DEALTALK-Battle for Capital Gold takes a confusing twist

Mon Dec 6, 2010 1:30pm EST

* Two bids financially near identical, tied to share price

* Gammon deal favored for $0.79 cash, management team

* Analysts say confused shareholders should sell

* Capital Gold shares up 40 pct over 3 months at $4.80 (In U.S. dollars unless noted)

By Julie Gordon

TORONTO, Dec 3 (Reuters) - Six of one or half a dozen of another?

That about sums up the decision faced by shareholders of Capital Gold CGC.A CGC.TO, the New York-based gold miner that owns the El Chanate mine in Mexico's northern state of Sonora.

Both Gammon Gold GAM.TO and Timmins Gold TMM.V are circling Capital, with Toronto-based Gammon offering a cash and share takeover deal, and Vancouver-based Timmins offering an all-stock deal.

For the average investor, the deals are near carbon copies and the decision is made even tougher by the fact that Capital Gold appears to be floundering since its longtime president and chief operating officer stepped down in July.

Capital Gold is now being run by the former president of Nayarit Gold, an exploration company Capital absorbed in August.

"I think both deals are pretty similar as far as the implied value per share," said Dahlman Rose analyst Adam Graf, adding that picking who should manage those assets may be tough.

"Capital's assets may be valued better in the hands on someone else," he said. "Creating a bigger, better company with better direction would be advantageous."

The value of the deals is heavily influenced by the market, which has favored either company at different moments.

At market close on Friday, the Gammon deal was worth C$4.87 a share, while the Timmins deal was worth C$4.77. By midday on Monday, the valuations had flipped and the Timmins deal was worth C$5.13 a share, while Gammon's was worth C$4.82.

Analysts say shareholders need to look past the dollars and cents, and focus on which deal has "certainty to close".

This means, much like in real estate, picking the deal with the fewest "onerous" conditions.


While analysts say the fewer conditions the better, the one factor that might see investors back Gammon over Timmins is the 79 U.S. cents a share in cash that Gammon is using to court Capital.

"Cash is cash, right?" said Graf, adding that most investors will prefer a deal that "should make it easier for them to cash out."

But Graf expressed some concern that both bids ignored growth prospects at Capital, which also owns the Orion development project in Mexico's Nayarit state.

Graf said the project could add another $2 per share to Capital's value.

Some analysts say it may be time for confused shareholders to just walk away as the stock trades at a 40 percent premium to three months ago and the inexperienced management team mulls the two offers on the table.

"I think if (shareholders) can't decide, they should just sell the stock, because it's fully valued," said Octagon Capital analyst Annie Zhang.

Before the offers, her target price for the gold miner's U.S. shares was $3.76. On Monday, the stock was at $4.80 on Amex, while its Canadian shares were at C$4.84 on the Toronto Stock Exchange.

Zhang added that Capital Gold has been floundering since former president and chief operating officer John Brownlie left the company in July.

"The situation is only getting worse for Capital Gold," said Zhang. "There's no one to run the company right now."

She added that while, financially, Timmins seemed to offer more to shareholders, she said there had been friction between the two companies and she would not back that deal.

"I personally I don't think it would be a good fit, management-wise," she said. "I would be more comfortable with a sell."

($1=$1.01 Canadian) (Editing by Pav Jordan and Rob Wilson)

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