Buy Orosur Mining* at 24.25p

Argues Tom Winnifrith of t1ps.com

Penny share Orosur Mining* has a track record of non delivery
It's management's priorities are not (I think) correct
And Evil has been a fan (losing money) for years....But
Its assets are impressive, it has cash and is profitable
The time to buy is when the good qualities are obscured by bad sentiment
That time is now.....
Orusur is a buy at 24.5p and at up to 30p with a 1 year target share price of 50p.

I start with 2 confessions about this free share tip. One: we own this TSX and AIM listed stock in the SF t1ps Gold Fund already. Two: As an activist shareholder I am ready to push other companies into "having a go at Orosur" (OMI) since I am not 100% convinced that the current management will deliver as much value as they should, as quickly as they should. I suppose a third confession is in order. Evil has been banging on about this company (formerly known as Uruguay Minerals) for years and the stock has gone nowhere. But the old boy is correct now and again and having chatted on Friday about what the assets are really worth I think that he is correct. The issue is when and how value will be delivered. But the asset backing is undeniable and I suspect that one way or t'other it is about to be realised.

The Assets

Let's start at the very beginning. It's a very good place to start. The company has c$9m of net cash and has farmed out its base metals assets to some Australian iron company (Gladiator) which, even in a firesale, must be worth $6million. So lets call that cash and cash equivalents of GBP10 million.

The producing asset is the San Gregorio mine complex in Uruguay. This consists of two pits (San Gregorio and Arenal). In 2009 they produced 70,147 oz of gold at grades of 1.73g/t. But output is declining and this year it will be just 57,500 oz at a grade of 1.25g/t meaning cash costs will be c$900 oz. But... if Orosur spends $10 million ( which we know it has) it can open up Arenal Deeps and Cawky and I reckon that we will then see output at 75,000 oz for 4 years at a cash cost of $600 oz. Prudently we allow a $20 million charge in year 4 to close down the mine. Management is farting about, talking of how it will seek funding to open Arenal Deeps (hell's teeth it has the cash) and opening in Q1 2011. Cawky and I would go for bust and open it asap. However even the existing mine should generate enough cash to just about cover PLC costs.

Then we have the development assets. Earlier this year Orosur bought a TSX listed company Fortune Valley which brings two Chilean assets Pantanillo and Anillo. I will ignore the latter for the time being and even the former cannot be said to have a proven resource. But historic drilling (17,000 metres of it) at the former prospect indicated a gold resource of 2.2 million ounces. We believe that a mine here could be developed for $100 million.

The Management

The Board owns a pathetic number of shares in Orosur. Share options do not count as a sign of commitment. Cawky and I have both put it pretty strongly to the company that it is no good the management bleating about how cheap the shares are if they do not buy themselves in the market. I hope that the message has got through. The main man is CEO David Fowler who is more credible than most mining CEOs running companies of this size. But I am afraid that is rather like saying that Cawky would win a 100 metre sprint if the rest of the field were clinically obsese, blind, one legged three year olds.

The Fowler strategy is to secure funding and to slowly bring Arenal Deeps into production while at the same time continuing work in Chile. EK and I would do nothing in Chile until Christmas so chuck everything at Arenal, avoid dilution and pretty quickly have a company chucking of $50 million per annum in operational cashflow. It is a nuance but I think an important one. We push our case.

Valuation

Let us assume that Orosur follows the suggestions of myself and Evil. All liquid assets are realised and used to bring Arenal Deeps onstream What is it worth? Let us assume that after PLC costs it leaves Orosur with GBP40 million free cashflow for each of the next three years and $10 million in year four (incidentally minelife could be longer but I am being cautious). Discount that back at 10% and you are still left with c$100 million ( call that GBP60 million).

That $100 million would incidentally provide the cashflow to develop Pantanillo without debt finance. But let us assume that the Chilean asset was sold. What would it fetch? In the current climate surely $25 oz is not extreme for a mine which, it appears , could produce at low cost 200,000 oz per annum for more than a decade.. That implies a valuation of $55 million. Let's call it GBP36 million. So we have a valuation of GBP96 million and there are 65 million shares in issue which equates to 148p per share.

However there are risks. South America is an odd place to do business. Orosur has a track record of non delivery. And you have to worry that Fowler may decide to issue shares at some stage even though he does not need to. Hence I will go with a target price of 50p which I will only revise if this company starts to deliver. But will it get the chance? There are other AIM and TSX listed companies operating in South America whose management really are very good (Minera springs to mind). I would suggest that if Minera offered 50p per share in paper then most investors would bit its hand off. It would thus be paying GBP32 million but could immediately strip out corporate costs so would get its money back in just one year from the expanded operations in Uruguay. Years 2, 3 and 4 plus the Chilean potential would be in for free. If I were running Orosur I'd be pretty panicked about the threat of a hostile offer and would be doing my utmost to bring Arenal Deeps onstream and to buy shares pa in the market without delay. Let us see how the management reacts to this article. For the rest of thus this is a win win. Either Orosur delivers or a bid is inevitable. The stance is buy at 24.25p and at up to 30p with an initial target price of 50p

*The SF t1ps Smaller Companies Gold Fund owns shares in this company. For more details on the fund - in which my SIPP will be buying more units tomorrow - email goldfund@t1ps.com or visit www.t1psim.com

Key Data

EPIC: OMI
Market: AIM
Spread: 24p - 24.5p (2.04%)

Tom Winnifrith edits t1ps.com where he publishes 20 t1ps a year with a constant stream of updates and there will be 9 CEO webcasts exclusively on the site next week. T1ps also plays home to bear raider Evil Knievil. For one year's access for as little as GBP73 click HERE