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EGU writeup

After running to 7 in January, the stock has now spiked down to the absurd level of  $C 3.26 on the back of what looks like forced selling. At a third of NAV, EGU represents exceptional value down here. With a market cap of $586mm and $200mm of cash, the stock sells for an EV/attributable gold equivalent Oz. of less than $30. Mature producers sell for many multiples of this valuation. This morning, Kinross announced it was acquiring Aurelian Resources, a Canadian listed company with a major discovery in Ecuador. Kinross paid $87 per resource oz. in the ground. Aurelian has no booked reserves and the political situation is dicey to say the least. EGU has booked reserves in an E.U. country.

 I wanted to provide an update and point out the exceptional opportunity the present price presents.

I know I just re- recommended this stock a little over six months ago in the low 5’s, but at 3.26, the stock has dropped nearly 40 % since I wrote it up.  I won’t repeat the whole story because very little has changed. (Perhaps part of the problem). Since the December write-up, gold has run from 800 to over 900 and silver from $14 to $17 per oz. Lead and zinc have gotten hit, which hurts near term cash flow from Stratoni, but most of the value resides in the Skouries and Olympias projects, which have not yet gone into production. The takeover bid by Eldorado for Frontier Pacific shows that significant companies are paying attention and don’t seem as phased by the prospect of doing business in Greece as the current valuation implies. Frontier has a relatively small, nice deposit, but is considerably behind EGU in its permitting efforts.  I was hoping that EGU would be the consolidator, but Eldorado jumped the gun with their move. There are rumors that Eldorado was interested in acquiring EGU as well, but with the stock so depressed and permits nearly in hand, the timing was wrong.  

I believe that six months ago the company was poised to receive provisional acceptance of their environmental permit application.  They were very, very close – one ministry signature remained. Unfortunately, the Minister of Culture, whose signature was required, was found attempting to leap from his office window in conjunction with a sex scandal. Management initially felt the issue would be resolved fairly quickly, but the sexual aspect of the scandal turned out to be the tip of the iceberg.  Apparently, financial impropriety lurked in the background, which led to blackmail and the revelation of sexual shenanigans. While the malfeasance had nothing to do with EGU, or its projects, the scope of the problems at the Ministry led the government to basically fire the whole Ministry staff. Consequently, review and signing of EGU’s project was delayed, along with many other unrelated projects across Greece.

The little saga I conveyed above was fairly well communicated to the market some months ago. In July, though, EGU stock has dropped dramatically on no new news that I am aware of. I believe that a few institutional shareholders have been dumping stock for reasons unrelated to the company.

This is an off the charts low valuation. Yes, getting permits in Europe, and Greece in particular, is a slow frustrating process. That’s the way of the world in mining now.  But for this stock to be valued at or below remote marginal projects and political basket cases is just crazy.

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