Description

AAG.CN

Andean American Mining (AAG) is unabashedly the cheapest mining equity we have seen in 5 years of covering the space. Where else can you get a fully feased resource ounce of gold for the price of a Heineken?

BASIC S/O: 80M

WARRANTS/OPTIONS: 20M (implies $15M extra cash)

FD S/O: 100M

Price: $0.30

Basic Market Cap: $24M

Cash: $2M

Andean has 2 major assets: its Invicta project and its stake in fellow junior mining company, Sinchao Metals Corp. (SMZ.CN).

Sinchao Metals Corp.

Andean owns 41M shares of SMZ.CN, a stake currently worth $8.5M. Only 2 weeks ago the stake was worth $12M. Sinchao is a copper/gold porphyry deposit, with associated breccia and skarn zones, located in Peru. Previous drill results include:

Currently, the deposit has been traced to a length of 750m of strike, to a width of 300m, and the envelope of mineralization seems to be roughly 250m thick. Using a typical specific gravity of 3t/m^3, the deposit contains over 160 Mt of ore. Using grades of .7g/t gold and .8% copper (so far the average based on existing drill holes), this ore body would contain over 3.5 million oz gold and almost 3bn lbs copper in situ.  Never mind the silver, which looks to be running about 1/3^rd of an oz per tonne.

Sinchao’s most recent holes show 188meters of 2.02% copper, 1.07g/t gold and 100meters of 1.41% copper, 1.04g/t gold and 26 g/t silver. These are some of the best copper/gold porphyry holes pulled in years, period. This represents 200$ rock over a length of 188meters. Basically, there is lots of mineralization here, and there is no doubt about it whatsoever. For a project of this size, expected cost/tonne mining and processing in a bulk open pit scenario would be under 30$ per tonne. A high grade zone of this nature is very important for the early years of a mine life.

Worldwide grade distributions for all medium sized Cu/Au porphyry deposits, ranging from 400Mt to 4000Mt, place Sinchao in the upper decile in terms of grade. This is to show that Sinchao, which is an early stage exploration project, is very much an economic one, and ranks with the best Cu/Au deposits in the world. Of course, the size of the deposit would need to be expanded, and this is the purpose of the current drill campaign. An initial resource estimate is expected by the end of this year.

Invicta (main project)

Invicta is a pollymetallic, high sulphidation, epithermal vein deposit in Peru, about 3 hours northeast of Lima. The deposit transitions from high gold grades and minimum base metals to high copper grades, moderate silver grades and low gold grades in the later years. The project was optioned from Barrick. Barrick has a one time shot to opt in for 51% in exchange for paying 1.5x all expenditures on the property to date. The opt-in is only possible if the company tables a resource number that has over 2M oz of gold in reserves (not gold equivalent, i.e. copper not included in this measurement.). This is highly unlikely. Capex must also be paid back at 1.5x, assuming Barrick chooses to back in post production, should a new resource show over 2M oz down the road. This is very unlikely, first since the gold oz number will be depleted quickly in the first years of the mine plan, and since Barrick has no interest in a 2M oz deposit.

The company recently released a revised resource extimate. The estimate shows roughly 8Mt of M&I material, which will constitute the initial mine plan. There is an additional 11Mt of inferred material. Total contained gold equivalent ounces in the resource estimate are roughly 2M.

The in-house feasibility study on the project (completed by the company’s own in-house engineering and procurement staff) already has most of the detailed engineering done, and will be complete as soon as block model data is available for input. The company has already secured long lead time items such as its grinding mills and crushers will be locked in soon. Concentrate sales agreements have been negotiated. Much of the Capex has firm costing, eliminating the risk of inflation. Capex is estimated at 60-70m including contingencies.

The company recently commenced development work, driving a large adit into the high grade zone. The adit showed remarkable results when crosscuts and galleries were cut into the vein. What they found is a structure much thicker and much higher grade than what had been estimated by surface drilling. So far the adit has shown over 200m of continuous massive sulphide mineralization on large high grade widths, including results like 7m of 50gpt gold, 6% lead, 3% copper. The adit has been extended a total of roughly 1200m already.

The mine plan will likely be based on roughly 8Mtonnes of reserves (once they are deemed economic in the feasibility study) from the resource estimate. Throughput will likely be somewhere on the order of 3000 tpd during the first year, and 5000 tpd after that, making for a 5 year mine life based on current reserves. Based on resources from the current estimate, mine life will likely extend to 10 years, and further exploration will greatly expand the mine life after that, as the geology here is very conducive to continuity of mineralization at depth. Throughput will likely ramp up to 8000 tpd after the first few years, which is the nameplate capacity of the refurbished mills.

The mine plan will likely be influenced significantly from higher grades zones that will be mined more heavily during the early years of production, in order to maximize economic return of the deposit. The high grade zones include broad areas grading up to 8g/t Au, 1.5% Cu, and 50g/t Ag (nearly $400 rock at current prices). The high grade zones can be seen in the company’s most recent 43-101 dated July 24^th 2007, on pages 63-65. That document outlines a resource of roughly 1.2M oz Gold equivalent.

Below is our estimated mine plan using average grades from the just released resource estimate (ignoring more recent higher grade results and any high grading in early years), and conservative cost numbers 30% higher those at a similar 5000tpd operation located close by. We use 75% overall process recovery numbers, which we think are conservative. It shows a very robust operation with quick payback and massive returns on capital.

Management

CEO John Huguet has a 25 year background building mines, and his experience and connections in the construction industry and in Peru are a tremendous source of added value for Andean. He was senior mgmt (MD, President) at Commonwealth Atkinson, EPCM contractor who built 86 mines during his time there, for Barrick, Placer, etc. He has his own team of engineers working in-house on the feasibility study alongside Wardrop.

Huguet left Atkinson to start his own mining deal, AAG, in 2001. He seeded the company with a lot of his own money and has stayed on ever since, through good and bad times. Times have been mostly tough, so far.

Huguet has been working in mining in Peru for nearly 20 years and married a Peruvian woman. He has been the chair of the Peruvian-Canadian chamber of Commerce for many years, and is a member of what is equivalent to the Order of Canada in Peru (basically the country’s highest civilian honor). Andean employs over 400 local workers (Peruvians), and has been doing so for many years.

We highly recommend speaking with John.

Valuation

Market Cap: $24M

Sinchao holding: $8.5M

Cash: $2M

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Implied stub value given to Invicta: $13.5M

Implied value per resource Oz of Gold in-situ: $6.5

Catalyst