Aurcana: IRR and NPV of Shafter
By Christopher Wood
Investment Revaluation Catalyst
at 13:38 Monday, 20 February 2012
Aurcana Corp. (TSX:AUN; OTC:AUNFF) published a feasibility study ( http://tiny.cc/fgg3l ) on their 100% owned Shafter mine in November 2010. The study predicted a net present value (NPV) of $34M at a discount rate of 5%, an internal rate of return (IRR) of 32%, and payback in 1.9 years. Quite robust economics. But this study used a silver price of US $15.53 and only included the measured & indicated resource. What would the economics look like using the current price of silver and including the inferred resource? Vastly better.
I have attempted to extrapolate the original feasibility study in the following ways, in each case using the current price of silver ($33.28 at the time of writing):
1) Original (M&I): Only measured/indicated resources
2) Original (M&I&Inf): Both measured/indicated and inferred resources
3) Start-up (M&I): Only measured/indicated resources at production start date (accounts for sunk costs)
4) Start-up (M&I&Inf): Both measured/indicated and inferred resources at production start data (accounts for sunk costs)
The first two include the original capital costs, however, since all the original capital costs have already been raised (and the majority spent), these are really sunk costs. So, a more accurate estimate is consider these sunk costs and eliminate them from the calculation. This is done in the second two calculations.
In all cases, the results are stunning:
1) Original (M&I): NPV = $273M, IRR = 144%, Payback = 6 months
2) Original (M&I&Inf): NPV = $480M, IRR = 146%, Payback = 6 months
3) Start-up (M&I): NPV = $332M
4) Start-up (M&I&Inf): NPV = $549M
Here is the overall improvement in the important metrics between the original and these new estimates:
NPV: $34M -> $549M (~15x increase)
IRR: 32% -> 146%
Payback: 1.9 years -> 0.5 years
The calculations to back-up these results can be found here http://tiny.cc/0x1ti . They use the same 5% discount rate as used in the original study. The grade used for the inferred resources was the average from the feasibility study after accounting for grade reduction due to dilution (10.52opt *.91 = 9.57opt). Capital costs and operating costs were extrapolated to be the average yearly costs from the original.
Now these results look phenomenal, but I expect actual results to be even better for the following reasons:
* Resource numbers used where from current 43-101 resources, which resulted from drilling programs conducted by previous owners in the mid-to late 1990s and earlier. Aurcana is currently engaged in an aggressive drilling program on the Shafter property with results expected later in the year. There is high probability for resource expansion as a result of this program. This would extend mine life and/or provide opportunities for increased throughput.
* Increased extraction rates. The current mine plan calls for a milling rate of 1500tpd, yet Lenic stated in the Christopher Barker interview ( http://tiny.cc/oa8wb ) that Aurcana is considering upgrading to a rate of 2500tpd. This could cause cash costs to decrease. Additionally it would cause cash flows to be recognised sooner (reducing the impact of the 5% discount rate). The net result is higher NPV.
* Potential for recovery of gold, lead, and zinc from the ore. Current projections assume no metal by-products, however, historic drilling results hint that gold, lead and zinc are all present. Future drilling results could report economic quantities of metal by-products which could result in mill upgrades to extract the by products. This would further reduce cash costs.
* Potential for silver price increases. These estimates assume current silver prices, which I expect to be significantly higher in the future.
http://investmentrevaluationcatalyst.blogspot.com/2012/02/aurcana-irr-and-npv-of-shafter.html
Dan  |
