European Goldfields

European Goldfields is a precious metals company with properties in Greece and Romania, with proven and probable reserves of 10mm oz of gold and 18mm oz of gold equivalent. The company generates cash flow from its 95% owned Stratoni operation, a high grade lead/zinc/silver mine in Northern Greece. The real reason to own EGU however is that the company is set to evolve into Europe's largest precious metals producer once the company obtains its final environmental approval and construction permits from the Greek and Romanian national governments. Having already obtained financing for mine construction, EGU could be producing 400k oz per year by 2013 at the lowest quartile cash cost in the industry with zero hedging in place.

The company has said that the Greek permits are imminent Q1/2011, although on Feb 24 Environment Minister Tina Birbili was mis-quoted by Reuters as saying that there needs to be more public consultation over the mines. Separately, the European Commission said that a 2003 sale of the mines by the Greek government was made for less than real value. After investigation they ruled that EGU would have a $21mm liability related to the sale. As for the first concern, the company is unaware of any delays in the permitting process and the translation from Greek to English was a problem with the Reuters article. Regarding the second, strategic holder Ellaktor will appeal the court ruling, although it will not likely make a difference given EGU's $2.17B market cap.

As Michael Lewis noted in Vanity Fair, Greece is an oddball place to do business. Rampant corruption, tax evasion, bribery, and a government that is essentially bankrupt all add to political risk. Luckily, EGU has a key strategic partnership with Ellaktor, a leader in southern European construction and one of the largest employers in Greece. Ellaktor holds 19.3% of EGU as a long term strategic holding. Given the country's high unemployment, precarious financial position, and strategic holders in the project the likelihood of approval is increased.

Based on conservative gold and base metal assumptions, EGU has a NAV in the $20+ range should the company receive approvals. Under a worst case scenario all approvals fall through and the company's vast proven reserves are given no value, the company is worth the value of its Stratoni mine, maybe a buck or less. Under a best case scenario the company receives approvals and has exploration success much like its recent high grade results at Piavitsa. The company will trade at NAV or a slight discount to NAV until Olympias reaches production. EGU management still guides that Greek approval is imminent, so a re-rating from the current $11.81/sh to the $18-$20 range in the next 3-6 months is not out of the question depending on what multiple the market wants to assign. As a vote of confidence insiders bought 60,000 shares on March 16th.

The Canadian options market is horribly illiquid, so it may take some time to buy calls and they wont be terribly cheap. I like buying calls because in a worst case scenario the EGU could fall considerably, but should the more likely outcome occur (permitting) a long call strategy provides a better risk/return. The July 15 calls went out at 0.65, Greek permitting should be in hand by then and Certej in Romania should be through its public consultation period.