Mariusz Skonieczny

# Aurcana Corporation – Silver Producer on Its Way to Greatness

While governments around the world are printing fiat money, investors are buying gold and silver to protect the purchasing power of their own wealth. However, while the prices of gold and silver have increased significantly, gold and silver stocks have not responded in the same fashion. Why? One explanation is that bullion investors are not the same investors as gold and silver equity investors. Another explanation is that gold and silver are in a bubble and equity investors simply do not believe that these “high” metal prices are sustainable.

With that being said, something interesting is starting to happen. Investors who have never invested in gold and silver equities before are starting to pay attention. They are realizing that the mining stocks have lagged so much that even if gold and silver prices fall significantly, these equities are still cheap.

Aurcana Corporation, a silver producer, is a perfect example. Today, the company has a market cap of \$255 million (Fully diluted = \$317 million – \$62 million cash to the treasury = \$255 million) and is on track to produce 6 million silver equivalent ounces at a cash cost of approximately \$8 per ounce. Even if the price of silver declined to \$20 per ounce, the stock will be trading at a market cap to forward cash flow multiple of 3.54. However, if the price of silver stays where it is today or increases, this multiple will be much more appealing.

Scenario 1: Silver Price = \$20 per ounce

Cash flow from mining operations = 6,000,000 ounces x (\$20 – \$8) = \$72,000,000

Multiple = \$255,000,000/\$72,000,000 = 3.54

Scenario 2: Silver Price = \$30 per ounce

Cash flow from mining operations = 6,000,000 ounces x (\$30 – \$8) = \$132,000,000

Multiple = \$255,000,000/\$132,000,000 = 1.93

Scenario 3: Silver Price = \$40 per ounce (Silver Price Just a Few Days Ago)

Cash flow from mining operations = 6,000,000 ounces x (\$40 – \$8) = \$192,000,000

Multiple = \$255,000,000/\$192,000,000 = 1.33

Scenario 4: Silver Price = \$60 per ounce

Cash flow from mining operations = 6,000,000 ounces x (\$60 – \$8) = \$312,000,000

Multiple = \$255,000,000/\$312,000,000 = 0.81

Aurcana Corporation is a Canadian junior mining company listed on the TSX Venture Exchange, symbol AUN and U.S. Pink Sheets, symbol AUNFF. According to the most recent conference call, the company is in the process of getting a listing on a major TSX Exchange. This should be completed by the end of the year. Also, the management plans to list the company on AMEX, but this will not happen before the stock price reaches \$2 per share, which is the exchange’s requirement.

Second Quarter 2011 Conference Call

The principal business of the company is the acquisition, exploration, production and development of mineral properties, primarily silver-copper-zinc-lead mines. Since 2007, the company has been operating La Negra Mine in which it holds a 92% interest. La Negra Mine is in the state of Queretaro, Mexico. In addition, in 2008, the company purchased a 100% interest in Shafter Mine in the U.S. state of Texas.

Source: Aurcana Investors Presentation

La Negra Mine

The La Negra silver-copper-lead-zinc mine is located in the state of Queretaro, Mexico. The mine was discovered and developed by Industriales Penoles S.A. de C.V. and it was in production from 1970 until 2000. Historically, it produced 36 million ounces of silver, 323 million pounds of zinc, 70 million pounds of copper, and 161 million pounds of lead. Aurcana acquired La Negra Mine in 2006. Annualized production starting in 2011 is estimated to be 2 million silver equivalent ounces.

Shafter Mine

Shafter Mine is a silver mine in Presidio County, Southwest Texas. From the late 1800s to 1942, it produced more than 35 million ounces of silver. Currently, this mine is not producing any silver, but the company started construction in December 2010 and the mine should be put back into production by May 2012. Once put into production, this mine will quadruple the company’s silver production.

Turnaround

As you can see in the following illustration, Aurcana was not doing well in 2008, but was recently turned around by Lenic Rodriguez, the company’s CEO.

Source: Aurcana Investors Presentation

In 2008, under the previous management, Aurcana was not able to operate profitably. The company was on the brink of bankruptcy. The board of directors was dissatisfied, fired the previous CEO and asked Lenic Rodriguez, who at that time was one of Aurcana’s board members, to turn the company around.

Since he took over on May 19, 2009, positive things have started to happen as is evident by the results in 2009 and 2010. The company became profitable while continuing to increase production. He replaced some members of the management team, expanded La Negra Mine’s mill capacity from 1,000 tonnes per day to 1,500 tonnes per day, and transformed La Negra Mine from a money-losing operation into a cash cow.

What is Next?

Now that Rodriguez has turned the company around, he is not even close to being done. His next goal is to increase the mill capacity at La Negra Mine from 1,500 tonnes per day to 2,000 tonnes per day by early 2012. This should increase production from 2 million to 2.6 million of silver equivalent ounces at La Negra Mine.

While this 33 percent increase in production is excellent, it pales in comparison to what is about to happen to the company’s overall production once Rodriguez and his team put Shafter Mine into production by May 2012. Aurcana will then be producing 5 million silver ounces at a cash cost of \$7.60 per ounce. With the copper, zinc and lead from La Negra Mine taken into account and converted into silver equivalent ounces, the total production will equate to 6 million silver equivalent ounces. Assuming the price of silver is \$30 per ounce, the company will generate more than \$100 million in cash flow. However, if the price of silver returns to \$40 per ounce, which was the price just a few days ago before the gold and silver meltdown, the cash flow will be nearly \$200 million per year. Let’s not forget that currently, the market cap is \$255 million.

As a result of Shafter Mine being put into production, Aurcana will become a mid-tier silver producer. To realize just how monumental this will be, it is helpful to put things in perspective. Shafter Mine’s production alone will increase US silver production by 10 percent., the United States will jump from being the number 8 silver producer in the world to number 6, and Shafter Mine will become the 14th largest silver mine in the world:

Source: Aurcana Investors Presentation

Precious Metals Summit

On September 15, 2011, Aurcana presented at Precious Metals Summit. The following is the link to the audio file. It also includes the most recent investor presentation.

Management

The quality of any company’s management is always of critical importance, but is especially important in the mining world. The following are some of Lenic Rodriguez’s accomplishments with Aurcana:

• He took over in May 2009, and by the end of 2009, the company turned EBITDA positive
• He needed to raise money to put Shafter Mine into production and he did so by raising \$85 million, which is remarkable considering that the market cap was \$30 million at that time
• After he raised the money, he immediately started construction of Shafter Mine
• Before he became CEO, Aurcana had a silver contract with Silver Wheaton that he managed to pay off for about \$25 million even though its value was \$65 million at that time
• He wanted Dr. Peter Megaw, one of the top three geologists in North America, to be part of Aurcana and he persisted until Megaw finally agreed to join them
• He said he was going to increase La Negra Mine’s mill capacity from 1,000 tonnes per day to 1,500 tonnes per day, and he completed it on time and under budget
Now, he is promising to increase capacity at La Negra Mine again and put Shafter Mine into production to generate between \$100 and \$200 million of cash flow per year. He has delivered time and time again, and I have confidence that he will do it this time.

In the following interview, Rodriguez talks about the expansion of La Negra Mine, Aurcana’s turnaround, the new management, and Shafter Mine.

In the following interview, Rodriguez talks about the private placement that closed December 2010. He raised \$85 million even though the market cap at that time was \$25 to \$30 million. Sprott Asset Management and Fidelity Investments were the participants. Rodriguez also talks about the silver stream agreement with Silver Wheaton. Again, he talks more about Shafter Mine and how Aurcana will cash flow north of \$100 million per year.

The following video summarizes the investment case for Aurcana Corporation. It was featured on BTV – Business Television. Dr. Peter Megaw talks about how \$25 to \$30 million was spent by other people on Shafter Mine before Aurcana acquired it.

In a radio interview with the Korelin Economics Report (Segment 1), Dr. Peter Magaw and Lenic Rodriguez discuss the reopening of Aurcana’s Shafter Mine in Texas. Rodriguez talks about how he met Dr. Peter Magaw. Magaw describes the tremendous exploration potential at Aurcana. Rodriguez talks about how Aurcana acquired Shafter Mine.

In another radio interview (Segment 6), Al Korelin and Roger Wiegand discuss Aurcana, which Trader Rog follows in his newsletter. Korelin talks about how Lenic Rodriguez gets things done.

Why is the Company So Cheap?

While many of the mining companies are cheap in relation to the prices of gold and silver, Aurcana is particularly cheap. One explanation is that the company was recently turned around and the full potential is not being shown in the financials yet. As time passes, this will slowly change in the company’s income statements. Second, Aurcana is a junior mining company, and many investors have never heard of it. Third, Sprott Asset Management is suing Aurcana. Yes, you read that correctly. Even though Sprott owns a big portion of Aurcana, he is suing the company. Sprott claims that Aurcana backed out of an agreement to borrow \$25 million and failed to pay a termination fee equal to 1.56 million ounces of silver. Aurcana claims that it never signed such an agreement. Aurcana asked the court to have the case dismissed. The next court date is scheduled on October 19, 2011. The worst case scenario is if Aurcana is forced to take a \$25 million loan and repay it with 1.56 million ounces of silver. Although this outcome is possible, it would not have a devastating effect on Aurcana especially when it starts producing 6 million ounces of silver per year.

Conclusion

Aurcana’s future will depend on the management’s execution and the price of silver. Even though the stock of the company will still be cheap if the price of silver decreases significantly, it probably does not make any sense to invest in it unless you believe that the price of silver will increase or at least stay at the current level. With that being said, the upside potential in Aurcana is tremendous and the downside is fairly limited. However, in the short term, this does not mean that the market won’t sell it off. If there are enough fools trying to sell the stock at the same time, the price will decline no matter what the underlying business is doing. This kind of behavior is evident in the stock’s price action over the last few days which allowed me to acquire all the shares I wanted at these depressed priced.

Disclosure: I, or persons whose accounts I manage, own shares of Aurcana Corporation. This report is not a solicitation to buy or sell securities. Neither Mariusz Skonieczny nor Classic Value Investors, LLC, is responsible for any losses resulting from purchasing or disposing shares of Aurcana Corporation. You are advised to consult your financial advisor or conduct the due diligence yourself.

Mariusz Skonieczny
Mariusz Skonieczny is the founder and president of Classic Value Investors, an investment management firm. He is also the editor of Ultimate Value Finder, a monthly newsletter that features three underfollowed, unknown, and undervalued companies ignored by Wall Street.

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