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[basserdan]

Aurcana: Possible resource increases

Posted by Christopher Wood
at 20:41 Thursday, 16 February 2012


In Aurcana's December 2011 corporate presentation ( http://tiny.cc/evhhk ), the following reserve numbers are reported (43-101 compliant):

La Negra:

Measured & Indicated: 1.248Mt @ 105 Ag g/t (3.4oz/t) for 4.2Moz Ag and 7.5 Moz AgEq

Inferred: 0.262Mt @ 78.6 Ag g/t for 0.7 Moz Ag and 1.4 Moz AgEq

Shafter:

Measured & Indicated 2.795Mt @ 8.6 oz/t (267 g/t) for 24.0Moz Ag

Inferred: 2.167 Mt @ 10.5 oz/t (326 g/t) for 22.8 Moz Ag

For La Negra, running the mill at 1500tpd would exhaust the M&I resource in 832 days; once the 2000tpd expansion it complete (Q1-2012) the resource would be exhausted in 624 days. So finding more resources is critical. The good news is that we know the ore is there; from their Q4-2011 production numbers we know that only 14% of production was from M&I resources and 86% was from "new discoveries or non-compliant resources). If er use these numbers to estimate the amount of resources that could be there, unaccounted for in the 43-101, resources size increases by a factor of 7 (100/14) and the M&I resource number potential jumps to 30Moz Ag and 54Moz AgEq.

But how realistic is this estimate? Well, in the recent Christopher Barker interview Lenic gave up another data point:

"We're expecting a resource update at La Negra by mid-February. We are going to add about 1 million tons, which will be a substantial increase from what we now have, and these will come from the 1950 level ... the first time we have gone so deep into the mine. The haulage level is at the 2000 level. So all of the orebodies -- these 28 orebodies -- are above the haul level; all of them are gravity fed. And all of them are open. So we're down in the 1950 level now, and we have about 1 million tons here, (with more copper than silver).

Meanwhile, at the 2400 level in the Northwest Trend, we have two orebodies that seem to connect; bridging an 800-meter gap. We're already drilling 400 meters into it, and we need to drill the other 400 meters. And if they do connect, we have the potential for about 4 million tons there, and the grades are around 100 to 200 grams per ton of silver."

Lets look at the 1Mt first. Assuming a grade 100 g/t (the weighted average of their current M&I and Inferred resources) we get another 3.2Moz Ag of resources. Now what about AgEq? Well, in their current resource numbers, the AgEq number is roughly double the Ag number. Additionally, Lenic indicates there is more copper than silver in this ore, which seems to support the doubling for AgEq. Thus, we get an AgEq number of 6.4Moz. And as Lenic indicates, we can expect a resource update in mid February (now) that will hopefully validate these estimates.

* 1Mt @ 100g/t: 3.2Moz Ag and 6.4Moz AgEq

Now, what about the 4Mt? Lenic indicates a potential for and additional 4Mt of or grading between 100g/t and 200g/t. He indicates that they think they have two connecting ore bodies, but that they have to prove it by drilling. Drilling is already halfway complete, which would seem to indicate at least a 50% probability of 4Mt of ore. Using the an average grade of 150g/t, how much silver is this?

* 50% of 4Mt @ 150g/t: 9.6 M/oz

* 100% of 4Mt @ 150g/t: 19.3 M/oz

If we again assume a doubling when considering AgEq we get:

* 50% of 4Mt @ 150g/t: 19.3 M/oz

* 100% of 4Mt @ 150g/t: 38.6 M/oz

If the 4Mt resource is there, adding this to the 1Mt resource that is expected in February we have 22.5Moz Ag and 45.0Moz AgEq. This is remarkably close to the numbers we estimated based sources of the ore currently being mined.

If this all comes to fruition, Aurcana will increase at La Negra by 560% for Ag and AgEq by 600%:

* LN Current: 4.9Moz Ag and 8.9Moz AgEq

* LN Projected: 27.4Moz Ag and 53.9Moz AgEq

Factoring in the current cash costs at LN (~10/oz Ag) and the current price of silver ($33), and an 85% recovery, this 22.5Moz Ag resource converts to $440M in cash flow. But, if you think prices of silver are going to rise (which I do) this number goes up too.

Finally, Aurcana is currently engaged in an "aggressive drill program" at Shafter. So expect further resource increases there as well. Estimating these numbers will be more difficult though since we have less data points.

http://investmentrevaluationcatalyst.blogspot.com/2012/02/aurcana-possible-resource-increases.html