AUN VALUATION Keep in mind the metal prices continue to rise and therfore cash flow as well when reading this.
New Near-Term Mexican Silver Producer Is on the Bargain Counter
By David J. DesLauriers
09 Mar 2006 at 06:24 PM EST
TORONTO (ResourceInvestor.com) -- Aurcana Resources [TSXv:AUN], trading at 25 cents on the TSX Venture Exchange, is one of those rare, compelling stories that comes along every so often, and can boast a risk/reward ratio heavily skewed in favour of the latter. The reason is Aurcana’s recent announcement that it intends to proceed with the acquisition from Penoles, of the La Negra silver-zinc-copper-lead mine in Queretaro State, Mexico.
The Mine
With La Negra, a "skarn-hosted" polymetallic deposit, comes a well-maintained 800 tonne per day mill. A non-43-101 compliant resource of 1.2 million tonnes based-on historically reported grades of approximately 160 grams/tonne silver, 2.83% zinc, 0.94% copper and 0.91% lead also exists at La Negra.
Investors who know Penoles, Mexico’s premier mining company, are not concerned in this case with what is and isn’t compliant. Indeed, it would appear that substantially more than the aforementioned 1.2 million tonne resource is already recognized, but cannot be disclosed because of National Instrument 43-101.
Beyond this, “the exploration potential at La Negra is considered to be very good, both around existing ore zones and also at depth. Penoles developed a very detailed exploration model outlining potential blocks, location and number of holes to be drilled and a budget.” In fact, “At greater depth the copper content increases significantly as seen on the Cristo Rey 2 level where stopes have historically reported grades of up to 353 grams/tonne silver, 5.69% copper and 1.26% zinc. Penoles reported diamond drilling results from 90 metres below the Cristo Rey 2 stope that graded 323 grams/tonne silver, 5.79% copper and 2.37% zinc over a width of 7.8 metres.”
Let’s get down to what this all means in terms of the primary objective of the mining business: monetizing rock, and creating shareholder value.
The Cash Flow
Before we get to the numbers, here is the basic outline of the putative transaction:
Under the terms of its LOI, Aurcana and Reyna will form a joint venture whereby Aurcana will own an 80% interest in La Negra, and Reyna will own 20%. “Aurcana will be responsible for the cost of the acquisition and up to US$3.0 million in expected costs and working capital to bring the mine back into production. The total cost of the acquisition is US$3.0 million of which US$2.0 million is to be paid to the vendor on March 15, 2006 and US$1.0 million to be paid on March 15, 2007.”
Reyna, if you are wondering, is a well-known Mexican firm that has built a dozen mines just like La Negra. What Aurcana has managed to do is find a partner that has huge connections, relationships, and access to mining equipment which is scarce at present, and who will be incentivized to bring the mine to production, on budget, and on time, because they will reap the benefit in the form of 20% of total project cash flow. This is a huge competitive advantage for AUN.
In order to satisfy the purchase price, Aurcana has undertaken to complete non-brokered private placement for up to C$4,500,000 on a best efforts basis. Once this is accomplished, the company will have roughly 70 million shares fully diluted. At 800 tonnes per day (the mill can be expanded to 1000 tonnes per day at minimal expense), it is estimated that La Negra, operating 300 days of the year, and at current metal prices, can generate on the order of C$15 million in cash flow net to the J/V.
At the end of the day, this translates into at least 15 cents, and probably more like 20 cents of cash flow per share for Aurcana, taking into account all of the shares issued in the current private placement, and the exercise of the half-warrants that go along with it. Readers may be aware that a number of similar silver vehicles are trading at in excess of 20 times cash flow, but even awarding the company a conservative base metal cash flow multiple of 5 times yields a share price of C$1!
Acquisitions
On top of the cash flow from La Negra which alone should be capable of delivering tremendous share appreciation for investors, President Ken Booth, a veteran of the game, who was ‘booth-less’ at this year’s PDAC, but was in attendance, understands the value of silver, has a positive view of the direction of metals prices, and is aware of the popularity of the metal with investors.
Booth will be looking for other silver assets to complement the mine, and no doubt capture the imagination. We believe that he will be successful in this pursuit.
Conclusion
La Negra is a company maker, and the cash flow that the mine will generate should justify a valuation on Aurcana at a multiple of that which the company commands today. The added bonus will come as more exciting silver assets are spun into AUN, adding further value, and leverage.
Where else can you find a near-term silver producer trading at 1 times cash flow?
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