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Aurcana Corp.: Silver Mine Development Story

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Aurcana Corp.: Silver Mine Development Story

By Dan Durrett
May 14, 2020 9:24 AM ET


* Engaged in the final construction of a fully-permitted high-grade silver mine in Colorado.

* The resource is 30 million oz. at 700 gpt, with excellent exploration potential.

* The project is construction-ready and all they need is financing.

Stock Name - Aurcana Corp
Type - Silver
Category - Late Stage Development
Share Price (US) - $0.29
FD Shares - 201M
FD Mkt Cap (5/12/2020) - $58M

I have been following Aurcana's high-grade silver project (Revenue-Virginius Mine) in Colorado for a while now. I have waited patiently to see how it progressed. Recently, I watched a video interview with the CEO explaining the project and its current status. I was impressed. They seem to be close to the finish line.

Aurcana Corp. is under the radar. I don't think investors realize the quality of their RV project. It is in a good location in Colorado, where mining has been common in the past. In my opinion, there aren't any location issues. Plus, what makes it special is the high-grade and exploration potential. The resource is 30 million oz. (700 gpt), but it will increase in size. Management is excited about what they are going to find once they start drilling certain targets. It is a past-producing mine with several known veins.

All development stocks carry significant risk. The risk for Aurcana is that they do not get financing, or they have higher than expected costs, or silver prices do not rise. Plus, there are likely several other risks that I am not aware of that are lurking. That said, I think the risk-reward is compelling.

In addition to the RV mine, they have another project in their back pocket. Their Shafter mine in Texas is on care & maintenance and has a low capex to restart. It is a small mine with only 18 million oz. (240 gpt). It requires higher silver prices to restart, but was producing 1.5 million oz. before it was shut down by Aurcana. I think this mine will get restarted after we get above $20 silver.

When you combine the production potential of RV and Shafter, they can easily become a 3 million oz. producer. Both projects are permitted with a mill. Plus, management is intent on becoming a successful producer that rewards shareholders. They know from their past history after they lost their La Negra mine that shareholders were hurt. They want to make that up to them.

Company Overview

Aurcana Corp. had a market cap of $545 million in 2011 and everything looked great. Then silver prices collapsed from 2011 to 2015. They had to sell their La Negra mine in 2015 (which was producing 3 million oz. per year) to pay off their outstanding debt. Since then their share price has crashed and they have been waiting for silver prices to rise. However, they recently acquired Ouray Silver and their RV mine.

RV is permitted with a feasibility study. They need to raise $37 million to begin production at RV at 2 million oz. annual production. It can be financed and built at $16 silver, with all-in costs (free cash flow) forecast below $14 per oz. Once RV begins production, they will use the cash flow to return their Shafter mine to production.

Shafter is on care and maintenance. They can resume production at around 1.5 million oz. per year. The capex to resume production is around $20 million. They will need about $20 silver to restart the mine.

They recently did a 5 to 1 reverse split, which is usually the precursor to a financing. I think they will raise $20 million in debt and another $15 million in equity financing to build RV. If they succeed in raising $35 million, they will be in an excellent position to become a silver producer. As a speculation stock, it looks pretty good.

When you do the math, their potential annual future free cash flow will be higher than their current FD market cap of $58 million. That is one of the best indicators for an undervalued stock. Why? Because a company can be valued at 5x, 10x, even 20x free cash flow.

Project Information

(refer to company presentation: http://www.aurcana.com/)

* Location: USA (Colorado).
* RV Project: 30 million oz. at 700 gpt (likely to increase in size).
* Mine Type: Underground (thin veins).
* Capex: $37 million (they have been spending money on development, so the required financing is much lower than this amount, perhaps only $25 million).
* Costs: $8 per oz. cash costs / $14 per oz. all-in costs (more likely $15 or $16).
* Permitted and construction ready.
* Annual Production: 2 million oz. (likely to increase with exploration success).
* Recovery Rate: 90% recovery rate (my estimate).
* After-tax IRR: 50% (approximately).
* Production Date: 2022 (my estimate) (7-month build).


Their management team has extensive experience in building and operating mines. They shouldn't have any trouble building and operating the RV mine. They are ready to go once they get financing.

Balance Sheet

(refer to Sedar.com: http://sedar.com/)

They have about $3 million in cash and have no debt. They are currently trying to finance construction, so they do not need to spend very much money until they get financing.

Concerns/Red Flags

I mentioned the red flags in the introduction. They need financing, higher silver prices, and costs not to exceed their targets. If silver remains under $16, they might have trouble getting financing in 2020. Also, they will need to dilute shares to finance the capex. Plus, there is always the chance that they could sell the project for a small premium.

Another red flag is that they are somewhat dependent on base metal offsets (lead and zinc) for their low cash costs. They list their reserves at 1265 gpt silver equivalent. However, silver is only about half that total. I wish they listed their cash costs for silver-only to give us an idea of the risk.

Future Valuation

Note: I'm going to use two silver price scenarios and you can pick the one you prefer. I am using a free cash flow multiplier of 7, which I think is realistic if silver prices rise and there is good investor sentiment for silver miners, which are becoming rare.

Scenario #1 ($50 Silver Price)

* Estimated future All-In Cost Per Oz.: $18

* Estimated future annual free cash flow: 3 million oz. x $32 = $96 million

* Estimated future market cap: $96 million x 7 = $700 million

* Comparing the current market cap ($58 million) to the future market cap ($700 million), you get a potential 1,100% increase.

Scenario #2 ($72 Silver Price)

* Estimated future All-In Cost Per Oz.: $20

* Estimated future annual free cash flow: 3 million oz. x $55 = $165 million

* Estimated future market cap: $165 million x 7 = $1.1 billion

* Comparing the current market cap ($58 million) to the future market cap ($1.1 billion), you get a potential 1,900% increase.

Both scenarios are optimistic because I am not reducing the upside potential for the share dilution required to fund the capex. Also, this is a long-term expectation that they reach 3 million oz. annual production. They likely won't reach that level for 3-5 years.

For scenario #2 (the most optimistic) valuation, it assumes that Aurcana will reach 3 million oz. of production and they will reach $165 million in free cash flow. This high cash flow is based on the assumption that silver prices will reach $75 per oz. and all-in costs (free cash flow) are $20 per oz. This is close to a best-case scenario for the long term.

Note: I don't think it is too optimistic to anticipate higher valuations than these two scenarios. I think it is plausible that quality mid-tier silver producers will receive cash flow multiples of at least 10, and 20 is not inconceivable. I was going to use a multiplier of 10 (which is my expectation), but decided to be more conservative. I also don't think it is implausible to expect $100 silver prices. Run the numbers with a 15x cash flow multiplier at $100 silver and Aurcana has huge upside potential.


Aurcana Corp. looks really good from a risk-reward standpoint. If they get financed and silver prices begin to trend higher, their share price will do very well. And if silver prices blast off, they are extremely well leveraged for that outcome.

This development story does not have everything you look for, but still has most of the factors. Let's review:

1) High upside potential. (Yes)

2) High insider ownership to prevent a hostile takeover. (Yes)

3) Quality management team. (Yes)

4) Desire by the company to get a high return for shareholders. (Yes)

5) Low to moderate cash costs per oz. (Yes)

6) Low to moderate capex. (Yes)

7) Good entry price. (Yes)

8) Good buzz. (No)

9) Low downside potential. (No)

10) Long-life mine. (Yes)

11) Good grade. (Yes)

12) Good recovery rate. (Yes)

13) Good location. (Yes)

14) Good exploration potential. (Yes)

15) Good pipeline - potential second mine. (Yes)

Note: You can check the data included in this analysis on the company website. http://www.aurcana.com/

Disclosure: I am/we are long AUNFF. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.


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