Northern Orion: Raking In the Cash

| About: Northern Orion (NTO)

Another solid earnings update was released by Northern Orion Resources, Inc. (NTO) yesterday, along with a little bit of an update on their future prospects.

NTO is a Canadian junior mining company with essentially two properties -- a 12.5% stake in the maturing Alumbrera gold and copper mine in Chile, and 100% ownership in the yet-to-be-built Agua Rica mine a few miles away.

And as you might expect, given the tremendous metals prices we've seen this year, they are raking in the cash on their Alumbrera holdings -- bringing them .22 a share in earnings this quarter on average copper prices of $4.44 a pound and gold prices of $608 per ounce.

No surprise there; and these high metals prices couldn't come at a better time, as they're building the cash pile that they'll need to start up a new mine at Agua Rica.

They also updated us on the life of Alumbrera, which keeps getting extended as they find more good stuff under the surface. They're now estimating that the mine should keep producing for at least ten more years.

And somewhere in that ten year period is when it's going to get very interesting for Agua Rica. The siting, equipping, hiring and geological assessment of a mine takes a very long time and a lot of money -- as in many years and many billions. I heard rumors years ago that they were hoping to just move all the heavy processing plant and equipment stuff over from Alumbrera when that mine played out, but with Alumbrera having at least another decade of life and copper in a big demand cycle right now I think we can safely assume that rumor has been laid to rest. They're going to want to get Agua Rica up and producing as soon as they can, so costs maybe significantly higher than if they waited until 2016.

So, first they have to nail down the financing, since their $170 million or so in cash isn't going to put much of a dent in the $2 billion or so in capital costs to get Agua Rica running. And the first step in financing is the release of a thorough feasibility study of the site. Actually, it would technically be an update to an older study from the mid-1990s.

We had been told to expect the feasibility study by "mid year", the latest in a long run of incremental news about Agua Rica work over the past few years, so investors were a little anxious to see it. But the preliminary information that they provided in their earnings release continued to be extremely positive about the potential for this new mine:

- 23-year life of mine

- Cash cost of $0.09 per pound of copper net of by-products (based on $435/oz gold and $7.00/lb molybdenum)

- Cash cost of negative $1.05 per pound of copper net of by-products (based on current prices of $635/oz gold and $26/lb molybdenum)

That last one is what should really get your attention -- and what I hope will get the attention of NTO's bankers and allow for some very friendly financing terms. If prices stay up in the current realm for gold and molybdenum, then Northern Orion will actually be paid a surplus of $1.05 a pound to mine the copper (and even if prices revert to where they were a year ago, NTO will still have by far the lowest cost copper mine that I'm aware of).

You see, Northern Orion is really a copper miner. They essentially treat everything else as a nice byproduct, so they use the gold they pull out of Alumbrera to help offset the cost of the mine, and to lower their production cost for copper.

So the prospects continue to be great -- assuming that the political risk in Argentina remains limited (and since Alumbrera just paid a nice royalty on their record earnings, I assume the government's pretty happy with them), and assuming that copper remains at least above a dollar a pound (one quarter of its current level), Alumbrera will continue to spit out millions of dollars in free cash and the development of Agua Rica should proceed on the current optimistic track.

No guarantees, except for the fact that there will probably continue to be delays, but I'm continuing to hold these shares and I think we have the potential for a continued dramatic climb over the coming year or so as the feasibility study adds a little more detail to the expected output of the mine and as firm financing (hopefully) comes on line at a reasonable price.

NTO reports that they expect mine construction to take about three years from the completion of permitting, so the old expected start date that I had of 2009 now appears very optimistic, but they are completing the social and environmental impact work and the technical analysis of the feasibility studies now (at least the fieldwork for the feasibility study is complete), so I guess patience is the watchword.

I hate to bet on metals and basic materials after the run they've had in the last year, but with NTO's enviable position as a low-cost copper producer and a continuing demand for copper as the world industrializes, I think the downside is pretty limited.

In case you want a little more background, you can see that I thought pretty much the same thing, though the numbers weren't so dramatic, when I first bought these NTO shares last year.

NTO 1-yr chart: