Euro.Mins. Share Discussion Threads

[ukdavec] 22/4/2008 08:51

Just another opinion....


www.jameswinston.com

European Minerals to Acquire Lero Gold

On Friday morning I received news that European Minerals intends to acquire Lero Gold. At first I was upset. Actually very upset. I kept reading the news release and then after hearing directly from Lero Chairman Dr. Sergey Kurzin, I couldn't be happier. This is going to be a huge win-win for both European Minerals and Lero Gold shareholders.

You may recall I mentioned Kurzin's name when I introduced Lero Gold to you back in February. Kurzin was the primary reason I took a hard look at Lero. Kurzin means strong management.

Following Kurzin is like following the money. Over the years we have profited handsomely with his winners.

Dr. Sergey Kurzin is a Russian-born research engineer who moved to the United Kingdom in 1990 and has played a key role in initiatives to acquire and progress several important Former Soviet Union (FSU) mining assets. These include Julietta (a high grade gold deposit in Magadan, Russia with Bema Gold), Kupol (a high grade epithermal gold deposit in Chukotka, Russia, also with with Bema Gold.

One of our best winners last year was UrAsia Energy which morphed into Uranium One. It was another triple digit winner that went from pennies to dollars in just a matter of months. A key player in that deal was Kurzin, who seems to have a unique talent for sniffing out high potential resource projects in the former Soviet Union (FSU) countries.

Kurzin was also a founder of European Minerals, back in 1995. However the management of EPM was left in other hands. The current management needed some additional expertise to help get the Varvarinskoye gold and copper mine running smoothly. The company also needed a cash injection before they could themselves move into a cash flow positive position.

Hence an opportunity arose where Kurzin and his team will take over the management of European Minerals. The win for European shareholders is that the grossly undervalued Varvarinskoye mine will reach its potential faster: 149,000 ounces of gold and 25 million pounds of copper per year. By year end, their goal is to reach 99% capacity from the mill which will generate an annual cash flow of $250 million.

The existing European management team was having difficulty in getting their mine into production. That's why I was more then a little shocked at the headline that EPM was intending to acquire Lero Gold.

However now I'm greatly relieved.

As for Lero shareholders - well again, in just three months another Kurzin deal has done well for us. We're up about 80% so far and we'll no doubt have another triple digit winner on our hands shortly.

The immediate objective for Lero is to advance their Taldybulak copper/gold property in Kyrgyzstan this project toward a Definitive Feasibility Study (DFS).

Lero should soon have an initial resource calculation ready, a 43-101 compliant report, which by my math will be a huge step towards outlining a 10 million ounce resource at Taldybulak. Oh, and add in almost 2 billion pounds of copper.

The win for Lero shareholders will be that they can take part in the cash flow and further development of the Varvarinskoye project while the Taldybulak project advances.

Details of the Acquisition (from the press release)

Under the terms of the Acquisition, Lero shareholders will receive one common share of EMC for each issued share of Lero, representing a value of C$0.98 per share based upon the 20-day volume weighted average price of EMC on the Toronto Stock Exchange (the "TSX") for the 20- day period leading up to and including April 17, 2008. This represents an 9% premium to Lero's 20-day volume weighted average trading price based on the 20-day volume weighted average prices of EMC and Lero shares on the TSX and TSX Venture Exchange, respectively.

Subject to receipt of required stock exchange approval, following the completion of the Acquisition, EMC's shares will continue to be listed on the TSX and admitted to trading on the AIM market of the London Stock Exchange ("AIM").

The combined company will focus on regional consolidation and growth opportunities in the countries of the former Soviet Union. Some of the salient terms of the Acquisition and characteristics of the combined company are set forth below:

• Upon the closing of the Acquisition, Dr. Sergey V. Kurzin, currently Chairman of Lero,
will join the board of EMC as Executive Chairman, together with Dr Alexander
Yakubchuk (currently Chief Executive Officer of Lero) and Mr Takhirzhan T. Baratov
(currently the chairman of EMC's Kazakh subsidiary, JSC Varvarinskoye).

• At the next meeting of shareholders of EMC following the closing of the Acquisition, the name of EMC will be changed to Orsu Metals Corporation ("Orsu").

• Concurrent with this announcement of the Acquisition, Lero announces a C$40,000,000 "bought deal" financing with Canaccord Adams Limited, details of which are set out below. Of this financing, US$25 million will be lent by Lero to EMC (the "Lero Loan") prior to closing of the Acquisition on the terms outlined below.

• Endeavour Mining Capital Corp. has agreed to provide a US$5 million bridge loan to
EMC for working capital purposes to be repaid upon the completion of the Lero Loan.

• EMC is currently commissioning the Varvarinskoye gold/copper project in Kazakhstan where commercial production is expected to be achieved by the end of Q3 2008. At steady state production the mine is expected to produce 149,000 ounces of gold and 26 million pounds of copper annually in its first three years of production.

• As previously announced (see EMC's press release dated 31 March 2008) EMC has appointed an independent engineering company to undertake a scoping study to engineer the expansion of the Varvarinskoye plant throughput beyond the currently planned 4.2 million tonnes per annum.

• Lero is currently exploring the Taldybulak Talas gold copper deposit in Kyrgyzstan and is also exploring at the Karchiga copper deposit in western Kazakhstan. Lero expects to announce National Instrument 43-101 compliant resource estimates for both properties by the end of April 2008.

• The board of directors of Lero believes there is substantial exploration upside at their Taldybulak Talas and Karchiga deposits and also within EMC's three square kilometer mining lease for Varvarinskoye and surrounding 220 square kilometre exploration
licence.

[ukgeorge] 21/4/2008 20:40

P bear
other shares that i rate as interesting, good value/risk/reward.
i've got some aricom (ore) which i think you post on so you know those
i also bought a few amur minerals (another hambro) as dont mind sitting on them for a couple of years
i've been buying a few srb recently as think they have bottomed, also they have cash in the bank and should start to increase production.
hmb aswell, although they have a bit of a shoddy mine plan they seem to just get on with what they say they are going to do unlike these.
yamana yau and hochschild hoc are two others that i rate even though they aren't juniors still think they have a lot of blue sky potential and not so risky as the juniors.
got a few other juniors clf,cey which have held up well.
another gold share that has come to its 200 mda is KGI but dont hold any of those but based in canada and seem quite sound.
what do you rate at the moment

[chrismisson555] 21/4/2008 15:25

the professional 500 shorter is back again driving down the price.

Hope Lero have some good news tomorrow otherwise we are going sub 40p very soon.

[chrismisson555] 21/4/2008 15:14

Down we go again.

[chipperfrd] 21/4/2008 15:05

More from Minesite ...

[chrismisson555] 20/4/2008 16:33

Although very annoyed by these developments I do see some light with 'Randy Reinhard' sorting things out we should be up and running sooner than end of 3rd Quarter considering we are already at 60%.

If the resource estimates for Lero are good then I would hope we could be back to $1 by the end of the month and hopefully set a base around that.

Surprises me that no other company was interested in such a cheap price despite the capital costs the resources are still in the ground and we are looking at possible upgrades.

All in all I will continue to hold but will not add until further news has been released.

Have to say that the minesite article is very negative on EUM considering it was very positive only three weeks ago.



1.but presumably Mr Kurzin would prefer them to stay in London's plush W1 district, rather than get under the feet of Randy Reinhard in Kazakhstan. Mr Reinhard is the "fixer" from Oriel who is going in to iron out the bugs in the Varvarinskoye operation: FINALLY

2.

[donaferentes] 20/4/2008 13:12

Interesting to hear Kurzin's further comments on his Minesite presentation on Tuesday.

I also hope a new NOMAD is announced Monday without delay, so we can have suspension lifted.

[strow] 20/4/2008 10:44

Seems on further reflection that all they are saying is that the plant is currently working at 60% of full capacity-well we knew already that they were building up to full capacity,so that is no suprise at all,although 60% currently is actually a little further ahead than i imagined they were-they make it out to be a disaster though-maybe they are referring to a disaster in relation to the original plans-perhaps,but we all know and have done for a while that the project has been put back by some 6 months,so hopefully that is now priced in-the article implies that this will be a very good deal for eum and it really does seem to be a good short and longer term solution to their current difficulties

[strow] 20/4/2008 10:25

Cash flow positive at 80% capacity-i should bloody well hope so! its meant to be a bit more profitable than that-takes me back to my headgrade comment on stockhouse
That minesite article makes out that there are more significant problems going on than we are aware of -david deslauriers made comments to the effect that they should be producing gold oz with effectively negative costs due to the copper credits-was this all pie in the sky??
Chip-whats your take on that article?

[chipperfrd] 19/4/2008 17:46

Must admit that I have struggled to try and build a model for EUM that I have any confidence in.

I still cannot reconcile their target 22m lbs Cu pa with their processing, grade & recovery numbers - I get a figure more like 38m lbs at full production. Similar workings on gold work out at around the 150koz pa that they predict, so it is obviously only an issue with the copper. Things should become a little clearer once they are able to report steady-state production figures.

I will also be interested to see what level of tax they actually pay bearing in mind the significant capex that they have sunk in this project. Will they set against losses or will there be a straight depreciation!

All that aside, given the higher pool of shares, this still looks ok over a 12-18 month period, as long as copper and gold maintain a reasonable price level. I estimate that the project has a roughly 2:1 ratio with gold, so a continuing gold trend could be very positive for the bottom line (but the converse is also true of course!).

Even though the upside from Varvarinskoye will be reduced by this latest dilution there would still appear to be a reasonable prospect of a healthy return by the end of 2009 (aimo of course).
Chip

[donaferentes] 19/4/2008 16:21

strow - please edit your post 724 to disconnnect "-MIGHT" from the link - then it links. Thanks.

edit: chip beat me to it I see.

thanks everyone for excellent posts and links.

seems like Lero mgt may be good corporate traders - build an asset fast and sell at a reasonable multiiple, if less than the ultimate potential. fees etc spinning off to them on each turn plus residual interests no doubt maintained will grow their personal value somewhat greater than PIs. But we will at least have the prospect of some return. At $5 within another 3 years, that's a 5+ bagger for me over an average 4.3 years - 45% pa compound growth is not bad.

I remain curious as to either why EUM did not require its own new NOMAD to get this far in negotiations or/and one was not lined up to take over seamlessly without suspension. Gives a clue as to who is driving this deal IMHO.

Curious as to what Monday brings.

[strow] 19/4/2008 15:45

P Bear-is that really eums problem though-they get paid for the goods inside the country-what happens to them after that is not their business-are their contracts not based on lme spot prices? The export tax should not therefore effect them

[p bear] 19/4/2008 14:56

Oh and to put a cheery on the cake, let's not forget the news that the Kazakh finance minister announce yesterday he will be adding another (at least) 10% export tax on metals from Kazakhstan.

[p bear] 19/4/2008 14:55

Chip

> if they can take oriel from 20p to £1.10 in the timescale they did

Don't forget they took Ori from a 90p IPO listing to almost 5p first before they took it to 1100. From 20p they asked all old gang to put some cash in -it hung in the 50-70p range for almost a year before the £1.10 which was daylight robbery (note the price of Ni and Cr increased about 5fold in the same period. So not really that impressive).

$5 a share is my ultimate target too. However I am now less optimistic.

[strow] 19/4/2008 13:31

Chip clearly the deal will dilute nearer term eps for 2009/10-i think thats right as its unlikely the lero projects will be up and running by that point,but looking further out the deal should be earnings enhancing for a number of reasons-i think that they sort of have run here before they are walking,but the additional management will have a major input into the varynivoske ramp up and im sure will push for a much more aggressive ramp up plan than would otherwise have been the case-i am hoping at some point in the future for the combined entity to crack $5 a share,and i think if they did not sell it on that could be achieveable even with 552 m shares,assuming there will be no more dilution in the future-the plan makes sense to me and they could always make a play for andash as per aur once the dispute is resolved??
My ultimate target of $5 per share would require $250m cash flow per year,but that should not be impossible in due course with the expansion plans-as usual the people that will be the most fed up are going to be those out for a fast buck-if they can take oriel from 20p to £1.10 in the timescale they did,then i would be happy with a repeat performance here,and they had nothing like the same back up cash flow to play with re oriel

[chipperfrd] 19/4/2008 11:22

adam,

I agree with all that!

FWIW, I reckon the new fully diluted shares in the new combined entity at circa 552m (until the next deal!).

[adam] 19/4/2008 10:33

I sold my remaining 2010 warrants recently. It is a shame that banks often require hedging pre-production, really this destroys so many miners. You can understand the logic, but it is apparent that the risk to delays in start up are as least as great, if not greater than the downside risk to the commodity price. I think I will revisit in a few months time and look at the value in the ordinaries.

I made a great deal of money on ORI, so respect Kurzin but he looks after himself - we are along for the ride. He is reintegrating Lero as it was formerly a spin out from ORI as was EUM itself. The assets he brings with lero are not much given he is getting a quarter of EUM, but that is the price of an emergency fund-raising. If you took the view that the Lero assets are immature and of little value then imputes a C$142m value for EUM (i.e. 28% @ $C40m -> 100% @ C$142m)

EMC shareholders will own approximately 81% of the combined company (72% including the shares to be issued pursuant to the Offering (as defined below)

That's a cheap entry price!

OK. On the plus side shareholders are getting some Krgystan assets and some Kazakh assets where there will be a 43-101 soon, but it is early days and you have to discount heavily. EUM on the other hand is in production!!

Also Kurzin is clearly a mover and a shaker in the former soviet republic, and you can add some value for that, but still, I find the deal disappointing.

Why did they not do a heavily discounted rights issue? At least then shareholders could have avoided dilution - ok the warrant holders like me would have been screwed, but so that goes with the territory of derivatives

What did Charlemagne Capital say?

[ukgeorge] 19/4/2008 10:25

yeah im hoping the management (new) really get things going. after all the manegement over last 4 months have done nothing and IR even less.
Tony williams has a few other companies and his mind is on those. If these guys are dedicated and act fast and have all these dodgey russian mates maybe we will get some where quite fast.

[chipperfrd] 19/4/2008 10:21

I suppose I am a bit miffed about this new development for very personal reasons!

Yesterday morning I spent a lot of time trying to reconcile my spreadsheet model of EUM following their latest RNS. Having finally worked through it all I switched back to the market in time to find out about this merger.

So basically, all the numbers have changed again (doh!!) and my sheet now needs another work over.

I find it difficult to ascribe much value from the LERO assets, especially as Gold Fields have rights to 70% of the most advanced of their projects. Hence, I see this deal as essentially dilutive of forward EPS and therefore likely to lower my own forward targets for 2009/2010, etc.

However, as the new management being inserted into the new joint entity are such deal brokers I tend to the view that we are likely to see more fireworks ahead.

My holding here is a fairly small part of my overall portfolio of mining stocks so I am minded to hang around and see how things develop.

Chip

[strow] 19/4/2008 10:15

Yes-for some reason i do feel quite excited about this-i dont think we have been quite as shafted as would appear at first site-i think the penny will drop soon-there does seem to be huge potential with this takeover of lero

[chipperfrd] 19/4/2008 10:06

Cheers strow,

They do appear to be deal makers don't they?
I have re-posted your link here ...

[strow] 19/4/2008 09:54

Thanks chip-Sorry this wont link in,but its a very very good article on lero-go to the web site an then into archives-the one on lero is a few down the page-looks very very interesting!

[strow] 19/4/2008 09:52

ALSO BE OF INTEREST