Aurcana sets production records, Red Kite loan stalled

VANCOUVER — Silver producer Aurcana (TSXV: AUN; US-OTC: AUNFF) is improving operations at its wholly owned La Negra silver-copper-lead-zinc mine in Queretaro State, Mexico. The company’s mill boosted its daily throughput by 41% during the second quarter, which resulted in a 38% quarter-on-quarter jump in silver-equivalent production.

Aurcana is pushing to complete development at its wholly owned Shafter silver project in Presidio County, Texas, although a commercial production target slated for first-quarter 2014 might be pushed back after delays in closing a US$50-million loan facility and offtake agreement with Red Kite Mine Finance, which was expected in July.

La Negra cranked out 818,000 equivalent oz. silver over the past three months, which marks a 19% production increase compared to the same period in 2012. Perhaps more promising, however, are Aurcana’s milling metrics. The company saw a 73% jump in ore mined to 249,000 tonnes, even as total cash costs per tonne milled dropped 6% year-on-year to US$30.84. La Negra’s mill hummed along at 3,057 tonnes daily during the quarter, which marks a 41% improvement in throughput rates compared to last year’s second quarter.

During a conference call, president and CEO Lenic Rodriguez said the company “once again” increased second-quarter, silver-equivalent production at La Negra, and also hit a new milling target. By processing larger volumes the company lowered cash costs, which he called “a strategic advantage.”

But despite the jump in production, Aurcana was hit by weaker silver markets during the quarter. Total quarterly revenues dropped US$2.4 million year-on-year to US$11.3 million. Net income was similarly affected, dropping to US$300,000, compared to US$1.4 million over the same period in 2012. Cash costs were up US85¢ at US$7.79 per silver oz., net of by-products.

“The drop in revenue was mainly due to lower silver prices and lower grades processed, as more mill feed was derived from new areas, though we have developed the equivalent of another two years of production,” Rodriguez said, noting that the company would target higher-grade ore for the rest of the year.

Shafter is seeing capital improvements as it moves towards producing 1,500 tonnes per day. Mine development at the site is expected to cost Aurcana US$18.5 million, with US$5.5 million spent in the first six months of 2013. The company’s silver production at Shafter has been hit by bottlenecks in its processing plant pending the delivery, installation and commissioning of key pieces of equipment.

With US$13 million left to be spent at Shafter, Aurcana will need the proceeds from its Red Kite loan to complete the project. The company finished the second quarter with US$3 million in cash, and a working capital deficit of US$17 million.

“One of the delays with the financing has been dealing with summer doldrums. We have had sequential types of due diligence people that have been on holidays and things, but we are now in the final stages of completing that aspect of the process,” Rodriguez said. “We’re close to finalizing — it’s imminent — but I can’t give an exact date right now.”

Aurcana is planning to ramp up Shafter in the months leading to  2014, although Red Kite’s loan — expected to close at the end of September — could affect this schedule. Shafter would produce around 3.8 million oz. silver annually under the 1,500-tonne-per-day mine plan, with cash costs clocking in at $10 per oz.

BMO Capital Markets analyst Andrew Kaip, who maintains a “market perform” rating and a $2.50-per-share target price on Aurcana, acknowledges the company’s cost-control success during the quarter, but noted on Aug. 30 that “cash balance is a concern in light of the financing delay, which placed Shafter’s development activities on hold.”

Aurcana has traded within a 52-week window of 53¢ and $2.51 per share, and closed at $2.51 at press time. The company completed an 8-to-1 rollback in mid-April, and maintains 58 million shares outstanding for a $147-million market capitalization.