via Stonecap [re] Aurcana TGR: Can you tell us about another Mexican play?
CD: I was the first to launch on Aurcana Corporation (AUN:TSX.V; AUNFF:OTCQX). The company is a silver producer that has two operating mines in Mexico including one called La Negra, which is a little cash flow machine. It's also got the Shafter project in Texas, which unfortunately has been more challenging. As a result, the share price has suffered recently.
Shafter could be much bigger than La Negra: 3.5–4 million ounces (3.5–4 Moz) silver, compared with 1.5 Moz at Le Negra. Although the company has a plan to expand production at Shafter to 5 Moz, it still hasn't quite gotten to the 3.5 Moz stage yet, so the jury is still out on this asset.
My take on it is La Negra alone is worth $0.75/share and the stock is currently trading around that level. If you buy it, you're getting La Negra at the right price, and you're effectively paying nothing for Shafter. If Shafter works out, I see lots of upside and if it doesn't work out I don't see a ton of downside.
The biggest challenge the company has is manpower. Hiring skilled workers for underground mining in Texas is not easy. Aurcana has been mining Mexico, which has a strong mining culture and history. Finding people there to drive machinery underground is not a challenge. It's a different story in Texas. And bringing labor in from Mexico isn't as simple as you'd think. You have to prove that there's no American able to do the job. In my opinion, labor has been the single largest challenge for Aurcana at Shafter.
The company also had an issue with some filter presses. The presses should be installed by the end of the first half of the year. I have ramped down my assumptions on Shafter pretty aggressively. I only have it throwing off around 1 Moz silver this year as opposed to its potential 3.5 Moz annual production profile. Shafter probably won't come fully on-line until halfway through the third quarter or the fourth quarter although Aurcana did declare commercial production there in December 2012.
TGR: So Aurcana could be positioned to have a good 2014?
CD: Absolutely. But with Aurcana, the shares are going to remain in the $0.70–0.80 range until we get positive news on Shafter. Given the struggles the company has had at Shafter and the current market conditions, investors are unwilling to ascribe any value for Shafter.VIA