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Energold Drilling (EGD) is an obscure, under-appreciated micro-cap Iranchise that possesses

both a large margin oI saIety and what we believe is an incredibly Iavorable, highly skewed risk/
reward equation.

Investment Highlights:

An investment in Energold at or around the current price possesses nearly all the qualities we
look Ior in a great long-term investment. In particular (1) an unsustainably low valuation (both
absolute and relative to peers) (2) a good, Iully incentivized management team (3) near to
medium-term operating momentum (4) a highly attractive long-term business model (5) multiple
internal and external high probability catalysts (which we expect will drive substantial near to
medium-term upside) and (6) a situation where a variety oI temporary issues converge to mask
a signiIicant inIlection point both in regards to the company`s corporate development and Iuture
prospects as well as in relation to its industry as a whole.

Other attractive attributes oI Energold include.
A dominant competitive position in a rapidly growing niche market
An unlevered balance sheet
Improving economics on an attractive and Iast growing asset base
A high likelihood oI experiencing meaningIul improvements in near-term proIitability
and cash Ilow
Opportunity to invest capital at (1) a very high rate and (2) Ior a very long time
Valuable hidden assets their stake in Impact Silver could potentially be worth more
than Energold`s entire current EV
A natural inIlation hedge/low risk way to participate in minerals/commodity bull market

Why is it Mis-Priced?

It`s small, unknown/under-Iollowed, illiquid, Canadian, and run by a non-promotional
management team

The combination oI conservative accounting and depressed operating results over the last two
years - due to a once in a generation recession and the lingering eIIects oI the credit crisis - make
the company look expensive based on TTM math

Brief Business Description/Operational Overview:

Energold is an operator oI environmentally Iriendly man-portable drilling rigs that service the
mining industry. With its operations in over 20 under-served countries throughout the developing
world, Energold emphasizes an environmentally and socially sensitive approach to contract
drilling. The company`s primary competitive advantages are its permanently lower operating
costs and its use oI proprietary, highly portable rigs in serving Irontier-drilling regions. Long-
term, the company seeks to become the worlds leading specialty driller.

Unlike most oI its competitors, Energold`s operations are managed in a way meant to consistently
protect and grow shareholder value regardless oI the environment or where the company is in
the cycle. The companies operating principles reIlect this, and are intended to both maximize
Ilexibility and the ability to capitalize on opportunity over time.

Energold`s core business is oIIering drilling services in 'Irontier markets by utilizing a
proprietary Ileet oI 'man-portable rigs. 'Man portable rigs are high quality, low cost drills
that Energold designs and manuIactures in house which possess a variety oI unique (and game
changing) attributes attributes that have been at the heart oI why Energold has been able to
rapidly penetrate over 20 under-served markets in an impressively short period oI time. What
we mean by 'under-served in Energold`s sense is developing nations with high mineral drilling
potential and minimal competition.

The company`s use oI an innovative modular component technology allows them to create small,
highly portable rigs that aren`t mounted on trucks and hence don't require roads and/or trees to
be cut down Ior access to drilling properties (notably, the vast majority oI the ~7000 rigs in the
world today are truck mounted). This not only saves a signiIicant amount oI time and money, it
allows drilling to take place without leaving a large environmental impact in its wake. In other
words, Energold`s mineral drills possess dramatically lower all in costs to build, transport, and/
or operate, and equally as importantly, leave an essentially non-existent environmental Iootprint
in an industry plagued by the secondary eIIects oI its inability to operate in an environmentally
Iriendly manner. OI course, Energold`s revolutionary rigs also provided the company with a high
return business model and a tactical advantage in a rapidly growing market.

Framing The Opportunity:

There is couple oI helpIul ways to think about the unique attributes oI Energold`s business
model and long-term opportunity. The Iirst relates to how when we think about this company`s
prospects Ior sustainable value creation over time, we just can`t help but draw comparisons to
both Geico and Walmart in certain respects. Like Walmart, you have a business that has grown
over time by expanding into under-served markets with minimal competition, which in turn
allows them to quickly entrench as the low cost producer based on economies oI scale. Like
GEICO, you have a business with very low market share, a tremendously long runway Ior
growth, hard to replicate cost advantages, and compelling incremental economics. Hkup881 also
compared Energold`s investment proposition to be akin to 'betting on CSCO in 1995 knowing
that the Internet thing would work, but reIusing to buy or anything like that which we
believe to be an apt comparison as well. Feel Iree to take the above comparisons with a grain oI
salt, but we wanted to mention it here in brieI because - like the excerpt below - we think it`s
helpIul as Iar as Iraming the opportunity and helping others 'see what we see, iI you will.

The second is about how history has taught time and again that the low-risk way to make money
in any gold rush is to sell the "picks and shovels, and our how our expectation is that this time
around should be more oI the same. With that in mind, the gentleman over at Praetorian Capital
who (1) notably did most oI the heavy liIting here (2) also happen to be the purveyors oI one
oI our absolute Iavorite blogs Adventures in Capitalism and (3) recently put how this historical
reality relates to Energold in a recent Sum-Zero write-up better than we ever could.

That said, rather than try and regurgitate our own inIerior articulation on the matter, we will just
quote an excerpt Irom Mathew Goodman's Iantastically insightIul take below....

"Im an equities guv, but I want gold exposure

If vou are still reading, vou are aware that gold is in a multivear bull market that is unlikelv to let
up anvtime soon. Even if vou are no gold bug, but are traditional value and subscribe to Jeremv
Granthams ideas, particularlv his recent piece "Time To Wake Up. Davs of Abundant Resources
and Falling Prices Are Over Forever", this mav work for vou. If vou are scared of the commoditv
sector because vou dont want to participate in putting a future price on something without
financial statements, vou might want to look elsewhere. While understanding golds bull market,
I set out to find a wav to get leverage to the price of gold. This would cause one to turn to the
mining sector, the companies that actuallv set out to find and then produce the shinv metal. Mv
conclusion upon studving the mining industrv is that it fell in the too difficult pile. I did not have
a geologv degree. I did not want to pav a massive amount of monev to bet on a consultants word
on the prospective geologv. In mv opinion, everv single factor determining profits was based on
commoditv prices. Betting on mining meant that I wasnt onlv betting on gold but on the relative
outperformance of gold versus other commodities. Then we get to the mining.

Mining is 'a series of problems`, quite literallv. We can start with the amount of guesswork
that incorporates the geologv side, lets fust sav it would make Nostradamus blush. Then we get
into communitv relations, convincing a tribe of indigenous Ama:onians that an international
companv extracting billions from their communitv reallv is best for evervone in the long term.
Oh, and we also need to build a road thru vour rain forest. This is fust the beginning. The capital
outlav is incredulous. A bank wont even talk to vou until vouve pissed awav millions on a non
income-producing endeavor. Yes, that means dilution is an issue. Mines can take 3-5 vears to
build, and lots can happen between then and now. So what kind of management does such an
industrv attract? You have the Ibankers who are there simplv to raid the treasurv. And vou have
the geologist, he knows the gold is there, but doesnt have the slightest clue in how to obtain
financing or exploit the value chain. Part of the business plan is to spend all vour monev in the
name of exploration, which is, based at least 50 on luck, I kid vou not.

When plaving bull markets I constantlv look for the trickledown effect. I turned to historv to
find out where the monev was made in previous mining booms. Samuel Brannan was the first
millionaire of the California gold rush. Must have been a big deposit? Brannan actuallv opened
town stores next to the mines and after having bought as manv shovels in the state of California
as he could, proceeded to sell them to the miners. Another gentleman who in mv own opinion left
the largest legacv of the gold mining boom, died with an estimated fortune of $6M (in 1902). This
gentleman was Levi Strauss. Bv using copper fastenings, his feans stood up to the hard labor of
mining. Those who came in search for gold, left with little more than thev came with, if thev were
luckv. A sawmill operator, Marshall, was the first to discover the gold that set off the gold rush.
He shared this information with his boss, who owned the land and mill. Neither of them ever
profited from the discoverv of gold. In fact Marshall died penniless, after he became the partner
in a gold mine that ultimatelv failed. His boss shared a similar fate. As stated at the California
gold rush Wiki page, 'recent scholarship confirms that merchants made far more monev than
miners during the gold rush`. If vou were not convinced reading annual reports that mining is a
trickv business, mavbe vour mind has now changed.

A friend who is more familiar with the mining industrv than I calls fr mining 'drill hole roulette`.
Once vou own land the remaining fob is to get as much of other peoples monev as possible, and
spend it all drilling holes. The more monev that is attracted to the gold industrv, the more holes
will be drilled. Following mining industrv financings are a telling tale of the trickledown effect of
monev spent on drilling. Mafors are finding it almost impossible to replace reserves which will
lead them to plaving the game themselves or supporting others who are in. The world produced
approximatelv the same amount of gold at $1200 gold as we did at $300 gold 10 vears ago. On
the other side of this sits the casino, or the service companies. Im a fan of investing in the house.
There is also a second driver here for the service industrv. The general population is unfamiliar
with the gold mining industrv, as it had been dormant for so long. It is thought that the cost of
gold is about $500 or so per o:. This is the cash cost of mining the gold. This comes after the shit
show of spending and dilution I mentioned earlier. Most knowledgeable analvsts believe the price
to locate new gold is upwards of $1200 todav, and growing rapidlv as we mine what is easiest to
find, and are forced deeper into the earth, and to more remote locations (read. more expensive).
At a recent mining conference, an HSBC precious metals analvst put the marginal cost at
$1200, 'the long term floor`. Mining companies have done an awful fob replacing gold over the
last 10 vears because thev were paid less than the cost of finding new reserves. Monev does not
flow into unprofitable ventures. Jerv little exploration occurred and the service industrv made
few advancements. There are manv statistics out there talking about how little the allocation to
gold is in worldwide assets, as this is readfusted upwards, monev will flow into mining. Now that
mining offers an appropriate return on invested capital, more capital will again find its wav into
mining. This monev will be used to explore for gold."

Opportunity Overview - Key Points:

Sustainable Cost Advantage:

One oI the most important aspects to understand when analyzing Energold`s business is the
Iact that it possesses a sustainable cost advantage, which is a Iunction oI their decision early
on to build their own drills. Realizing that vertical integration and owning their own assets was
integral to establishing a sustainable cost advantage, the company made an early transition. This
has allowed them to squeeze out the manuIacturing middleman, more eIIectively control their
production proIile, and continuously wring out increasing amounts oI cost eIIiciencies as they
have scaled. The company also possesses a lower operating cost structure due to a local, less
skilled work Iorce and due to superior scale achieved in developing markets, which enables
leveraging oI Iixed costs. The end result is a business with the lowest operating cost and hence
the highest margins in an extremely Iragmented industry.

Again, the Iact that their drills can be made internally at lower cost allows Energold to 1) oIIer
the same services to clients at lower prices 2) operate with a permanently lower cost structure
and 3) rapidly innovate and deploy new technologies at a much Iaster clip. The end result allows
them to quickly become the dominant business within the markets it serves, where by 'dominant
we mean a business that can be highly proIitable at a price level that leaves smaller competitors
(in terms oI local mkt share) with permanently higher than average costs, which in turn makes
the company nearly impossible to compete against long-term. Again, consider Ior a moment how
powerIul the ability to run its business at a permanent 10 diIIerential to its closest competitors
really is, as it not only provides the company with an ability to bid contracts at a level that allows
them to operate at a proIit where others cannot, but also to more eIIectively preserve and/or steal
share in diIIicult market environments.

The key take away here is that competitors operating within their markets can try to take
share, but eventually they will either go bankrupt or just end up walking away aIter the
eventual realization that attempting to compete is truly absurd given what is a permanent and
insurmountable cost disadvantage.

Overly Conservative Accounting

Unlike most companies, Energold is incredibly conservative Irom an accounting standpoint and
chooses to immediately expense all oI what would normally be considered maintenance cap
ex (such as the purchase oI rig modules Ior existing rigs that have useIul lives which exceed
one year). This results in huge hits to the income statement and artiIicially depressed earnings.
ThereIore, during periods oI high growth, investors can (obviously) expect periods oI particularly
depressed earnings. We mention it, only because it is policies like this that oIten provide a IruitIul
source oI opportunity Ior the bargain hunting investor, who oIten looks Ior situations where high
growth is penalizing today's earnings and in particular, situations where that high growth is being
employed at high and improving ROIC.

Anyhow, Energold has a high return business that`s been in rapid growth mode. Currently the
market is (as expected) Iailing to notice the Iact that operating cash actually includes signiIicant
growth cap ex since growth in inventories (changes in non-cash capital) is directly related to rig
unit growth, in Iavor oI a myopic Iocus on depressed operating income. OI course, such a Iocus is
mis-placed, as once the high margin/high growth stops, the hugely artiIicially depressed operating
income numbers will normalize. As it does, the multiple will naturally begin to expand rapidly.

Point being, Ior those who are Iocused on what matters, i.e., the normalized earnings power oI the
existing business as is (assuming no growth), and can see past the accounting related distortions,
a very diIIerent picture emerges. By our calculations, the company is trading at only ~5x owner
earnings, or earnings aIter they have been adjusted Ior growth capex in order to approximate
the company`s steady state earnings power. In other words, stupid cheap Ior a non-distressed
business with highly attractive underlying economics and a huge runway still ahead oI it.

1remendous Incremental Economics

Perhaps even more interesting is that we think we are at a crucial inIlection point in the
company's evolution, where its huge growth investments over the last Iew years have resulted in a
level oI scale within the company's key markets that should begin to unlock a signiIicant amount
oI operating leverage going Iorward as the company's top and bottom lines accelerate and the
beneIits oI Iixed cost utilization really begin to kick in.

In other words, the company has just started to hit critical mass and we expect that the
combination oI 1) a much larger drill Ileet 2) improving asset utilization 3) rapidly improving
day rates (price/meter) and 4) a positive mix shiIt (as lower margin brownIield services start to
transition towards the company's higher margin "Irontier" drilling), should result in signiIicant
gross margin expansion within the near to medium term - the primary eIIect being that as gross
margins expand, the company`s high incremental margins will Iinally begin to Iall to the bottom
line. OI course the price doesn't reIlect any oI these temporarily hidden dynamics, yet given how
these high margin revenues have an increasingly outsized impact on earnings as they increase, it's
a good bet it won`t take long beIore the company`s rapidly growing earnings and cash Ilows start
becoming incorporated within the Iinancials and in turn quickly priced into the stock.

Favorable Long-1erm Market Dynamics

To appreciate the growth opportunity here we think it's crucial to understand a couple oI
things, namely (1) how a structural problem Iacing the world`s major gold producers has
resulted in a permanent change in their spending habits going Iorward and as a result, a likely
permanent improvement in Energold's underlying economics and long-term growth prospects
and (2) the Iact that Energold is Iirmly in the pole position to capitalize on this transition. A solid
understanding oI the likely eIIects oI the transition on Energold`s top and bottom lines (and the
growth potential oI "Irontier" drilling as a whole) is in our opinion, Iundamental to developing a
proper appreciation Ior Energold`s long-term investment potential.

The structural issues reIerred to above relate to the Majors` diIIiculties associated with
successIully replacing (let alone growing) their reserves going Iorward. Importantly, with major
producers at this point unable to even replace annual depletion, the only way they will be able
to maintain, let alone grow production long-term is by devoting an increasing amount oI their
growing capex budgets towards greenIield work in "Irontier" markets. The reason Ior this mix
shiIt in capex spend is because it is really only within these markets that the major gold producers
are likely to Iind deposits big enough to alleviate what is a large and growing problem. Keep
in mind that the vast majority oI the world`s existing production comes Irom a relatively small
amount oI massive, low cost deposits, all oI which are currently in decline. This Iact alone
essentially ensures that 'proving up the world`s well known existing mineral assets won`t come
anywhere close to bridging the widening deIicit between what's been Iound and what's actually
needed (in order to simply keep overall production steady). The implication being that there is a
very high likelihood that all oI the proverbial low hanging Iruit within the world`s existing asset
base has already been picked, and as a consequence, the only way to stabilize and/or reverse this
dynamic long-term is through ratcheting up exploration spending in hopes oI discovering new
deposits oI suIIicient quality, size and scope to close the gap.

In sum, most oI the world`s incremental production currently being brought on line has much
higher Iinding and development costs than miners current cash costs would indicate. It`s not
so much that the world is running out oI gold per se, as much as it is that we are running out
oI 'cheap gold (or the massive deposits that produce at prodigious rates at low costs). As these
older 'super deposits produce less and less each year, the worlds major producers have been
having an increasingly diIIicult time making up Ior this lost production. This dynamic should
support the price oI gold in our opinion and will result in higher exploration spending in remote
locations in an eIIort to counteract this reality (cue, Energold :)). Again, there is no other way
that we are aware oI Ior producers to alleviate the current bottleneck other than by spending tens
oI billions oI dollars collectively over the coming Iew years and beyond on exploring/drilling
Ior new high impact deposits. To Iurther this point, we would make the case that this isn`t really
discretionary spending going Iorward, as without it, they will Iully deplete their resource base and
in the process, cease to be a viable going concern.

Let`s review some high level Iigures exploration spending wise in order to paint a better picture
oI how we Ieel the above dynamic will eIIect the Iuture prospects oI the Irontier drilling market
and EGD in particular. First, total exploration spending amongst all base and precious metals
producers looks to be coming in around ~$14B in 2011, and with Jr. miner`s raising U.S.
$12B last year Ior gold related projects, spending should remain stable, iI not improve in 2012
(potentially surpassing the all time spending record set in 2008). Again, overall activity and hence
spending is, in our minds, highly probable to remain strong/Iirmly in an uptrend over the next
Iew years with (1) commodities and mineral prices high across the board (2) the structural reserve
issue getting worse and (3) both majors and juniors having the cash and resources necessary to
ramp up spending. OI that ~$14B, roughly ~50 oI that spending - or ~$8B - is currently being
allocated towards gold exploration (which may be higher going Iorward, but is essentially in line
with gold`s historical share oI the overall exploration pie). Also, the share oI total spend
allocated towards Irontier drilling has been decreasing over the last Iew years but importantly
looks to have stabilized around 33 oI the total. We think this is interesting as it appears that
right about the same time Irontier drilling`s share is set to normalize (i.e., begin to revert
towards its natural LT equilibrium closer to say ~45), the structural issues discussed above
are set to kick in, which should naturally turbo charge the share gains that accrue to the Irontier
market. In other words, the ~$4.62B ($14B in total metal exploration * 33 to Irontier) dollars
oI total Irontier drilling spend should grow materially in the coming Iew years, and Energold is
almost certain to garner a growing oI this growing pie.

Another point worth mentioning is that at the margin the absolute dollar amount that this
incremental demand increase will likely bring about is massive, and our expectation is that
the resulting incremental demand Ior Irontier drilling rigs will overwhelm incremental supply.
This is a really crucial point, as the dynamic described above should lead to both (1) incredibly
high/sustained demand Ior new 'Irontier rigs and (2) signiIicant pricing power Ior rigs already
deployed, which is pretty much as good as it gets Ior pretty much the only company capable oI
supplying both pieces oI the above puzzle. The result should be huge increases in both volumes
and pricing on existing and new rigs, which will lead to an explosion in Energold`s underlying
operating perIormance as this dynamic plays out.

All in all, given that EGD is the dominant player in a variety oI relatively unexplored, mineral
rich "Irontier" markets, and because their 'man portable rigs are both environmentally Iriendly
(unlike competing rigs) as well as possess the ability to drill in remote, hard to reach places (i.e.,
where their competition can`t), we don`t think it necessarily takes a genius to realize that (1)
the company is perIectly positioned to exploit the above dynamic and (2) holding such a key
position within what is an abnormally proIitable, rapidly growing niche market - on the cusp
oI accelerating growth due to structural change - is almost certain to be an immensely lucrative

Additional thoughts on Energolds Market Position...

Remember that Energold is pretty much the only game in town at this point, and its position as
essentially the sole source provider in regards to 'man-portable rigs is likely to stay that way
Ior at least the next Iew years, iI not indeIinitely. AIter all, the company`s more mature (read
bureaucratic/slow moving), structurally less eIIicient peers have been built in a way that makes
successIully competing in remote, diIIicult to reach locations (that lack traditional inIrastructure)
practically impossible. Also, local competition within Energold's core markets doesn't stand
a chance long-term, as Energolds unmatched Iinancial Ilexibility, superior size and scale, the
breadth and depth oI its service oIIerings, etc. practically ensures that threats Irom local mom
and pops will always be a non-issue. As things stand then, we don`t see any serious potential
competitors anywhere on the horizon that have a prayer in our opinion oI taking a non-negligible
amount oI market share.

To understand why this is, consider that in order to seriously compete in attractive new "Irontier"
markets in the Iuture, Energold`s larger comps would have to radically transIorm the way they
have always done business, literally Irom the bottom up. Granted, success is theoretically possible
with enough time, money, and determination but such an outcome is highly unlikely in our
opinion, and even under the chance that such a low probability event comes to be, it should take a
couple oI years at least beIore these eIIorts would gain any real traction.

A Iew oI the Iactors as to why we think the odds oI Energold's comps successIully engineering
such a transition are so low include the majors` (1) entrenched culture (2) radically diIIerent Ileet
composition and core "target" market (3) lack oI Iully interchangeable skill sets between the two
companies crews and mid-level management (Ior example, the material diIIerences related to
diIIering training requirements Ior personnel, the typical target crew member, etc.) and (4) lack
oI the requisite in house manuIacturing and logistical expertise, back oIIice systems, political
contacts, and other unique "on the ground" experience that is Iundamental to eIIectively produce,
mobilize, transport, and train "man-portable" rigs & crews around the globe (at least in an
eIIicient, cost competitive manner). OI course as things stand, the Iact that many oI these comps
have chosen not to enter the market at all, and perhaps even more telling, oI those that have, none
have been able to make any real progress over what has been a suIIicient period oI time to make a
good run at it is quite telling as well.

Jalue Proposition (Continued Market Share Cains are a High Probability Event)

Given that Energold`s saIe, low cost, and high quality rigs are 1) cheaper 2) more productive
(i.e., quicker per meter) and 3) better Ior the environment than the average drill (read 99
oI the market), the value proposition here is obviously signiIicant. In other words, it seems a
near certainty that the company`s suite oI drills/services is intrinsically beneIicial to producers
operations on nearly every level.

It`s a similar story Ior the local communities they serve. Unlike the company`s comps whose
drill crews are primarily Ioreigners and whose equipment is certain to leave the local landscape
scarred long aIter they have packed up and gone home (aIter extracting a Iew billion dollars Ior
the trouble oI course), Energold appears to truly care about and actually improve the communities
which they operate in. For example, not only do they leave the surrounding environment
essentially as it was, they are able to act as a source oI job creation and in the process
meaningIully improve the local economies they serve. AIter all, roughly 80 oI Energold`s drill
crews are comprised oI locals who are both trained and provided with a competitive and steady
paycheck in a world where such things are sadly nearly nonexistent. Additionally, the company
usually sets aside 1-2 oI revenues in order to reinvest in local community projects.

Best in Class Management

No discussion on Energold would be complete without mentioning CEO Fred Thompson, who
is arguably the best CEO in the industry and is in our opinion responsible Ior almost the entirety
oI Energold`s historical (and Iuture) success. OI course we also want to discuss his paper trail
because we are, aIter all, talking about a micro cap operating within the mining/commodity
industry, so mentioning why we Ieel he has what it takes to deliver over time is absolutely crucial
in our minds Ior other investors to properly calibrate the overall risk/reward equation here. So
with that said, let`s get to it.

First, we wanted to quickly discuss Thompson`s paper trail and how his leadership has not
only Iacilitated high return rig growth oI ~30 annualized since the company`s inception, it
also resulted in Energold - unlike nearly all oI its drilling peers - consistently generating cash
throughout the worst Iinancial crisis in a generation. Clearly he has proven himselI capable oI
(1) running the company to make money regardless oI the market environment or where the
company is within the cycle and (2) grinding out market share gains year in and year out, both oI
which are an incredibly impressive testament to his skill as an operator as well as in regards to his
dedication to preserving/growing shareholder value.

Second, we want to discuss his incentives and uniquely capable background in order to add
some insight into why we think he is Iully capable oI executing the company long-term plan. For
example, his historical dedication to maintaining...

(1) A strong balance sheet (net cash) - provides suIIicient liquidity/Iinancial Ilexibility to weather
the vicissitudes oI a cyclical, commodity industry, as well as to opportunistically capitalize on the
mistakes/misIortune oI competitors when and where the opportunity presents itselI.

(2) Capital discipline - Ior example, by Iocusing on ROIC and conservatively growing the
company at an appropriate rate (given the appropriate top down and bottom up considerations),
an investor doesn't have to worry about the immolation oI shareholder value typical oI the avg
management team within the space/industry. OI course the Iact that he owns a ton oI stock might
have a lot to do with his prudence as well.

(3) The establishment oI - and improvement upon - the company's permanent cost advantage. A
management team that not only excels at operations but that actually gets competitive strategy,
and that is continuously Iocused on widening the moat is almost "unicorn" rare in our experience
when dealing with micro cap managements operating in the commodity/mineral industry.

(4) A capital light operation with a variable cost structure - this augments the companies ability
to quickly react to any signiIicant detonation within the company`s Iundamental outlook and in
turn to preserve proIitability much more easily than most over a Iull cycle (2009 was a perIect
testament to the power oI this model).

...Have all played key roles in his tremendously impressive operational success since Energold`s
creation in 2006 and should continue to as Energold evolves over time.

Another crucial element to Energold`s success is Thompson`s uniquely capable background. His
experience as an economics undergrad, International Iinance MBA, CPA and public company
auditor, Iinance proIessor and consultant to mining companies, beIore being asked to run Impact
Silver, and eventually - once he had the big idea - a specialty driller (Energold), has all been
integral to his success and we think oIIers important clues to understanding why he is so capable/
uniquely qualiIied to lead and execute Energold's long-term vision. First, his business background
helps in all the obvious ways (capital allocation, strategy, etc.) and second (perhaps more
importantly), his experience running both a highly successIul commodity/mineral producer and
service company (at the same time) over the last halI decade or so allows an understanding oI the
needs and wants oI both businesses (i.e., his customers and competition) that is unmatched in the

Attractive Inflation/Macro Hedge

In light oI structural credit risks and the large amount oI quantitative easing/money printing that
has been occurring and, all things considered, will likely continue, it is reasonable in our minds to
be concerned about the Iuture buying power oI the U.S. dollar and the paper currencies oI these
economies in general. The truth is that continued money printing in the developed world is very
likely the only politically Ieasible solution to dealing with the large and growing liabilities that
the world`s major economies have racked up over the previous Iour decades or so.

Luckily though, the eIIects oI such policies on Energold`s business and Iuture prospects are
not only not harmIul, they are actually beneIicial on a variety oI diIIerent levels. AIter all, this
business (1) earns the vast majority oI its proIits globally (2) has pricing power given its market
position and the 'man-portable rig supply/demand bottleneck currently underway and (3) its
huge leverage to the price oI commodities/minerals generally, but in particular, to gold and silver.
All oI which make it a natural hedge against inIlation and in some sense, a play on the current
Iiscal and monetary irresponsibility oI our various leaders continuing uninterrupted.

Consider the secondary eIIects that our present Iiscal and monetary policy has on Energold and
the virtuous cycle oI operating tailwinds that result. For example, continued money printing
all things the same equals higher precious metal prices. Higher prices mean above average and
improving ROIC Ior mineral/commodity producers, which equals increasing capital inIlows/
investment in mining companies, which equals increasing exploratory budgets/capex and hence
more drilling demand. More drilling equals more demand Ior Energolds service`s, which is
interesting but especially in light oI the limited supply oI experienced and capable drilling
crews, the majors structural issues related to reserve replacement, and the weak to non-existent
competition in the companies large/growing core market, all oI which should result in not only
high growth, but in a signiIicant amount oI untapped pricing power Ior the company going

Taken together then, Energold oIIers investors 1) tremendous leverage to the price oI precious
metals without all oI the operational, commodity and Iinancing risk typical oI mining industry
and 2) short to intermediate-term optionality on the continued depreciation oI the dollar and
developed world currencies and the signiIicant currency tailwinds that would result (remember
that almost all oI Energold`s markets are by deIinition mineral/commodity rich, so rising prices
should result in rising currencies relative to our own).

In sum, A Low-Risk, High-Return Investment Opportunity

Given Energold Drilling (EGD CN) (1) is currently trading hands at ~5x our estimate oI
normalized owner earnings and (2) will likely continue to organically compound book value at a
rapid rate - say 20 - Ior the Ioreseeable Iuture, the company's current valuation is stunningly
cheap on an absolute basis and relative to (1) comps (2) other business service companies with
similar growth prospects and returns on capital (3) to the 10 yr. treasury or (4) relative to the S&P
as a whole.

Preposterously, the current valuation assigns absolutely no value to the company`s premier
contract drilling Iranchise or its signiIicant high margin secular growth prospects. In our
experience, rarely does one get the chance to purchase a competitively entrenched, high return
growth business at a no growth price. Even rarer still, when the company in question operates in
a secular growth industry, has a recent history oI high growth, Iavorable near to medium-term
operating momentum, and various top and bottom line tailwinds Iirmly at their back.

AIter all, businesses that typically trade at 20 maintenance FCF yields are almost always
businesses that are undergoing Iinancial distress and/or are in terminal decline with very little,
iI any hope oI value accretive growth in the Iuture. For a competitively entrenched, high return
business with an above average secular growth proIile to trade at a similar valuation makes
no rational sense. Clearly then, our view is radically diIIerent than the markets regarding the
value oI Energold`s growth prospects and/or in relation to the presence oI a durable competitive
advantage. It`s this mismatch (expectations wise) that we think is primarily responsible Ior the
magnitude oI the current mis-pricing and hence Ior what is in our opinion a truly one oI kind
opportunity to purchase a wonderIul business at an almost impossibly cheap price.


Note all figures are in Canadian Dollars

Adfusted EJ Jalue Calculation.

Current price - $3.79
F/D shares outstanding - ~46.5m
MKT Cap - ~$176.25m
Debt $10m
Value oI Impact Stake today - 6.9m shares ~ $2.02 ~$13.9m
Value oI Dominican Republic mineral deposit ~$1m (wild ass guess)
Value oI Bertram acquisition ~$18m (accounted Ior at cost)
Cash - ~$22.4m

Adjusted EV ~$130.9m

Notes: In order to get a Ieel Ior what we are paying Ior Energold's core mineral drilling business
(and b/c its not consolidated within the company's Iinancials yet, which could lead to a decent
amount oI noise post deal Ior a Iew quarters) we have deducted the acquisition cost oI Bertram
Irom our Adj. EV calculation. Our take is that management likely got a steal here and that long
term the 2.5x normalized EBITDA multiple that the company paid will look like a ridiculous
bargain in retrospect, especially as the strategic and Iinancial beneIits become increasingly clear.
Regardless, the assumption here is that Bertram is worth at least the ~$18m they paid.

Also, Energold's true adj. EV could be signiIicantly lower (potentially negative even) depending
on a couple oI issues.

First, one could potentially justiIy canceling out some, iI not all oI the $10m in debt related to
the recent Bertram acquisition with the 10m backlog acquired Irom the recent Dando purchase
(bringing the adj. EV to ~$120.9m).

Second, the Dominican Republic land/deposit could be worth materially more than the $1m listed
above, as other producers continue to prove up their own high quality parcels surrounding EGD's
claim. The thought is that (at least as we understand it) as these producers continue to de-risk
EGD's play the accretion oI value here could be both quick and material. Fwiw, Thompson has
stated he intends to be opportunistic and that they will monetize this asset in the near to medium-
term as the above dynamic unIolds.

Third, and this is where things get intriguing, EGD's stake in Impact Silver could potentially be
worth somewhere between ~ $25m to $130m (maybe more) over the next 3-5 years depending
upon the amount oI oz. the company produces and the price oI silver (obviously). We can run the
the numbers on a variety oI scenarios, but at minimum we think that it's really hard to rationally
argue the IV oI this stake is worth less than $25m (vs. Our current mark oI 13.9m). Anyhow, our
back oI the envelope calculations leads us to believe that the optionality associated with EGD's
~10 Impact stake is signiIicant. Notably, iI things go reasonably well over the next Iew years
- which Iwiw we think is likely given management`s history oI operational excellence, low cost
producer status, ability to internally selI Iund organic growth, and numerous levers available to
them to help Iinance a massive production ramp through 2015 Energold`s stake is worth at least
~$50m (again, based on what I think are plausible estimates, i.e. 1.5m in 2012 production, $50
silver, etc.). II we assume $30 silver, a static $13 cash costs, and a production ramp that amounts
to only halI oI its 2015 production potential oI 6k ounces - i.e. 3k ounces (and a 10x multiple),
investors would be getting Energold`s operations essentially Ior Iree.

Clearly then the Impact stake is a material hidden asset that in many ways amounts to an
embedded call option leveraged to higher silver prices and managements ability to execute the
company's huge production ramp over the medium-term. It appears entirely reasonable to us that
we may look back two years Irom now and realize we actually got paid to own a best in class,
rapidly growing niche business Ior less than nothing. Not saying it's probable, but it's certainly
possible and better yet, we aren't paying a dime Ior it.

For a more granular look at Impacts valuation, the recent and well-done write-up by Iriend oI the
blog Mario Skonieczny oI the superb Classic Value Investors is posted below. His discussion oI
the valuation under diIIering scenarios provides a great, quick and dirty overview oI what IPT
is/could be worth under a variety oI potential Iuture outcomes, and is particularly helpIul in our
opinion as Iar as thinking about the value oI the optionality/embedded call option here. The Iull
write-up can be Iound here.


IMPACT Silver increased silver production from 348,949 ounces in 2007 to 823,571 ounces
in 2009 which represents a 136 percent growth. All this growth was financed bv internal cash
flow, which is absolutelv ama:ing. Also, lets not forget that the price of silver was nowhere near
where it is todav. In 2010, production dipped to 750,259 because the companv revised cut-off
grades and mined more medium grade ore as it took advantage of high silver prices. In 2011,
silver production is on track to reach 1 million ounces. During the first quarter of 2011, the
companv alreadv produced 260,970 ounces. Bv 2012, the companv profects a production level
of 1.5 million ounces of silver. Considering that so far, the management is executing flawlesslv, I
have no doubt that thev will be able to execute again.

Lets first look at how much monev IMPACT Silver can make with the production of 1 million
ounces of silver. I will use a silver price of $30 per ounce even though it is $36 per ounce as of
the date of this report.

Revenues 1 million production x $30 per ounce $30 million

Expenses 1 million production x $13 per ounce $13 million

Profit before Taxes $17 million or $0.24 per share

Using a multiple of 10 on this number gives us a value of $2.40 per share.

Now lets take a look at how much IMPACT Silver can make with the production of 1.5 million
ounces of silver which is scheduled to occur in 2012.

Revenues 1.5 million production x $30 per ounce $45 million

Expenses 1.5 million production x $13 per ounce $19.5 million

Profit before Taxes $25.5 million or $0.35 per share

Using a multiple of 10 on this number gives us a value of $3.50 per share.

What if Eric Sprott is right and silver reaches $50 per ounce?

Revenues 1.5 million production x $50 per ounce $75 million

Expenses 1.5 million production x $13 per ounce $19.5 million

Profit before Taxes $55.5 million or $0.77 per share

Using a multiple of 10 on this number gives us a value of $7.70 per share.

What if Eric Sprott is even more right and silver reaches $100 per ounce?

Revenues 1.5 million production x $100 per ounce $150 million

Expenses 1.5 million production x $13 per ounce $19.5 million

Profit before Taxes $130.5 million or $1.81 per share

Using a multiple of 10 on this number gives us a value of $18.10 per share.

As vou can see the value of IMPACT Silver will depend on the price of silver and its underlving
production. Consequentlv, if we assume silver production levels of 1.5 million ounces of silver,
then we arrive at values between $3.50 and $18.10 per share. While I have no idea where it will
fall, buving it for $1.70 per share does not seem like a bad idea.

But the storv does not end here. The above production calculations are onlv from the Zacualpan
Silver District. Thev do not include Mamatla Mining District, which as I mentioned before could
add over 4.5 million ounces to the companvs silver production levels. Running the same number
using 6 million ounces of production can get vou a stock price that is significantlv higher than
anv of mv conservative estimates. Because the companv is cheap based on the current production,
I wont bother calculating it and I will treat it as a free option that might have some value in the

Net Asset Jalue.

Given the myriad oI risks/headwinds that still Iace the global economy we think it makes eminent
sense Ior investors to look Ior low-risk investments with rock solid downside protection along
with certain other deIensive characteristics that in combination, will likely ensure the business
in question should continue to do well under any reasonable Iuture outcome we can imagine.
With that in mind, we believe purchasing EGD at or around NAV (at current prices) and/or a mid
single digit to its steady state earnings power oIIers investors exactly such an opportunity.

AIter all, its pretty hard to lose money purchasing a Iast growing Iranchise business with 20
EBIT margins and the ability to grow organically at high double digit rates at roughly its readily
saleable tangible asset value.

Quick and Dirtv Pro Forma NAJ.

A) Current Mineral Drilling Rig count oI 118, assuming a private market value oI ~750k/per rig
B) EGD's adj. net working capital ~$34m
C) Bertram NAV at cost $18m
D) Dominican Minerals $1m
Total Assets $141.5m
Less: $10m Debt
NAV $131.5m
NAV per share $2.83
Price to NAV 1.35x

Energold`s NAV is calculated by adding the private market value oI the mineral drilling Ileet, the
value oI Energold's net working capital (less inventory), and the book value oI the rigs recently
acquired through the Bertram acquisition. Note that our private market value calculation is based
on the value oI the rigs being sold along with their contracts (which is why it is higher than the
500k/rig replacement cost) - as the remaining cash Ilows Irom the existing contract in place will
always be included in a private sale.

NAV should approximate roughly $131.5m, implying a net asset value per share oI 1.35x. We
note that given the build out oI twelve more rigs and cash generation, Energold is likely trading
at or slightly below our estimate oI NAV Ior year end `11. Although an earnings power valuation
is the more appropriate metric, the Iact that investors are paying NAV Ior a Iranchise business
should provide an additional layer oI comIort/downside protection. Generally speaking, buying
businesses that can generate 30 ROIC near the saleable value oI their assets is a very good

Normali:ed Earnings Power (Base Case)

We believe the Iollowing assumptions are conservative as Iar as normalized pricing, utilization
and rig count is concerned (Ior some historical context, Energold has grown revenues over
900 over the last Iive years). Notably, we have purposeIully attributed no value to the ~100
rigs acquired in the Bertram acquisition Ior conservatism's sake. In other words, the normalized
earnings capacity listed below is entirely a Iunction oI what we expect the core mineral drilling
business alone to earn in a normal year going Iorward on Energold`s existing asset base
(everything else is gravy).

So with that said, Q1 11 pricing was $170/meter. $190/meter assumes 5 price increase and 5
Irom improvement in mix shiIt.

Energold is adding roughly 25 to its rig count. II we assume that only Iour out oI Iive are
Irontier drilling rigs (it will likely be all oI them) and Irontier pricing is $250 versus $140 Ior
brownIield, then average revenue per meter could be raised by another $30MM. This would add
$10MM in net income.

valuaLlon - normallzaLlon of
LxlsLlng AsseL 8ase

8lg CounL 118
MeLers er 8lg 6,300
Average 8evenue er MeLer $190.0
1oLal 8evenues (MM) $143.7
CosL of urllllng $87.4
Cross roflL $38.3
S,C&A $20.0
CperaLlng lncome $38.3
1axes $12.6
!"#$%&'()" *+,-.

Shares CuLsLandlng (MMM) 46.3
CurrenL rlce $3.79
MarkeL Cap 176.24
uebL $10.0
/&01234#"1$5&#"67684"$90:3" *;<=-+
Cash $22.4
8erLram AcqulslLlon $18.0
lmpacL Sllver SLake $13.4
>1234#"1$5&#"67684"$90:3" *;?@-A

59$B$!% ,-@<C
59$B$D7"60#8&E$%&'()" ?-A;C

We think such a yield is mouthwatering, rub your eyes and check again attractive, especially
given the tremendous qualitative attributes oI this business and the Iact that this ~20
maintenance FCF yield will likely grow at a low twenties double digit clip over time. Personally
we Iind it incredible that EGD's tremendous high margin/high growth potential is currently being
assigned zero value by the market, especially given that above avg, highly proIitable growth
going Iorward is a high probability event given Energold`s dominant market share, sustainable
cost advantage, superior value proposition, etc.

From a Iinancials perspective, we think this is one oI the most important elements.
Comparison oI
Historical ROIC with
Normalized Operations
on Existing Asset Base

2005 2006 2007 2008 2009 2010 Normalized
Total Assets $20,739,470 $31,092,940 $50,328,480 $70,441,300 $68,912,830 $95,274,160 $108,930,000
Excess Cash $1,567,287 $5,074,532 $6,021,587 $6,274,512 $6,993,436 $12,158,820 $20,000,000
Current Liabilities $5,174,869 $7,941,141 $20,293,964 $21,733,880 $19,398,373 $29,624,288 $13,940,000
Invested Capital $13,997,314 $18,077,267 $24,012,929 $42,432,908 $42,521,021 $53,491,052 $74,990,000
NOPAT $1,611,542 $1,467,022 $4,607,194 $6,469,644 $110,291 $1,469,771 $28,655,640
ROIC 11.51 8.12 19.19 15.25 0.26 2.75 38.21

Note: Inputs Ior normalized conditions include: 118 current rig count, 6,500 meters per rig
annually, $190 revenue per meter, 26 operating margins, $10MM add to asset Ior Bertram
Acquisition convertible issue and $2MM contribution to NOPAT Irom Bertram division)

Historically, Energold`s ROIC has ranged Irom mediocre to downright bad. This is attributable
to two major Iactors (1) a signiIicant lag in the time between capital investment and revenue
generation and (2) a catastrophic hit to the industry in `09 and `10. Over the last two years
Energold has added 40 rigs to its Ileet count. This investment, along with acquisitions, has total
$40MM, yet until the end oI 2010 and into the beginning oI 2011 revenues had actually declined
Irom 2008 levels. With rigs now built and being delivered to their work site as we write this and
utilization in Iull recovery mode thanks to $1700 gold, this trend is set to reverse. Fast.

Energold possesses highly attractive opportunities to reinvest its cash, resulting in high
contribution margins and Iurther improving returns on invested capital. Assuming that each new
rig consists oI $350,000 investment in capital assets and $250,000 in working capital, we estimate
that Energold`s investment in new rigs has a strong chance at generating 50 aIter-tax returns.

Cost oI a New Rig $600,000
Meters Drilled 6,500
Revenue Per Meter (Frontier Pricing) $215
Annual Revenue $1,397,500
Gross Margin 40
Gross ProIit $559,000
Incremental SG&A 5
SG&A Load $69,875
Operating Income $489,125
Taxes $161,411
After-Tax Incremental Cash Flow $327,714
After-Tax ROIC 54.6

Normali:ed Earnings Power (5 vears)

The Iollowing long-term scenario assumes that Energold is capable oI tripling its current man-
portable rig count looking out long-term. This is supported by what we believe is the entirely
reasonable assumption that this superior high return, capital light business, with its innovative,
proven, Iully incentivized jockey, durable competitive advantage, and a long, high-return growth
runway should be able to grow it's overall industry wide market share Irom the current ~2 (118/
7000) to ~5 (354/7000) within the next 5 years.

So given the above and assuming similarly conservative assumptions similar to our base case, we
get a total rig count oI 354 rigs. Assuming they do 6.5k meters per drill at rates averaging ~$190/
meter, normalized revenues should equal $437,190,000.

II we also assume a conservative normalized 40 GM, SGA at 10 (to reIlect the considerably
larger scale and inherent operating leverage within the business), and a 30 tax rate, Energold`s
core mineral business alone should generate NI oI ~ $91.8m.

Compared to its current Adj. EV oI ~$130m, Energold appears to be presently trading hands at
little more than 1x core 2017 owner earnings. Not a bad outcome Ior long-term investors who
possess the willingness to wait patiently Ior management to deliver/execute the plan, no?

YE 2017 total rig count 354
6.5k Meters per drill
Revenues per meter $190

Normalized Revenues $437.2m
Normalized GM 40 $174.9m in gross proIit
Normalized SG&A 10 $43.7m in corporate expense
Normalized Tax Rates 30 $39.4m in taxes owed
Normalized NI $91.8m
Normalized Maintenance FCF Yield $91.8m/~$130m or a ~70 maintenance FCF yield

Applying reasonable 10x multiple on 2017 NI, the business is worth $918m which divided by
the ~46.5m F/D SO, equals ~19.75/share. At a more rational market multiple oI 15x 2017 Owner
Earnings, the business is worth $1.37B or ~29.61/share. Not bad given a current share price oI

Note: Because the company has hit an inIlection point within its corporate development that
should allow it to internally Iund the entirety oI its growth capex on a go Iorward basis we have
decided to keep the share count the same. We realize that management has historically\recently
opportunistically issued shares to Iund a Iair amount oI its Ileet growth/acquisitions but the past is
not likely prologue in our opinion and why issues shares when there's no need to (again, internal
cash generation should be plenty suIIicient to add the rigs necessary to capture 5 oI the market.
Historically it made sense (all things considered) and given rig count grew at 3x the growth in
share count, that growth was still massively value accretive on a per/share basis.

Normali:ed Earnings Power (Scorched Earth Scenario).

Now that we`ve looked at the some oI the more probable outcomes, lets assume that the Iuture
turns out to be considerably worse than we imagine and not only does growth cease, but that
the mix shiIt and thereIore revenue and gross margin expansion we expect never materialize.
As the low cost operator then, we assume that the company starts bidding contracts out at say a
30 gross margin or a level at which its comps will lose money. Lets also assume meters drilled
per day are only ~5.5k and purposeIully inIlate SG&A and depress the price/meter piece oI the
equation to account Ior a potentially equally as diIIicult market environment as the company
experienced in 09 - all oI which we think are incredibly unlikely to happen again but we are
attempting to see what this business is worth under a scorched earth scenario so we`ll run with it.

So with YE 2011 rig count at ~130, 5.5k meters/rig, and price/meter at $165 we get normalized
revenues oI ~$117,975,000. At a 30 gross margin, SG&A at $20m, and a 30 tax rate
Energold will earn ~$35.4m in gross proIit. Taking that ~$35.4m and subtracting the ~$20m in
corporate expense equals ~$15.4m. AIter adjusting Ior the 30 tax rate we get ~$10.78m in aIter
tax income or ~12x the current adjusted EV.

Ironically enough then, we think that iI one assumes an almost impossibly draconian outcome
that implies (1) no growth (2) no market share gains (3) depressed Ileet wide utilization and
(4) a price per meter drilled less than what was earned Ileet wide at the trough oI the worst
environment in modern memory, then investors are paying something much closer to Iair value
on an earnings basis or a ~12x multiple on depressed 2011 earnings. Yet our margin oI saIety
under this scenario comes Irom the Iact that we didn't purchase the company at a signiIicant
premium to NAV. Wherever we are in the cycle, a wonderIul business run by a phenomenal
jockey is worth more than its tangible asset value.

We think the odds oI such an outcome coming to Iruition are less than 5 and even iI it does, the
company would in reality still oIIer downside protection, consistently generate cash and grind out
additional share gains (and hence grow) by undercutting less eIIicient comps, which as it happens
would Iuel even stronger core earnings once the cycle eventually turns at some point in the Iuture
(and preserving/growing Energold`s per/share intrinsic value in the process).

1op and Bottom Line Drivers - Recap

Companv Specific Factors

Rig Count is Increasing - As more low cost, quick payback, high ROIC rigs are built and
deployed towards the company`s highest return opportunities, Energold should increasingly
beneIit Irom Iixed cost utilization as early stage markets gain scale and the higher margins and
better utilization rates on incremental revenue start Ialling towards the bottom line. As rigs are
rapidly added, we expect the combination will be explosive, as increased activity should result in
more rigs doing higher volumes at better prices, which in turn should drive rapid improvements in
revenues and gross margin.

Also, investors should take comIort in the Iact that demand Ior additional rigs should stay
extremely strong given industry trends as it provides a relatively visible and signiIicant growth
trajectory Ior Energold to exploit. It`s also nice that Energold is in a great position to meet this
large and growing demand given it has the internal cash Ilow and balance sheet strength to
continue to Iinance above average (high return) Ileet growth as long as necessary.

Price/Meter is Increasing - With the shortage oI rigs within the industry already evident and the
step change in exploratory spending in Irontier markets just beginning, pricing power should
rapidly accrue to the industry as what is an increasingly tight supply/demand bottleneck only gets
worse Irom here (as incremental rig demand should continue to overwhelm incremental 'Irontier
capable supply).

With that in mind, we expect both overall rig demand and day rates to continue to move up -
and given the company remains pretty much the only game in town - we expect that most oI the
mineral industry`s increasing exploration spend on Irontier drilling should, in one way or the
other, accrue primarily to Energold. AIter all, there isn`t a competitor in sight that has anywhere
close to the unique capabilities required to step into this growing gap in order to help 'de-
bottleneck the situation.

Rig Utili:ation Increasing - With large and growing spreads between the ROIC and the cost oI
capital, gold producers oI all sizes should continue to Iire up their drill bits as Iast as possible.
Again, this increase in Irontier related exploration spend looks set to continue Ior quite awhile
and will obviously augment the demand Ior man-portable rigs, in turn driving a growing
proportion oI Energold`s total Ileet towards higher margin markets.

Positive mix shift - a large oI the company's assets will be redeployed at more attractive rates
within the next year as more rigs are added and legacy, lower margin drilling contracts run oII.
The result is that higher margin Irontier contracts should begin to make up an increasingly large
portion oI the companies total revenues and operating proIit over the next couple years. This will
slowly transIorm the cash generating capabilities oI the existing Ileet in a hugely positive way,
and ultimately leading to Energold generating rapidly increasing amounts oI owner earnings/

Industrv Specific Factors

Increasing Commodities Prices (primarilv gold) - Given how proIitable gold production is around
current levels, increasing amounts oI capital should continue to Ilow into the industry. This could
cause both volumes and pricing to simultaneously increase dramatically, which in turn would
likely result in exponential as opposed to linear EBITDA growth as operating leverage and
pricing power magniIy FCF growth in relation to revenue growth.

Mafor/Junior Capex Budgets are Increasing - With both major and junior E&P`s sitting on
record cash balances and structural issues being what they are, producers have (unsurprisingly)
continued to expand their exploration budgets Ior the 2011/2012 Iiscal year(s). Notably,
exploration spending Ior 2011 is on track to clock in at ~14B and due to issues already covered,
will almost certainly go higher Irom here.


So, what we have here is an innovative, environmentally Iriendly business with 1) a sustainable,
nearly impossible to replicate cost advantage 2) attractive incremental economics 3) very low
market share and 4) a tremendously long runway Ior high return growth in Iront oI them coupled
with a growth strategy Iocused on rapidly expanding in under-served markets with minimal
competition, which in turn allows them to quickly entrench as the low cost provider.

This is a business that also happens to be 6) a leader in innovation with an ability to grow rapidly
over time Irom its present small base oI revenue and proIits and perhaps even more importantly,
has a very high probability oI earning multiples oI what it earns today looking out a Iew years and
7) is run by a uniquely capable, visionary owner/operator with a long and impressive paper trail
oI success and huge insider ownership. It also happens to be unsustainably cheap.

We think the combination oI the above Iactors should provide investors with the opportunity
to earn 2-10x their money with very little risk oI permanent capital loss under any reasonable
Iuture scenario we can imagine looking out 3-5 years. In the incredibly improbable event that a
scorched earth scenario happens, its important to keep in mind that even then, the company would
likely still prosper in a downturn (at the expense oI its weaker comps) and its still cheap to Iairly
valued (and growing).

The bottom line here then is that Energold appears to be a classic low-risk, high-return Iat pitch
and in our opinion it`s only a matter oI time beIore the market wake`s up and comes around to
our point oI view (our guess is sooner rather than later). When it does, we expect the market will
quickly award this high quality business with an appropriate (i.e., higher) multiple much more
reIlective oI the quality oI this business and its high return, above average growth prospects.


Investor recognition oI a great business

Improving operating perIormance - increasing rig utilization and pricing power begin to
demonstrate the company`s latent/true earnings power

Miscellaneous Must Read's:

CEO Fred Thompson's Recent Interview

Adventures in Capitalism Blog Posts

Mining Services Part 1

Mining Services Part 2


Eric Sprott Interview/`Markets at a Glance`

Recent Chris Martenson Interview

Follow the Monev

Energold Companv Materials

Energold Financials/Letters to Shareholders

Energold Drilling July Presentation


3 Crucial Questions:

The million dollar question(s) with Energold in our minds revolves around three issues. The Iirst
two relate to thinking about what really drives Energold`s top and bottom lines, in particular,
(1) how many meters will the company drill, and (2) what price will they get per meter? II you
can satisIactorily answer both oI those questions than you can approximately estimate what
the company should earn. The other relates to the durability oI its moat (or lack thereoI). In
particular, is their advantage permanent or merely temporary? AIter all, iI Energold truly is
one oI those exceedingly rare businesses that possess above average prospects Ior sustainable
value creation then it is very likely worth many multiples oI its current price. II not, then the
risk/reward calculation changes considerably and its a pass. So again, the question really boils
down to whether or not Energold`s present level oI owner earnings is - at an absolute minimum -
sustainable, and iI so, why?

With the above in mind, lets get down to answering the questions at hand, namely how does
one evaluate a company`s prospects Ior sustainable value creation and gain conviction in their
possession oI a sustainable competitive advantage? Well, we know that a company must have
two characteristics to claim that it has a durable competitive advantage. The Iirst is that it must
generate, or have an ability to generate, returns in excess oI the cost oI capital. Second, the
company must earn a higher rate oI economic proIit than the average oI its competitors. So
given that, its helpIul to review a quick primer on the unique attributes oI a durable moat beIore
discerning the issue.

The excerpts below are taken Irom the Iantastic series on competitive advantage (which can be
Iound in Iull here, here, and here) via another one oI our Iavorite blogs, the outstanding The
Fallible Investor.

So, Iirst things Iirst, what is a sustainable competitive advantage?

'As most of us are aware, a sustainable competitive advantage is the abilitv for a business to do
something that its (potential) rivals cannot. It means being able to.
1. Keep the businesss current customers and,
2. (Possiblv) grow bv attracting new customers,
3. On terms which are more profitable than the businesss competitors,
4. For a reasonablv long-time (it is sustainable not temporarv)`

Second, what is, and how does one evaluate, an economies oI scale competitive advantage?

'A business has an economies of scale competitive advantage when.

1. It has a much larger market share with a product or service than its competitors in a.

Geographic area, or,
Product or service space (for example Intel with computer CPUs), and,

1. Fixed costs make up a large share of total costs.[2]

If this occurs the dominant businesss average cost per unit will be lower than its competitors. Its
smaller competitors will have higher average costs because thev cannot reach the same scale of
operation. The dominant businesss lower average cost per unit means it can keep competitors at
bav bv using one or more of the following tactics. It can have.

1. A lower price for its product or service than its competitors, [3]
2. A more technologicallv advanced product or service than its competitors (it can spend
more on research and development), or,
3. Better marketing for its product or service than its competitors (it can spend more on
advertising and sales promotion).[4]

However, as Professor Greenwald points out, pure si:e is not the same as economies of scale.[5]
It is the share of the relevant local market rather than si:e bv itself that creates economies of

Third, an economies oI scale advantage alone isn`t enough - only in combination with customer
captivity, will economies oI scale result in a durable advantage...

'Economies of scale bv itself are not enough for a business to keep a competitive advantage. If
a business has onlv an economies of scale advantage, its competitors will be able to take some
of its customers and will eventuallv be able to capture enough market share to remove its scale
advantage. 1he business with the economies of scale advantage needs to be able to keep its
larger market share. It does this by keeping its customers. 1he way to do that is to have at least
a mild form of customer captivity.`

'The overwhelming prioritv of a business with an economies of scale advantage is to protect its
market share and, thus, keep its large si:e relative to its competitors. It can do this bv matching
the moves of an aggressive competitor price cut for price cut, new product for new product,
niche bv niche. If it does, then its customer captivitv will secure its greater market share. Its
competitors average costs will be higher than its average costs at everv stage of the struggle.
While this will reduce the profit of the business with the economies of scale advantage, its
competitors will usuallv make verv low returns on capital, or a loss, and will eventuallv stop