Description

A meltdown in the junior resource sector and possible non fundamental selling are creating an opportunity to buy EGU at a hefty discount to NAV, comparable companies and its private market value.

-the prices of metals have increased dramatically

-EGU has advanced its projects towards permitting and production. The process of permitting has dragged a bit, but there appear to be no major issues, other than the sluggishness of the Greek bureaucracy

-rationalized its ownership structure. Greek partners swapped most of their stake in the project for shares in EGU itself. They now own 19% 

-secured financing through permitting and beyond

 I refer you to the earlier write-up for most of the background information, but EGU operates the Stratoni Zinc-lead- silver mine and is in the process of permitting the Skouries Copper-gold project and the Olympias gold mine. In Romania, EGU holds the Certej gold deposit. In total, EGU has booked 10.6mm attributable ounces of gold, not counting credits for silver and base metals.  All the projects are in advanced stages and display robust economics in EU countries, where title should be secure. These assets are not marginal. Cash costs are estimated to be in the $150 -210 per oz range vs. a current gold price of $800.  By 2011, the company should be producing 300,000 ounces of gold per year, plus substantial amounts of base metals and silver, positioning EGU as a solid mid tier producer.

Valuation:

EGU stock sells at a 40% + discount to conservatively stated NAV.  The 9ish NAV,

reflects a $670 gold price, 80c zinc, 50c, lead, 1.80 copper and 12.00 silver- all substantially below current prices of these metals. The analysis also incorporates a high single digit discount rate assumption. As the company progresses, I believe analysts will ratchet that discount rate down. Many gold stocks are valued on the basis of a “zero % " discount rate.  If a 5% discount rate were used, the NAV jumps to north of $14 per share.

Mid tier producers currently sell at premiums to NAV and their reserves are valued at $300 per ounce or more.  As EGU received permits and gets closer to production, this discount should narrow.

If you buy EGU today, you’re buying gold equivalent ozs. In the ground at about $32 per oz.! The few companies that trade lower than this figure reside in countries with high political risk such as Venezuela and the Congo. Or, they have very low grade deposits that show big ounces, but small economic value.

In addition, there is substantial exploration potential in their land holdings in Greece that are being given no current value in my view. Seismic is now being shot on these lands and could add an element of “blue sky” to the story.

I believe this discount exists, in part, because of the bad experience TVX Gold had with these properties. TVX ended up going broke when their poor management of relations with the locals resulted in the shutdown of their operations and the eventual return of these assets to the Greek State. The issue was never related to engineering or geology, but stemmed, ultimately, from their lack of an effective Greek partner. In Dmitrios Koutras and Aktor, EGU has found an ideal combination of expertise and local power and savvy for their partner.  

Well financed.  Cash stands at 220mm with no debt.  This cash, cash flow from operations and some debt financing should allow the company to accomplish its objectives without significant dilution.  There are also significant unpledged silver reserves, which could be used to raise additional capital through a Silver Wheaton transaction.  At a time when investors are concerned with the ability of companies to control their own destiny in building their projects, EGU stands out quite favorably.

What’s next?

I expect permits in Greece to be awarded next year- likely within the first half.

An announcement of preliminary acceptance of the EIS is likely early in the New Year.

When that happens, the formal filing of the EIS and its acceptance should follow in fairly short order.

When these permits are received, the company will be quite vulnerable to takeover bids.

Catalyst