretty forthright, but I will certainly admit that I don't know a lot about mining.
Fact is that Orko insiders have put their money where there mouth is with options recently, obviously expecting a payday from Pan American that isn't going to happen now. If I start to see them unload shares at these or lower levels, I'll start to become even more uneasy. But until that happens, or unless the stock sees a significant bounce that I can sell into, I will hold and see what unfolds.
But that doesn't take away from the fact that the market in many, many cases is as much about perception as it is about reality and right now the perception is not good. That isn't going to change in the next few weeks as far as I'm concerned; it's probably going to take a while and the overall market may not be kind to us either. On the other hand, $40-$50 silver would definitely give us a positive backdrop and support us a bit.
No easy money here I'm afraid and for shareholders like me there's potentially going to be more pain before there is the reward. But I'm still hopeful, perhaps foolishly, of the reward.