BERAL, INC.
Andrew Racz
Director of Research
300 East 54 Street, Suite 26C
New York, NY 10022
Phone: (212) 319-6949
Fax: (212) 753-1944
E-mail: mlikar@aol.com

Entrée Gold, Inc

February 11, 2008

EGI - AMEX - $2.05
ETG - TSX - $2.15

(AMEX)

 

Price:

$2.05

52-Week Price Range:

$1.50 - $3.70

Current assets:

$65 Million

Current liabilities:

$0.4 Million

Stockholders equity:

$65 Million

Shares outstanding:

93,937,000

Options outstanding:

8,855,000

Average exercise price:

$1.50

This memo is a recommendation to the possible future of Entrée Gold.
It is based on facts; the analysis is a futuristic calculation.

MINERAL PROPERTY INTERESTS

Title to mineral property interests involves certain inherent risks due to the difficulties of determining the validity of certain claims as well as the potential for problems arising from the frequently ambiguous conveyancing history characteristic of many mineral property interests. The Company has investigated title to its mineral property interests and, to the best of its knowledge, title to the mineral property interests are in good standing.

In October 2004, the Company granted to Ivanhoe Mines Ltd. ("Ivanhoe") the right to earn, over an eight-year period, a participating interest in a certain portion of its Lookout Hill Property (the "Project Property"). Under the agreement, Ivanhoe must spend a minimum of $3 million in order to earn surface rights in the Project Property and a minimum of $20 million in order to earn any mineral rights interest in the project. Thereafter, the Company has the right to require Ivanhoe to fund its share of subsequent project costs through to production, to be recovered from production cash flow. The agreement with Ivanhoe also provides for Ivanhoe to subscribe for 4,600,000 units of the Company at a price of C$1.00 per unit (completed in November 2004). In October 2007, the Company has received notice from Ivanhoe that it has incurred the required expenditures (US$20 million), giving it the right to form a 51%-49% joint venture. Ivanhoe has indicated to the Company that it will not be forming a joint venture at this time, but will continue to spend to earn a higher percentage interest.

This recommendation is only valid for today while the Mongolian crisis lasts and while the price of gold is around $900 or higher.

There is no doubt that the election of Sen. Hillary Clinton is a strong plus.

Let us now look at the world EGI is currently deposited. We have the Chinese, Aluminum Corp. of China, Alcoa, BHP, Rio, Ivanhoe—EGI. One very important positive about EGI is that nobody has ever said anything derogatory about the Company, to our knowledge.

However, and I am quoting from the daily papers, we are there. We represent a company, a stock, a piece of land. The first assets we have that nobody has ever said anything derogatory of EGI.

In the midst of the greatest financial turmoil among mineral companies, EGI is often mentioned for the simple reason that "we are there." Not only "we are there," "we are unique."

What is the good story?  Is there a story?

We have less than 100 million shares, the market cap of 200 million, a piece of land in a faraway country whose value carries some magic numbers, some other exploration projects, a solid board, $68 million cash, and commendable staff with vast experience in mining.

We have a vice chairman whose country once ruled the seas (quote from Gen. de Gaulle, June 14, 1940).

In the midst of this international fight for assets nobody bid for EGI but nobody knocked EGI.

Let's start with the latter event, since it'll easily be more important to the two companies' respective futures. Hours before an effective paint-or-get-off-the ladder deadline, BHP offered 3.4 of its share for every one of Rio Tinto's. That's up from an earlier three-for-one proposal and was worth more than $147 billion, based on BHP's Monday's closing price.

Apparently, BHP didn't view the recent purchase of a 12% stake in Rio Tinto by Alco (NYSE:AA) and state-owned Aluminum Corp. of China (NYSE: ACH), or Chinalco, as a deal breaker. Nevertheless, metals customers in China, Japan, and elsewhere have expressed concern about a combination of the world's largest and third-largest mining companies. Brazil's Vale (NYSE: RIO) currently sits between the pair as the second largest. For its part, Rio Tinto continues to spurn BHP's advances, saying that its plans would change only with an offer that "fully reflects the value of Rio Tinto."

On the earnings front, BHP's biannual results were generally sound, while "attributable profit" dipped to $6.0 billion, from $6.2 billion, on a softer U.S. dollar and higher costs. Perhaps more importantly, as the company noted, "We achieved record or equal record production for seven major commodities and significantly increased production across a further six commodities."

So BHP has intensified the Rio Tinto chase, although the "chasee" is still playing hard to get. My bet is that the pursuer will ultimately land the pursued—albeit, at an even higher price—creating a massive and globally dominant entity. For that reason, I urge Fools to keep an eye on developments and perhaps nibble away at a BHP position. Even if Rio evades BHP's clutches, you'll still be part owner of a huge company that's right in the middle of the world's escalating demand for natural resources.

There is an underlying trend unspoken in London, New York, Toronto but may not be for long in Hong Kong or Shanghai—a trend to monetize gold.

According to a colleague, Phillip Gotthelf, the author of precious metal trading, the torch has been passed from those who believe that gold as a metal will hit $1,000 but inevitably march $2,000 as a monetary currency.

In the next 15 years, where the majority of the board members of EGI will still be around, one will see as many different gold-related investment vehicles as one sees today in mortgaged-backed securities, CDOs, sub-prime and other collapsing mortgage-backed securities.

Drexel's junk bonds

$500B loss

Sub-prime

$250B loss

Gold-backed bonds

A class for the future

I was 7 years old when I learned to respect my father, an attorney in Budapest, 60-years-old in 1945, when he was active on the Black Market in the daily business of Swiss franc and gold. I learned early, in gold we trust.

The sub-prime crisis accelerated among investors and traders. Barrick Gold and U.S. gold are here to stay, but the Florida condos will be passed from domestic to international ownership at a 50% discount.

Actually, when the government of the United States, when the treasury understands the difference between sub-prime and gold, gold will march inevitably to the $2,000 mark.

There is an opportunity for EGI to take advantage of the current turmoil.

  1. Yes, Mr. Crowe, there is going to be a gold index market.

  2. When your stock is $2.00 you can form a unit priced at $2.50 consisting of stock and a warrant exercisable at $2.75, and package it in such a way that the exercise price of the stock and the warrant will drop 5 cents whenever gold goes up $5.00. We can start with the $900 gold price.

  3. Obviously we have to draw a line and the regression analysis stops when the exercise price drops to $2.00. We take it for granted that if gold goes to $950 per ounce, the value of the stock would go to $2.50; therefore the profit potential for the unit holder will be there. This is only a concept. The numbers can be changed.

  4. We should raise with such gold-backed bonds $100 million.

  5. Look at the pro forma picture. Entrée Gold will own a valuable piece of real estate in Mongolia whose value goes up every day with the price of gold and sooner or later Neville Chamberlain will not be able to say that Entrée's real estate in the Ivanhoe Group is a piece of real estate about which we know nothing.

Take that piece of land to be worth $400 million. Add to it $170 million cash. This is $500 plus per share.

We have the same management. We will still have the British Navy and the world around us, with the Chinese, with BHP, with Rio, with a signed finance agreement with the Mongolian government, and in the middle of all this the Lilliput from Vancouver.

Every securities analyst, every commentator will discover EGI and an opinion will emerge that they have done everything right.

My contacts in London would be more than happy to talk to Entrée.

We should do nothing else. Raise the $100 million and raise it fast.

The turmoil around us is so big that we have absolutely no power to influence the winds.

But here we are, the Lilliput, the team player. When everything is settled around us we can start formulating the future but until then we should play a modest role in the biggest turmoil of mineral history.

Come to think of it, what was wrong in the 20th century to be in Switzerland?

Disclaimer

Information contained herein is based on data obtained from recognized statistical services, issuers reports or communications or other sources believed to be reliable. However, such information has not been verified by us and we do not make any representation to its accuracy or completeness. Any statement non-factual in nature constitutes only current opinions which are subject to change. BERAL INC. or their officers, directors, analysts or employees may have positions in the securities or commodities referred to herein, and may as principal or agent buy and sell such securities or commodities. An employee, analyst, officer or a director of BERAL INC. may serve as a director for companies mentioned in this report. Neither the information nor any comment expressed shall constitute an offer to sell or a solicitation of an offer to buy any securities or commodities mentioned herein. There may be instances when fundamental, technical and competitive opinions may not be in concert. This firm may from time to time perform investment banking or other services for or which investment banking or other businesses from any company mentioned in this report.

 

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Andrew Racz. 300 East 54 Street, Suite 26C, New York, NY 10022
Phone: (212) 319-6949 Fax: (212) 753-1944. E-mail: mlikar@aol.com

Copyright © 2011 Andrew Racz. All Rights Reserved.

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