I hope many of you bought the stock on my suggestion, in my Feb 15th update. My points then, it was trading at a way too large discount to asset value and stuck in a trading range that I expected to break out of to the upside, and boy did it ever. The stock has jumped about $0.70 in the last four days.
Beside the discount to asset value, my interest was in their strategy to once again merge a few gold companies to create a bigger entity that would achieve a higher valuation on the total sum of such merger entity.
I mentioned they recently took a controlling interest in Etruscan Resources (EET-TSX) before Christmas, and a 38% interest in Crew Gold (CRU-TSX) in early 2010. It is the Crew Gold interest that lit a spark under the stock.
Last Thursday, Russian steelmaker Severstal made a bid for all of the outstanding shares of Crew. Severstal already has 26.6% stake in Crew. Endeavour Financial (EDV) bought another 1.1 million shares of Crew on Thursday (after the announced bid), bringing its ownership up to 37.9% of the outstanding shares. Endeavour said it is likely to continue to raise its stake and that "we believe Severstal's increased ownership interest supports our view that Crew remains undervalued."
Endeavour's purchase of some 810 million shares a month ago amounted to an average of 12 cents Canadian per share. Crew shares today are 32 cents. This highlights the great value that EDV moved into Crew at and obviously EDV's asset value took another jump up and even with the move up is probably still at a good discount. The Crew Gold position alone is worth $259 million or about $2.60/share.
Since then, on Thursday EDV announced they increased their position to 855,793,211 shares of Crew, representing 40.02% of Crew's issued and outstanding common shares.
The talk going around is that Severstal also owns 50.1% of High River Gold, with another 18.8% held by Polenica Investments (Russian) and Endeavour also holds 55% of the outstanding shares of Etruscan. Could a New Gold (NGD)-style, three-way merger happen to create a significant new West African-focused gold producer?
According to a Cannacord newsletter, the combined market cap of these companies would be $1.3 billion, which would put it on par with Semafo (SMF), which has an approximate $1.2-billion market cap. Such an entity would have combined annual production of roughly 645,000 ounces of gold per year (~30% more than Red Back Mining (RBI), currently, and 166% higher than SMF). Crew, High River and Etruscan are all stories that have been labouring under precarious balance sheets that have undergone restructuring recently. This would create a new, liquid, leveraged gold producer in West Africa and Russia, that could continue to consolidate in the region, with roughly US$178 million in long-term debt and roughly US$100 million in working capital.
Since the stock has seen such a strong run in the short term, it may consolidate some of these gains, and likely hold a new support.
On the chart I marked the old trading range that I was betting we would break out of and now marked in what should be the new support area around $2.00 to $2.20. If the stock were to correct or consolidate back below $2.20, I would be a buyer. For now hold positions, we should see much larger gains in time no matter how the stock chart plays out.
