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European Minerals

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By Bobwins

Posted: Thursday Aug 30 7:19:22AM 2007

EPM is my 2nd biggest gold position. I have mostly the long term warrants mentioned in the article. 2010 maturity for the A warrants with C$1.20 strike price. Bought some yesterday for C$.46,they are selling this morning after article for C$.53. Near term production with big copper and gold production. Negative production costs for gold after copper credits. Nice two metal play with significant upside. If EPM goes to C$3, my warrants should be worth 1.80 to 2 by mid 2008(after Q2 full qtr production is published). More potential down the road as EPM has long mine life and can use early years cashflow to finance doubling mine production capacity. Bobwins Overlooked Bargain Mid-Tier Gold Producer Begins Production in December By David J. DesLauriers 29 Aug 2007 at 08:48 PM GMT-04:00 TORONTO ( -- We alerted readers to European Minerals [TSX:EPM] in December of last year when shares were trading at 84 cents. Today they can be had for C$1.26, off, along with everything else, from a 52-week high of C$1.59 at the beginning of July. We consider this price range to be incredibly cheap given that EPM is just a month and a half away from production. The long life warrants on the story that expire in 2010 are even better leverage to this play - we will get to that later. The first order of business is to review the numbers, because they tell the tale. Low Cash Flow Multiple & Steep Growth Profile The following is a repeat of the numbers that we showed readers in December. They haven’t changed, and they are still equally impressive. Indeed, that is probably the reason that EPM shares are up 50% since our December article, while the HUI is down 7%. We are repeating many of the things that we stated at the end of 2006 because they are still true, and the inherent value and high potential returns still exist - in fact, more so than ever given that European Minerals is less than 2 months from joining the ranks of the mid-tier gold producers. “Starting in October 2007, EPM will produce over 140,000 ounces of gold, and 40 million pounds of copper per annum.” “We estimate that incorporating European Mineral’s hedge at $575 on 75,000 ounces of production, and using metal prices of $625 gold, and $2 copper, EPM will cash flow $120 million in 2008.” That is equivalent to 43 cents per share. At current metals prices, EPM would cash flow $186 million or 66 cents per outstanding share. On a gold-equivalent basis with copper considered as a credit, EPM is producing gold ounces, much like Alumbrera, at a cost per ounce which is negative by several hundred dollars! “What makes this story even better is that based on metal prices and the company’s substantial reserves, the plan would appear to be that EPM will double production in Yr 3 after a small boost in Yr 2. The year 2 boost would take gold production up to nearly 200,000 ounces per year with copper output remaining roughly flat. But the Yr 3 increase should see gold output expand further to 300-350 thousand ounces per year, with copper output of 80-100 million pounds.” That increase could all be financed out of cash flow, and would take cash flow per share numbers right through the roof. Not only this, several hundred million dollars per year worth of cash flow per year and nearly 6 million gold equivalent ounces (plus outstanding exploration potential remaining all over the property) make EPM a takeover target all the way up the food chain to the Barrick’s of this world – this is big enough for the majors.” So what’s the best way to capitalize on this? The A Warrants European Minerals has a series of A warrants [TSX:EPM.WT.A] which expire in April 2010. They closed today at C$.45. With an exercise price of C$1.20 per share, these are EPM’s best series of warrants. Further, with the long life, we believe that this is the best way to play EPM. The leverage versus the stock is substantial and in our opinion, performance in the warrants should be double that of the stock in the scenario which we envision. We made the same recommendation in December, and in the intervening period the stock has actually performed better - up 50% versus 21.6% for the warrants at today’s close price. But the reality is that anyone who wants size would have to pay over 50 cents right now for the warrants, at which price a similar gain would have been realized. Further, as the warrants become more and more ‘in the money’, their outperformance versus the shares will increase dramatically. Conclusion We will continue to re-iterate some of the comments that we made in December, because nothing has changed. As we stated last December, “EPM is separated from all other emerging gold producers because of the sheer scale of the cash flow that the company will generate. It is in its own league, and we would challenge readers to provide another name that could even come close to throwing-off this much cash year-in, year-out.” Indeed, taking our cash flow estimate of 43 cents per share at $625 gold and $2 copper, and applying a cash flow multiple of anywhere between 10-12 times, in line with gold producing peers and accounting for the substantial production growth which EPM will experience, we believe that a 6-month target price of C$3-C$5 per share on European Minerals is called for. At the high end, that would represent almost a four bagger in the stock from current levels, and over an eight bagger in the company’s levered, long-life A-Series warrants."

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