Intro:

I recently took a big long position in Oroco stock. This is a junior copper play that sits on a historic copper deposit in coastal north-west Mexico. I say historic, because the copper resource was validated way back in 1994. Fast forward to today, this copper deposit is about to be officially revalidated, and very likely at a much higher value. Oroco’s current market cap is a fraction of that expected value, and I expect shares to rerate to much higher levels once the official word is out (before summer). The endgame here is a big miner acquiring the copper deposit from Oroco, which will, I think, deliver a 5X return or even more. I expect this to happen in 2024.

History:

As said, Oroco’s copper deposit is based in Mexico, and is called the Santa Thomas project. Back in 1994, a PFS was conducted that resulted in an official >6-billion-pound copper resource. The copper price than was merely a dollar, so nobody found it economic viable to buy up the property and get the copper out of the ground. At some point, Oroco bought the property rights – they now own 86% - and commenced a new drilling program in 2021. The copper is quite near-surface, so it’s relatively easy to extract the copper. The Santa Thomas area has great infrastructure and Mexico is one of the most permit friendly countries on earth. It also has a very good local community backing. I suggest going to their website and checking out the news flow over those years. Oroco’s goal is to sell it to a big miner which has the capabilities and funding to exploit such a big Tier-1 copper deposit, that could last more than 20 years of mining.

Now what?

A PEA and MRE are coming up within a few months. A historic milestone for the company, because finally they can scrap the term historic. The copper deposit will then be a current deposit, valued much higher than in 1994. The new drilling results thus far are quite positive, not only reaffirming the historic findings, but also discovering more copper and higher grades here and there. That is because the new drilling program is much more elaborate and bigger than the historical drilling program prior 1994. And nowadays, the copper price is not $1, but $4. My expectation that the total tonnage will exceed 10 billion. Management even said in 2021 that the tonnage could be multiples of the 1994’s report, but let’s be conservative and assume 10 billion.

In other words, the PEA will be the official word out and the start of the sales process. It’s like you putting a for sale sign in front of your house if you have plans to move. The market will definitely wake up and find out that Oroco stock is trading at a fraction of the NPV. Oroco will suddenly pop up on screeners as a company with a current resource, instead as a speculative exploration company with some drilling activities. A wave of new investors will flock to Oroco and realize how undervalued it is. 

After releasing the PEA and MRE, the company will work on a PFS, which will take about half a year to a year. Big miners need a PFS, so that is why I think a buy-out could occur in 2024.

Why is the stock trading so low?

If you look at a historical chart of Oroco stock, you can see this stock was a multi-bagger, rising from $0.30 to >$3 in just over a year. An amazing trade for whoever who got in. However, the valuation got way ahead of itself given the known information at the time, and shares crashed subsequently. A lot of traders got burned. It now trades sideways for more than half a year, on low volume. People got out and stayed out. Not many folks talk about Oroco anymore, despite the positive news flow and a PEA/MRE around the corner. A key factor why the opportunity exists. 

Path to re-rating

Current market cap - using the fully diluted shares outstanding of 230 million per their January 2023 investor presentation - is about 185 million CAD. The after-tax NPV, using a $3,75 forward copper price, 86% property rights and 230 million shares will probably be in the billions. So, Oroco currently trades at about 5% to 10% of that NPV. It could be even lower. I think 20% is fair for such a rare Tier-1 copper resource. That’s a good double from here. The second re-rating will come if a big miner does a bid. 50% of NPV is then fair. That equates to a $4 per share minimum. Of course, it depends on the copper price and M&A buzz in the commodities space, but a 5X return is definitely in the cards. But I would not be surprised to see even higher returns. There are no warrants outstanding that could hinder the re-rating, so blue skies ahead.

What’s the risk?

Investing in a junior commodity play is always risky. The risks are as follows:
-    Oroco issues new shares. They need to raise money this year. I’m not too worried about this, because the raise will be relatively small, but it could cause a temporary drop in the share price.
-    Mexico’s jurisdictions suddenly change.
-    M&A doesn’t pick up somehow, and Oroco needs a plan B to exploit the copper deposit. Investors won’t like this. Me neither.
-    Despite all the articles you read about copper shortages, the copper price takes a hit. This happened last year, when copper dropped from $4,5 to almost $3. 

But given the fact that Oroco stock has sold off so much already and there are no known showstoppers, I think the downside risk is quite limited.

Conclusion

When looking into micro-cap stocks, evaluate the risk/reward carefully. In this case, the downside risk is quite limited, but the upside scenario is realistic and indicates multi-bagger gains. If you are looking for a grand opportunity in these times of looming commodity shortages, Oroco may just fits the bill.