Research Summary for Energold Mining Ltd. - written by Mike Kachanovsky

I am pleased to share my summary of research for an interesting junior mining company, Energold Mining Ltd.  The company is leveraged to the upside of a major discovery through the exploration interests, subject to participate in a possible bull market in silver through the 100% interest in a Mexican silver project, and remains a low risk play due to the profits generated through their interest in a drilling division.  Investors can almost regard Energold as a self contained mutual fund offering a limited risk option to participate in the upside potential of the junior precious metals sector.  I own shares in Energold Mining.

Overview

Energold Mining is a well-managed, active player in the robust junior exploration sector.  This company is unique in its approach to creating value in the sector, offering investors some diversification in its interests with exposure to a late stage silver development project in Mexico, partial ownership in a profitable and growing drilling division, and partial ownership in a junior exploration firm with assets in grass roots exploration properties.   The company is listed on the TSX-Venture exchange (EGD) and can be accessed through the Internet at   www.energold.com  .   As of September 30, 2003, the company had a share structure of only 16.9 million shares fully diluted.  On March 18, 2004 the company closed a private placement equity offering of 1 million additional shares and 500,000 warrants.  The result is a company that is well financed to aggressively pursue ongoing exploration initiatives, yet has a small market capitalization and limited overhang of cheap paper to be sold off into the market.

The core asset for Energold is a 100% interest in the Real de Belem Project in Mexico, a late stage exploration property that is currently under development to begin mining silver.  The company has an option to purchase the project once the mine is fully permitted and operational.  Energold maintains a 50% interest in the Kluane International Drilling, a profitable subsidiary that provides contract drilling services.  The company also maintains a controlling interest in Impact Minerals International, which trades on the TSX-Venture exchange (IPT).

Properties

Energold holds an option to purchase a 100% interest in the Real de Belem silver project in Mexico.  The option is set up with Energold loaning the owner of the property $1.5 million to fund the development to the mining stage, at which point Energold may purchase the entire project for an additional $5 million.  Earlier exploration work on this property identified a series of high-grade silver and gold veins with assays returning an average of 2,175 g/t silver and 1.2 g/t gold.  At current precious metals spot prices with gold at $420 and silver at $8 this infers a gross metal value in excess of  $500 per ton.  It is significant to note that drilling only extends to 75m, and much of the property has not seen modern exploration.  Through the addition of recent staking, the claim has been increased to nearly three times the original size, as additional veins and historic mining activity have been identified.  The potential to expand the known strike length beyond the current 500m estimate and at depth, could increase the size of this high-grade resource substantially.   A 1500m drilling program has been announced to commence in April 2004, to verify the previous exploration work and test the newly identified mineralized zones.  The results will also allow for resource grade estimates to be published under the standards established for Canadian mining companies NI 43-101.  The property is currently permitted for a 200 tons per day mill, and has essential infrastructure in place, including road and power access, and a 120m underground decline access to the deposit.

The company is also one of the largest landholders in the Dominican Republic, controlling 11 properties including the El Higo concession, and the Longyear concession, each having high-grade occurrences of precious and base metals identified through surface sampling, geophysics surveying and trenching work.  Energold has opted to pursue joint venture agreements with other junior companies funding exploration activity to earn their interest.  Exploration work is currently underway on the Longyear concession with MinMet funding $1.5 million in exploration activity to earn up to an 80% interest if carried all the way to a feasibility study, and the El Higo concession with MinMet mining whereby Minmet has agreed to fund $1million in exploration activity to earn an 80% interest if Minmet funds activity all the way to a feasibility study.  This property has already yielded a drill intersection of 18m grading 14.28 g/t gold, and up to 300 g/t silver.  A recent transaction announced by MinMet has transferred the interest in these properties to a subsidiary to be traded on the TSX-Venture exchange, Wellington Cove Explorations.

Subsidiary Companies

Kluane International Drilling is a 50% owned subsidiary offering contract drilling services.  The current bull market in precious metals has led to renewed interest in exploration activity worldwide, and provided an excellent opportunity for firms specializing in drilling.  The drills operated by Kluane fill a niche in the marketplace as they are light, portable, efficient, and able to operate in extreme topography with minimum disruption to the environment.  As much of the exploration potential shifts to remote regions of the world, this type of drilling will become more in demand.  To service this market Kluane continues to invest to build their drill fleet and improve the design features.   The drill fleet currently includes 14 drill rigs, and plans are in place to increase this number, with discussions underway to lease drills directly to other companies.   The drilling interest yielded a profit of $433,973 to Energold through the first 9 months on 2003 (3 cents per share).  Kluane already has contracts in hand for more than double the entire drilling completed in 2003, and has working arrangements with several major exploration firms in various regions around the world.  A new joint venture agreement in China will allow Kluane to earn an interest in a gold property through providing drilling services to the Chinese exploration partner, and ensure that Kluane gains an active presence in one of the highest profile exploration regions of the world.  This company appears to be headed for greater profitability in future quarters, and is gaining market share and establishing a presence in the most actively explored regions of the world.

Impact Minerals controls a number of properties in the Dominican Republic and the Caribbean Basin.  Energold owns a controlling 46.7% interest in Impact.  The various properties are considered grass roots stage and have undergone limited exploration.  On the El Brujo and La Bruja concessions, drilling identified a copper/gold porphyry structure, and soil sampling indicates high-grade gold and silver potential.  The properties are strategically located near other major precious metals deposits in the area, and offer significant upside potential through further exploration.  A joint venture agreement is in place with MinMet for ongoing exploration work on the Bacco Y Ofir concession, allowing MinMet to earn a 51% interest in the property.

Outlook

The diversified interests of Energold will allow investors the opportunity to achieve gains through significant new discoveries on their properties, while maintaining a lower risk profile than can typically be found in the junior sector.  The strategy of seeking joint venture partners provides upside potential to new discoveries without the funding drain on the resources of a small junior explorer.  The option for the Real de Belem project in Mexico could add a producing high-grade silver mine with significant exploration upside.  Kluane Drilling yields profits to help fund additional activity or acquisitions, and is itself growing in a strong sector.

The fundamentals driving the precious metals bull market suggest that current gold and silver spot pricing can not only be maintained, but in fact will continue to increase.    In particular it appears that silver will see rapid gains throughout 2004 with the potential that demand will consume above ground silver supplies, and a large speculative forward position exists that may have to be closed out at higher prices.  Companies that control large silver deposits or operating low cost silver mines will be the beneficiaries of this possible market outcome.  As pricing continues to improve, consolidation will occur among the limited number of primary silver producers and junior explorers.

Given that the company anticipates more than double the revenues from the drilling division in 2004, Energold could post record earnings in excess of $1 million.  Factoring in the dilution from the most recent financing that would still yield roughly 5 cents per share in earnings, and put Energold in very select company among junior explorers.  These companies typically trade on a premium based on contained resources in their holdings, or on projected future cash flow from mining activity.  While it is entirely possible that a new discovery will occur on one of the Dominican Republic properties, this must be regarded as an upside bonus for the purposes of speculation.  The dominant asset that will dictate the future value for Energold remains the Real de Belem Project.  Even if gold and silver prices do not continue to increase from the current range by the time this mine goes into production, 200 tons per day at $500 per ton yields revenues of  $100,000 per day.  Funding requirements and the necessity to raise the capital for their option on the property will probably result in some dilution going forward, but in all probability Energold should finish 2005 with profitable drilling and mining operations and a low number of shares issued. 

It is difficult to arrive at a realistic target price for Energold.  A number of variables can be plugged into the calculations, which would result in a wide range of expectations.  These would include the size of the deposit in Mexico, as further drilling at depth and along strike, and across parallel vein structures outlines the extent of mineralization;  the cost per ton of ore that is processed and the resulting profit margins;  the growth potential of the drilling operations at Kluane; the possibility of additional acquisitions of properties in Mexico and the Caribbean; the price of gold and silver;  the willingness of investors to assume more risk or aggressively pursue opportunities in the junior precious metals sector.  Each of these factors could increase the multiple that one could assign to the share price that EGD will trade at.  Nevertheless it is apparent that at the current price range Energold is undervalued compared to the peer group of  junior exploration properties.

Taking the operations individually, Impact has a market capitalization of approximately $3 million fully diluted, with the value of the Energold interest approximately $1.4 million.  Kluane International Drilling could contribute $1 million in profits to the bottom line for Energold, and with a 20 times earnings multiple would account for $20 million in market capitalization.  The Real de Belem mine project could become a producer of 2500 ounces of gold and 4.5 million ounces of silver per year.  A conservative market capitalization for a junior producer would be in the order of $50 million.  Adding the three divisions one could assume a potential market capitalization for Energold Mining of $71.4 million.  With the expected dilution to raise funds for ongoing operations and settlement of the purchase option for Real de Belem, a share structure approaching 30 million fully diluted is reasonable.  This would infer a target price for EGD of $2.38 by the end of 2005, or approximately a 400% increase from the current share value.

To provide a balanced outlook one must also consider the risks.  There is no certainty that the pricing trends for gold and silver will continue into the future.  If a sharp decline occurred in both metals the profitability of the mining projects would be in jeopardy, and the appetite of investors to continue to participate in junior companies, or to fund exploration and development through equity offerings would be reduced.  Such a decline would also affect the profitability of Kluane Drilling.  There is no certainty that additional ore resources will be discovered in economic grades at Real de Belem to support a long-term mining operation.  Energold shares have been thinly traded and largely ignored by investors.  While this has translated into a current buying opportunity, it may also continue into the future resulting in difficulty securing additional financing or contributing higher dilution in shares offered.

Given that Energold has opted to pursue exploration of their properties through joint venture agreements, and that the company has managed cash reserves effectively, and continues to generate revenues, one could make a case that there are substantially lower risks for investors to participate in the sector by investing in Energold shares.   If one accepts the assumptions made earlier regarding the potential upside within 18 months, then an investment in Energold at current prices will offer above average gains potential with below average risks.

Disclaimer:  I have made my research and opinions available to the public as a resource to provide investors and the public with basic information.  My comments and opinions should not be interpreted as a recommendation or investment advice, which I am not qualified to provide.   While I have made every effort to maintain accuracy in the information I provide, it is possible that there are some errors or omissions in my coverage and the accuracy cannot be guaranteed.  It remains the responsibility of each individual investor to confirm if the subject of my analysis is appropriate for their investment objectives, and to conduct their own research and due diligence, and retain the services of a qualified advisor on to provide this service on their behalf.  I accept no responsibility for the performance of the companies that I feature in my coverage.  Junior mining and exploration companies are a risky market sector and investment in these companies can result in loss of capital.  Past performance is no guarantee of future success.  From time to time I may purchase stocks in the companies I feature in my reports, and I may sell some or all of my holdings.  I will disclose personal ownership in those companies that I refer to at the time of my first coverage, or after follow up reports.  I do not accept compensation from companies as payment to provide positive coverage or opinions