TD - Earle Update -.05 Value Harvest
Announces Spin-Out of Ethiopian Properties
Event
Pre-market yesterday, Canaco announced its intention to spin-out its 70%
interest in the Harvest Project in Ethiopia to a wholly owned subsidiary,
Tigray Resources Inc. The transaction will include the transfer of
approximately $4 million to Tigray to fund an initial exploration program and
provide near-term working capital. Canaco intends to distribute 100% of its
shares in Tigray to the company’s shareholders on a pro rata basis.
Impact - POSITIVE
We believe the spin-out transaction will surface additional value for
shareholders in the Harvest Project and allow the company to remain focused
on its flagship Handeni Project.
We carry a nominal value (
.05/share) for the company’s interest in the
project. As a result, the proposed transaction does not represent a material
change to our current valuation. We maintain our 12-month target price of
$8.00/share and reiterate our SPECULATIVE BUY recommendation.
Details
Tigray to Focus on Exploration at Terakimti
Terakimti is one of the six exploration concessions that comprise the Harvest
Project. To date, 12 holes have been drilled, 11 of which returned significant
intercepts, highlighted by a 52.1m interval grading 4.1% Cu, 1.55 g/t Au and
25.96 g/t Ag. Going forward, the initial focus will be to complete geological,
geochemical and geophysical sampling to establish new drill targets and
complete an 11,000m diamond drill program at Terakimti and the Nesafit
concession.
Andrew Lee Smith Leads Initial Management Team
Tigray’s initial management team will include Andrew Lee Smith as
President and CEO and Jeff Heidema as VP, exploration. Additions to the
management team are planned and will take place as Tigray expands its
Ethiopian presence.
Transaction Pending Multiple Approvals
The arrangement remains subject to the TSX Venture Exchange, regulatory and court approval as well as
shareholder approval. Full details of the transaction are expected to be filed in an information circular,
and a shareholder meeting is scheduled for June 24. Under the arrangement, Canaco shareholders would
receive one common share of Tigray for every five common shares of Canaco held as of the effective date
of the arrangement.
Outlook
We anticipate the following developments over our 12-month target price horizon:
• Additional results from Magambazi – Imminent
• Results from drilling targeting MK trend – Imminent
• Completion of Tigray spin-out – June 2011
• Phase 1 diamond drilling along MK Trend – Q2/11
• Phase 2 diamond drilling along MK Trend – Q3/11
• Initial resource estimate (Magambazi) – Q4/11
Valuation
We calculate that Canaco is currently trading at 0.72x our corporate NAV5%; this represents a significant
discount to the comparable development stage gold companies in our coverage universe which trade at an
average of 0.96x corporate NAV5%.
Justification of Target Price
We generate our target price by applying a 1.3x target multiple to our fully financed corporate NAV5% of
$6.27. We calculate our NAV using a gold price of US$1000/oz, an exchange rate of US
.90 to the Canadian
dollar, and a 5% discount rate. Our valuation includes a $175 million exploration credit which represents our
view of a risked potential resource addition of 1 million oz to our modeled inventory.
Key Risks to Target Price
Gold and fuel price risk; foreign exchange rate risk; forecasting risk relating to deposit size; financial and
market risk; title risk; availability/cost of financing; technical risk; capital and operating cost risk; timing risk;
political risk, including risks related to indigenous peoples; permitting risk; environmental risk; staffing and
key personnel risk.
Investment Conclusion
We maintain our 12-month target price of $8.00/share and reiterate our SPECULATIVE BUY
recommendation.