ECU and Aquiline Resources: A Little Risk, A LOT of Return

The fund I manage owns both of these stocks, for the record (ECU.TO/ECUXF; AQI.TO/AQLNF).  I have personally owned ECU since mid-2005.  To say the least, it's been a wild ride.  Both Companies are intermediate-stage exploration miners who have discovered extremely large silver deposits.  ECU's deposit is in Valerdena, Mexico, in the heart of  one of the most prolific silver mining regions in the world.  AQI's holy grail is located in Navidad, Argentina, in the Chebut province.  At the end of the day, I view these two emerging silver miners as being "twin" companies in terms of the outright size of their respective deposits and relative stages of development.  Both have obstacles to overcome in order to unlock their massive upside value.  Either one could possibly be sitting on what will end up being the largest untapped silver deposit in the world.  Both stocks are extremely undervalued relative to the potential value being given by the market right now for their proven in-ground silver.

AQI to date has proved up 750 million ounces of silver on its Navidad site.  The stock has been moving higher over the past couple months as the political climate in its province in Argentina appears to be moving toward being more amenable to allowing open pit mining and the use of cyanide, which is used in processing mined ore.  At it's peak valuation before the 2009 bloodbath in junior mining stocks, AQI had reached a market cap of approximately $850 million.  The current market cap is $337 million, or about 45 cents per proved ounce of silver in the ground.  AQI also has two gold mines it is developing, one of which is in Peru should be operational some time in 2010.

ECU has a proven approximately 431 million ounces of silver at its three main properties, with the Valerdena deposit being the largest.  Interestingly, MICON, one of the most respected of the mineral resource testing and validation firms, also believes that  ECU's deposits have "Mineral Potential: 569,524,000 to 930,400,000 ounces of silver equivalent."  ECU's current market cap is $133 million, or about 31 cents per silver, as strictly measured, in the ground.  But based on Micon's potential estimates - let's use a mid-point of roughly 700 million ounces - ECU is being valued at 19 cents per ounce of silver in the ground.  ECU is currently processing ore stockpiles using a mill it acquired earlier this year.  One of the surprises - and which could be another big source of upside for ECU - is the amount of gold which has been discovered and is being produced from the ore stockpiles.  In other words, as ECU further develops and unlocks the metallurgy of its silver discoveries, there is a lot of gold also embedded as part of the ore mix.  The stock market is not giving any credit whatsoever to the fact that ECU has not only begun to produce mining revenues, but that a large part of this revenue stream will come from gold.  ECU has always been viewed as a pure silver play.

Just to quickly address the source of Micon's "mineral potential" statement.  The ultimate source of the mineralized veins discovered on ECU's Valerdena property has not yet been determined.  However, the geologists at ECU believe they have identified the location of a Massive Sulphide Zone (MSZ), which they believe, off-the-record, could be as big as 500 million ounces. The potential silver content of this MSZ is not included in Micon's "silver potential" estimates.  ECU's goal is to use the revenue being derived from their mill to pay for the deep drilling required to explore and prove the content of this MSZ.  I have always believed, based on several conversations with management AND with people who have been down to see the mine, that this MSZ would eventually be defined and would give ECU's stock serious upside potential.

Similar to ECU's hurdle to valuation nirvana, the instant that the cyanide and open pit mining ban is lifted in AQI's Chebut province, AQI's stock could go parabolic - at least a triple from here very quickly. 
I do believe, however, that while ECU is unbelievably undervalued relative to AQI,  both stocks have unique risk/return characteristics which make them two of the most attractive junior mining stock plays I have seen in the last 8 years.  And one more variable to consider if you decide to put some of your own numbers to the valuation potential for ECU and AQI.  Both are trading below 50 cents per ounce in the ground right now.  For general valuation purposes  at the peak of the junior mining stock valuation run which culminated in May 2006, silver minining companies, on average, were being valued at $5 per ounce in the ground. Back then silver topped out a little over $15/ounce.  We've seen silver go over $21/ounce in the last 18 months.  Imagine what the ultimate stock price/valuation potential is for Companies like ECU and AQI when silver goes back over $20 and stays there AND the market reverts to valuing silver in the ground at several dollars per ounce.