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TABLE OF CONTENTS Dec 23 - 29, 2013 Volume 99 Number 45 - 0 comments

Aurcana slides on suboptimal Q3 results

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The third quarter wasn’t kind to Aurcana (TSXV: AUN; US-OTC: AUNFF), and the market took notice.

The company’s stock was downgraded by BMO Capital Markets and Stonecap Securities, and it fell on Dec. 3 by 8%, or 10¢, to finish at $1.20 on 267,849 shares traded.

The reasons were a reported 26¢-per-share quarterly loss and concerns over whether it could meet a commercial production target date at one of its mines.

Regarding the financials, after the bottom earnings figure was adjusted for foreign exchange loss, non-cash impairment charges and stock-based compensation, the third-quarter loss came in at 2¢ per share — but that improved number still missed BMO Capital Markets’ expected adjusted return of zero.

The disappointment largely stems from higher operating costs and depreciation.

Production levels, however, weren’t much of a factor in the selling flurry, as Aurcana had pre-released positive production results. The company said it increased silver equivalent production by 5% over the same period last year to 754,800 oz. silver for the quarter.

Total cash costs for the quarter, net of by-product credits, also improved, as they came in at a respectable US$6.45 per oz. This figure was 17% lower than the US$7.79 per oz. reported in last year’s third quarter.

The better numbers largely came from its La Negra mine, 180 km north of Mexico City. The mill at the site saw throughput increase by 15% to an average of 2,632 tonnes per day. But the production increase was offset by lower grade, as the average head grade came in at 55 grams per tonne compared to the 80 grams per tonne averaged last year.

The decrease in grade had been expected, due to the company’s efforts to focus on mine development so that future production rates can move higher. At present the company has done enough mine development to support two years of production. The company plans to transition to higher-grade silver mineralized zones in 2014 and 2015.

Of more concern is the development of its Shafter project in the Presidio County of southwest Texas.

The mine was reopened in June 2012, with production starting last December. Since then Aurcana has been working on improvements, with an eye to ramp up to full capacity of 1,500 tonnes per day by later this year, or early 2014.

Ore is coming from a deposit with proven and probable reserves of 2.4 million tons (2.2 million tonnes) grading 221 grams silver per ton for 19.2 million tons (17.4 million tonnes), making it one of the largest pure-silver deposits in North America.

But the project has been hit by delays. Aurcana first encountered problems at the mill, but now it has had to temporarily suspend mining activities. Those problems have some wondering if it can meet its own targets.

“At Shafter, second-quarter 2014 commercial production is looking increasingly optimistic,” BMO analyst Andrew Kaip writes in his research note. “At current metal prices, operating profit from La Negra and cash sources look to be insufficient to cover Shafter development and ongoing debt-repayment schedules.”

The forecasted capital shortfall at current silver prices has Kaip projecting that the company will need to complete a US$20-million financing in next year’s second quarter.

If it raises more capital, it would come on the heels of the $50-million loan facility and off-take agreement with Red Kite Mine Finance in the third quarter. The financing helped it end the quarter with US$41.7 million in cash, but also with a net debt of US$26.6 million.

BMO rates Aurcana as a “market perform,” and Kaip lowered his price target price to $1.50 per share from its previous $1.75 per share.

Stonecap Securities also downgraded the company’s stock to a rating of “underperform” from its previous “sector perform,” and cut its share price target to $1.75, from $2.50.

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Aurcana Corporation

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