LilNev2000's Blog : Top Silver Pick - Aurcana Corporation

With a market cap of roughly CAD 223 Million and 323 million floating shares (?), it seems that this company is following Horace’s proverb: “Many shall be restored that are now fallen and many shall fall that are now in honor “. In May 2007, this company was trading at $ 1.62 to bottom out on $0.08 during 2009 and appears to be restoring presently at $0.75 at elevated daily dollar volumes of $75,000. Hence, buying a few thousand shares will presently not influence its stock price. It is excluded from this game as its price is under $1.50. It is excluded from my data mining as the money flow is far too low not too easily influence the stock price.

Well that's why I brought the stock to people's attention originally. As much as I like Zacks, its People and Picks simulator doesn't cater to the stocks I would actually put my money into (and probably why I didn't win their contest back in 2007). I like mining small cap stocks under $150 million market cap that are in production, that are increasing cash flow and revenue. With companies over a $150 million market cap, I need to see production increasing a great deal in a 2-3 year time frame.

From 9 cents to 75 cents. Not a bad return on an investment. And with silver pushing 30 year highs and copper at record highs there is a lot of room left for quality silver and copper plays to take off.

First Majestic and Silvercorp are the best overall silver mining companies but they don't have as much upside to the stock price at this point as Aurcana.

LiiNev2000,
I am not saying this is a bad pick, certainly considering you know the mining world. But for my investments it is too risky, the stock liquidity (Money Flow) is too low. If you buy 2000 shares, you may make $1500 to $2500 in two to three years, or perhaps faster. My approach to mining is the following. There are currently about 45 silver, gold and non-ferrous miners in Zacks Dbases. I just weekly pick and weekly rebalance to equal weighting the12 best poised to grow their market caps and require their market caps to be in excess of $300 Million and their prices in excess of $1.5.These 12 best gave me over 100%/year since March last year, after slippages and costs, and I could invest as much as $10,000 per stock without influencing the stock price. From a fundamental point of view, I think that Silver and Gold miners are getting overvalued, but non-ferrous miners are still OK. What do you think?

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JohntheWizard,

What is the money flow requirement that you look for in a company and how do you calculate that? Once I understand that I can better answer part of your post.

The bid/ask spread in Aurcana's case is at the most 2 cents and the majority of the time is a penny. If you are investing in the $10k range you aren't pushing the stock anywhere. Now compare Aurcana to Dynacor Gold, another company that I purchased in October and then sold, since Dynacor's float is so small, investing $10k could drive up the price by 5-10 cents.

Next, if gold and silver miners are considered overvalued then the entire general market is overvalued. There are plenty of silver and gold miners who still aren't trading near their highs before the financial collapse a few years back. Gold prices are hundreds of dollars higher than in 2007/2008 and silver prices are double of what they were in 2007/2008.

As for base metals, I like them as a supplement to a gold and silver mining deposit (to offset mining costs) but not as a pure play.

LilNev2000,

I approximate the Money Flow of a stock by multiplying the 20 day SMA of stock price times the 20 day SMA of traded share volume (daily exchanged number of shares). Presently this number is of the order of $75,000 for Aurcana according to my Boker’s stock desktop application program. This number usually determines the price elasticity of exchanged shares. If I presently would buy 100,000 shares into Aurcana in one order, I would significantly influence the stock price. It is my experience that if I only would buy a few percent of the average daily dollar volume (=Money Flow), I will not influence the price which is one of my investment conditions for my own portfolio. My data mining proves that I am by far not unique by using such a condition.

If I would add Aurcana to my portfolio, this Money Flow condition would set the total investment amount of my equally weighted portfolio to roughly $750 of Aurcana investment times the number of stocks in that portfolio. That simply doesn’t work for me as that number is too small, given the kind of capital I want to invest versus the amount of risk I want to take. The twelve mining stocks that I selected real-life during the past week, and that I gave in my blog performed well during the past week (7% after slippage and cost), YTD this portfolio did over 150% before slippage and costs. But I only started to add these stocks to my portfolio three weeks ago, indeed very profitable during these past three weeks.

Valuation is a different subject for me. When I calculate the P/E ratio of any sector of my interest, I just calculate the moving annual total of all market caps of the stocks in that sector and divide that by the moving annual total of Earnings before NRI of all stocks in that sector and put that in an eleven years’ historical perspective on a monthly basis. It is that historical perspective that gives me some clue about whether the individual EPS of a stock like Aurcana is properly valued relative to its own history, versus the history of its peers, versus the history of the S&P500 and versus the history of the total market of some 6000 stocks in my own Dbase.

I was just interested in what you see as the P/E of the mining sector (Silver, Gold + non-ferrous) and of Aurcana in particular, and how you see these two quantities evolve in the coming two years of your planned investments. My point is that Silver and Gold appear to me presently overvalued in that perspective and non-ferrous not. I realize that miners often delve all three types of metals.

John,

In your December 30th post you mentioned an investment of $10,000 which at current prices amounts to 13,000 shares. Now you are talking about in your January 1st post of an investment of 100k shares. Which one is it? As for my calculations looking at the share and price volume over the past 2 months (AUN on the TSX), an investment of $10k is about 1.6% of what trades in a day. Now in my mind that isn't going to move share prices. If you have total faith in your "Boker stock application", by all means stick to it.

Also looking back at your post on your mining picks on December 20th, the
only producers I see on your list are Northgate Minerals and Endeavour Silver. So those are the only stocks therefore that will have a P/E as they are the only ones that make money.

As far as P/E goes I don't think it's the best way to value mining companies as I feel Cash Flow is a best way to value mining companies. As far as Aurcana goes in 2 years its going to improve its silver production by a factor of 4, which will increase its cash flow tremendously. You find me a 1/2 of a million to one million ounce silver producer that is improving its growth profile by a factor of 4 and I'll invest my money there. Explorers are more risky than producers as they must generate money by debt or share financing and those explorers must consistently come up will decent drill results in order to secure future financing.

Also, find me a copper producer or any non-ferrous mid-tier producer that is increasing its production profile by a factor of 4 (and has the financing secured) in two years and I'll invest in them as well.

LilNev2000,

My broker shows the same volumes as I see on Yahoo for AUN.V. Yahoo also gives a pink sheet version, AUN.FF that also tades $75,000/day. I am not trading on TSX, but I believe you that the trading volumes are much higher there. Again, I am not saying it is a bad pick but it does not fit my investment requirements where I trade.

I was talking about 100k shares for the sake of illustrating my point on price elasticity. The volumes shown on Yahoo Finance for AUN.V allow me to invest what I stated before. But trading on TSX may very well satisfy my requirements.

As you asked me about it, in my blog of December 28, upon responding to one of the many 3J questions, I gave the twelve miners: “AXU, BAA, BRD, EGI, EXK, JAG, KGN, MVG, NXG, THM, UXG, and XRA”. These 12 miners all satisfy my stock liquidity and other requirements. They compounded 7% during the past week, YTD 57% in a buy and hold, but in my real-life portfolio I update them to the 12 best out of 45 every week and that weekly rebalanced portfolio did more than two times better than the buy and hold one over the past year.

If you believe that Cash is a better measure for the valuation of Miners, that is OK with me. The combined Cash of all 260 basic materials companies in my Dbase has been steadily increasing without dipping during any of the crises of the past 11 years. The valuation of that cash (Price per $ Cash) has been oscillating during those 11 years around $13 per dollar Cash and is presently increasing from a level of around $10 per dollar Cash. I could see that valuation rising for the entire sector during the coming two years, not only for Aurcana. But Aurcana is not in my Dbase. I would be interested to learn how much real Cash they presently have and how much you project that to be in two years from now.

There are 7 non-ferrous miners in my Dbase that satisfy my requirements: AA, ACH, FCX, LUNMF, PZG, SCCO, and TC. My quant program would presently select PZG, TC, and LUNMF as the three most promising ones.

Exploration companies don't make cash. They only raise cash and spend cash, so I still don't understand how explorers can be in your portfolio.

LilNev2000
Exploration Companies have Cash on their balance sheets, and that cash is valued as Market Cap/Cash.

Anyhow, I decided to buy Aurcana and did so on January 04 for $0.75. It went all the way down to $0.59. A drawdown of -22% is a lot for me, but I stayed put. At the time of this comment, it is trading at $0.94, a 25% gain. The pack of 12 miners/explorers I was following went through a similar dip of over -20% and are presently standing at -5%, last Friday. Your pick of Aurcana did considerably better, and I'll keep it for the rest of this year.
Thank you!
John

Well exploration have to have cash on their balance sheets otherwise they couldn't explore. There is a huge difference between raising money and making money. Exploration companies sole source of income is going to the markets/banks and raising money. Production companies can raise money by selling their metals or by going to the markets/banks. Thus if metal prices are high and the production companies can make money, they offer less risk than explorers as they can generate multiple sources of income.

As for Aurcana, as with all metals companies move along, leveraged, with the price of their associated metal. With what the future holds for the company, I'm buying the company whenever I can. Since I hold some shares at much much lower prices, dips don't concern me as I already have a huge gain and I'm looking long term instead of short term. If I don't believe silver will remain strong (>$23.00)over the next year, then I'll sell. But there are no signs of that happening.