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The Gold Stock Strategist analyzes leading junior gold producers and major gold mining companies.

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Sunday, April 20, 2008

European Minerals Merges with Lero Gold to Form Orsu Metals

On another front related to execution risk in junior gold miner investing, European Minerals (in which I own a large number of warrants, OTC:EPMWF) announced that they are merging with Lero Gold (TSX:LER, OTC:LERGF). This arrangement is curious for several reasons, the most interesting being that Lero is issuing more shares before the deal is closed in order to raise capital for European Minerals to pay off it's creditors about $25 million.

European Minerals (TSX:EPM, OTC:EPMCF) was renegotiating loans and had not planned to run out of money. They couldn't produce the gold they promised and had pre-sold at $574 an ounce, So, they ended up buying gold at almost $1,000 an ounce to cover the "hedge." Even worse, these financial details ended up being released two weeks later than planned.

In essence, European Minerals had miscalculated their credit situation, overspent, and underachieved on production. The result is that current European Minerals management will be replaced by Lero Gold officers who are also bring in outside managers with a history of successfully executing production milestones. I intend to hold my European Minerals warrants, despite the dilution of this project. The new company will be called Orsu Metals. In addition to Varvarinskoye, European Minerals’ key asset, Orsu Metals will have Lero's advanced exploration stage gold and base metal projects in Kazakhstan, Kyrgyzstan and Russia.

Another twist to the European Minerals saga is that the Kazakh government is considering custom duties on exports of metals The export duty is purportedly to be designed to offset the planned cut of corporate income tax and that the duty would be determined once the new corporate income tax was determined.

I still think European Minerals has the potential to be a strong play. However, any runup has been deferred until they can prove the ability to execute on production and manage credit more responsibly.

No comments:

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