CIBC Research Canaco

8/2/2019 CIBC Research Canaco

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Institutional Equity Research

Initiating Coverag

October 31, 2011 Precious Metals

Canaco Resources Inc.There's Gold In That There Hill

As of 10/31, we are initiating coverage of Canaco with a 12- to 18-monthprice target of $4.50 and a Sector Outperformer rating based on a 0.8x

multiple to our 5% discounted NAV calculated at a US$1,500/oz. gold price

Our valuation is based on CAN defining a high-grade open-pitable resource

We believe short-term share price movements will be driven byinfill/expansion drill results at the Magambazi project and any positive drill

results released from MK trend targets to the north. We expect the gold

price will also continue to have a strong influence on the share price.

We estimate that less than 1.5 million oz. are incorporated into Canaco'scurrent share price. We expect 3.5 million oz . will be defined within 12 to

months and that some 2.5 million oz. will be included in an open-pit desig

with a grade that is nearly 60% greater than the African average.

We believe the initial resource estimate at Magambazi and the subsequentPEA will be the major catalyst for Canaco in the next six to e ight months.

Canaco is trading at ~$65/oz. based on our resource estimate compared to

~$115/oz. for other non-producers in our coverage universe.

Stock Price Performance

Source: Reuters

All figures in Canadian dollars, unless otherwise stated. 11-111750

CIBC World Markets does and seeks to do business with companies covered inits research reports. As a result, investors should be aware that the firm may

have a conflict o f interest that could a ffect the objectivity of this report.

Investors should consider this report as only a single factor in making their

investment decision.

See "Important Disclosures" section at the end of this report for important

required disclosures, including potential conflicts of interest.

See "Price Target Calculation" and "Key Risks to Price Target" sections at th

end of this report, where applicable.

Jeff Killeen Barry Cooper

Stock Rating:

Sector OutperformerSector Weighting:

Overweight12-18 mo. Price Target $4.50

CAN-V (10/28/11) $1.75

Key Indices: TSX/SP - Canadian Gold

3-5-Yr. EPS Gr. Rate (E) NM

52-week Range $1.53-$6.45Shares Outstanding 199.0M

Float 150.3M Shrs

Avg. Daily Trading Vol. 450,000Market Capitaliza tion $348.3M

Dividend/Div Yield Nil / Nil

Fiscal Year Ends JuneBook Value $0.60 per Shr

2011 ROE (E) NM

LT Debt NAPreferred Nil

Common Equity $120.0M

Convertible Av ailable No

Earnings per Share Prev Current

2011 ($0.24E)2012 ($0.24E)

2013 ($0.17E)P/E2011 NM2012 NM2013 NM

Cash Flow per Share2011 ($0.23E)2012 ($0.23E)

2013 ($0.17E)

P/CF2011 NM2012 NM

2013 NM

Company DescriptionCanaco Resources Inc. is a Canadian-based ex plorationcompany conducting exploration on the Magambaziproject. The project is in the Handeni region of easternTanzania and is a focus for development.www.canaco.ca/s/Home.asp
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There's Gold In That There Hill - October 31, 2011

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Canaco Resources Inc. Sector OutperformCAN-TSX 10/31/11 $1.75 Jeff Killeen (416-956-6218) jeff.killeen@cibc

12- To 18- Month Price Target: $4.50 Barry Cooper (416-956-6787) barry.cooper@cibc

Precious Metals

Sector Weighting: Overweight

All figures in US$ million, unless otherwise stated. Gold price assumption in yr 2011 @ $1650, yr 2012@ $2000, and yr 2013 @ $2200

Risk adjusted discount rates vary from 8% to 15% depending on the location of the asset and its technical challenges

Key Multiples EV/NAV* EV/NAV^ 2011 PE 2012 PE 2011 PCF 2012 PCF

Canaco 0.3x 0.5x NA NEG NEG NEG

North American Average 1.7x 2.8x 20.9x 11.3x 14.0x 7.4x

Large Cap Average (>$10B) 2.3x 4.1x 17.9x 10.9x 11.9x 8.4x

Mid Cap Average ($2B-$10B) 1.6x 2.3x 25.1x 16.2x 15.0x 9.2x

Small Cap Average ( 1M oz 1.8x 2.7x 24.8x 14.9x 14.1x 10.2x

Intermediate Producers 0.2-1 M oz 1.7x 2.7x 19.8x 9.2x 12.5x 6.6x

Small Producers < 0.2M oz 1.6x 2.4x 19.6x 8.9x 13.2x 6.9x

P/NAV Sensitivity P/NAV P/NAV P/NAV P/NAV P/NAV P/NAV Production Profile

Avg. Gold Px - US$ $1,300 $1,400 $1,600 $1,300 $1,400 $1,600

Canaco 0.4x 0.4x 0.3x 0.6x 0.5x 0.4x

North American Average 1.4x 1.2x 0.9x 2.3x 1.8x 1.4x

Large Cap Average (>$10B) 1.9x 1.6x 1.3x 3.3x 2.7x 2.1x

Mid Cap Average ($2B-$10B) 1.4x 1.3x 1.0x 2.0x 1.8x 1.4x

Small Cap Average ( 1M oz 1.5x 1.3x 1.1x 2.2x 1.9x 1.5x

Intermediate Producers 0.2-1 M oz 1.4x 1.2x 1.0x 2.2x 1.9x 1.5x

Small Producers < 0.2M oz 1.3x 1.1x 0.8x 1.9x 1.5x 1.1x

Income Statement F2010A F2011E F2012E F2013E

Gold Price Assumptions US$ $1,225 $1,650 $2,000 $2,200 Asset Production Cash Costs 2P M & I & I

Magambazi (O/P) 0 0 0 0

Production (000s ounces) 0 0 0 0 Magambazi (U/G) 0 0 0 0

Cash Costs US$/oz 0 0 0 0 Total 0 $0 0 0

Capital Expenditures 5 0 0 0 * Gold (000s oz) 2P: Modeled Proven & Probable Reserves (000s oz)

Revenues 0 0 0 0 ^ Net of by product credits (if applicable) M & I & I: Measured & Indicated & Inferred Resources (000s oz)

Expenses

Operating Expenses 0 0 0 0 Ownership Discount Rate US$ Millions Per Share

D,D&A, Reclamation 0 0 0 0 Current Assets

S,G&A 1 4 5 5 Cash $120 $0.60

Exploration 0 41 40 30

Other Expenses 2 2 2 0 Mining Assets

Total Expenses 3 47 47 35 Magambazi (O/P) 100.0% 5% $763 $3.84

Magambazi (U/G) 100.0% 5% $123 $0.62

Income Before Tax -3 -47 -47 -35 Other Exploration Asset $100 $0.50Income Taxes (0) 0 0 0 Total Assets $1,106 $5.56

Net Income (3) (47) (47) (35) Liabilities

Other Liabilities $5 $0.03

EPS -0.03 -0.24 -0.24 -0.17 Reclamation $5 $0.03

CFPS -0.05 -0.23 -0.23 -0.17 Total Liabilities $10 $0.05

Shares Outstanding 139 199 200 201 Net Asset Value (CAD) $1,096 $5.51

EV Statistics - US$ EV ($mln) EV/Prod EV/2P* EV/R&R^ Asset Locations

Canaco $244 NA NA $65North American Average $11,536 $607 $342

Large Cap Average (>$10B) $3,357 $290 $194

Mid Cap Average ($2B-$10B) NA $268 $139

Small Cap Average ( 1M oz $12,187 $601 $307

Intermediate Producers 0.2-1 M oz $9,622 $538 $331

Small Producers < 0.2M oz $9,794 $1,201 $281

* Proven & Probable Reserves ^ Reserves and Resources

* Cash Adjusted NAV Multiples Using: $1500/oz Gold Pricing And 5% Discount Rates

^ Using: $1500/oz @ Risk Adjusted Discount Rates

5% Discount Risk Adjusted Discount

Production (2011E) Modeled Resource Detail

NAV Breakdown - US$ Gold Price of: $1,500

Investment Thesis

CAN is conducting exploration on a recently dicovered go ld deposit in the Handeni region of Eastern Tanzania. The Hande

Property contains several targets for advanced exploration but the company's current focus is on the Magambazi ridge. Th

ridge hosts five recognized mineralized lodes that are being defined by diamond drilling. The lodes offer a blend of potentia

open-pit and underground development targets. We expect a resource co ntaining several million ounces of gold will beindentified at Magambazi over the next 12 to 18 months and addition to the resource beyond this timeframe is probable. W

anticipate open-pit grades will be nearly 60% higher than the African average for open-pit gold mines and that a premium

should be applied in valuation of CAN. The Magambazi lodes will need to show continuity in detailed drilling to meet our

expectations for grade, particularly within the portion we have allocated for open-pit extraction. We believe the share price o

CAN will be driven by step-out and infill results at at Magambazi, by the initial resource estimate scheduled for release in th

next six months and by drilling results at regional targets outside the Magambazi area, along the MK trend.

Handeni

0

50

100

150

200

250

300

350

2015E 2016E 2017E 2018E 2019E

Production000s

Ounces

$0

$100

$200

$300

$400

$500

$600

$700

$/ozCashCost

Underground Open Pit Total Cash Costs

Source: Company reports and CIBC World Markets Inc.
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Table of Contents

Executive Summary ......................................................................................

Share Price Catalysts....................................................................................

Risks And Challenges.....................................................................................

Capital Structure ...........................................................................................

Handeni Gold Hills Of Africa .......................................................................

From The Hill To The Mill ..............................................................................

Estimating Extraction Costs .......................................................................

Constructing Our Valuation ...........................................................................

Site Visit ...................................................................................................

Price Target Calculation .............................................................................

Key Risks To Price Target ..........................................................................

Appendix A. Property And Geological Overview .............................................

Regional Geology ......................................................................................

Local Geology............................................................................................

Mineralization............................................................................................2

Appendix B. Management Group...................................................................
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Executive SummaryCanaco Resources Inc. (CANSO) is a Canadian-based exploration company

focused on advancing the Magambazi prospect in the Handeni Project of easter

Tanzania. The project is approximately 175 kilometers (km) northwest of Dar e

Salaam, the countrys former capital city, and 30 km south of the town of

Handeni. The company holds 100% ownership in the project and is conducting

diamond drilling with the intention of defining a NI 43-101 compliant goldresource w ithin the next six months. Canaco is drilling w ith nine diamond drill

rigs at the main target of Magambazi and several rigs could be added over the

coming months. The company recently announced an increase to its exploratio

program of up to 500 additional holes for approximately 95,000 meters to be

completed over the next 10 months. An increase in drilling will allow the

company to perform infill drilling at 20-meter spacing across the Magambazi

deposit, in areas where mineralization has been defined.

We have compiled our own non-compliant resource estimate by performing

sectional interpretation of the drilling data made available by Canaco. We

anticipate that there will be approximately 3.5 million ounces (oz.) defined

within the next 18 months. However, we believe it is unlikely that the initial

estimate to be produced in early 2012 will reach our estimated figure. It is ourexpectation that the initial resource will include approximately 2 million oz.

2.5 million oz., but, with subsequent drilling over the next 12 to 18 months, th

number should increase to approximately 3.5 million oz . We also expect that t

majority of the resource will be extracted by open-pit mining and that the grad

of the open pit will significantly exceed the African average for open-pit gold

mines. We base our valuation on this assumption.

The main reasons we believe Canaco to be a good investment are as follows:

Production of the first gold resource at Magambazi is likely to be >2 millio

oz. and include an open-pitable portion with overall grade approximating

3.0 g/t (grams per tonne); our estimate is ~58% greater than the African

average for open-pit mines at 1.9 g/t.

The company holds 100% ownership in a property located in an emerging

gold district in a relatively stable, mining-friendly country in East Africa.

We expect expansion of the initial resource with respect to contained

ounces in the next 12 to 18 months as drilling continues.

The company is well funded to continue exploration at the current rate for

several years with excess for contingency spending.

Portions of the property are subject to a 2% net smelting royalty (NSR), b

the company has the right to repurchase 1%; potential total royalty at

Handeni is 5% (we expect the 1% could be repurchased for less than

$5 million).

The company represents a potential take-out target by another senior

mining company provided it is successful in defining a substantial gold

resource at Magambazi.

The initial resource estimate for the Handeni property will be mostly limited to

the Magambazi Main Lode but will likely have contributions from several other

mineralized zones, namely the Western, Cave, Central Contact and Southern

Gneiss zones (or lodes). Each of these lodes is proximal to the Main Lode and

can be drilled from the Magambazi ridge.
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Several other prospective targets beyond Magambazi have recognized gold in

soil anomalies within the property, namely Majiri, Majiri Bomba, Kijani,

Kwadijava, Kwadijava South, Bahati and Kuta. Of the seven listed targets, five

are located along a recognized geological trend referred to as the MK trend,

which is approximately 4 km in length from the southern-most Kwadijava Sout

to the northern-most Majiri. The MK Trend is being explored by Reverse

Circulation (RC) drilling to further define quality targets for future diamond

drilling in 2012.

Two diamond drill rigs with some 20,000 meters of drilling are planned at the

highest-priority targets of Kuta, Kwadijava and Magambazi Deep. A number of

RC holes already completed at Kwadijava confirm the presence of anomalous

gold grades. If the company is successful in defining further ore-grade

mineralization at other targets along the MK Trend, such as Kwadijava, the gol

resource could well exceed our initial expectations beyond 18 months time.

Chinese resource company Sinotech(Hong Kong) Corp. Ltd., a non-publiclytraded subsidiary of Sinotech Mineral Exploration Co. Ltd., holds a large positio

of approximately 20% of the outstanding shares of Canaco. It became a

significant shareholder in 2009, obtaining over 30% of the outstanding Canaco

shares. The partnership provided Canaco with necessary funding at the time to

continue operations and to bring the Handeni project to the level of developme

it is at today. Sinotech has since divested a portion of its original holding butremains a major shareholder. Two members of Canaco management are also

Sinotech employees: Chaoxian Zhou, Deputy General Manager, and Lingling

Yang, Director Corporate Communications.

Canaco spun out its 70% interest in its Ethiopian asset, the Harvest project, in

July 2011. The Harvest polymetallic VMS project is now operated by new

company Tigray Resources Inc. (TIGTSX-V). At this time, Tigray and Canaco

have the same management group. Ezana Mining Development, a private

Ethiopian company, holds the remaining 30% interest in Tigray. We believe

focusing on Magambazi is a positive step forward for Canaco in streamlining th

company to be a gold-only explorer and de-risks the company by limiting

operations to a single East African country.

Share Price CatalystsContinued news flow from infill drilling within Magambazi Main Lode and

expansion drilling from the Western, Cave, Central Contact and Southern

Gneiss Lodes.

Release of initial resource calculation for the Magambazi deposit expected

Q1/2012.

News flow from drilling at targets north of Magambazi, along the MK trend

Kwadijava, Kwadijava South, Kijani, Majiri Bomba or Majiri.

Revision of initial resource within the next 18 months, including an increas

in the total ounces and upgrading of some ounces from the inferred to

indicated category.

Compilation and release of a Preliminary Economic Assessment (PEA) for

the Magambazi deposit expected in June 2012.

Potential acquisition of project by another major mining company; we

expect that the number of ounces defined will need to exceed 3 million

before the company becomes a viable target for acquisition.
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Risks And ChallengesWe see the following risks for the company and challenges that it will need to

overcome:

Infill drilling at Magambazi proves significant discontinuity of mineralized

zones along strike. Thus far, faulting has indicated that there is a

reasonable probability that the zones will be less continuous than initially

believed. We have factored in less continuity to our assessment.

Potential discontinuity of mineralization reduces the number of ounces to

included in an open-pit scenario, reduces the overall deposit grade within

the open pit below our 3.00 g/t estimate and/or increases the potential

open-pit strip ratio beyond our 4:1 estimate. The greatest uncertainty lies

with grade but the average grade of ore intercepts drilled to date is

approximately 3.73 g/t.

Drilling is geographically restricted to the point at which the program slow

to facilitate construction of sufficient drilling platforms along flanks of the

Magambazi ridge, resulting in increased spending and reduced news flow.

We do not anticipate any major hindrances and believe that access to the

ridge flanks would be feasible if required.

Drilling at targets to the north, along the MK trend, fail to define significan

mineralization, limiting resources to the Magambazi lodes; total resource

figure may not be sufficiently large to garner acquisition attention. We ha

based our valuation on Canaco developing the project.

Infrastructure requirements for mine development significantly exceed ou

costs estimates; the government is undertaking road upgrading but it is n

a continuous project (partially funded through foreign aid) and known wat

sources on s ite will likely be insufficient to support full mining operations.

We have incorporated approximate ly 35% of our capex estimate for

contingency spending to offset potential cost increases due to infrastructu

spending.

Canaco is unable to raise sufficient funds to develop the project as outline

in our valuation; if financing for mine development is not obtained, our

valuation would be negatively impacted.

Capital StructureAs of September 30, 2011, Canaco had 199,396,603 common shares issued an

outstanding. There are an additional 964,965 warrants outstanding w ith exerc

prices ranging from $0.75 to $6.00 and an average exercise price of $5.01.

There are also an additional 13,103,535 options ranging from $0.10 to $4.88

with an average exercise price of $2.95. The options and warrants bring the fu

diluted share count for Canaco to 213,465,103. Canacos current market cap is$348,944,055. Management ownership accounts for approximately 6.5% of the

current outstanding shares; combined with insiders and company contractors,

ownership increases to approximately 27%. The company has a strong balance

sheet with approximate ly $120 million in cash and no debt. The priority

allocation for the cash will be for drilling and related costs with current

expenditures at the Magambazi project totaling approximately $3.5 million per

month. Expenditures are expected to increase to roughly $4.5 million per mont

as additional drill rigs are added to the project. Funds will also be used to

complete a preliminary economic assessment by mid-2012.
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Handeni Gold Hills Of AfricaThe Magambazi project, on the eastern side of the Handeni property, hosts a

number of mineralized targets for exploration. Canaco is focusing on the

southeastern portion of the property, on the mineralization beneath the

Magambazi ridge. Gold mineralization is being defined w ithin a number of

discrete zones or lodes, referred to as the Magambazi Main, Western, Cave,

Central Contact and Southern Gneiss lodes. There are nine other target areas

defined within the property that are to the northwest o f the Magambazi ridge(Exhibit 1). Approximately 10,000 meters of drilling are being completed on a

monthly basis with a ll diamond drills located at Magambazi. The sole Reverse

Circulation (RC) drill is exploring the MK Trend targets and the company plans

complete approximately 23,000 meters in 180 holes by July 2012 via RC drillin

The RC program will allow the company to refine potential targets for follow-u

diamond drilling, expected to begin in Q3/2012.

Exhibit 1 is a plan view of Canacos Handeni property in eastern Tanzania. The

exhibit includes the mineralized targets recognized by the company and display

gold in soil sampling trends. Note that the focus of exploration is at Magambaz

along the eastern boundary of the property.

Exhibit 1. Handeni Property Showing Gold In Soils And Target Areas

Source: Company reports.

Over 40,000 meters of diamond drilling have been completed at Magambazi

since the beginning of this year and an additional 40,000 meters are planned b

the end of 2011. The current program is allocating half of the meters drilled fo

infill drilling at 20-meter spacing in select locations to satisfy requirements for

an initial resource estimate. Drilling at the project site can continue year-round

with minimal to no stoppage despite seasonal rains. There are nine diamond d

rigs on site at Magambazi, focused on the Main, Western, Southern Gneiss,

Central Contact and Cave lodes (Exhibit 2).
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There are, however, some limitations to collar selection for drilling, as the loca

topography in the mineralized area is very steep. As a result, almost all drilling

completed to date has been collared along the top of what is referred to as the

Magambazi ridge. We believe that the current drilling program will be sufficient

to define an inferred resource but further upgrading of the resource to measur

and indicated categories will require drilling along the flanks of the hill. While w

believe drilling on the sides of the ridge will be possible, it w ill require site

modification with construction of some temporary roadways and drilling

platforms. Developing such drilling platforms could cause a nominal increase in

exploration spending and reduce the rate of drill core production but we do not

anticipate any significant hindrances in the program.

A benefit of the project s location is its easy accessibility by roadway. The

current road infrastructure is passable by regular vehicle but will require

significant modification to support the large vehicle traffic associated with a

mining operation. Fortunately, with some funding from Chinese foreign aid, the

Tanzanian government is working to upgrade the main roadway from Dar es

Salaam to the Handeni region to an e levated, paved roadway capable of

supporting large vehicles. With completion of the state-funded road project

Canaco would be required to undertake only local road improvements.

Over 300 holes have been drilled on the main Magambazi ridge, the majority o

which have been directed at intercepting the Main Lode. Subsequent drilling atMagambazi has defined several other mineralized zones. The Cave, Western,

Central Contact and Southern Gneiss lodes are now being targeted with

expansion drilling. While some mineralization from these other zones may be

included in the initial resource estimate at Handeni, the primary component of

the estimate will comprise resources from the Main Lode.

Exhibit 2 illustrates the five main mineralized zones within the Magambazi targ

area as defined by Canaco. The depiction also includes some drill collar location

from recent results released to the public.
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Exhibit 2. Main Gold Zones At The Magambazi Target


The primary host o f gold at Magambazi is an altered amphibolite. The

amphibolite rock-type hosts the Main, Western, Central Contact and Cave lodeThe Southern Gneiss lode is hosted within overlying intermediate gneiss. Canac

initially believed the gneissic material to be barren but subsequent drilling has

intercepted ore-grade gold mineralization in the gneiss.

Since recognition of gold mineralization in the gneissic material, previously

drilled core is now being sampled from collar, through the gneissic layer, to

confirm or deny the presence of gold mineralization. Mineralization within the

gneissic layer could reduce the overall amount of uneconomic overburden abov

the Main Lode; however, at this time we do not anticipate the gneissic unit wil

contribute a large amount of gold ounces.

As infill drilling on the project continues, there is increasing recognition of the

greater complexity with respect to structural influence on the gold

mineralization. Due to the complexity of ore distribution, Canaco has decreasedthe spacing of infill drilling to 20 meters from 40 meters to facilitate proper

geological/structural interpretation through much of the deposit. Although each

of the lodes does appear to have continuity along strike, north-south, the

company is beginning to recognize a number of fault structures that could

displace mineralization from section to section. It is a combination of the

potential discontinuity a long strike and the narrow w idth of some of the

intercepts that leads us to assume that 1.0 million of our estimated 3.5 million

ounces will be extracted by underground mining. We believe the grade of these

intercepts would suggest selective underground mining would be feasible desp

its higher cost compared to open-pit extraction.
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Of the drill holes published to date, the average width of intercepts reported is

approximately 14 meters. Performing a length-weighted average of the grades

reported to date provides an overall grade of approximately 3.73 g/t, which we

believe may approximate the achievable grade of an open-pit model a t

Magambazi; however, given the projects early stage and some recent

lower-than-average grade drilling results, we have applied a 20% reduction to

our estimate of overall grade for an open pit at Magambazi. We apply an

estimate of 3.0 g/t for open-pit operations in our valuation. We believe that

higher grades would be obtained with greater selectivity and grade control in a

underground operation. We have assumed a grade of 5.5 g/t for extraction fro

underground operations. Note that, in our estimate, grades that exceeded

1 oz./t were capped at that figure. Until Canaco offers further guidance, we wil

maintain a 1 oz ./t top-cut of grades.

The company has provided guidance with respect to the average density of the

host-rock at Magambazi. Due to the abundance of garnet within the amphibolit

material, the average density of the majority of the host-rock has been

estimated between 3.0 g/cm33.1 g/cm3 (t/m3), which is slightly higher than

average for typical amphibolite or gneissic material. The typical density of

gneissic or granitic material tends to be on the order of 2.8 g/cm3. Deriving an

estimate for tonnage of mineralized material at Magambazi is still primitive in

origin. We have ascertained a volume by estimating the average strike length

each of the lodes and applying an average width and a vertical continuity baseon the position of each lode. We derive our estimate of approximately 3.5 milli

oz. of gold collectively for the lodes at Magambazi by applying our volume and

density assumptions with weighted average assay values.

Visual review of available sections leads us to assume that approximately 70%

or 2.5 million oz., of our estimate could be extracted by open-pit mining. We

have also assumed that there would be a three-year lag between

commencement of open-pit mining and underground mining but that both cou

be undertaken at the same time. Validation of our assumption is partially relia

on the orientation of mineralization and our expectation that the ore material

becomes increasingly sub-horizontal at depth. Such a change in orientation fro

sub-vertical within the open pit to sub-horizontal a t depth would mean at least

portion of the underground mining could proceed without being directlyunderneath the open pit. A properly sequenced strategic mining plan will be

critical for simultaneous underground and surface mining.

From The Hill To The MillWe have based our valuation of Canaco on a number o f assumptions related to

extraction, processing rate and costs relative to comparable projects with

respect to grade, location, mining style and/or processing method. We estimat

that the combined open-pit and underground mining operations at Magambazi

would have a mine life of approximately 12.5 years. Our model forecasts the

open-pit portion of mining operations beginning in mid-2015, in accordance wi

current company guidance and relying on construction beginning before the enof 2013. We estimate that production for the projects underground componen

will begin in mid-2018.

The three-year lag between commencement of open-pit mining and

underground mining is based on the assumption that Canaco will need to

continue to perform definition drilling for underground mining beyond 2015. A

lag will also allow the company to contribute revenue generated from the

open-pit portion of the operation to capital expenditures (capex) associated wi

underground development, thereby removing the need to secure debt or raise
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For the initial two and a half years of production, our forecast of 7,000 tpd wou

be supplied from open-pit operations. Once underground mining begins in 201

we expect that the open-pit contribution would fall to 5,250 tpd and

underground operations would contribute the remaining 1,750 tpd. With the

open pit producing at an assumed 3.0 g/t and underground producing at 5.5 g

the project could produce approximately 255,000 oz. of gold per year once in

full production.

We have assumed a 90% recovery rate, which is a reduction from the recover

obtained from preliminary metallurgical test work completed in 2010, at94.14%. The means of recovery in testing were by gravitation and cyanidation

with 72.59% of the gold recovered via gravitation. The high percentage of

recovery by gravitation indicates the gold is non-refractory and that our

estimated recovery is likely achievable in an applied processing scenario. The

high recovery by gravitational methods also indicates that a standard carbon-i

process (CIP) or carbon-in-leach (CIL) process could be employed and with a

grind size of 200 mesh. The testing effectively removes any concern that

secondary grinding or higher-cost processing methods will be required. We do

anticipate, however, that some added complexity may be required in the

processing circuit due to the local abundance of graphite alteration associated

with gold in the deposit. The presence of graphite is the principal reason we

have reduced the recovery by over 4% from initial testing stated by Canaco.

We assume a strip ratio for the open pit of 4:1. The strip ratio was determined

by reviewing available geological sections of the Magambazi deposit and it may

be one of the most sensitive assumptions we have incorporated in our valuatio

Local structures have shown to have strong influence on mineralization. If thes

structures result in significant discontinuity along strike or down-dip within the

deposit, our estimated strip ratio could be negatively affected. At this time we

believe our estimated strip ratio is appropriate but we will continue to review o

estimate as new information becomes available.

Estimating Extraction Costs

We apply an average open-pit total processing cost of US$33.42/t for the life o

mine (LOM) in our valuation, and it is based on our estimate for extraction cosof approximately US$1.70/t for both ore and waste. When combined with the

1.0% NSR attributed to the property and a 4% royalty for projects in Tanzania

we derive our average LOM cash cost of US$461/oz. We note that the 1.0% NS

on the property is a reduction from the current 2% NSR and assumes that

Canaco will opt to repurchase the available 1.0%. Canaco management has

indicated that details regarding the repurchase of a 1.0% portion of the curren

property NSR are yet to be finalized but that details will be provided once they

have been agreed upon. We expect the cost to repurchase 1% of the royalty w

not exceed $5 million. We estimate processing costs for the underground porti

of the operation at US$104.54/t average for LOM and cash costs at US$732/oz

We have assumed that some higher-grade material, at 3.75 g/t, will be

extracted in the first and second years of full production from the open pit,

increasing payback and generating more cash for underground developmentcosts. Oppositely, in the first two years of production underground, we expect

lower-than-average grade of 4.5 g/t and 5.0g/t will be extracted. We base our

expectation on the company processing some incremental ore as underground

accesses to ore are being developed.

As a comparison, the North Mara mine has reported 2010 cash costs of

US$472/oz. The operation had a reported grade of 2.8g/t and a recovery of

82.9% for that year. The strip ratio was approximately 2:1. If we input these

criteria into our model for Canaco, our cash cost estimate would nearly equal

North Mara at US$479/oz.


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Geita has projected cash costs for 2011 at US$643/oz. Geita has a lower head

grade by over 20% (from 2010 production) than our expectations for

Magambazi, as well as a higher strip ratio at 5:1, which accounts for the

substantially higher costs at Geita versus our Canaco estimate.

Another African comparison can be reviewed with Banros estimates for the

Twangiza mine in the DRC. Twangiza has estimated cash costs of US$356/oz.

the first five years of the project and a LOM average cash cost estimated at

approximately US$459/oz. The Banro project has a lower strip ratio of

approximately 2:1 but that is offset by a lower overall resource grade that is

nearly half of our estimate for Magambazi. We note that the total resource and

reserve estimate for grade at Twangiza is approximately 1.7 g/t versus our

estimate for Magambazi at 3.0 g/t for the open-pit component of the operation

Exhibit 3 outlines the parameters applied in our valuation of the Magambazi

project. Some figures have been rounded to the nearest dollar figure.

Exhibit 3. Valuation Parameter For Magambazi

Open Pit Undergro

Ounces (000) 2,500 1,

Grade (g/t) 3.0

Ounces Mined (% Of Resource) 100

Process Recovery (%) 90

Process ing Cost (US$/t) 34

Total Cash Cost (US$/oz.) 461

Total Mining Cos t (US$/oz.) 664

Royalty (%) 5

Gold Price (US$) 1,500 1,

Capex (US$ mlns. ) 350

Sustaining Capex/Year (US$ mlns.) 25

Exploration Cost ($ mlns. ) 120

Production Rate (Avg. tpd) 5,250 1,

Source: CIBC World Markets Inc.

We expect the current financial year to encompass the largest exploration

spending on the project as Canaco undertakes extensive infill drilling, regional

target definition and completion of a preliminary economic assessment. The

company estimates that approximately $41 million will be spent on exploration

for the 2011 financial year, ending in June 2012. Of that $41 million, Canaco

estimates $35 million will be spent on drilling and approximately $5 million is

allocated for the PEA.

We anticipate that exploration spending will remain nearly constant next year,

approximately $40 million, as infill and expansion drilling at Magambazi

continues. We also expect an increase in drilling at regional targets identified

through RC drilling in 2012. In subsequent years we anticipate a steady

decrease in exploration drilling. For 2013 through 2015 we reduce our estimatsuccessively from $30 million to $20 million until open-pit mining begins. We

expect exploration spending would range from $7 million$10 million per year

until the underground operations begin, as the company will be refining

interpretations at Magambazi, as well as continuing to explore regional targets

We have incorporated $4 million in exploration spending for each year that

mining continues. We expect replacement of resources will be a focus of drillin

particularly for the underground component of the operation. Underground

drilling w ill aim to extend the LOM at Magambazi but we also expect that

exploration of regional targets would continue. We estimate total exploration

spending at the Handeni project from 2011 onward at $210 million.


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Constructing Our ValuationWe have detailed our estimates for development and extraction at the

Magambazi project in the previous section and we use the described model as

basis for our valuation. Provided the company is successful in defining a

substantial gold resource and obtaining the required capital to develop the asse

at Magambazi, we anticipate that the project could generate positive cash flow

within the first year of full production, which we have estimated to be 2016. W

expect that initial pre-production would begin in mid-2015. The initiation of fulproduction is highly dependant on a successful drilling campaign through

mid-2013 and a construction period of approximately 18 months.

We believe the proposed timeline is achievable, as we expect most of the

regional road construction would be complete by 2013 and facilitate mobilizatio

of large equipment. As noted in the risks section at the beginning of the report

availability of water is one of the largest challenges faced in the successful

start-up of a mine in the Handeni region. The area has sufficient ground water

support diamond drilling but Canaco will need to develop a strategic water usa

system in order to maintain the required amount of water on site for mining

operations.

Exhibit 4 illustrates the estimated development timeline of the Magambaziproject, as outlined by Canaco management. We have incorporated this

estimated schedule in our valuation.

Exhibit 4. Estimated Timeline For Development Of The Magambazi

Project


We expect production from the open-pit operation to begin in the second half o

2015 and that the project will process approximate ly 1.3 million tonnes of ore produce nearly 110,000 oz. of gold. For the following two years through 2017,

we anticipate the project could process approximately 2.6 million tonnes of ore

per year and produce between 260,000 oz. and 275,000 oz. of gold, depending

on head grade. Once underground mining begins in 2018, we expect the annua

average contribution from the open-pit mine w ill be approximate ly 150,000 oz

based on a 5,250 tpd production rate. We estimate the underground compone

will contribute approximately 104,000 oz. a year based on a 1,750 tpd

production rate.
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Calculated at a US$1,500/oz. gold price, we expect that the Magambazi projec

could generate cash flow averaging $201 million per year for the life of the

project. Based on the same gold price, our estimate for average earnings

generated from the project are nearly $123 million. If prices remain near the

current spot price of approximately US$1,650/oz., we anticipate annual cash

flow and earnings would increase to $231 million and $147 million, respectively

We can compare these figures to other junior explorers and emerging produce

in our gold universe. We forecast Nevsun Resources (NSUSP) to generate an

average of $204 million in cash flow and $159 million in earnings for the years

20112015 based on a gold price of US$1,500/oz. For the same period we

expect Banro to generate an average of $270 million in cash flow and

$236 million in earnings. Another African peer is Keegan Resources (KGNSO)

for which we estimate average cash flow and earnings of $102 million and

$53 million, respectively, for a five-year period once Keegan begins generating

positive figures in 2016.

These three companies have higher market capitalizations than Canaco, rangin

from $460 million to $1.1 billion. With a current market cap of approximately

$349 million, Canacos current valuation is below this comparative group. The

principal difference between Canaco and these three peers is that Canaco has

yet to produce a compliant resource. We expect that Canaco should trade with

the range noted once a resource estimate has been provided and a PEAreleased. We believe that Canaco should trade towards the upper end of the

noted range, as the resource grade we expect at Magambazi is towards the

upper end of the group mentioned and we recognize the market typically

attributes a premium for higher-grade projects.

Our expectations for Canaco with respect to overall grade within the open pit a

nearly 60% higher than the average for open pits in Africa. Exhibit 5 displays

the relationship of total resource size versus grade for African open-pit mines.

Based on our expectations for Magambazi, we can see that Canaco plots well

above the continental average with respect to overall grade.

Exhibit 5. Total Resource Ounces Versus Grade For African Open Pits

CAN

Average

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

18,000

20,000

0 1 2 3 4 5 6

Deposit Grade (g/t)

Resourceoz.

(000's)

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In Exhibit 6, we display how Canaco relates to other gold explorers and

producers in our universe with respect to the total resource ounces versus the

enterprise value per ounce. We have incorporated our previously outlined

assumptions for positioning of Canaco in this relationship.

Exhibit 6. Total Resource Ounces Versus EV/oz. For Gold CompaniesWithin Our Universe

DGC

OSK

SGR

RMX

BAA

SMF

GBU

CGA

CRJ

GSS

LSG

RR

R

KGN

BSX

TRR

ORE

CAN

0

5,000

10,000

15,000

20,000

0 100 200 300 400 500 600 700 800

EV/oz

GoldOunces(000's)


It is evident that Canaco plots among but towards the bottom of the

comparative group of companies with similar-sized resources. In this comparis

there is not a significant discrepancy with its current valuation with respect to peers. However, if we take into account the overall resource grade that we

expect from the resource at Magambazi, Canaco trades near the bottom of the

group despite having a significantly higher grade than many others in the

comparison.

Exhibit 7 illustrates the relationship of Canaco to the same group of companies

shown in the previous exhibit but relates total resource grade versus the

estimated EV/oz.
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Exhibit 7. Total Resource Grade Versus EV/oz. For Gold Companies

Within Our Universe


When we consider that higher-grade projects often garner a premium with

respect to valuation, we would expect that Canaco will trade at a higher EV/oz

once a compliant resource estimate is released. Our valuation of the company

would imply that Canaco should trade at approximately $250/oz.$270/oz.,

which would shift it to the right in Exhibits 6 and 7.

Exhibit 8 outlines our expectations for ea rnings and cash flow sensitivities for

the years from 2015 to 2017, which represent the first three years of producti

at Magambazi, according to our expectations. The sensitivity is relative to the

gold price and the Canadian/U.S. dollar exchange rate. Figures are quoted as

totals per year and in per share values. Note that we have calculated these

estimates based on a fully diluted share count that assumes additional issuanceof shares described previously in this report.
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Exhibit 8. Estimates For Earnings And Cash Flow Sensitivities For 2015

2017 ($ mlns., except per share)

2015E 2016E 20

US$1,200/oz. Gold C$= 0.90/US$ Earnings $23 $118 $

EPS $0.09 $0.43 $0

Cash Flow $52 $201 $

CFPS $0.19 $0.74 $0


EPS $0.11 $0.49 $0Cash Flow $59 $220 $

CFPS $0.22 $0.81 $0


EPS $0.13 $0.55 $0


CFPS $0.24 $0.87 $0


EPS $0.15 $0.61 $0


CFPS $0.27 $0.96 $0


EPS $0.17 $0.67 $0


CFPS $0.32 $1.03 $1US$1,700/oz. Gold C$= 1.10/US$ Earnings $53 $199 $

EPS $0.20 $0.73 $0


CFPS $0.32 $1.09 $1


EPS $0.22 $0.78 $0


CFPS $0.35 $1.16 $1

Shares Outstanding (mlns.) 273 273


It is evident that, if our expectations are met, Canaco has a market cap wellbelow that of companies generating earnings and cash flows similar to those

detailed in Exhibit 7. The average of our cash flow estimates based on a

US$1,500/oz. gold price is approximately $201 million. If we were to apply a

9.8x multiple to our average estimate, which represents a current average

multiple for intermediate (0.2M oz.1M oz.) gold producers in our universe, we

would obtain a valuation of approximately $1.9 b illion. This figure exceeds our

applied valuation for Canaco; however, given the projects early stage, the lac

of cash flow generation for several years and a large number of uncertainties

still associated with the project, we believe that proper assessment of valuatio

for Canaco is through a net asset value (NAV) calculation. We believe that once

Canaco advances the project to the bankable feasibility or construction stage,

the valuation for Canaco may shift to a cash flow- or earnings-based multiple.
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In reviewing the NAV multiples for the gold companies within our universe bas

on a US$1,500/oz. gold price, we find that the current average is nearly 0.9x.

we limit the companies included in the average calculation to those shown in

Exhibits 5 and 6, the multiple falls to approximately 0.7x. If we further restrict

our inclusion of companies to those non-producing explorers, the figure drops

again, to approximately 0.6x. We believe that Canaco should trade at a premiu

to the group given its average grade is nearly 50% higher than the next highe

within the non-producing group. Similarly, we expect that Canaco should trade

at a comparable multiple to other emerging or single-asset producers. Despite

being some four to five years from generating positive cash flows, the high

grade expected at Magambazi will likely allow it to trade at a premium to other

non-producers. As such, we select our 0.8x multiple in our valuation of Canaco

Factors like operating costs, total capital costs, foreign exchange rates and

overall deposit grade have a strong influence on our NAV estimate. Although th

portion of our non-compliant resource estimate incorporated into an open-pit

scenario is relatively high grade compared to many other operations, the

underground portion of the operation is not. As the underground portion

accounts for nearly 30% of the total assumed resource, variance in the overall

deposit grade has the strongest influence on our valuation compared to the

other parameters. We note that variations in operating cost and foreign

exchange rate have virtually the same impact on our valuations.

Exhibit 9 displays the influence on our 5% discounted NAV/share estimate

relative to the variation of several parameters such as capital costs, operationa

costs, foreign exchange and overall deposit grade.

Exhibit 9. NAV/Share Sensitivity To Variable Parameters

4.50

4.70

4.90

5.10

5.30

5.50

5.70

5.90

6.10

6.30

6.50

-20% -10% Base Case +10% +20%

NAV/Share

(C$)

Capital Cost Operating Cost Gold Grade US$:TZS$ Exchange

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The total resource ounces defined at the project also have a strong influence o

our valuation, particularly how much of the resource can be included in the

open-pit operation. For instance, if we incorporate an addition of 1 million oz. o

gold and split that equally between the open-pit and underground operations,

our NAV increases by approximately $0.98/share. If we add all of the 1 million

oz. solely to the open-pit operation our NAV increases by $1.32/share, or a 35

increase when split between open pit and underground. Conversely, if we

decrease the overall resource by 1 million oz. split equally between open pit an

underground, our NAV decreases by approximately $1.15/share whereas if

removed solely from the open pit the decrease is $1.55/share.

We can see that the amount of ounces incorporated into the potential open pit

Magambazi has the greatest influence on our valuation as the substantially low

costs and higher mining rate heavily influence potential revenues.

The price of gold also has a significant influence on our NAV estimate. Althoug

the project does have a 5% royalty applied, Canaco could still realize increased

margins with an increase in gold price. Exhibit 10 shows the variance of our NA

with respect to the currentshare price and relative to a change in the price of

gold.

Exhibit 10. P/NAV Variance Relative To The Price Of Gold

0.63x

0.51x

0.43x

0.37x

0.33x

0.29x

0.26x

0.24x

0.22x

0.20x

900

1100

1300

1500

1700

1900

2100

0.16x 0.26x 0.36x 0.46x 0.56x 0.66x 0.76x

P/NAV Multiple

US$

Gold

PricePerOunce


In comparing Canaco to other gold explorers and emerging producers in ourcoverage universe, we see that Canaco is trading well below the group average

for our select group shown in Exhibits 5 and 6. Based on the current price,

Canaco is trading at a P /NAV multiple of 0.3x versus the group average for go

companies of approximately 0.9x
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Exhibit 11 illustrates a comparative P/NAV of explorers and emerging producer

within our gold spectrum that were included in the previous EV/oz. comparison

(with a few additions). We expect that that Canaco will trade at the group

average for all gold companies once a resource is produced on the Magambazi

property. Despite being at an early stage of project development, the overall

grade at Magambazi will likely exceed many of the peers shown in Exhibit 11

and, as such, we expect a premium should be applied to our valuation compare

to other non-producers/explorers.

Exhibit 11. P/NAV Multiples For A Select Group Of Gold Companies At

US$1,500/oz. Gold Price And A 5% Discount Rate

0

0.2

0.4

0.6

0.8

1

1.2

BeloSun

Canaco*

Keegan

Trelawney

Banro

SanGold

Minefinders

LakeShore

Average

Romarco

Detour

RainyRiver

CGAMining

Osisko

ClaudeResources

GoldenStar

Semafo

KirklandLake

P/NAV

Multiple(US$

1,5

00/oz)

* Valuation based on assumed ounces and is not based on a compliant resource estima te.


In Exhibit 12 we outline an income statement based on our expectations for

spending and production at Magambazi for the current year through 2016. We

have incorporated our expectations for all exploration spending at the Handeni

property. We also have assumed that a ll options and warrants are exercised a

include our expectation for a share issue into our estimated count .
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