CANACO Resources Inc.
(CAN-V)
.42

TD Waterhouse Research Report

Exciting Discovery in Potential New Gold District

Event

We are initiating coverage of CANACO Resources Inc. (CAN-V) with a
Speculative BUY recommendation and $1.25 target price. PLEASE SEE
OUR FULL INITIATING REPORT for complete discussion and analysis.

Details

CANACO is a Vancouver-based gold exploration company that is focused on
Africa. The company’s flagship Handeni Gold Project (100%) is located in
eastern Tanzania in a region that recent research has shown may represent the
extension of the geology that hosts the Lake Victoria Goldfields (40 million
oz of resources and production of 1 million oz per year) to the west.
The company made what we considered one of the most exciting grass roots
gold discoveries of 2009 on its Handeni property, with the first holes returning
59 meters of 4.28 g/t, 41 meters of 3.32 g/t, and 56 meters of 6.39 g/t in a broad,
outcropping zone of alteration called Magambazi.
Based on drilling to date, we estimate a conceptual resource of 1.4 million oz
grading 4.1 g/t, which, in our view, suggests potential for a low-strip open pit
mine capable of 171,000 oz/yr of production at total cash costs of US$248/oz.
We see multiple-times resource expansion potential at Magambazi.
However, it is the district-scale potential of the Handeni project that is most
compelling to us. The company has defined an 11-kilometer trend of
anomalous gold-in-soil values and sites of artisanal mining where we believe
the best targets are yet to be tested.
Majiri Bomba, in particular, is defined by the strongest soil anomaly on the
property and is bounded to the northwest and southeast by deep-seated
regional thrust faults, which are thought to have been the major conduits for
fluid flow at the giant (over 15 million oz) Geita deposit in the Lake Victoria
Goldfields. Semwaliko also represents a high tonnage target, in our view.

We are initiating coverage with a Speculative BUY recommendation and $1.25
target price, based on 0.8x NAV5% using US$900/oz gold.
Recommendation: SPEC. BUY
Risk: SPECULATIVE
12-Month Target Price: C$1.25

Outlook

We anticipate the following developments over our 12-month target price horizon:
• Extension and infill drilling at Magambazi – Ongoing
• Results of preliminary metallurgical testing – Q2/10
• Exploration drilling at Majiri Bomba, Semwaliko and other targets – Q3/10
• Airborne geophysics to refine mapping, identify alteration zones – H2/10
• Initial resource estimate for Magambazi – Q1/11
Valuation
We calculate that CANACO is currently trading at 0.26x our corporate NAV5%. This represents a major discount
to the small capitalization and development stage gold companies in our coverage universe, which trade at an
average of 1.02x NAV5%. We expect this valuation gap to narrow as the market becomes aware of the
company and the exploration potential of its Handeni project.
We believe the most relevant comparable in our coverage universe would be Ventana Gold Corp. (VEN-T). Its
flagship La Bodega property in Colombia is also pre-resource stage, albeit more advanced, with nearly 200 holes
released to date (CANACO has drilled 36 holes at Magambazi) and preliminary metallurgical results, although it is
subject to an ongoing legal dispute.
Rubicon Minerals Corp. (RMX-T) is also pre-resource stage, but its flagship Phoenix Project is located in the
Red Lake camp of Ontario, is also more advanced with nearly 150 holes drilled, and is exceptionally high
grade. We expect it to always trade at a significant premium for these reasons.

Justification of Target Price

We generate our target price by applying a 0.8x target multiple to our fully financed corporate NAV. We calculate
our NAV using a flat gold price of US$900/ounce, an exchange rate of US
.90 to the Canadian dollar, and a 5%
discount rate. We use a 5% discount rate for nearly all of the gold companies in our coverage universe to provide a
consistent basis upon which to assess relative valuation through the P/NAV multiple.
We feel that a 20% discount to our fully financed NAV5% is appropriate given the early stage nature of the project
with a high level of attendant forecast risk due to a wide drill spacing over our conceptual resource, uncertain
Action Notes April 28, 2010
Equity Research 6 of 49
metallurgy, and a high level of financial risk due to the likelihood of equity dilution associated with project
financing. With project advancement, these negatives may be offset by the high grade nature of mineralization at
Magambazi and the strong exploration upside of the Magambazi Trend and of the Handeni property beyond this.

Key Risks to Target Price

Gold, and fuel price risk; foreign exchange rate risk; forecasting risk relating to deposit size; financial and
market risk; technical risk; capital and operating cost risk; timing risk; political risk, including risks related to
indigenous peoples; permitting risk; environmental risk; and staffing and key personnel retention risk.
Investment Conclusion
CANACO made what we considered one of the most exciting grass roots gold discoveries of 2009 on its Handeni
property. Based on drilling at Magambazi to date, we see potential for an open pit mine capable of 171,000 oz/yr
of production at total cash costs of US$248/oz with potential to expand the deposit multiple-times. However, it is
the district-scale potential of the Handeni project that is most compelling to us. The company has defined an
11-kilometer trend of anomalous gold-in-soil values and sites of artisanal mining where we believe the best
targets are yet to be tested. As such, we are initiating coverage with a Speculative BUY recommendation and
$1.25 target price.