2010 | 2011 | ||||||
Price: | 3.66 | EPS | -$0.23 | $0.25 | |||
Shares Out. (in M): | 218 | P/E | 0.0x | 14.7x | |||
Market Cap (in $M): | 798 | P/FCF | 0.0x | 13.2x | |||
Net Debt (in $M): | 26 | EBIT | 0 | 62 | |||
TEV (in $M): | 824 | TEV/EBIT | 0.0x | 13.2x |
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All figures are reported in US dollars. Gold, Copper and Silver prices are estimated
using prices of $1150 per oz, $3.45 per lb and $17.95 per oz respectively. EV calculation
is determined using short term cash - total liabilities, and will, therefore, differ materially
from conventional estimates.
Shares Outstanding: 218 million
Net liabilities (est. on March 31st, 2010): $26.4 million.
Enterprise Value: $824.3 million.
2010 forecast revenues: $231.6 million.
2011 forecast revenues: $351.9 million.
2012 forecast revenues: $362.2 million-$603.8 million.
2013 forecast revenues: $362.2 million-$1138.5 million.
2010 forecast capex: $100 million.
2011 forecast capex: $200 million
2012 forecast capex: $300 million.
2013 forecast capex: $217 million.
2010 forecast EBITDA: $93.8 million
2011 forecast EBITDA: $177.6 million.
2012 forecast EBITDA: $180.2 million-$280 million.
2013 forecast EBITDA: $173 million-$600 million.
Management and insider ownership: 30%
Yamana Gold: 11%
Aura Minerals is an unhedged small cap gold producer. Growth is to come from the
acquisition of producing mines and development of purchased advanced stage deposits.
2010-2013 will be a period in which the company transforms from single mine operator
of gold; in 2013 the company will operate as many as 5 mines. A total of 3 operating
mines have been purchased, as well as two advanced stage deposits, for a net
consideration of $547.7 million.
Should all development proceed according to my analysis, Aura will boast at least two
world class mines, be debt free, and may be reporting more than $1.1 billion of
annualized revenues, by 2013. Mining firms tend to command enterprise values
expressed as a multiple of revenues. There may be a significant expansion in the market
cap throughout the forecast period.
Aura Minerals presently operates a small open pit gold mine in Honduras. On May 1st,
2010 Aura will commence ownership of two additional open pit gold mines in Brazil.
All three mines were purchased from Yamana Gold (AUY-NYSE, $10.43), a related
company, in two separate transactions. The first purchase, the San Andres Mine
(Honduras), closed on August 25th, 2009. The subsequent two purchases, the Sao
Francisco and Sao Vincente mines (Brazil) closes on April 30th, 2010.
Total consideration for the three mines is $267 million. The purchase price is made up of
$90 million in cash (already paid or escrowed), $40 million in deferred compensation
payable once $214 million of mine free cash flow has been booked by Aura, $70 million
of liability to Yamana in the form of promissory notes (of which $44.5 million remains to
be issued) and $67 million in shares. My proforma balance sheet adds in all liabilities
(including the "to be issued" promissory notes) and removes the escrow cash, to arrive at
the quoted enterprise value.
Yamana Minerals had made expenditures totalling $264.9 million, at the 3 divested
mines, during the periods 2005-2009.
The San Andres Mine has been in operation since 1983.
The mine was purchased by Yamana gold in February 2006 at a cost of $22.5 million. A
further $29.1 million was invested between 2006-2009. In 2006, mine reserves were
sufficient to permit a 7 year forecast life. Modest development drilling since that time
has continued to prove up sufficient reserves to maintain a future mine life of between 5-
7 years.
The San Andres Mine is a 400 hectare mineral property encompassing a 13,150 tpd.
conventional heap leach open pit mine with uncomplicated metallurgy. Oxide ore gold
recoveries are historically in the range of 78%. Proven and probable oxide reserves (30.5
million tonnes grading .61 g/t). should support at least a six year mine life with annual
output in the range of 100,000 ounces per year of gold. Measured and inferred oxide
reserves could double the mine life expectancy. Approximately 5.6 million tonnes of
mixed material (oxide and sulphide) reserves, grading .74g/t have been reported. This
ore can also be mined by heap leach, with gold recoveries estimated in the 50% range.
Factoring in this material, the current proven and probably reserve life is therefore 6
years.
No exploration on the mine site took place in 2009. The deposit is open to the south, east
and west. The prospective resource base is more than 4X the present level of reserves. In
1998, geophysical surveys identified at least four targets directly adjacent to existing
reserves. For 2010, $1 million has been earmarked to exploration drilling. The near term
objective is to upgrade 8.3 million tonnes of M&I oxide ore to proven reserves. Follow
up exploration drilling will also commence on another adjacent oxide target with ore
at/near surface. Minosa, the mining subsidiary purchased from Yamana by Aura, had
applied, in 2002, for mining concessions on 3768 hectares of adjacent lands.
San Andres output is set to increase by 46% in the coming year.
Aura Minerals, immediately after completing the purchase, embarked on a significant
expansion of the operation. $18 million of capex has been budgeted at the San Andres
mine for 2010. Management intends to raise output, by 2011, to 100,000 ounces per year,
up from 68,300 ounces in 2009. A new crusher and conveyor system were added by the
first quarter of 2010. A leach pad expansion and new stacking system will be operational
in Q3, 2010. In the first quarter of 2010, production from the mine was forecast at
19,299 ounces. The cash cost of production was estimated to be $560 per ounce.
In 2010, based upon the mine plan, gold production could be 90,000 ounces at a cash
cost of $500 per ounce. The Honduran Lempir has remained unchanged vs the US dollar
in 2009 and 2010. Honduran taxes are 25% after depreciation and other expenses. Terra
Mining Inc. holds a 1% NSR on the first $20 million of mine revenues per year, plus
a .5% NSR on mining revenues above $20 million. This NSR is capped at $1.5 million
per annum. Government royalties are presently 1% but may soon be raised to 2.5%.
The San Andres mine has potential to be a long lived operation offering an excellent return on capital at current gold prices.
At present, management seems comfortable with a forecast of 100,000 ounces per year in
2011 and 2012. Operational efficiencies from the upgrades and expansion could allow
2011 cash costs to fall well below $500 per ounce. DD&A is roughly $53 per ounce.
2010 mine operating profits at San Andres could exceed $53.2 million, after taking into
account cash taxes paid to the Honduran government and a higher royalty stream. In
2011, mine operating profits could touch $63 million.
The Sao Francisco Gold Mine is located in the extreme western portion of Mato Grosso State in west central Brazil.
The 19,725 tpd mine is an open-pit gravity and heap leach gold mine. Operations
commenced in 2006. Production in 2008 was reported to be 76,000 gold ounces at a cash
cost of US$629 per gold ounce. 2009 estimated annual production is 90,000 ounces of
gold at a cash cost of about $740 per ounce. DD&A is roughly $160 per ounce.
Reserves and resources at the Sao Francisco Gold Mine are proven and probable reserves
of 727,000 gold ounces, additional measured and indicated resources of 549,000 gold
ounces and an additional inferred resource of 582,000 gold ounces at December 31, 2008.
The proven and probable ore reserves were based upon 25 million tonnes at a grade
of .71g/t
Sao Francisco was an utter disappointment to Yamana management and shareholders.
Yamana invested a total of $133.4 million into the project between 2004-2009. It was
initially hoped that gold production could rise to 140,000 ounces per annum at cash costs
well below $500 per ounce. Expectations were dashed after three years of sub-par
results. There are great variations in the grade of ore being mined, due to a considerable
nugget effect. Historic feed grades of .46g/t are well below overall estimated grades.
Some of the low grade ore is not ground before placement on the heap leach pads. Gold
recoveries are in the overall range of 69.2%. Ore grades routinely vary by 22% from
quarter to quarter. Recovery rates can vary by 13% in any given quarter.
On the plus side, the mine features a substantial mineral resource, with the deposit being
fully open to the north and the southeast.
Based upon a May 1st ownership date, the Sao Francisco mine is anticipated to produce
60,000 ounces, net to Aura, in 2010. Operating efficiencies to accrue from capital
investments should keep 2010 cash costs flat. 2010 mine operating profits could be $24.6
million. In 2011, based upon a full year of operation, production could exceed 80,000
ounces. In 2011, based upon a 5% inflation of costs, no change in output and a full
year's ownership, Sao Francisco operating profits could be $29.9 million. Brazilian taxes
are 34% and mining royalties are 1.5%.
The Sao Vincente Gold Mine is located in the extreme western portion of Mato Grosso State in West Central Brazil.
The mine consists of three contiguous mining permits totalling 28,980 hectares. Mining is
open-pit gravity and heap leach. This mine reached commercial production in
mid-2009. Total capital invested by Yamana, at Sao Vincente, between 2006-2009, was
estimated at $79.9 million. This was originally designed to be a feeder deposit for the Sao
Francisco mill; reserves grew to the point that a decision was reached to build a mill onsite.
Reserves and resources at the Sao Vicente gold mine are proven and probable reserves of
342,000 gold ounces, additional measured and indicated resources of 298,000 gold
ounces and an additional inferred resource of 101,000 gold ounces at December 3, 2008.
The deposit is open at depth. The proven and probable were calculated based upon 13
million tonnes grading .81g/t.
2009 cash mine operating costs were estimated to be $740 per ounce. As with Sao
Francisco, I anticipate that cash costs will remain flat year over year. Based upon a May
1st ownership date, the Sao Vincente mine could produce 35,000 ounces, net to Aura, for
2010. Mine operating profits for 2010 could be $14 million. In 2011, a full year of
ownership could result in 45,000 ounces of gold production. Mine operating profits in 2011
could be $16.3 million. Royalties are 1.5% and mining taxes are 34%
DLO ore, as with Sao Francisco, is not crushed, but is sent directly to leach pads. This
seems inefficient, as Sao Vincente ore is also heavily nuggeted. Aura management will
be investing capital immediately after ownership, to modify the present mining process.
Cash and DD&A costs rose sharply in 2009 vs 2008, at the Brazilian gold mines, but may have peaked.
I attribute 4 reasons to the year over year increase in total costs of production at the two
mines.
1. The Brazilian gold mines generate revenues in US dollars, but pay expenses in
Brazilian Real. A 10% increase in the Real increases cash costs of production by
$30 US per ounce.
For 2009, the Brazilian Real had appreciated 33% against the US dollar, rising from
$.432 to $.5749. Sao Francisco and Sao Vincente mine cash costs increased by almost
$100 per ounce as a result. A 10% change in the price of fuel increases cash costs by
roughly $4 per ounce.
2. The mines operated for almost a year in a transitional phase. The vendor is
entitled to receive the net cash flow of the operations from sale date until closing;
there was no financial incentive to make expenditures that would have controlled
costs. Maintenance expenditures were kept to a bare minimum. The operator
simply worked the properties to obtain cash flow. Finally, the possibility of
employee slippage during 2009 was high.
Aura minerals will be immediately making substantial capital investments to both mines.
In 2010, $25 million will be invested in new equipment and upgrades at the two mines.
3. The Sao Francisco mining plan appears to have a key design flaw that results in
inconsistent recovery rates.
This mine recovers ore from 3 separate processes. Processed run of mine dump leach ore
(DLO) accounts for approximately 12.6% of total production and is the lowest grade of
ore. Run of mine ore is NOT crushed. Instead, it goes directly to the leach pad. Without
crushing, recovery rates for DLO ore remain in the 50% range. A simple gravity fed
circuit to recover free gold is designed to account for 17.6% of total production.
Unfortunately, the gravity fed circuits also suffer from recovery rates that are typically far
lower than heap leach recoveries. Furthermore, the size of the feed going into gravity
circuits is important to control. Gravity leach ore (GLO) is crushed before going to the
leach pad and is designed to recover the remaining 69.8% of production.
The placing of non-crushed ore on leach pads seems to be largely responsible for poor
overall gold recovery rates. As DLO ore is exactly the same as GLO ore (except for
grade) there is no reason to expect such diverse recovery rates between the two
processing streams. Crushing DLO ore could increase overall gold output at the San
Francisco mine by as much as 4%.
The solution appears simple; crush ALL ore, including high grade streams, before placing
it on the leach pads. However implementation of the solution requires capital. The
crusher is only designed to operate on a 16 hour per day rate (two shifts), and will need to
be upgraded for 24 hour continuous operation.
4. DD&A costs (non-cash) are high, due to a lack of reserve replacement.
The vendor did not undertake any significant exploration or development drilling on the
Brazilian gold properties in 2009. While there are substantial measure and inferred
resources at both locations, a failure to upgrade M&I deposits to reserves results in
relatively short expected mine lives. Aura will immediately embark upon a $10 million
definition and exploration drill program at both mines, with a goal to increase reserves.
The year over year increase in the cash costs of the Brazilian gold mines has recentlyremoved $118 million of value from Aura's EV, BEFORE the mines have even changed hands.
Aura shares are down 41.3% from their 52 week high. The realization that two of the
three acquisitions will not be initially as profitable as envisioned has resulted in a
15% share price decline over the last 3 months. After removing the assumed cost of the
San Andres purchase (which is working out as planned), and taking into account the
share price decline in the last 90 days, the markets are effectively attributing a value of
zero on the Brazilian operations.
The reasons for the lowered profitability in 2009 should not have come as any shock to
those who follow global currencies. A 2009 increase in the Brazilian Real accounts for
the overwhelming majority of reported cost inflation. This situation is certainly not
unique to Aura. What IS unique to Aura are the cost increases based upon reduced
productivity at the mines. The impact of a cessation in sustaining maintenance
expenditures and long term capital investment at the Brazilian mines will necessitate two
years of investments be made in one year, so as to catch up.
In a highly unlikely scenario whereby Aura assumes ownership of the two Brazilian
properties and soon shuts them down; the balance sheet of Aura will only have a total of
$44.2 million of future liability ($.20 per share), based on the creation of two promissory
notes due to Yamana on the purchase. In a worst case scenario, that liability may be
nullified. Aura could simply default on the notes and turn the mines
back to Yamana. Yamana holds the producing mines as collateral against the notes.
Cash for the Brazilian mine purchases is already in escrow and accounted for. $40
million of the reported purchase price is contingent; this amount is based on incremental
cash flow, and will not be payable unless the mines are producing. The contingent
liability will be adjusted upon the mine transfer date. All free cash flow earned by the
vendor from purchase offer through close reduces the maximum contingent payment
accordingly. I estimate that a cash flow credit of $20 million will be applied against the
$40 million maximum liability.
The lack of investor confidence expressed in the Brazilian operations seems overdone.
Investors have fully written off the "to be acquired" operations at the current share price.
However, both are profitable. Thus far in 2010, the Brazilian Real has fallen 1.1% vs the
US dollar. For at least the first and second quarters of 2010, currency inflation has
reversed. Moreover, the punitive reaction from the marketplace has completely
overshadowed meaningful improvements at the San Andres gold mine.
On February 4th, 2010, Aura Minerals closed an 18 million share placement at $4.20
($3.92 per share net of expenses). The net proceeds to Aura totalled $70.46 million.
This sum, when added to the current cash and forecast 2010 free cash flow, should leave
the company with a net cash balance, at the conclusion of the 2010 capital program. The
mid-term capital plan appears fully funded, and then some.
The Aranzazu copper/gold/silver deposit, scheduled for restart in Q3, 2010, offers near term profit potential equal to San Andres. Upside potential is considerable.
This 12,960 hectare property encompasses a deposit in the Zacatecas region of Mexico,
in relative proximity to a number of world class mines. Aranzazu features a copper, gold
and silver sulphide deposit plus a mothballed 2250 tpd sulphide flotation mill now being
upgraded. The property was acquired by Aura in 2008 for $57.5 million in cash and 1.86
million common shares. Indicated resources at Aranzazu, at the time of purchase, were
reported to be 25.7 million tonnes grading 1% copper.
Subsequent to the purchase, management has expensed roughly $4.73 million on
Aranzazu exploration drilling. A .8% copper cutoff and including only drilling results
through October 2009 has confirmed a measured and indicated resource of 12.84 million
tonnes grading 1.34% copper, .5g/t gold and 11.8g/t silver. Importantly, the deposits
appear to be open at depth (below 300 metres), and along strike (1.5 km) at both ends.
The deposit is up to 300 metres in width. This resource was determined based upon 603
drill holes assayed through September 2009. Subsequent to that date, a further 40 drill
holes have been completed. Many of the holes look to have added reserves at depth,
strike and width.
At least $49 million will be spent at Aranzazu in 2010. $25 million will be invested in
equipment and work to advance the operation to a Q3, 2010 restart date. The upgraded
mill will process 2600 tpd. Minor modifications can increase throughput to 3000 tpd.
The original mine plan was for ore extraction through long hole stoping a zone with high.
grades of copper (+1.4% cu) and gold grades of better than 1 g/t. At 2600 tpd, and
assuming 90% copper recoveries and 70% gold/silver recoveries, annual output could be
25 million pounds of copper, 14,000 ounces of gold and 140,000 ounces of silver.
In 2011, management estimated that total cash costs may be well below $.9 per pound of
copper, based upon gold and silver by-product credits. A ramp up to 3000 tpd at Aranzazu
could result in mine revenues exceeding $91.15 million, with mine operating profits
of $70 million, after deducting gold and silverby-product.
Mexican corporate tax rates will be 30%.
$24 million will be expensed at Aranzazu in 2010 on significant exploration and
development drilling.
Management intends to test the deposit to at least 1000 metres of
depth and will attempt to increase the reserves along strike.
Conceptually, if results bear out, management feels that reserves may surpass 55 million
tonnes. Importantly, copper, gold and silver grades appear to increase at depth.
Management now contemplates a bulk tonnage underground sublevel caving program, to
be supplemented with open pit mining. A major expansion of the mill will be required to
handle a potential 5 fold increase in mining output. I estimate the capital costs of such an
expansion would be in the range of $150 million, to commence in 2011.
The Aranzazu mine restart has been pushed from early Q2, 2010 , to mid Q3, 2010.
A 25 metre wide by 200 metre long block of near surface high grade ore has been
discovered above the potential sub level cave. This ore will serve as feed for the 2600
tpd mill. However, the location of the ore requires that it be extracted BEFORE any
potential caving work can begin. The mine plan has had to be altered to allow for this
processing, creating a delay. Further drilling is now being undertaken to determine the
size of the near surface ore block.
The purchase of operating assets provides Aura with sufficient internally generated cash flow to advance the Aranzazu deposit to near term production.
I forecast 2010 operating cash flow from the three mines as follows:
San Andres: $53.2 million
San Francisco: $24.6 million.
Sao Vincente: $14.4 million.
Aranzazu, assuming that the start date of Q3, 2010 is met, could add $11.5 million of
mine profits in 2010.
After assuming $5 million of additional corporate overhead applies in 2010 and that
consolidated cash taxes of $5 million will apply, over and above taxes paid at the
subsidiary level to Honduras and Brazil, a total of $93.7 million for exploration and
development should be available. DD&A at the 4 mines could be $31.2 million.
In 2011, total mine operating profits could exceed $181.2 million. Aranzazu could be
producing 27 million lbs copper, 18,000 ounces gold and 185,000 ounces of silver in that
year. After required taxes, G&A and other expenses, I forecast cash flow of $115.7
million for exploration and development.
In 2012, the cash flow from the four mines should advance Aura Mineral's highest profile project to commercial production.
Aura Minerals purchased the "Arapiraca" deposit for total consideration of 64 million
shares. This is equal to $234.2 million, based upon a share price of $3.66.
The Arapiraca sulphide copper, gold and iron ore deposit in Brazil should be a substantial
open pit mine. Future capital costs, to bring the deposit to production of 41,000 tpd, is
estimated to be $500 million. This includes includes roughly $80 million of contingency
capital for overruns. Two deposits, "Serrote" and "Caboclo", have total ore on a
measured and indicated basis, in the range of 203.3 million tonnes, grading .49%
copper, .09g/t gold and 15.4% iron. Recoveries of copper, gold, and iron are forecast
to be 85%, 65% and 92% respectively. These assessments suggest that average
annual production for the first three years may be 155 million pounds copper, 29,500
ounces of gold and .87 million tonnes of iron in magnetite. Cash costs, net of iron and
gold credits, using November 2009 prices, are estimated at less than $.8 per pound of
copper. Both deposits are open in a number of directions and to depth.
The unique mix of metals, easy access to infrastructure and low cost of open pit mining
makes Arapiraca a highly economic project at substantially lower commodity prices. At
$2 per pound for copper, $800 per ounce for gold and $85 dmtu for iron fines, the project
would have a payback of 2.8 years, and offer a 25.4% IRR. Taking into account the 50%
plus increase in spot magnetite fines and the 42% increase in gold prices over the last
study, copper cash costs, net of credits, would be less than $.56 per pound. At my
forecast prices, annual EBITDA from Arapiraca, at full initial production, may exceed
$400 million.
Overall, total expenditures of $817 million could fully develop all assets.
$100 million will be expended this year to bring Arapiraca to production, to increase San
Andres output, and for necessary maintenance investments at Sao Francisco and Sao
Vincente. A further $44 million will be required to maintain forecast output at the 3 gold
mines through 2013. I estimate that $23 million will be required in 2011-2013 to
increase and then maintain the Aranzazu mine at 3000 tpd. A further $150 million will
be required to expand Aranzazu to 10,000 tpd-15,000 tpd of output. Finally, $500
million will be needed to place Serrote and Caboclo into production.
My three year base target prices range from $6.01-$13.98 per share.
The shares are presently trading for 8.8X my forecast 2010 EV/EBITDA ratio and just
4.7X my 2011 estimate.
I assume that Sao Vincente and Sao Francisco produce 125,000 ounces of gold per
annum. This is 15,000 ounces per annum below Aura's initial estimates. My assumptions
use three scenarios.
A. Aura continues to operate the 3 gold mines, and operates Aranzazu at just 3000
tpd through the end of 2013. Serrote remains undeveloped. The $464.5 million
of free cash flow - capital expenditures of $167 million, results in a net cash
addition of $297.5 million to the balance sheet. The balance sheet would then
report total net cash of $271.1 million. Assuming 2013 EBITDA of $173.2
million and a valuation of 6X EBITDA produces a potential value of $6.01 per
share at the end of 2013.
B. Aura operates the three gold mines and expands the Aranzazu mine to 10,000 tpd.
in 2011, with the increased revenue commencing 2012. Serrote remains
undeveloped. The $633 million of free cash flow -$317 million of capital
expenditures results in a net addition of $316 million to the balance sheet. The
balance sheet would hold net cash of $289.6 million. Assuming EBITDA of $280
million; a valuation of 6X EBITDA results in a potential value of $9.03 per share,
at the end of 2013.
C. Aura operates three gold mines, expands Aranzazu and develops Serrote with
output starting in 2013. Free cash flow of $893 million - total cash costs of $817
- $26.4 million of current total liabilities = a net cash surplus of $49.6 million.
Assuming EBITDA of $600 million; a valuation of 5X EBITDA results in a
potential price of $13.98 per share, at the end of 2013. The company would be
considered a copper producer rather than a gold producer. Aura's valuations
would be discounted accordingly.
Aura Minerals, by 2013, could be operating two world class mines.
In 2010, Aura should produce 185,000 ounces of gold at an average cost of $623.2 per
ounce. 6.3 million pounds of copper could be added at an average cash cost (net of gold
and silver byproducts) of $1.00 per pound.
In 2011, Aura could produce 225,000 ounces of gold at an average cash cost of $645 per
ounce. 27 million pounds of copper could be produced at an average cash cost of $.80
per pound.
In 2012, Aura could produce 225,000 ounces of gold at an average cash cost of $686.7
per ounce. 30 million-125 million pounds of copper could be produced at an average
cash cost of $.85 per pound.
In 2013, Aura could produce 225,000 ounces of gold at an average cash cost of $721 per
ounce. 30 million-255 million pounds of copper could be produced at an average cash
cost of $.77-$.90 per pound.
2010 is a transformative year. The groundwork being laid from the purchases will only
be fully reflected on the fiscal reports commencing Q1, 2011. The firm will be now
expensing exploration costs against operating profits. Head office G&A will be also be
allocated over a much larger revenue base. The two Brazilian mines will be contributing
8 months of revenues. Should Aranzazu commence milling in Q3, revenues will be
earned for about a fiscal quarter.
Management has most recently compared Aranzazu to a nearby mine, in the same skarn
system, presently scaling up to 15,000 tpd. They note that the Aranzazu deposit offers
greater strike length, greater deposit width, and could have equal potential at depth. I
take this to mean that management is internally anticipating a mine larger than 10,000
tpd. As the firm is fully funded, there is little need to "talk up" potential deposits to
investors. I accept their assertions on Aranzazu at face value.
Should Aranzazu expand to 10,000 tpd and Serrote be developed, Aura Minerals could be
producing the annual equivalent of 255 million pounds of copper, 315,000 ounces of
gold, 1.25 million ounces of silver and 880,000 tonnes of iron ore, at year end 2013.
Annualized revenues at the end of 2013 could be well over $1.2 billion. Should Aranzazu
expand beyond 10,000 tpd, this number may be conservative by as much as $100 million
of revenue per annum.
A 5X EV/EBITDA ratio, for an intermediate with several long lived assets, would not be
inconsistent as compared with other intermediates reporting similar revenues.
While the two Brazilian mines proved to be a disappointment for Yamana, these assets still offer potential for increased production.
The operational problems experienced by Yamana are the sort that can be addressed
simply by throwing money at them. If Aura management meets their own
forecasts at Sao Vincente and Sao Francisco, gold production will be 45,000 ounces
higher than my assumptions through 2013. This would add $14.5 million of cumulative cash
flow. Should management successfully implement operational improvements at both
mines, recoveries could improve by a further 5%, potentially adding 7,000 ounces per
year of incremental output. This would add an additional $6.6 million of cash flow. If
the 2010 capex program does reduce costs at the two Brazilian mines by 5%, cumulative
cash flow through 2013 could increase by a further $42.8 million. Placing a 5X multiple
on the cumulative potential improvements, if successful, would add $1.46 per share to the
forecast return.
If Aura management can meet their current expectations on the Brazilian gold mines, the shares could be a double through 2013.
A successful capital and operational plan at the two Brazilian gold mines could result in a
potential share value of $7.47 per share, before any accretive returns from a projected
expansion at Aranzazu or production from Arapiraca. There is currently far too much
stranded value in Arapiraca, and the potential return appears far too high at current metal
prices, for their copper, gold and iron deposit to remain undeveloped. Should Aranzazu
and Arapiraca be placed into production as forecast, Aura shares offer a total potential return in the
range of 400%.
The risk/reward, in my estimation, favors current ownership. I presently hold Aura shares.
Technical reports on each of the acquired mines, as well as the Aranzazu deposit, may be
found here
http://www.auraminerals.com/Operations/Technical-Reports/default.aspx
Expanded reserve update at Ararpiraca due in Q2, 2010. Transfer of Sao Francisco and Sao Vincente gold mines to be effective shortly. First deep exploration drill holes at Aranzazu should be released in Q2. This will help to determine the ultimate potential output from the Aranzazu mine.
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