A Tale of 2 Profitable Micro-Caps
- Chapter 1
An Unappreciated Drilling Company
Valued below Its Assets
Doug Beiers
TheSimpleInvestor.ca
Nov 17, 2006
This is a tale of market dislocation,
and about the man who is President of 2 profitable companies.
A guy who knows a lot about running a business but is a bit light
on marketing skills. All in my opinion of course.
The first is Energold Drilling
- EGD.V. Energold has a history of 20% annual growth of new drills
in the field and the company is now ramping up growth even more
rapidly. Meters drilled in Q2 2006 are up 39% over the comparable
quarter in 2005. Energold is experiencing its 4th consecutive
year of profitability and looks to offer a nice surprise this
year with both the increase in the number of drills in the field
as well as number of meters drilled.
The second company Fred heads
up, is currently 100% owner of a profitable Mexican silver mine
and they have an option to acquire a 2nd one that has just gone
into production. Details about this silver miner will be revealed
in the second installment of this story in a few days. I visited
the mine-site recently and was totally impressed.
Fred Davidson - Bean Counter
Energold is headed
by President Fred Davidson. Fred is probably a boring guy to
most resource investors but this is about investing wisely and
making money. He does not grab headlines with big pronouncements
and his companies are not market darlings, at least not yet.
Fred is a bean counter (an accountant) and an experienced mine
manager. Fred is unique in that he puts a lot of effort into
solid "business management practices" and "long-term
planning".
Energold Drilling - EGD.V -
www.energold.com
24 million shares Fully Diluted
Working Capital $15million
Owns 6.6 million shares of Impact Silver IPT.V (value at Nov
15/06 - $8.5 million)
Currently 24 rigs in the field, 2 being mobilized and 4 under
construction.
Energold is often referred
to as an "Environmentally Friendly" drilling company
because they only need a level space of 4m x 4m to set up. In
other words they are considered "Low Impact". They
are also referred to as "Man Portable" since the entire
drill can be easily broken down (<1 shift) and carried around
remote mountain trails by mules or a local crew. They also build
their drills in-house so their proprietary designs are not copied.
Energold began as a 50% owner partnering with Kluane Drilling.
The past 2 years they have directed their growth towards 100%
ownership of new drills, initially mobilizing them to Mexico.
EGD is now 1 of only 5 drillers in the world accepted by BHP
as a drilling service contractor, which says a lot about the
quality of service they provide. Of the 24 drills currently in
the field 18 are 50% owned and 6 are 100% owned. The 2 rigs currently
being mobilized are both 100% owned and the 4 under construction
are also 100% owned. I think you get the picture.
Energold Shares are a give-away
Now for some interesting
numbers. With a current (Nov 16/06 market close) Market Cap fully
diluted of $24 million, remove the $15 million working capital,
remove the value of their IPT.V shares, another $8.5 million,
and what you have left is 24 drills with trained crews in 13
countries, with contracts in place, with growing profits and
cash flow - valued at under $1 million. If current outstanding
options and warrants are exercised this will bring an additional
$1.76 million into the treasury with no further dilution (I am
using fully diluted numbers above). So the current value of Energold
shares are deeply discounted as established drillers are usually
(or often) valued at healthy multiples of revenue and earnings,
and rapid growth companies often trade for a premium on top of
this as growth is very costly so anything that makes it to the
bottom line is a bonus.
Value in the Dominican Republic
There's more. Energold
is the largest holder of exploration projects in the Dominican
Republic. Some are adjoining Placer dome's 18 million oz
gold deposit, some are JV'd out. In this bull market my guess
is their DR properties could potentially be valued at 50% or
more of the market cap of the entire company. The Dominican Republic
is where Energold was born a number of years back. Fred's frustration
with the type of drills being provided to explore his many mountainous
properties stirred his creative juices. He had his own rigs built
to his specifications and Fred's drilling business was born.
These properties are extremely prospective and the DR is quite
mining friendly. Countries like the DR are getting more popular
with mining companies with all the recent concerns about "country
safe" locations. Fred commented that he plan to "realize
value on the majority of the DR properties by early 2007."
How to Value?
What is a fair price for Energold shares?
We will likely never
know until someone tries to acquire the company, but, from Major
Drillings recent financials they show earnings per share of $1.18.
On Nov 8/06 their share price was $22.55 which works out to 19
x EPS. I think it is reasonable to expect Energold to come in
at between $0.08 - $0.10 this year (a lot of drills being mobilized
with substantial up-front costs) so at $0.08 (the lower end)
x 19 = $1.52. 2007 earnings could easily end up around $0.20
the way things are shaping up and at 19 x EPS there is potential
for a $3.80 share value. This does not include any consideration
for their 6.6 million shares of IPT (on the books at $1 million)
nor their working capital and DR properties. I expect Fred to
get full value for both holdings in 2007. Growth is expensive
for drillers. New rigs coming on stream have substantial up-front
costs including: mobilization costs to the field and training
new personnel. Earnings are constantly muted with such a rapid
growth company.
Take-Out Candidate?
I do expect them to
continue and even accelerate their rapid growth, and I also expect
a company like Major Drilling to take them out before all that
long. At that time we shareholders will get handsomely paid.
I have held Energold shares
in my Retirement plan for about 2 years now and have no plans
to sell until Fred sells the company.
Tip for traders. Check out
the annual chart for EGD for the past few years. Seems like the
share price shoots up anytime now (late November) and peaks in
the early spring, sometimes dramatically.
Nov 17, 2006
Doug Beiers
email: doug@baytides.ca
Doug Beiers
spends several hours a day researching the junior & micro-junior
resource sector for undervalued and underloved stocks that offer
hidden opportunities. His background includes 35 years business
management & ownership. He has owned a bookstore, a weekly
newspaper, a cafe, and is currently a partner in a website management
business. Experience in the resource sector varies from working
a year at a Yellowknife gold mine, some diamond drilling, and
staking mining claims on a few occasions in the Arctic. One time
he struck out on his own to discover the next big gold strike
and got hopelessly lost. He offers his research for free to all
at www.theSimpleInvestor.ca.
321gold
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