Sunday, 21 October 2012
Aurcana: Comments on La Negra Q3-2012 Production Numbers
On October 18 2012, Aurcana released production numbers for their La Negra mine in Mexico [ 1]. At first glance, the numbers look very good... most metrics are up strongly year-over-year and also up quarter-over-quarter. However, the next day, Stonecap Securities released a report giving their impressions and it wasn't all positive [ 2]. In fact, Stonecap reduced their price target on Aurcana from $1.80 to $1.60 stating "production growth slowed" and characterised the results as "mildly disappointing". So let's take a closer look. Here is what Aurcana reported:
Silver Production: 376,687 oz (54% increase year-over-year)
Silver Equivalent Production: 718,063 oz (67% increase year-over-year... although my calculations based on data filed with Seder indicates this is only a 64% increase year-over-year)
Mill Feed: 196,843 tonnes (and although they didn't specifically state it, this is a 64% year-over-year increase)
That all looks pretty darn good right? Well, here are some of the statistics they neglected to draw attention to:
Silver Production: increased 1% Q3-over-Q2 (compared to a 30% Q2-over-Q1 increase)
Silver Equivalent Production: increased 4% quarter-over-quarter (compared to a 40% Q2-over-Q1 increase)
Mill Feed: increased 10% quarter-over (compared to a 35% Q2-over-Q1 increase)
So, the numbers look quite good year-over-year, but much less so quarter-over-quarter. And the majority of the year-over-year gain can be attributed to the stellar increase reported in Q2. Here's the information in chart form (sometimes a little easier to interpret/digest):
Now, we've been expecting Aurcana to work their way up to 2500 TPD by the end of the year, up from a run rate target of 2000 TPD for Q2-2012. How did they do on that objective? Well, not as well as they did in Q2. Specifically, here are the TPD milling rate increase reported in each quarter:
Q3-2012: 2140 TPD (up from 1941 TPD in Q1-2012, for an increase of 199 TPD)
Q2-2012: 1941 TPD (up from 1435 TPD in Q1-2012, for an increase of 506 TPD)
Now, one thing that has been troubling me. If Aurcana increased tonnes milled by 10% in Q3, how come silver equivalent production only increased by 4% and silver production increased barely budged (1% increase)? Did grades drop? According to Aurcana, they didn't. Here is their comment on grades from each of the quarterly production press releases this year:
Q3-2012: "average grade of silver increased 7% YTD to an average of 80 grams per ton in 2012" [ 1]
Q2-2012: " average grade of silver increased 5% YTD from an average of 80 grams per ton in 2012" [ 3]
Q1-2012: "average grade of silver increased 9% to 81 grams per ton in Q1, 2012" [ 4]
If grades have been steady all year, what remains as the probable cause of the lower production. Recoveries? It appears that silver recoveries must have dropped. Crunching some numbers from the quarterly reports, here is the data I get on recoveries ... a disturbing trend. (Note: I calculate this as follows: recovery = (silver produced)/(ore milled * grade)):
Q3-2012: 74%
Q2-2012: 82%
Q1-2012: 85%
Not what you hope to see. So, it appears the the rapid mill expansion may have introduced some inefficiencies into the operation that will need to be corrected as they could have a fairly large impact on profit. One question that follows is, what would the Q3-2012 silver production number have looked like if recoveries had been at the average value seen during the last 4 quarters (83%)?
Possible Q3-2012 Silver Production: 420,222 oz (or 43,535oz more)
And this would flow straight through to the bottom line. At $29.50/oz silver (the average price that I estimate Aurcana sold silver at during Q3-2012), this equates to an extra $1.3M. Not insignificant (this additional income could have conceivably doubled their profit in Q3... although well have to wait for the Q3 financial's to know for sure). So this is clearly a problem that needs to be addressed. As such, I'll be keeping a close eye on recoveries in the coming quarters.
Overall, Aurcana's Q3-2012 number weren't great, but they weren't bad either. They continued to deliver growth across most of the important metrics, although at a slower pace than some may have hoped for. The one item that is concerning is the declining trend in recoveries... a problem that will need to be resolved if Aurcana plans to meet the production targets going forward (refer to their corporate presentation for these [ 5]).
Below is the raw data used throughout this post. Targets are my own; all other values are either reported values (extracted from documents on Sedar or press releases), or calculated from reported values:
[1] http://www.aurcana.com/s/NewsReleases.asp?ReportID=552989
[2] http://www.proactiveinvestors.com/companies/pdf/36252/stonecap-securities-morning-advantage-report-aurcanas-production-growth-slows-in-q3-and-others-36252.html
[3] http://www.aurcana.com/s/NewsReleases.asp?ReportID=536302
[4] http://www.aurcana.com/s/NewsReleases.asp?ReportID=521413
[5] http://www.aurcana.com/i/pdf/CorporatePresentation.pdf
Posted by Christopher Wood at 22:03
investmentrevaluationcatalyst.blogspot.ca |
