Looking forward, the Congressional Budget Office is projecting the deficit come in around $3.5 trillion this year, and they’re probably going to dramatically undershoot the actual number as they usually do, observes resources sector specialist Brien Lundin, editor of Gold Newsletter.
All of this is coming in only the first wave of the policy responses to the Covid-19 economic crisis. Such massive spending and resulting debts guarantee that interest rates on an inflation adjusted basis will be negative, and deeply so, for years to come.
That, of course, means gale-force winds beneath the wings of gold, silver and mining stocks. Which is why we need to continue positioning ourselves in this sector. The long-term picture remains exceedingly bullish.
In terms of positioning ourselves in the sector, things are getting a bit hectic, as junior gold and silver companies are rushing to fill their tills while they can. There has been an absolutely dizzying array of new opportunities and new financings emerging, and I’m trying my best to sort things out and get them to you.
In fact, one of the best opportunities I’ve seen in a long time just emerged — or rather re-emerged. In short, a special situation is developing with New Oroperu Resources (Vancouver: ORO) (OTC: NOPUF) that makes it a near-perfect development story for these times. It’s also a blast from the past.
The New Oroperu story has literally been decades in the making. In fact, I have a personal connection to the company, having participated in its founding in 1994. I have followed it and recommended it in this missive over the years, watching it take its Tres Cruces project in Peru from greenfields discovery to multi-million-ounce gold resource.
A key event for ORO occurred in 2003, when the company cut a 17-year (you read that right) option deal with Barrick Gold (GOLD) to develop the project. To earn a 70% interest in Tres Cruces, the major agreed to pay New Oroperu $250,000 annually to maintain its option while it mulled a production decision.
What followed was a relatively long fallow period with some intermittent activity. Barrick did some drilling on the project in the mid-00s and then New Oroperu used that data to produce an updated NI 43-101 compliant resource in 2012.
Somewhere along the way, I had to let go of ORO, both in the newsletter and my personal portfolio, frankly because Barrick was in no hurry to do anything with it. Now there’s a deadline coming up, as that 17-year option agreement is about to expire at the end of the year.
Key to Barrick’s slow-walking its decision was the nearby Lagunas Norte project, which had an oxide resource that made it one of the major’s key assets until it (recently) ran out of oxide gold and the mine went on care and maintenance.
As long as Lagunas Norte was cranking out gold, the major was content to maintain its option and hold Tres Cruces for future development. Now, finally, Barrick has a decision to make.
Lagunas Norte still has four million ounces of gold left, but all those ounces are refractory sulphide ore that will require a plant upgrade estimated at $640 million to process. So, it’s either move forward with that effort or go through a decommissioning process, which is expensive in its own right.
Tres Cruces provides a potential bridge to future sulphide production because, while a good portion of its resource is sulphide mineralization as well, at least a portion of it is oxide and open-pittable. And permitted.
And indeed, ORO has just raised the funds it needs to outline the oxide portion of that 3.2-million-ounce resource (2.6 million ounces measured and indicated and 0.6 million ounces inferred).
With the mill at Lagunas Norte a mere 10 kilometers away, New Oroperu has the chance to prove up an oxide resource that could, for the costs of digging a hole in the ground and hauling ore to Barrick’s mill, cover a significant chunk of the equity portion of the mill upgrade costs.
If Barrick elects to take its 70% option on ORO’s project by the end of this year, it will have a resource base of more than 7 million ounces to work with between Lagunas Norte and Tres Cruces. As I said, the mining infrastructure is already in place at Lagunas Norte, so this thing is pretty much turn-key.
If the major takes that route, New Oroperu shareholders would have a free 30% carried interest on the development of Tres Cruces, plus a 2% NSR. And that’s the downside scenario.
Alternatively, Barrick could elect not to pick up the option (and potentially decide to sell Lagunas Norte). In that scenario, an oxide resource at Tres Cruces could provide a very tempting carrot for a buyer willing to take on the project costs of processing Lagunas Norte’s sulphide ore.
Either way, New Oroperu would appear to be in the proverbial catbird’s seat. As an added bonus, those annual option payments from Barrick over the last 17 years have left the company’s share structure drum tight, which means it won’t take much buying to send its share price due north.
For proof of that fact, one need only look at the run ORO has made over the past month. Even with this recent jump, though, the company’s in situ resource continues to be valued at less than $7/ounce. This in a market where a developable resource like Tres Cruces could easily sell for $50/ounce or more.
And I haven’t even mentioned the fact that the resource at Tres Cruces shows the potential to grow significantly. Once they’d outlined the current sizeable resource, Barrick simply wasn’t motivated to drill further along strike of the resource, probe new targets or search for potential high-grade feeder zones.
Right now, as Barrick’s deadline approaches, New Oroperu is being rejuvenated by an investment group working closely with management.
As part of this, the company just closed a financing to fund the oxide resource estimation for Tres Cruces (which will basically be a desktop operation and not involve any drilling or on-the-ground work). Because of my early involvement with the company, I was invited to participate in the financing, and I grabbed that opportunity.
ORO’s recent price action demonstrates what happens when you combine a compelling story with a tight share structure in a gold bull market. Even after its recent gains, it remains a near-perfect junior gold play. It’s a strong buy at current levels and a hand-over-fist buy on any significant weakness.
But a word of warning: This company’s share structure is one of the tightest I’ve ever seen. Be patient and peck away at it. The upside potential is such that prices anywhere near the current range should prove to be a rare bargain.
