Other poets display cabinets of precious rarities, minutely finished…Shakespeare opens a mine which contains gold and diamonds in inexhaustible plenty, though clouded by incrustations, debased by impurities, and mingled with a mass of meaner metals. – Dr Johnson
It is July since I last wrote a blog – about silver. You would think we had all the time in the world in this pandemonium but it is also a big space for loss of focus, diffusion and distraction. The tyranny of too much space and time and the blank page. But no excuses. The price of things must rise as much as the value of confetti-money must fall.
In general the Junior explorer has genially punched above its weight in metal discoveries. But the game has changed utterly. The big undiscovered metal is deeper and increasingly blind to the diving rod. For a long time now needs more than a prospector’s pick to find these deposits. It needs a sophisticated toolbox. Most of all it needs a sustained effort and deep pockets. The prospector’s sudden eureka moment at the outcrop was of a bygone time. It now takes a team of many complimentary talents applying the latest technology. It is a painstaking mission for the resilient to try, fail fast, fail better and keep trying to detect the metallic that lies beneath.
When I met geologist Bob Felder in Reno in the summer of 2018 I did not know that he was involved in the discovery of the Long Canyon gold deposit in Nevada. In fact I had never heard of Long Canyon. The mine produced 180,000 ounces of gold in 2019 and is operated by a Barrick-Newmont JV. At the time Bob was the CEO of a Junior gold project generator called Renaissance Gold. I was very impressed with another geologist working for them Renaissance called Dan Pace. In August last year Renaissance merged with Evrim Resources to form Orogen Gold Royalties – https://www.orogenroyalties.com/news/evrim-resources-and-renaissance-gold-announce-completion-of-merger-and-creation-of-orogen.
I like Orogen Gold Royalties and bought some stock before Christmas. What I like about Orogen is that they are different from most other Juniors that tap equity markets to fund exploration. Which works if you are lucky enough to make an early discovery but if you don’t then it you run out of road fairly quickly.
Nothing stays the same. The era of the prospector with the keen eye is long gone. It is getting harder and harder to make big discoveries. The gold mineralisation not yet discovered is deeper and deeper. Multidisciplinary teams of geoscientists need to read subtle alteration clues at surface. Sometimes they drill conceptual targets on a wing an a prayer. All this needs substantial budgets for drilling and most importantly sustained effort.
Orogen is a Junior that generates convincing drill targets on its own gold prospects. Nothing special about that. So what is different from its herd of peers is that it does not fund the highest risk part of exploration. Drilling. Orogen creates the opportunity to get rich for those miners with deep pockets who can afford to take the risk to drill and find nothing. If there is a discovery or even a compelling case for discovery then Orogen gets periodic cash payments from its joint venture partner. If the project builds toward a development decision then Orogen sells the project for more cash and retains a royalty. It is a strategy that is very effective in managing exploration-risk for shareholders. In a business where failure decimates success.
For the project generator model to work it needs an exploration team that has a good track record in finding mines. A team that has a deep geological knowledge of ore districts where big gold deposits have been found. Most of all it needs boots on the ground and a trained eye.
There are two ways to acquire gold royalties. You can hunt for opportunities and buy them. Most royalty companies are averse to any exploration risk and buy royalties when a project is at development-stage. Orogen tries to generate royalties for a fraction of the cost but has to take on the exploration risk. It is more a farmer than a hunter. It spreads the risk across a portfolio of projects with multiple partners. The hunter model is high-cost and low-risk. The farmer’s approach is low-cost but high-risk.
Some might say that the organic approach to nurturing gold royalties is a long term business but Orogen has a number of short-term and medium term value creation catalysts. These could lift the share price in 2021 and for that reason are worth looking at.
For the project generator model to work the cost of holding ground in the long-term must be modest. State royalties must also be small enough to allow room for the royalty added by the project generator. Jurisdictions that tick both these boxes are few and far between. Nevada and Mexico ticks both these boxes.
Orogen has CDN$11.2 million in cash at the end of November combined with a low cash. Certainly a lower cash-burn than many other Junior explorers trying to finance exploration on their own from serial equity financings.
I caught up with Paddy Nicol the CEO of Orogen before Christmas for a video chat.
The Orogen share price has fallen substantially since its debut in August on the TSX-V. Why has the OGN share price slumped since the merger in August?
PN: There are 9.2 million legacy options issued to former directors and employees of Renaissance. These options must now be exercised by February within six months of the merger and Orogen debut on the TSX-V. This overhang has likely depressed and held down the share price. We have seen this particularly since September so hopefully all this will be washed out soon.
How would you value OGN?
PN: It is too early in the development of this brand new company to contemplate dividends. The royalty portfolio includes four projects in Mexico, two in Nevada and four in Argentina on projects owned and operated by First Majestic Silver Corp and Heliostar Metals in Mexico and AngloGold Ashanti on the Silicon Gold Project in Nevada. There are also a number of highly prospective exploration joint ventures in the pipeline. Orogen’s business model is to harvest these gold projects through royalties and then reinvest some into exploration to grow its project portfolio and retain some earnings to build its treasury. I am not a big advocate of buying royalties because they are extremely expensive but if we find something strategic and smart to do then we might have a good look. Orogen wants to build a sustainable and profitable business based on royalties. Orogen is the only royalty company that is generating all its royalties organically from scratch. For example, Evrim’s investment into Ermitaño was in the range of $50,000 but to buy that royalty now might cost $25 million or more.”
A business based on royalties is a long-term strategy. What about interim cash-flows to keep the exploration wheels turning?
Since the merger to make Orogen there is a renewed idea behind restructuring the deals. In the past the big thing was to let them spend the money, give them as much time as they want, say 10 years. But at the end of the ten years you must table a pre-feasibility study. The deal Orogen is doing now shortens the option cycle to five years. For example, Peruvian miner Hochschild has to spend $5 million and pay Orogen US$5 million in cash payments over the five year exploration cycle on the Sarape Project in Sonora, Mexico. At the end of that period they must continue to make payments to Orogen as a part royalty buy-down by buying 1% of a 3% royalty. Note that this is not an advance payment against future revenue on the mine. In the deal structured by Orogen there is not an option for the miner not to buy down the remaining part of the royalty https://www.orogenroyalties.com/news/orogen-options-the-sarape-gold-project-to-hochschild.
What are the value-creating catalysts for investors to look out for in 2021?
- Orogen Gold has a 2% NSR on Ermitaño. A PEA for Ermitaño is due imminently and some limited production is expected in Q2 of this year. Ermitaño has an indicated and inferred resource of 381,000 ounces of gold and 11.7 million ounces of silver. Orogen’s royalty has exposure to 85 percent share of the green field exploration that exists in that camp. https://www.orogenroyalties.com/project/ermitano-gold
- At some point AngloGold will come out with results from the Silicon gold project in Nevada – as far as we are aware, there are five drill rigs, 2 RC and 3 DC are on site. Orogen sold the Silicon gold project last year to AngloGold for US$3 million but retains a 1% NSR on a defined area of interest within the southern part of AngloGold’s claim block. Corvus Gold’s property on this structural trend is called the Lynnda Strip and is drilling up against the Silicon property boundary. Coeur Mining’s Daisy, Secret Pass and SNA gold deposits extend southwest of the Corvus Drilling along a structural trend they call C-Horst. https://www.coeur.com/operations/project/sterling-gold-nevada/
Coeur Mining’s Sterling gold project complex is only 12 kilometres south of the Silicon claim block.
- Other catalysts are about announcing some new JV’s. Three have been done since the merger and we anticipate more in the first couple of months of 2021. Our corporate goal is to try to get to 13 to 15 JV’s by the end of 2021. Cash payments from that cluster of JV’s could generate significant funds to fuel further growth through exploration and decrease Orogen’s burn-rate. Also there is the prospect of making a big discovery with its partners.
If we ever find that special project that seems “too good to be true” then the team could confidently go to the board to get funding for drill it ourselves. Evrim only ever drilled one of its projects. A high-sulfidation gold project. It was the Cuale gold project in Mexico. Great trench results. Financing was on good terms, $7.2 million raised from Newmont on the back of that. But when it was drilled the mineralisation did not go down! Gut wrenching but that is the nature of the business. You have to kill some and move on in this business. https://www.globenewswire.com/news-release/2018/12/06/1662993/0/en/Evrim-announces-initial-drilling-results-at-Cuale-Gold-Project-in-Mexico.html
In hindsight Cuale may have been the trigger in 2018 for Evrim to look for a new strategic path as a royalty project generator and the merger with Renaissance Gold.
Is the Americas your sole focus?
PN: There is a new sense of focus on Nevada for gold. With the ground holding and the local but deep geological expertise in Dan and Bob and Patricia there is very strong exploration “bench strength” in Reno. Also in Mexico where of the three regional exploration areas the Rio Sonora Valley where Ermitaño is located is the least explored. Another focus is British Columbia where Evrim has expertise in the golden triangle and also the south central BC porphyry belts.
The only way Orogen would go into a new jurisdiction would be as a partner with a producer. This gives you the financial strength to do what Juniors can’t do because Juniors typically have very limited funds. Evrim did a deal like this with Newmont in the Trans Mexican Volcanic Belt in 2012. More recently with Newmont on a two-year regional programme in the Northwest Territories which is an extremely expensive place to work – Newmont funded 70% of the US$2 million budget. Evrim came up with the concept and staked the ground and contributed some of the exploration funding. We started with 24,000 square kilometres of regional exploration ground – BLEG, stream sediment sampling, and whittled it down to just 200 square kilometres of ground.
Where is OGN’s” Sweet Spot”?
PN: “Typically it is at the drill-target stage”. The riskiest part for the Junior is the drilling. Orogen is seeing an appetite for gold projects at an even earlier stage. An example would be the Trek 31 project in British Columbia which Orogen recently optioned to Pacific Imperial Mines Inc. last October and where there are no defined drill targets generated at this point but we think is a project with fantastic potential. https://www.orogenroyalties.com/news/orogen-options-the-trek-31-gold-project-to-pacific-imperial-mines
You get some money back before the target is tested and if it is a discovery then Orogen gets a piece of the action through a royalty. Also Orogen is attempting to do deals with a gold producers in Nevada on some Renaissance projects which also do not have specific drill targets on them. This earlier stage appetite is being driven by the gold price and the intense competition for good exploration ground. But again the typical situation is to generate compelling drill-targets and then you have a deal.
Orogen has an experienced and talented team of exploration geologists. Alongside Bob Felder is Dan Pace, new VP of Exploration, whose research and understanding of the RBM deposit in the Bald Mountain Mining District of Nevada led to the discovery of the Redbird Deposit at Bald Mountain. Patty Capistran is a highly regarded Senior Geologist.
Orogen has a good reputation for JV execution. Effectiveness and discipline in project management and budgeting. This is key to building trust when you are spending someone else’s money. Attracting partners is about the quality of your exploration team and the quality of your drill targets. But there are many more exploration failures than successes and when a project is run efficiently and effectively with discipline then you win respect and it becomes easier to build your partnership network.
Mining analysts do not cover Orogen. Orogen’s organic royalty generation model creates challenges for mining analysts. They do not know how to value Orogen. Mining Funds are also not equipped to appreciate Orogen’s business model with the exception of some savvy groups like project generator Altius (12% equity), Sprott Asset Management (8% equity) Adrian Day Asset Management (8% equity).
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Disclosure: The author bought shares in Orogen Gold Royalties before Christmas. Please read disclaimer below.
Disclaimer: This blog is written as a hobby and created as free information for entertainment purposes. It should not be viewed as financial advice. Rather it is the views of a curious exploration geologist nearer the end of his career who has a passion for exploration and discovery and helped find some gold and zinc mines along the way. Nothing in this blog is intended to predict future performance and past performance does not provide an indication of future results of any stock mentioned. You should not rely on the information in this blog. You should do your own homework and research and not rely on what you read.
 Corvus intersected 44 metres averaging 0.90g/t close to the property boundary. The Motherlode gold project of Corvus is less than four kilometres south of the Silicon Property – http://www.corvusgold.com/projects/mother-lode/.