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Growth Stock Report
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Issue 13 Vol.15 April 8, 2008 Customer Service
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Peak Gold (PIK, TSXV) � Merger Enhances Future Growth
Just over a year ago when Peak Gold started trading, my heads up alert referred
to Peak as possibly the new Wheaton Minerals which morphed into Goldcorp, one
of the world�s largest gold producers. What was once a 50 cent penny stock now
has a market cap of $30 billion and has given early investors a spectacular
1300% return.
The reason for my optimism of Peak Gold last year was largely based on the fact
that some of the key players behind the success of Wheaton were also involved
with Peak Gold. The initial Peak Gold board of directors comprised of the
Goldcorp Chairman and the former Chairman and CEO of Wheaton, Ian Telfer. Also
the mastermind behind Endeavour Financial and the key player behind many of our
success stories including last year�s UrAsia Energy, Frank Giustra and Gordon
Keep, another key player from Endeavour.
Also Pierre Lassonde was appointed as a Special Advisor to the Board of
Directors. Lassonde is currently the Chairman of Franco Nevada Corporation and
formerly served as President of Newmont, one of the world�s largest gold
companies.
You�ll be hard pressed to find such a collection of heavy weights running a
newly formed gold company as this bunch. Though there is no guarantee Peak Gold
will be another Wheaton, success usually breeds success and this group are
serious company builders.
Now just over a year later, a mega $1.3 billion all stock merger has taken
place with Peak Gold, New Gold (NGD, TSX; NGD, AMEX) and Metallica Resources
(MR, TSX; MRB, AMEX) which will give the new company a market cap of $1.6
billion. The new entity will retain the New Gold name.
Peak Gold shareholders will be receiving one tenth of a New Gold share for each
Peak share owned while Metallica shareholders will be receiving nine-tenths for
every Metallica share owned.
With this merger, Peak Gold shareholders will now own an intermediate gold
producing company with 2008 output of 297,000 ounces rising to an estimated
335,000 ounces in 2009 from three mines in Australia, Brazil and Mexico. In
addition the new company will have new developing mines in their portfolio
including New Golds� New Afton mine, which is scheduled to commence production
in late 2009.
The new company will have cash costs of production of approximately US$340 per
ounce of gold, net of by-product credits in 2008. There will also be a
significant leverage to the uptrending gold prices as all the production is
unhedged.
Combined metal inventories will include gold reserves and resources of 11
million ounces; silver reserves and resources of 83.7 million ounces; copper
reserves and resources of over 4.4 billion pounds.
The new company will be in a
position for rapid growth given their healthy treasury of $500 million in cash
and short-term investments (including the potential cash proceeds from the
exercise of in-the-money options and warrants), $120 million in investments,
and a significant operating cash flow.
Here�s the key new projects New Gold and Metallica Resources are bringing to
the table.
Metallica Resources (MR, TSX; MRB, AMEX)
Metallica has two primary assets, the 100% owned Cerro San Pedro gold-silver
mine in Mexico and a 30% interest in the El Morro copper-gold property in Chile
which is a joint venture with Xstrata.
The Cerro San Pedro is an open pit mine which is forecasted to produce a 10
year life of mine average of 125,000 ounces of gold equivalent (90,000 ounces
silver, 2.1 million ounces of gold) annually at a cash cost of US $282 oz net
of the silver by product. Production began in April of 2007 with a total of 33,600
ounces of gold equivalent produced over 2007. Initial operating costs came in
at US $407 per ounce but should drop significantly going forward.
This mine will be a nice cash cow for the company in the years ahead.
The 3,600 hectare El Morro property in Chile was a result of a exploration
agreement with Metallica and Falconbridge � who were later taken over by
Xstrata. The agreement now has Xstrata obligated to complete a feasibility
study and to provide 91% of the project financing (70% and 21% at Metallica�s
option) dependent on a positive production decision. A feasibility study is now
in its final stages.
Preliminary numbers suggested that over a 15 year mine life, El Morro could
average 157,453 tons of copper and 337,225 ounces of gold.
A couple of major obstacles remain though and that concerns obtaining water and
power. One scenario is that a water desalination plant could be built on the
coast and the water could be pumped up to the 3,800 meter elevation. Needless
to say, a huge amount of cash would be needed.
Also another wrench in the works for this project is that Xstrata may be taken
over by CVRD-Vale thus delaying the development of El Morro further.
The bottom line is that Cerro San Pedro will be a major asset and cash cow for
New Gold whereas the outcome for El Morro looks a little fuzzy right now.
New Gold Inc. (NGD:TSX/AMEX)
New Gold�s major asset is the New Afton Project located 10 kms from the city of
Kamloops which is about a three hour drive from Vancouver. There�s great mining
infrastructure up there with a long rich history.
New Afton has a 43-101 compliant Measured and Indicated Resource containing
approximately 1.5 billion pounds of copper and 1.6 million ounces of gold. The
project has a projected 13 year mine life which could annually produce on
average 80,000 ounces of gold, 214,000 ounces of silver and 75.4 million pounds
of copper.
The kicker with New Gold is that they are $292 million in debt. In 2007, the
Company incurred a loss of $61.4 million or $2.00 per share compared with a
loss of $3.5 million or $0.15 per share in 2006. The increased loss is
primarily attributable to the $50.1 million impairment charge which the Company
took in 2007 in respect of its investments in non-bank sponsored Asset Backed
Commercial Paper ("ABCP").
This financial faux pas doesn�t speak highly of New Gold�s management who have
been faced with the problem of financing the completion of the New Afton mine.
This merger will alleviate that problem for them. At the same time, it gave
Metallica and Peak Gold some leverage in acquiring a key asset under favorable
terms.
Management and Directors
The market took an immediate liking to this merger announcement with all three
stocks trading higher on the news. Again, I think it�s the people behind the
deal that are drawing the favorable attention.
Upon completion of the deal, Robert Gallagher, currently Chief Executive
Officer of Peak Gold, will assume that role for the combined company.
Clifford Davis, the Chairman and CEO of New Gold will stay on as a Director
given his 40 year international mining experience in both underground and open
pit mining.
Craig Nelson is also on the board and is currently the Chairman and Director of
Metallica. He�s also the President, CEO, and a Director of Avanti Mining.
Nelson was also the Executive V.P. of exploration for Gold Fields, one of the
world�s largest gold companies.
Paul Sweeney brings 30 years of experience in the mining industry finance and
is currently the V.P. of Corporate Development of Plutonic Power Corp.
And last but certainly not least, the two of the original heavy weights behind
the Peak Gold deal, Pierre Lassonde and Ian Telfer will be Directors as well.
Certainly the new board are a exponentially more powerful group who are more
than capable of leading New Gold forward.
Conclusion
This deal is good for Peak Gold shareholders. The addition of Metallicas� Cerro
San Pedro mine and New Golds� New Afton Mine will ramp up the company�s cash
flow, profits, production, reserves and resources going forward.
At the end of the day the pro forma ownership of the New Company will work out
to Metallica Resources owning 45.7%, Peak Gold owning 37.8% and New Gold
controlling 16.5%.
The potential for short term share price appreciation is good. The combined
company will have a price to net asset value of 0.94X whereas the peer group
average for intermediate gold companies is 1.23X.
Further increased valuation will come by way of ramping up production from the
existing mines and further mergers or acquisitions. With over a half a billion
in cash, the board of New Gold will be able to make sharp deals when the time
is right.
The merger is subject to the entering into of definitive agreements among the
parties on or before May 9, 2008, the preparation and mailing of a joint
information circular, and the holding of special meetings of each company�s
shareholders. The parties expect to complete and mail the joint information
circular in early June 2008 and plan to hold the special meetings in late June 2008.
The Transaction is expected to close in early July 2008.
As I stated a year ago, Peak Gold may not turn out to be another Wheaton clone
but the company does possess the potential for triple digit returns going
forward. Now more than ever I still believe this will be the case.
Peak Gold is a buy for growth.
For further information go to www.jameswinston.com
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