(Note: This is the undisclosed position that I mentioned in my 2017 performance post).
Oroco Resources (OCO) is a mineral exploration company with history of gold assets in Mexico. It is a company that has a history of acquiring assets, proving resources, and then selling assets. I hate investing in companies that are associated with gold mining but this is different.
But it is not the gold assets that makes Oroco an incredible investment opportunity. It is a copper asset that they recently got possession of. It has a story that includes corruption, copper price swings, fictitious lawsuits, securities fraud, naive investors, and a happy ending.
The asset that Oroco has acquired has a complicated history. But the story going forward is very straight forward. Oroco owns a large piece of this asset that is unlikely to be put into production by Oroco. The play is to provide some updated resource assessment and sell the asset (in an extremely bull copper market). The asset is something that major producers salvate over. And we have a tiny $20M market cap company owning it.
Santo Tomas is an asset that been known for decades as having a large copper deposit. This is an asset located in a mining friendly country (Mexico), with infrastructure (access to roads and railway) in place to mine and sell the copper. This is a huge sized asset, 7B+ pounds of copper, and some gold and silver. The copper deposit information is from a study published in 1994, so with the higher copper price and newer data we could see the asset size increase.
Also, the company has recently acquired adjoining properties. I’ve been looking to find the resource estimates for these properties but haven’t found anything concrete yet. So I put no value on it but it is likely worth a decent amount (actually a huge amount if you compare it to Oroco market cap).
(This is a very complicated story with legal cases in Bahamian, Canadian, and Mexican courts. Fortunately there is a site dedicated to layout the entire history and court documents to prove the story. http://santotomascopper.com/
The asset had been owned by Ruben Rodriguez. The asset was owed by a Bahamian company, Ruero International, which Ruben controlled, via a Mexican company. In 2001, copper prices hit rock bottom. Ruben wanted out, so he sold the asset to Fierce Investment.
The sale price was $8M, which Fierce was required to make in a series of scheduled payments. The agreement included a clause that if Fierce didn’t make the payments, Ruben could get back the asset (this is key as you will see below). Fierce initially made a few payments to Ruben but then they stopped making payments.
Fierce was controlled and run by David Hermiston. David basically was a crook who didn’t have any plans to make the entire $8M payment. David needed cash to keep making payments. So he setup a company in Canada, via which he could raise capital and then make payments.
David setup Aztec Copper in Arizona. He raised some capital from naive investors and signed a deal with Fierce. Fierce sold its rights to acquire Santo Tomas for cash from Aztec. Aztec agreed to make the scheduled payments to Ruben for Santo Tomas.
Aztec made initial payments but then stopped. So we now have a situation the acquirer is in default and Ruben can get back the asset (since payments haven’t been made).
Oroco to rescue
In 2010/2011, the management team of Oroco comes to the rescue of Ruben. Basically, a group composed of investors including Oroco’s management helps Ruben get back the legal ownership of Santo Tomas and in return, they gain an ownership interest. Once successful they negotiated to sell the interest they have earned to Oroco. (Oroco is currently negotiating the acquisition of the remaining interest that it doesn’t already own.)
Ruben isn’t a rich guy and he is based in Mexico. So he doesn’t want to deal w/ the international legal rules and doesn’t have the capital to fight the case to get back the asset.
The legal battle is extremely complicated. There are multiple jurisdictions (Bahama, Mexico, Canada) and fake lawsuits (between Aztec and Fierce). Fortunately for investors in Oroco, the legal battle is well documented. http://santotomascopper.com has a really good explanation of the entire legal battle and legal documents showing Oroco and Ruben getting ownership of the assets. (The company putting up a website to document all the legal documents in a public place, seems like a clear indication to me that this company has no intent to go into production. They want to sell the asset to some).
Oroco has been fighting the case and working its way through the international legal issues and the Mexican rules to get the asset back to Ruben and then registered to Oroco. This has been a long and expensive process. But after 9 years the end is here.
Oroco now owns the asset via a private company it has invested in. From what I can tell we still have couple of legal hurdles to complete. But these look like mostly formality. Oroco owns the asset.
We don’t really know how much Santo Tomas is worth. The asset was never put into production, so we don’t have a good estimate on the size of the resource or the production rate. We have some old data that says it is a large copper deposit. The size of the asset is something a medium or large major could only get into production.
Copper is high demand. All the talk about EV cars has been revolving around lithium and other minerals needed for batteries. But copper is a huge component and demand has been increasing. Also, copper has many other applications. As the Asian economies grow they will need more copper for all the construction that is happening.
If you look at the copper spot prices, we are currently around $3.2. We are within 10% of all-time highs in the last 5 years. There isn’t much new copper assets coming into production. Infact, copper was one of the best metal investment in 2017 and the future looks really good.
So how much is Santo Tomas worth?
An old study on the asset:
We do have an old, 1994, study that discusses the economics of the Santo Tomas property. It states: (http://webcache.googleusercontent.com/search?q=cache:baJ9NGuW-oIJ:www.northernminer.com/news/positive-study-at-exall-s-santo-tomas/1000179477/+&cd=2&hl=en&ct=clnk&gl=us)
“Capital costs for a 60,000-tonne-per-day operation utilizing all new equipment are estimated at US$318 million. The payback period will be 6.6 years with a rate of return (ROI) estimated at 16%. These estimates are based on US$1 per lb. copper, US$380 per oz. gold and US$5 per oz. silver.”
$1 in 1994 is worth $1.69 in 2018. So the capital requirements are $540M. The price of copper was $1.20 in 1994. So that is $2 in 2018, current copper prices are 60% higher. And this study is only the Santo Tomas asset, doesn’t account for the adjoining property (Oroco has acquire the adjoining property also). The article mentions the adjoining property is also very good.
For a company with a market cap of 20M, it doesn’t take much to move the valuation. But owning an asset like Santo Tomas makes it worth multiples of current valuation. We don’t need any exact numbers, but just based on the rough numbers above we know Oroco is worth a lot lot more. Don’t want to state how much it could be worth as it sounds too absurd, but I don’t think 10x from current prices is not absurd.
Old transaction in close proximity to asset:
In 2007, a Chinese company acquired an asset (Bahuerachi) close to Santo Tomas for $213M. Copper prices were dropping at that time. Current copper market prices are much higher, in the $3-3.50 range, a tight copper market with very few large deposits in a friendly mining country. The Chinese company acquired the asset for around 4.7 cents per pounds of copper in ground. At that price, Santo Tomas is worth about $350M. But the copper market is much different now and prices much higher.
In Nov ‘17, Altona Mining was acquired. It is an Australian based mining company. The sale price was $70M, about 4 cents per pounds for their copper resource. That values Santo Tomas’ 7B pounds at $300M. But copper prices have been moving up and Santo Tomas has much better geography and mining jurisdiction that Altona. The Santo Tomas property is much easier to access, has better infrastructure in place, and Mexico is much more friendly than Australia for mining.
Based on the different methods the asset is likely worth $300M+. The company currently has 88M shares outstanding. The current market cap is roughly $22M (CAD). Comparing it to the current market cap we have a huge runway.
If you look at the insider buying the CEO has been buying all the shares he can. From my records he has bought over 3M shares just in Q4 ‘17. The company had 88M shares O/S, so that is a huge % of the company to acquire in the public markets in a short time period.
– Even though Oroco has all the legal documents to show they have own the court rulings and own the assets, there could always be something that we don’t know.
– The company will likely need some capital to do testing and proving out the resources. They recently closed a PP that has been in the works for 6+ months. So now they have capital to do some initial study report and market the property. If needed, I think mgmt can wait until price goes up to do another raise for a fully study.