Sunday, October 25, 2009

The Guessing Game of Orko Silver


I was looking over Orko Silvers latest presentation again and thinking, why not post a couple variations on the valuation of Orko Silver now and in the future? Purely for entertainment purposes.

To start off this guessing game I will explain some variables which we will be using as our input. The first valuation I do will be one using present day information.

Orko Silver Corp. Resource Estimates (Indicated/Inferred)
Resource Estimate
Source : News Release February 19, 2009

The current indicated silver resources the Joint Venture has is rounded up 70 Million ounces. If you thus hear any mention of JV or Joint Venture then by that is meant Orko Silver and Pan American Silver.

Cash Cost per Ounce
Pan American Silver 2009 Production Forecast
Source : Pan American Silver Fact Sheet

The cash cost per ounce is derived from the chart above in which Pan American Silver does a round up of cash costs per mine they have. From that list I can then choose an average or a bearish or a bullish one.

Metallurgical recovery

Source : News Release April 17, 2008

Metallurgical recovery also plays a part in the valuation. What this means is actually, to get the silver from the ore you need to go through certain processes (cyanidation,...) to remove all other materials you don't want like other base metals, impurities, and more and eventually remain with the pure silver. Because of that process anywhere from 5% to 15% and more can be lost. That is why companies have something like a Metallurgical Testing done to see how much the recovery rate will be. Orko Silver has released in their news release which you can read above that they expect a 90% recovery.

Orko Silver ownership
Orko Silver ownership
Source : Orko Silver Corp. homepage

So, with these numbers we can get to work. I saw someone on a forum use the highest cash cost per ounce Pan American Silver has on their overview and I will also use that in my first two conservative valuations. So, here it goes, the first one is the current situation, with the second one I am a little more bullish on Orko's indicated resources (double) and the silver price ($21), the last one I decided to let loose.

Indicated Resources : 70 Moz
45% of Indicated Resources : 70 x 0.45 = 31.5 Moz
Metallurgical Recovery 90% : 31.5 x 0.90 = 26.75 Moz
Cash Cost per Ounce : $7.86
Silver Spot Price : $17.64
Value Silver after cash costs : $17.64 - $7.86 = $9.78
Value of silver : $9.78 x 26.75 Moz = $261.61 M
Shares Outstanding : 132M
Value (Value silver/Shares) : 261.61 / 132 = $1.98

Indicated Resources : 150 Moz
45% of Indicated Resources : 150 x 0.45 = 67.5 Moz
Metallurgical Recovery 90% : 67.5 x 0.90 = 60.75 Moz
Cash Cost per Ounce : $7.86
Silver Spot Price : $21.00
Value Silver after cash costs : $21.00 - $7.86 = $13.14
Value of silver : $13.14 x 60.75 Moz = $798.255 M
Shares Outstanding : 132M
Value (Value silver/Shares) : 798.255 / 132 = $6.04

Indicated Resources : 250 Moz
45% of Indicated Resources : 250 x 0.45 = 112.5 Moz
Metallurgical Recovery 90% : 112.5 x 0.90 = 101.25 Moz
Cash Cost per Ounce : $6.06
Silver Spot Price : $30.00
Value Silver after cash costs : $30.00 - $6.06 = $23.94
Value of silver : $23.94 x 101.25 Moz = $2423.925 M
Shares Outstanding : 132M
Value (Value silver/Shares) : 2423.925 / 132 = $18.36

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2 comments:

  1. Interesting analysis!Your middle scenario seems most probable. IMHO we will get at least 150 indicated and more if Nabct and El Orito prove to be worthy targets.Cash costs of $7.86 may well be on the high side for La Presciosa..so that means spot price of silver as a KEY component...All in all it would appear Orko has much upside potential even using your very conservative first scenario. Cheers

    ReplyDelete
  2. Indeed.
    One also has to consider, a valuation is only of use when in this case Pan American Silver will at one moment in time make a bid for Orko. If Pan American Silver does not pull through then they loose their 55%.
    So, doing a valuation on Orko Silver is that bit of a higher probability than most other juniors.
    And yes, $7.86 might be on the high side for La Preciosa but in my first example I just tried to be very conservative.
    All in all, as keeper material Orko definitely has the goods and the thrills of the ride in adding on current resources.
    I will let the treasures of the Sierra Madre surprise me!

    About the analysis, well the idea about doing this article really came after reading a forum members posting, I just worked it out with some extra facts and figures. Glad you like anyway.

    Cheers.

    ReplyDelete

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