Aurcana tumbles as it closes the Shafter mine

Aurcana (TSXV: AUN; OTCQX: AUNFF) is taking its Shafter silver mine in Texas immediately offline due to declining silver prices.

Aurcana says its board has reviewed the development and mining options for Shafter and given the current price environment has opted to put the operation on care-and-maintenance to preserve its treasury without disclosing how long the mine will be idled or how many workers will be impacted.

“We are very sad to make this decision and we are mindful that we’re affecting the lives of hundreds of families there. And despite the hard work and best efforts of many of our people and employees, unfortunately the project is not economical today in this environment,” Catalin Chiloflischi, the company’s director of corporate communications, says. “So we are really mindful of that and we are sharing the pain that this is causing to the families in the area, and we are also of the view that the project still has value,” he adds. “The question, of course, which we can’t answer today, is: when can we bring this back to life?”

While it’s too early to say, Chiloflischi maintains the resurrection will largely depend on silver prices and whether the company finds additional resources at Shafter. He adds a silver price of US$25–US$30 per oz. will be a “really good price for us.” The silver spot price has fallen roughly 36% year-to-date and is currently hovering around US$19 per oz.

Due to the closure, the Vancouver-based firm will defer the mine’s resource update and instead aim to start an exploration program in 2014 to test several targets on the Shafter property in an effort to delineate high-grade mineralization.

“We have some high-grade prospects and if we hit them then this would change the project,” Chiloflischi says.

Meanwhile, unhappy Aurcana investors pushed the stock down 30% to close at 72¢, while analysts hacked their price targets.  

“The decision to place Shafter on care and maintenance appears to be the final nail in the coffin for AUN’s key growth project following a series of unconstructive developments,” comments BMO analyst Andrew Kaip. He maintains an “underperform speculative” rating but has cut his target price to 50¢ from 90¢ given the higher financial risk the company faces due to its reduced ability to generate cash flow and pay off its debt.

Kaip estimates Aurcana may need to raise about $25 million in equity to sustain Shafter and meet its debt repayments over the next three years.

The miner scored a US$50 million loan from Orion Mine Finance in September 2013 along with an offtake agreement for silver and gold produced from the Shafter mine to help finish construction and upgrade work, among other activities.

The company is “very likely to go bankrupt” unless it renegotiates that debt facility and/or lines up additional financing, Christos Doulis, Stonecap Securities analyst, echoes in a note. He has lowered his target to 50¢ from $1.50 and rates the stock as “underperform.”  

Chiloflischi says Aurcana is currently discussing the loan and offtake agreement with its lenders to come up with a more lenient repayment schedule.  

To help lighten the financial strain, the company’s board and management team has agreed to take a 20% salary reduction.

Apart from Shafter, the company operates the La Negra silver-zinc-copper-lead mine in Mexico.

“While La Negra is a cash generating, profitable operation, in a $20 per oz. silver environment it cannot generate enough free cash flow to meet Aurcana’s obligations under its existing debt facility,” Doulis notes.