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Orla Mining: Growth at a Reasonable Price (NYSE:ORLA)

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It’s been a brutal two months for the Gold Juniors Index (GDXJ), and while many names have seen violent declines, Orla Mining (NYSE:ORLA) sheds more than 40% of its value in a straight line fashion. It could be This is due to the weakness in gold prices and its recent announcement that it plans to acquire Gold Standard Ventures (G.S.V), which often leads to Share-price weakness for acquirers. Overall, Orla has got a solid deal and is undervalued after its recent decline. However, as I look to the long-term upside from current levels, I see any rallies above US$3.55 before September as profit-taking opportunities.

All figures are in United States dollars unless otherwise stated and any calculations use an exchange rate of 0.80 CAD/USD.

Camino Rojo operations

Camino Rojo operations (Company Presentation)

Orla Mining had a solid start to the year for commercial production at its new Camino Rojo Mine on time and on budget during a construction period plagued by supply chain headwinds, labor tightness and inflationary pressures. Compared to companies like Argonaut Gold ( OTCPK:ARNGF ) and Iamgold ( IAG ) that failed miserably in their build process (Magino, quote), Orla’s performance is commendable and makes the company one to watch closely. Unfortunately, just three months later, the stock fell more than 40% following its proposed acquisition of Gold Standard Ventures (“Gold Standard”). Let’s take a closer look below:

Acquisition of Gold Standard Ventures

Orla Mining last month announced the acquisition of Nevada gold developer Gold Standard Ventures for ~$194 million. For those unfamiliar, Gold Standard owns a railroad pinion land package south of the prolific Carlin Trend, a 50-mile by 5-mile geological corridor through southern Nevada. Gold Standard is the second largest land owner in the prosperous region with ~21,700 hectares of land. The company’s focus is on its South Railroad project, which has 1.60 million ounces of gold reserves in two major deposits: Dark Star and Pinion.

Gold Standard completed a feasibility study on the South Railroad earlier this year, with the study estimating the potential to produce ~152,000 ounces of gold in its first four years at a cost of less than $1,000/oz. Over a 10-year mine life, annual gold production is expected to be ~124,000 ounces (excluding pre-production and remaining leach years of operation), a very respectable production profile. Just as important, average all-sustainable costs are expected to come in below $1,050/oz over mine life net of by-product credits. Ultimately, initial capex should be more than manageable at just $190 million.

Railroad South - Production Profile

Railroad South – Production Profile (Company Technical Report)

Aside from Gold Standard’s valuation, which allowed the company to acquire Gold Standard at less than 0.65x P/NAV ($315 million at $1,650/oz), which helped justify the acquisition, Railroad South fits well with Orla’s business model. This is because it is a run-of-mine heap-leach gold project that, like its Camino Rojo mine, is a relatively high-grade heap-leach gold project in Nevada. These projects are relatively cheap to build with just an ADR plant, LNG facility and mobile equipment in the context of the gold standard, but if run properly they will benefit from industry-leading costs, assuming they have grades above 0.75 grams per tonne of gold.

Given Orla’s size as a ~$1.0 billion market cap producer, Railroad South is a good fit, which should be able to bring the project into production by 2025 (assuming approvals are granted) with zero share dilution (outside of dilution to get to the gold standard). A negative point is that the railroad will be margin-dilutive for South Orla, although it is only Camino Rojo that is such a robust project, costing less than $800/oz. For this reason, it is not easy to find projects that can meet or beat Camino Rojo or are in the same league. Still, the jurisdictional upgrade is a big deal, with Nevada in a better position than Mexico, especially with the problems some Mexican miners such as Equinox ( EQX ) and Fortuna Silver ( FSM ) have experienced over the past two years.

Exploration Upside

Along with Dark Star and Pinion, which forms the basis of the Southern Railroad’s mine plan, Gold Standard has multiple targets outside its mine plan and 600,000 ounces of resources. Certain upsides in Railroad South contain sulfide resources that require a separate processing plan and a toll-milling agreement with nearby operators. Still, as with Orla’s Camino Rojo, the opportunity on the property is significant, suggesting that the current mine plan undercuts the project’s true potential from a long-term cash flow perspective.

Nevada targets

Nevada targets (Presentation by Gold Standard Ventures)

Finally, in addition to ounces not included in the mine plan, Gold Standard owns the Lewis Project, which is ~21 square kilometers of land on the Battle Mountain-Eureka trend and is adjacent to the Nevada Gold Mines Phoenix Mine. The deposit has a minor resource base of 7.74 million tonnes, grading 0.83 grams per tonne gold and 14 grams per tonne silver, which translates to just over 250,000 gold equivalent ounces. This is of interest to Nevada gold mines [NGM] Given its proximity to NGM’s high-margin Phoenix Mine, in the form of a layback contract. Therefore, although the resource is small (~200,000 ounces), it should be of strategic value to Orla.

Industry-leading growth

Since acquiring Gold Standard, Orla Mining has gone from a company with a lean and mean growth plan (Cerro Quima, Camino Rojo sulphides potential) to a gold producer on steroids. That’s because the company could be on track for ~200,000 ounces of annual production by 2026 at sub-$800/oz all-in sustainable costs and 350,000+ ounces later this decade. However, with the addition of South Railroad, the company could have 500,000-ounce capacity by 2029, translating to ~400% growth from its FY2022 guidance (90,000 to 100,000 ounces).

This development profile is based on Cerro Quima, which could be 80,000 to 100,000-ounce producers, South Railroad at ~125,000 ounces, Camino Rojo at ~125,000 ounces, and Cerro Quima further upside from the Camino Rojo sulfides opportunity. As it stands, the main priority seems to have shifted from Cerro Quima to Railroad South, leading to immediate growth, an improvement in the jurisdictional profile (Nevada vs. Panama) and this is currently further advanced. In fact, Southern Railway can have all its permits by September 2023, enabling construction of Orla to begin in October next year.

Orla Mining - Comparisons and Projected Growth Profile

Orla Mining – Comparisons and Projected Growth Profile (Company Presentation)

While this growth profile is exceptional, the estimates laid out in the latest presentation look a bit ambitious. That’s because Orla expects a 231% growth rate from its estimated 98,000 ounces of gold production this year, or 325,000 ounces of gold in 2025. I don’t see how the company expects to achieve this growth. It will take at least 14 months to build Railroad South and at least 13-15 months to issue permissions.

If we assume permits are issued in September 2023, construction begins in October 2023, and the first gold pour occurs in January 2025, I would be shocked to see a 140,000-ounce year from Railroad South in 2025. So, even if Camino Rojo estimates over 130,000 ounces from its mine project, that would put Orla at about 270,000 ounces by 2025, which, while still an incredible growth rate, is a bit shy of the potential 325,000-ounce target. In 2025. Even if the company breaches the 300,000-ounce mark in 2026, this is a very impressive feat, given one of the most impressive growth profiles across the industry.

In the long term, Orla is significantly outperformed by its Camino Rojo sulphides project, where we should get a better idea of ​​potential by the end of the year. In addition, it is likely to build the Cerro Quima, a copper-potential oxide project in Panama, after Railroad South is built. Putting all this together, there is a clear path to annual production of at least 300,000 ounces by 2028 at sub-$900/oz costs, and even higher if the company can deliver on the Camino Rojo sulfides. Assuming a successful execution on Nevada’s diversification and Railroad South, this should allow Orla to see a slight re-rating, with multiple expansion potential to 1.05x P/NAV after shedding its single-asset producer status.

Appraisal and technical drawing

Based on an estimated ~340 million fully diluted shares and a share price of US$2.90, Orla trades at a market cap of ~$986 million. This compares quite favorably to an estimated post-acquisition net asset value of ~$1.90 billion, with the stock trading at approximately 0.52x P/NAV. Based on the fact that I see a fair multiple for the stock above 0.80x P/NAV, I see meaningful upside for the stock from current levels. I believe the estimated net asset value is on the conservative side as I have valued Railroad South at only $260 million to account for potential inflationary pressures. I have not assigned any value to a potential future layback contract at Lewes, or upside exploration in the broader land package.

So, buying shares?

While there is no disputing that Orla is undervalued after its recent pullback, the technical picture leaves much to be desired. Because the stock recently broke through strong support levels dating back to Q1 2021, this area is now new resistance (C$4.35 / US$3.50). Generally, key support levels, once broken, can become new resistance levels and given the parabolic run-up in 2020, there is no clear support below the stock until C$2.60 (US$2.08).

Orla Mining Chart [OLA.TSX]

Orla Mining Chart [OLA.TSX] (TC2000.com)

The lack of support below does not mean that the stock should continue its decline, and it is certainly likely to bounce back to overcome oversold conditions. However, I prefer to buy small-cap stocks only when they have a reward/risk ratio of 5.0 to 1.0 or better (support vs. resistance), and with Orla at US$0.60 on strength to resistance and $0.82 on potential downside to support, the current reward/risk ratio is 0.73 to 1.0. comes to In short, while this may present an attractive entry for long-term investors who are not concerned about medium-term share price performance, I think there are currently more attractive bets elsewhere from a technical perspective.

Summary

Orla has significantly improved its organic growth profile with the addition of Gold Standards Railroad South project and surrounding land. While I don’t think the deal is necessary given Orla’s development pipeline, I can understand the reasoning. Because it’s certainly a ripe market to take advantage of discounts (gold developers say they’ve gotten cheaper over the years). However, while this would provide a nice boost to net asset value and diversification into Tier-1 jurisdictions, the technical picture remains bearish after a multi-month support break.

After plunging to short-term oversold levels last week, Orla could put together a sharp rally. Any rallies above US$3.55 before September should provide profit-taking opportunities, it said. This is because some investors who bought at previous support (US$3.50) and are underwater may sell if given the opportunity to exit positions at breakeven. Given this potential short-term ceiling on the stock, I currently see more attractive opportunities elsewhere, hence my hold rating.

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