A Little Known Name, Offering Value and Gold Leverage

ADAM GRAF, Dahlman Rose & Co. (04/30/2009)
Gold Leverage and Value: Our analysis indicates that the Capital Gold Corporation (OTC: CGLD; TSX: CGC) provides gold leverage through its ownership of the El Chanate gold mine in northern Mexico. El Chanate appears to be a high-return operation with low capital-development costs, attractive operating costs, an expanding growth profile and strong free cash-flow generation from current operations.

Under-Covered and Underexposed: Capital has little in the way of broker research coverage likely due to: 1) domicile in the U.S.; 2) low historic financing needs; and 3) management has maintained a low investor profile. Capital Gold has a very lean corporate structure, with top executives having either a technical or accounting backgrounds—optimal for successful mine building and operating.

Proven Mine Builders: Management brought on El Chanate on schedule, on budget and at a very low capital cost when most of the industry was experiencing capital cost blowouts. The company remains focused on execution and expansion to optimize the ore body for the least additional capital. Now, management is looking to find another El Chanate to replicate their success.

Mexico Factor: Mexico has a long history of mining and is a North American Free Trade Agreement (NAFTA) member, historically with relatively low political risk. The country maintains an attractive, stable mining code with no country royalties and a low tax rate of 28% (and 15% refundable value added tax). Diesel prices are regulated and the Mexican peso has weakened substantially vs. the U.S. dollar, reducing costs most dramatically for open-pit miners. However, recent escalation of drug cartel-related violence, lower petroleum price and falling inflow of dollars from the U.S. are factors that could increase political risk for Mexican operations.

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