Timmins Hostile Bid for Capital Gold – How much are they really paying?

As this bid has now turned hostile, and given Timmins has now increased their cash offer to $0.25 per Capitlal Gold share, and will need to take on additional debt and dilution to meet expenditures. I have decided to objectively determine how much value is in this merger to ensure Timmins shareholders are not paying too much. My findings below –

Timmins 2011 Expenditures (ex. Tax)

$21m Drilling program, $6.14m Capital expenditure at San Francisco, $2.55m Property option payments, $10m Gammon cancellation fee, $10m Merger transaction costs, $ 15.7m Cash payment in consideration to Capital Gold shareholders

Other – Estimated 6668 gold ounce loan still payable to Sprott. This is deducted in combined cash flow. No other significant liabilities.

Capital Gold Corp 2011 Expenditures (ex. Tax)

$30 m Capital expenditure (not clear at present if the entire balance is for El Chante only?).

Other – No significant other liabilities. Current cash balance can safely cover current liabilities. No significant long term liabilities.

Total => $95.4m

Combined Entity 2011 Cash flow

Calculations assume a base case scenario –

San francisco 95k ounces @ $500 cash cost / ounce;  El Chante 65k ounces @ $500 / ounce => $152m. There is also an estimated 6668 ounce gold loan repayable to Sprott. Therefore, adjusted combined entity cash flow => $142m (2012 => $152m).

Financing

Okay, now I am going to conclude that Timmins will go all out with the financing. For argument sake, we will assume half Equity financing (at $2.40, with one half warrant for every share of the combined entity), and half debt (non convertible). Sprott has already agreed $20m financing.

Total Capital requirements => $95.4m.

Equity financing needs = $47.7m. 19.9m shares + 9.95 warrants.

Debt financing needs = $47.7m (inc. $20m arranged financing from Sprott).

Combined F/D entity shares outstanding => 145,111,661 + (62,871,000*2.27) + 19.9m + 9.95m  => 320m.

Combined F/D entity market capitalisation @ $2.40 (60 day Timmins average share price  => $768m.

Estimated combined entity Enterprise value => (F/D Market Cap = $768m) + $47.7m Debt – $35.3m cash from options/warrants if exercised => $780m.

(Assumes all cash equivalents are reserved for Capex / transaction and other expenditures listed above).

Projected Enterprise value after consideration of 2011 cash flow ($142m), interest payments @ 10% ($4.77m), and income tax @ 30% ($23.2m) => $780m – ($142m -$4.77m – $23.2m) => $666m.

Summary – As the above shows, we could expect an enterprise value of $666m by year end. This would give an EV/CF of 4.38x. Given most mid tiers are trading in the 7 – 11 range, we could reasonably expect the share price to double within one year post merger. Possibly by year end, if we experience the usual autumn/winter gold stock bullishness!

As for reserves, we have a combined 2.2m gold ounce P+P, and a total of approximately 2.5m gold ounces M+I at the producing mines. The projected enterprise value is certainly not excessive in relation to reserves and resources. It is also reasonable to expect increased reserves by year end given Timmins current $21m drilling program.

Caveat Emptor (Buyer beware!) – It is common for post merger stocks to sell off due to the perceived reduced value of the combined company (transaction costs incurred, acquired company purchased at a premium, management conflicts etc..) and those selling once they have received their cash payment. Therefore, be cautious when buying. I will only accumulate more of these on weakness to reduce post merger sell off risks.