Mexican gov’t greenlights Orla Mining’s Camino Rojo

Mexico has approved the environmental impact statement (EIS) for Orla Mining’s (TSX: OLA) Camino Rojo oxide gold project in Zacatecas state — clearing the way for mine construction to start.

The approval from the Mexican Federal Environmental Department (Semarnat) also satisfies one of the key conditions for the company to drawdown the remaining US$100 million available on a US$125 million project finance facility.

“With its Camino Rojo environmental permit, Orla is among the few permitted and financed projects progressing to construction worldwide,” Andrew Mikitchook of BMO Capital Markets commented in a research note to clients.

The approved EIS will enable the company to maintain its goal of producing first gold at the project in 2021, Jason Simpson, the company’s president and CEO, said in an interview.

Camino Rojo, about 50 km southeast of Newmont’s (TSX: NGT; NYSE: NEM) Penasquito mine, covers 2,060 sq. km and includes an oxide gold-silver deposit as well as a deeper gold-silver-zinc-lead sulphide resource.

“There are about 7.3 million ounces of gold in measured and indicated resources below the oxide and if you add inferred, we’re well over 8 million ounces,” Simpson says. “Going after the 8 million ounces of sulphides that reside below the oxide is Orla’s most valuable asset.

Orla Mining’s Camino Rojo gold property in Mexico. Credit: Orla Mining.

“A lot of the excitement about us — supported by a very robust gold price — is a fully funded, now fully permitted, very robust oxide project as the starting point but people are also starting to look further down the track at the sulphides that are going to follow the oxides, and when you combine the oxides and the sulphides, frankly, there just aren’t that many 10 million oz. gold projects that are in mineable locations like Zacatecas that are being driven by a management team that builds and operates mines.”

Since the beginning of the year, Orla has been studying different options on how to develop the deposit’s sulphide ounces. The main question is whether the company will develop and process them itself, or whether it will transport the mineralized material to Newmont’s nearby Penasquito operation for processing. Newmont is currently Orla’s largest shareholder with an 18% stake in the company. A decision will be made next year.

But in the shorter term, the priority is to start construction of the open pit. Detailed engineering is now over 73% complete, and the company has pre-ordered and committed to over US$50 million for long-lead items. Major contracts for earthmoving and civil work are well advanced and are expected to be finalized before the end of August.

A definitive feasibility study completed last year envisions an 18,000-tonne per day open pit, heap leach operation with a mine life of over six years, producing an average of 97,000 oz. gold annually at all-in sustaining costs of US$576 per ounce. With an initial capital outlay of US$123 million, the after-tax net present value estimate for the project came in at US$142 million, at a 5% discount rate, based on a US$1,250 per oz. gold price.

The 2019 feasibility outlines a mineral reserve of 44 million tonnes at 0.73 gram gold per tonne and 14.2 grams silver per tonne, containing 1 million oz. gold and 20.1 million oz. silver. These reserves are within measured and indicated resources of 353.4 million tonnes grading 0.83 gram gold and 8.83 grams silver, which includes 94.6 million tonnes of leachable material. Inferred resources add 60.9 million tonnes to the company’s inventory, at 0.87 gram gold and 7.41 grams silver.

The company is also putting the finishing touches on a non-binding layback agreement it signed with Fresnillo in March that will allow it to expand the Camino Rojo oxide pit onto part of Fresnillo’s mineral concessions to the north for US$62.8 million in staggered cash payments. The agreement is expected to boost the project’s mineral reserves, and Orla is working on a revised feasibility study on a project that would be unconstrained by its current property boundary.

A production water well pump test. Credit: Orla Mining.

“The letter of agreement allows us to develop a larger open pit on our property and that will allow us to go deeper in the oxide pit and recover more gold, so the punchline is that people can expect an improvement to the already known oxide project, showing more gold and a longer mine life,” Simpson says, noting that he expects to complete the revised feasibility study before the end of this quarter.

Orla doesn’t expect funding to be an issue. In April, Orla closed a $75-million bought deal financing. Net proceeds are expected to be deployed towards the development and construction of the oxide phase of Camino Rojo.

In October 2019, the company entered into a commitment letter with Trinity Capital Partners for a secured project finance facility of up to US$125 million for the development of the oxide portion of Camino Rojo. The syndicate of lenders includes Pierre Lassonde and Agnico Eagle Mines (TSX: AEM; NYSE: AEM).

“Orla remains a unique combination of financed and now permitted development assets moving into construction,” BMO Capital’s Mikitchook wrote in his research note following news of the permitting milestone on Aug. 13. “At the same time, the company has two additional distinguishing features: 1) backing by three key strategic shareholders and 2) exceptional leverage from the 7 million oz. of sulphide resources (all categories) to the rising gold price.”

Mikitchook raised his target price on the stock from his previous $3.80 per share to $7.00 per share.

At press time in Toronto, Orla was trading at $6.88 per share within a 52-week range of $1.42 and $7.52. The company has about 227 million common shares outstanding for a $1.6-billion market capitalization.