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Gold Sector Note August 7, 2014

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Gold Sector Note August 7, 2014 Gold Sector Note August 7, 2014 Company Mentioned Company Rec. Target Gold Sector Bear Creek Spec. Buy $3.50 Belo Sun N/R N/A The Revival of the Takeover 20 (ish) Carlisle Goldfields Spec. Buy $0.27 Castle Mountain Spec. Buy $2.60 Freegold Spec. Buy $0.42 Gryphon Minerals Spec. Buy $0.25 Event Guyana Goldfields Spec. Buy $4.00 We are reviving our “Takeover 20” analysis. After three years of worshipping at the altar Integra Gold Spec. Buy $0.60 of cash-flowing companies, we believe the time is right for gold sector investors to Kaminak Spec. Buy $1.50 consider development-stage projects. In this note, we present the strategic rational, which MAG Silver N/R N/A boils down to scarcity, the value proposition, and then proceed with initiating coverage of Mega Precious Metals Spec. Buy $0.35 Midas Gold Spec. Buy $2.95 seven of the 25 companies. In this update of the Takeover 20, we have gone further than Orbis Gold Spec. Buy A$0.70 previous reports, providing more comprehensive analysis, not to mention expanding our Orezone Gold Spec. Buy $1.15 universe to more than 20 — almost all new names to the Takeover 20. Our goal is to offer Petium Resources N/R N/A insight into the best-of-breed development projects, helping readers tailor their selections Premier Gold N/R N/A to their investment preferences, be it high IRR projects or low entry cost per ounce. We Probe Mines N/R N/A are launching coverage of: Carlisle Goldfields; Castle Mountain Mining; Freegold Ventures; Romarco Spec. Buy $0.95 Integra Gold; Midas Gold; Orbis Gold; and Seabridge Gold. Roxgold N/R N/A Details Rubicon Minerals N/R N/A Producer’s reserves are decreasing in response to lower gold prices. It’s a matter of Sabina Spec. Buy $1.50 Seabridge Spec. Buy $20.00 time before the equity market recognizes that the producers need to replenish by Torex N/R N/A acquiring development-stage projects. Historically, producers have acquired, not True Gold N/R N/A discovered; i.e., 81% of reserve replacement dollars have gone to acquisitions. Victoria Gold Spec. Buy $0.30 Gold is becoming increasingly hard to find, especially in politically stable regions. Yet, investors have punished gold companies making acquisitions in development Research Analysts projects, viewed as cash consumers. While this was also the case in the energy and base metal sectors, some recent acquisitions of development-stage projects indicate Don MacLean, Sr. Analyst 416.360.3459 Don Blyth, Analyst 416.360.3461 the tide is turning. Our philosophy: “The first diners get the best parts of the buffet”. Lauren McConnell, Analyst 416.366.7776 Exploration budgets and discoveries dropping sharply. For a few years, the number Grant Moenting 416.360.1397 and volume of new discoveries was dropping sharply, even while exploration budgets were setting new records. Sharply curtailed producer and explorer budgets can only Sales accelerate the gap between rising production and new discoveries. Gold is scarcer Toronto 416.361.1064 than generally perceived and while it might take years to register in the supply- demand equation, we think the perception of this scarcity is quietly dawning on producers who now feel the squeeze between the pressure to increase production (to improve profits) and declining reserves. Gold Equities are cheap! We believe the gold sector has bottomed, and while prices have started to pick up the values remain excellent. Our Takeover 20 candidates have only regained 20% of their four-year trading range on average. Consider the recent Osisko transaction, purchased for ~$3.5B — a 60% premium to the opening bid by Goldcorp, yet it was still ~20% below Osisko’s market cap of four years ago ($4.4B)! Conclusion It seems fitting to bring back the Takeover 20 now — the beginning of what we believe is a new mining cycle. We have focused on the developers because we see a unique investment opportunity, caused by the following inconsistency: the market values developer equities on par with cabbage soup, yet falling discovery rates and producer reserves are sending a strong signal that Mother Nature is telling us gold is scarce. We know who we think will change — the market, not Mother Nature. The 25 companies in our Takeover 20 each have a good investment proposition. We have selected seven to initiate coverage on in this report, in addition to the nine that we already cover. Paradigm Capital Inc, IIROC/TSX member 1 August 7, 2014 Gold Sector Note Reviving the Takeover 20 In late 2005, we published an analysis dubbed The Takeover 20, which became a popular periodical. It attempted to highlight, using fairly simple valuation techniques, 20-ish companies that either we or our clients felt were takeover candidates. There wasn’t much call for it after mid-2012, but now is a good time to launch a new Takeover 20 focused on development and advanced exploration companies. It was too hard to narrow the list down to just 20, so readers will note 20-ish is more accurate. Quite a bit more detail is provided in the new platform and it seemed a good opportunity to use this to initiate coverage of a six favourite companies. We can’t promise that it will offer any better track record, the old one was reasonably good, but the new, more comprehensive analysis should help readers tailor their selections to their investment preferences, whether it is to find high IRR projects or low entry cost per ounce of resource. The Takeover 20 has had a reasonably good track record, but the timeframe can be years, not months. For example, Osisko was included back in 2006 and was taken over in 2014. The results over the past nine years are displayed on Figure 1. Figure 1: Takeover 20 Report Card Date Successful In Existence Bankrupt December 2005 13 4 3 May 2011 5 14 - June 2012 6 18 - Source: Paradigm Capital Inc. New Initiations Despite now having detailed models for each of the companies in this report, and liking almost all of them, it just didn’t make sense to initiate coverage on them all. We have identified six that offer excellent upside, in our opinion. They span the spectrum in size, from Carlisle’s ~$14M market cap to Seabridge’s ~$458M. Each new initiation has a unique investment thesis. Carlisle Goldfields (CGJ‐T, C$0.05, Speculative Buy, C$0.27 Target) is a small cap (C$14M) explorer-developer with two neighbouring projects in Manitoba hosting 1.9Moz of estimated mineable resources. The overall project has one of the best IRRs at 28% after tax, one of the best IRRs to a potential acquirer (22%) and lowest P/NAVs (0.08x), plus exploration upside. Castle Mountain Mining (CMM‐V, C$0.69, Speculative Buy, C$2.60 Target): If there is one company that has a project that should be developed by the company itself it is Castle Mountain’s. While one of the best in our valuation criteria it also has one of the lowest execution risks, with the key mining permit in hand and past experience from the predecessor mine. Freegold Ventures (FVL, C$0.20, Speculative Buy, C$0.42 Target): An arctic heap leach candidate located next door to the very successful, very low-grade Fort Knox mine in Alaska, FVL has identified 6.5Moz to date for >$2/oz with heaps (sorry) of exploration upside, valued at just $3/oz. Integra Gold (ICG‐V, C$0.21, Speculative Buy, C$0.60 Target): Currently hosts a 0.8Moz at 10.8 gpT underground deposit known as Lamaque just outside the town of Val D'or, Quebec and just south of the historic Lamaque and Sigma Mines that produced +4.5Moz over their respective life times. Although Lamaque's current resource is small, we believe it is only a snap shot into time and that its Paradigm Capital Inc, IIROC/TSX member 2 August 7, 2014 Gold Sector Note development plan is an intelligent market friendly (low capex, low risk, low cost) option. Midas Gold (MAX‐T, C$0.73, Speculative Buy, C$2.95 Target): The company’s 7Moz Golden Meadow project in Idaho is one of the largest and best undeveloped gold deposits in the USA and is trading at one sixth the market cap of its closest analogue, Romarco. This is because Midas is about to enter the 3-5 year permitting process that Romarco is just finishing. The prize is well worth the wait, we believe. Orbis Gold (OBS‐ASX, A$0.38, Speculative Buy, A$0.70 Target): Orbis’ 2.0Moz Natougou project is relatively small relative to many of the peers in this study, but the 3.4 gpT average grade is amongst the best for open-pittable deposits. We believe it is one of the top three undeveloped projects in Burkina Faso, a country that has backed up the talk of being “mining-friendly and open for business” with the opening of 7 new gold mines in 7 years, and remarkably responsive turnaround on permitting applications. Seabridge Gold (SEA‐T, C$10.38, Speculative Buy, C$20.00 Target): The KSM project stands out as a giant among the world’s largest undeveloped copper gold deposits and is valued at just $15/oz. A neighbour to Pretium in B.C., the two share an extraordinarily endowed copper-gold camp. While our 8.5% IRR is not quite viable, Seabridge provides investors with exceptional leverage to rising prices. Paradigm Capital Inc, IIROC/TSX member 3 August 7, 2014 Gold Sector Note Figure 2: Takeover 20 Summary Page Assumptions Gold Price: $1,300 Copper Price: $3.00 SUMMARY Silver Price: $20.80 C$ Exchange: $0.94 "TAKEOVER TWENTY" LOM Other Investor Share of Price Capital Shares Net Mkt Reserves Paradigm LOM Total IRR to Market Construction Resources Process Net Mkt Sustaining Total Annual Production to Long Project IRR Efficiency Last Economic Outstanding Cap Moz Au Estimate of Construction Cash Acquirer
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