14 bagger from here - detailed analyis

Hi Guys,

Put the coffee on this is long: but if you want to make lots of money I think it is worth 15 min of your time.


ENVIROGOLD 14 BAGGER POTENTIAL

SOME QUICK HOUSEKEEPING

Just so you know before you read this I have a +10% stake in EVG and I am not a licenced investment advisor, instead just a fellow HCer sharing my work...

BACKGROUND

EVG is a small ASX listed company focusing on developing gold projects in Latin America. It currently has two projects (Las Lagunas in the Dominican Republic and Azuay in Ecuador).

EVG has had several hurdles to overcome in developing its first project, Las Lagunas, including engineering consultant design shortcomings, obtaining financing during the GFC, and problems with their minority (6%) JV partner. These problems are now resolved and EVG is progressing from being a developer to a producer of gold and silver within 12 months.

Due to ongoing delays EVGs share price is heavily discounted (current share price 7.8c for a market cap of $33m) to Las Lagunas NPV and the potential of its Azuay Gold Project in Ecuador.

LAS LAGUNAS PROJECT

Las Lagunas is a tailings project involving refactory gold that remains from a previous, Government owned mining project. It has been purposely stored for later extraction.

EVG won an international tender several years ago to develop the LL project. Using new technology developed by Xstrata (Albion) EVG will extract approx 70.1% of the gold from the tailings over a project life of 6.5 years.

The reserve includes recoverable gold of 421,000 oz (65,000 oz p.a.) and 3.8 million oz of silver (600,000 oz p.a.) that can be extracted for an estimated $334 opex per oz.

EVG will spend USD $36m in building the gold plant, of which $34m is spent to-date. Mac Bank is financing a total of USD $45m and the Ban Reservas is providing a USD $5m contingency facility to build a USD $81m gold processing plant including an Albion processing component.

With project delays finally being overcome first production is expecting in September 2011 (11 months time). Go to www.envirogold.links.com.au to see latest project photos.

As part of the Mac Bank financing facility 50% of the first four years production (126,000oz) or 30% of total gold production will be hedged. Silver will remain unhedged at this point. In addition as part of the finance package EVG has sovereign risk insurance against capital losses (e.g. nationalisation of project) although the Dominican Republic has a sound, Americanised political system.

EVG will enjoy 94% of the JV partnership profits from this project and also earn a 2.5% management fee. Part of the project terms is that EVG is also repaid all of its capital contribution (expected to be USD $36m) from project revenues and will own the gold plant at the end of the project (for a $5m payment to the JV, of which EVG is the principal partner).

AZUAY PROJECT

EVG has created a company in conjunction with two landowners in Ecuador that are currently mining vein style gold over 700 ha. EVG will earn a 65% interest in the company by spending $6.5m in mapping, drilling and feasibility studies.

Consultants have recently been on the properties creating 3D maps and taking tunnel samples. This is to understand the gold mineralisation and prepare for extensive drilling.

Historical drill results have led the consultants to agree that there is likely +1m oz of +10g/t over the properties that could support a 75k oz p.a. production operation.

UPCOMING ANNOUNCEMENTS AND MILESTONES CY 2010

1.Accessing of financing and money flow for LL project Announced 14/10/10
2.Hedging of 126,000 oz of LL gold production
3.Construction milestones and timeline and revised NPV for LL
4.Consultants Report for Azuay confirming conceptual potential for +1m oz of gold
5.Scoping Study for Azuay Project outlining financial robustness and projections
6.Commencement of drilling on Azuay for maiden JORC resource

NPV AND CASHFLOW FOR LAS LAGUNAS PROJECT

Page 9 of the latest Annual Report provides an NPV for LL using inputs approved by Macquarie Bank. This base case, and conservative NPV, shows the following:

Variable inputs (USD)

Hedged price of 126,000 oz gold $1250.00
Unhedged price of 295,000 oz of gold $1010.00
Unhedged price of 3.8m oz of silver $15.34
Exchange rate 85c
Discount rate 10%

Project NPV (AUD @ 0.85c)

NPV $0.26 per share ($112m)*
Project profit to EVG $0.368 per share ($158.2m)
Capital returned to EVG $0.098 per share ($42.3m)

* Based on 430m shares on issue

However, these inputs are conservative and out-of-date. For example gold will be hedged in the coming weeks at the spot price, which is currently USD $1,372 which is 9.7% above the NPV input figure. Likewise, silver is currently trading at USD $24.51 which is 59.7% higher than the NPV input. The exchange rate has also moved significantly and the spot price of gold is currently 36% above the unhedged gold input price.

Assuming the current spot prices for the inputs (gold $1,372, silver $24.51 and the AUD 0.99c) I believe that there is significant upside for the LL project:

(1)Revenue increases $158m in USD/AUD I assume parity
(2)Marginal costs (royalties, taxes, project share with Dominican Government and JV partner) equate to 48.1%*. This leaves an additional $82m for EVG on the NPAT line.
(3)Assuming that this is spread evenly over the project life and with a 10% discount rate this provides an increased NPV of $57.8m.

* Government royalties 3.2%, Government share of operating profit 13.9%, Dominican income tax 25.0%, JV partner share 6.0%

Project NPV (Gold $1,372, silver $24.51 and AUD @ 0.99c)**

(1)NPV $0.355 per share ($152m)
(2)Project profit to EVG $0.502 per share ($216m)
(3)Capital returned to EVG $0.084 cents per share ($36m)

** Note entire NPV has been recalculated using AUD $0.99 instead of the original AUD $0.85

SHOW ME THE BAGS

This is how I believe EVG will become a 14 bagger (capital growth and dividends) in the coming years:

Bag 1

The return of all its capital from the LL project ($36m). Market capitalisation of EVG currently is $33m.

Bag 2

EVG is spending USD $81m on building its LL gold plant including an Albion processing component. The plant is situated in an area prospective for gold and highly mineralised. Several (predominantly Canadian companies) are developing adjacent and surrounding properties. EVG will own the gold plant after the 6.5 year LL project life. I have assumed that this will either be sold for a minimum of AUD $33m or remain as an income earning asset for EVG either via subsequent JV or toll treatment of ore.

Bags 3 - 8

This is the profit returned to EVG over the LL project life using Macquarie Bank conservative NPV inputs. A total of $158.2m will be returned to EVG in profit or $0.368 per share (current SP $0.078)

Bags 9 - 10

This is the incremental profit returned to EVG from LL using the less conservative spot prices for gold and silver but the more conservative current AUD rate. An additional $58m is returned to EVG.

Bag 11

This is from an assumed +1m oz of +10g/t gold on the Azuay properties valued at a JORC level of confidence. From an early CY 2010 report from PIR the average metric for Australian gold transactions is approximately AUD $34 oz, undeveloped. Thus, with 1m oz a value could be prescribed of $34m for the Azuay Project in its early stages.

Bag 12 - 14+

This is from the assumed development of the Azuay Gold Project into a 75k oz p.a. high grade project of which EVG will hold a 65% interest in.

CONCLUSION

I believe that EVG is well placed in terms of its company life cycle in a very good sector and will enjoy significant profits over the coming years as it ramps up its two existing projects and develops more. I think a multi-bagger is well and truly feasible from here and not blue-sky-dreaming.

FINAL NOTE

In the true spirit of HC this is shared with others to allow an opportunity to at least become aware of this opportunity. Your own research is obviously required. However, if you thought this was useful, please thumb it up and maybe it will appear on the main page, thus allowing other, fellow HC�ers to at least become aware of EVG.

Cheers
John