Entre Gold is ‘sitting pretty’

Entrée Gold (etg-t, egi-x) is “strongly undervalued” given the potential that exists for it to sell its Mongolian assets to Ivanhoe Mines (ivn-t, ivn-n) or Rio Tinto (rio-n, rio-l), Christopher Ecclestone of Hallgarten & Co. argues in a research note to clients.
Entrée Gold’s flagship Lookout Hill property surrounds Ivanhoe Mines’ massive Oyu Tolgoi project on three sides with the western side held solely by Entrée, and part of the Lookout Hill property is subject to a joint-venture (JV) with Ivanhoe Mines, struck in 2008. The joint-venture property contains the Hugo North Extension copper-gold deposit and the Heruga copper-gold-molybdenum deposit.
“Entrée is sitting pretty,” Ecclestone writes. “Eventually the parties will come around to drafting in Entrée’s portion of the massive Oyu Tolgoi resource… To those who would argue that Oyu Tolgoi is on the road to production and the JV’s territory is not, we would point to the inevitability that mining at Hugo North will extend into the JV’s territory in the first years of production.”
Currently Ivanhoe Mines holds about 12% of Entrée Gold and Rio Tinto 13%.
Ecclestone argues that for Entrée “the time for proactive strategies to restructure the company into parts that can move independently, has arrived.”
Entrée holds sizable assets in western Nevada’s Yerington district about 80 km southeast of Reno, including its Ann Mason property, and has a conditional agreement with a private company in Peru to acquire an initial 70% interest in the Lukkacha property in the country’s southern copper porphyry belt.
“It is pretty certain that Entrée will need to be split into two companies before the deal or that a NewCo type “exit strategy” for management will be included with the non-Mongolian assets being liberated by the transaction to start life afresh,” Ecclestone  concludes.
“Leaving Entrée in the mix and funding it to near-production would only empower Entrée and delay the ‘evil day’ of having to take them out and having to pay a higher price for a value-added asset. Thus a deal sooner rather than later is more likely. As Entrée’s management seems to be made up of realistic people, we suspect the bargaining will be hard but not inflexible.”
At presstime in Toronto, Entrée was trading at $3.34 per share and over the last year has traded between a low of $1.84 per share (July 8, 2010) and a high of $3.47 (Dec. 31).
Ecclestone has a 12-month target price on the stock of $3.80 per share.