Orla Mining: Another Beat And Raise For This Consistent Producer

seekingalpha10-14

Orla Mining reported record Q3-24 gold production, and is tracking to deliver a nearly 20% beat vs. its initial annual guidance midpoint.Notably, the company is on track for another quarter of 65%+ ...

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G/T = grams per tonne (of gold or silver). GEOs = gold-equivalent ounces. SEOs = silver-equivalent ounces. AISC refers to all-in sustaining costs. LOMP = life of mine plan. TPD = tonnes per day. Orla Mining Q3-24 Production & Sales Orla Mining (NYSE:ORLA) released its preliminary Q3-24 results last week, reporting quarterly production of ~43,800 ounces of gold, a new quarterly record. In fact, this figure trouncing its previous record of ~34,500 ounces and translated to a 35% increase in production year-over-year. The higher output was related to an increase in stacked grades/recoveries with the latter related to optimization work, with ~1.94 million tonnes of ore mined at a stacked grade of 0.93 G/T of gold, albeit at a higher strip ratio (1.46 vs. 0.61). Notably, daily stacking rates have continued to exceed nameplate capacity, with an average rate of over ~18,400 tonnes in Q3-24. Orla Mining Quarterly Gold Production - Company Filings, Author's Chart Given the impressive performance year-to-date, Orla is now sitting at ~96% of its initial guidance midpoint of 115,000 ounces with a full quarter left to go, continuing its incredible track record of massive over-delivery on promises. And given the impressive Q3-24 performance, the company has lifted its annual guidance midpoint to 135,000 ounces, an ~18% increase from its initial midpoint set as it entered the year. Plus, even if we assume a softer Q4 and that Orla delivers ~139,000 ounces for the year, this would translate to a three-year average beat of ~17.6% vs. its guidance midpoint for the 2022-2024 period since the mine began production. These are truly phenomenal results that make it stand head and shoulders above its peer group, especially in a sector where many have struggled to meet expectations, whether in bull or bear markets for their respect commodity. Orla Mining Annual Gold Production & 2024 Estimates vs. Initial Guidance Midpoint - Company Filings, Author's Chart Digging into the results a little closer, Orla noted that the solid performance year-to-date was helped by higher recoveries from finer crushing following its work to reduce crushed size from 28mm to 23mm (80% passing size). The company shared that this test work was quite positive with a 3-5% lift in recoveries from the heap leach pad, translating to an extra ~3,000 ounces per year even using more conservative estimates. Additionally, Orla has stacked significantly more material on a year-over-year basis vs. 2023, with ~5.5 million tonnes stacked vs. ~3.49 million tonnes in Q1-Q3 2023. Orla Mining Quarterly Revenue - Company Filings, Author's Chart As for what this means for the company's upcoming Q3-24 financial results to be released on November 12th, Orla should generate upwards of $95 million in revenue despite selling fewer ounces than produced in the period (~38,300 vs. ~43,800). And assuming $95+ million in revenue, Orla would enjoy peer-leading revenue growth of 58% (Q3-23: $60.3 million), benefiting from the record gold price and peer-leading production growth. Let's take a look at how this might impact its costs and margins: Costs & Margins Looking at Orla's costs and margins, the company is a bit of the unique in the sector, operating one of the highest margin mines globally within its junior producer portfolio. In fact, Q2-24 AISC came in at industry-leading levels of $782/oz, translating to $1,550/oz AISC margins or 66.5% in the most recent quarter. However, this was with the impact of elevated sustaining capital related to constructing Phase 2 of its heap leach pad. So, with more normalized sustaining capital spend in Q3, an increase in ounces sold and the benefit of a softer Mexican Peso (~19.0 USD/MXN vs. 17.1 USD/MXN in Q3-23), Orla should enjoy sub $780/oz AISC in Q3-24. And if we combine this with what should be an average realized gold price of $2,440/oz or better, Orla is positioned to report AISC margins of ~$1,660/oz or 68% AISC margins, a massive increase from 61.3% in the year-ago period. Given this outperformance from a sales and production standpoint, its production guidance wasn't the only guidance to be adjusted, with Orla confident that it can deliver at the low end of its revised guidance of $800/oz to $900/oz for the year. Orla Mining Quarterly Gold Price, AISC & AISC Margins - Company Filings, Author's Chart Given the company's phenomenal margin profile, it's little surprise that Orla is generating more free cash flow per annum than some of its ~250,000-ounce peers that are twice the scale. In fact, Orla has already generated ~$68 million in free cash flow year-to-date, with Q2-24 operating cash flow soaring over 130% to $44.1 million. This free cash flow figure benefited from a VAT refund, but the company is positioned to generate over $140 million in free cash flow this year. Notably, the consistent free cash flow generation from Camino Rojo Oxides has given Orla one of the stronger balance sheets sector-wide, with ~$122 million in net cash, just $58 million in debt remaining and ~$273 million in total liquidity. This financial strength is an important differentiator vs. some of its \"build-on-the-back-of-significant-dilution\" peers, with the ability to construct mine in 2026 primarily from its rapidly growing cash position. And in a sector where finding producers with consistent per share growth is difficult, Orla has positioned itself to build South Railroad without the need for any dilution. The other benefit is that it could look at potentially looking at returning some capital to shareholders, given that it's in a far better financial position than expected due to the combo of a record gold price and outperformance vs. the LOMP at Camino Rojo. Orla Mining Quarterly Operating Cash Flow & Free Cash Flow - Company Filings, Author's Chart Recent Developments As for recent developments, the record gold price that's now hovering above $2,600/oz has not only significantly increased Orla's expected free cash flow generation, but it's also increased the value of its South Railroad Project (Gold Standard Ventures acquisition), which was already sporting a ~45% IRR at $1,900/oz gold using more conservative capex/opex assumptions. In fact, as the chart below highlights, this asset that sits in the wings that will ultimately improve Orla's diversification and jurisdictional profile is one of the more robust undeveloped gold assets globally from a production relative to upfront capex standpoint. Plus, even assuming a more conservative ~$250 million in upfront capex to account for inflationary pressures, it can easily be funded from the company's ~$250 million estimated year-end 2025 net cash position. Just as importantly, South Railroad is a very high margin project (estimated ~$1,100/oz first four years), meaning there will be minimal dilution from a margin standpoint relative to Camino Rojo Oxides' industry-leading cost profile. Finally, with the second-largest land package on the Carlin trend south of the massive Carlin Complex owned by Nevada Gold Mines LLC, there's certainly material upside from a mine life, grade, and NPV standpoint if the company can find a way to exploit the growing sulphide resource here and/or make a new sulphide discovery. South Railroad Project Average Annual Production & Upfront Capex vs. Other Undeveloped/Recently Constructed Gold Projects - Company Filings, Author's Chart Permitting Delays As for permitting delays, Orla has stuck with its 2026 construction start for South Railroad, setting the asset up for potential production in H2-2027. Meanwhile, although Camino Rojo is dealing with its own permitting delays after the CUS and MIA modification permit were not approved by SEMARNAT in Mexico, its re-sequenced waste stripping has allowed production to continue uninterrupted through 2026, de-risking the company while it hopefully enjoys more favorable permitting timelines under the new administration. As per the most recent commentary related to these permits, Orla noted in a recent presentation that it planned to re-submit in October with the new administration in Mexico under Mexican President Claudio Sheinbaum. Valuation Based on ~355 million fully diluted shares and a share price of US$4.50, Orla trades at a market cap of ~$1.60 billion and an enterprise value of ~$1.48 billion. This is a steep valuation for a junior producer that's set to produce roughly ~120,000 ounces per annum, even if at industry-leading margins, but it's important to remember that it has a few key attributes that make it stand out vs. peers:  The company has a significant opportunity in Camino Rojo Sulphides, a higher-grade deposit that lies beneath Camino Rojo Oxides with a mineral resource due by year-end. The company has a relatively high-grade oxide opportunity in Nevada with the South Railroad Project, with the potential to move this into production by late 2027, more than doubling the company's production profile. The company has a glowing track record of delivering on promises and disciplined capital allocation, which should command a premium in a sector where these are not always strong suits.  Given these key differentiators, I believe the current valuation is more than justified even if Orla doesn't screen as well as some of its single-asset producer peers from a free cash flow yield standpoint. That said, with an FY2025 EV/FCF multiple that's now higher than several diversified mid-tier and large-scale producers, it's hard to argue that Orla is cheap here and offering an adequate margin of safety for new positions. So, what's a fair value for the stock? Camino Rojo Operations - Company Website Using what I believe to be fair multiples of 1.0x P/NAV (6%) and 7.0x FY2025 cash flow estimates and a 65/35 weighting to P/NAV vs. P/CF, I see a fair value for Orla of US$5.35. This points to a 19% upside from current levels, suggesting that the stock could trade up towards its 2020 highs if the company can continue to execute successfully. However, I am looking for a minimum 35% discount to fair value for single-asset producers in non-Tier-1 ranked jurisdictions and while this hurdle will be lower when South Railroad is in production, I would be surprised to see South Railroad come online before Q3 2027 based on further permitting requirements. Hence, while Orla is undoubtedly a company with one of the best track records of execution among producers of all scale sector-wide, I continue to see more attractive bets elsewhere in the sector today given that I prefer to buy with a significant margin of safety or pass entirely. Summary Orla Mining reported another blowout quarter in Q3, is tracking to beat its initial guidance midpoint by nearly 20% and is in rare air from a balance sheet strength standpoint among its junior producer peers. More importantly, the company has continued to deliver flawlessly from a capital discipline and operations standpoint with the brilliant acquisition of Gold Standard Ventures to diversify at even better prices considering where the gold price sits today. That said, while Orla deserves a premium relative to its smaller peers for its strong track record, I don't see enough margin of safety at current levels above US$4.50.  So, while I see Orla as one of the sector's better buy-the-dip candidates, I would need a deeper pullback to become interested in adding the stock to my portfolio.","kind":null,"is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"0","news_tag":"analysis","news_rank":0,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.29.1","shortVersion":"4.29.1","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2475487370"}