InvestorsHub Logo
Followers 329
Posts 92770
Boards Moderated 3
Alias Born 07/06/2002

Re: None

Monday, 07/29/2013 9:04:22 AM

Monday, July 29, 2013 9:04:22 AM

Post# of 1360

Silver Bulls Should Consider Aurcana Corp.

By Ben Kramer-Miller
Jul 26 2013, 08:32

This article is about Aurcana Corp. (AUN.V; AUNFF.OB). Aurcana has a market capitalization of $145 million, or $180 million fully diluted. The company operates two silver mines: La Negra in Mexico and Shafter in Texas.



La Negra has been producing for a long time and is estimated to produce over three million ounces of silver in 2013. Over time the company anticipates increasing production at La Negra as it mines (what it hopes will be) higher grade ore. The mine has relatively low costs so that it can produce profitably even at a depressed silver price of $20/ounce.

Shafter is an historically producing mine that Aurcana recently brought back into production. While it has promised to mine 1,500 tons of ore per day it has failed to bring production to that level. Still the mine is producing about 600 tons of ore per day yielding about 1.5 million ounces of silver annually at a slight profit.

Currently, even with the limited output from Shafter, the company is fairly valued at roughly 10-times its estimated 2013 cash-flow. If Aurcana can increase production at Shafter as it plans to without anymore setbacks then the mine adds significant value to the company, especially if Shafter can reach the company's estimated peak production level of 2,500 tons of ore mined per day.

Ultimately purchasing shares in Aurcana is akin to purchasing its current production at fair value with a free call option on its ability to increase production at Shafter plus any exploration success that the company has at the two properties. With this being the case Aurcana is an inexpensive way for silver bulls to capture leverage to the precious metal's upside.

Resources

Aurcana has an estimated 212 million ounces of silver on its two properties (19 million ounces of reserves at 7.8 ounces per ton (all at Shafter), and 193 million ounces of resources: 170 million ounces at 4.2 ounces per ton at La Negra and 23 million ounces at 10.5 ounces per ton at Shafter) (the term "reserves" implies a higher level of certainty/accuracy than the term "resources"). This information is detailed in the tables below.

1. La Negra



2. Shafter




Production

At La Negra the company mined roughly 2,200 tons of ore per day (1,500 per day through April and then 2,500 tons until March, 2013), producing 2.5 million silver equivalent ounces in 2012. At this rate, at 3,000 tons of ore mined per day the company can produce approximately 3.4 million silver equivalent ounces. However, the company anticipates mining higher grade silver and projects production at 4.3 million ounces at 3,000 tons of ore mined per day. Cash costs for La Negra per ounce are roughly $8, which comes to $16 including taxes, exploration, administrative expenses...etc.

At Shafter the company anticipates producing an estimated 3.8 million ounces of silver by 2014. In order to do this it must mine 1,500 tons of ore per day. Whether the company can achieve this is uncertain at the moment, as it has claimed that it would ramp up production to this level in the past but has failed. Currently the mine is operating at 40% of this capacity at 600 tons of ore per day, which equates to an annualized rate of 1.5 million ounces of annual silver production. Ultimately the company believes that it can mine 2,500 tons of ore daily and produce 6.3 million ounces of silver annually.

Cash costs at Shafter are anticipated to be $10/ounce , or $18 "all in." Given the increased costs at Shafter due to the production ramp-up $20/ounce is probably more accurate.

In all Aurcana currently produces about 5 million ounces annually at around $17/ounce, although in a best case scenario the company can produce around 10.6 million ounces at around the same price. The best case scenario assumes 4.3 million ounces produced at La Negra at $16/ounce and 6.3 million ounces produced at Shafter at $18/ounce. The following chart provides a rough estimate of the company's cash flow for both scenarios at various silver prices.

Silver Price Current Cash Flow Best Case Scenario Cash Flow
$15/ounce -$10 million -$21.2 million
$20/ounce $15 million $31.8 million
$25/ounce $40 million $84.8 million
$30/ounce $65 million $137.8 million
$40/ounce $115 million $243.8 million
$50/ounce $165 million $349.8 million


Given the company's current market capitalization of $150 million it appears to be fairly valued given that it will have $15 million in cash flow at the current silver price. Furthermore the shares offer enormous leverage to the upside for silver bulls: a 25% increase in the price of silver would lead to a 267% increase in the company's estimated cash flow. Finally, if the company can ramp up production at Shafter, and the "best case" scenario pans out (which also includes increased production at La Negra), then the shares are conceivably worth more than twice what they are currently.

Exploration
1. La Negra Exploration


La Negra has a lot of exploration potential. As shown on the diagram below Aurcana has found many targets with high grade silver deposits (along with lead, copper, and zinc).


It has found 11 drill holes that indicate that there is potentially additional silver resources at La Negra. Here are some of the more notable ones:

* 17.65 meters with 225 grams per ton of silver.
* 10.9 meters with 153 grams per ton of silver.
* 7.55 meters with 360 grams per ton of silver.

Given that these silver deposits are close to the company's resources there is a good possibility that these figures can be extrapolated, and that the company has additional resources that can be mined economically at La Negra.

2. Shafter Exploration

Shafter has less exploration potential than La Negra given the current data. Furthermore the results have not shown significant silver deposits, as the following diagram shows.


Still, the company has found several potential mineral deposits of value at Shafter. Some highlights include:

* 6 feet of 0.03 ounces of gold per ton, 1.2% lead, 13.2% zinc
* 100 feet of 6% copper
* 7 feet of 10 ounces of silver per ton, 0.07 ounces of gold per ton, 4% lead, and 2% zinc

For the most part these drill holes are too small (except for the 100 feet of 6% copper) to anticipate a mine. However their proximity to the Shafter silver deposit suggests that these regions are worth further exploring.

Risks
1. The Price of Silver


The price of silver has performed terribly over the past two years, having declined from $48/ounce to around $20/ounce. While there is significant technical support at the current price the downtrend that began in May 2011 is still intact.



Most silver producers cannot turn a profit at the current price, and this is a reason that the silver price has likely reached or is near a bottom. Still the downtrend in the price of silver is intact, and Aurcana's profits will be closely linked to the price of silver.

2. Aurcana's Size

Aurcana only has two properties, one of which accounts for most of its current production and profits. As a result, if for whatever reason the company cannot mine at La Negra then the value of Aurcana will drop substantially. Fortunately for potential investors the market is assigning very little value to Shafter given its recent problems, so if the company sees further delays or has to shut down Shafter then I don't think this would hurt the company's share price substantially.

Conclusion

The recent problems with Aurcana's Shafter mine have provided potential investors with an opportunity to buy the company's shares inexpensively. Even if problems linger at Shafter, the company still trades at just 10 times cash flow at the current silver price, while providing leverage to silver bulls. The shares can also potentially rise substantially should the company bring production up at Shafter, because the current valuation assigns almost no value to the company's Texas property.

http://seekingalpha.com/article/1575352-silver-bulls-should-consider-aurcana-corp?source=email_rt_article_title







Dan

Join the InvestorsHub Community

Register for free to join our community of investors and share your ideas. You will also get access to streaming quotes, interactive charts, trades, portfolio, live options flow and more tools.