RE:RE:RE:RE:RE:Earnings out
Not very strong report, but also, I would say, rather in line with expectations. AISC high, which is nothing new, in similar level as last quarter so no surprise in neither direction. AISC a bit over 1700, at the current 12000 oz/q production level we are a high AISC producer. A bit depending on how much scarn the company choose to blend into the oxides gives a bit more/less oz/month. With development of more of the oxides ore there is an upside potential on production for the coming quarters from OroValle. I think the company continuously review the blend ratio in order to maintain a net cash flow that supports maximum mine life and possibility to develop further areas within OroValle through the exploration activities as well as progress now primarily with the OSP project and in a second phase Taguas (developed by cash-flow from future OSP production and maybe through partnering but not as easy to find a partner with a limited project, therefore further drilling is on the way if more resources could be added this could be a more realistic option).
So I think the strategy is to minimize the risk for the long term operations and be able to finance further development organically and through loans instead of having to go to the stock market with PP etc that would dilute Fabulosa. This may be a strategy with to some extent slower progress than an aggressive PP/dilution driven strategy, however the upside is that current shareholders are not diluted the way that happens in so many juniors where the small investors always takes the hit, while a selected few get a nice discount.
However, for me there were several positives in the report. First of all, we are getting rid of the hedges, we are only 1.5 months off from being hedge free. Very important being a high AISC producer and will have major impact on results/cash flow. Even if they only maintain the current production levels for the coming year we still will make a nice profit that will have impact on share price. Also, good they didn’t sell all gold in 3Q, probably tied to also getting rid of hedging to push sales into the future and get max out of high gold price. Will be interesting to see how much they sell in 4Q.
Second, COVID impact has been limited, which is also very positive. With strong impact on operations, this could have been really bad for the company. The one thing that has been hurt is the OSP development which is unfortunate (not mentioning Taguas, but that development is not the critical path at this point), seems we have lost a quarter or so on the COVID. Still however target end of 2021.
Third, OSP seems now to be high on agenda and moving forward. Was really lack of info last year if any development is done and probably creating a lot of frustration among existing shareholders why nothing seems to happen. Now it is priority, both seen through the NR where Gavida specifically is "quoted" on the OSP project moving forward (commitment) and also more detailed info in the MD&A on progress and timelines compared to previous reports. The increase in gold price and copper price really supports the development now, lowering the risk as even in the case that the new planned sulphidization circuit would give a lower yield than expected the project could be very profitable. Tailings rework gives futher future potential. One thing that needed to be solved was financing, think this has been holding back the OSP development pace. Therefore, the BISA $7.8 million funding was key which they got in the second quarter. I think the plan was then to accelerate on the project once financing was (partly) secured, but then COVID hit which again slowed progress. Now it though sounds like we are focused and things will get moving forward. Also, important is the VAT balance to be paid out. Another $7.8 M near term. This brings $15.6 M in total that can fund the OSP development and with that, the company will not have to go to shareholders (dilute Fabulosa) and development can get started with full speed.
So short term, the share price should be very sensitive to gold price (and to some extent copper as by-product) being a high AISC producer for the coming year. As we get closer to the start of OSP this should change with lowered risk and lower expected future production costs. From financial 1Q 2021 (4Q 2020 callendar), if the current gold price holds, the company should turn to a nice profit and be able to move projects forward that with success should have major impact on the share price.
Holding shares in ORV for the last years has not been much of a success story, which is also reflected by the comments on this forum with I guess several long term holders being frustrated on SP development, however, with the very low current valuation, I think there is a good opportunity here going forward that the company will get gradually revaluated reflecting the above potential. I believe buy and hold for one year has good potential (short term share price very difficult to predict though with limited float and trading volume).
Good luck everyone and any comments appreciated!