Mexican Mining

[basserdan]

Aurcana Corporation (AUN.V; AUNFF) - by Stonecap Securities


What Could Be... Possible Expansion At Both Operations

Our Aurcana model assumes a maximum throughput of 2,000 tpd at La Negra and 1,500 stpd at Shafter.

The company’s goal is to increase throughput at La Negra to 2,500 tpd in early 2012, generating an average throughput rate of 2,000 tpd for 2012 and 2,500 tpd thereafter. Similarly, Aurcana’s goal at Shafter is to utilize the old Goldfields shaft at the mine as a production shaft allowing the project to achieve a throughput rate of 2,500 stpd in 2013.

Should Aurcana be able to achieve these goals, Aurcana’s total silver production in 2013 and beyond would be in the 7m to 8m oz range versus our current forecast of around 5m oz Ag.

While Aurcana has been able to expand throughput at La Negra from 800 tpd to 1,500 tpd, we are currently maintaining our conservative view of 2,000 tpd as the ultimate throughput at La Negra. Similarly, as Aurcana has yet to commission Shafter, we are currently maintaining our model of 1,500 stpd maximum throughput for the project.

We would likely re-visit our mine model assumptions once Aurcana has successfully completed expansion at Le Negra and provided third party support for a plan to expand throughput at Shafter.

The body of this Morning Advantage note provides a comparison for Aurcana assuming both expansion plans are achievable in the short term relative to our current, more conservative model.

Valuation

We value Aurcana using a 67/33 blend of P/NAV multiples and 2012 CFPS multiples. Our CFPS-based target for Aurcana is $1.24, while our NAV based target is $1.03, resulting in a blended target of $1.10.

Conclusion

We are maintaining our current model and forecasts for Aurcana but note that the company’s expansion plans could significantly increase production beyond our current forecasts. We maintain our Outperform rating and our $1.10 target price.

Expansion Scenarios

Aurcana’s goals are to expand throughput at both La Negra and Shafter significantly in 2012 with the ultimate goal of achieving throughput rates of 2,500 tpd at La Negra and 2,500 stpd at Shafter in 2013. Our assumptions are more conservative and are based on current feasibility work at Shafter and a more modest expansion to 2,000 tpd at La Negra, with 2012 throughput at La Negra averaging 1,850 tpd.

At Shafter the company intends to use the old Goldfields (see Figure 1*) shaft as a production only (or “skip”) shaft allowing it to increase throughput by 1,000 stpd while still hauling around 1,500 stpd via decline. Plans for this expansion are currently at the internal level and have yet to be vetted by any third party engineering groups.

Figure 2* provides a comparison of our current production, EPS, CFPS and NAVPS estimates for Aurcana versus what these estimates would be assuming Aurcana successfully executed the expansion plans outlined above at both La Negra and Shafter.

Conclusion

Aurcana is poised to enter the ranks of the mid-tier silver producers in 2012 once it has successfully commissioned the Shafter mine. Should Aurcana be able to execute its expansion plans at both La Negra and Shafter, the company could rise to the top of the midtier silver producers with the potential for 7m to 8m oz Ag of annual production. While we are not yet factoring these potential expansion scenarios into our model for the company, we may do so in the future, specifically once the company moves Shafter expansion plans from the internal drawing board to a third-party vetted engineering study. In such a case, our 2013 and beyond EPS and CFPS estimates for Aurcana would increase substantially as well as our NAVPS estimate. At this time, we are maintaining our Outperform rating and $1.10 target
price.

* Click on link to view Figures 1 & 2

http://www.geckoresearch.com/sites/default/files/Aurcana_Stonecap_120209.pdf