Date / Location of update
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Comments |
21st April 2008, Weekly Update
(Stock Price: C$0.91)
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In last week's Interim Update we wrote:
"...EPM will have to come to an
agreement with its lenders to re-schedule loan repayments and
deliveries into forward sales contracts so that they line up with the
revised production schedule, or arrange additional financing of at
least $30M.
We think that EPM will get through
this rough period mostly intact, although there is a good chance that
the share count will rise by another 10-15% between now and when the
company becomes cash flow positive. In any case, we would not do any
new buying of the stock until a solution to the immediate financial
issues is in place."
In a press release on Friday it was announced that EPM has arranged to
get the money it needs to solve its immediate financial problems. The
way the money is being obtained is quite strange, however, because
instead of doing its own equity financing EPM has agreed to buy a small
exploration-stage miner by the name of Lero Gold (TSXV: LER) via a
share exchange (one new EPM share for each LER share). Prior to the
takeover being effected LER will do a private placement of new shares
at C$0.85/share to raise at least $40M ($66M maximum), $25M of which
will immediately be lent to EPM.
We don't know anything about Lero, except that it owns some
exploration-stage projects in Kazakhstan and Kyrgyzstan. These projects
currently don't have any NI-43-101 compliant resources, but initial
resource estimates are due to be published before the end of this
month. EPM is also expected to issue a revised (upgraded) resource for
its Varvarinskoye gold/copper project in the near future.
Given that LER's large equity financing is being fully underwritten by
Canaccord, it seems that there is considerable demand for EPM/LER
shares at C$0.85. This suggests to us that EPM's news flow is about to
take a turn for the better.
We now consider EPM to be a speculative buy at around C$0.85.
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16th April 2008, Interim Update
(Stock Price: C$0.89)
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We concluded our 7th April update on emerging gold/copper miner EPM by saying: "IF
we are only dealing with a delay of a few months to project
commissioning and deliveries into the hedge book can be adjusted to fit
the revised commissioning timetable then EPM is a strong buy near
Friday's closing price [of C$0.89]. The problem is, we can't be certain
that this is the case. At this time it is therefore not possible for us
to make a definitive buy or sell recommendation."
Earlier this week some more information on EPM's current situation
became available thanks to the publishing of the company's MD&A
(Management Discussion and Analysis) for the December quarter.
Unfortunately, though, the MD&A raised as many questions as it
answered.
What we now know is that EPM had $25M of cash at the end of last year,
$6M of which was used during the first quarter of this year to settle
the forward sales contracts that, due to project delays, could not be
settled by delivering gold bullion. The company would also have spent
money on project commissioning over the past few months, so cash on
hand at this time is probably no more than $15M. This is nowhere near
enough to see the company through to the commencement of commercial
production -- now expected to occur in September -- given that: a) loan
repayments totaling around $18M are due on 30th June, b) other forward
sales contracts might have to be settled in cash, and c) commissioning
costs will continue to be incurred. Therefore, EPM will have to come to
an agreement with its lenders to re-schedule loan repayments and
deliveries into forward sales contracts so that they line up with the
revised production schedule, or arrange additional financing of at
least $30M.
We think that EPM will get through this rough period mostly intact,
although there is a good chance that the share count will rise by
another 10-15% between now and when the company becomes cash flow
positive. In any case, we would not do any new buying of the stock
until a solution to the immediate financial issues is in place.
We have always been very much against the practice of forward selling
by mining companies because the only reason we ever want to own the
shares of these companies is to obtain leveraged exposure to the
anticipated upside in metal prices. However, we have been prepared to
stick with EPM because we thought -- and continue to think -- that its
eventual production levels would be high relative to the amount of
price-capped production (the company forward-sold 50% of the currently
planned production as part of a debt package, but substantial
production growth is likely over the coming years).
It's beginning to look like sticking with EPM was a mistake, though,
because we are now being given a clear demonstration of the risk that a
small single-project mining company accepts when it finances project
construction via the combination of debt and forward selling (some
hedging of future production is normally a prerequisite when a mining
company with no current revenue takes on significant debt). Financing a
large chunk of the mine construction cost in this way minimises stock
dilution, but it greatly increases the potential adverse impact of
project delays and, therefore, the risk.
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7th April 2008, Weekly Update
(Stock Price: C$0.89)
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EPM has a much larger market capitalisation and is at a much more
advanced stage of project development than the other beaten-down stocks
we'll update today, but it warrants a mention due to its recent price
action. Unlike the other stocks, which are at depressed levels due to
an absence of buying, there has been some concerted selling in the
market for EPM shares over the past week.
EPM issued a press release last Monday announcing that commercial
gold/copper production would not be achieved until September of this
year, a few months later than previously scheduled. This obviously
wasn't good news, but commissioning delays are common and this news, in
itself, is not a reason to be overly concerned. There is always a risk,
however, that a mine will not be able to achieve its design parameters,
so nagging doubts will persist within the investment world until EPM's
mine gets to the point where it is producing gold and copper at the
expected rates/costs. Last week's sell-off could be related to such
doubts.
The other potential problem area for EPM is its forward sales book.
About 50% of EPM's gold production (less than 20% of its gold reserve)
has been sold forward at $575/ounce, which seemed like an attractive
price at the time the sale was arranged (December-2005), but is very
low relative to today's spot price. The gold hedge book shouldn't
create a big problem for EPM because it will still be selling 50% of
its gold production into the spot market and because its copper
production is unhedged, PROVIDED that it is able to deliver the gold it
has contracted to deliver. The main concern we have at this time is
that the commissioning delays will prevent the company from meeting the
obligations under its forward sales contracts. This concern of ours may
not have any validity, but it will remain a concern until it is
specifically addressed by the company.
On the positive side of the ledger, the company has said that it is
completing an internal update of estimated mineral resources at
Varvarinskoye, which will be announced shortly and is expected to
result in an increase to resource estimates. Depending on the size of
the upward revision this could give the stock price a significant
boost.
The bottom line: IF we are only dealing with a delay of a few months to
project commissioning and deliveries into the hedge book can be
adjusted to fit the revised commissioning timetable then EPM is a
strong buy near Friday's closing price. The problem is, we can't be
certain that this is the case. At this time it is therefore not
possible for us to make a definitive buy or sell recommendation.
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19th March 2008, Interim Update
(Price: C$1.17)
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EPM
is currently transitioning from the development to the production
phase. When things go roughly according to plan this type of transition
will generally lead to a substantial upward re-rating in the stock
market, but it is also a risky time in that the proof of the pudding is
in the eating and the proof of the mining operation is in the actual
mining. In other words, before a mine actually begins to produce you
can never be totally sure of its economics.
Under more normal circumstances the recent slide in EPM's stock price
would be a 'red flag', but in the current environment it doesn't
necessarily mean anything because many junior gold-mining stocks have
performed in similar fashion. We therefore don't know whether the stock
price weakness is more likely a symptom of an operational problem or
just part and parcel of a lousy market environment.
The following chart shows that EPM broke below an intermediate-term
trend-line last week. This can't be construed bullishly, although note
that the stock bottomed in 2006 shortly after breaking below a similar
trend-line.
On the positive side of the ledger, over the past three years EPM has
always been near a short- or intermediate-term low whenever the RSI --
a momentum indicator shown at the bottom of the chart -- dropped to its
current level. Additionally, there appears to be strong buying support
in the C$1.10-1.20 range as evidenced by the fact that this gold stock
actually gained 2c on higher-than-average volume in the face of
Wednesday's sector-wide carnage.
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5th March 2008, Interim Update
(Price: C$1.35)
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A
lot of junior gold stocks are immersed in consolidation patterns. If
these patterns are resolved via upside breakouts in the near future --
a distinct possibility -- then rapid additional gains will likely
ensue.
Here are four examples from the TSI Stocks List, presented in alphabetical order:
1. European Minerals (TSX: EPM)
EPM's Varvarinskoye gold/copper mine in Kazakhstan is about to go into
production. A junior gold-mining company's transition from developer to
producer can lead to a substantial upward re-rating of its stock,
although the transition period will occasionally highlight problems
that lead to a sell-off in the stock market (as Gammon and Nevsun have
proved).
Provided that EPM doesn't encounter more than the usual amount of
teething difficulty as production commences over the coming three
months its stock price should break above resistance at C$1.50-1.60 and
move quickly to new all-time highs.
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27th February 2008, Interim Update
(Price: C$1.44)
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The following information was included in the email sent to subscribers on Wednesday 27th February:
"This far into a gold rally the
junior gold stocks would normally be running hard to the upside and the
warrants on these types of stocks would be going berserk, but, as we've
discussed many times in TSI commentaries, the current gold-stock
situation is not normal. As a result, most junior gold stocks are still
in consolidation patterns and some of the warrants on these stocks are
still reasonably priced. Here are two examples of warrants that are
candidates for new buying near current prices:
1) European Minerals April-2010 C$1.20 warrants (TSX: EPM.WT.A).
With EPM at Tuesday's closing price
of C$1.40 we calculate fair value for EPM.WT.A to be around C$0.50, but
paying anything up to the high-0.50s would be OK.
2) Great Basin Gold April-2009 C$3.50 warrants (TSX: GBG.WT).
With GBG at Tuesday's closing price
of C$3.37 we calculate fair value for GBG.WT to be around C$0.65, but
anything up to around C$0.70 would be OK.
The above-mentioned warrants are a
lot more risky than the underlying stocks. For example, if GBG were to
trade sideways over the coming 14 months then someone who owned the
stock wouldn't lose any money, but someone who held the warrants over
this period would lose 100% of their investment (the warrants will
expire worthless if the stock price is below C$3.50 at the April-2009
expiry date). The EPM warrants are less risky because they are 'in the
money' (their exercise price is below the current stock price) and
because they have an extra 12 months of time prior to expiry, but there
is still a significantly greater risk of loss with the warrants than
with the stock.
Despite the additional risk, warrants
are sometimes worth considering due to the leverage -- and the
associated additional upside potential -- that they offer. For example,
a rise in GBG's stock price to around C$5.50 over the next few months
would result in a rise to more than C$2.00 in the fair value of GBG.WT;
that is, a 60% increase in the stock price over the next few months
would lead to an increase of at least 180% in the warrant price."
Note that the GBG warrants jumped up to C$0.75-C$0.80 in response to
the favourable mention in our email, but the EPM "A Series" warrants
are still available in the high-0.50s.
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25th February 2008, Weekly Update
(Price: C$1.39)
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Exposure
to copper can also be obtained via the junior gold producers that have
a significant amount of by-product copper production. One of the most
obvious choices in this regard is Northgate Minerals (AMEX: NXG). NXG
is slated to produce 64M pounds of copper this year -- all of it
unhedged -- in addition to 400K ounces of gold, so changes in the
copper price will have a meaningful impact on the company's cash flow.
Another junior gold miner that would benefit from a higher copper price
is European Minerals (TSX: EPM). In its first three years of operation
EPM's mine is expected to produce 26M pounds of copper in addition to
150K ounces of gold. Note, though, that EPM won't be in production
until the second quarter of this year and therefore won't see any
immediate bottom-line benefit from further gains in the copper price.
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12th September 2007, Interim Update
(Stock price: C$1.15)
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The
EPM warrants are now very expensive relative to the stock, but the
stock itself offers excellent value at the current price. The
commencement of production over the coming three months could give EPM
a boost.
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3rd September 2007, Market Alert #167
(Warrant Price: C$0.57)
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In
response to the shift in our short-term outlook for gold shares we are
going to exit the European Minerals warrants (TSX: EPM.WT.A) that were
added to the TSI Stocks List at the end of July. EPM offers one of
the best risk/reward ratios in the gold sector and the warrants don't
expire until April-2010 , so we have no specific concerns about
this position. The concern (reason for selling) is that we added
the warrants to the List on the basis that significant short-term gains
were likely, but our perception of the facts has since changed. We are
therefore taking the opportunity provided by the recent rebound to exit
the position at around breakeven. We will, though, be retaining
exposure to EPM (the stock).
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30th July 2007, Weekly Update
(Stock Price: C$1.33, Warrant Price: C$0.58)
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EPM
broke out to the upside a few weeks ago, but the sharp sector-wide
correction has pushed it back from the C$1.50s to the C$1.30s.
This is an interesting time for EPM because if everything goes
according to plan then the company will commence production in about
three months time. This means that if the current schedule is
maintained and the mine begins to operate as expected during the final
quarter of this year then EPM should experience a significant upward
re-rating in the stock market even if the gold price doesn't do very
much. The risks are that something goes wrong in the lead-up to
production or that the mine doesn't perform as well as expected. These
risks are, we think, partially reflected in the current stock price;
hence, the potential for an upward re-rating.
EPM is a current member of the TSI Stocks List and is a good candidate
for new buying in the low-to-mid C$1.30s, but our main reason for
mentioning it today is because we have decided to add the EPM warrants
(TSX: EPM.WT.A) to the Stocks List at Friday's closing price of C$0.58.
These warrants have a strike price of C$1.20 and an expiry date of
April-2010. By our calculations they are moderately over-valued
relative to the stock, but they still offer suitable leverage in that a
50% rise in the stock price within the next 6 months would probably
lead to an approximate doubling of the warrant price. Keep in mind,
though, that leverage works both ways.
With the stock price at C$1.33 we think fair value for the warrants is
around C$0.50, but in this case we'd be prepared to pay 15% (or so)
more than 'fair value'. As long as the stock remains in the 1.30-1.40
range we would definitely not pay more than 0.60 for the warrants.
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4th July 2007, Interim Update
(Stock price: C$1.53)
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EPM
shares have been moving steadily higher over the past few months
despite the correction in the gold sector. The reason, we think, is the
gradual removal of the risk discount as the company's Varvarinskoye
gold/copper project in Kazakhstan progresses towards its scheduled
October-2007 commissioning date.
If Varvarinskoye performs as per its design parameters then, taking
copper as a by-product and assuming that the copper price remains above
US$2.50/pound, it will be producing gold at the rate of 140K
ounces/year by year-end at a NEGATIVE cost. This means that its
operating cash flow will be greater than or equal to the revenue it
generates from its gold production. Therefore, assuming it can achieve
an average selling price of US$600/ounce then its annual operating cash
flow will be at least US$84M (140K ounces at $600/oz).
Applying a 10-times cash flow multiple to the above -- a reasonably low
multiple for a gold miner -- would imply a market capitalisation of
US$840M. Subtracting US$61M of debt from this figure and assuming a
total share count of 350M then gives us a fairly conservative value per
share of US$2.20 (C$2.35). We consider this valuation to be
conservative because it is based on a low cash flow multiple and
because it doesn't allow anything for the substantial growth in
production that will most likely occur over the coming three years.
However, it will be appropriate to apply a significant risk discount
until commercial production is reached and we know, for a fact, that
the mine is capable of operating as per its design parameters. We are
therefore maintaining the C$1.80-C$2.00 valuation-based price target
for EPM that we've mentioned several times in TSI commentaries over the
past 18 months.
With the stock having recently broken-out to the upside (see chart
below) there is a distinct possibly that this target will be achieved
within the next few weeks, thus creating a profit-taking opportunity.
We would, however, be inclined to maintain some exposure to EPM.
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19th March 2007, Weekly Update
(Stock price: C$1.19)
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EPM
has recently come to life. After trading as low as C$0.88 during the
first week of March, it traded as high as C$1.30 late last week before
easing back to end Friday's session at C$1.19.
We don't know whether the increased speculative interest in EPM is due
to unfounded rumours of a takeover bid for the company; or due to
well-founded rumours of a takeover bid; or simply due to the market
belatedly coming to the realisation that EPM's Kazakhstan-based
gold/copper mine should generate enough cash during 2008 to justify a
higher valuation. Whatever the reasons for the renewed interest in the
stock, we would view a move up to around C$1.40 within the coming
fortnight as an opportunity to take PARTIAL profits. On the other hand,
if the stock were to pullback to around C$1.00 on the back of some
additional sector-wide weakness within the coming month then we would
view it as a buying opportunity.
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17th January 2007, Interim Update
(Stock price: C$0.86)
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We had speculated that an updated
resource/reserve estimate from EPM, calculated using metal prices that
are closer to reality than the 1990s-style prices used in the previous
estimate, would be the catalyst for an upward re-rating of the stock
during Q1 2007. Well, the resource/reserve re-estimate, along with
revised financial forecasts for the company's gold/copper project, was
announced on Tuesday and was -- to put it mildly -- under-whelming.
Whereas we had expected EPM to report a substantial increase in
reserves, the re-estimate showed no increase.
The information contained within EPM's latest press release shows why
it is becoming increasingly difficult to be bullish on gold mining
equities and why it is becoming especially difficult to favour an
investment in the gold mining business over an investment in the metal
itself. For example, using metal price assumptions for gold and copper
that were 60% and 100%, respectively, above the assumptions used for
the analysis completed back in 2004, EPM's updated analysis reveals
only a 23% increase in total life-of-mine cash flow. So much for mining
companies being leveraged plays on metal prices!
The problem faced by EPM is the problem faced by the entire gold mining
industry: over the past few years the overall cost of extracting gold
from the ground has risen almost as fast as the gold price; or, to put
it another way, the gold price has not risen fast enough relative to
other prices to generate significant gains in the profit margins of
gold miners. Some gold bulls claim that this is evidence of gold price
suppression, but it's actually an example of counter-cyclical gold
doing what it should do and has always done: under-perform cyclical
commodities during a liquidity-driven boom.
The trend might have already turned in favour of gold and will
certainly turn in gold's favour once the liquidity trend reverses from
expansion to contraction (as signaled most reliably by an upward
reversal in the yield-spread). Once this happens the business of mining
gold will begin to look far more attractive. In the mean time, when
development-stage companies such as EPM do their cash flow forecasts
they are required to account for all the cost increases that have
occurred over the past few years and only a portion of the metal price
increases. In EPM's case this means accounting for all the increases in
costs that accompanied the rise in the copper price to $4/pound, whilst
assuming a copper price of only $1.30/pound when updating
resource/reserve estimates and only $2.00/pound when doing the most
'optimistic' forecast of life-of-mine cash flow.
If it were possible to do a worse than worst-case estimate of project
economics then EPM's latest estimate was probably it. This means that
the latest figures can be classed as conservative in the extreme,
leaving the company's bankers with a 'warm and fuzzy' feeling but
leaving the stock market less than enthused.
The absence of anything remotely exciting in EPM's latest resource
estimate probably means that the stock will do no better than perform
in line with the overall sector in the short-term.
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11th December 2006, Weekly Update
(Stock price: C$0.89)
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EPM was quite strong on Friday in reaction to a very bullish article at http://www.resourceinvestor.com/pebble.asp?relid=26951,
although general weakness in the gold sector prevented it from
sustaining the break above resistance at C$0.90 (see chart below).
We agree with the bullish outlook presented in the above-linked
article, but if we are given the chance to exit the stock at
C$1.80-C$2.00 within the next 6 months we will probably take it because
there will be significant execution risk until the Varvarinskoye
gold/copper mine is actually producing metal in accordance with its
design specifications.
The EPM warrants (TSX: EPM.WT.A) mentioned in the article were in the
TSI Stocks List until we took profits in May of this year and may be
returned to the List in the future if they become available at a
reasonable price, but at Friday's closing prices the stock offers much
better value than the warrants (the warrants closed at C$0.40 on
Friday, but, in our opinion, would be fairly priced at around C$0.25
with the stock at C$0.89).
The stock is certainly a candidate for new buying at around C$0.90 or
lower in anticipation of an updated reserve/resource estimate and some
additional strength in the gold sector.
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23rd October 2006, Weekly Update
(Stock price: C$0.85)
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EPM
is another cash flow story. In particular, at the current copper price
the company's 100%-owned Varvarinskoye gold/copper project in
Kazakhstan will produce 145K ounces of gold per year at a substantially
NEGATIVE operating cost (assuming copper is accounted for as a
by-product).
EPM announced some good and some bad news last week. The good news is
that the project debt facility has been finalised, meaning that the
company is fully funded through to production, and that a re-estimation
of in-ground reserves is almost complete (this re-estimate should be
much higher than the current estimate). The bad news is that the
commencement of project commissioning has been delayed by 6 months
(from April of 2007 to October of 2007).
On balance the news was good and the stock price bounced.
We continue to have C$1.80 in mind as an intermediate-term target, but
the 6-month delay to project construction has delayed the likely
achievement of this target by a similar amount of time (from the second
quarter of 2007 to the 4th quarter of 2007).
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13th September 2006, Interim Update
(Stock Price: C$0.70)
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EPM's Varvarinskoye gold/copper project in Kazakhstan is scheduled to
begin production in April of 2007. The design production rate is 145K
oz/yr of gold, and this gold will be produced at a cash operating cost
of around ZERO accounting for the 18M pounds/year of copper production
as a byproduct and assuming a copper price of US$2.00/pound. If things
go roughly according to plan, EPM will throw-off huge amounts of cash
beginning in the 2nd half of next year and the stock price will move to
2.5-3 times its current level of C$0.70.
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19th June 2006, Weekly Update
(Stock price: C$0.88)
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Here's a link to the recent European Minerals (TSX: EPM) corporate presentation: http://www.europeanminerals.com/i/pdf/Presentation200606.pdf.
The presentation contains a lot of interesting photos showing the
status of construction work at the company's Varvarinskoye gold/copper
project in Kazakhstan. The bottom line is that Varvarinskoye remains on
track to produce its first gold in April of 2007.
The things we like about EPM are:
1. At its current price the stock is very under-valued based on the
enormous cash flow that the Varvarinskoye mine should generate
2. There is going to be a substantial upward revision to in-ground
metal reserves at some point in the not-too-distant future because the
previous calculation was based on gold and copper prices of only
$375/ounce and $1/pound, respectively.
3. There is huge potential to increase in-ground reserves and resources via exploration in the vicinity of the mine.
4. As a result of 2 and 3 above, the amount of gold that actually gets
produced over the next several years will probably be much higher than
the current 145K oz/yr forecast.
The things we don't like are:
1. 443K ounces (19% of current gold reserves) have been forward sold at $575/ounce.
2. The share structure is terrible (there are 274M shares currently
issued and 416M shares on a fully diluted basis). The share structure
is, we think, one of the main reasons for the stock's relatively poor
performance over the past year.
If the site work at Varvarinskoye remains on track then between now and
next April the stock market will be forced to re-rate EPM. The stock
closed at C$0.88 last Friday and we continue to have C$1.80 in mind as
an intermediate-term target.
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17th May 2006, Interim Update
(Stock price: C$1.07
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A good update on EPM was posted at the end of last week at http://www.minesite.com/storyFull.php?storySeq=3506
Our 12-month target for the stock remains C$1.80.
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15th May 2006, Weekly Update
(Stock price: C$1.17)
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We
have decided to exit the European Minerals warrants (TSX: EPM.WT.A) at
a profit of 175% (based on our October-2005 entry at C$0.20 and
Friday's closing price of C$0.55). We will, however, retain the EPM
stock. Our decision to remove the warrants does not reflect a change of
opinion regarding the intermediate-term upside potential of either the
stock or the warrants, but, rather, a desire to only have one EPM
position in the List in the current high-risk market environment.
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19th April 2006, Market Alert #156
(Stock price: C$1.13)
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Amongst the junior gold stocks in the TSI List, European Minerals (TSX:
EPM) looks particularly interesting at its current price of C$1.13. The
stock market seems to be oblivious to the fact that EPM has substantial
copper exposure (at today's metal prices about 37% of EPM's revenue
would come from selling copper). The stock is no doubt being weighed
down by the large equity financing that was completed last month.
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3rd April 2006, Weekly Update
(Stock price: C$1.09)
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European
Minerals (TSX: EPM) hasn't moved much since we suggested it as a
short-term trade on 27th March (it began the week at C$1.03 and ended
the week at C$1.09). It will make sense for traders to take profits if
the stock moves up to test this year's peak of around C$1.40 over the
next few weeks.
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27th March 2006, Weekly Update
(Stock price: C$1.03)
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EPM's
large equity financing has been completed, so the company is now funded
through to the start of production in April-2007. With the financing
issue out of the way there's a good chance that the stock will resume
its ascent.
Short-term traders could consider buying the stock near Friday's
closing price of C$1.03 in anticipation of a move up to test the
early-February peak, whereas longer-term speculators could consider
buying either the stock or the warrants. There are two series of
long-dated warrants worth considering. The 'A series' warrants (TSX:
EPM.WT.A), which have a strike price of C$1.20 and an expiry date of
April-2010, are good value at Friday's closing price of C$0.37. And the
recently-listed 'B series' (TSX: EPM.WT.B), which have a strike price
of C$1.55 and an expiry date of March-2011, are good value at Friday's
closing price of C$0.28.
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1st March 2006, Interim Update
(Stock price: C$1.05)
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In
order to fund the remaining mine construction work at its Varvarinskoye
gold/copper project in Kazahkstan, European Minerals (TSX: EPM)
announced at the beginning of this week that it is going to be raising
up to US$70M by issuing up to 77M new shares at a price of
C$1.05/share. We assume that this equity financing replaces the
previously announced debt financing and can only guess at the reasons
why EPM's management has chosen to make the change.
The positive effect of this financing change will be a lowering of risk
for shareholders since it will result in the company remaining debt
free, while the negative effect of adding such a large number of shares
to the total share count will be a lowering of the stock's upside
potential.
The company's per-share value has been significantly reduced as a
result of this week's new development. However, an updated reserve
estimate for the Varvarinskoye project is likely to be announced in the
near future and this should significantly boost the per-share value
(the current reserve calculation shows 2.34M ounces of gold and 269M
pounds of copper, but this calculation was based on metal prices of
only $375/oz for gold and US$1.00/pound for copper). Management's
original intention was to announce the new reserve calculation in
January, but this appears to have been put in abeyance while the
changes in construction contractors and financing were arranged.
In this week's press release the company didn't mention whether or not
the change from debt financing to equity financing would result in any
changes to, or the elimination of, the hedging facility announced last
December (the company had entered into an agreement to forward sell 50%
of the first 8 years of its gold production at US$575/ounce). The
hedging facility was a prerequisite of the former debt package, so with
the company no longer going down the debt-financing path there is no
longer a good reason to forward sell any gold. $575/ounce sounds like a
reasonable price right now, but 2 years from now it will probably seem
awfully low.
We see EPM's hedging facility (as it currently stands) as a long-term
negative, but it is unlikely to be a material factor over the coming
6-12 months.
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27th February 2006, Weekly Update
(Stock price: C$1.12)
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European
Minerals (TSX: EPM) announced on Friday that a new contractor had been
appointed to take over the mine construction work at the Varvarinskoye
gold/copper project in Kazahkstan. The work was originally intended to
be done by the troubled MDM Ferroman.
The change in contractors will increase the total construction cost by
US$20M -- from US$125M to US$145M -- and delay project completion by 4
months (the scheduled date for the first gold pour has been pushed back
from December-2006 to April-2007).
We think EPM's management has done a reasonable job of containing the
damage stemming from MDM's delinquency and are pleased that some
uncertainty has now been removed. The project debt facility still has
to be re-negotiated, but in the current environment it shouldn't be
difficult to finance a project with such excellent economics.
The recent weakness in the EPM stock price has created a buying opportunity.
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6th February 2006, Weekly Update
(Stock Price: C$1.25, Warrant Price: C$0.49)
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Fears
that the development of European Minerals' (TSX: EPM) Varvarinskoye
gold/copper project would be delayed by the financial problems being
experienced by its contractor (MDM Ferroman) created an opportunity to
buy the stock in the low-to-mid C0.80s during the first half of
January. The stock price subsequently rocketed up to the C1.40s on the
back of increasing enthusiasm for gold stocks and the realisation that
MDM's troubles didn't materially alter the investment case for EPM. It
therefore almost reached our intermediate-term target of C$1.50 before
pulling back over the past two trading days.
EPM has now terminated MDM's turnkey mine construction contract, an
outcome that could be a blessing in disguise because other gold mining
companies that have employed MDM over the past two years have
experienced cost overruns and delays. Fortunately, MDM's contract at
Varvarinskoye was ended before it had really begun, that is, before
there was an opportunity for the contractor to cause any major delays
or cost overruns. However, there is now some additional uncertainty for
the stock market to deal with because EPM no longer has a fixed price
mine-construction contract.
As a result of the recent price action and further consideration of the
effects that higher metal price assumptions will have on the reported
gold/copper reserves at Varvarinskoye, we are increasing our
intermediate-term target for EPM to C$1.80-C$2.00. A pullback to near
the support shown on the following chart would create a short-term
buying opportunity.
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18th January 2006, Interim Update
(Stock price: C$0.88)
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European
Minerals (TSX: EPM) announced on Monday that it was having problems
with its mine construction contractor. The contractor -- MDM Ferroman
-- appears to be experiencing financial trouble and has, at this stage,
been unable to provide the performance bond required under its contract
with EPM.
In our opinion, the worst case outcome for EPM as a result of MDM's
financial difficulties would be a delay of a few months in the
construction of the Varvarinskoye mine. Such an outcome would not
materially alter our valuation or assessment of the stock.
In the latest Weekly Market Update we said that EPM would be suitable
for new buying at around C$0.92, but as a result of Monday's news it
was possible to do a bit better than that because the stock traded in
the low-to-mid C$0.80s during Monday's trading session and during the
early part of Tuesday's session. It closed at C$0.88 on Wednesday.
There is good support in the C$0.80-C$0.85 range that SHOULD hold on a
daily closing basis (see chart below). We continue to believe that EPM
is a reasonable stock to accumulate near current levels.
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16th January 2006, Weekly Update
(Stock price: C$0.92)
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After
trading as high as C$1.14 during the week before last, European
Minerals (TSX: EPM) has pulled back to C$0.92. This, we think, is a
level at which some new buying would be appropriate. EPM is expected to
announce an increase in its gold and copper reserves later this month,
and although this 'news' should not take the market by surprise it
could, in the current speculative environment, give the stock price a
hefty boost.
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4th January 2006, Interim Update
(Stock price: C$1.04)
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European Minerals (TSX: EPM) closed at C$1.04 on Wednesday. The
chart pattern points towards a move up to around C$1.50, which is the
sort of price at which we'd be interested in taking profits.
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7th December 2005, Interim Update
(Stock price: C$0.90)
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In
Sunday's Weekly Market Update we mentioned that the gold hedge facility
being negotiated by European Minerals (TSX: EPM) would likely have an
average sales price of around US$600/ounce. We thought this was obvious
based on the contango -- the positive difference between the prices of
longer-dated and shorter-dated gold futures contracts -- at which gold
was trading. However, when EPM announced on Tuesday that it had forward
sold 50% of its production (less than 20% of its reserves) at
US$575/ounce the stock price quickly gained 20%, suggesting that a lot
of people were surprised by the high price of the forward sales
contracts. Which goes to show: never under-estimate the inefficiency of
the stock market.
Good news for EPM is likely early next year when the company
re-estimates its reserves based on a higher gold price (the current
reserve calculations are based on a gold price of $375/oz). Our guess
is that this re-estimation will increase the company's stated gold
reserve from 2.3M ounces to more than 3M ounces.
Our intermediate-term target for EPM is C$1.50. Any pullback in the
short-term should hold at, or above, former resistance (now support) in
the low-0.80s.
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5th December 2005, Weekly Update
(Stock price: C$0.73)
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European
Minerals (TSX: EPM) is developing the Varvarinskoye gold/copper project
in Kazakhstan. Varvarinskoye contains 2.3M ounces of gold and 269M
pounds of copper in the "proven and probable" reserve category and is
scheduled to go into production at the end of 2006. The mine is
expected to have annual production of 145K ounces of gold during its
first 10 years of operation at a cash cost, net of copper credits, of
less than US$100/oz.
EPM announced last Thursday that the debt component of the project
financing had been arranged (the equity component of the financing was
completed earlier this year). The salient details of the debt facility
are as follows:
- The amount is US$75.4M
- The first drawdown is expected to occur in January-2006
- The duration of the loan is 8 years, with semi-annual payments scheduled to commence 2 years after the first drawdown
EPM also announced that a lump-sum turnkey contract had been let for
the construction and commissioning of the mine, and that a hedging
facility would be implemented. The company stated in its press release
that the hedge will be in the form of a monthly US dollar flat forward
gold sale over the 8-year term of the debt facility and will be
executed prior to first drawdown of the debt (that is, by January of
2006). It also stated that the gold hedge will represent approximately
50% of production during the term of the debt facility, but only around
19% of the current proven and probable reserves of gold.
There are positives and negatives associated with the aforementioned
hedge facility. The main positive is that the company will be putting
the hedge in place at a time when the gold price is near an 18-year
high, which, given that the expected costs of production are very low
(the cash cost per ounce is estimated to be $130/ounce assuming a
copper price of US$1.00/pound, but would be close to zero at the
current copper price*), means that they should be able to lock-in a
huge profit margin for the 50% of production that will be hedged.
Furthermore, because gold is trading in contango -- the longer-dated
futures contracts are priced above the shorter-dated contracts -- the
prices at which EPM commits to sell its future gold production should
be well above the current spot price. For example, at the close of
trading on Friday the December-2005 gold futures contract was priced at
$503, the December-2007 contract was priced at $555, and the
December-2009 contract was priced at $605. As a result of the contango
the average price on EPM's forward sales of gold will quite possibly be
around US$600/ounce.
A negative associated with the hedge facility is that the company's
leverage to the spot gold price has been significantly reduced. The
main issue, however, is that forward-selling doesn't just protect the
company against a falling gold price; it also creates risks in the
situation where the spot gold price moves well above the current market
price of the forward sales contracts. One risk, should the gold price
move much higher than the forward sales price, is that an operational
problem will prevent EPM from mining enough gold to deliver into its
contracts, forcing the company to purchase gold on the spot market in
order to fulfill the obligations to its hedge counter-parties. Another
risk is that the company's cost of production will rise by so much that
selling gold at the pre-determined rate will result in losses.
We don't plan to become long-term investors in EPM so the possibility
that the hedge facility might cause problems a few years down the track
isn't a major concern for us. We simply view EPM as an under-valued
asset play and expect that at some point over the next 12 months the
stock will be re-rated to bring its market price into line with the
value of its reserves and expected production. At the current gold
price, doing so would require an approximate doubling of the stock
price.
From a technical perspective (see chart below) there is considerable
resistance at C$0.80-0.85, but once through this resistance we suspect
that the price will move smartly up to the C$1.00-1.10 range.
*When copper is
accounted for as a byproduct it means that the money generated from the
sale of copper gets deducted from costs, not added to revenue
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30th October 2005, Weekly Update
(Stock price: C$0.75)
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During
the 4 weeks since we added European Minerals (TSX: EPM) to the TSI
Stocks List the stock price has edged up from the mid-60c area to
Friday's closing price of C$0.75. This is interesting considering that
the HUI has fallen by around 10% over the same period.
The fundamental reasons behind our selection of EPM are outlined at
http://www.speculative-investor.com/new/EPM.html. In a nutshell, the
stock is incredibly under-valued considering that its Varvarinskoye
gold/copper project is likely to be producing gold at the rate of 150K
ounces per year at a cash cost of only US$87/ounce by the end of next
year. Its discount to fair value probably has a lot to do with the fact
that the project is located in Kazakhstan, but given the amount of
money being poured into Kazakhstan by savvy investors we suspect that
this discount is presently way too big.
We think it makes sense to accumulate EPM while it is in the bottom
half of the large triangular consolidation pattern drawn on the
following chart. We also think the EPM warrants that trade under the
symbol EPM.WT.A (NOT the ones that trade under the symbol EPM.WT) are
attractive at current levels. These warrants have an expiry date of
April-2010 and an exercise price of C$1.20. They can be illiquid at
times, but there's recently been decent liquidity in the C$0.18-0.20
range (a price range within which they offer good value).
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3rd October 2005, Stock Selection Update #36
(Stock price: C$0.65)
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Regardless of what happens over the
next 6 weeks there's a high probability that gold stock indices such as
the HUI will be trading far below current levels within the next 6
months. This is not, therefore, the time to be buying aggressively, but
instead a time to be looking for opportunities to take profits. This
will particular be the case if the HUI makes a new recovery high over
the coming month or so, thus setting the stage for another
October-November high and ensuing 6+ month decline.
Having said that, there are many exploration/development-stage gold
stocks that have yet to move much and that offer exceptional value. It
is reasonable to assume that these stocks will take a hit if there's a
sector-wide downturn, but they offer such large upside potential --
both in the short-term if the rally in the overall sector can persist
for just 4-6 more weeks and in the long-term irrespective of what
happens over the next several weeks -- that buying at this time might
be appropriate for those who feel under-exposed to the market.
An exploration/development-stage gold stock that looks attractive right
now from both fundamental and technical perspectives is European
Minerals (TSX: EPM). This stock has been on our radar screen for a long
time, but our concerns about the political risk associated with Central
Asia -- EPM's main asset is located in Kazakhstan -- have prevented us
from adding it to the TSI Stocks List. However, over the past year
we've observed some very smart players in the natural resources sector
making substantial investments in Kazakhstan, the most recent example
being a large uranium venture involving some of the best-known names in
mining finance (refer to http://www.resourceinvestor.com/pebble.asp?relid=13270
for details). We continue to believe that there is significant
political risk in Kazakhstan, but probably not as much as there is in
Russia and in many other parts of the world. We no longer consider
Kazakhstan's political situation to be a 'deal breaker' as far as the
purchase of shares in EPM is concerned.
EPM owns the Varvarinskoye development-stage project, which has proven
and probable reserves of 2.3M ounces of gold and 269M pounds of copper.
The company has about US$70M of cash and is presently negotiating a
US$80M debt facility, the combination of which should be more than
enough to take the project through to commercial production. Production
is expected to commence during the final quarter of next year. The plan
is for the mine to produce 150K ounces of gold per year at a cash cost
of US$87/ounce.
There are about 200M shares outstanding, so at Friday's closing price
of C$0.65 the company's market cap is C$130M (US$110M). Subtracting the
US$70M of cash gives us an enterprise value of only US$40M, meaning
that EPM's gold reserves are presently being valued by the stock market
at only US$17/ounce. This is extremely low for high-quality reserves in
such an advanced-stage project and suggests that there is a very
substantial Central Asian discount being applied to the shares. This,
in turn, creates an opportunity because if Kazakhstan remains
relatively stable and investment continues to be drawn into the country
as a result of its enormous natural-resource wealth, then EPM's shares
will likely be re-rated.
Technically, there is support at around C$0.60 that should limit the
downside as long as the overall sector remains in a short-term upward
trend.
We are going to add EPM to the TSI Stocks List at Friday's closing
price of C$0.65. The stock is fairly liquid (average daily trading
volume is about 430K shares), so hopefully our buy recommendation won't
have a significant effect on the price. However, if the stock does move
sharply higher in response to our recommendation then we suggest that
you put it on your 'watch list' but don't buy it now. There will
probably be an opportunity to buy the stock near current prices in the
future (later this week, perhaps), but if not it doesn't matter because
there will be plenty of buying opportunities in other stocks.
There are, by the way, two series of EPM warrants trading on the TSX.
Of these warrants, only the "A" series (TSX: EPM.WT.A) looks
interesting to us. The "A" series warrants have an expiry date of
April-2010, and exercise price of C$1.20, and with the stock trading in
the mid-60s would be fairly priced at around C$0.20.
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