Precious Metals


Raymond James analyst David Sadowski believes Orezone is an attractive stock and thinks the company may be a takeover target moving forward.

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Analyst David Sadowski covers the uranium space, as well as precious metals exploration and development companies, at Raymond James. Prior to joining the firm in 2008, he worked as a geologist in Central and Northern British Columbia with a variety of Vancouver-based junior exploration companies.
In the interview below, Sadowski shares his thoughts on Orezone Gold (TSX:ORE), which wholly owns the Bombore gold project in Burkina Faso. Bombore is the largest undeveloped gold project in both Burkina Faso and West Africa, and a 2014 preliminary economic assessment for the project shows that it holds 4.56 million ounces in the measured and indicated categories plus 0.72 million ounces in the inferred category. Sadowski believes Orezone is an attractive stock and thinks the company may be a takeover target moving forward.
INN: Orezone released a feasibility study for its Burkina Faso-based Bombore project at the end of April. Were you happy with what you saw there? Any surprises?
DS: We were happy for sure. We had fairly high expectations on what the feasibility study would deliver. The main differences were a larger mineral inventory than we were looking for because they reclassified some material that was previously considered waste as low grade. It actually reduced the strip ratio and improved the overall economics. There was a little bit of a tick upwards in capex relative to our forecasts because they had to revise the water reservoir and make it a bit bigger, [and] they increased the relocation cost.
Beyond those two sets of things, really it was in line with expectations. We find that Orezone’s management is very good at communicating where things are headed, they provide a lot of updates to the market. So nothing really shocked us — it was very good, very comforting to see the numbers come in as positively as they did.
INN: It sounds like the feasibility study gives Orezone some different options for developing Bombore. For example, it can expand the CIL circuit to include grinding if the gold price gets over $1,400 per ounce. Is that type of optionality important?
DS: For sure. The thing about Bombore is there’s quite a bit of flexibility, and a lot of value can be uncovered if the gold price rises. It’s essentially a 5-million-ounce deposit, and roughly 2 million ounces of that 5 million are oxide — that’s what’s going into this mine plan. So there’s 3 million ounces beyond that underlying the oxide zone, and that’s really the untapped potential.
According to the mine plan they’re looking at, it doesn’t make sense to mine that material and process it today, but if the gold price rises, it could justify expanding the CIL plant and processing that sulfide material. With sulfide it’s very challenging to heap leach the ore — the recoveries are very, very low metallurgically. So you’d have to run it through CIL, but of course building a huge CIL plant in this kind of financing and gold price environment doesn’t make a lot of sense. That’s one of the optionality pluses that Orezone and its Bombore project feature.
INN: The reason the CIL circuit won’t include grinding, at least initially, is that the company will start with mining shallow, softer oxidized ores. Why is that ore easier to process?
DS: Because it’s near the surface, the rock is more exposed to weathering — you’ll have erosion by wind and rain and oxygen for very long periods of time, physically and chemically changing the complexion of that material. It softens up and becomes more porous, but also oftentimes the gold [in it] is associated with other minerals like pyrite — what that weathering does is liberate the gold from the pyrite, leaving it a lot easier to run through a simple processing flow sheet and extract the gold.
In the case of Orezone, gold from the shallower, oxidized ore can be recovered without the need for fine grinding or flotation. A CIL circuit is also unnecessary, but the flow sheet in the recent study suggests that putting the fine-grained fraction through an agitated leach process leads to optimal recoveries and economics.
INN: More recently, Orezone submitted a mining permit application for Bombore. I’ve noticed some concerns that the company may be delayed in receiving them due to elections in Burkina Faso your thoughts?
DS: Historically in Burkina it’s taken roughly three to six months for mining companies to get their permit. But as you know, Burkina’s gone through some political flux in the last year. In October there was a civilian-led coup in the country, and the previous president, Blaise Compaore, was ousted. The military swooped in and installed an interim government, and basically they’re running the show until this general election is held in October. In that election, we understand that the interim government can’t run [and] the previous government that was deposed can’t run, so you’ve got two new groups in the running that in our view seem pro-mining. So things look okay. We’re not too worried about the election being an event that could lead to mining companies having a much more difficult time in Burkina.
But we think the change that’s coming with swapping out a whole government, installing new ministers for the environment [and] ministers of mining, will naturally lead to a lengthier process for a company like Orezone to get its permits returned, at least during 2015. Odds are you’ll see the new government come in, it’ll settle in over a period of a few months and then they’ll get to processing these mine permit applications. We’re looking for successful approval of their permit application at the end of this year or early 2016.
INN: That’s reassuring — I know there’s been some concern from investors about the situation in Burkina Faso.
DS: That’s one of the big reasons in my view that the stock has underperformed compared to its gold peers. People look at Burkina and view it as a challenging jurisdiction, and they quickly forget that over the past decade,10 gold mines have been constructed there or are currently being developed. It’s the fastest-growing gold producer in Africa, and there’s a reason for that — it’s a very accommodative environment both on a permitting and tax and royalty level and from a geopolitical risk perspective. And we don’t think the calculus has changed on those factors because of this coup. But looking at Orezone’s share price and [the share prices] of some of its peers in country, we don’t believe that the market completely shares that view — investors appear to be layering a lot of risk into their valuation of some of these stocks.
INN: Looking at Orezone’s relationship with Burkina Faso, the government has a 10-percent free-carried interest in Bombore, plus a 4-percent NSR. Is that standard?
DS: It’s quite normal for the host nation to participate in the economics of a mine in any country through taxes and royalties and other instruments. When it comes to Burkina, they take a 10-percent free-carried interest in the economics of a project, and Bombore is no exception to that. There’s that, and then there is a sliding-scale royalty that changes with the gold price, in addition to taxes. In our view, the government’s level of participation is actually quite reasonable in Burkina relative to other countries. When you add up all of the cash flows that don’t head to shareholders  and that head to the government, it’s not really a punitive level of participation.
And in our view, it’s actually good to have the government participate because then it’s motivated to facilitate the development of the project in an expeditious fashion — the government is going to get money out of it, so it shouldn’t want to put the brakes on. [Government involvement also] reduces the perception of risk that the country might in future really inflate its share of the economics; it also might even reduce the perceived risk of expropriation.
INN: Looking ahead, Orezone is currently in the process of updating the 2013 mineral resource estimate for Bombore (due out Q3 2015). What should investors be looking for in that report?
DS: What we believe you’ll see is a lower gold price assumption leading to a slight downtick in contained ounces, a slight uptick in the average grade and then maybe an increase in the confidence level of some of the resources. But I wouldn’t expect a massive change in the numbers. Bombore has been around for awhile, [and] Orezone has done a very good job delineating the heart of it, so it’s not as if there’s going to be a new zone that we don’t know about layered into there. So we wouldn’t put the market’s expectations as being incredibly lofty on what we could see from this resource.
Looking further out, we continue to see strong exploration upside at the project and the potential for adding significantly to global resource ounces. But for the time being, Orezone is prudently focused on de-risking the ounces that they have and bringing them into the development phase.
INN: What will it take for Orezone to bring Bombore into production? I’m thinking in terms of a timeline and funding.
DS: That is the real question mark on the company and the project. Assuming successful receipt of that mine permit towards the end of this year or early 2016, the company will turn its focus to financing. Bombore, based on this latest feasibility study, has an initial development capex of US$250 million. That’s a pretty reasonable capital cost in our view given the quality of the project, level of production and all-in sustaining costs. But for a company with Orezone’s market cap — $30 to $35 million — to have to raise $250 million in this environment is daunting in my view, and that’ll be the real hurdle for them going forward.
There’s other things they can look at — they can look at debt, which undoubtedly will be a large component of the financing package if and when it’s successfully put in place, [as well as] royalties, streams, that kind of thing. And management has looked at these things in the past, they did a small royalty deal recently. Equity will undoubtedly also be a component. Assuming they are able to secure financing, we believe development would start immediately, and with an 18- to 24-month development and commissioning timeline, we could see first ounces in 2018.
INN: Anything you’d like to add about Orezone?
DS: Orezone’s a name that we like, and especially at current levels we think it’s very, attractive. Really because of that, the wildcard here is M&A. I think it’s a relatively likely scenario that a larger mining company will come in and kick the tires on buying Orezone — [there is] scalability and optionality layered into that mine plan, [and Bombore is] a project that works today in what I would call a challenged gold price environment, with good economic returns because of its low all-in sustaining cost base. Furthermore, if the gold price does run, then you’ve got a very large underlying sulfide resource that could underpin significant production levels for many years — one of the most important criteria the major miners use when evaluating potential M&A.
The stock’s trading at basically a 90-percent discount to our calculated net asset value for the company. So another mining company with a longer-term view that wants to add reasonable levels of low-cost production with that scalable optionality in a decent jurisdiction would find a company like Orezone very attractive.
INN: Finally, let’s touch on the gold price. The consensus seems to be that there won’t be much movement in 2015, but what are your thoughts?
DS: We definitely share that view. Not a lot of movement, but we think there will be volatility in the gold price as broader macroeconomic events occur. Political instability, the potential for Greece to exit the EU, the possibility of rate hikes and US dollar’s performance have each had an impact on gold and the broader market as well, and things like that are going to continue to affect how commodities prices move, particularly gold.
It’s challenging to forecast what the gold price will do on a very precise level, but our view at Raymond James is that the gold price should trade in a range over the next six to 12 months and gradually appreciate in value. In our modeling we forecast $1,250 per ounce on a flat forward basis for gold, which is a bit above current levels; however, it can be argued that investors assume a higher gold price when they think about the potential upside for gold equities.
Securities Disclosure: I, Charlotte McLeod, hold no direct investment interest in any company mentioned in this article.
Editorial Disclosure: Orezone Gold is a client of the Investing News Network. This interview was conducted as part of the company’s paid advertising campaign and is paid-for content.
Interviews conducted by the Investing News Network are edited for clarity. The Investing News Network does not guarantee the accuracy or thoroughness of the information reported. The opinions expressed in these interviews do not reflect the opinions of the Investing News Network and do not constitute investment advice. All readers are encouraged to perform their own due diligence.
Click here for David Sadowski’s full disclosure.


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