Pooling of human capital for the unofficial 'Two Plus Two Portfolio'

[missmisery]

Here's my analysis on AUN.V (closed today at 1.25$)

Disclaimer: I own shares of this company so it is in my best interest to promote it. You should do your own DD and double-check my analysis.

I follow exclusively the resources sector and for investment purposes, I like to focus on near-term producers as they offer a very good risk/reward ratio.

With the recent closing of the private placement, Aurcan has a market cap of ~100M with 90M shares (fully diluted). AUN will start miling 1000 tons per day (tpd) at their LaNegra mine in mining-friendly Mexico this month.

In order to evaluate AUN, we need to see how much money each milled ton will generate. Based on historic data of the area, each ton should generate between 125$ and 180$. (125$ being very conservative. I believe the true cost will be closer to 180$). For this analysis, let's use 150$ / ton. This would cashflow 50M in a year, or 0.55$ /share. Small producers usually trade at a multiple of 8 times earnings. So based on these numbers, we get a 4.40$ target. Since AUN will start production right now, I believe the share price will start to climb very quickly and we could see 4$ by the end of the year.

Aurcana recently announced the acquisition on an other mine that could be put in production in 2008 and add an additional 600 tpd. Using the same numbers, it would cashflow 0.87$/share and thus a valuation of 6.75$ would be in order in 2008. As the production increases, it should trade at a higher multiple of earnings so 8$ would be more realistic.

In addition, I expect a few other acquisitions in the upcoming weeks/months. The company was already well financed and they are on the verge of being a producer. They closed tonight a private placement of 21M $. Why would they such a large amount of money right now? This is pure speculation, but I strongly believe that a few major acquisitions are in the work. This is the only logical explanation for such a large financing right now. It is well known that management is looking to acquire projects that can be put in production very quickly.. They know that sooner or later, precious metals will appreciate and they want to acquire projects right now in order to be a producer during the bull market.

My previous targets do not take into account further acquisitions since it is speculative. But if Aurcana can acquire one or two projects, the production could be greatly improved and thus a target well over 10$ would be required.

Finally, I like to look at the exercise price of the warrants in private placements as an indicator of where the management thinks the company is going. Each warrant allow the holder to buy a common share at 1.85$ and the company can accelerate the expiricy date of these warrants if the stock trade 20 consecutive days above 3.00$. This 3$ says to me that management believe they can reach this value sooner than later. Usually, I find it a very good sign when the warrants and their trigger price are way above the current price.

In resume, what I like here is the risk/reward ratio. Unless their mine collapse, I can't see a lot of risk and the potential is huge. I have 24 months target of 8$ and the upside is quite huge with a few key acquisitions. While I believe risk is low, it can be very volatile as any stocks that trade on the TSX-Venture.

They just announced the closing of the private placement which was holding the share price. Now that is it behind us, I expect a lot of news in the upcoming weeks and I believe it won't be long until we reach 2$. It may not reach my targets, but I just don't see how this stock would fail to return 100% to any investors patient enough to hold it for a year or two.