 Gold is where you find it
Bob Moriarty
Archives
November 24, 2004
If I had my way, all articles about gold and silver companies
would be required to tell themselves. After all, if a story pretty
much doesn't tell itself, it probably is a story not worth telling.
I traveled to Varvarinskoye
(sorta rolls off your tongue, doesn't it?) in Kazakhstan recently
to look at the primary gold project for European Minerals
Corporation [EPM.U $.77 US, EUM on the AIM, EPMLF on the
OTCBB - 60 million shares outstanding - $45 million dollar market
cap - website].
The company is an interesting
combination of a British company listed on a Canadian exchange,
quoted in American dollars with its primary project located in
Central Asia.
Before I left for my flight
to Frankfurt and on to Kazakhstan, I was talking to Sally Schofield,
Vice President of European Minerals, about the company and the
project. It's an interesting story which pretty much tells itself.
The company has had the project
for about ten years. After the Bre-X flushing of the industry,
European pretty much went into hibernation. They did a half-hearted
feasibility study in 1998 without any real ability or intention
to go into production.
Basically the project was discovered
by a woman Russian geologist, in her canoe, paddling down the
river next to the property in 1936. She saw signs of an iron
gossen and reported her find. Over the next 60 years, the Russians
drilled the property until it looked like Swiss cheese. The Russians were long on drilling and short
on actually going into production.
When European Minerals first
took over the property in 1995 they got access to all of the
Russian data but also spent about $11 million of their own money
doing infill drilling and testing.
European is at the bankable
feasibility study stage. Their work indicates a total gold resource
of 3.5 million ounces of gold and 240,000 tonnes of copper with
a reserve of 2.345 million ounces of gold and 269 million pounds
of copper. With $400 gold and $1.10 copper, the company would
have a NPV of $371 million at 0% discount and $147 million at
a pessimistic 10% discount.
With a total capital cost of
$94 million to fund European's 86% interest in the project, the
IRR shows 41% with a total capital payback of 22 months. Those
numbers are not just good, they are great. Let me remind the
reader, gold is a lot higher than $400 and copper higher than
$1.10.
Something was gnawing at me
and I couldn't figure out what. I asked Sally what the price
of the stock was. She told me $.60. Then I asked her how many
shares were outstanding and she said 60 million and added that
they also have $10 million in the bank.
I did the numbers and came
up with a market cap after cash of $26 million.
Which in Spanish is called "flipping absurdo" for a
company planning on being in production in 20 months with a cash
cost of $108 an ounce of gold. Their feasibility study predicted
145,000 ounces of gold a year and 18.4 million pounds of copper
yearly during the first ten years.
Something didn't add up. The
company should have been selling for a 2-3 times
higher price in a really rotten market. So when I got off the
phone I went to look at their website to see what they had to
say about the project. And there was the problem. They talked
about the project in two different places on their site using
a total of 138 words to describe the entire story.
In the mining game, it's not
enough to just have a story. You must also tell the story or
it becomes the tree falling in the forest with no one to hear
it. European's entire problem was based around them totally failing
to tell their story. In this market, shareholders get bored and
when they get bored, they dump the stock. No news is bad news.
We flew an
ancient Russian Tupalov jet from Frankfurt to Kustanai. There
were moments I wondered if the old girl would make it. (mostly
from takeoff to landing) But we did. Three of us went. Sally
Schofield was the escort, David Coffin from Vancouver was along
for the tour. The Frankfurt/Kustanai journey was a breeze, Sally
and I chatted up a storm and the pilot knocked about 20% off
the journey time and I was just about to take a nap, and we were
landing. Very different from my return journey where I was traveling
for almost 24 hours simply getting from Frankfurt to Miami via
United Airlines.
We arrived
in
Kustanai
at about 8 local in the morning and were rushed through customs
and immigration. Foreigners are unusual in this region of Kazakhstan
and preference is still given them. We set out in two cars for
the project and were there a few hours later. Kazakhstan is one
isolated, barren, cold, desolate country.
Winter was setting in and although the temperature was above
freezing during the day, we were all chilled to the marrow. David
and I were shattered with the jetlag and timezone changes, not
only did we not know what time or day it was, we barely knew
what season it was. But it was darned cold. David seemed to have
somehow missed a couple of nights' sleep along the way. Those
of you who have time might enjoy looking through the picture
gallery of the trip that Barb's
put on the website. (I don't think I'm in that batch of pictures,
because I was taking the photos).
Flying into and out of Kazakhstan
is difficult, there isn't much traffic. We were restricted by
time. If we wanted to make the flight back to Frankfurt, we either
spent 30 hours in Kustanai or we spent a full week. We went for
the cheap seats and "if it's Saturday, it must be Kazakhstan"
tour. So we didn't have a lot of time on the ground.
David Coffin was disappointed
to hear they hadn't done any more exploration drilling. He had
been told as late as August that a primary goal was increasing
the size of the resource. Since the company was selling for about
$6 an ounce of gold, increasing the resource was the fastest
way to get attention. Other projects at a similar size sell for
an average of $58 an ounce. So by every measure EPM is pretty
cheap.
 Instead of drilling, European had sunk
the money into prestripping,
which Sally Schofield knew about but even she had only seen pictures
and wasn't aware of the scope of the operation. It was pretty
obvious to me from the gitgo, that 100% of European's problems
centered around communication.
What can you say about an open
pit gold/copper project which hasn't been said a thousand times
before? The numbers are robust at the very least, the company
stands a good probability of increasing the resources, prestripping
is in progress and they are in the last stages of arranging financing
for the project.
My only issue with anything
was with an almost total lack of communication on behalf of European
Minerals. Shareholders were being left in total darkness even
as great progress was being made on their project.
Readers often confuse the role
analysts play when they visit a property. Since most people tend
to attribute to others what they would do themselves, a lot of
readers think analysts do nothing more than pump and dump stocks.
It's called transference by psychologists. Actually, writers
perform an incredibly valuable function for the management of
mining companies.
First of all, no mining company
is spending thousands of dollars sending analysts all over the
world just to pump and dump projects. They have their own people
to do that. It's pretty much true that any writer asked to go
on one of these dog and pony shows has earned his spurs along
the way and at least has a reputation for having some sense.
I've been very impressed with the caliber of people on these
trips and I'll tell my readers, there is a hell of a lot you
never hear about. I've seen writers tear a strip off mining company
people on more than one trip.
There isn't very much that
passes by even a small group. Bre-X could happen, there are people
who spend 24 hours a day trying to figure out how to con money
out of investors. But the day to day lapses in management which
we all expect and get on a regular basis are going to get picked
up. And while few writers will actually come out and totally
trash a company, (The real scum bags know better than to invite
a group of writers on a tour in the first place. We know who
the scammers are), when a tour disappoints, nothing much gets
said.
I've been on
a bunch of mining tours in the last year and this was the most
unusual and enjoyable. Considering the very basic facilities
one would expect in Kazakhstan we were very comfortable. I was
able to get online at the European offices
there,
and check that Barb wasn't goofing off in my absence, and that
the 321gold website was up to snuff. Sally's British cellphone
seemed to work, which made my Miami phone seem like a joke, I
can sometimes barely get it to work in N. Florida!
We had a Saturday night dinner bash for 7 at one of the
local restaurants. (No 40-course sea slug/deep fried bees dinner
for me here, ala Beijing, though). There must
have been 40 tables, only 3 were occupied. But there was a band,
3 singers, and 2 separate groups of dancing girls. The
show was quite incredible given the location.
 The project is a text book example
of great economics, everyone knew what they were doing and did
a good job of answering all our questions. Sally provided us
with a superb briefing book and when we left, David and I got
a slab of core sample showing the high grade copper and gold.
That was a nice touch.
It was
my trip gift, to Barb, and she said it was one of the most fabulous
trip gifts she'd ever received. We were there for such a short
time that I didn't have the chance to change any money or shop. So the Kazakhstan
bottled water I took back for Barb was a real thrill for her,
too. I also bought Barb a small gold ingot at Frankfurt airport.
Yes, at Frankfurt airport gold bars are for sale, just like hotdogs.
 We even were escorted by a beautiful
24 year-old blond translator who told the saddest stories of
growing up in poverty-stricken Kazakhstan. She still remembers
her parents traveling to Moscow and bringing her back a black,
overripe banana. She thought is was just wonderful. It was the
first she had ever seen or tasted and I guess under those circumstances,
even an overripe banana is nice.
As astute readers may have
figured out by now, I like to recommend stocks when they are
so cheap there is pretty much only one direction they can move.
EPM.U is such a stock. I have to give Sally a lot of Brownie points, she
took a lot of criticism from both David Coffin and me about the
communication issues but the day she got back from the trip,
she was changing the website.
I wanted to
wait a couple of weeks before doing a piece so Sally could see
the benefits of the increased communication and I'd guess a 25%
rise in the stock price in less than a month pretty much proves
the point. On the downside, European will need to do an offering
- concurrently with the bank financing - to actually make their
2 year production schedule but even at today's prices, you can
buy gold in the ground about as cheap as any stock around. The
stock has a lot of potential on the upside and I expect to see
it move higher on a steady basis over the next year and a half
as they approach production. At today's price you are paying
about $10 per ounce of gold reserve and that is way under priced.
Expect European to do the same thing as Desert Sun did. It sat
at an absurd price for months and shot up 50% in a week.
I like the company and the
management. Sally Schofield leapt to solve the communication
issue as soon as it was pointed out and I'd expect other similar
problems to be sorted out the same way. They are on track to
being a mid-tier, low cost producer in short order. I'd like
to see them take the suggestion of David Coffin and spend some
money expanding their gold and copper resource.
European is an advertiser.
They have not paid for this piece. Naturally we have some bias,
we like the company and the stock. I'd like to remind readers
to do their own due diligence.
Kazakhstan photo
gallery
 Note: I will be at the San Francisco gold
show, leaving zero dark early on Thursday, Thanksgiving Day.
I'll be back on Wed Dec 1st, so kindly refrain from emailing
me until Tues. night Nov 30th.
November 23,
2004
Bob Moriarty
President: 321gold Inc
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