Stock forum member parlays Silver Wheaton deal into valuation technique.
In a recent article (click here), I introduced the Silver Wheaton Valuation Method (SWVM) which provides a convenient way of valuing producing and near producing junior silver mining companies. The method takes the data point of Silver Wheaton's recent purchase of the silver stream from Aurcana Corporation's (TSX: V.AUN, Stock Forum) La Negra mine to produce a valuation of roughly $30.50 / annual produced oz of silver. This is the valuation Silver Wheaton (TSX: T.SLW, Stock Forum), a quite successful company in the silver miner space, thought was a good deal for its purchase of annual silver production. This valuation method provides a quick and dirty way of valuing junior producing and near producing silver miners while the price of silver remains near its current level and especially when the cash cost of the silver is around the deal's $3.90/oz level.
The article went on to show that Silver Wheaton itself was significantly overvalued using this valuation method. This makes sense. Otherwise why would Silver Wheaton consider the deal attractive? The method finds Impact Silver (TSX: V.IPT, Stock Forum) fairly valued. The response to this valuation on the Stockhouse.com Impact Silver message board was that this valuation does not adequately value Impact Silver's exploration upside. I agree it does not put any value on that upside.
This article goes on to value Aurcana itself. In fact, it values Aurcana before the Silver Wheaton deal and after the Silver Wheaton deal to determine both whether Aurcana is undervalued and whether the deal increased Aurcana's valuation.
As was profiled in a much earlier article (click here), Aurcana, prior to the Shafter project acquisition and Silver Wheaton deal, was a silver mine re-opener with 80% of the La Negra silver/copper/zinc mine and with a second silver/lead mine, Rosario, set to open towards the end of 2008. Without the Shafter acquisition, Aurcana expected to increase La Negra's production to 2000 tonnes/day and Rosario to 1200 tonnes/day for an annual silver production of approximately 2.9 million oz/year. This yields a SWVM valuation of $88 million. Given the current stock price of 56 cents and the reasonably diluted number of shares (prior to the Shafter acquisition and Silver Wheaton deal) of 95.7 million shares, it yields a reasonably diluted market cap of $54 million. The reasonably diluted number of shares does not include warrants and options with a strike price of $1.50 or higher.
So, without the Shafter acquisition and Silver Wheaton deal, the SWVM method indicates that AUN is undervalued by 65% (that is, AUN's stock price would have to rise 65% to have a market cap that matches the SWVM valuation).
Aurcana expects to finance bringing Shafter to production by selling another silver stream to Silver Wheaton. The amount to be financed and the terms of that financing have not been announced. I estimate this as another $25 million deal for 500,000 annual oz/year. I assume that La Negra's production is left at 1000 tonnes/day (and, of course, 50% of its silver production is delivered to Silver Wheaton). The result is that I estimate Aurcana's annual production to be roughly 4 million oz/year (after giving Silver Wheaton its due). Aurcana project’s this rate will be achieved in Q3, 2009. I expect it will occur about 6 months after that.
With these assumptions, the SWVM valuation of Aurcana is $124 million. This indicates that the Shafter acquisition (if execution proceeds as planned) increases Aurcana's valuation by 40% (at the cost of 15 million additional reasonably diluted shares).
As a result, after the Shafter acquisition (if execution proceeds as expected), Aurcana will have a reasonably diluted share count of 111 million shares and a market cap of $62 million. Aurcana is undervalued by 100% (that is, AUN's stock price would have to rise 100% to have a market cap that matches the SWVM valuation).
I believe Aurcana can do a reasonable job of executing and so I am comfortable having a large Aurcana position in my portfolio. It is actually my second largest holding after Gold Resource Corp., (OTC:BB: GORO, Stock Forum). I would consider the current price to be a good entry price if I did not already have a full position.
Next, I expect I will turn the Silver Wheaton Valuation Method on two other silver juniors I admire: First Majestic Silver (TSX: T.FR, Stock Forum) and Silverstone Resources (TSX: V.SST, Stock Forum). Like Impact Silver and Aurcana, I admire the management and prospects of these companies. I'm hoping that SWVM will provide some objectivity to compare these admirable company's stock price prospects.
Are there any other juniors that you recommend I analyze? How do you like to value this kind of stock? Leave me some comments in the comment section below.
See more of the work of Douglas M. Dillon (also known as MontyHigh) at www.worldofwallstreet.us.
This article was written by a member of the Stockhouse community.
