Buy vs Sell, page-23

The downward movement in the ORN share price the last couple of monthshas been a big disappointment. I believe Prieska is an exceptional mining assetand I have used the downward movement as an opportunity to increase my positionin ORN.

 

My conviction that Prieska isan exceptional mining asset is based on -

 

1.      Key infrastructure already in place - bigcapex and time saver

 

All therequired shaft infrastructure (including ventilation shafts) and lateral accessunderground are already in place to access the Deep Sulphides for mining andextraction at the deepest level.

 

Detailedengineering appraisal has confirmed the integrity of key installations atPrieska. Engineers have confirmed that the underground steelwork is in superb conditionwith only 15% of it needing replacement and that ground conditions are in agood state. ORN has confirmed that the mine refurbishment will not requiresubstantial engineering effort.

 

Paved / sealedaccess roads to Prieska site and paved road to existing rail siding, 48km fromsite - 800km rail link to major, bulk commodity and deep water port at SaldanhaBay.

 

175MWoperational solar power plants in the area - additional 675MW have beenapproved, with further 300MW pending authorisation - 4 HV regional lines linkedto national electricity grid.

 

Bulk waterpipeline supplies site sourced from Orange River with all year pumping capacity(Orange river is the largest river in SA).

 

1900m landingstrip - good contractors accommodation available in the private village ofCopperton, 3km from Prieska site via paved road.

 

Low regionalenvironmental sensitivity - existing disturbed/rehabilitated mine footprint.

 

2.     Mineral Resource - One of the World's topVMS deposits

+105Supergene / Oxide -

1.5Mt @ 2.25%Zn, 2.12% Cu, 0.22 g/t Au and 7.96 g/t Ag - Open Pit target.

 

DeepSulphide -

27.8Mt @ 3.92%Zn, 1.22% Cu, 9.5g/t Ag and 0.2g/t Au. ORN has stated that a substantialportion of the existing Inferred Resource will be moved into IndicatedResource. Petra Capital estimated 17.6Mt and given Petra's close relationshipwith ORN, I recon this number is going to be close.

 

The latestassay results shows that the orebody is thickening to the North West with veryimpressive grades (32m @ 5.5% Zn, 1.7% Zn, 0.3g/t Au and 15.3g/t Ag) andcorrelates to historic grades and intersections of 20m+. This rich thick zoneis open-ended along strike and there is a high probability that the existingMineral Resource will be expanded significantly with further drilling.

 

The latestassay results also reported thick high grade intersections on the South Eastmargin of the existing Mineral Resource - 11.3m @ 3.7% Cu, 4.42% Zn - 25m @1.38% Cu, 4.26% Zn. This rich thick zone is also open-ended along strike to thesouth east and there is a high probability that the existing Mineral Resourcewill here also be expanded significantly with further drilling.

 

Discovery of anew gold-rich zone just below the primary mineralised zone - given the closeproximity to existing underground infrastructure, this can add significantvalue to Prieska.

 

MineralResource in remaining pillars

ES previouslystated in an interview that there are 7Mt of resource in the undergroundpillars that were not mined by Anglovaal when they were the operators ofPrieska. Most of this is above the water level of the mine and with modernmining technology this presents early cash flow as they prepare to mine theDeep Sulphides.

 

A number ofknown smaller deposits are within a 12km radius from Prieska (ORN holds themineral rights over these):

Kielder - Doonies Pan (extract from thesisby D Rossouw)

The Kielderdeposit is 12 km north-west of Prieska. Newmont carried out regionalprospecting in the Kielder area in the late 1970s, making the discovery. TheKielder deposit is a shallow surface or of a sub-outcropping nature. Themassive Zn & Cu sulphides reported from portions of Kielder included onelens delineated (K3) and two only partly delineated (K1 and K6) by diamonddrilling. Using a 2,5% Zn + Cu cut-off for the K3 body, an estimate of 1,3 Mt grading 4.32 % Zn, 0.33 % Cu and4.45 g/t Ag was arrived at. A crude estimate of K6 gave 1 Mt grading 8.85 % Zn, 0.42 % Cuand 15 g/t Ag. The Newmont report of 1978 states that three anomalies (K2,K4 and K5) remained to be investigated. K2 and K4 had only been drilled withone diamond hole each and disseminated pyrite mineralisation was found. The K7gossan was disclosed by soil geochemistry, but not drilled.

Annex

The AnnexCu-Zn massive sulphide deposit was discovered by Anglovaal in 1969 and issituated 5 km south of Prieska. The ore reserves are estimated to be 1,5 Mt of1,5 % Cu and 0.5% Zn.

 

Prieska Area Current Mineral Resource

Total Prieskaarea current Mineral Resource - 1.5Mt + 27.8Mt + 7Mt + 2.3Mt + 1.5Mt = 40.1Mt

 

Potentialin the area surrounding Prieska

Apart from thehigh probability that the Prieska Mineral Resource will be increased alongstrike, the area surrounding Prieska holds huge potential.

 

Volcanogenicmassive sulphides (VMS) are formed as a result of a specialised type ofhydrothermal system that is developed within a submarine volcanic environment.VMS deposits commonly form clusters and are separated from each other by rocksof similar lithologies.

 

In a quantitative study of eight provinces in Canadaand Japan (Sangster, 1980), the size, metal content and number of deposits withineach province were measured and led to the establishment of a statistical modelfor a classical VMS province. The statistical review revealed that the average area occupied by a typicalcluster of VMS deposits is in the region of 850 km², which is equalto a circular area of approximately 32 km in diameter. The study furthermorestated that a cluster often contained an average of 12 deposits (usuallybetween 4-20 deposits) amounting to 92 Mt of ore. The largest deposit in thecluster contains an average of 67% of the total metal, and the second largestin the order of 13%.

 

In theAreachap Terrane the clusters are represented by the Areachap, Boksputs andPrieska/Kielder deposits. In the Prieska/Kielder region there are five knownmassive sulphide deposits, made up of the Prieska and Annex (Middleton, 1976)deposits and the three deposits of Kielder. The largest of these is the Prieskadeposit, with a current known deposit of 83.3Mt (47Mt historically mined + 1.5Mt Oxide + 27.8Mt Deep Sulphide + 7Mt inthe pillars). These deposits are situated within an area of 20 km radius. IfSangster's evaluation of massive sulphide cluster is presumed correct, and thePrieska deposit is assumed to be the largest within the cluster (83.3 Mt = 67%)then the remaining tonnages within the Prieska/Kielder cluster region, althoughhighly speculative, could be in the order of 41 Mt and the total tonnages in the cluster would be in the orderof 124 Mt. The suggestion by Gorton(1981) that the Kielder deposits did not necessarily originate from a singlevent could also indicate that there is a strong possibility of additional orebodies in the cluster region.

 

3.     Metallurgy

The results from the test work confirmed that thehistorical results can as a minimum be duplicated, thereby confirming theproduction of the historically sought after Prieska zinc and copperconcentrates -  zinc and copperconcentrate from Prieska were very sought after by smelters in the past due tolow deleterious elements - i.e. very "clean" concentrates making themattractive for smelters or as a blending product for bulk concentrate traders.

 

Markets

The share prices of other companies on the ASX mining and metals sectorhave also been hammered. There have been a number of reasons put forward forthis -

• thedecline in commodity prices as a result of the escalating trade war between theUS and China;
• currencycrises in Turkey and Argentina, causing risk aversion to emerging economies ofwhich South Africa is a part;
• debtproblems in Italy and rising interest rates;
• theuncertainty regarding how Brexit will unfold in the new year; and
• US Q3earnings season has appeared less rosy than many expected.

 

The effects of the trade war between the US and China is being felt onboth sides and in the rest of the world - hopefully when Trump and Jinping meetlater this week at the G20 summit they can find some common ground to startwith a process to ease the tension between the two countries, which will be apositive signal for commodity markets.

 

There is also a goodpossibility that Theresa May with her 27 EU counterparts will get theirproposal for the Brexit withdrawal agreement approved by the U.K. Parliamentduring the next couple of weeks and by doing so bring some certainty to theEuropean markets as to how Brexit could take shape.

 

Despite the above short term issues (that will be resolved is some formor shape), the outlook for both Zinc and Copper are very robust - especiallyfrom the time when Prieska is expected to start with production and marketingof its concentrates - read links below:

 

https://agmetalminer.com/2018/10/01/zinc-on-the-brink-of-new-beginnings/

 

http://www.miningweekly.com/article/copper-industry-sees-green-shoots-of-demand-after-trade-war-price-slump-2018-11-14

 

Valuation

Petra Capital did a pre-BFS update on Prieska (23 Oct 2018) andmaintained their buy recommendation with a price target of A$0.12/sh - theirbase case. Their base case valuation was based on -

• IndicatedResource of 17.6Mt
• Miningrate of 1.2Mtpa
• CapexUS$250m

 

From recent media coverage and from previous announcements and reports,the most likely scenario seems to be -

• IndicatedResource of 17.6Mt
• Miningrate of 1.8 - 2Mtpa
• CapexUS$235m

 

Using the above with Petra's other assumptions and numbers the pricetarget goes to A$0.20/sh. It is important to note that in Petra's numbers noreduction in operating costs were made despite the potential to increaseeconomies of scale as a result of the increase in production (from 1.2Mtpa to1.8-2Mtpa).