High Desert Gold – We accept the South American Silver offer

About six weeks ago, South American Silver (SAC.TO) announced an offer to merge with High Desert Gold (HDG.V). In this flash update we will explain why we think the offer is fair and should be accepted by the shareholders of High Desert Gold.

[download_link link=”http://caesarsreport.com/freereports/CaesarsReport_2013-12-03.pdf” variation=”blue”] DOWNLOAD REPORT [1.4MB][/download_link]

[gview file=”http://caesarsreport.com/freereports/CaesarsReport_2013-12-03.pdf”]

[download_link link=”http://caesarsreport.com/freereports/CaesarsReport_2013-07-08.pdf” variation=”blue”] DOWNLOAD REPORT [1.4MB][/download_link]

[fancy_header3]TEXT VERSION[/fancy_header3]
[margin20]

The offer

On October 21st, High Desert Gold announced it entered into an agreement with South American Silver, whereby South American Silver would acquire all the HDG shares it didn’t own yet at a ratio of 0.275 SAC A-shares per share of High Desert Gold.
Immediately prior to the HDG acquisition, SAC will split its shares in A-shares and B-shares. The A-shares will contain the company’s current cash position and Escalones project and will be used to acquire High Desert Gold. The B-shares will have 85% of the potential revenues of the Malku Khota arbitration procedure as asset. By splitting up the shares in A and B shares, South American allows investors to choose between investing in the commodity assets of the company and/or the arbitration procedure against the Bolivian government.
As SAC already owned 16,077,000 shares of High Desert Gold, it would only have to acquire an additional 70.4M shares at the pre-determined ratio. This means that SAC will only have to issue 19.4M new shares which would increase the total share count to approximately 135M outstanding shares.

The question now is at what value the B-shares will be valued by the market. If we attribute a current value of $10M to the arbitration procedure, the B-shares will have a value of approximately $0.08/share. This means that a Class A share at this point has a theoretical value of C$0.80/share. Applying the ratio of 0.275 SAC share per HDG share, the offer has an approximate value of $0.22 per HDG share, which means that at the current share price of High Desert Gold there’s a considerable upside potential.

How will the MergeCo look like?

The combined entity of South American Silver and High Desert Gold will have the full ownership of the Escalones project and the Gold Springs project as well as a 15% stake in the proceeds from the arbitration procedure against the Bolivian government.
The Escalones project is one of the most exciting exploration projects in South America, as the most recent resource estimate outlined a total resource estimate containing 5.6 billion pounds of copper, 1.1 million ounces of gold, 19.5 million ounces of silver and 112 million pounds of molybdenum for a total in situ value of not less than $21B.

The Gold Springs drill program which was conducted this year revealed some very interesting drill results, and we expect the upcoming resource estimate to contain in excess of 1 million gold-equivalent ounces.
At the end of the third quarter, both companies had a combined working capital of $12.4M, so High Desert Gold investors will definitely benefit from being involved in a company with a much stronger financial position and an exciting exploration project in Chile. On top of that, they will benefit from a potential compensation payment from the Bolivian government for the Malku Khota expropriation as the class A shares will receive 15% of all proceeds.

Conclusion

We are actually glad to see South American made an offer to acquire High Desert Gold, as it’s very clear the combined entity will be so much stronger compared to a scenario wherein High Desert Gold would decide to try it on a standalone basis. By accepting the SAC-offer, High Desert shareholders gain exposure to a double-digit treasury and an exploration project which has an in situ value of tens of billions of dollars.
As such, we will accept the offer, and tender our shares to South American Silver, as we feel the price is right. Keep in mind your proxies will have to be delivered by December 5th, 5PM Toronto time.