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National Bank Financial says development draft picks "have it all": Prodigy Gold, Lydian International, Astur Gold and Grayd Resource

Junior gold explorers have a landmine of potential, especially with the right assets, and considering the soaring price of the yellow metal. Indeed, National Bank Financial issued an equity research report covering the space last week, initiating coverage on four "attractively valued, quality, emerging" developers, including Prodigy Gold (CVE:PDG), Lydian International (TSE:LYD), Astur Gold (CVE:AST), and Grayd Resource Corp (CVE:GYD), which just today was announced to be the target of a $275 million takeover transaction by Agnico-Eagle Gold Mines (TSE:AEM) (NYSE:AEM).

"With gold prices at unprecedented levels, we believe our attractively valued initiating companies are well positioned to garner further upside and potentially benefit from expected industry consolidation and increased equity available to small and mid-cap companies," National Bank said.

"Given the limited supply of assets in the global development pipeline, we believe quality
assets which can meet a number of criteria...could be in high demand not only to investors but also junior and mid-tier producers looking to consolidation as a way to attract higher multiples and fill gaps in production growth profiles."

All four junior companies were given an "outperform rating", with price targets well above current trading levels, as they were lauded as being modestly valued, with projects having a "respectable mine life", low risks to advance, and strong potential for resource and production growth.

Prodigy Gold, for example, with a price target of $0.85, is definitely a prime takeover candidate. Since acquiring its Magino gold project near Wawa, Ontario in lat 2010, the company has outlined a more than 1.5 million ounce mineable gold resource, and completed a preliminary economic assessment for a simple open-pit, carbon-in-leach project.

The economic study outlined strong baseline economics, said National Bank, with a pre–tax net present value of  $351 million and a 49% internal rate of return (NYSE:IRR), considering a long–term gold price more than 20% below three–year trailing prices. Project valuations are also expected to increase in the near term, as Prodigy completes additional drilling and technical studies.

"We expect additional upside could come from consideration of increased resources, increased annual throughput, reduced stripping ratio and consideration of a SAG mill," explained the report.

Existing surface infrastructure in the area will also benefit project development, with an expected positive permitting decision on an accelerated timeline.

Lydian International is another with solid prospects, being given a $4.00 price target, up from its $3.15 trading price. The company's Amulsar project is a self-generated discovery made in 2006, and with the completion of this year's 40,000 metre drill program, Lydian will have conducted nearly 100,000 metres of drilling in less than four years, and defined a resource which National Bank believes could top three million ounces of gold shortly. Currently, resources are defined at 2.5 million ounces, with the deposit remaining open in all directions.

Amulsar's all–oxide resource is also amenable to low–cost heap leach processing and is well positioned to advance to the development stage within the next year, with initial economics outlining a pre-tax net present value of $493.6 million and a pre-tax IRR of 39.5%, using a base case gold price of US$1,200 per ounce of gold.

"The incorporation of updated technical data (drill results, metallurgy and geotechnical data) in the near term and further exploration at the property over the next 12–18 months could lead to enhanced economics," National Bank added.

The next on the list of emerging junior developers is Astur Gold, whose Salave project in northwestern Spain is "much better positioned" to move forward to production than it was under previous owners. The property is one of Europe's largest and highest grade gold deposits, but it hasn't seen production since the Roman Era as a result of the introduction of developement restrictions for open pit mines.

However, Astur’s work, including a renewed development approach that addresses restrictions, has shown that Salave has the potential to generate attractive returns as an underground mine, National Bank said, forecasting a 131,000 ounce per year project with a 10-year mine life, and US$590 per ounce cash costs. Astur also has support from local communities, amid a major negative shift in the Spanish economy over the last five years.

National Bank Financial anticipates Astur, witha  $3.30 price target, will be on track for production in the second half of 2014, with a positive permitting decision expected to rapidly erase the junior miner's trading discount to its peers.

Last, but certainly not least, National Bank was proved correct in picking Grayd Resource Corp, which this morning announced it will be bought by Agnico-Eagle Mines. The $2.15 price target assigned to the Vancouver-based resource company was even below the $2.80 price tag Agnico-Eagle offered.

With the potential for Grayd's La India project in Sonora, Mexico already proven, the Tarachi project, which lies about 10 kilometres north of La India, is the company's "lottery ticket" to valuation upside, National Bank noted, with less than 6% of a 10 square kilometre potentially mineralized area having been tested. With an initial resource expected in 2012, the property is seen to be a starting point of a potentially sizable multi-million ounce resource.

La India, which has been deemed well positioned to move into the feasibility and construction phases, has a mineable resource topping one million ounces of gold, with a pre-tax net present value of US$187 million, and a pre-tax IRR of 51%, assuming a gold price of US$950 per ounce, and a 5% discount rate. Project economics are expected to receive a boost on the reflection of higher gold prices, with first production anticipated in late 2014 or early 2015.

Grayd CEO, Marc Prefontaine, commented today on the company's transaction with Agnico-Eagle in a statement: "Our Mexican properties have advanced to the stage that it is time for us to join with a fully funded and well established mine builder like Agnico-Eagle for their final stage of development into gold mines."

Indeed, with operating cash flows increasing for senior and mid-tier producers over the mid-term, but organic production growth estimated to expand at a much slower pace, Prodigy Gold, Lydian International and Astur Gold could be next on the takeover target list.