US Edition European Goldfields
770p +7
Questor says BUY
The shares have jumped by almost one fifth this week after the company confirmed it had received a number of preliminary approaches. Questor understands that these are very early-stage – but there has been more than one company talking to the group. Canadian group Eldorado is one of the names which has been doing the rounds.
An approach at this time certainly makes sense. The company has overcome much this year and is on track to become Europe's largest gold producer.
The problem this year has been that the company's assets are located in Greece. The shares were recommended because the Greek authorities were on the verge of granting permits for the group's mines at Olympias and Skouries.
Unfortunately the permits took longer than expected to materialise, with the go-ahead eventually given in July. This was a major milestone – but the company faced its second major task – raising funds to develop the projects.
Because the operations are in Greece, the market simply didn't believe the company would get the funding. Fears were that no bank would lend up to $1bn (£638m) to a business operating in an almost bankrupt country.
Thankfully, the Qataris came to the rescue. In October, Goldfields struck a deal with the Qatari sovereign wealth fund, which saw it agree to inject $1bn in return for a 9.9pc stake. This means that the company is now fully funded to develop all of its mines.
Existing shareholders have been given the funding benefit, but there is also dilution as the Qataris have a number of warrants as well.
So, the project has been completely "de-risked" with all major hurdles crossed and Goldfields plans to start output at Olympias next year, reaching an annual production equivalent of 125,000 gold ounces in the fourth quarter of 2015.
Yet still the share price has continued to fall – hitting a low of 525p at the end of September. This appeared to be significantly undervaluing the company and its prospects.
It's not just Questor that believes this is the case. Yesterday, Goldman Sachs said that the shares were trading "well below" fair value, noting the group had significant reserves, low-cost production and its assets were in a politically safer country than other large deposits, which are found in places such as West Africa and Russia.
Goldman also said that the Qatari deal did not appear to be a barrier to a takeover, as the wealth fund could maintain its stake should a more technically experienced operator decide to take over the company.
So, all in all this week's developments are good news. Even if a full takeover does not emerge – and this is all too likely because the approaches are early-stage – the news has highlighted that the valuation appears to be too low. The group is also expected to pay a dividend from next year.
The shares are still 12pc lower than the recommendation at the start of January compared with a FTSE 100 down 6pc. However, they are up 93pc since they were first recommended as a buy on March 21 2009.
The shares remain a buy.