Valuing Mining Stocks: Reverse-Engineering the Odds of Project Permits
Reverse Engineering Market Implied Probabilities: The Case of Oroco’s Santa Tomas Project
When you look at a company’s stock price, you’re not just seeing today's fundamentals—you’re also catching a glimpse of what investors expect to happen in the future. In the case of Oroco Resource Corp, a striking observation emerges: the market is pricing the company at only a small fraction of the estimated value of its flagship asset, the Santa Tomas project. Today, we’ll explore how this huge discount can be interpreted as the market’s implicit assessment of the odds of a key event—in this case, the approval of the necessary permits—and discuss the assumptions, limitations, and uncertainties inherent in that thought process.
Disclaimer: A Thought Experiment Only
This analysis is a simplified thought experiment designed to illustrate the thought process behind assigning market-implied probabilities. It relies on numerous simplifying assumptions and inherently uncertain factors. Actual market outcomes depend on many variables not accounted for here. Additionally, some data used in this analysis were obtained using Perplexity's deep research function, which, like all AI tools, may occasionally produce inaccuracies or "hallucinations."
Key Assumptions and Limitations
Before diving into the analysis, let’s clarify some assumptions:
Binary Outcome: The permit approval is assumed to have two clear outcomes:
Approved: Project reaches its full after-tax NPV (approx. US$1.2 billion).
Not Approved: Little or no value is added.
Instant Full Fair Value: Assumes immediate realization of full project value if the permit is approved.
Time Frame: The implied probability derived here is not tied to a specific time frame but represents the overall market-implied probability of the event occurring eventually.
These assumptions significantly simplify real-world complexities—like financing, execution risk, regulatory shifts, and community factors—and the resulting implied probability is purely illustrative.
The Puzzle: A 95% Discount
The after-tax NPV of Santa Tomas is roughly US$1.2 billion, yet Oroco’s current market cap is only around US$43–US$56 million—indicating the market values the company at only about 4–5% of the project's potential value. Thus, the market appears to embed a 95% discount.
One plausible explanation is extreme investor caution around permit approval risk.
Using a simplified binary model:
This suggests the market assigns a 3–4% implied probability to permit approval eventually (without specifying a particular timeframe).
Note: at $4.50 copper the NPV8 is $2.147 billion, and the IRR is 27.9%. At $5 copper the NPV8 is $2.817 billion, and the IRR is 33.2%. All are post tax figures. *Thanks to Adam Smith for the feedback.
Context: Historical Permit Success in Mexico (2014-2024)
To provide context, here’s how large-scale mining projects have fared with Mexico’s permitting process:
Successful Permits (examples):
Copper Projects:
Media Luna Project (Torex Gold), Guerrero (2022)
Buena Vista del Cobre Expansion (Grupo Mexico), Sonora, 2018
El Arco (Grupo Mexico), Baja California, initial permits in 2020
Gold/Silver Projects:
Juanicipio (Fresnillo/MAG Silver): Permitted 2018
Camino Rojo (Orla Mining): Permitted 2020
Historically, large-scale copper projects in Mexico had roughly a 35% approval rate over the past decade, significantly higher than the implied 3-4% probability from our simplified binary model.
Permit Success Factors:
Community Engagement: 65% approval with community agreements vs. 27% without.
Water Management: Projects addressing water concerns clearly had significantly better success.
Economic Impact: Strong local employment boosts odds.
These factors suggest the current market assessment for Santa Tomas (3–4%) could be overly pessimistic relative to historical trends.
A Note on the Breeden–Litzenberger Method
Ideally, with an active options market, we’d use the Breeden–Litzenberger method to extract a detailed, market-implied probability distribution directly from option prices. However, Oroco doesn’t have tradable options, so we’re restricted to simplified analysis.
Note: I personally wish Oroco’s management would allow warrants to trade openly in the market. Tradable warrants would provide investors with valuable data points to perform more sophisticated probability and valuation analyses.
Conclusion
This exercise is purely a thought experiment. Real-world valuation involves many nuances and complexities beyond simplified binary scenarios. However, it illustrates a crucial investing concept: market prices implicitly reflect expectations, even around uncertain outcomes.
The huge current discount (95%) and implied low permit approval probability (3-4%) highlight the significant risk embedded by investors. However, given historical context and project details, one might argue the current market is overly pessimistic.
Always remember: Simplified models are helpful educational tools, but the real world is invariably more complex.
Disclaimer: This article is not investment advice. Always conduct thorough due diligence or consult a financial advisor before making investment decisions.
