DGO takeover by Gold Road, page-49

It is clear that many are concerned about what the GOR takeover of DGO will mean for the shareholders of DEG. It is a fair question to ask. I will give you my two cents worth and maybe it will help.

DGO is a company that has an incomplete portfolio in that nothing there actually produces much of a cash flow in it's own right. I think that their main income stream comes from their holding in Dacian Gold (DCN) which is a producing gold miner that had some troubles a while back with a geologist that couldn't get the reserve calculations right. I lost some money but got out at when the shares were trading 42 cents on that when the revelations hit the market so it is likely that DGO probably lost a lot more given that the shares now trade at 24 cents each. Despite owning ~14% of DEG the rest of DGO's holdings are too immature to be worth much to the market due to lack of exploration. For this reason DGO lacks liquidity in the market.

GOR is a company that had to accept a joint venture proposal by Anglo Gold for their Gruyre discovery in the Yamana gold belt. There was a level of compulsion in accepting the joint venture offer as Anglo Gold had accumulated a takeover stake in the company and a refusal to accept the joint venture offer would have seen the company fall victim to a hostile takeover. The upside of accepting the offer was that Anglo Gold paid for the entire mine development and while GOR manages the mine they have 50% of the cash profits from the operation. Since then GOR have been searching for another prospect to explore and, if they find a viable resource, develop into a mine. They have tried several times without success. Either there was no viable ore bodies to explore or another company came in and outbid them for the asset. I feel that this is why they have been generous in their offer for DGO, to avoid being gazumped.

GOR has a market for their shares that is quite liquid with between 2 and 8 million shares changing hands on a daily basis. For people who own shares in DGO that had only 40,000 shares trading on a daily basis this is an important consideration because owning liquid shares means that it is easy to get cash when you need it. The share price is one thing but being able to readily sell your shares is equally important.

So, what is in the deal for GOR? I may be wrong but knowing GOR like I do (I have owned a parcel of shares since before they released their BFS) I suspect that it is the unexplored tenements controlled by DGO more so than the share holding in DEG or DCN. I suspect that GOR may look for a buyer for the shares of DCN. Not so for the shares of DEG. GOR is looking for another tier 1 gold mine to develop and own outright. The exploration prospects held by DGO offer this possibility as GOR is cashed up and can afford an aggressive drilling program if they find the right place to drill. Incidentally, GOR's exploration program that led to them finding the Gruyre deposit is what attracted me to DEG in the first place because DEG was doing the same things.

OK, that is the background. What does this mean for us shareholders in DEG? A ~14% stake in DEG is strategic. Will they hold it or will they trade it? That is not an easy question to answer because there are arguments for both. As a yield play DEG could see a share price as a producing tier one miner that is much higher than it is now. If DEG is producing about 500,000 ounces of gold at US$2,000 an ounce (back of the envelope figures here so please don't be too picky on the details) an 8% yield would see a share price of about $6.50 and this would be very attractive to insurance companies that need yield to cover their obligations. Speaking in an actuarial sense 8% yield is where insurance companies need to be. Consequently there is a strong argument to sit on those DEG shares and make a lot of money in just 5 years. GOR does not need the cash to fund any exploration so there is no pressing need to sell those shares. On the other hand, GOR could be made an offer that is too good to refuse but what would that be because they do not need cash. It could be an offer that includes cash and a desirable exploration prospect but it would have to be a good offer because GOR does not need the cash.

For myself, I would look at GOR as a canary in the coal mine. If GOR announces that they have sold their shares in DEG (assuming that the DGO merger goes ahead) or if a take over offer is made for GOR then we will know that DEG is in play for a take over. If this happens after the next resource upgrade by DEG then we shareholders will be in a better position to enjoy a good offer for our shares. If a hostile bidder wants to take over DEG they have a very short time to outbid GOR and that should alert DEG of the intent of a predator. Maybe they will rush to release the resource upgrade before the dust settles on the DGO-GOR merger. It is all probabilities at this stage and something that we will all have to keep our eyes on. I personally would hope to see DEG become that producer with an 8% yield or, even better, a 4% yield (as the yield goes down the price goes up).

Good luck to all here