Quote & Symbol	ASX ESE
Market Cap.	A$19m
Enterprise Value (EV)	A$30m
Shares Issued	48.8m
Fully Diluted	49.1m
Free Float	23%
Current Share Price	A$0.40
Share Price Target	A$0.67
Year High/ Low	A$0.45/0.33
Typical Weekly Trading Vol.	164,000
Net Gearing Year End 1999	30%
Cash Year End 1998	A$0.6m
Hedging	US$310/oz (spot deferred)
Significant Shareholdings
Management	25.6%
Peter Gunzburg	18.9%
CIBC Eyres Reed Resources Fund	9.9%
Top 20 Shareholders	75.4%
EV/EB ITDA 1999f & 2000f*	3.7x/ 2.9x
P/Cashflow 1999f & 2000f*	4.4x/ 3.0x

* These valuations are based on the earnings stream from Esmeralda's 50% stake in the Baia Mare Tailings Project.

Esmeralda is an Australian Stock Exchange listed gold tailings plant operator. It has a 50% interest in a gold tailings retreatment project in Baia Mare, north western Romania. In addition to the tailings it also has mining and exploration concessions in the nearby area. We believe that Esmeralda is a growth and value play.

• The tailings plant is about to begin production and we expect the first gold pour in April 1999. Output for the first twelve months is expected to be 55,000oz Au.

• Production from the plant should double as high grade hard rock resources are blended with the slurry from the tailings dumps. These additional hard rock resources could be brought into production at a small incremental cost.

• Esmeralda will be a low cost producer, with an estimated average cash cost of production over the tailings project's life of US$160/oz Au. This places Esmeralda at the lower end of the industry's cost curve and allows the company to maintain attractive profit margins during these times of historically depressed gold prices.

• We believe that Esmeralda is undervalued. We have a current share price target of A$0.67 per share, 67% upside on the current price. We recommend Esmeralda's shares as a Buy.

PART I. Investment Summary

Investment Summary

• Esmeralda's participation in the Baia Mare Tailings Project is through its 50% stake of Aurul SA, a joint-venture vehicle with the Romanian State Mining Agency, Remin SA. Esmeralda retains management of the project. The tailings dumps are estimated to contain 511,000oz Au and 2.2moz Ag. Annual production is expected to average 52,000oz Au and 280,000oz Ag. The plant in Baia Mare has just been commissioned and the first gold pour is expected mid-April 1999.

• Aurul has the mining and exploration rights to the immediate surrounding area. Hard rock ore from these concessions will be blended into the tailings feed, considerably boosting production from the plant in Baia Mare. Exploration results to date have been encouraging. Esmeralda has six priority targets. Within the most promising of these, Hanau, adit sampling and trenching has revealed five quartz veins with widths of between 3m to 12m, with strike lengths of at least 350m and with sample values ranging from 0.7g Au/t and 7g Au/t. Based on the exploration work carried out to date and historical data from Remin, Aurul has an eighteen month target of confirming proven and probable reserves of 500,000oz Au. Esmeralda expects that hard rock ore to come on stream as of the third year of operation, 2001, doubling the plant's output to over 100,000oz per annum.

• Esmeralda's Baia Mare plant is a low cost producer. The tailings will be processed at an average cash cost of production of US$160/oz Au over the project's life. We calculate the Baia Mare plant to have total costs of production of US$210/oz Au. This calculation is based on known reserves from the tailings alone, without any adjustment for potential exploration reserves. The incremental cost of bringing hard rock reserves into production will be small and limited to open cut mining, crushing and transport. We also take comfort from Esmeralda's successful hedging policy. To date it has sold forward 100,000oz Au, two years of production, at US$310/oz spot deferred. This currently equates to an average sales price for 1999 and 2000 of US$3251 Au oz.

• Esmeralda is expecting its first gold pour in April 1999. It has taken nine years and considerable patience to bring the project to fruition. A number of other junior exploration companies are looking to exploit low cost and highly prospective opportunities in Romania. Amongst this peer group Esmeralda is at a considerable advantage given that it has already overcome the numerous obstacles that face foreign start up operations in Romania. In addition, Esmeralda has no further financing risk or requirements, subsequent to raising project finance of US$17m from Dresdner Bank AG and N.M.Rothschild Australia Ltd. We also take comfort that Esmeralda has taken out comprehensive political risk insurance.

• We have valued Esmeralda on the basis of the "sum of the parts" (STP); by looking at the Baia Mare Tailings Project and the exploration rights separately. We have then supported this valuation by benchmarking Esmeralda against a group of analogues according to a number of different methods of valuations. These support our current STP share price target of A$0.67, 67% upside on the present price of A$0.40/ share.

PART II. Esmeralda's Operations

PROJECT BACKGROUND AND DESCRIPTION

Ownership

Esmeralda's participation in the Baia Mare Tailings and exploration project is through its 50% stake in Aurul SA, a local unlisted subsidiary. 45% of Aurul is held by Remin and the remaining 5% is held by a number of small local Romanian companies. Esmeralda retains control of Aurul and receives an annual management fee of 4% of the project's EBITDA. Esmeralda has the first rights of refusal over Remin's share of Aurul. In addition to the exploration rights held through Aurul, Esmeralda has the mining concessions to the entire surrounding district of the tenements, covering an additional area of 20 km². It is currently in negotiations for a further block of 55km². These blocks are held through Explorer SA, a 97.5% owned subsidiary.

Corporate Profile

Esmeralda's management has had considerable experience in the mining industry and in particular in the treatment of tailings. In Australia Esmeralda's management has successfully treated a number of dumps, including Kaltails, Cobar and Peak Hills. Esmeralda's joint-Managing Director, Jamie Taylor, was a founding partner in Lycopodium. Lycopodium was responsible for the design and construction of over 15 hard rock and alluvial mining projects. In addition, Lycopodium designed and built the plant in Baia Mare. Jamie Taylor is also a former President of Minproc (which bought Lycopodium in 1997). Minproc is a mining consultancy and mining plant construction group, with expertise in over 30 countries and having completed over 200 projects. The other directors of Esmeralda are as follows: Brett Montgomery (joint Managing Director & Chairman), Peter Cordin, Michael Beck, David Semmens (alternate for Michael Beck) and Maxwell Montgomery (alternate for Brett Montgomery).

Regional Background

Baia Mare is in northern Romania, 600 kilometres from Bucharest and at the south eastern end of the Carpathian mountains. The area has a long and prestigious history of both base and precious metals mining dating back to the Roman times. Remin continues to be active in the area processing 350,000 tpa from its underground mines which is processed at its plant in Baia Mare. Despite this activity the mining industry in Romania has long been in a state of decline and exists on a heavily subsidised basis. To this end over the past couple of decades there has been an ever increasing lack of impetus to carry out new exploration or indeed to re-evaluate existing sites. The old underground shafts are being reworked with ever diminishing returns. Little or no work has been carried out in looking at surface deposits. (It is rumoured that former President Ceausescu did not want the area disturbed given that the forests surrounding Baia Mare were amongst his most favoured hunting grounds.) We therefore believe that the area still remains one of Europe's most untouched and promising prospective areas.

Esmeralda's participation in Baia Mare began in 1990, when it negotiated an interest to treat Remin's tailings plants. Initially it was awarded the rights to process the three dumps from previous production; Sasar, Central and Phoenix. Subsequently, and since the original feasibility study was made, Esmeralda has been awarded the mandate to reprocess the Bozinta tailings and it will also gain a royalty from processing Remin's slurry from the Sasar treatment plant. The contents, grades and ounces of reserves of these tailing are shown in Table 1. Remin has other tailings and it is possible Aurul will be awarded the concession to process these. Remin's pre-war Merrill Crowe plant is currently working with a 60% recovery rate, and therefore it has a vested interest in processing its ore through Aurul's plant. In addition Aurul has the first right of refusal to treat all Remin's resources. We will be looking to increase our valuation of Esmeralda if and when these concessions are awarded to the company.

Aurul's Tailings Reserves & Production

Aurul has the concession to process the following tailings, with the estimated contained reserves:

Table I
Baia Mare Tailings

Reserves	Tonnes (m)	Gold Grade (g/t)	Silver Grade (g/t)	Gold Recovery (oz)	Silver Recovery (oz)
Sasar	4.43	0.61	3.03	86,950	431,897
Central	10.03	0.48	3.74	154,727	1,205,579
Phoenix (calcine)	0.22	3.20	3.15	22,637	22,283
Bozinta	11.00	0.37	1.5	130,868	530,547
Sasar Ore (Live)	4.00	0.90	­	115,942	­
Total	30.68	0.53	2.22	511,125	2,190,306
Source: Esmeralda/ Loeb Aron and Co.Ltd

Since the publication of the banking feasibility study and subsequent to further testing, Esmeralda is expecting improved rates of recovery and ore grades from the tailings. The original project was independently audited by Behre Dolbear on behalf of the financing banks. However, based on the subsequent work carried out by Esmeralda we believe that these reserves contain 511,125oz Au. This increase is based on higher grades being achieved at the Phoenix calcine tailings, of 3.2 g/t (ex 2.7g/t) and the improved royalty to be gained from processing the live Sasar Ore tailings, of 0.9g/t (ex 0.77g/t).

Production

Esmeralda has commissioned the plant at the beginning of March 1999 and the first gold pour is expected in April 1999. Production will start with the processing of the high grade Phoenix calcine, blended together with the Sasar tailings. The tailings will be mined by using high pressure monitors, turning the dumps into slurry which will piped through to the plant. The treatment plant is a conventional CIP, with a ball mill which will be used to polish the tailings particles ahead of the leaching process. The plant has a 2.5m tonne per year capacity. The design includes a 20% engineering safety factor and it is probable that the plant will have a higher output. Based on management's experience from processing the Kaltail tailings in Australia, plant capacity could increase due to higher pulp densities and availability, both of which were conservatively estimated in the project study. In third year we are expecting production from the tailings to dip to 48,000oz Au as production switches to the lower grade Central tailings. However, production should recover on the basis of improving ore grades, throughput and better optimisation of the plant. In our model we are forecasting an annual production from the tailings dumps alone of 52,000oz Au.

 

As of 2001, Esmeralda anticipates that it will start to blend hard rock reserves to the slurry from the tailings dumps. This should substantially increase the average ore grade to be fed through the plant and Esmeralda expects that total production should double to between 100,000oz and 120,000oz per annum. This target is based on Esmeralda confirming minimum proven and probable reserves of 500,000oz Au in the llba, Nistru and Sasar concession areas. Reserves from these concession areas, let alone the additional areas to which Esmeralda has the rights, could be considerably higher. We believe that this ability to add to hard rock resources represents considerable potential upside to the investor in Esmeralda.

Exploration

Esmeralda has two sets of exploration and mining rights. Through its 50% stake in Aurul, Esmeralda has rights to three tenements; llba, Nistru and Sasar. These encompass seventeen previous mining concessions and cover an area of 70 km². These individual concessions are between 2 kms and 16 kms from the plant at Baia Mare and therefore provide extremely good synergies of production. Esmeralda also separately holds three leases to the entire surrounding area. Esmeralda is in negotiations for the last remaining block, which should increase these land holdings to 75 km². These concessions are held through Explorer, a 97.5% owned subsidiary.

Esmeralda's immediate target is confirm 500,000 oz of proven and probable reserves Au. Within the tenements six particularly promising targets have been identified. In the potentially richest of these, Hanau, adit sampling and trenching has revealed five quartz veins of up to 12m in width, over strike lengths of 350m and with sample values ranging from 0.7g Au/t to 7g Au/t. Mineralisation suggests that these will be amenable to open cut mining. Drilling will begin in May 1999. The second priority will be to define lower grade ore deposits with higher tonnages and to these ends Esmeralda has identified a further 200 high quality open vein targets. Based on Esmeralda's work carried out to date and on historic data from Remin, the tenements are estimated to have resources of between 750,000 oz and 1m oz Au.

We have valued these resources, in comparison to Gabriel Resources, at US$10/oz resources (see Valuations). This is a conservative appraisal, noting that in Barrick's recent acquisition of Sutton Resources it paid US$46/oz resources (see Acquisition Valuations). Once Esmeralda succeeds in confirming its proven and probable reserves in the tenements, or the surrounding area, we will be looking to revise our valuation of the company.

Financial Outlook & Debt

Table ll
The Baia Mare Plant's Earning Stream 1999f-2002f 100%

Baia Mare Talling Project (A$m)	Sales	EBITDA	Cashflow*	Free Cashflow*	Net Income
1999f	23.7	12.3	8.4	07	-6.1
2000f	29.3	15.1	12.7	4.1	-2.3
2001f	24.5	11.5	10.1	5.7	-0.3
2002f	26.4	12.5	10.9	6.4	0.8
Source: Loeb Aron and Co. Ltd. *Cashflow (EBITDA, less exploration, less interest, less taxes, plus management fee) *Free Cashflow (As above, less amortisation)

Our earnings expectations of the Baia Mare plant is shown above in Table ll. For the nine months of production for 1999, we are expecting the plant to have an output of 42,000oz Au and 233,000oz Ag. Over the project's 10 year life we estimate that silver will account for 10% of the plant's revenue. We estimate that gold production for the second year of operations should increase by 24% to 52,000oz. This estimate is higher than expected and should be the result of richer grades being processed from the bottom of the Sasar tailings. In the third year of operation we expect that gold production from the dumps should decrease by 7%, to 48,000oz, as production switches to the lower grade Central dump. Esmeralda expects to be able to start feeding through hard rock resources as of the third year of operation, doubling Baia Mare's output to over 100,000oz Au. However, we are not factoring these additional resources into our model until these hard rock resources are confirmed as proven and probable reserves. After 2001 we expect production from the tailings dumps to improve by 8% to 52,000oz Au. We expect this increase on the basis of better ore grades and improving throughput in the plant. As of 2002 we have kept production from the tailings flat at 52,000oz Au per annum.

We are expecting the plant in Baia Mare to have a sales revenue of A$24m (US$15m) in 1999f and A$29m (US$18m) in 2000f. We reiterate that Esmeralda has sold forward 100,000 oz Au, the equivalent of two years of production for US$310/oz Au spot deferred. This currently equates to a flat average price of US$325/oz Au for 1999 and 2000. In 2001 f we are expecting the plant to have a 16% decrease in sales to A$24.5m (US$15.3m) on the basis of the levelling off of production and the decrease in the gold price from US$325/oz Au to our "base case" scenario, with a flat average gold price of US$290/oz Au. From 2002f onwards we are assuming flat sales of A$26.4m (US$16.5m).

EBITDA & Profit Forecasts

In our model we are using a flat average cash cost of production of US$160/oz Au over the tailings project's forecasted life of ten years. In addition to this cost a 2% royalty is payable to the Romanian State and a further 1% royalty is due to the project's financiers over the life of the loan. As shown in Table ll on the previous page, we are expecting the plant to generate an EBITDA of A$12.3m (US$7.7m) in 1999f and A$15m (US$9.4m) in 2000f. Due to the decrease in production and gold price in our "base case" scenario we are expecting the plant's EBITDA to decrease to A$11.5m (US$7m) in 2001f. As of 2002f we are assuming a flat EBITDA for the tailings plant of A$12.5m (US$7.8m) per annum.

In our model we are expecting the tailings plant operation to run at a loss for the first three years; of A$6m (US$4m) in 1999f, A$2m (US$1.4m) in 2000f and A$0.3m (US$0.2m) in 2001f. These losses could widen and be more prolonged chiefly depending on the rate at which the plant is depreciated. Esmeralda might accelerate the rate of depreciation for tax purposes. These losses do not overly concern us given that we expect the project to have a positive free cashflow of A$0.7m (U5$0.4m) 1999f, A$4.1m (US$2.6m) in 2000f and A$5.7m (US$3.6m) in 2001f. The free cashflows arising from the Baia Mare tailings are more comprehensively broken down in Part V, Financial Appendices.

Given Esmeralda's 50% interest in the Baia Mare tailings operations we are expecting it to have the following pro-forma earnings stream. This is shown in Table lll below. In addition to its earnings stream from the 50% interest, Esmeralda also receives a 4% management fee.

Table III
Esmeralda's Earnings Stream from its 50% stake in the Baia Mare Tailings Project

Esmeralda (50% Bahia Mare)	Sales (A$m)	Net Income (A$m)	P/E (x)	EBITDA (A$m)	Cashflow (A$m)	P/Cashflow (x)	EV/EBITDA (x)
1999f	11.9	-2.5	nmf	6.1	4.5	4.4	3.7
2000f	14.6	-0.6	nmf	7.6	6.5	3.0	2.9
2001f	12.3	0.3	nmf	5.8	5.3	3.7	3.4
2002f	13.2	0.9	13.3	6.3	5.7	3.4	3.1
Source: Leob Aron and Co. Ltd. * Cashflow (EBITDA less exploration, less interest, less taxes, plus manapement fee) * Free Cashflow (As above, less amortisation)

Debt

Aurul has US$17m in project finance from Dresdner Bank AG and N.M.Rothschild Australia Ltd. This will be fully drawn down. The amortisation of debt is heavily front loaded, with semi-annual bullet repayments over the first four years of production. Aurul also has US$2.5m on deposit with N.M.Rothschild & Co. Ltd. This sum has accrued from the hedging policy and will be used for exploration or to meet debt repayment. Based on Esmeralda's 50% share of Aurul's net debt, it currently has net gearing of 100%. By year end 1999 and with the amortisisation of US$7m we expect this net gearing to decrease to 30%. The amortisation schedule is as follows in Table IV:

Table IV
Aurul's Amortisation Schedule

Amort. Schedule	1H 1999	2H 1999	1H 2000	2H 2000	1H 2001	2H 2001	1H 2001	2H 2002
US$m	3.5	3.5	2.5	2.5	1.25	1.25	1.25	1.25
Source: Loeb Aron & Co.Ltd.

PART III Valuations

In our STP valuation we have looked at Esmeralda's 50% interest in the Baia Mare Tailings Project on the basis of doing a discounted cashflow analysis. We have also looked at the tailings project in terms of its ability to generate Economic Profit over and above Esmeralda's weighted average cost of capital (WACC). On the basis of the tailings alone we arrive at a share price target of A$0.48 per share, a 20% premium to Esmeralda's current share price of A$0.40. The upside in the share price is greater when we add the value of Esmeralda's mining concessions and exploration rights. We have valued these rights in comparison to Gabriel Resources, another junior western listed mining company active in Romania. Once we include this valuation our share price target increases to A$0.67, 67% upside on the current price. This share price target is supported if we compare Esmeralda to analogues, according to a number of different methods of valuation.

DCF Valuation

In our Discounted Cashflow Analysis (DCF) of the Baia Mare Tailings operation we have made the following series of assumptions. We calculate that Esmeralda has a weighted average cost of capital (WACC) of 9.4%. We have therefore used this as our discount rate of the cashflows from the Baia Mare tailings plant. We note that to date Esmeralda has been using a discount rate of 7% in its feasibility studies. Whilst the company might have comprehensive political risk insurance, we believe that a discount rate of 7% is too low and are more comfortable with our revised WACC of 9.4%.

In forecasting Esmeralda's free cashflow from operations we have included the management fee of 4%. In terms of our estimates for the capex, we are including exploration charges of US$1.2m for 1999 and US$1m for 2000. A case can be argued that this should not be included in the DCF analysis. However we have included this charge on the basis that Esmeralda is committed to this exploration programme and it is therefore not a discretionary disbursement. We have not included any working capital changes, given that these charges, including start up and commissioning costs, have already been accounted for and financed. Aurul has sold forward two years of production at US$310/oz spot deferred. This equates to an average forward price of US$325/oz Au for 1999 and 2000. As of 2001 we have looked at Esmeralda's earnings stream with the following flat average gold and silver prices:

SCENARIO (US$/ OZ)	GOLD PRICE	SILVER PRICE
Base Case	290	5.00
Best Case	320	5.50
Worst Case	250	4.50

In the following calculations and valuations we are assuming a base case scenario, with a gold price of US$290/oz Au over the tailings project's life. In our model we have assumed a mine life of ten years. The addition of hard rock reserves from Esmeralda's concessions should substantially increase the earnings stream and project life. We will be looking to amend our valuation as and when additional reserves are discovered. We also stress that we are being conservative in that we are not giving the plant in Baia Mare any residual value.

From the sum of the discounted cashflows we have then subtracted Esmeralda's share of the Aurul's current net debt, amounting to A$11 m (U5$7m). This gives us an implied market value for Esmeralda's 50% of the Baia Mare Tailings Project of A22$m (U5$13.9m). With 48.8m shares outstanding this gives us a share price target for the tailings alone of A$0.48/share (US$0.30/ share). These calculations are shown below in Table V (a full breakdown of the DCF is shown in Part V, Financial Appendices). We are using an exchange rate of US$1:A$1.60.

Table V
DCF Baia Mare

Esmeralda Pro-Forma 50%	1999f	2000f	2001f	2002f	2003f	2004f	2005f	2006f	2007f	2008f
Base Case @ US$290/oz	Year 1	Year 2	Year 3	Year 4	Year 5	Year 6	Year 7	Year 8	Year 9	Year 10
Ese Earning's Stream US$m	3.4	4.4	3.5	3.7	3.4	3.4	3.6	2.92	3.6	3.6	31.8
Discounted Cashflow	3.1	3.7	2.7	2.6	2.2	2.0	1.9	1.5	1.6	1.5	21.4
Pro forma Sum of DCF										21
Less Net Debt										-6.7
Implied Market Value										14.69
No. Shares Outstanding										48.8	A$
Imp. Price Target US$										0.30	0.48
Current Share Price										0.25	0.40
Discount to Current Share Price										20%	20%
Source: Loeb Aron & Co. Ltd

Economic Profit Analysis

We have supported the previous DCF valuation by looking at the Baia Mare Tailings project in terms of its ability to generate Economic Profit. We are defining Economic Profit as the profit generated, or the rate of return on equity and debt, over and above Esmeralda's WACC of 9.4%. Over the project's life we estimate that the Baia Mare Tailings Project are generating an average Economic Profit spread of 58% and an implied market value, less net debt, of A$24m (US$15m) or A$0.50/share (US$0.31). We take comfort that this supports our more conservative DCF price target of A$0.48/share. These above calculations are shown below in Table Vl.

Table Vl
Esmeralda's Economic Profit Analysis from its Pro-Forma 50% stake in the Baia Mare Tailings Project

Economic Profit Spread US$m	1999f	2000f	2001f	2002f	2003f	2004f	2005f	2006f	2007f	2008f
Esmeralda's Earnings Stream	3.4	4.4	3.5	3.7	3.7	3.7	3.8	3.8	4.0	4.1
Cash Taxes	0.00	0.00	0.00	-0.05	-0.29	-0.31	-0.34	-0.91	-0.40	-0.43
NOPAT	3.4	4.4	3.5	3.7	3.4	3.4	3.5	2.9	3.6	3.6
ROCE	31%	55%	64%	67%	81%	81%	82%	69%	85%	86%
WACC	9%	9%	9%	9%	9%	9%	9%	9%	9%	9%
Economlc Profit Spread	21%	46%	54%	58%	72%	71%	73%	60%	75%	77%
Economic Profit	2.4	3.7	3.0	3.2	3.0	3.0	3.1	2.5	3.2	3.2
PV of Economic Profit	2.1	3.1	2.3	2.2	1.9	1.8	1.6	1.2	1.4	1.4
Total PV of Economic Profit	17.7
Economic Value	21.9
Less Net Debt	-6.7
Imp. Value Less Net Debt	15.2	24.3
No. Shares Out	48.8	A$
Imp. Share Price Target US$	0.31	0.50
Current Share Price	0.25	0.40
Discount to Current Price	24%	24%
Source: Leob Aron and Co. Ltd.

Valuation of Esmeralda Exploration Rights

We have valued Esmeralda's exploration rights in comparison to the only other western listed junior gold explorer active in Romania, Gabriel Resources Ltd. Gabriel is listed in Vancover and is developing the Rosia Montana deposit in Romania. Gabriel is continuing drilling and an independent survey estimates that Rosia Montana has resources of 2.4m oz Au. The independent study also stipulates an equal cash cost of production to Baia Mare, of US$160/oz Au. We therefore suggest that Esmeralda should trade on a par to Gabriel's US$10.1/oz Resources. This is a conservative approach if we consider that Gabriel is three years and US$100m short of production. In addition, we note that in recent acquisitions companies have been willing to pay US$44/oz Au resources (see Comparative & Acquisition Valuations).

Based on historical data provided by Remin and the work carried out by Esmeralda to date, the seventeen tenements are estimated to contain resources of between 750,000 oz and 1moz Au. For this calculation we have assumed the lower estimate of 750,000oz. This gives Esmeralda's pro-forma concessions an implied value of A$6m (US$4m). In addition to these concessions, Esmeralda has mining leases and exploration rights to the entire surrounding area, covering a further 75 km². It holds these rights through a 97.5% owned subsidiary Explorer SA. We are giving these additional concessions a value of A$3m (US$2m). We therefore ascribe a total equity pro-forma value of Esmeralda's exploration rights of A$9m (US$6m).

Sum of the Parts Valuation

In our STP valuation we have looked at the value of Esmeralda's pro-forma equity share of the Baia Mare tailings operation and exploration and mining rights to the surrounding area. In our base case analysis we are using a long term flat gold price of US$290/oz. By adding the values of the tailings operation and that of the exploration rights we arrive at a total implied market value for Esmeralda of A$41.6m (US$26m). From this we have deducted Esmeralda's share of Aurul's net debt, of AS11m (US$6.7m). With 48.8m shares outstanding this gives us a current share price target of A$0.67 (US$0.42), 67% upside on the current price of A$0.40. This calculation is shown in Table Vll. We are using an exchange rate of US$1:A$1.60.

Table VII
STP Valuation Base Case @ US$290/oz

	Value (US$m)	Value (A$m)
DCF(50% tailings)	21.35	34.16
Aurul Exp. (50%) + Explorer SA.	5.79	9.27
Total lmplied Value	27.15	43.43
Less Net Debt	-6.73	-10.76
Imp. Market Value	20.42	32.67
No. Share Out	48.80	48.80
Implied Share Price target	0.42	0.67
Current Share Price	0.25	0.40
Upside/ (Discount) on Current Share Price	67%	67%
Source: Loeb Aron and Co. Ltd.

Comparative Valuations

We believe that following comparative valuations are indicative and we are looking at them in order to challenge or support our STP valuation of Esmeralda. There are no direct analogues for Esmeralda (other than Gabriel, which is a long way from production). Nevertheless, in this exercise we have looked at a number of other Australian listed small cap gold producers, with similar cost structures and ounces of proven and probable gold reserves (Hill 50 Gold, Hargraves and Perseverance). We estimate that these companies are trading on a WAV Market Cap/RAV (Reserve Asset Value) multiple of 0.76x and a WAV Market Cap/Proven & Probable Reserves of US$71/oz Reserves. We prefer looking at the Market Cap/RAV given that it mirrors each companies cash cost of production. Should Esmeralda trade in line with the WAV Market Cap/RAV this would gives us an implied market cap of U5$26m, over double Esmeralda's current market capitalisation. Should Esmeralda trade in line with the WAV Market Cap/Proven and Probable Reserves this would give us an inferred market capitalisation of US$20m, implying that it is currently trading at a 66% discount to our analogues This is shown in Table Vlll below. Given that Esmeralda's assets are in Romania we believe that it should trade at a slight discount to these analogues, to reflect Romanian country risk. Nevertheless, we suggest that these discounts are too steep and are not warranted.

Table Vlll
Comparative Valuations

	WAV	ESMERALDA	IMPLIED VALUE (US$m)	DISCOUNT
Market. Cap/RAV (x)	0.76	0.38	26	116%
Market. Cap/P and P reserves (US$/oz)	71	48	20	66%
Source: Loeb Aron and Co. Ltd.

Financial Multiples

In our models for the tailings operations alone, we estimate that Esmeralda is trading on low financial operating multiples; with an EV/ EBITDA of 3.7x 1999f and 2.9x 2000f and a P/ Cashflow of 4.4x 1999f and 3.0x 2000f (see Financial Outlook & Debt). We do not have any EV/EBITDA multiples for our Australian analogues. Nevertheless, in terms of Esmeralda's P/Cashflow, we estimate that this is aggressively low in comparison to our Australian analogues. We estimate that these analogues are trading on a WAV of 7.3x 1999f and 6.2x 2000f. This comparison reinforces our belief that Esmeralda is trading at an unwarranted discount.

Acquisition Valuation

All the above valuations are mirrored when we look at the valuation of Barrick's acquisition of Sutton Resources in Tanzania in 1999 and Crystallex's take over of the San Gregorio mine in Uruguay in 1998. In considering both of these transactions, Barrick generally paid a premium and we have therefore taken a mean price when comparing multiples to Esmeralda. We place most stock by comparing Esmeralda to these valuations on the basis of EV/Reserve Asset Valuation (RAV), given that it reflects the differing cash costs of production. Barrick and Crystallex paid a mean Price/ RAV of 0.74x. In comparison Esmeralda is trading on a 23% discount at an EV/ RAV of 0.57x. At an EV/RAV multiple of 0.74x, this would give Esmeralda tailings project an implied Enterprise Value of US$25m. This is shown in Table IX.

In terms of EV/Resources we estimate that Barrick and Crystallex paid a mean US$42/oz of resources. This valuation is mirrored when we note that Homestake paid the equivalent of US$44/oz of resources in its recent acquisition of Argentina Gold. At US$42/oz, this would give Esmeralda an implied EV of US$26m. This equates to a 1% discount on our STP valuation of Esmeralda. This is shown in Table IX below. We believe that we have established that Esmeralda is undervalued. In addition to this we also believe that our valuation of the company and share price target is in line with recent acquisition prices.

Table IX
Price Target Comparison

	MEAN	ESMERALDA IMPLIED VALUE	ESMERALDA STP	DISCOUNT
EV (Price paid)/ RAV (x)	0.74	25	27	-5%
EV (Price Paid)/ Resources (US$/ oz)	42	26	27	-1%
Source: Loeb Aron and Co. Ltd.

Gold Price Sensitivity Analysis

In our base case scenario we are using a flat average gold price of US$290/oz. We believe that this reflects a prudent appraisal of the future long term gold price. We note that the market has become increasingly "bullish" about the gold price; with average estimates for 1999 ad infinitum within a range of between US$320/oz to US$350/oz. We have looked at the effect of such an upwards move in the gold price in our "best case" scenario. Nevertheless, in forecasting a long term gold price we prefer to remain more sceptical principally on the basis of the unresolved business of Central, and particularly European and Swiss Central Bank sales. We believe that periodic short covering rallies will drive the gold price back above US$300/oz, however this should be capped given the long term threat of the release of Central Bank bullion stocks and forward selling by producers. To reflect further Central Bank sales we have also looked at a "worst case" scenario with a gold price of US$250/oz. The differing effects of the "best" and "worst" case scenarios on our share price targets for Esmeralda are shown in Tables IX and X below.

Best Case Scenario

In our best case scenario above we estimate that Esmeralda's implied market value increases, once net debt is subtracted, to A$37m (US$23m). This gives us a share price target of A$0.76 (US$0.47), 89% upside on the current price of A$0.40 (US$0.25) This is shown in Table X below.

Table X
STP Valuation Best Case Scenario @ US$320/oz

	Value (US$m)	Value (A$m)
DCF(50% tailings)	24	38
Aurul Exp. (50%) + Explorer	6	9
Total Implied Value	30	48
Less Net Debt	-6.7	-11
Imp. Market Value	23	37
No. Share Out	48.8	48.8
Implied Share Price target	0.47	0.76
Current Share Price	0.25	0.40
Upside Discount to Current Share Price	89%	89%
Source: Leob Aron & Co. Ltd.

In our worst case scenario above we estimate that Esmeralda's implied market value decreases, once net debt is subtracted, to A$25m (US$15m). This gives us a share price target of A$0.50 (US$0.31), 26% upside on the current price of A$0.40 (US$0.21). This is shown in Table Xl below.

Table Xl
STP Valuation Worst Case Scenario @ US$250/oz

	Value (US$m)	Value (A$m)
DCF(50% tailings)	16	25
Aurul Exp. (50%) + Explorer	6	9
Total Implied Value	22	35
Less Net Debt	-6.7	-11
Imp. Market Value	15	25
No. Share Out	48.8	48.8
Implied Share Price target	0.31	0.50
Current Share Price	0.25	0.40
Upside to Current Share Price	26%	26%
Source: Loeb Aron & Co. Ltd.

PART IV. Investment Conclusion

We believe that Esmeralda offers a growth and value play to the investor. Esmeralda's long patience in Romania is paying off; the plant in Baia Mare has just been commissioned and the first gold pour is scheduled for mid-April 1999. Gold production from the plant should be higher than originally expected in the banking feasibility study, given higher tonnage and improved ore grades of the tailings to be processed. In addition, we believe that production will be higher than anticipated due to improved pulp densities and throughput in the plant. Nevertheless, in our models we are conservatively assuming an average annual output from the tailings plant of 52,000 oz Au. On the basis of this output we have arrived at a DCF valuation of the tailings alone, less net debt, of US$0.48/ share, 20% upside on Esmeralda's current share price.

The principal upside to the investor in Esmeralda will come from the addition of hard rock to the feed from the tailings. This should be done at a limited extra cost and will be economically viable with as low an average ore grade of 1.8g Au/t. Given that the plant in Baia Mare has already been constructed, the incremental cost of bringing these hard rocks into production will be limited to open cut mining, crushing and trucking. Within the next eighteen months Esmeralda anticipates being able to confirm its initial target of 500,000 oz of proven and probable reserves Au. These should come on stream of 2001 and should double the tailings plant output in Baia Mare to over 100,000 oz Au per annum. We have valued these concessions according to conservative parameters at US$10/oz Au resources, giving us an additional A$0.19/share. This gives us a STP price target for Esmeralda of A$0.67/ share, 67% upside on the current price.

We have supported our STP valuation by benchmarking Esmeralda against a group of analogues, according to a number of different methods of valuations. Across the board Esmeralda is trading at an approximate 60% discount. We do not think that this discount is warranted. These valuations are calculated on a base case; with a long term gold price of US$290/ oz. We have also looked at Esmeralda's value in "best" and "worst" case scenario with a long term gold price of US$320/ oz and US$250/ oz respectively. In our "best case" scenario we estimate that Esmeralda is currently trading at an 89% discount to its fair value and we take comfort that, even in our "worst case" scenario, there is a 26% upside in Esmeralda's current share price We recommend Esmeralda's shares as a Buy.

PART V. Financial Appendices

Table XII
Esmeralda's DCF (Pro-Forma 50% Baia Mare Tailings Project)

For further information please contact:

Agustin Hochschild (Director) or:
Dr. Frank Lucas (Managing Director)
Loeb Aron & Co. Ltd.
Georgian House
63 Coleman Street
London EC2R 5BB
United Kingdom

Telephone: +44 (171) 628 1128
Fax: +44 (1 71) 638 0756
E-Mail: richards@loebaron.co.uk

Jamie Taylor (Managing Director)
Esmeralda Exploration Limited
2nd Floor
220 St. George's Terrace
Perth, W.A. 6000
Austral ia

Telephone: + 61 (8) 9481 0572
Fax: + 61 (8) 9481 3586

Loeb Aron & Company and some of its directors hold 175,000 shares In Esmeralda Exploration Limited.

Loeb Aron & Company Limited is regulated by The Securities and Futures Authority Limited. This is a research note is not for distribution to, or to be used by private clients. This note is not, and under no circumstance is to be constructed, as an offer to buy, or sell, or deal in any security and or derivative instruments based on such securities. Comments made in this research note represent the current opinions of Loeb Aron & Company Limited and have been arrived at in good faith. No representation or warranty, either actual or implied is made as to the accuracy, precision, completeness or correctness of the statements, opinions and judgements contained in this document. This document is intended for background information purposes only and this report is furnished on the basis and understanding that Loeb Aron & Co. Ltd. is under no responsibility or liability whatsoever in respect thereof. The value of any investment made in connection with the contents of this document may rise or fall and the sums realised may be less than those originally invested. Any reference to past performance should not be construed as being a guide to future performance. Investment in this company would be effected in Australian Dollars and the change in the value of A$ may have an adverse effect on the value price or income of the investment. Investment in Esmeralda may not be readily realisable and therefore investors should take due regard of the liquidity of the shares. Investment in mining and exploration companies carries a high degree of risk and an independent financial adviser, authorised under the Financial Services Act 1986, who specialises in investments in this kind, should be consulted before making any such investment.