On March 26th /08 Canaccord Adams released their Junior Mining Weekly in which they provided an update on Etruscan Resources (EET: TSX) after a site visit by an analyst.



Company Profile

Etruscan Resources Inc. is a diversified Canadian mining company that has been exploring for gold and diamonds in Africa for over 13 years. Today, Etruscan holds one of the largest strategic land positions in West Africa covering over 13,000 km² in the prolific gold belts of Mali, Niger, Burkina Faso, Côte d'Ivoire and Ghana. The Company is also active in diamond exploration and development in South Africa and iron oxide copper gold exploration in Namibia. Etruscan's interests include operations that produce gold and diamonds together with advanced stage projects and earlier stage regional exploration opportunities.

Takeaways From The Event

Etruscan’s principal assets include the Youga gold project in Burkina Faso, the Samira Hill gold mine in Niger, the Agbou gold project in Côte d’Ivoire and the Finkolo gold project in Mali.



On March 3rd/08 Etruscan reported that the first gold was poured at its 90% owned Youga Mine located in Burkina Faso, West Africa. Canaccord notes that the “project consists of six open pits hosted within the 80-kilometre-long Youga gold belt. The exploration permits for the Youga project represent a combined land package of more than 1,000 square kilometres. The Youga project has an estimated reserve base of 6.6 million tonnes of ore grading 2.7 g/t gold for an in situ gold reserve of 580,000 ounces of gold (100%). In addition to reserves, there are 271,000 ounces of measured and indicated gold resources and 114,000 ounces of inferred gold resources estimated for the Youga project. Etruscan has developed the Youga mine as an open pit mining operation with a conventional gravity-CIL plant capable of processing 1 million tonnes of ore per year. Gold recoveries are expected to average roughly 93%, with average gold production of roughly 90,000 ounces per year at full capacity, likely achievable in 2009. Total cash costs over the life of the mine are estimated at US$360 per ounce; however, during the first five years of production, total cash costs are expected to average US$425 per ounce and to drop to less than US$225 per ounce after year five, once mining operations cease (based on the current mine plan). Power is currently being supplied by diesel-powered Genset generators; however, Etruscan has now received approval to develop a power line connecting the project to the Volta River Authority hydro power supply across the border in Ghana. The power line is expected to be built and electrified by July 2008. Until such time, the Genset power production will add roughly US$50 per ounce to the total cash costs at the Youga project. After the power line has been developed, the Youga mine will have full Genset back-up power in case of any power disruptions from Ghana’s VRA.
To secure project debt financing, Etruscan purchased 456,000 put options exercisable at a price of US$629 per ounce and sold 246,000 call options exercisable at a price of US$700 per ounce. This effectively hedges 42% of the total forecast production from Youga at US$700 per ounce, with the remainder leveraged to higher gold prices. When we visited the Youga project, the company was in the process of adding cyanide to the CIL plant and starting up the gravity circuit On March 3, 2008, the company reported that the first gold pour from the smelting of gravity concentrate recovered 100 ounces of gold. The elution circuit, to extract gold from the CIL process, is in the final stages of commissioning. The company anticipates achieving commercial production in April 2008 with the objective of producing between 60,000 and 70,000 ounces of gold in 2008.”

Also in Etruscan’s March 3rd/08 press release were comments from President and CEO, Gerald McConnell that read “Our next gold producer will be Agbaou located in Côte d'Ivoire where the feasibility study will be completed this summer with production to follow in 2010.”

With regards to the Agbaou project, Canaccord reports that “Etruscan recently released the first NI 43-101 compliant resource estimate for the Agbaou gold project in the Côte d’Ivoire. Using a 1 g/t cut-off, Coffey Mining estimated an initial resource of more than 1 million ounces of gold (all categories). The initial resource estimate is summarized below:



The Agbou project area covers 939 square kilometres of Birimian greenstone belts in south-central Côte d’Ivoire. It is accessible by paved road and is within 10 kilometres of the national power grid. The company is looking to develop a conventional open mining/CIL processing operation capable of producing in excess of 100,000 ounces of gold per year. Combined with the gold production from the Youga operation, Agbou could propel Etruscan into a new 200,000 ounce per year gold producer by 2010, with significant exploration upside potential at both mines and several prospective gold exploration projects within its portfolio of projects.”

Additionally, Etruscan owns a 53.7% stake in Etruscan Diamonds, a private company which it is likely to spin out in an IPO. The company holds one mining permit and three prospecting permits over three adjacent properties in the Ventersdorp alluvial diamond district (Nooitgedacht, Hartbeestlaagte and Zwartrand properties) known as the Blue Gum Project. Canaccord reports that “Etruscan Diamonds has land holdings of over 5,000 square kilometres in the Ventersdorp Alluvial Diamond District, which hosts Etruscan Diamonds’ primary asset, the Blue Gum diamond project. The project hosts a NI 43-101 compliant resource of 20.5 million cubic metres of indicated resources and 17.0 million cubic metres of inferred resources, grading 1.77 ct/100 m3 in the upper gravel package and 2.85 ct/100 m3 in the lower gravel package. The diamonds have an average estimated value of US$466/ct. A prefeasibility study on the Blue Gum project, led by MDM Engineering of South Africa, is expected to be completed by mid-2008.” Diamonds are currently being produced at the Tirisano Diamond Mine, which is part of the Blue Gum Project and located in the district of Ventersdorp. According to a March 16th/08 article on the Resource Investor website “Tirisano yielded more than 1,220 carats at an overall grade of 2.67 carats per hundred cubic metres in February. A total 1,311 carats sold at an average bid price US$854 for US$727,000 in gross proceeds in an early March tender, well in excess of the US$466 per carat projected value included in the Blue Gum Project’s NI 43-101 resource estimate, which was released February 1. February diamond sales averaged more than US$750 per carat. When it is operating at full capacity, a rate expected within two months, management anticipates recovering more than 2,500 carats per month. Etruscan Diamonds is planning a public offering in order to finance further expansion that will bring Blue Gum’s diamond production rate to 260,000 cubic metres or gravel per month.”

The Finkolo gold project is located in Mali South approximately 300 kilometers southeast of Bamako. The Finkolo permit covers 160 square kilometers along the Syama gold belt and is contiguous with the Syama holdings of Resolute Mining Ltd. which hosts the 6.4 million ounce Syama gold deposit. Canaccord reports “A JORC standard resource estimate was completed on Finkolo in January 2008, which, based on a 0.5 g/t cutoff, outlined measured and indicated gold resources of 436,000 ounces hosted within 6.9 million tonnes of ore and inferred resources of 468,000 ounces hosted within 9.1 million tonnes of ore (100%). Finkolo is viewed as a potential satellite orebody of the Syama deposit, which is expected to be advanced to production in H2/08. The joint venture has approved a 6,100 metre drill program to test for further depth extensions of mineralization down to 300 metres below surface. The deposit is currently outlined to a depth of 120 metres. The drill program is expected to be completed by mid-2008.”

Lastly, the Canaccord report mentions that “Etruscan’s portfolio of gold exploration and development projects provides it with a solid platform of production and resource growth. With the Youga mine ramping up to full production, the company should begin to generate significant operating cash flows. The Agbou project represents the next leg of production growth for the company with production anticipated in 2010. Combined, the two projects could boost Etruscan’s annual gold production to almost 200,000 ounces of gold per year. Beyond 2010, the company should begin to receive a positive contribution from the Samira Hill operation in 2011 to 2012, and there is significant potential within its Mali and Namibian exploration projects to provide the next stage of production growth for the company. We note that the recent friendly acquisition bid by Lihir Gold Ltd. (LGG : TSX : C$3.31 Not rated) to acquire Equigold (EQI : ASX : AUD$4.59 Not rated) is a significant endorsement for companies with gold development projects in Côte d’Ivoire. Equigold has two producing gold operations in Australia; however, its gold production growth and a significant portion of its gold resources are associated with its Bonikro gold project, in Côte d’Ivoire. Lihir has made a bid of roughly US$953 million for Equigold, which represents a purchase price of roughly US$282 per ounce of gold resource (all categories). Based on the company’s current share price of C$2.42, the company has a market capitalization of C$297 million, which implies a value of C$89 per ounce of total resource.”



“At the end of November 2007, Etruscan had cash and equivalents of US$31.9 million and US$32.3 million of long-term debt (including current portion). It also had 17.1 million warrants and options outstanding.”

Valuation and Price Target

Since Canaccord does not officially cover Etruscan Resources, the only other analyst targets on the street are from Mike Niehuser of Beacon Rock Research who has a Strong Buy rating and a C8.00/sh target and Brad Humphrey of CIBC World Markets who as of March 3rd/08 has a Sector Outperform rating on Etruscan.

Additionally, Toronto-based portfolio managers Herbert Abramson and Randall Abramson of Trapeze Asset Management have a 12 month target of $7.30/sh on Etruscan (as of February 29th/08). The following are some of their comments from their quarterly investment letter dated November 12th/07:

“Our largest gold holding, Etruscan, is trading at less than net asset value and we believe that its growing FMV warrants a double in the share price over the next 3 years. Etruscan’s assets are predominantly in the Birmian trend in West Africa which enjoys similar characteristics to Nevada’s Carlin/Cortez belt in the '90s, but with the Birmian trend stretching over an even larger area. Etruscan has operated in the region for many years and now has claims over 20,000 sq km, likely making it the region’s largest landowner. The mines that Etruscan currently has in production and development alone justify our 3 year projection, but should the company have further exploration success on its prospective gold properties, or within subsidiary Etruscan Diamond’s enormous gravel package, the upside could be even greater.”

Have I mentioned that the guys at Trapeze have averaged annualized returns of 24.9% since inception (October 1st, 1998) in their long/short accounts and 24% over the same period in their long only accounts? I’m a huge fan of these guys and encourage everyone to visit their website (http://www.trapezeasset.com/)to read their quarterly letters (http://www.trapezeasset.com/news.html)

Investment Risks

Without limitations, some of the risks include reserves and resource risk, development risks, permitting risks, off-take agreements, commodity price risks, geo-political risks, exchange rates, weather related impacts etc.

My Take: Etruscan has perhaps the largest land package of any mining company in West Africa and expects to be a 200,000 ounce producer by 2010. I quite like the company’s business model which is focussed on finding less than million ounces deposits with strong exploration potential and building fairly modest production facilities on those sites. Case in point, all 3 of Etruscan’s most advanced projects: Youga, Agbaou and Finkolo have satellite deposits that have the potential to increase resources or extend mine lives at these projects. As the cash flow starts pouring in from the from operations at the Tirisano Diamond Mine and the Youga Mine, Etruscan will have the wherewithal to fund its exploration activities from its existing cash flow. With a highly prospective exploration portfolio, several company-owned drill rigs, trained staff and a bulked up exploration budget, investors should expect plenty of news flow in 2008. Plus, investors can also look forward to the IPO of Etruscan Diamonds in the coming months and perhaps a listing on an American exchange.

The one drawback of Etruscan is that due to a hedging program (which was a stipulation Etruscan had to adhere by in order to receive debt financing for Youga), there is a cap on the amount Etruscan can receive on 42% of its production at $700 per ounce (at the time gold was trading around $640/oz). The remaining 60% is unhedged and will allow the company to reap the benefits of current gold prices.

The weekly and daily RSI-7 values are at 49.29 and 41.08 and hence do not proclaim a Buy signal (which would be triggered if both the weekly and daily RSI-7 values dipped below 30). Additionally, the MACD and Stochastics (slow) still indicate further downside for the stock. In the short term, maybe in the case of a dramatic sell-off in spot price of gold or the S&P/TSX Composite Index, the stock dips to the $2.00 level but longer term I think this is a neat little gold holding with great upside.