I’ve just returned from Mexico, where I was the guest of Aurcana Corp. (OTC: AUNFF), a Vancouver-based mining company. The firm owns the La Negra mine in Maconi, a small town about five hours by car from Mexico City, and the Shafter silver mine in Southwest Texas. Although this was my first underground tour, the group of eleven that I was with included some seasoned denizens of the precious-metals netherworld. There were mining-industry analysts and investors from Canada and the U.S., several bullion-oriented gurus from the newsletter world, and two radio-show hosts, Steve Carr and Al Korelin.

It was Korelin who had invited me to join his entourage for a visit to La Negra, which produces commercially significant quantities of silver, copper, lead and zinc.  Although I’ve been a regular guest on Korelin’s widely syndicated radio show, the Korelin Report, which explores the precious-metals sector and its intersection with national and world news, the economy and geopolitics, my comments on bullion have been based mainly on technical analysis and the events of the day rather than on any special feel for the mining business. Curious to learn how companies extract profits from mountains of rock, I eagerly accepted Korelin’s invitation to join the group. I was just as curious to find out whether someone who knows relatively little about drill, blasting, core-sampling, mineralization levels and such could judge from a visit to a mine whether it offered good value for investors.

Valuing the Stock

My answer is a qualified yes, since this verdict comes from the gut rather than from an exhaustive study of the firm’s geological and financial history. As I learned from the tour, however, it is possible for an expert to make an educated guess concerning the potential value of a mine and to arrive at a scientifically precise and verifiable revenue projection.  In fact, an experienced geologist can estimate before-the-fact and to within pennies per pound how much profit a pulverized wall of rock will fetch from the smelter.

However, the question of whether Aurcana’s shares are likely to appreciate significantly in the future is perforce more difficult, notwithstanding the voluminous data on La Negra that the firm made available to our group. There is little question that when Aurcana bought the property for $3 million from Penoles in May 2006, they got a great deal. The milling facility and on-site amenities were substantial and in excellent shape, and the mine had already produced more than $1.3 billion worth of metals: silver ($612 million), lead ($161 million), zinc ($323 million) and copper ($210 million).

Executives’ Zeal

No less impressive, however, is the executive team charged with the task of fully exploiting La Negra’s projected ten-year lifespan. Most of the operational managers have worked in the field for 30 years or more (you can view their qualifications by clicking here), and their considerable zeal for Aurcana seemed genuine. Under the leadership of CEO Lenic Rodriquez, the company has boosted provable and probable historic reserves to 2.1 million metric tons from 1.2 million in just two years. Plans call for ramping up daily tonnage by half, to 1,500 tonnes per day, and for tripling silver production to 6.15 million ounces by 2012.

That will entail fast-tracking Shafter for production beginning in late 2011. The mine’s output is silver alone, and it is the only silver mine in Texas, ranked 12^th among the world’s leading primary silver mines.  Aurcana bought Shafter in July 2008, and the company expects the property to increase their unhedged leverage to silver substantially. Aurcana plans to raise $40 million to gear up operations there via a warrant offering that would pay backers in silver rather than stock to minimize dilution. Including warrants, options and a 3% convertible debenture, there are currently 144,415,235 fully diluted shares.  The O-T-C stock was quoted at 30.23 cents per share yesterday at the close.

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