Takeover Analyst's  Instablog

Given concerns about hyperinflation and domestic stagnation, many experts are forecasting that gold will continue to surge. While Jim Rogers, co-founder of the multi-billon dollar Quantum Fund, expects gold to hit $3.5K/oz soon, Rob McEwen of Goldcorp (GG) expects it to trend above $5K/oz. Firms like Barrick (ABX) and Freeport (FCX) may be able to generate solid streams of free cash flow, but the best returns naturally come from smaller companies where asymmetric information significantly discounts market value below intrinsic value. Accordingly, exposure to small-cap emerging market gold producers are, in my view, the ideal way to hedge against macro uncertainty.

Fortunately, investors are just starting to pick up on how undervalued Mustang Alliances (MSTG) is. Subsequent informational flow will only further render the company an ideal takeover target.

STRUCK GOLD!; OR WHY A TAKEOVER IS LIKELY

Mustang may be resting on the world's largest gold and silver site. It has secured exclusive rights to the Choluteca District of Southern Honduras - an area that foreign gold producers have been blocked from developing due to government regulations. This area was found to have have gold samples worth as much as 305.2 g/t. When you consider that Goldcorp (GG) bought out Glamis Gold and its El Sauzal mine for $9.5B - a site whose samples averaged a value between 0.4 and 0.6 g/t - the takeover potential of Mustang is nothing short of tremendous. Local "pick and shovel" miners have yielded 1K oz of gold per month. If Mustang is just able to meet this level and no more while trading at 12x sales, it should have a minimum value of one quarter of $1B.

The two concessions that Mustang specifically owns rights to are Corpus I-V and El Potosi. The small-cap gold firm has 4.4K hectares thus far in a proven gold belt and is under negotiation for 12K more. While a surface study found samples worth 10.4 g/t at Corpus I-V, gold values have been estimated as high as 305.2 g/t at El Potosi. The latter has had more than 15 gold zones identified and the Tajo mine is already ready for production, which will substantially benefit early investors.

Thus, acquiring Mustang would be almost instantaneously accretive to EPS for Barrick. Previously called the "hedging miracle" here, Barrick has underperformed the competition for the year to date and is in need of a catalyst to help attract back investors. Consensus estimates for Barrick's EPS forecast that it will grow by 46.7% to $4.87 in 2011 and then by 16.2% and 19.3% more in the following two years.

The recent resolution of the Grasberg strike has increased Barrick's visibility, but challenges in labor relations make an acquisition of a local producer highly desirable. With backing from the Honduran government, Mustang is optimally capable of handling any labor disruptions.

While my forecasts on Freeport and Yamana (AUY) have proven accurate with double-digit returns (see hereand here), I am even more optimistic about Mustang. Simply put, Mustang could be the top winner of 2012 as both a takeover target and a developer of a region that can support sustainable generation of free cash flow.

The Newmont 1998 Joint Venture report found:

"The physical proximity of world class, greater than one million ounce gold deposits proximal to the Nicaraguan Trough… indicates a strong possibility for analogous deposits at Manto and Potosi [which Mustang is exploring]

Highly anomalous surface gold assays within epithermal quartz veining associated with structural zones at both Manto and Potosi argue the necessity for further geological exploration". (Mashburn, 1997)

And the only meaningful way for major firms, like Barrick, to gain access to all of these regions is through acquiring Mustang. With regulations loosening, foreign companies can begin to operate in these emerging markets - but the process will only begin by taking over the companies that secured the initial exclusive development rights.

DISCLOSURE: The distributor of this research report, Gould Partners, is not a licensed investment adviser or broker dealer. Investors are cautioned to perform their own due diligence as information contained within this report has been derived by public sources and cannot be guaranteed by us to be fully accurate. We are a consultant to a third-party EAG, representing Mustang and have received one thousand dollars for independent research. Always discuss investments with a licensed professional before making any financial decision. Statements made herein are often "forward-looking statements" as stipulated under Section 27A of the Securities Act of 1933, Section 21E of the Securities Act of 1934, and the Private Securities Litigation Reform Act of 1995. Since these statements are uncertain, actual results may be materially different from those expected.