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The Gold Stock Strategist analyzes leading junior gold producers and major gold mining companies.

Comments are welcomed!

Wednesday, May 7, 2008

Capital Gold Valuation Update

Jeff Pritchard, Capital Gold's investor relations contact is making news and raising a lot of questions in my mind about AngloGold Ashanti's intentions. Three questions come to mind.

First, why is Jeff Pritchard moving now--midway through AngloGold's due diligence on the option--to be a board member of Tara Gold?

My sense is that whatever is going to happen between Capital Gold and AngloGold is already decided in Mr. Pritchard's mind and he is staking out his next challenge.

Second, why would AngloGold Ashanti need to conduct extensive due diligence given the decision should be about the numbers and assumptions on the future price of gold?

My sense is that AngloGold is doing more extensive due diligence than just the option decision--possibly a buyout.

Third, IF there is a buyout, how much would AngloGold pay for Capital Gold?

My metrics suggest Anglogold should be willing to pay between $1.30 and $1.70 to Capital Gold shareholders.

Here are my valuation calcualtions.

SHORT-RUN CASH FLOW SHARE VALUE

$1.34 per share based on 2010 production (the first year of projected full production for Capital Gold) using a cash flow model valuation and assuming the following:

10x cash flow
$295 per ounce production cost
40,000 ounces of production in 2009 (half of 80,000 since AngloGold will already own 51% of production if they exercise the option)
$2 million G&A
196,100,000 shares outstanding (fully diluted)
$1000 price of gold in 2010

POTENTIAL LONG-RUN RESERVE SHARE VALUE

$1.72 per share based on current resource base.. The majors are paying about $280 an ounce for buyouts at $950 an ounce POG. Capital Gold currently has about 1.8 million ounces of measured, indicated, and inferred gold leaving about 0.9 million ounces (again, this assumes AngloGold owns half of the reserves) times $280 an ounce minus the $13 million in debt PLUS the $90 million or so paid to Capital Gold for the option equals $328 million. $328 million divided by 196 million shares equals $1.72 per share.

Now, Capital Gold has stakes other than El Chanate pending Mexican government approval and this valuation exercise excludes the valuation of those undeveloped properties. I don't know how to value unexplored stakes and I suspect AngloGold doesn't know how to either. A bird in the hand . . .

This play is difficult to assess because of three intangibles. The fisrt intangible having to do with AngloGold's retooling of existing projects to lower costs and boost production and whether they view the Capital Gold deal as a distraction.

The second intangible is AngloGold's strategic direction--whether or not AngloGold wants to establish a presence in Mexico.

The third intangible is AngloGold's price of gold (POG) forecast. A higher projected POG would make a buyout more likely.

If I knew the answer to these questions, it would be a lot easier to make a buy decision on Capital Gold.

Any comments providing insight on the intangibles would be most welcome.

Gold Stock Strategest

1 comment:

Anonymous said...

I am not quite as optimistic as you on the price AAG-Ashanti might pay. I think they will make a run at Capital, perhaps paying $1 share, which would be a little better than the buy in price for the half not subject to the buy-in, but would still be a 50% premium on market price. I would happily take that and invest elsewhere.

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