JUNIOR MINING

Gold mining takeovers and consolidations wave has begun

Toronto’s Paradigm Capital suggests that the recent friendly takeover bids of Aurelian and Gold Eagle “underscore the importance of strategically sized sources with strong rates of return.”

RENO, NV -

Toronto's junior mining specialist Paradigm Capital says a difficult financing environment, and a widening performance spread between large and small cap gold stocks have made conditions for the acquirer the most attractive in years.

Gold analysts Don MacLean and Don Blyth and Associate John Case chose Andean Resources (TSX: AND), Andina Minerals (TSX-V: ADM), Bear Creek (TSX-V: BCM), Detour Gold (TSX: DGC), and Osisko Mining (TSX: OSK) are their top takeover picks that focus on large resource bases in favorable jurisdictions.

Two emerging producer candidates, which Paradigm considered to be good takeover possibilities, including Guyana Goldfields (TSX: GUY) and Rainy River Resources (TSX-V: RR).

Paradigm also favors IAMGOLD among the intermediate gold producers, suggesting the company "has been punished by investors for its high cost structure and low growth profile. At its current valuation, IAMGOLD looks attractive on the basis of NAV and cash flow. With an improving balance sheet, we expect IAMGOLD to address their growth profile by early 2009."

In their "Takeover 20" Update, Paradigm said sagging prices in the small cap gold sector, combined with a number of changes since February, "have made conditions ripe for another wave of takeovers and consolidation."

These conditions include:

· Senior and intermediate share prices have declined -11% and -12% respectively over the past six months, while emerging and exploration stocks have slid -24% and -25% respectively. Meanwhile, gold has decreased only two percent over the same period.

· This puts larger cap stocks at an even greater advantage relative to smaller companies, in terms of using their valuation multiple advantage to acquire the smaller companies.

· The ability of junior companies to finance development of their projects has also deteriorated, as a combined result of weaker equity markets and tightening credit conditions.

· The market's appetite for risk continues to shrink, whether it is sovereign risk, technical risk, or financing risk.

· A lack of new large discoveries tends to place a strategic focus on size.

Paradigm noted that two sizeable acquisitions involving Aurelian Resources and Gold Eagle were announced within a week of each other. The analysts assert that these transactions will "prompt other acquirers to take notice and, we suspect, spur on other acquisitions. In both cases strategically large resource bases are being acquired, in very economically robust projects, yet the margins to the buyers are among the best that we have seen..."

On July 23rd, Kinross announced its intention to take over Aurelian in a friendly transaction that would give the major gold miner control over the Fruta del Norte deposit in Ecuador. "The FFN deposit is a world class 14 Moz (we assume 9 Moz mineable) high grade deposit (we estimate $250/oz cash costs), and it is the most significant new discovery made this cycle in our opinion. "

"It is a risky move because terms of Ecuador's pending Mining Code3 have yet to be disclosed. On the other hand, the acquisition cost of $1 billion is only about 8% of Kinross' market capitalization, the analysts said. "If the risks were low, the competition to buy Aurelian amongst the major companies, would have been intense and the price much higher."

"Aurelian is also arguably the riskiest major acquisition that we have witnessed, although in retrospect, Gold Fields' $390m acquisition of Bolivar's Venezuelan project in 2005 was much riskier. We don't doubt that Kinross has done its political homework, to the extent this is possible in this time of change in Ecuador, so we wish them well. The prize looks worthy of the risk."

On July 31st, Goldcorp announce its intention for a friendly takeover of Gold Eagle Mines. "Goldcorp enjoys one of the industry's best growth profiles, underpinned by the Red Lake mine, and enjoys a major strategic advantage in the area because it owns the area's processing plants," according to Paradigm.

The analysts assumed 6.9 million ounces of resource and cash costs of $260/oz at Gold Eagle's Bruce Channel Discovery. "Gold Eagle's recent financing with Agnico-Eagle in June may have prompted Goldcorp to launch a pre-emptive takeover."

"Gold Eagle's resource is deep and detailed underground drilling will be necessary to confirm the widespread drill results to date," Paradigm noted. "Therefore, there is technical risk that mining conditions and grades will not be as good as suggested by today's drilling and Gold Eagle's consultants."

"On the other hand, the political risk is low and permitting is not likely to be a problem, given Goldcorp's existing infrastructure. We estimate that Goldcorp has a $100/oz cost advantage, possibly a year advantage in terms of timing and a considerable knowledge advantage compared to other potential bidders."

MEASURES OF ATTRACTIVENESS OF CURRENT M&A TARGETS

Paradigm's analysis suggests that the cost to acquire resources may be cheaper than discovery.

"We believe that the real cost to discover new, economically viable gold deposits is not less than $35/oz and likely over $50/oz. With that is mind, one has to wonder whether there is a second motivation for the larger cap acquirers-it is possibly cheaper to buy ounces than it is to explore for them. The reciprocal is also true for the investor as in investor in junior gold explorers-has the market now attached so low a value to new discoveries, that broadly speaking, the risk: reward of investing in explorers no longer makes sense to invest? Perhaps this is a more obscure part of the answer to the ongoing price weakness of the junior exploration stock," Paradigm asserted.

Meanwhile Paradigm claims that the average margin for the buyer is now $303/oz, "near the best we have seen since last 2005. ...It is indeed a buyer's market."

The analysts also suggest that buyers have considerable advantage over potential sellers.

Paradigm's analysis also asserts the IRR is also at its best for buyers. "Our experience with acquisitions up to early 2008 suggests that the average IRR to the buyer has been under 5%, a figure that is consistent with the IRR range for acquisitions in the last cycle. The current implied IRR over 10% is quite attractive for acquirers and, in our opinion, is likely to prompt additional acquisitions in the not too distant future," the analysts advised.