Oroco Resource: Update

August 18, 2018 Leave a comment

The main pending news with Oroco is the finalization of the legal battles. Once this is done then things will really start moving on this asset, mainly management can start talking more about the size of the asset and the potential upside from further drilling.

In the meanwhile there have been couple of updates put out by management. These might not seem major press releases but they are quiet huge in terms of gathering momentum.

Oroco has acquired the Papago 17 mineral concession. This is an adjacent piece of land to Santo Tomas. It looks like mgmt is buying up adjacent land to ST to build a portfolio that they can likely sell once the legal issues are done. The terms of the acquisition don’t show any cash changing hands. So I’m thinking they will likely give away some % of the equity from the combined asset (ST, Papago, ….).

Oroco also acquired historical technical Santo Tomas data. This will help the company put together the material to sell this asset and also to figure out where to drill and prove out the resources. OCO was able to acquire this for $500K in cash pymts and 500K of stock options.

The other piece of information, which is really important, is the company has hired John Thornton as project manager. Thornton knows the ST resource better than anyone. Having worked on the initial 43-101 report. Thornton was retired and has come out of retirement to work on this ST asset. And he is taking lot of equity, 750k options priced at 20 cents, for taking on this role.

 

 

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Categories: Updates

Portfolio update

August 17, 2018 Leave a comment

I haven’t written in a long time. There have been couple of changes to my holdings that I recently made. So a quick update:

Valeura Energy (VLE): This was a very large position at the start of 2018. The main reason was the run-up that occurred starting in late 2017. Through the early part of 2018, the stock ran up even more. I held on to it until recently. I sold out of it after the results of the recent Turkey elections.

A few years ago, I had invested in Harvest Natural Resources. The asset they owned in Venezuela was world class. The market was not giving it fair value due to the country risk. I thought the market was over reacting and HNR was cheap. In the end the market was right and I got my a** handed.

I don’t think Turkey will create a similar situation w/ VLE. But I can’t be certain that it won’t. So I decided to sell out completely from VLE. I didn’t want to take on a country risk, currency risk, and drilling risk (the last is very small in my opinion). Especially when I have other ideas that I know will do very well.

 

Aegean Marine Petroleum (ANW): I have been following ANW since 2017. I saw the activist filings and didn’t expect them to win. But they won the board seats and were able to throw out the old management team. The board that the activist has selected is top notch and a big reason why I bought a large stake in the company. I initially bought a small position after the board got rid of the old management team. Then the stock got destroyed when the company disclosed they will be writing down $200M in A/R. The market started pricing in liquidation / bankruptcy. I thought the assets were very good that even in liquidation, I could make really good returns. So I grew my position by 5x.

The board is working on getting the audited results out and fixing the debt issue. The debt situation has been resolved and I think the audited reports are not too far. I think the upside on this is huge and the market has a very strong position to grown in the next couple years.

I have been wanting to write this one but haven’t had the time. Hopefully I will put something together in the next month or so.

Categories: Updates

Oroco Resources (OCO): A 9 year legal battle comes to an end

May 26, 2018 4 comments

(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.

The asset

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).

The option

(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).

Happy ending 

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.

Valuation

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.
(https://www.cnbc.com/2017/10/24/goldman-says-market-not-fully-appreciating-whats-sending-copper-higher-as-it-ups-forecast.html)

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.

Recent M&A:

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.

Insider Buying

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.

Risks

– 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.

 

More Reading

The company’s legal battle makes for lot of changes that are happening rapidly. The best resources I use to stay updated is the santotomascopper.com site and Calichebahada.com site.

http://www.santotomascopper.com

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

https://www.swissinfo.ch/eng/bloomberg/copper-deals-off-to-best-start-in-12-years-as-prices-surge/43857014#.WmxeUyMdlJU.whatsapp

http://calichebahada.com/

http://www.stockhouse.com/companies/bullboard?symbol=v.oco

 

Categories: Investment Idea Tags: ,

Morgan Housel: What other industries teach us about investing

January 23, 2018 Leave a comment

This is a really good presentation from Morgan Housel about lesson we can take from other industries and apply to investing. Morgan has an incredible talent in distilling the key points and presenting it.

Categories: Uncategorized

2017 Performance

January 4, 2018 12 comments

2017 was a crazy year. The S&P500 index has been on a tear the last 8 years. And 2017 wasn’t any different. The market ended the year up 19.41%. For the last 9 years, the index has been averaging 14.13% annual. Historically the index has returned approximately 10% annual since 1928 to 2014. So the last 9 years have been extremely bullish. We don’t expect the index to give this type of return going forward but with the low interest rates and herd mentality, I don’t expect things to correct anytime soon.

My portfolio returned 139.91% in 2017. The year was largely impacted by 5 very large returns. The knew these companies were cheap but we didn’t expect this type of return in a short time period. The big winners were HemaCare (215% return), Bewhere Holdings (300%), Petro River Oil (268%), Total  Telcom (110%), and Valeura Energy (253%). Out of these 5 holdings, we sold out of all except Valeura.

We ended the year with 3 position on our portfolio. We sold out of all other positions as I believe these 3 positions have huge upside potential in 2017. It was hard selling some of our holdings (HemaCare and Schmitt) but I think the current positions have huge short-term  catalyst.

Current holdings:

Valeura Energy (VLE): This is our biggest position. The company’s first test well with the Statoil partnership has been a success. The results from the well are much better than management had expected. The market rewarded the stock price by moving it up more than 7x in the last 2 months. But I think this is just the beginning. The main reason is institutions still haven’t started buying up the shares. Also even after the 7x run-up, the company is still valued very cheaply. The company will have a resource update in late January, which should be a major catalyst to get other aware of the company and the asset they own. I think the most likely outcome for this company is a buyout and it is likely to happen in 2018.

Unidentified company #1: This is a company that we became aware of by looking at insider buys. It is very rare that I see the type of buying from the CEO that I saw for this company. After digging around on the company, I initially didn’t find much that would shed a light on why the CEO is buying. But then following the press releases the company put out it started to become clear the company has some special assets that is making the insider buy. Digging around online it is easy to see which asset it is. This is a sub-$6M market cap company with an asset that is likely worth in the billions. From the press releases it seems clear the company is likely to sell these assets. Again we see this as a short-term catalyst that should have great rewards for shareholders.

Grande West Transportation (BUS): This company I’ve followed for the last 2 years. I knew the story but never got that excited by the valuation. But in late 2017, I noticed couple of things that lined up perfectly and made me build an initial position. The insider buying on this one is huge. Over a year ago, insiders had buying when it was selling at fraction of the current price. Even after going up multiples, insiders didn’t stop buying. The constant insider buying and that too multiple different directors, made it very appealing. The company also has been a huge success in Canada and has recently entered US market. The upside from the US market is huge and they have the right product to win this market. If successful, the company can easily be worth multiples. Also I expect the orders from US to start coming in early 2018. Finally, in late 2017 the stock dropped from $3.45 to $2. This created a great opportunity to start a position. (Recently I sold out of BUS. I wanted the capital to allocate to VLE due to the recent pull back in VLE).

 

Although I’m concentrated in 2 plays (VLE and Unidentified #1), I feel that the risk is extremely low that I can lose. I think both of these companies are extremely cheap and once the market becomes aware of what is happening, the stock will be worth multiples. Also, I think the catalyst is in place for the market to wake up in early 2018. I feel like the biggest risk is me doing something stupid, like selling too early. Although 2017 has been good, I think 2018 is likely to be even better.

 

 

Categories: Performance

Moats

December 21, 2017 Leave a comment

This is a fascinating look at moat that Google Map has created over Apple (or any other mapping software).

Categories: Uncategorized

VLE: Successful 3rd flow test

December 19, 2017 Leave a comment

So far VLE had been 2 for 2 on their first test deep well. The company recently announced that their 3rd flow test has been a success. The results are similar to what the first and second (2nd test results were hurt by a mechanical issue) test.

Over the final 24 hours of stable flow, the well was produced at an average restricted rate of approximately 0.9 million cubic feet per day (“MMcf/d“) of natural gas. This rate compares to the final 24-hour rate of 0.8 MMcf/d in both Test #1 and Test #2.

Condensate production in the range of 20 to 30 barrels per MMcf was observed in Test #3. The condensate measurement is subject to considerable uncertainty given the nature of the testing protocol and the short duration of the testing.

So far VLE has shown production of 2.5 MMcf/d of natural gas at the restricted rate. Cormark recently made a comment that on a production well the company could easily show 10-30 MMcf/d. Now these are absurd numbers and the valuation for VLE just looks stupid cheap (even after a recent 5x+ in a month).

At production of 10 MMcf/d and gas prices at $7 mcf in Turkey, the annual revenue from one well could $25M+. And the cost per well should be around $6-8M. Clearly the ROI on this asset is superb for anyone to deal with the low country risk.

 

 

Categories: Updates Tags: