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Subject:  My Best Pick - Northern Orion Date:  12/10/2006  3:21 AM
Author:  dwot Number:  540 of 731

Northern Orion is my favorite stock these day. NTO - US, NNO - Canada


Fully diluted it has 221.5 million shares. At its current price of about $4 that gives a market cap of $886 million.


It has $180 million in the bank, the warrants that dilute the stock bring in another $160 million.


Its current cash flow from existing operations is about $150 million/year, and with copper at $3, earnings per share should come in around $0.50/year (Q2 earnings were $0.22/share when copper prices peaked, and $0.15/share for Q3). This cash flow should continue for about 10 years. There is a 20% royalty on their existing earnings from a 1/8th share of a mine which gives them 50 million pounds of copper/year and 75,000 oz gold.


They have completed a feasibility study to build a new mine at Agua Rica, and have a 3 year plan to build the mine. The mine costs about $2 billion to build and would have operating costs around $220 million per year.


The mine life is estimated to be 23 years and the first 10 years of production would give:


135,000 oz gold: About twice existing gold.

368 million lbs copper: More than 7 times the existing copper

15.4 million lbs molybdenum: A new metal for the company.


There will not be a 20% royalty on the new mine.


Cash flow from the new mine @ $2 copper, $400 gold and $12 molybdenum is


$736 + $54 + $185 = $975 million of additional cash flow.


Their current cash flow, money from warrants, and money in the bank gives them at least 1/2 billion towards building the new mine, and the financials are so strong, they can likely do this without dilution.


The cash flow from the existing and new mine could very well pay off the mine in about 2 years, so by 2012 they could be debt free with over $1 billion coming in and only $220 million in expense.


After taxes you have about a half billion in earnings for 221 million shares, or about $2.25 per share. To value the shares so earnings are 12%, well, that gives a share price around $19, and a strong share price, not one of these crap 2% crash and burn earnings, like say, Google. So, I give this stock a 5 year target price of $19/share, or 475% growth. And that's with highly realistic prices for the metals. At $3 for copper, or $20 for molybdenum, well, the earnings become even more stellar.


These target prices or strong buy valuations given on the market are a bunch of garbage. IMHO a strong buy recommendation has to define to what price the buy is strong, to what date, and the range of the expected rate of return. I frequently see a strong buy or sell recommendation, I look at the date, check the share price, and see that it has moved considerable, say 20%, from when the recommendation was given.


With Northern Orion's current valuation of around $4, the $19 target price gives an annual rate of return of 37%.


Here's how I do a strong buy - there is an expectation of a return 25% or more up until a certain date, in this case, for 5 years. That gives Northern Orion a strong buy recommendation up to $6.23/share prior to its Q4 report. That recommendation increases to $6.58/share prior to Q1/07 report, and it increase by 5.7% each quarter.


I give a buy recommendation with an expected rate of return between 20-25%. That gives a price between $6.23 and $7.63 prior to the year end financial report, and $6.58 to $7.99 prior to Q1/07, and an increase of 4.6% per quarter.


This stock is grossly underpriced because the market is bearish on copper. With this look at Northern Orion, copper is priced at $2, taking in the bearish consideration.

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