Correction: I incorrectly stated in the email version of this post that Santo Tomas would be a heap leach operation. It’s been pointed out to me that it would actually float a copper concentrate. Errors and omissions are always mine.

Seems my notes and thoughts on Oroco upset many of you. Deeply.

Thank you to those who sent me thoughtful questions, criticism and comments, before and after that post went up. I’ve collected my responses below to share more broadly.

Why Sinaloa is an investment no-go zone for me

I wanted to start with this article I linked to in the original post. The data and direct responses show very few people read it, so I’m going to call it out more explicitly here.

While cartels have traditionally focused on drug trafficking, a slump in heroin prices has forced them to diversify into other activities such as extortion of mining companies and their workers.

The level of risk for mining companies depends on location, and changes as the boundaries between cartels’ territories shift …

— Bnamericas – January, 2022

This article is a year old. My inquiries suggest the problem of cartel violence has gotten worse in that time. There’s a fight for control of Sinaloa and splinter groups have become more deadly as they seek out new income streams. 

To be clear, I can’t speak to Oroco specifically. However, remote mining camps can become easy targets for criminal organizations that are used to controlling, and fighting for, large swathes of territory. 

Suggesting Santo Tomas is out of reach for the cartel is false considering the camp has been shut down before because of nearby danger.

Those focused on the stolen ore from the 2015 robbery of El Gallo are being intentionally obtuse. The salient point from that incident is Rob McEwen’s initial comment – miners don’t operate in Sinaloa without the blessing of the cartels. 

Considering the situation on the ground, is it more or less likely this has changed? Speaking off the record, companies that operate in Mexico will admit extortion and equipment theft are often not reported. It spooks shareholders.

I freely admit I haven’t talked to Oroco officials. I am aware of their publicly available explanations and disagree with them. In a jurisdiction where the government isn’t fully in control, a mining camp that’s operating today can shut down tomorrow. It’s why I don’t invest in Burkina Faso, and why I don’t invest in Sinaloa. If you do, that’s fine. Difference of opinion is what makes a market.

The buyout thesis

Finally I would encourage anyone who owns OCO.V that is “waiting on a buyout” to conduct a thought exercise. Instead of asking which projects are better or disputing the existence of opportunity cost, work backwards. Build a list of potential buyers to stress test your thesis and ballpark your IRR.

Oroco has a market cap today of CAD$186-million. In my mind, the checklist to qualify a buyer looks like this:

• Has the money and the willingness to purchase Santo Tomas at a premium you as a shareholder find acceptable.
• A heap leach Putting Santo Tomas into operation shouldn’t be too expensive, but this buyer also needs the financial resources to build after making the purchase.
• Doesn’t already have a pipeline of copper projects they are drilling, permitting, or otherwise moving forward.
• Can’t find and purchase an equivalent deposit in a safer jurisdiction with a relatively easier (no AMLO) route to permitting.
• A history of working in conflict zones and still generating satisfactory IRRs.
• Santo Tomas would move the needle relative to the buyer’s current and future production profile

I couldn’t think of a single major that fits this criteria. It’s a pretty small list if you can think of anyone at all. My scenario analysis comes up with a Canadian mid-cap miner as the most likely buyer. Most likely in an all-share transaction. 

As someone put it to me, “who is building anything these days with cost increases?”

I have no position in Oroco, either long or short.