Aurelian Resources (ARU)

[veteran98]

Ecuador May Be Worth a Punt

By Ben Abelson
22 Apr 2008 at 03:50 PM GMT-04:00
http://www.resourceinvestor.com/pebble.asp?relid=42145

SEATTLE (ResourceInvestor.com) -- The recent announcement by the Ecuadorian government of a dramatic revamping of mining policy has left investors in the country scrambling to dump shares of miners remotely affiliated with the developing South American nation.

While the language in the recent mining mandate is far from positive, it stops well short of outright nationalization. The new mandate calls for a 180-day suspension of all mining activities until a new mining code can be approved, and a limit of three concessions to any given mining company.

Investors would do well to be concerned by these new regulations. But, that being said, as any investor involved in developing nations knows, the risks of outright nationalization of mining projects is often well overblown. Beyond the disaster called Venezuela, government scares in Turkey, Mongolia, Eritrea and others over the past few years have created tremendously profitable opportunities for risk-seeking investors.

Witness the share price of Aurelian Resources [TSX:ARU], for one, which owns rights to one of the largest undeveloped gold deposits in the world. Worth more than C$10/share just days ago, Aurelian’s shares have sunk to as low as C$4 in the past few days on concern over its ownership stakes.

Aurelian’s FDN deposit contains some 13.7 million ounces of inferred gold – and Aurelian’s stake is worth only about C$500 million at today’s share prices. Even if one factors in the Ecuadorian government taking a very large ownership stake in this project upwards of 50%, these numbers don’t make much sense.

The price obviously reflects uncertainty in the outcome in Ecuador, which is certainly binary in nature – either the deposit is confiscated, or Aurelian retains some reasonable ownership stake and builds it. There are many good reasons to believe the odds favour the latter.

Given that the new mining mandate was reportedly drafted by a small faction of legislators, and that the Aurelian had previously made reasonable progress in negotiating with the Ministry of Mines for a stability agreement, there appears to be a reasonable hope that logic will eventually succeed in Ecuador.

Logically speaking, Ecuador will need an experienced mining company involved to have any hope of profitably developing FDN to help the country. The Ministry of Mines understands the difficulty of developing a large-scale mine, has generally been supportive of Aurelian’s efforts, and will likely get involved in the process long before any nationalization takes place.

That’s not to say there aren’t likely to be massive delays in FDN’s development, and that the government isn’t likely to take a big cut. But even with these reasonable assumptions for an outcome in effect, the numbers simply don’t make a tonne of sense.

CIBC analyst Barry Cooper finds a fair value of FDN at $12/share, assuming gold prices of $1,000/ounce, that Aurelian trades at its NAV, that the government takes a 50% ownership stake, and that there is a 10% discount rate for the project. Given the political situation and resolutions to prior conflicts in developing markets, these don’t appear to be unreasonable expectations to price in.

While tremendous risk remains in Ecuador, the fact of the matter remains that this is not another Venezuela run by pseudo-socialist dictator. For investors with speculative risk-taking ability, the shares warrant a close look. The prize of FDN’s massive deposit is too potentially lucrative to both the government and investors that it doesn’t get built in some shape or form. With the massive haircut in Aurelian’s share price, it seems more likely than ever that some of the major gold miners experienced in such political uncertainty start taking a very close look at the firm.

The same is true for other up and coming Ecuadorian developers, particularly Dynasty Metals & Mining [TSX:DMM], which was close to developing several sizeable deposits in the country. While exploration firms also have been tremendously bruised, we’d prefer to speculate on the rebound of developing producers as the value of these firms has been more clearly defined, and these firms have a more involved history of working with the government on the permitting and development of their deposits.