Natural Resource Investor
October 19, 2009
Orko Silver Corp (TSXV: OK; US OTC: OKOFF; Frankfurt Exchg: 063.F)
Orko Silver Advances to the Major Leagues as Pan American Silver Starts JV Development on Company’s La Preciosa Silver Project in Mexico. Major Breakout for Silver Impacts Markets!
La Preciosa Project Now Headed Toward Production Status Within Pan American's Portfolio of Producing Silver Mines. La Preciosa Has the Potential to Become One of the Largest Silver Mines in Mexico – With Orko Silver Having a 45% Carried Interest to Production.
Pan American's First 19 Drill Holes Confirm Orko Results. Current 30,000-Meter Drilling Program Aims to Upgrade and Significantly Expand Resource at One of Largest New Silver Discoveries in the World.
There are very few primary silver deposits in the world. Orko Silver's La Preciosa silver deposit in Mexico is presently the 9th-largest, and the 2nd-richest in terms of silver grade.
On April 14 this year, Orko announced a joint venture with Pan American Silver – presently the second-largest primary silver producer in the Western Hemisphere – to bring La Preciosa to production.
This joint venture is different from all the others and leaves Orko a unique silver player. In this report we explain the new joint venture and the new Orko, and how the company makes an exceptional opportunity for silver stock investors. We also address the initial work performed by Pan American, and the current development plan leading to a Preliminary Economic Assessment (scoping study) planned to be released by the partners early to mid 2010.
Orko has virtually no downside with the joint venture today, because it is fully carried as to all exploration and development costs right up to production. Its La Preciosa Project is the beneficiary of a first-class development program by one of the strongest silver producers in the world today, including a current 30,000-meter drilling program that is one-half resource expansion drilling and one-half in-fill drilling to advance the inferred portion of the resource to the M&I categories.
And Orko's upside is very large. The company's shareholders will essentially benefit from a free ride on the development of this large primary silver deposit – and then the upside of production possibly starting in three to four years.
But first, within 18 to 24 months, as continued exploration and as advanced development of the project proceeds, it should be considered that Pan American may make the offer to buy out Orko for a significant premium. This potential opportunity for investors also comes free with the stock today.
As we say, Orko Silver is a completely unique silver company:
- Little to no need to dilute its share base; plenty of cash
- 45% carried interest in one of the largest silver deposits in the world.
- Partnering with US$1.65 billion-market cap Pan American Silver.
- Already, with the release of the assays from the first 19 diamond-drill holes completed by Pan American, the Orko results have been confirmed and both partners are excited about this year's new exploration drilling and metallurgical test work to be released in the coming months.
- Truly exciting resource expansion potential, with a 30,000-meter drilling program now started.
- La Preciosa could become one of Pan American's largest mines, and potentially one of the largest mines in Mexico.
The Joint Venture Deal
On April 14 this year, Orko Silver and Pan American Silver Corp., jointly announced the formation of a joint venture (JV) to advance Orko's La Preciosa project to production.
- Pan American earns a 55% interest in the JV by bringing La Preciosa into production. Orko will be fully carried and will end up owning 45% of a producing mine. Until the start of production, Pan American has no earned interest in the project or assets. The cost to bring La Preciosa into production – including all drilling to bring the resource to reserve status, including full bankable feasibility, including the construction of ramps and mill, including all metallurgical work – is estimated to range between US$150 million and US$250 million.
- Pan American made a C$5 million investment in Orko at C$1.25/share, a significant premium to market.
- Pan American will spend US$16 million on exploration and development to complete a feasibility study in the next two years.
we endorse the possibility of a major WIN for Orko shareholders.
As announced jointly on June 22, this year's program at La Preciosa consists of 30,000 meters of drilling, with two to four diamond drill rigs active, as well as initiating other project developments including advanced metallurgical testing – all at a cost of US$5.7 million, all being paid by Pan American.
The 30,000-meters of drilling is broken down between in-fill drilling on the Martha Vein to bring the inferred portion of the resource (78 million oz. of silver equiv.) into the measured and indicated categories. This will involve approx. 15,000 meters of drilling.
The other half of the drilling program will explore prominent vein structures within the joint venture property that have been previously discovered by Orko. This drilling will start with the Nancy Vein, where trenching has demonstrated stronger mineralization than did the trenching of the Martha Vein, which contains most of the mineralization thus far discovered at La Preciosa.
About this year's drilling program, Geoff Burns, the President of Pan American, said, "We are set up, we are in the field working and I am extremely optimistic about the potential for a meaningful expansion of the resource base." This statement, from one of the most experienced silver-producing executives, means a lot.
In addition, Gary Cope, the President of Orko, stated that Orko will be "regularly disclosing drill results over the balance of the year." In other words, Orko will NOT be issuing just 1 – 2 statements/year about exploration progress as occurs frequently with JVs with majors, rather, like other juniors, will be announcing results from assays as they come available.
Already, as released by Orko on September 8, three key actions have been performed by Pan American.
- PAA's Phase-I delineation drilling at La Preciosa consisted of 31 diamond drill holes totaling 8,850 meters. PAA has received results for approx. 6,300 meters of the drilling, the first 19 holes. The holes are located in the heart of the Martha vein structure and were drilled at approx. 50-meter spacing in an area previously drilled by Orko at 100-meter spacing. The drilling has confirmed Orko's drill results at La Preciosa. Phase-II diamond drilling is underway.
- In addition to the drilling, PAA has completed 57 trenches on regional exploration targets and collected 557 samples. These results have encouraged PAA to commence drilling on the exploration targets including Nancy, El Vaquero, Baritina, Baritina Norte (Martha North) and Orito Norte.
- PAA has also completed 90% of a planned first-phase detailed metallurgical program. These studies are a key component in the upcoming Preliminary Economic Assessment.
Investors in Orko are, in all likelihood, in for an exciting year, as we demonstrate in the ‘Exploration Potential' section of this report below.
Pan American Silver, the ideal partner
In terms of silver production, Pan American Silver Corp. (NASDAQ: PAAS; TSX: PAA) has the objective of becoming the world's number-one silver producer. In 2008, Pan American had higher production than both Coeur d'Alene and Hecla. However, both of these companies are rapidly increasing their production each year, and analysts expect at least Coeur d'Alene to become larger than PAA. PAA needs to increase global silver production. The company is presently producing from six silver mines located in Mexico, Peru and Argentina.
In 2008, PAA produced 18.7 million oz. of silver, which generated US$338.6 million in sales and earnings-per-share of 31 cents. In 2009, the company's target is to produce 21.5 million oz. of silver at a cash cost of US$6.28/ounce. The company has increased its production for 13 consecutive years.
In the last four years, PAA has successfully built and put into production three new silver mines. This same development team is presently at Orko's La Preciosa Project and plans to bring it to production within as little as three to four years.
PAA's largest mine is at Alamo Dorado in Mexico, producing approx. 4.8 million oz. silver per year. The plan is for La Preciosa to become PAA's new flagship mine with an early production target approaching 7 million oz./year. Clearly, for their newest development opportunity, the Pan American team of engineers, geologists and metallurgists will be delivering their very best. And 45% of this production will belong to Orko.
La Preciosa is one of the largest primary silver deposits globally. For comparatives, in terms of GRADE, it is second to only the Prognoz Silver Deposit in Siberia, and is believed to be the second-richest silver deposit of magnitude with average grades of 201 g/t silver-equivalent (more than 6 oz./ton).
In terms of SIZE, La Preciosa is already the 9th-largest undeveloped primary silver deposit with 146-million oz. of silver-equivalent in all categories. With this year's exploration drilling, La Preciosa could quickly move up the ladder of primary silver deposits globally.
For a view of the deposit in its regional setting, please click through here.
Click-through here to view the project, including the key deposit area and additional zones to be drill-tested this year.
The Pan American/Orko Joint Venture controls 100% of the 32,400-hectare La Preciosa Silver Project. La Preciosa is ideally located for production, 40 km. northeast of Durango City, Mexico. It is located in the heart of Mexico's prolific Silver Trend, on the Mesa Central along the east side of the Sierra Madre Occidental mountains, with essentially ideal infrastructure for production:
- 90 minutes from the city of Durango
- 60 minutes from Durango international airport
- access by paved highway
- 8 km. to the national power grid
- 8 km to rail lines
- 2 hours by road or rail to smelter
- water sources directly on property
- no camp on site, none needed, all workers live at home locally
Resource Estimate*Silver-equivalent values are based on converting the gold ounces at a 60:1 ratio. A cut-off grade of 100 grams/tonne, or more than 3 oz. of silver/ton, was selected by MDA.
The current resource estimate was prepared independently by Mine Development Associates based in Reno, Nevada. The estimate includes drilling results from 354 drill holes at La Preciosa, all of which have been drilled by Orko over the past 4 years.
The resource included in the Inferred category is presently being upgraded to the higher confidence level of Measured and Indicated categories, with in-fill drilling now underway.
As mentioned above, the Martha Vein contains the bulk of the resource at La Preciosa, representing approx. 74% of the silver. It is relatively flat-lying, dipping an average of 20 degrees to the west. It has a known strike extent of over four kilometers and varies in down-dip extent between 200 meters to 1.7 kilometers.
The Martha vein varies in thickness from one meter to 40 meters and averages approx. 15 meters. Within that zone are one or more veins and vein breccias which contain the resource-grade material and which average about five meters in width.
The plan is to find another vein greater than or equivalent to the Martha Vein, and then another, while extending and upgrading the resource in the Martha Vein.
The exploration potential at La Preciosa is very large. Both partners endorse the concept that exploration will uncover significantly more resources. Drilling is underway now on the highly prospective Nancy Vein, located 1 km. southwest of the Martha Vein.
Trenching results released by Orko in mid-June highlight the potential at the Nancy Vein. Of particular note are trench sample NT09-12, which yielded 4.2 meters grading 1.342 g/t gold and 217.4 g/t silver for a silver-equivalent of 298 g/t, and trench sample NT09-07, which yielded 8.25 meters grading 0.653 g/t gold and 132.4 g/t silver for a silver-equivalent of 171 g/t.
Trenching of the other veins at La Preciosa, including the surface expression of the Martha Vein, have yielded lower silver values near surface – significantly lower values actually – and this highlights the potential at Nancy. The Nancy Vein has been exposed by trenching for a distance of over 450 meters and remains open along strike in both directions.
Extensions of the Martha Vein will also be addressed with new exploration drilling this year, along with drilling of another four prospective veins (El Vaquero, Baritina, Baritina Norte and Orito Norte) discovered with earlier prospecting by Orko, and by the trenching completed thus far by PAA.
Gary Cope, President, CEO, and Director – Mr. Cope has more than 30 years of experience in corporate finance and 12 years as a senior officer and director of various publicly-held companies. He has an extensive background in corporate strategy, as well as significant experience with the financing of publicly-held companies. Mr. Cope arranged financing for the South Kemess project and was instrumental in the negotiations and sale of the South Kemess deposit.
Mike Devji, Executive Vice-President and Director – Mr. Devji is an experienced financier of public companies. Among other achievements, he led a group of investors who financed a 40%-interest in the South Kemess Gold-Copper Deposit in British Columbia, which was subsequently sold for over C$400 million.
George Cavey, P. Geo., Vice-President Exploration and Director – Mr. Cavey has managed early stage through advanced exploration programs worldwide for 30 years as the president of a geological consulting company. He earlier served as president of the Canadian Council of Professional Geoscientists. He was the 2004 recipient of the Association of Professional Engineers and Geoscientists of BC's Westerman Award, the association's highest honor for a professional geoscientist.
B H (Ben) Whiting, M.Sc., P.Geo., Chief Geologist – Mr. Whiting has 30 years of experience in the international mining industry. He has worked for both major and junior mining companies managing a wide range of operations, from exploration all the way through to production. He also has experience as an advisor to government agencies. Formerly an adjunct professor at Queen's University, Mr. Whiting was awarded the Aaro Aho Foundation's prize in Economic Geology.
Art Freeze, P.Geo., Consulting Geologist, Advisory Board Member – Over the past 40 years, Mr. Freeze has held consulting, supervising and managing positions with several mining companies including Cominco Ltd., Pasminco Exploration, Echo Bay Mines and Pan American Silver Corp. He is president of Stillwater Enterprises Ltd., and served as the primary consulting geologist for Goldcorp Inc. until June 2007.
By any valuation measure available, Orko Silver is significantly undervalued, as it presently has a market capitalization of approx. C$90 million, or US$80 million.
Let's consider, for example, the two recent buyouts: Hecla's purchase of 70% of the Green's Creek Mine in Alaska and Coeur d'Alene's buyout of Palmarejo in Mexico. Hecla paid US$750 million for 110 million oz. of silver, or $4.75/oz., and Coeur D'Alene paid $US 1.1 billion for 200 mil. oz. silver, or $5.50/oz.
Assuming Pan American earns its 55% by achieving production, and assuming no discovery of additional ounces at La Preciosa (an unrealistically conservative assumption), this approx. $5/oz valuation from the two buyouts can suggest share valuations for Orko Silver of US$2.46/share (C$2.75/share) on the basis of such comparables. Obviously, however, such factors as additional resources, world silver prices and global economic conditions can offset such notional estimates.
The joint-venture partners' plan is to upgrade the resource, expand the resource and issue a Preliminary Economic Assessment. All positive progress will cause Orko Silver to become more broadly appreciated by the market and potentially lead to significant revaluations of the company.
Taking a broader survey of this sector, there are very few pure-play silver companies in advanced exploration or development today. Canaccord-Adams Research tracks 19 such companies, but only 12 of those offer more than 50% silver in their total resource. Of the 12, deleting those with political concerns, metallurgical problems, or a small resource leaves only a handful to warrant the attention of the serious silver investor.
Concurrently, with silver trading stably in the $15/oz to $17/oz range, this sector holds tremendous potential for large gains in value.
Against this backdrop, Orko stands out clearly from the crowd as the company with a world-class project selected by Pan American Silver. PAA is one of only 4 major silver producers in North America in the position of having the experienced personnel who know exactly the full criteria for development of a major pure-play silver mine.
Further, the unique character of the JV agreement – with Orko having a 45% carried interest all the way to production – leaves this company as a serious primary silver developer, and exhibiting certain unique advantages:
- No further dilution
- 30,000-meter drilling program this year, now started
- 45%-owner of one of the world’s major silver deposits with large growth potential
- Partnering with one of the best and biggest silver miners
- And a modest market valuation
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