The Aurelian Bonanza and Its Role in the Junior Bull Market
By Alan Leishman
21 Jun 2006 at 11:44 AM
SWITZERLAND (ResourceInvestor.com) -- Aurelian Resources is currently causing some excitement among those investors who follow the junior mining sector.
The company history is described in the introduction page on their web site:
“Aurelian Resources Inc. [TSXv:ARU] is committed to the exploration, discovery and development of gold, copper and other mineral resources in Ecuador. Since January 2001, we have focused in the Cordillera del Condor area of Ecuador after geologists and company founders, Dr. Keith M. Barron and Patrick F. N. Anderson, discovered epithermal gold mineralization in the area. This find led to the accumulation of nearly 95,000 hectares of mining concessions over a recognized gold producing trend and copper porphyry belt. We have since identified 33 gold targets and 28 copper targets in the concessions.”
This represents a large land package with lots of targets, and the initial exploration results have been nothing short of sensational.
Although Aurelian has only drilled a few holes in its drilling program in Ecuador, three of the holes are world class, the best of which was 189 metres of 24 grams/tonne (g/t) gold.
The share price has responded to the results and climbed over the last 3 months from a low of C$0.46 to C$22.70 in Toronto at the close on 20/06/06, giving a market cap of C$749 million based on 33 million shares Fully Diluted.
Aurelian may be on the radar screens of Bay Street and Howe Street, but not yet of Wall Street, although that is likely to change if the results and the share price continue their upward progression. ARU now features in the top ten of the most active Bulletin Boards on a popular Canadian website. Some of the topics being posted will now be commented on by the author.
The reader is then invited to form his own opinion on whether this story comes into the sphere of “rational exuberance,” or the other more famous Greenspan version of the phrase.
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ARU is being compared to Arequipa, which was taken over by Barrick [NYSE:ABX; TSX:ABX] in the mid 1990’s after a small number of drill holes had indicated but not yet fully proven a large multi million oz gold deposit at a take over price corresponding to a market cap of approximately US$750 million. Comparisons from one decade to another are difficult, because not only has the market changed, but also key parameters, such as the gold price (over 100 us$ lower then compared to today), exchange rates and cost factors in mining.
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Fortunately ARU has proposed a mild poison pill measure designed to protect shareholders from a take over at a price well below the “market value of the assets of the company.”
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BRE-X but this time for real. The BRE-X scam fooled investors, major mining companies, analysts and governments world wide, and helped to crash the junior mining market when it was exposed in 1996/7. Regulations in Canada were subsequently changed as a result to try and prevent any repetition.
Bre-X - The Red Flags That Were Ignored by Analysts and Investors
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Previous Australian drilling on Busang, Indonesia resulted in zero gold discovered.
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Normal drill practice is to cut the cores in half- analyse half and retain the other half for later independent lab testing. Bre-X retained only a 10 centimetre skeleton.
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Fire Assays for gold are standard practice. Bre-X carried out cyanide extraction analysis, which is less accurate and requires larger samples.
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Site visits to Busang were refused with the exception of friendly gold analysts. They failed completely to do any critical technical due diligence, and accepted verbatim the hype that they were presented with.
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The analysts were given small sample cores. Only one person had his sample analysed and found it contained zero gold.
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Wild resource estimates were made after hole LBH1 was alleged to show 3gms gold. This hole which was 1.5 kilometres from the next one in the central area was used to interpolate 10 to 34 million ounces without any drilling having been completed between the 2 holes.
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90,000 metres of core were drilled between 1994 and 1997 costing C$20 million. Any suggestions for Joint Ventures and visits to Busang were turned down. The implication was that they had something to hide.
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The geological hype reached new levels of imaginative spamming. “The mother lode was said to consist of a cigar shaped volcanic diatreme 12 kilometres long by 6 kilometres wide”
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The salting of the gold samples probably occurred at a warehouse where the samples were stored in transit, despite the official version being that the sealed samples went direct to the lab for analysis.
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Initial salting was suspected to have been done using gold ex jewellery and was composed of a gold/copper alloy. Later on alluvial gold bought by Guzman from local panners was used. The lab failed to identify the falsified sources of the gold in each case, a not too difficult task for a skilled laboratory taking its due diligence responsibilities seriously.
By Feb. 96 Bre-X’s share price had risen from under US$1.00 to US$170 giving it a market cap of over US$4 billion. A 10 for 1 split and PP were planned and Walsh’s buzz phrase was “increase shareholder value” at the many analyst meetings that took place. A move from the Alberta stock exchange to Toronto and a quote on Nasdaq was in the pipeline.
The Bre-X Scam Finally Exposed, the Crash and the Aftermath
Freeport who had vast experience in mining similar large deposits, knew that it takes much longer than Bre-X had taken to drill out and delineate a gold deposit of the size claimed. Hence they were not surprised when in March 1997 their DD drilling campaign in parallel holes failed to find any significant gold on the Busang site.
Despite the exposure of the scam, a propaganda war of words continued for some months before the inevitable complete collapse of Bre-X’s share price followed.
Aurelian – Due Dilligence
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The quality of the management : Co-founder of ARU, Dr.Keith Barron is a highly esteemed and experienced geologist, and well followed internet author on junior mining and mining topics.
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Numerous photos on the ARU website show the halved drill cores, on many of which visible gold can be observed embedded in the cores.
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The new canadian regulations are much stricter now than in 1996 requiring checking and control of results by indepenent qualified geologists, before drilling results can be published.
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Canadian SE authorities review news releases before publication in an effort to eliminate unwarranted hype and unproven statements, and demand retraction and clarification for nr’s not meeting their high standards.
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All major gold mining companies will want to visit ARU’s Ecuador sites, and it would be very surprising if they are not invited at an appropriate time.
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A move to a senior exchange in Toronto or the U.S. must already be justified by the market cap, and no doubt will be considered in due course by ARU.
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Of course everybody as always should do their own DD and not rely on the efforts of others.
The Junior Mining Market – 2006 vs. 1996
In 1996 before the Bre-X collapse, there were signs of irrational exuberance in the junior mining market, apart from BRE-X. Small startup exploration companies share prices were soaring before they had any real results on the ground.
For example, Highgrade Ventures were a victim of the boom bust cycle triggered by BRE-X. HGV’s share price went from under C$1 to C$12 in Vancouver, based on some diamond and gold properties they put together in Brasil. They later merged and changed their name to Brasilca. The Bre-X crash in 1997 pulled down their SP along with the majority of the startup companies from overvalued to undervalued. Financing dried up. Companies shut down, or transmorphed into dot.coms alongside the spectacular Nasdaq dot.com bubble, which burst in 2000.
Markets go in cycles, and now Brasilca is again trying to obtain funding, and file all necessary documents to get their suspended status uplifted. We wish them luck in their efforts this time round.
In June 2006 we are in a correction phase of the new secular precious metals and junior mining bull market, which commenced back around 2001. There are as yet no similar signs of irrational exhuberance. Stocks with high market caps have all produced good exploration results. Many juniors are still trading at rock bottom levels, rating their gold (and other precious metals) ounces in the ground at firesale levels. M&A activity is likely to increase as the majors need to increase their depleted reserves, and recognise the value in acquiring undervalued juniors. This is likely to lift the general market in the next phase of this bull market.
Aurelian has already staked an area play with its large land package. Its drill results are open in several directions. Most of their prospects still await drilling. At this stage one can only guess how many ounces they have below the ground.
John Embry apparently mentioned them on Rob-TV in Canada. (I have not seen the replay). He was an early ARU investor and is now a partial seller, purely on the basis that ARU represents a larger than permitted % of one of his portfolios. Despite this type of selling ARU continues to rise. Each drill hole is awaited with eagerness, and announced after a trading halted notice followed by a gap up of the SP on the results.
This of course is a dangerous situation, because expectations are running at very high levels, and one « poor » result could cause a hefty correction. On the other hand with the huge intersections and high grade, each good hole adds in many potential ounces. Multiple million ounces arrive very quickly in this rare scenario!
ARU’s success is not yet known by main stream investors. This is likely to follow, if and when the results keep coming and the market cap passes US$1 billion and heads for $US2 billion or even the US$4 billion of Bre-X. (Obviously this is only a possible, not necessarily a probable scenario).
CNBC and the Wall Street Journal will no longer be able to ignore ARU if this happens, and a quote on a major U.S. exchange might logically be expected to follow as well.
In this scenario, investors will become lemmings, looking first for the ‘next ARU,’ then proximity plays, or look alike start up companies. As the tide comes in all boats will start to rise. Companies with good exploration results and management such as ECU [TSXv:ECU], Samex [TSXv:SXG], NovaGold [AMEX:NG; TSX:NG] and many others will see their share prices continue to rise.
The time to sell will only come when startup companies with no results or assets rise dramtically as well. We are still a long way from that currently. With the fiat U.S. dollar struggling with deficits, debts and geopolitical risks, the PRECIOUS METALs still have a long way to go in this cycle, in my honest opinion.
Copyright © 2006 Alan Leishman
Disclosure: The author bought a small stake in ARU at C$3 after the publication of the first good drill results in April. He sold half his stake recently at C$20 because of the relative size valuation in his portfolio. Everybody should note the particular risks of ARU’s share price potential volatility, (both higher and lower) for the reasons outlined in this essay.
Disclaimer: Alan Leishman is not a registered Investment Advisor or a Broker/Dealer. Readers are advised that the information contained herein is issued solely for information purposes and is not constructed as an offer to sell or the solicitation of an offer to buy. The opinions and analysis included herein are based from sources believed to be reliable and in good faith but no representation or warranty, expressed or implied is made as to their accuracy, completeness or correctness. Readers are urged to consult with their own independent financial advisors with respect to any investment. All information contained in this report should be independently verified with the companies mentioned.
© Copyright 2006, Resource Investor.
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