Symbol Lookup »
($$) Newsletters »
Self Directed Investor Inc
Newsletters ($$) »  Email alerts (free) »  RSS »
SDI: "Empowering investors with ideas and education"
$$  Newsletters  |  FREE   ♦ Articles · Videos · Calls  |  TOPICS  ETFs · Earnings · Economy · Energy ·  ♦ Gold · Income · Personal Finance · Trading


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

Comments are welcomed!

Friday, March 13, 2009

Capital Gold and Gammon Gold Merger Analyzed

Yesterday, Capital Gold and Gammon Gold announced a merger. I am not familiar with Gammon Gold and spent the morning analyzing the deal based on publicly available sources and my cash flow multiple valuation model.

First, Gammon Gold views itself as the consolidator for gold producers in Mexico. This information is provided in their latest corporate presentation from the BMO conference on February 22-25, 2009.

Gammon makes clear in their latest presentation that their corporate strategy is to buy up or merge with junior gold producers with mines in Mexico. So for those who follow junior gold producers with mines in Mexico, this should not be a big surprise. What has been a surprise is the relatively low premium Capital Gold shareholders are receiving from Gammon Gold.

Based on a quick visual analysis, it seems that Capital Gold shareholders may not be getting fair value for their investment in this deal.

Take a look at the following chart from page 18 of Gammon Gold's BMO presentation.

You will note that Gammon Gold lays out a very useful visual map of the relationship between market capitalization and valuation among junior producers and developers, intermediate producers, and senior producers. The chart shows, as I have written in prior articles, that the higher the market cap for gold producers the higher the valuation of a company's share price. You can visually draw, in your mind's eye, a regression line sloping upward and to the right at roughly 45 degrees. That is strong evidence in favor of the junior/intermediate/senior valuation assertion.

For comparison's sake, take a look first at the relative valuation of junior producers New Gold and Western Goldfields who last week announced a similar merger deal. New Gold's price/NAV multiple ratio is at about 0.7x and Western Goldfields is at about a 0.6x ratio. These two companies are roughly valued equally and the premium paid to Western Goldfields shareholders (about 20%) is roughly equal to the disparity in valuation between New Gold and Western Goldfields at the time the deal was announced.

Now look at the relative valuation of Gammon Gold at about 1.4x price/NAV ratio and Capital Gold at about a 0.5x price/NAV ratio. The Capital Gold premium is roughly 30% based on today's share price. In fairness, if we go back to when this presentation was made the premium is about 40% for Capital Gold shareholders.

A 40% premium on a 0.5x price/NAV ratio puts the merger valuation for Capital Gold at about a 0.7x price/NAV ratio--well roughly half of Gammon's valuation of 1.4x price/NAV ratio.

Looking at this data another way is that the new 0.7x price/NAV ratio valuation puts Capital Gold in the middle of the junior gold producer universe equal to the "new" New Gold, providing Capital Gold with an average junior gold producer valuation in this merger deal rather than a lower than average valuation.

My sense is that Capital Gold shareholders deserve a higher premium than they are getting. Using my cash flow multiple model at 10x 2009 production and 10x cash flow, Capital Gold is worth about $1.50 per share and for 2010 about $2.00 a share. Using an "in situ" valuation method, Capital Gold is likely worth more than $2 a share.

I would note that the 2009 10x cash flow multiple valuation produces a valuation similar to the price/NAV ratio valution method above using Gammon Gold's own data.

Clearly, a more thorough analyis needs to be done before Capital Gold shareholders make a decision on what to do. I don't own shares in either Capital Gold or Gammon Gold and as a result, I don't feel strongly either way. This analysis may be a good place for Capital Gold shareholders to start as they decide how to vote on the proposed merger.

As a further note, Gammon Gold's Ocampo mine operation is geographically close to two nearby mines Mulatos, owned by Alamos Gold Inc., and Delores mine owned by Minefinders. It stands to reason that Gammon Gold, with a strategy of consolidating junior gold producers in Mexico, is assessing these two companies as potential merger candidates as well.

Good luck!

Gold Stock Strategist

Full disclosure: I do not own shares in Capital Gold Corp. or Gammon Gold. The information provided in this post is believed to be correct, but not guaranteed. Investing in junior gold miners entails risks. Readers are responsible for their own investment decisions

1 comment:

Anonymous said...

Very much appreciated! Thanks from a disgruntled CGLD shareholder!

Gold Price Chart--Interactive

HUI "Gold Bugs" Index--Interactive

Breaking News!

    follow me on Twitter

    Gold & Mining News

    Seeking Alpha on Gold and Miners

    Lijit Search

    Disclaimer and Copyright

    Gold Stock Strategist receives no payments from companies in exchange for coverage. The Editor does own and authors may own and trade stocks they mention.

    Nothing in is intended to be investment advice, nor does it represent the recommendations by or other authors.

    The reader accepts information on the Gold Stock Strategist with the condition that errors or omissions shall not be made the basis for any claim, demand or cause for action.

    The information on the Gold Stock Strategist is solely for the entertainment of the reader and authors.

    The Editor reserves the right to delete material deemed inappropriate for

    ©2008-2009, Nystrom & Associates LLC, All rights reserved and protected under US copyright law.

    FEEDJIT Live Traffic Feed

    SDI Featured Articles | Self Directed Investor | Copyright © 2008 - 2009, All Rights Reserved

    Any ideas and opinions presented in Self Directed Investor content are for informational and educational purposes only, and do not reflect the opinions of Self Directed Investor, Inc. or any of its affiliates, subsidiaries or partners. In no way should any content contained herein be interpreted to represent trading or investment advice. None of the information contained herein constitutes a recommendation that any particular security, portfolio, transaction, or investment strategy is suitable for any specific person. All site visitors agree that under no circumstances will Self Directed Investor, Inc,. its subsidiaries, partners, officers, employees, affiliates, or agents be held liable for any loss or damage caused by your reliance on information obtained. Read Full Disclaimer.

    SDI is associated with: -- participation in SDI's conference calls is available exclusively to ValueForum members. | -- weekly SDI videos are produced by Market News Video. | -- stock quote content is at least 20 minutes delayed and is powered by Ticker Technologies. | -- Edited by Scott V. Nystrom, PhD, Gold Stock Strategist provides analysis on gold mining companies.