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Gold is where you find it

Bob Moriarty
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

321gold Inc

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