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The potential for a class action suit against Aurcana Corp (AUN.v)

Below is the piece that first appeared in The IKN Weekly issue 206, dated April 14th 2013. By way of context, back in Novermber 2012 I bought Aurcana Corp (AUN.v) at $1.07 and for a little little while the trade showed green, but the stock then started its downhill run and via a Flash update just before IKN206 came out I sold the position at 55c for a big percentage loss. 

So I made a trade and lost. Shit happens, all that etc, however the post today isn't about a dose of them there sour grapes (it's only money, after all) and more about how I'm sick and tired of having to listen to, read and pay attention to liars and scumballs in the mining industry such as Lenic Rodriguez, Pres/CEO of Aurcana. What we have in this case isn't a subjective opinion that he's a liar either, as the company's own words make it abundantly clear that AUN.v told outright falsehoods to the market in December 2012. As such, and considering the hefty share price drop between then and now, AUN.v looks ripe for a potential class action suit (a legal recourse that's finally gaining some traction in Canada, glad to say).

Oh by, the way, that thing liar Rodriguez said about not needing cash during the YE company conference call? Well, as of this week RBC seems to agree with your humble scribe that AUN.v will in fact need to raise more cash, as it was one of the reasons cited by RBC during its downgrade of AUN.v to "underperform" on May 21st. Anyway, have a read of the piece in IKN206 here and decide for yourself if there's a civil case to answer. Personally, I think there's an abundance of evidence.


Aurcana Corp (AUN.v): Position sold
To call myself disappointed with the Aurcana (AUN.v) 2012 YE financials is an understatement, as the Flash update of Friday morning (see appendix 1) should have pointed out clearly. The position sold as per Friday and the loss is taken so there won’t be a massive post-mortem here today. However, a few notes on just why, above and beyond the outright lies that AUN.v has used on the market, we don’t like the look of where AUN.v sits financially today follow.

Here bulleted are some of the items included in the company news release of December 14th 2012 (3) and between the bullets are updates, dating from last week, on how the information released on April 11th(4) compares to the original news:
  • The assets at the Shafter Mine are ready for their intended use and the plant is now operating on a continuous basis at an average rate of 600tpd.
According to last week’s results, commercial production has not been achieved at Shafter.
  • Processing of lower grade open pit ore, initially mined during the plant commissioning and testing phase, has been discontinued. The plant is currently processing higher grade underground ore exclusively.
The company reported in its NR that ore at 5 oz /t Ag was currently being mined, lower than the ~8oz/t average for the underground material. It also stated in the ConfCall that until the CCD circuit is installed (supposedly happening “gradually through 2013”) recoveries are running at 50%.
  • The Shafter Mine currently employs 152 personnel allowing for a continuous operation. Additional underground miners have been recruited and will join the Shafter mine in January 2013, as the Shafter mine ramps up.
During the conference call, CEO Rodriguez admitted that the company was still short of staff, talking about 15 extra heads needed to bring Shafter up to 600tpd and that one problem had been high staff turnover. To combat this problem the company is now building living accommodation for employees.
  • Aurcana has implemented a production ramp up plan to gradually increase production towards the phase I planned capacity of 1,500tpd, as mining operations proceed.
On December 14th the mine was apparently running at 600tpd. Last week, some 118 days after the wholly false announcement of commercial production, it was running at 560tpd.
  • As part of the ramp up plan, the installation of additional thickener tanks, increasing the processing capacity of the plant, will be commissioned early Q1, 2013. In addition, upgraded filters will be installed in Q2 2013.
Those installations have been delayed. Also, additional filter presses are needed but won’t arrive until 2q13 or become operational before 3q13.

As well as those points, it was also clear that AUN has dropped its grand plans for M&A type expansion. Back in 3q12 the company said it was in talks with another Mexico producer for a merger (we guessed at Scorpio at the time), but the message last week was that AUN would be concentrating on its organic growth. It’s unsurprising given the share price weakness between then and now of course, because its lack of cash and serious paper closes the door.

Aside from the untruths told and now admitted, there are financial ramifications to the delayed timeline for Shafter. This chart shows our forecasts for overall working capital at AUN during FY13 which assumes steady state production and post credit at La Negra, Shafter that runs at 600tpd in 2q13 and moves up to 1,000tpd by year end (using 5oz/t silver and average 70% recoveries) and an average $29/oz realized price for silver. On the ConfCall, CEO Rodriguez (after some prompting) admitted that the 2013 capex budget for AUN would be around $20m, which according to our model means that AUN is likely to go working cap negative for a while before recovering at the end of the year. It does have a credit line in position that will be more than enough to cover cash flow needs for a near-term period, but the problem here is if silver doesn’t maintain a $28/oz average, AUN does more than just go through a couple of quarters without profit; it runs out of cash.

On the ConfCall, CEO Rodriguez said that the company wasn’t planning any further equity raises but quite frankly, with a track record like his there’s no reason to believe him. As AUN is now about to enact its reverse stock split which will cut the shares out total eightfold (putting it at 58.4m s/o) and the share price to over $4, a rollback of this sort smacks of a company preparing to raise more cash via equity. Given the thin state of cash holdings forecast for this year and the slipping in timelines for expansion, I’d say a dilutive round of raising in 2013 is far more likely than the two-faced Rodriguez would like us all to believe.

Anyway, it’s all rather too much like sour grapes from me on this trade today. I’m now out and not going back until things have substantially changed at AUN. That would include a complete change in top management as I’ve been fooled once by these people, so shame on them. Next time would be fool on me. But there is one more thing I’d like to share here, which is the price chart for AUN since December 14th, date of the apparent “commercial production” that turned out to be a tissue of lies. It was due to this announcement that its promised timeline was being kept that AUN remained in the IKN portfolio. Since that time the stock has sunk, from a December 14th close of $1.04 to the current 56c. That’s $224.3m in market cap wiped from the stock and in my personal view, that leaves plenty of room for compensatory actions from those who have lost money on this deal due to the lies and deception of company officers. I for one know that I wouldn’t have held on this long if AUN hadn’t announced its “achievement” of commercial production on December 14th.