Horsey Pucks and Horse Sense
October 26, 2005
Some of us who grew up as God's frozen people remember winter when milk, bread and freight were delivered by horse drawn vehicles. You will immediately understand about horsey pucks. For deprived others, who missed the delight of "stink handling" a properly frozen "horsey puck" in your four buckle overshoes, let me explain. "Horsey pucks" are a reasonable facsimile of the rubber hockey puck when you don't have the real thing. However, horsey pucks are not at all durable, only generally like the real thing and really are best if gathered and buried in your garden to help the posies grow.
In mid October 2005 Guinor Gold's London based management announced and recommended acceptance of an offer from (also London based) Crew Gold . Crew offered to acquire all common shares, options, warrants etc., for US$328 million (about C$390 million). Guinor, the operator of the Siguiri mine located north of Cassidy's Guinea exploration tract is doing a US$140 million expansion to improve gold recovery. It will start a CIP (Carbon in Pulp) process Documents filed last April in support of a $65 million common shares issue for this purpose say that over the next seven years or so, Siguiri will recover 4.2 million ounces of Gold from rocks with an average grade of 1.4 to 1.7 grams per tonne. Crew doesn't yet have all the money, but this is an all cash offer. When rationalized for the remaining US$75 million capital required to install the CIP plant and for the US$7 million or so of existing debt the bid is really C$490 million.
The Horsey Pucks: Since October is too early in the year for finding good horsey pucks even in Canada the "soft and fresh" variety says that; if Guinor's 4.2 million ounce reserve and resource (calculated by the same consultants as Cassidy's [RSG Global]) are worth C$490 million, then: Cassidy's April 2005 reported resource of 315,000 ounces gold is worth C$37 million or about C$0.64 per common share of Cassidy (fully diluted as at September). Too simple and verily, fresh horsey puck thinking! Consider further!
The Horse Sense: Analysis of the independent consultant RSG Global's 245 page Guinor report and RSG's 60 page Cassidy report provides significant facts. Both are "current" reports (last April). Any price comparison needs to apply the observations and measurements reported by RSG. Mere simple comparison of relative value of these two companies, just because both are gold explorers in Guinea, would be a travesty. Finding relative "value" for Cassidy's shares by looking at the Guinor buy needs to apply some critical "correcting" factors. The analysis also can help solve the WHY of Guinor's management willingness to take the offer. The only "absolute truths" to be derived from the proposed transaction are:
1. There is someone (Crew Gold) successful in the gold mining business who believes gold mining in Guinea is a good business.
2. The purchaser has provided sufficiently convincing evidence to major financial resource providers to justify those sources providing it with nearly half a billion US dollars backing for the venture.
Guidance : The Guinor transaction can be a useful guide to "Cassidy value" if the differences and similarities between the two companies are properly addressed. The following comparisons are believed valid. It uses the facts and opinions recorded by RSG and apply mining business "horse sense" to make comparisons. These are the factors considered and interpreted:
1. Guinor and its predecessor companies have been hunting for and producing gold in the Siguiri region since the 1980s. Despite the drilling of 5,411 holes penetrating 640,000 meters of rock, RSG Global observes that the intense exploration of eight localities indicates only four to be commercially exploitable at US$400 per ounce gold.
2. A further observation by RSG is that the Guinor explorations failed to find a rich source that must exist somewhere not too distant. (My aside: that's because it's on CDY's area?).
3. This means that Guinor found 6.53 ounces Gold per meter of hole drilled.
4. The RSG report for Cassidy says that to the date of that report Cassidy had drilled 9 anomaly sites with 8 of them showing significant results. Cassidy had by then drilled a total of 134 holes (18,800 meters). Cassidy had drilled 71 holes (less than 11,000 meters) on the SF zone for which RSG calculated resources of 315,000 ounces (capped calculation). I will belabour the "capped" uncapped" calculation later.
5 Cassidy found resources of 28.6 ounces per SF zone meter drilled (or 16.75 ounces per meter drilled if one wants to include all Cassidy's drilling on all zones to the date)
6. RSG lists a page full of highgrade assay results ranging up to the famous 150 g/t one. RSG does not show such a list, but carefull reading through the report seems to suggest that "high" in the Siguiri area is rare and in the order of 15 g/t or less.
7. Strangely, RSG's descriptions of the zones to be mined by Guinor lack expressions of "open along strike" or "and open to depth" although more exploration is recommended by RSG. Where?
The statistics given and observations made above help to explain why Guinor managers are willing to sell. Simply, there is not enough glamour remaining. Several generations of owners/explorers have failed to "unlock the jewelry store" (if there is one on these lands).
8. Comparing Average grades: The RSG calculated average grade of the Cassidy resource is 2.2 grams per ton. This is 25% higher than the average grades they used to calculated Guinor's reserves. Because the cost to dig, move, grind and treat rock tonnage is the same regardless of gold content an increase in average grade translates directly to the PROFIT line!
9. The first adjustment therefore to Cassidy comparative value then is to "improve" the value of gold per share by 25% to be a "certain" $0.80 per share based on the Guinor/Crew transaction.
10. The second adjustment of Cassidy share value as can be calculated when compared with the Guinor buy is also related to the apparent much greater riches of the Cassidy exploration area's gold accumulations. In an effort to compensate for the so-called "evil" Nugget Effect, RSG's computer model that reported a resource of 315,000 ounces gold in 300 meters length of the SF trend was not permitted to recognize the actual high grade assays. The high assays were "capped " at 30 g/t. (Guinor results were not capped because they are low to start with.)
11. "Capping" is better described as the "Consultants' cover your ass convention". Even though the measurement is validly obtained, the calculation is arbitrarily constrained. This better assures that the consultant's work will be accepted by Bankers and Brokers. It's good for his business.
12. Gratifyingly, RGS do provide the result of their modeling of Cassidy's SF trend done without the cap. The "bareheaded result " is that the zone investigated contains 581,000 ounces of gold. This implies that the SF trend drilling actually found more than 52 ounces of gold per meter drilled. The recalculation will also affect the average grade per tonne. I make it to be more than 4.5 g/t.
13. Therefore, standing bareheaded before you in my four buckle snowshoes, I consider the more appropriate calculated "value" per share of Cassidy, FOR THE SF ZONE ALONE when based on the transaction price for a very "similar" company, Guinor Gold, to be 1.6 times the "basic $0.64 p.s. further adjusted by a profits from higher grade factor of 2 times. The EdZed calculating value on that relative basis is then C$2.05 per share.
TO "PARAQUOTE" FROM ONE OF HISTORIES MORE FAMOUS GEOLOGISTS, ARTE JOHNSON (HIS FAME RESULTING FROM HIS APPEARANCES ON THE SHOW, ROWAN AND MARTIN"S LAUGH IN) .. Arte would look at the current share price and say, "VERRRY INTERESTING ! BUT SHTOOPID!"
DISCLOSURE STATEMENT
Ed Zederayko is a shareholder of Cassidy Gold Corp. He is not an insider of the company.
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