Back in 1996, there were only a few boys on the block in the Argentine exploration game. Since that time MIM (now Xstrata), Cerro Castillo (then part Perez Companc and Minera Andes have all moved to production. And then there is Northern Orion (NTO).
There is a key difference between these others and Northern Orion. NTO would say it is a producer due to its purchase of 12.5% of Bajo de la Alumbrera. We would only agree with qualifications. NTO bought into Bajo only a few years ago. Its big project at Agua Rica has seemingly become a victim of the company shopping itself around rather than sticking to its knitting. In our experience there are two types of exploration companies. There are those dedicated to finding and bringing to production a deposit and there are those that find (or acquire) a deposit and then dressed themselves up with a big red bow and plant a “For Sale” sign on their stock.
Over the years, NTO proved to be opportunistic in snaffling assets as majors came and went. It got the Agua Rica deposit when BHP was no longer interested and it accumulated its stake in the massive Bajo de la Alumbrera mine that has provided it with all its growth and all its cashflow over the years. Gradually its cash mountain has grown. Agua Rica has remained on the drawing boards. NTO is “the dog in the manger”. It seems to be paralyzed waiting for a trade buyer to snap it up.
However, it may have waited too long. Being in proximity to Bajo meant potential cost savings for Agua Rica. But now Bajo has peaked and production is in decline and Agua is nowhere near even beginning. While “patriotism may be the last refuge of the scoundrel” the bankable feasibility study is the “last refuge of the explorer that doesn’t want to actually become a producer”. If one strings out the studies long enough one never has to do the hard work of getting the mine going.
Such is the picture at NTO. The latest results were a real disappointment to us. The market however took them in its stride. Maybe it still believes the hype on NTO really wanting to be a miner. With Bajo turning down, so does the cashflow. If NTO had moved more decisively to bring AR to production then it too could have had a Tenke-style takeover offer to knock the socks off happy investors. Instead NTO is a case of always the bridesmaid never the bride. NTO has not built value in recent times by just marking time. The AR asset is only perceived to have gained value in recent years through copper’s appreciation not through any fleshing out of the asset by NTO’s management. It’s just plain lazy. Tenke shows that even if you haven’t got the mine to production significant value added can be built into the price by narrowing the timeframe to production. It just appears to waiting for someone else to come along and do the dirty work and that is doing no favors to investors, even though they may be grateful for the price pop when it happens.
In the absence of actually starting production in Argentina, NTO should be looking to do deals. The most obvious one would have been to step in and snap up Peru Copper (CUP) that is currently being sought by the Chinese. The price the Chinese are paying works out at 2.3c per lb of copper, which even after adding capex is still under 8 cents per lb on a 40 year mine, they break even after 4 years with $1.60/lb copper and $10/lb moly. This is looking a gift horse in the mouth, particularly as the Chinese bid is not being well regarded in Canadian business and political circles. We have a limited upside scenario for Northern Orion in the absence of a takeover bid. It may yet test last year’s highs of around $6. However, we see it having difficulty getting much above that level as numbers coming out of Alumbrera are destined to deteriorate further. Thus we would be selling into strength above $6.
Disclosure: The author has no position in any stock mentioned
NTO 1-yr chart