This is also very good article for PEM shareholders:

http://www.stockhouse.com/Columnists/2011/Oct/14/Junior-gold-valuations--Ticker-Trax-Roundtable

October 12th merger provided very good gold valuation data

An encouraging merger Tuesday morning in the micro-cap gold space. B2Gold (TSX: T.BTO, Stock Forum; $3.32) is buying Auryx Gold (TSX: T.AYX, Stock Forum; 73 cents) for a 78% premium over Auryx's 20-day average price. Of particular interest is the price they are paying for gold ounces in the ground (see bottom of this report).

Since spring the valuations for gold in the ground on the juniors has been terribly low. In most cases the market cap in relation to ounces is anywhere from $15 to $40 per ounce. A few acquisitions have occurred this year that range from $40 to $150 but in most cases there was some strategic advantage for the company making the acquisition - partners on an existing project or proximity to an existing mine in production or under development.

The importance of Tuesday’s merger between BTO and AYX is that the gold valuation is decent and B2Gold has no operations in Namibia where Auryx has this project. They are simply paying this price to secure the asset and the large exploration package in Namibia.

They plan to issue BTO shares to AYX shareholders but the valuation is equivalent to $160 million. AYX had approx. $30 million in the bank so approx. $130 million is being paid for the gold ounces and exploration licenses.

Pre- merger

Auryx had 161 million shares outstanding prior to this merger and at last week's price of 46 cents, they had a market valuation of $44 million (after removing the cash). Their Otjikoto project in Namibia had a gold resource of 1.2 million ounces indicated and 0.7 million ounces inferred (unproven yet by sufficient drilling). Assuming a weighting of 75% on the indicated and 25% on the inferred, the market was valuing the 1.2 million ounces at $28 per ounce and the inferred at $16 per ounce.

Post-merger

The merger takes into consideration the fully-diluted shares, which include stock options and would have to be exercised. This would add another 11 million shares but also about $6 million to the bank. So assuming that is the case, cash would move to about $36 million and shares outstanding 172 million (please note that these are very close- but still rough estimates).

The fair value being given for the merger (based upon share swap with B2Gold) is $160 million. We will pull out the cash of $36 million. This assigns $124 million to the exploration licenses and gold reserves but I won't assign any value to the exploration upside (although it obviously has value). Once again we have to assume the indicated ounces are more valuable than inferred because they have seen extensive in-fill drilling that qualifies them for a 43-101 report.

Their Otjikoto project in Namibia had a gold resource of 1.2 million ounces indicated and 0.7 million ounces inferred (unproven yet by sufficient drilling). Weighting 75% of the price paid to the 1.2 million gold ounces and 25% to the 0.7 million inferred ounces, we arrive at the following:

Value assigned to the merger - $160 million less cash of $36 million = $124 million

> Indicated Ounces = $124 million x 75% = $93 million / 1.2 million oz = $78 per gold ounce
> Inferred Ounces = $124 million x 25% = $31 million / 0.7 million oz = $44 per gold ounce

Valuation summary

Indicated Gold Ounces - $28 (stock market - pre merger) / $78 (industry fair value - M&A)

Inferred Gold Ounces - $16 (stock market - pre merger) / $44 (industry fair value - M&A)

Industry valuations on a merger or acquisition (M&A) will run higher if the projects are more strategic in nature vs. building gold inventory - and also whether equipment and mining facilities are in place.

Two weeks ago Detour Gold bought Trade Wind and those numbers were lower. Indicated gold was worth about $43 per ounce and Inferred close to $23. However in that case, they were 50/50 partners on the project and it was unlikely a third party would have interest in paying a higher price or even participating.

Tuesday’s merger was a very good benchmark case study because they were only acquiring the undeveloped resources and Auryx owned 92%

The pre-merger numbers are in line with what I have seen since late spring where the gold in the ground is only worth $15 to $40 by the market.

It is also worth noting the gold grade. There was nothing too earth shattering here. The average on the indicated was 1.44 grams per tonne and the inferred 1.3 grams per tonne. At today's gold price these are economic grades (at least for Africa). It is also important to note that Auryx has been working in Namibia (and on this specific gold project) for over a decade.

The challenge is trying to identify which companies are on the radar of larger companies looking for acquisitions or mergers. Tuesday’s deal was evidence of how difficult it can be because B2Gold had shown no interest in Namibia in the past.

The best strategy is to spread risk across several companies with cash and low valuation reserves.