Last Chance to Board Mexican Silver Producer Geared for Lift-Off
By David J. DesLauriers
20 Nov 2006 at 07:21 PM EST
resourceinvestor.com
TORONTO (ResourceInvestor.com) -- Aurcana Corp [TSXv:AUN] which closed today at 75 cents has been the subject of RI’s attention, analysis and praise in the past (in March and May), and is a fine reflection of your correspondent’s affectionate predilection for the near-term production niche.
Today, already stockpiling ore at La Negra, AUN stands at the doorstep of major production and cash flow and will leap through that threshold in Q1 of next year as the company’s mill is re-started and begins to process material.
So what does this mean for investors?
Trading at a Fraction of Peer Valuations
Probably the best comparables and examples of where AUN will be in a couple of months are Endeavour Silver [TSX:EDR], Great Panther [TSX:GPR] and First Majestic [TSXv:FR].
All of these companies are silver producers, cash flowing far less than what is projected for AUN next year, producing at higher costs per ounce, and all have market capitalizations of between C$150 million to C$200 million. Aurcana currently has a market capitalization of just C$52 million.
The reason for the handsome market capitalizations of the three comparables listed above is that there is a dearth of listed silver producers for investors to choose from. As AUN joins this small, exclusive group in just 2-3 months from today, that same money seeking out such vehicles should chase Aurcana shares much higher.
But on the cusp of production, why is AUN still trading at 75 cents - what has been holding it back?
Aurcana Free of Its Chains
RI can identify three main reasons that AUN is still so far from a fair valuation. We believe that all of these things are just now behind Aurcana:
1.
Paper: Aurcana raised money at 20 cents and a lot of people have made a very nice return, taking something off the table at these levels, and holding the share price down. We believe that having traded nearly 30 million shares since August, the selling pressure on AUN has finally abated as most of these shares were passed into new hands in the 50-85 cents range, and these investors will hold through production.
2.
Financing: There was a rumour on the Street that Aurcana needed more money to go into production. That was not the case, but the prospect of a potential financing held the stock down. Friday’s update confirming that the company is on time and on budget for production seems to have disabused the market of that notion. The only financing that President Ken Booth will consider, will be for an accretive acquisition, and shareholders will be net winners.
3.
Lack of Feasibility Study: Because this is a re-start operation and Penoles has done a great job of keeping every sort of data one can imagine for the new owner (AUN), the company can predict with excellent accuracy what the operation will cost, and how much money they will make. Despite this, North American investors like to see umpteen studies before they feel comfortable, even if that is not the way that things are done in Mexico.
The lack of a feasibility study has left some waiting on the sidelines. Indeed, Aurcana has to satisfy regulatory procedures to the extent that the company has to put the following in every press release: “The reader should be cautioned the Company has not completed a feasibility study confirming the projected production capacity and there is no certainty the Company's plans will be economically viable.” The reality is, Aurcana knows what is there, what it will cost to mine, and how much money will be made. Mining dollars in Q1 will force the market to accept this.
Robust Cash Flow
At the current reserve head grade, today’s commodity prices, the planned rate of 1,000 tons per day, and given projected rates of recovery, and smelter charges, Aurcana would cash flow (to their 80% interest) over $40 million, or 59 cents per share in 2007.
To be prudent, one should choose to discount commodity prices and assume the odd hiccup here and there, so let’s say that AUN actually comes in at 50 cents per share of cash flow.
That means that at today’s close, Aurcana which is just 2-3 months away from full production, is trading at only 1.5X 2007 cash flow.
Accretive Acquisitions
Aurcana and its strategic local partner Reyna Mining & Engineering have superior relationships in Mexico which enable them to see and to be shown opportunities that the vast majority of Canadian companies cannot hope to see (this includes combing the Penoles offices, a group that has taken an equity stake in the company - a rarity for them).
With this advantage in hand, Ken Booth is looking at a number of exciting projects that have all the makings of La Negra repeats – in other words, extremely accretive to cash flow per share, and all other metrics one wishes to apply. He is focusing exclusively on very near-production projects with associated infrastructure, or mines that are already in production. Add one of those to AUN over the next few months and we will really be cooking with gas.
Upward Re-Rating / Conclusion
Given that Aurcana is currently trading at just 1.5X projected 2007 cash flow, that direct comparables have market capitalizations of 3-4 times AUN’s, and that the upward production re-rating is only 2-3 months away, this looks like an extremely compelling value situation that should start to appreciate almost right away.
A 2-3 month target of C$1.50 per share is in order here, as shares should jump as Aurcana’s enters its new life as one of the few listed silver producers that investors have to choose from, and with huge cash flow.
Beyond that, a 6-12 month target of C$3 to C$5 seems perfectly reasonable as quarterly earnings statements are delivered and the market and institutions really start to catch onto this story, valuing it more closely to its peers.
Lastly, if Ken Booth makes an accretive acquisition in that time-frame, increasing the silver bias and further bolstering the cash flow per share number, the share price should do even better.
Indeed, at these prices, this close to production, Aurcana has all the earmarks of a very low-risk, immediate high-reward slam-dunk. That much is algebraically demonstrable. |
