Aurania Resources Ltd V.ARU

Cormark Info

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special thanks to 'monmick' for getting the text out of a pdf for me... "Recommendation: Buy (S) Target Price: C$14.50 Aurelian Resources Inc. (ARU-TSX) Resource Exceeds Expectations, 13.7 MMoz David Stein, CFA, [phone]; [e-mail] Mike Kozak ­ Associate, [phone]; [e-mail] MORNING MEETING NOTES OCTOBER 05, 2007 Unless otherwise denoted, all figures shown in US$ Investment Thesis: Aurelian Resources has made a major gold discovery in southern Ecuador, Fruta Del Norte (FDN), and now that the initial excitement of the discovery has passed, we see significant unrecognized value in the size of the discovery so far, as well as the regional potential on Aurelian¹s huge land position. Aurelian has reported an initial inferred resource of 13.7 MMoz. We think Aurelian can continue to add value as it moves the project forward towards production. This is the first new discovery controlled by a junior company that is clearly marketable to even the largest gold producers, and could earn a premium valuation if the market can become comfortable with Ecuador. Highlights: € 13.7 MMoz First-Ever Resource Confirms World-Class Size And Scope Results comfortably exceed our 10 MMoz-11 MMoz estimate range, thanks partly to a higher resource grade at 7.2 g/t. € Engineering Scoping Work Now Ahead, Geopolitics The Biggest Upside Market still wary on Ecuador based on Aurelian¹s low valuation. € Increasing Target To C$14.50 From C$13.25 And Maintaining Our Speculative Buy Recommendation Resource approximately 20% higher than we were expecting, but we increased our costs assumptions as well. Company Description: Aurelian Resources is an exploration company that has made the largest new gold discovery by a junior so far this decade (13.7 MMoz). Fruta Del Norte is located in SE Ecuador, within an epithermal gold-silver trend and a porphyry copper-gold trend. 13.7 MMoz Resource Better Than Expected On Fruta Del Norte: Aurelian¹s first-ever resource announced yesterday was a pleasant surprise. Although we had tried to be somewhat conservative, we recognize that estimating the size of a world-class deposit at the initial drilling stage is risky. Nevertheless, the resource size is significantly bigger than the 10 MMoz-11 MMoz size we had been modelling and at a higher grade as well. Aurelian split the resource into four zones that are distinctive based on geological host and mineralogy, and the result is summarized below: The initial resource is a key milestone, is what has quickly become one of the exploration highlights of the decade. With the respected firm Micon International in charge of the 43-101 resource estimate, it should reduce any remaining naysayers as to the size and grade of the new discovery and hence should reduce the technical risk priced into the stock. The information surrounding the resource estimate, and yesterday¹s conference call certainly addressed the geological and technical aspects of developing and mining FDN very well, and while the mining and metallurgy is going to be a little higher cost than we were expecting, given that this project is still at the early stages, it is not surprising. Overall any additional costs we have modelled were more than offset by the greater resource. Initial Mining And Metallurgy Suggest Potential For Higher Costs: We were right in modelling a two- stage mining scenario, as it appears Aurelian is leaning towards designing the mining and milling to minimize capital costs and the environmental footprint. The biggest surprise to us on the engineering side is that initial metallurgical work suggests that part of the ore is refractory and will require a pre-oxidation process to achieve high recoveries. While much more detailed metallurgical engineering work will take place over the next year, at the present time Aurelian is looking at a process that will recover gold in three stages. First a gravity circuit will recover the coarse gold and then the ore will undergo a sulphide floatation process. The tails from floatation process will be processed using conventional CIL (recovering gold that is free but too fine to be recovered in the gravity process). The sulphide concentrate will be oxidized and then report to the CIL for leaching. The pre-oxidation process will add some capital cost and operating cost to the operation due to energy involved in oxidizing the sulphides. The inferred resource estimate, in some ways, was better than most initial resource reports we see in that the engineers clearly did much more work on the potential economics of the FDN mine than we would usually see at this early stage. Micon¹s preliminary estimates for mining costs were $37/tonne to derive a 2.3 g/t cut-off for the resource. The cost assumption uses a long-hole open stoping mining method and does not factor in any benefit from bulk mining in the expanded mining phase (phase 2). Our most recent model estimate a $26/t cost, so we have increased it to the scoping-level figure released with the inferred resource. The main difference is probably attributed to the additional processing costs as a result of the pre-oxidation step required, as well as general inflation (our original cost estimates for underground mining and G&A were based on Iamgold¹s Quimsacocha study, which is now over a year old). Other changes we are making at this time include extending out the mine life, partly due to the higher resource base and also a more conservative throughput assumption. We are also adding a 3% royalty to the project (over and above the current 1%), which is a conservative measure to account for the likelihood that the government will introduce a royalty on mining before FDN reaches production, similar to what has happened recently in Chile, Peru and other countries. Currently, there is no government royalty and only a 1% royalty technically applies to the property. We introduced this measure originally when we picked up Dynasty Mining and Metals a few months ago, and we are adding to our Aurelian analysis to maintain consistency. We estimate a $250MM capital cost, which we believe is conservative given the relatively modest mill (5,000 tpd) to start phase 1 of the mine. But, we have considered underground development costs and the additional expense of adding floatation and pressure oxidation to the mill flowsheet. The cash costs remain in the same range as our previous model due to the higher grades being mined, even though the raw operating costs are higher. Development, Exploration And Geopolitical News Could Enhance Value: Aurelian has yet to regain its highs that the stock enjoyed before Correa was elected, and this is despite a $100/oz higher gold price and a significantly larger-than-expected resource. Now that the constitutional assembly has been elected, we should see a more stable regime in Ecuador, and we expect the government to gradually address issues related to modernizing the mining sector, while maintaining a favourable environment for foreign investment. We see the continual advancement of this world-class project as another avenue to add value over the longer term, as the Company reduces the project risk. The first milestone for the market could be the permit/approval to drive a decline that the Company will use for large tonnage metallurgical sampling, underground exploration drilling and delineation drilling, and eventually perhaps production. While obtaining an excavation permit should be fairly minor ordeal based on Dynasty¹s experience, we think that the market will look upon approval as being an indication that the government is ³on side² with Aurelian¹s plans. Meanwhile, we expect Aurelian to continue exploring its huge land package, both near to and away from Fruta Del Norte. So far there have been no significant new discoveries outside of FDN but with more than 30 target areas, and the history of gold and copper mineralization in the Condor belt, it is highly likely that Aurelian will be able to add value this way over the longer term. Increasing Target To C$14.50 And Maintaining Speculative Buy Recommendation: Our NAVPS for Aurelian ($550/oz gold, 5% discount) increases to C$14.38 from C$13.30 per share previously and we have maintained our 1.0x P/NAV target multiple rounding to C$14.50. The positive impact of the resource, which is 24% larger than we were modelling, is partially offset by higher operating costs, a stretched out production profile, a slight delay in start-up by one year to 2011, and the addition of the hypothetical 3% royalty. Given where Aurelian is trading, we still see tremendous upside potential as the market recognizes the enormous development opportunity and becomes more comfortable with the technical aspects and the geopolitics. Ultimately, because of the size of the resource, the potential to produce well over 500,000 oz/yr and rapid reserve depletion of the world¹s largest gold producers, we think Aurelian makes an excellent candidate for a takeover." safeharbour