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Canaccord Adams is the global capital markets group of Canaccord Capital Inc. (CCI : TSX|AIM)
The recommendations and opinions expressed in this Investment Research accurately reflect the Investment Analyst’s personal,
independent and objective views about any and all the Designated Investments and Relevant Issuers discussed herein. For important information, please see the Important Disclosures section in the appendix of this document. Aurelian Resources Inc. ARU : TSX-V : C$23.20 SPECULATIVE BUY Target: C$40.00? Graeme Currie 1.604.643.7405 graeme.currie@canaccordadams.com Toni Wallis 1.604.643.7551
toni.wallis@canaccordadams.com
COMPANY STATISTICS:
52-week Range: $25.05-0.46 Avg.
Daily Vol. (000): 196,299
Market Capitalization (M): C$696.0
Units Out. (M) basic: 30.0
Units Out. (M) fd: 32.0
Long-term Debt (M): Nil
Working Capital (M): C$19.0
SHARE PRICE PERFORMANCE:
COMPANY SUMMARY:
Aurelian Resources is a Toronto-based junior under the
stewardship of Patrick Anderson and is focused on
developing the Condor Project in south-eastern Ecuador.
In Q2/06 the company announced the initial discovery of
the FDN gold zone. Subsequent drilling has now extended
the strike to plus 900 metres and remains open. In our
view this now clearly represents a world class gold
discovery
All amounts in C$ unless otherwise noted.
Mining and Metals -- Exploration and Development
MORE VERY GOOD DRILL
INTERCEPTS FROM FDN ZONE
Aurelian Resources Inc. is a Toronto-based junior under the stewardship of Patrick Anderson and is focused on developing the Condor Project in southeastern Ecuador. The Condor project is 100% held subject to a 1 to 2% NSR and the first concessions were granted in 2001. The massive property holdings now
cover a region over 70 kilometres in length and almost surround at the northern end the Mirador copper deposit held by Corriente Resources. In 2002, Aurelian initiated a program of regional sampling and mapping along with staking which identified seven gold prospects. The company became a publicly-listed corporation in mid-2003. Earlier this quarter, the company announced the discovery of a new
epithermal gold zone on a target referred to as Fruta del Norte (FDN). FDN lies within a trend that based on mapping is within a pull apart basin. A portion of this trend between the previously identified Bonza zone and FDN is masked by a sandstone cover (50 metres thick?) .This cover also masks the FDN zone to the north beginning between section lines 3800 and 3900 north. After drilling two shallow holes which identified a buried quartz sinter that was interpreted to be marking the
top of a buried epithermal target, hole CP-06-51 was then drilled to a depth of over 300 metres and returned 237 metres at 4.1 g/t Au plus 8.5 g/t Ag beginning at about 200 metres.
The company has now drilled 25 holes along 900 metres of strike and with the release of the assays from three holes today, has now released assays from 15 holes (see Figure 1). The company reported that visual logging of core from holes without assays indicates that the silicified epithermal stock-work system continues north to section line 800N.
Daily Letter PM | 3
21 August 2006
Figure 1: Fruta Del Norte Drill Hole Plan Map
Source: Aurelian Resources
Daily Letter PM | 4
21 August 2006
This infers that hole 70 drilled on section line 900N may suggest the system has been defined to the northerly direction, or that it failed to intercept the main FDN zone – this is
conjecture on our part. The results released today include hole 63, drilled on section 400N, from east to west as a
scissor hole to holes 57, 58 and 59. Part of the reason for this scissor hole is to verify zone thickness and to confirm the plunge (and/or dip) of the main system. Hole 63 returned 215 metres at 10.1 g/t Au and 18.5 g/t Ag. This included two higher grade intervals of 31 and 13 metres grading 25.9 and 29.8 g/t Au, respectively. This interval is reported as about 60 metres above the higher grade intercepts reported in hole 57. Hole 63 exited the main FDN system at 538 metres on the drill stem as it crossed a fault implying the western boundary
of the main zone at FDN. Hole 62 was drilled on section 500N and returned 191 metres at 7.4 g/t Au and 11.1 g/t Ag
including 14 metres at 25.5 g/t Au and 26.7 g/t Ag and confirms the northerly extending direction of the system.
Hole 61 was drilled as a westerly step-out on section 300N and would represent the most westerly hole drilled to date (along with hole 59). This hole was designed to test the main
FDN zone at depth and did not cross into the favourable host geology until 427 metres on the drill stem. The hole returned 73 metres at 1.4 g/t Au and 9.8 g/t Ag and importantly
intersected relic copper porphyry mineralization in an 18 metre interval from 484 to 502 metres on the drill stem. This graded 0.71% Cu, 0.62 g/t Au and 16.8 g/t Ag. This interval
suggests the epithermal system overprinted an earlier copper porphyry system. The lower grade of the hole is likely explained by the proximity to the relic copper porphyry, as based on the epithermal model this interval may likely have been affected by temperature and other metals present thus it did not achieve optimum conditions for bonanza style grades
as seen elsewhere in the FDN zone. The presence of the porphyry also implies the deep heat engine that helped in ground preparation here (see Figure 2). Impact – Positive
The results today continue to confirm that the FDN zone is achieving world-class size for a gold deposit. The system is now traced along 700 metres of strike and there remains
significant potential for zone expansion. We understand that in the next several weeks one of the two drill rigs at site will test a hypothesis where, contiguous to and immediately west
of the FDN zone, there exists the potential for a second down-dropped block of the epithermal stockwork and veining mineralization characterized in the FDN zone. This
down-dropped block is likely to be tested on section line 300N where hole CP-06-61 intercepted a narrow buried quartz sinter (which represented a marker horizon at FDN –
as seen in Figure 2) at a vertical elevation some 100 plus metres below the top of the known FDN horizon.
Daily Letter PM | 5
21 August 2006
Figure 2: FRUTA Del Norte section 300N
Source: Aurelian Resources
Valuation
We now believe it is appropriate to consider that FDN may have a resource block approximately 800 metres in length with a 200-metre average depth component and a 100-metre true thickness component. These dimensions are purely hypothetical estimates on our part and are not supported by detailed geologic data as yet. We assume a specific gravity multiple of 2.75 which results in a tonnage estimate of 44 million tonnes. If we assume an average grade at 8.0 g/t Au, this equates to approximately 11 million ounces of gold in situ. We emphasize this is our very rough estimate and is based on the assumption
that the average grade and thickness is maintained in the 10 holes not yet reported. We have held a SPECULATIVE BUY recommendation since April 6, 2006, on Aurelian, and
we maintain this view. Under current preliminary tonnage and grade analysis and estimates outlined above, the FDN target could host a resource that may now reach or exceed 11 million ounces.
Daily Letter PM | 6
21 August 2006
Canaccord Adams has developed an in situ gold spreadsheet that covers 43 junior companies and weekly is employed to calculate an average value, based on the market capitalization of the companies included, per ounce of gold in a recognized NI43-101
resource. The current average value is about US$61.64/oz. We hold the view that even at this early stage FDN does not represent an average prospect within the Junior Mining
sector. Given the exploration upside potential for this newly discovered prospect, coupled with the grades and thicknesses reported to date, we hold the view that a large premium to the
average can be employed for an in situ estimate. We will use an arbitrary figure of US$100/ounce in situ to derive a valuation, assuming 11 million ounce potential, of US$1,100 million assuming the tonnage estimates noted earlier and the 8.0 g/t Au grade assumption. Based on a 0.85:1 Canadian dollar to US dollar exchange ratio, this equates to C$1,294 million. This approach, however, does not apply any development leverage which we believe remains substantial given that the FDN zone is open. Quantifying this leverage at such an early stage of exploration is difficult to tangibly estimate. We believe that a range of 1.10-1.25 times our rough estimates above may be applied by the market but will cease to employ this at present.
We maintain Aurelian as a SPECULATIVE BUY and revise our target upward from $29.50/share to $40.00 per share (rounded). This figure is derived by dividing the above implied market capitalization estimate by 32 million shares (fully diluted).
Next catalyst The company completed a financing in early Q2/06 in which Canaccord acted as a co-lead agent. We would note that the 7.27 million shares from this issue are to become freetrading on August 28/06. Investment risks The commercialization risks associated with mineral exploration and development are high; thus, investment in the shares of Aurelian Resources are for risk accounts only.
An analyst has completed a site visit to the FDN zone. Partial payment or reimbursementwas received from the issuer for the related travel costs.......
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