pfs, page-23

Disco Stu

What do I think of a possible merger between Keegan and PMV?

For some reason I can not access the article, so I am not sure why they think a merger is likely.

I had a bit of a look at Keegan's website but there is no point in worrying about a possible merger as there are so many other variables.

I note that Keegan is well cashed up for developing a mine with cash of $189m at 30 June 2012 and has only issued 75.5 shares (plus around another 8 million options/warrants). Their chart is interesting - they reached a high of $CAD9 in 2011 but are now $3.65, with a capitalisation of some $CAD275m.

They have a largish resource/reserve similar to PMV, but while PMV's grades at 2.3 gms tonee, their grade is only 1.1 (similar to PRU's operation in Ghana and CGX in the Philippines). Given the low grade they would need to build a large plant to make the deposit economic. PRU has a 8 million tpa milling capacity (I think) while CGA has 6.5 mtpa milling capacity with plans to increase to 10 mtpa when they would produce around 300k ounce pa (currently 200k ounces pa).

I have no idea the extent to which Keegan will need to clear over-burden to get at the ore. For PMV this is a major cost ($80m up front).

So the difference between the two is that while Keegan needs to build a much larger plant for economical milling at a cost (which I have not checked for 7-8 mtpa milling capacity), PMV can get by with 3.5 mtpa milling capacity to be economic.

Would a merger between the two make sense? I dunno. The one positive for us would be that the $189m cash that they have plus the $40m we have would mean we could get one mine built without having to borrow very much (say only $100m) and there would be no need to do a capital raising by PMV that would dilute existing shareholders in the merged company.

Once one mine is up the cashflow from that could fund the next mine about 2 years later.

So perhaps a merger is a reasonably attractive proposition for us given that the two deposits are roughly the same size. But like I said, I just do not know enough about Keegan and depth of its deposit and any metallurgical issues they may have.

There have been a few mergers of equals recently. Two which have involved companies in which I had an interest are ADU/EDV and CGA/BTO, just announced (EDV and BTO are Canadian companies). The attraction of the ADU/EDV merger was the $200m cash held by EDV and the ability to grow faster as a unit, which in turn makes them more attractive to investors. Unfortunately since the merger in late 2011 the share price has fallen partly as a result of the general downturn in goldies, but also because of perceived issues in some west African countries and the higher taxes in Ghana, where one of their mines is located and currently represents 50% of production.

loki