Chesapeake Gold Corp【CKG】株式ニュース

Chesapeake Gold Corp.: Significant Progress Towards Completion of the Pre-Feasibility Study Reported on Metates

Thursday, December 15, 2011

VANCOUVER, BRITISH COLUMBIA--(Marketwire - Dec. 15, 2011) - Chesapeake Gold Corp. (TSX VENTURE:CKG) ("Chesapeake") is pleased to provide an update to various activities and related developments on its 100% owned Metates gold-silver project located in Durango State, Mexico. Metates hosts one of the largest known undeveloped gold and silver deposits containing 17.2 million ounces gold, 466 million ounces silver and 3.4 billion pounds zinc (Measured + Indicated) and 2.6 million ounces gold, 62 million ounces silver and 360 million pounds zinc (Inferred). The April 2011 updated Preliminary Economic Assessment ("PEA") reported that the Metates project would produce an average of 759,000 ounces gold and 20.0 million ounces silver annually over a 19 year mine life with strong project economics.

Metates is envisioned as a conventional open pit mining operation with ore fed to a crushing/grinding circuit with the ground material fed to a bank of flotation cells. The bulk sulphide flotation concentrate is then transported downhill to the Ranchito processing site via a slurry pipeline. At Ranchito, the concentrate is placed into an autoclave circuit where the sulfides are oxidized prior to cyanidation to recover the gold and silver as dore bars. The zinc in the concentrate will be recovered as zinc cathode using solvent extraction/electrowinning methods (SX/EW). Based on the results of pilot and lab scale metallurgical test work reported in September, current overall recoveries based on the above flowsheet average 90% for gold, 77% for silver, and 81% for zinc.

Natural Gas Pipeline and Electric Power

Based on the costs estimated in the PEA, approximately 35%-40% of the total operating cost per tonne of ore processed is related to electric power costs. The PEA assumed power was generated from a dedicated coal fired power plant to be constructed in Tobolampo, a west coast industrial port in Sinaloa State. In November 2011, the Mexican national power commission (Comision Federal Electricidad or CFE) announced their intent to construct a natural gas pipeline along the northwest coast of Mexico. The pipeline would extend south from the current terminus at Hermosillo approximately 900 kilometres to Mazatlan. Gas would be supplied from existing pipelines in the southwest United States. The gas pipeline is slated for completion in 2015.

The importance of this gas pipeline to the Metates project is significant on several fronts. First, a gas fired power plant often has lower operating costs per unit of energy produced and is more environmentally friendly relative to a coal fired plant. Secondly, the capital cost to construct a gas fired plant is approximately one half or less that of a coal fired plant of similar capacity Third, the pipeline allows for more flexible siting options for the power plant which may result in further capital cost savings. In addition, the gas pipeline will allow for the construction of a smaller spur line to the Ranchito processing site where the gas can substitute for coal as the fuel source for the lime kiln and possibly as a combustion source to drive the steam turbines linked to the oxygen plant installation.

Pace Global, a leading energy consulting and management company with headquarters in Fairfax, Virginia, ("Pace"), has been engaged by Chesapeake to advise and support the Company towards it goal to secure a long term, low cost power supply agreement from a third party owner/operator. Pace has reported that several independent power producers have expressed interest in financing and operating a gas fuelled power plant for the Metates project.

Air Products of Allentown, Pennsylvania, ("Air Products"), a leading worldwide supplier of large air separation plants has been providing design and costing guidance for the oxygen plant installation related to the autoclave circuit as part of the Metates pre-feasibility study ("PFS"). Air Products has recently developed a new oxygen production technology (Ion Transfer Membrane or ITM) that offers significantly lower operating and capital costs to produce high purity oxygen while consuming less water and with a smaller physical installation footprint. Oxygen represents the single largest area of operating cost at the Metates project owing to electric power consumption. Air Products believes this technology will have a significant positive impact on the project's operating costs. Commercialization of this technology for large applications is expected to be compatible with the development timeframe of the Metates project.

Integrated Mine Waste Rock and Flotation Tailings Storage Facility

Work has continued on the optimization of waste rock and flotation tailings storage at the Metates site by Ausenco Vector ("Vector") of Denver, Colorado. In the PEA, separate storage facilities were designed for the waste rock and flotation tailings at the Metates mine site. Detailed engineering and design work has confirmed that disposal of both of these products in a common facility located in an area of favourable natural topography within the Arroyo San Nicolas drainage is technically feasible as well as economically and environmentally attractive. In addition the integration of these two waste streams will allow the implementation of a range of acid rock drainage mitigation options using a portion of the tailings as a benign "cap and cover" material. Chesapeake is also evaluating the option of using various tailings dewatering methods to both conserve water and provide even greater flexibility with the placement and operation of this integrated storage facility. Design for closure options currently under consideration includes the partial backfilling of the pit and establishing a natural outlet to eliminate a potential pit lake. Significant long term capital and operating cost savings are associated with this common storage facility and related mine closure.

Work by Vector is also moving forward at the Ranchito site where integrated disposal of both the autoclave acid neutralization residue with the precious metal leach tailings is being evaluated. Characterization testing of both of these materials is on-going. Disposal of both of these materials in a common facility also appears to be geotechnically feasible and significantly less expensive versus the construction and operation of two separate facilities.

Metallurgy

Additional sulphide flotation testing evaluating the impact of a suite of different reagents along with grind size and pH has been completed at Resource Development Inc. of Wheatridge, Colorado. The results of this flotation test matrix series is now available and are currently under review. Preliminary results suggest that high (+90%) gold recoveries are obtained for all test conditions and samples tested. Chesapeake continues to focus on optimizing flotation conditions that will consistently improve silver recoveries to the concentrate.

Geotechnical Investigations

During the 2011 drilling campaign 12 geotechnical holes totalling 3,219 meters were completed as proposed by Call & Nicholas, Inc. of Tucson, Arizona, ("CNI"), to support pit slope recommendations. CNI are integrating the results obtained from these holes along with collected laboratory and field data to determine the pit slope angles to be used in the PFS design pit. CNI is nearing the completion of their studies. Vector has evaluated the results from a comprehensive investigative program that included a series of geophysical surveys, test pits and bore holes to evaluate ground conditions in areas of proposed high impact site facilities at both the Metates and Ranchito sites. These investigations are nearing completion with a few boreholes remaining. Results to date support the proposed location of these facilities as shown in the PEA.

Environmental Studies

Environmental baseline data collection and reporting has been completed for the Metates, Ranchito and connecting infrastructure corridor with no significant environmental issues being identified. The environmental baseline work included a survey of biological, cultural and socio-economic resources. A number of surface and groundwater sampling stations have been established at both the Metates and Ranchito sites and a program of regular sampling is now underway on a quarterly basis.

Other Pre-Feasibility Study Investigations

M3 Engineering & Technology of Tucson, Arizona ("M3") is moving forward with a wide range of project related activities and recently finished the general arrangement drawings for the Metates site. Completed comminution testing and bond index work classified the Metates material as generally soft to moderately soft with reference to impact breakage and abrasion. Based partially on these results, M3 has determined that a more conventional SAG mill/ball mill circuit will be included in the PFS rather than the high pressure grinding rolls utilized in the PEA with a considerable capital cost savings. M3 is also working on obtaining vendor quotations for major capital cost items including crushing, grinding, flotation, thickening, precious metal recovery circuits and lime kiln. Sherritt Technologies will be developing the detailed design and capital and operating cost estimates for the pressure oxidation circuit for the PFS as well as the zinc recovery plant.

M3 has completed their initial design of an alternate access road and concentrate pipeline route from the Metates mine site to the Ranchito processing site. As currently surveyed, the road route is about 127 kilometers long with the pipeline perhaps 5-10% shorter owing to elimination of road switchback segments. The costing of the road and pipeline is underway.

2011 Drill Program

The core drilling program for 2011 has now been finished with a total of 53 holes totalling 24,255 meters. Chesapeake drilled 30 infill holes totalling 14,960 meters to convert Inferred class material to Measured class, and 11 step-out holes totalling 5,307 meters. Final assays from the last core holes are expected this month. Independent Mining Consultants of Tucson, Arizona, ("IMC"), will be incorporating the 2011 drill data into a new resource estimate which should be available in January 2012. The new resource will be the basis for the mine schedule and reserve estimate for the upcoming PFS.

Summary

The recent activities and developments reported represent significant and material new information that will enhance the economic profile of the Metates project. The construction of the natural gas pipeline will address the largest single area of operating cost at the Metates project at no direct capital cost to Chesapeake. Moreover, this pipeline affords the opportunity for further operating cost savings and synergies in numerous other areas. Chesapeake looks forward to integrating these new positive developments into the upcoming PFS. M3 and numerous other coordinating consultants working on the PFS anticipate the summary results of the study will be available during the first quarter of 2012.

Chesapeake currently has 39.8 million shares outstanding (47.5 million fully diluted) and $14 million in cash and liquid investments.

Mr. Gary Parkison, CPG, Chesapeake Vice President Development and a Qualified Person as defined by NI 43-101 supervised the preparation of the technical information in this release.

For more information on Chesapeake and its Metates Project, please visit our website at www.chesapeakegold.com.

CHESAPEAKE GOLD CORP.

P. Randy Reifel, President

FOR FURTHER INFORMATION PLEASE CONTACT:

Investor Relations
Chesapeake Gold Corp.
604-731-1094
www.chesapeakegold.com

The TSX Venture Exchange does not accept responsibility for the adequacy or accuracy of this news release.

http://www.theglobeandmail.com/globe-investor/news-sources/?date=20111215&archive=ccnm&slug=201112150753496001

February 8, 2007
http://www.kaiserbottomfish.com/s/Trackers.asp?ReportID=170037&_Type=Trackers&_Title=Tracker....

Imminent merger between American Gold and Chesapeake a marriage made in heaven

Synopsis: American Gold Capital Corp (AAU-V: $2.71) was recommended a medium priority bottom-fish buy in the $0.75-$1.00 range on January 5, 2006 (Tip of the Day - January 5, 2006). The basis for the recommendation was the ownership of two "out of the money" gold deposits in Mexico and Nevada called Metates and Talapoosa that Sun Valley sponsored American Gold acquired while gold was below $400 per oz. The stock jumped in March 2006 when the Chesapeake merger was announced. After analyzing the merger terms I issued a Good Relative Spec Value Buy recommendation at $2.09 (Tracker 2006-08 - March 20, 2006) on the premise that the value of the share, warrant and conversion "right" American Gold would receive upon completion of the merger would be worth much more than the prevailing price. These terms have changed somewhat to accommodate jurisdictional and tax issues, but their effect for American Gold shareholders remains largely unchanged. American Gold stock traded as high as $2.80 in May 2006 before succumbing to the double whammy of the general market sell-off and delays encountered with the details of the merger. We are now close to the merger's completion, and we have a gold price once again in an uptrend that is at the highest level since the sell-off in May 2006.

For those of you adhering to the bottom-fishing strategy American Gold remains a Spec Cycle 100% Hold because 1) I expect the 3 pieces of paper you will get during the next couple weeks will soon be worth a lot more than the $2.71 you could get today by selling American Gold, and, 2) the bottom-fishing strategy forbids adding to your position once a speculation cycle gets underway. For those of you who are Spec Value Hunters, namely sophisticated investors seeking to exploit inequities in the resource sector, I recommend not only holding the American Gold shares you bought when I recommended the stock at $2.09, but I also recommend adding to your position at the current price of $2.71 before the merger to secure a position that not only gives you a stake in Randy Reifel's ability to repeat the success he achieved with Francisco Gold through the El Sauzal and Marlin gold discoveries, but to also secure a stake in the possibility that the price of gold will soar well above $850 during the next 5-6 years. However, I qualify this recommendation in that if you are a hard money or apocalyptic gold bug (Paul van Eeden, Ian Gordon etc), you should ignore this recommendation, for if you believe gold will go up because the US dollar collapses or the global economy goes to hell in a handbasket, you will probably lose money buying American Gold because in your scenario American Gold's assets will remain out of the money regardless of the price of gold. But if you are a conspiracy gold bug (GATA, John Embry, James Turk etc) who thinks the price of gold has been artificially suppressed and will slingshot to a much higher "real" level without a corresponding rise in capital and operating costs, then buying American Gold now before the merger makes a lot of sense. And if you are a "prosperity" gold bug such as myself who believes that gold's increasingly obvious irrelevance as "money" makes it highly attractive as an asset class independent of sovereign and corporate risk in an expanding global economy whose eventual power structure 10-20 years from now strikes you as rather murky, meaning that in the interim raw gold ownership demand will outstrip incremental mine supply as everybody hedges a portion of their wealth in something that is not readily "fabricated", "printed" or otherwise bestowed with the ontological quality of "existence", then you too will (hopefully) see wisdom in owning American Gold before the merger is consummated.

The merger between American Gold and Chesapeake Gold Corp (CKG-V: $6.88) is expected to close by February 14 (a suitable day for a marriage made in heaven), at which point I will close out the American Gold bottom-fish cycle because it will become too complicated to track the value of the 0.29 Chesapeake shares, 0.145 Chesapeake warrants and 0.029 Chesapeake Series 1 Class A (possibly non-trading) shareholders will get for each American Gold share. For those of you who are math challenged or averse to complexity, or just plain skeptical that gold will rise much above $850 during the next five years, I recommend the simplicity of just buying Chesapeake Gold at $6.88. In formal terms, Chesapeake Gold is a Good Relative Spec Value Buy at $6.88 based on the $300 million implied project value of Metates based on 43 million fully diluted Chesapeake shares. This alternative of ignoring American Gold and buying Chesapeake instead is valid because the merger gives Randy Reifel's Chesapeake the critical mass needed to attract an institutional audience leery of mother nature's willingness to cough up new world class discoveries, but cognizant of the Reifel team's willingness to squeeze value out of an existing deposit. Sun Valley's strategy of accumulating "out of the money" deposits with an optimistic macro commodity outlook was essentially passive, but in merging with Chesapeake this strategy gains an active component where the Chesapeake management will look hard at making Metates and Talapoosa work at a gold price below $850. Metates has a resource of 3.4 million ounces gold and 61 million ounces silver, while Talapoosa has a resource of 1 million ounces gold and 14 million ounces silver. Randy Reifel thinks his team can make Metates and Talapoosa valuable at prices below $850 gold. Chesapeake is thus very attractive to speculators who think gold will oscillate between $500 and $1,000 during the next 5-6 years without triggering the $850 conversion privilege, and who think Randy Reifel's team has the smarts and will to extract value from Metates and Talapoosa below $850 gold. The American Gold/Chesapeake merger is an example of where the sum of the parts is worth more than the value of the parts on their own. Beyond telling KBFO members that buying American Gold at $2.71 and Chesapeake Gold at $6.88 constitutes rational speculation, Tracker 2007-01 tries to explain how these various pieces of paper American Gold shareholders will get will work.

Breaking down the value of the post merger securities

Shareholders have approved the merger between Randy Reifel's Chesapeake Gold Corp (CKG-V: $6.88) and American Gold Capital Corp (AAU-V: $2.71), with completion expected by February 14, 2007. The merger terms are straightforward for Chesapeake shareholders who keep their shares in the new company which will continue with Chesapeake's name. American Gold shareholders will receive 0.29 Chesapeake shares, 0.145 of a warrant to buy Chesapeake at $8.00 for 5 years (expected to be listed for trading), and 0.029 of a Series 1 Class A share (TSX-V still thinking about listing it for trading). At current prices for American Gold ($2.71) and Chesapeake ($6.88), the value of these three securities breaks down as follows. The 0.29 Chesapeake shares American Gold shareholders will receive are worth $2.00 at $6.88 Chesapeake. A five year warrant exercisable at $8.00 is bound to be worth at least $1.00. That, at least, is what I would be willing to pay; I have not attempted a Black and Scholes valuation because the leverage implicit in Chesapeake's price as linked to Metates suggests an off the scale volatility. On my terms the 0.145 warrant received for each American Gold share would be worth about $0.15. At $6.88 Chesapeake, if the $850 magic number was triggered, the 0.029 Class A shares would convert into 0.29 Chesapeake shares worth $2.00. This $2.00 value for the 0.029 Class A shares, however, is not realistic because of the uncertainty that their convertibility will be triggered during the next 5-6 years. They would thus have a market value lower than the converted value. For the value of American Gold now and the 3 securities issued after the merger to be a wash, the 0.029 Class A share would have to be worth $0.56 ($2.71 AAU price minus $2.00 for 0.29 CKG at $6.88 minus $0.15 for the 0.145 CKG warrant trading at $1.00). In other words, if the Class A shares were listed, they should trade at $19.31 to make the American Gold merger exchange a wash. Since the Class A share converts into 10 Chesapeake shares if gold trades at $850 average for 90 days, it would have a theoretical value of $68.80 on conversion if Chesapeake is at $6.88. The current pricing of American Gold relative to Chesapeake is assigning a 72% discount to the Class A shares.

Why make the Class A shares convertible into Chesapeake 10:1?

If the Class A share were trading, what would one expect its value to be? The Series 1 Class A share is an unprecedented instrument whose value is tied to the price of gold and the share price of Chesapeake. If the LME afternoon gold fix averages at least $850 per oz during any 90 day period, the Series 1 Class A share converts into 10 Chesapeake shares. One might ask why American Gold shareholders receive 0.029 Class A shares that convert into 0.29 Chesapeake shares rather than 0.29 Class A shares that convert 1:1. The answer is that Class A shares carry the same voting rights as common shares, which would have given American Gold shareholders nearly 50% of the votes of Chesapeake in the 1:1 scenario. In effect, this signals that control of the destiny of American Gold's "sleeper" assets shifts from Sun Valley (Peter Palmedo and Chris Falck) to Randy Reifel. Lurking in the background as a significant shareholder of the merged company will be Goldcorp, which has now swallowed the swallower (Glamis Gold) of Randy Reifel's past success stories.

The Class A share is an external event driven security

The merger was first announced on March 3, 2006, and has taken a long time to complete because of complex jurisdictional and tax issues. What started out as a merger structure viewed as brilliant by people like myself, got bogged down in consequences for American and Canadian shareholders, as well as regulatory concerns about exchange values and other arcane issues. The biggest trouble has been caused by the Class A share, a hybrid security whose value is linked both to the future price of gold and the value of Chesapeake. It is an "event driven" security, meaning that it has no intrinsic value until an event external to the security it converts into has occurred. Gold could swing between $650 and $1,000 during the next 5 years without ever producing that $850 average price over 90 days needed to make the Class A convertible into Chesapeake stock. While everybody is focused on Chesapeake's ability to demonstrate Metates economic at less than $850 gold, Chesapeake could make a world class discovery on one of its grassroots exploration plays in Mexico which takes the stock to $50. That would make the Class A portion shareholders got for their American Gold stock worth $14.50 if it became convertible. But until that trigger is achieved, the intrinsic value is zero. In this scenario the price of gold becomes unrelated to the price of Chesapeake. The market value of the Class A share would thus be based on the probability that the Class A share would become convertible into common Chesapeake stock. That probability would be exclusively linked to the gold price.

What about Chesapeake speculation that conversion will never be triggered?

The pricing of the Class A share, however, is more complicated than estimating the probability that gold will average at least $850 for 90 days during the next five years and looking up the price of Chesapeake. There is nothing special about the $850 price in terms of the economic value of the Metates deposit. At $849 gold the Metates deposit could be worth a lot to Chesapeake, especially if metallurgical breakthroughs are achieved. If the Class A shares expire in 5 years without the conversion trigger occurring, about 9 million shares of potential Chesapeake dilution will disappear. Assuming the trigger is within achievable range given the volatility of the gold price, the market would be expected to price Chesapeake on the basis of its projects' economic value divided by Cheaspeake's fully diluted capitalization. For example, suppose nearly 5 years from now the market decided Metates, Talapoosa and Chesapeake's other assets were worth $2.2 billion. At 43 million fully diluted shares that translates into about $50 per share. Suppose the Bank of England decides it is time to sell some more gold with great fanfare, knocking back the price of gold just enough so that the magic 90 day average price of $850 is not achieved. The Class A shares that would have converted into 9 million common shares evaporate, reducing the fully diluted capitalization of Chesapeake to 34 million shares. Because a 5% swing above or below $850 gold is not going to materially change the market's economic assessment of Chesapeake's gold assets, the new Chesapeake stock price should be $2.2 billion divided by 34 million, or about $65. But how much of that post-expiry jump will already be built into the Chesapeake price? At $65 Chesapeake the Class A portion received for each American Gold share would have a conversion value of about $19 rather than the $14.50 at $50 Chesapeake. The point I'm trying to make is that the pricing dynamic underlying the Class A shares becomes circular as we approach boundary conditions.

Another wrinkle: the gold price can extend the Class A expiry by 1 year

The merger terms also include a provision that if the Class A shares are listed for trading on a stock exchange, and LME gold manages to close at $850 or higher for only 1 day during the final 6 months of the 5 year expiration period, the expiry will be extended to 6 years. Here a single day's price fix could prevent the Class A share from becoming worthless, and bestow on it another year to actualize the conversion triggered underlying value. This is not a simple matter of calculating time and volatility premiums. The pricing of the Class A shares in these boundary conditions involving unrelated forces interwoven in a non-linear dynamic will keep some mathematician very busy.

Sad, but no surprise that the TSX is reluctant to list the Class A shares

That the TSX regulators are mulling the Class A shares with furrowed brows is no surprise, because this instrument is precedent setting and will be much copied, especially if an exchange accepts them for trading. It creates a way for apples and oranges to merge. For example, both Stornoway and Ashton shareholders might have been happier with a takeover bid which included a security with a time limit that converted into Stornoway stock only if a certain milestone were achieved. In the case of Ashton the milestone would not have involved linkage to a diamond price, but rather some sort of diamond resource size threshold like those which trigger back-in rights in property option agreements. The case of American Gold is different in that the resource is already known, and it is a commodity price change which would create value. Chesapeake, of course, would have no control over the price of gold. At a time when there is great uncertainty about the level of long term metal prices - witness the ongoing battle between the structural bulls and cyclical bears - at the same time there is the will and capital to consolidate assets that could be developed into mines if current metal prices prove sustainable, one would expect Class A scenarios such as pioneered by Chesapeake and American Gold to become a popular negotiating term.

The Chesapeake Class A share is a blueprint for a novel merger and acquisitions strategy

For example, consider Blue Pearl, a medium sized molybdenum producer. There are a number of juniors with molybdenum deposits that are economic at $25/lb molybdenum, but are trading well below the value of the deposit in discounted cash flow terms because the market is unwilling to plug current metal prices into cash flow models. The gap between the market value of these juniors and the project DCF at current base metal prices is often enormous. This gap could be closed by a Blue Pearl issuing Chesapeake style Class A shares with a conversion trigger linked to long term molybdenum prices when acquiring strategic molybdenum deposits.. Blue Pearl would only suffer the dilution from the conversion if molybdenum prices hold up over the long run. In such a scenario the acquired deposit would likely be worth much more than the acquisition price paid in common and convertible stock, because the negotiated value would be somewhere between the company's market value and the DCF value of the assets at prevailing metal prices. What clinches the deal is the expectation that the shareholders of the acquired junior would receive a bonus through the conversion of their "Class A" shares in the event that the rosy metal price scenario transpires. If such contingently convertible securities are allowed to trade, the initial recipients could collect a premium before the trigger is fulfilled. It would be a way for both the acquiring and acquired company to shift commodity price risk to the market. It would encourage more merger and acquisitions activity involving the juniors, which is a way of cementing the value created by a venture capital oriented stock exchange such as the TSX-V. It would also encourage larger companies to include "strategic" considerations in their decision-making, such as Inco did in 1996 when it bid 4 times more for Diamond Fields than Voisey's Bay was worth in discounted cash flow terms. (Readers may recall that Inco also used time limited securities in the bundle it issued for Diamond Fields.)

Could Class A style shares be the niche CNQ needs to put itself on the map?

It is understandable that the TSX would prefer to keep its distance from securities with complex pricing dynamics. It has been suggested that such shares get listed on the Montreal Exchange which specializes in derivatives, but the Chesapeake Class A shares are not a true derivative and the Montreal Exchange is apparently not interested in this type of security. Could it be that this is the niche which could put Canada's fledging CNQ stock exchange on the map? I don't bother to follow anything which lists on the CNQ because the universe of juniors offered by the TSX-TSXV is large enough and CNQ appears to be a destination for companies whose corporate transactions are rejected by the TSX. If CNQ can offer efficient order execution for the Chesapeake Series 1 Class A shares, and accepts listing of these securities which convert into the shares of companies listed on bigger exchanges, it would make itself relevant to a very broad audience.

If the TSXV lists the Class A shares, the convertibility changes

At the moment Chesapeake management is pessimistic that the TSXV will accept the Class A shares for trading, in which case the recipients will have to hold them or try to sell them in the grey market. If they are listed for trading, the conversion terms would change slightly, thanks to an obscure exchange requirement. Key to the conversion ratio is the price of Chesapeake on the day that the conversion trigger is deemed to have been achieved. The conversion ratio will be the Chesapeake price less $1.00 divided by the Chesapeake price and multiplied by 10. So if Chesapeake is at $8.00, one Class A share would convert into 8.75 Chesapeake shares. If Chesapeake were trading at $50, the Class A share would convert into 9.8 shares. (The higher the stock price, the closer to 1.0 will be the conversion ratio.) Of course, if Chesapeake's price has collapsed to $1.00 or lower, the conversion ratio would be zero. The formula protects Chesapeake from a dilutionary death spiral. This sliding conversion ratio applies only if the Class A shares are listed for trading within 60 days of the merger. I don't like this feature because it adds another layer of uncertainty to the value of the Class A shares, and because this provision was at the insistence of the TSX, which is backing off from letting the Class A shares trade, I would hope that Chesapeake abandons this formula if it gets the Class A shares listed on another exchange such as the CNQ.

The merger of American Gold and Chesapeake creates a strong company

The Series I Class A instrument was created because American Gold's primary asset is the Metates gold-silver deposit in Mexico whose various metallurgical, environmental and location challenges require $850 gold or better to be economic. When the merger plan was announced in March 2006 Chesapeake was cash rich and busy generating gold-silver projects in Mexico with the goal of duplicating its discovery successes, El Sauzal and Marlin. American Gold wanted to acquire additional "out-of-the-money" gold deposits, but its ability to do so on lucrative terms was hampered by the fact that higher gold prices were needed to justify a higher stock price based on Metates and Talapoosa. For both companies it was a waiting game whose outcome neither management could speed up. The merger would combine an exploration machine with a couple advanced gold-silver deposits whose value would blossom with a rising gold price. The merged company will have about $40 million working capital. It is a good example of the Plan A-Plan B-Plan C strategy which I think is perfect for that phase of the market cycle where one is uncertain that this is as good as it will ever get, or just a lull before it gets a lot better.

Randy Reifel not a fan of hard money or apocalyptic gold bug thinking

In designing the terms of the Series I Class A share Chesapeake's Randy Reifel has distanced himself from the "hard money" gold bug crowd which anticipates a much higher gold price due to the collapse of "fiat money". Unfortunately, real costs do not shrink when a fiat currency is debased, with the result that a higher gold price created by rampant inflation is accompanied by correspondingly higher cost thresholds. In accepting the terms of the Series 1 Class A shares, Reifel is gambling that the cost of developing Metates stays put while the price of gold soars above $850. If anything, he is expecting an increase in the real price of gold. For those who tie the price of gold to the fate of the US dollar, this merger has dilutionary implications for Cheasapeake, which may be forced to issue extra stock when the price of gold goes up even though Metates remains worthless thanks to a corresponding increase in costs. This group would include "hard money" gold bugs like Paul Van Eeden as well as apocalyptic gold bugs like Ian Gordon for whom the only way to benefit from a rising gold price is to own gold itself.

The new Chesapeake will appeal to conspiracy and prosperity gold bugs

The deal does, however, make sense to the conspiracy type of gold bug such as GATA and John Embry, who believe that the price of gold has been artificially suppressed. In this view the inflation has already happened and is reflected in the real cost of developing Metates. What the conspiracy gold bugs are looking for is a slingshot effect where gold jumps to a much higher level without a corresponding increase in costs. This "catchup" is similar in outcome to that expected by "prosperity" gold bugs, among whom I would count myself. But while a conspiracy gold bug thinks that the market for gold is manipulated by a cabal of masterminds trying to hide the true state of affairs, a prosperity gold bug thinks that the gold market is free in the sense that all gold owners are acting to maximize their own interest, and that a higher gold price will develop if demand for gold ownership outstrips new supply in the long run. Furthermore, such demand will not develop because the economic apocalypse has arrived, but rather because the growing prosperity of a global economy engenders new demand for an asset class that is independent of sovereign and corporate risk. In this scenario the size of the global economy vastly eclipses the current value of the 4 billion ounce above ground stock of gold, and is growing at a faster rate than the incremental new supply added to the gold stock by mine production. For the prosperity gold bug the real price of gold has to go higher precisely because gold is no longer relevant as that accounting system called "money", but has become relevant as a passive physical asset class whose value lies in the fact that it costs resources to bring more of it into existence. (To put gold's irrelevance in context, consider that all the gold in the world sitting in vaults doing nothing is worth just $2.6 trillion while $1 trillion worth of oil gets burned up annually to keep wheels turning.)

Hoping gold does not go to the moon, but not minding if it does

While it would be foolish for hard money and apocalyptic gold bugs to speculate on gold projects that are marginal at current prices, it makes perfect sense for both conspiracy and prosperity gold bugs to speculate on marginal projects such as Metates. And because Chesapeake will have both a Plan A bet on better real gold prices, and a Plan B exploration bet on new discoveries that work at current or lower gold-silver prices, the sum of the two parts will be more than the value of the parts alone. For his part, Chesapeake's Randy Reifel concedes that he is not a gold bug of the hard money or apocalyptic type, and is in fact hoping that gold averages $849 for the next six years while he tries to improve metallurgical recoveries and identify higher grade zones within Metates that make the deposit valuable below $850 gold. But he will not complain about a $1,000 or higher gold price if costs stay put, because that extra $150 per ounce all flows to the bottom line. High cost gold deposits offer extraordinary leverage to scenarios where the real price of gold increases substantially.

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