Description
Trading at only 13.50 $ per gold equivalent oz. of resource and 60 per cent of a conservative net asset value, I see European Goldfields as one of the cheapest gold stocks in the world. I believe that the factors causing the discounted valuation will be addressed over the next year. As the company executes its plan, the shares could double or more.
Primary Assets:
Greece – The Company holds a 65% interest in Hellas Gold S.A. (“Hellas Gold”). Hellas Gold owns assets in Northern Greece which consist of three deposits within 70-year mining concessions covering a total area of 317 km². The deposits include the polymetallic projects of Stratoni and Olympias which contain gold, lead, zinc and silver, and the copper-gold porphyry body referred to as Skouries. All three deposits have been well defined with over 200,000 meters of drilling and the completion of feasibility studies and later engineering studies. These assets represent some of the largest defined deposits in Europe. The three deposits are located within a 10 km radius of each other, making this effectively a gold and base metals centre. Furthermore, both Stratoni and Olympias were previously in production and have extensive existing mining and plant infrastructure and a ship loading facility on the Aegean Sea.
Romania - The Company’s primary focus is to advance its 80%-owned Certej
deposit. The Company has recently completed an in-house pre-feasibility study underpinning the value of the Certej deposit.
Please see the company website: http://www.egoldfields.com for more detail on the company’s projects and exploration potential. There are also links to several research reports under the “useful information” tab.
Valuation
Unrisked NAV = $C 3.90 share, calculated by Cannacord. This number itself is conservative because it bakes in a discount for Greece, uses 95c long term copper and a discount rate of 8%. Many North American analysts work with a zero % discount rate for gold miners. One should also bear in mind that no credit is given for the companies 317 sq KM of exploration concessions in Greece. Neither is any credit given for the possibility of
extending the size of the existing deposits. Other uplifts would include the monetization of the Stratoni silver production through a "Silver Wheaton" type transaction in the middle of next year. This would likely bump the NAV by 30c $C per share. Should EGU secure subsidies available to mining operations, there could be another bump up.
At 2.35 the market is skeptical. But, if the company executes, it should ultimately be rewarded with a premium valuation.
14.6m gold equivalent ozs. of resources net to the company:
EV of 232m $C / 14.6m ozs = 15.90 $C oz = USD 13.50 per oz of Au equivalent resource vs. $35 average for junior gold companies.
@ $35 /oz EGU would have a market price of $C 5.17 per share.
Bear in mind, that the $35 oz valuation pertains to junior miners that are typically not in production. Producing companies tend to sell at much higher valuations.
Balance Sheet
32m USD projected year end 2005 cash- means no near term dilution likely. The advent of cash flows from Stratoni should keep this cash figure stable in 2006.
= $37m C = 33c share cash
HISTORY/REASONS FOR DISCOUNT
The market has a skeptical view of European. First, EGU was a 2000 spin-off of non-core Romanian exploration assets from Gabriel Resources (GBU CN). In 2004 EGU acquired 65% of Hellas Gold in Greece from the Greek Government and Koutras affiiates.
The Greek assets had been owned by Kinross, by way of their acquisition of TVX Gold. TVX had spent $200m on these assets and Hellas Gold filed for bankruptcy after confronting local hostility and losing some key permits.
Gabriel has disappointed investors because of delays in developing the Rosia Montana gold deposit in Romania. Moreover, the companies formerly shared the same CEO: Frank Timis, an Australian Romanian ex-pat, whose shady past has recently been darkened further by his grotesque promotion of Regal Petroleum.
The negative perception of European Goldfields:
- The Greek assets blew up TVX Gold. Then, Kinross couldn’t make a go of it and handed the assets back to the Greek state. European won’t do any better trying to mine in Greece.
- Frank Timis, a convicted felon, liar and stock promoter owns 18% of EGU stock.
- Greek contractors will suck EGU’s blood
The new reality:
Unlike previous owners of the Hellas Gold assets, EGU has brought in an effective Greek partner in Aktor, the largest construction company in Greece. Aktor affiliates own the minority interest in Hellas Gold and also hold 12.5 % of EGU common stock. Dimitrious Koutras serves as EGU’s Board Chairman. Those who said EGU would never get a production license have been proved wrong as the company received a permit for its initial project, the Stratoni mine, which is now commencing commercial operations. EGU also has a much better deal than TVX had. No legacy environmental liabilities or social obligations. Also, the Greek government’s posture on mining has changed for the better as they have realized that these projects would provide substantial employment to an impoverished area. Likewise, technical advances in mining technology have been achieved which should lessen the concern regarding environmental issues. It is becoming more likely that EGU will use an alternative process and not need to use cyanide in its mining process at Olympias. They also believe they can address arsenic stability issues there.
The company has gotten strong support from the Government and there has been no opposition to the projects thus far. For these reasons, I believe EGU will be similarly successful in securing permits for its other Greek assets.
Aktor’s strong ownership position in the project and EGU shares, gives me comfort that stockholders interests will be protected as mines are constructed and operated.
While Frank Timis is a poster boy for bad investor relations and owns a large chunk of stock, he has no operating or Board role in the company. He does not interfere with how Dave Reading is running the company. I am hearing, though, that Timis will reduce his stake, to lower his profile as a shareholder and counter the perception that he is calling the shots at EGU. By selling down his stake to a more manageable level, the theory is that his remaining shares’ market value will increase
MANAGEMENT
- Koutras is Chairman and President of Hellas Gold. He is a well respected and powerful person in Greece. Aktor built many of the venues for the Athens Olympics.
-Dave Reading – a South African, came from the senior management team at Randgold. He strikes me as a solid, no nonsense mining guy.
Insider Buying – with assets such as mining deposits, management credibility is critical. There are so many things that can go wrong and so many ways to hide the problem. When I see management buying stock in an industry where the norm is to promote and sell personal stock, I take note. Several directors, including CEO Dave Reading and Chairman Koutras have bought shares in the public market during the past year.
Catalyst
North American sponsorship imminent
monetization of Stratoni silver production
permitting of Greek mines next year