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Institutional Equity Research Initiating Coverage

October 31, 2011

Stock Rating:

Precious Metals

Sector Outperformer
Sector Weighting:

Canaco Resources Inc.

There's Gold In That There Hill

12-18 mo. Price Target CAN-V (10/28/11) Key Indices: TSX/SP - Canadian Gold NM $1.53-$6.45 199. 0M 150. 3M Shrs 450, 000 $348.3M Nil / Nil June $0.60 per Shr NM NA Nil $120.0M No
Prev Current

$4.50 $1.75

3-5-Yr. EPS Gr. Rate (E) 52-week Range Shares Outstanding Float Avg. Daily Trading Vol. Market Capitalization Dividend/Div Yield Fiscal Year Ends Book Value 2011 ROE (E) LT Debt Preferred Common Equity Convertible Available
Earnings per Share

As of 10/31, we are initiating coverage of Canaco with a 12- to 18-month price 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 by infill/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's current share price. We expect 3.5 million oz. will be defined within 12 to 18 months and that some 2.5 million oz. will be included in an open-pit design with a grade that is nearly 60% greater than the African average. We believe the initial resource estimate at Magambazi and the subsequent PEA will be the major catalyst for Canaco in the next six to eight months. Canaco is trading at ~$65/oz. based on our resource estimate compared to ~$115/oz. for other non-producers in our coverage universe.

2011 2012 2013 P/E 2011 2012 2013

($0.24E) ($0.24E) ($0.17E) NM NM NM

Stock Price Performance

Cash Flow per Share 2011 2012 2013 P/CF 2011 2012 2013

($0.23E) ($0.23E) ($0.17E) NM NM NM

Source: Reuters

Company Description Canaco Resources Inc. is a Canadian-based exploration company conducting exploration on the Magambazi project. The project is in the Handeni region of eastern Tanzania and is a focus for development.

All figures in Canadian dollars, unless otherwis e stated.

11-111750 2011

CIBC World Markets does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect 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 the end of this report, where applicable.
CIBC World Markets Inc., P.O. Box 500, 161 Bay Street, Brookfield Place, Toronto, Canada M5J 2S8 (416) 594-7000

Jeff Killeen

Barry Cooper

Find CIBC research on Bloomberg, Reuters, and ResearchCentral.

The re' s Gol d I n That There Hill - October 31, 2011

Canaco Resources Inc.

CAN-TSX 10/31/11 12- To 18- Month Price Target: Precious Metals Sector Weighting: $1.75 $4.50 Overweight

Sector Outperformer
Jeff Killeen (416-956-6218) Barry Cooper (416-956-6787)

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 Investment Thesis CAN is conducting exploration on a recently dicovered gold deposit in the Handeni region of Eastern Tanzania. The Handeni Canaco 0.3x 0.5x NA NEG NEG NEG Property contains several targets for advanced exploration but the company's current focus is on the Magambazi ridge. The North American Average 1.7x 2.8x 20.9x 11.3x 14.0x 7.4x ridge hosts five recognized mineralized lodes that are being defined by diamond drilling. The lodes offer a blend of potential Large Cap Average (>$10B) 2.3x 4.1x 17.9x 10.9x 11.9x 8.4x open-pit and underground development targets. We expect a resource containing several million ounces of gold will be Mid Cap Average ($2B-$10B) 1.6x 2.3x 25.1x 16.2x 15.0x 9.2x indentified at Magambazi over the next 12 to 18 months and addition to the resource beyond this timeframe is probable. We Small Cap Average (<$2B) 1.5x 2.6x 17.5x 6.4x 12.5x 4.6x anticipate open-pit grades will be nearly 60% higher than the African average for open-pit gold mines and that a premium Large Cap Average > 1M oz 1.8x 2.7x 24.8x 14.9x 14.1x 10.2x should be applied in valuation of CAN. The Magambazi lodes will need to show continuity in detailed drilling to meet our Intermediate Producers 0.2-1 M oz 1.7x 2.7x 19.8x 9.2x 12.5x 6.6x expectations for grade, particularly within the portion we have allocated for open-pit extraction. We believe the share price of Small Producers < 0.2M oz 1.6x 2.4x 19.6x 8.9x 13.2x 6.9x CAN will be driven by step-out and infill results at at Magambazi, by the initial resource estimate scheduled for release in the next six months and by drilling results at regional targets outside the Magambazi area, along the MK trend. * Cash Adjusted NAV Multiples Using: $1500/oz Gold Pricing And 5% Discount Rates ^ Using: $1500/oz @ Risk Adjusted Discount Rates

5% Discount
P/NAV Sensitivity Avg. Gold Px - US$ Canaco North American Average Large Cap Average (>$10B) Mid Cap Average ($2B-$10B) Small Cap Average (<$2B) Large Cap Average > 1M oz Intermediate Producers 0.2-1 M oz Small Producers < 0.2M oz Income Statement Gold Price Assumptions US$ Production (000s ounces) Cash Costs US$/oz Capital Expenditures Revenues Expenses Operating Expenses D,D&A, Reclamation S,G&A Exploration Other Expenses Total Expenses Income Before Tax Income Taxes Net Income EPS CFPS Shares Outstanding EV Statistics - US$ Canaco North American Average Large Cap Average (>$10B) Mid Cap Average ($2B-$10B) Small Cap Average (<$2B) Large Cap Average > 1M oz Intermediate Producers 0.2-1 M oz Small Producers < 0.2M oz * Proven & Probable Reserves P/NAV P/NAV P/NAV

Risk Adjusted Discount

P/NAV P/NAV P/NAV Production Profile
350 300 250 200 150 100 50 0 2015E 2016E Underground 2017E Open Pit 2018E 2019E Total Cash Costs $700 $600 $500 $400 $300 $200 $100 $0
Production 000s Ounces $/oz Cash Cost

0.4x 1.4x 1.9x 1.4x 1.1x 1.5x 1.4x 1.3x

0.4x 1.2x 1.6x 1.3x 0.9x 1.3x 1.2x 1.1x

0.3x 0.9x 1.3x 1.0x 0.7x 1.1x 1.0x 0.8x F2010A

0.6x 2.3x 3.3x 2.0x 2.1x 2.2x 2.2x 1.9x F2011E

0.5x 1.8x 2.7x 1.8x 1.6x 1.9x 1.9x 1.5x F2012E

0.4x 1.4x 2.1x 1.4x 1.0x 1.5x 1.5x 1.1x F2013E

0 0 5 0 0 0 1 0 2 3 -3 (0) (3) -0.03 -0.05 139 EV ($mln) EV/Prod

0 0 0 0 0 0 4 41 2 47 -47 0 (47) -0.24 -0.23 199 EV/2P*

0 0 0 0 0 0 5 40 2 47 -47 0 (47) -0.24 -0.23 200

0 0 0 0 0 0 5 30 0 35 -35 0 (35) -0.17 -0.17 201 EV/R&R^

Production (2011E) Modeled Resource Detail Asset Magambazi (O/P) Magambazi (U/G) Total * Gold (000s oz) ^ Net of by product credits (if applicable) NAV Breakdown - US$ Gold Price of: Current Assets Cash Mining Assets Magambazi (O/P) Magambazi (U/G) Other Exploration Asset Total Assets Liabilities Other Liabilities Reclamation Total Liabilities Net Asset Value (CAD) Asset Locations

Production Cash Costs 2P M&I&I 0 0 0 0 0 0 0 0 0 $0 0 0 2P: Modeled Proven & Probable Reserves (000s oz) M & I & I: Measured & Indicated & Inferred Resources (000s oz) $1,500 Ownership Discount Rate US$ Millions Per Share



100.0% 100.0%

5% 5%

$763 $123 $100 $1,106 $5 $5 $10 $1,096

$3.84 $0.62 $0.50 $5.56 $0.03 $0.03 $0.05 $5.51


NA $11,536 $3,357 NA NA $12,187 $9,622 $9,794

NA $607 $290 $268 $609 $601 $538 $1,201

$65 $342 $194 $139 $130 $307 $331 $281

^ Reserves and Resources


Source: Company reports and CIB C World Markets I nc.

The re' s Gol d I n That There Hill - October 31, 2011

Table of Contents Executive Summary ...................................................................................... 4 Share Price Catalysts..................................................................................... 5 Risks And Challenges..................................................................................... 6 Capital Structure ........................................................................................... 6 Handeni Gold Hills Of Africa ........................................................................ 7 From The Hill To The Mill ..............................................................................10 Estimating Extraction Costs .......................................................................12 Constructing Our Valuation ...........................................................................14 Site Visit ...................................................................................................22 Price Target Calculation .............................................................................22 Key Risks To Price Target ..........................................................................23 Appendix A. Property And Geological Overview .............................................24 Regional Geology ......................................................................................25 Local Geology............................................................................................26 Mineralization............................................................................................28 Appendix B. Management Group...................................................................30

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Executive Summary
Canaco Resources Inc. (CANSO) is a Canadian-based exploration company focused on advancing the Magambazi prospect in the Handeni Project of eastern Tanzania. The project is approximately 175 kilometers (km) northwest of Dar es 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 gold resource within the next six months. Canaco is drilling with 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 exploration 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 availa ble 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 our expectation 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, that number should increase to approximately 3.5 million oz . We also expect that the majority of the resource will be extracted by open-pit mining and that the grade 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 a re as follows: Production of the first gold resource at Magambazi is likely to be >2 million 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), but 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 South 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 gold resource could well exceed our initial expectations beyond 18 months time. Chinese resource company Sinotech (Hong Kong) Corp. Ltd., a non-publicly traded subsidiary of Sinotech Mineral Exploration Co. Ltd., holds a large position 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 development it is at today. Sinotech has since divested a portion of its original holding but remains 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 Ethiopia n 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 the company to be a gold-only explorer and de-risks the company by limiting operations to a single East African country.

Share Price Catalysts

Continued 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 in 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 increase 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 Challenges

We 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 be 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 slows 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 significant mineralization, limiting resources to the Magambazi lodes; total resource figure may not be sufficiently large to garner acquisition attention. We have based our valuation on Canaco developing the project. Infrastructure requirements for mine development significantly exceed our costs estimates; the government is undertaking road upgrading but it is not a continuous project (partially funded through foreign aid) and known water sources on site will likely be insufficient to support full mining operations. We have incorporated approximately 35% of our capex es timate for contingency spending to offset potential cost increases due to infrastructure spending. Canaco is unable to raise sufficient funds to develop the project as outlined in our valuation; if financing for mine development is not obtained, our valuation would be negatively impacted.

Capital Structure
As of September 30, 2011, Canaco had 199,396,603 common shares issued and outstanding. There are an additional 964,965 warrants outstanding with exercise 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 fully 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 approximately $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 month 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 Africa

The 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 within 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 of the Magambazi ridge (Exhibit 1). Approximately 10,000 meters of drilling are being completed on a monthly basis with all diamond drills located at Magambazi. The sole Reverse Circulation (RC) drill is exploring the MK Trend targets and the company plans to complete approximately 23,000 meters in 180 holes by July 2012 via RC drilling. The RC program will allow the company to refine potential targets for follow -up diamond drilling, expected to begin in Q3/2012. Exhibit 1 is a plan view of Canacos Handeni property in eastern Tanzania. Th e exhibit includes the mineralized targets reco gnized by the company and displays gold in soil sampling trends. Note that the focus of exploration is at Magambazi 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 by the end of 2011. The current program is allocating half of the meters drilled for 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 drill 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 local 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 measured and indicated categories will require drilling along the flanks of the hill. While we believe drilling on the sides of the ridge will be possible , it will 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 projects 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 elevated, 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 of which have been directed at intercepting the Main Lode. Subsequent drilling at Magambazi 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 target area as defined by Canaco. The depiction also includes some drill collar locations from recent results released to the public.

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Exhibit 2. Main Gold Zones At The Magambazi Target

Source: Company reports.

The primary host of gold at Magambazi is an altered amphibolite. Th e amphibolite rock-type hosts the Main, Western, Central Contact and Cave lodes. The Southern Gneiss lode is hosted within overlying intermediate gneiss. Canaco 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 above the Main Lode; however, at this time we do not anticipate the gneissic unit w ill 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 decreased the 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 along strike and the narrow width 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 despite 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 at 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 n underground operation. We have assumed a grade of 5.5 g/t for extraction from underground operations. Note that, in our estimate, grades that exceeded 1 oz./t were capped at that figure. Until Canaco offers further guidance, we will 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 amphibolite 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 mineralize d material at Magambazi is still primitive in origin. We have ascertained a volume by estimating the average strike length of each of the lodes and applying an average width and a vertical continuity based on the position of each lode. We derive our estima te of approximately 3.5 million 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 could be undertaken at the same time. Validation of our assumption is partially reliant on the orientation of mineralization and our expectation that the ore material becomes increasingly sub-horizontal at depth. Such a change in orientation from sub-vertical within the open pit to sub-horizontal at depth would mean at least a portion of the underground mining could proceed without being directly underneath the open pit. A properly sequenced strategic mining plan will be critical for simultaneous underground and surface mining.

From The Hill To The Mill

We have based our valuation of Canaco on a number of assumptions related to extraction, processing rate and costs relative to comparable projects with respect to grade, location, mining style and/or processing method. We estimate 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 with current company guidance and relying on construction beginning before the end of 2013. We estimate that production for the projects underground component 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 with underground development, thereby removing the need to secure debt or raise


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funds through a subsequent share issue. Three years between start-ups would also optimize production, with both the underground and open-pit operations completing in 2027, based on our assumed resource. We estimate the initial capex for the Magambazi open pit at $350 million. We assume that this sum could be obtained partially by issuing shares at approximately our price target and the remainder by debt financing. We base our valuation on the company issuing 60 million shares, which would generate approximately $270 million. Such an issuance of shares would bring the total fully diluted share count to approximately 273 million. We anticipate Canaco would source another $200 million from debt financing. An amount of $470 million would provide sufficient funds to meet our expected capex and provide approximately 35% of our estimate for contingency spending. If debt financing becomes limited in the coming years it is possible that Canaco may elect to increase the equity financing or reduce the amount of contingency. Our capex estimate to initiate underground mining is $100 million, bringing our total initial capex estimate for the project to $450 million. We believe that Canaco would generate sufficient cash flow from the first three years of operations at the open pit to finance the underground component. The relatively low capex required for underground operations is a result of most requirements being met through construction for open-pit operations. The bulk of underground expenditures will be associated with fleet acquisition and development mining. We can compare these figures to other East African operations, such as Cluff Gold plcs (CLFL) Baomahun Gold mine in Sierra Leone, which has an estimated capex of US$195 million for a combined open-pit and underground operation that will process 1.9 million tonnes per year. We expect that Magambaz i will process approximately 2.5 million tonnes a year or 7,000 tonnes per day (tpd). We can also use AngloGold Ashantis (AUNYSE) Geita project as a comparison, as it is an open-pit producer in Tanzania. Processing approximately 6 million tonnes per year, or about three times Magambazis expected process rate, t he initial capex for Geita was approximately US$165 million in 2000. We believe that capex inflation over recent years worldwide will result in a higher development cost for Magambazi in two to three years time. Our estimate for Magambazi compares well with Banros (BAASO) estimates for the Twangiza mine in the Democratic Republic of the Congo (DRC). Banro estimates that capital expenditures at Twangiza will total $220 million for a 1.7 million metric tonne (Mt) per year operation. Our estimate of approximately 2.5Mt per year at Magambazi is 47% greater than Twangiza and, combined with inflation over several years, accounts for the estimated 59% higher capex at Magambazi versus Twangiza. Other comparables include the North Mara and Buzwagi mines, belonging to Barrick Golds (ABXSP) wholly owned African subsidiary, African Barrick. Both projects are located in Tanzania. Initial capex at North Mara was approximately US$50 million between 1999 and 2002. Although North Mara produces at a near equal rate to that expected at Magambazi, we again factor inflation into our higher capex estimate for Canaco. Buzwagi is producing at approximately 9,000 tpd and initial capex to complete construction was approximately US$400 million. Mine construction at Buzwagi was completed in mid-2009 and despite processing 50% more materia l than expected at Magambazi, inflation over several years and differing economies of scale result in a similar capex estimate for Canaco.


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For the initial two and a half years of production, our forecast of 7,000 tpd would be supplied from open-pit operations. Once underground mining begins in 2018, 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/t, 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 recovery obtained from preliminary metallurgical test work completed in 2010, at 94.14%. 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-inprocess (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 valuation. Local structures have shown to have strong influence on mineralization. If these 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 our 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 of mine (LOM) in our valuation, and it is based on our estimate for extraction costs of 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% NSR 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 current 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 will not exceed $5 million. We estimate processing costs for the underground portion 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 development costs. Oppositely, in the first two years of production underground, we expect a 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. for 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

Ounces (000) Grade (g/t) Ounces Mined (% Of Resource) Process Recov ery (%) Processing Cost (US$/t) Total Cash Cost (US$/oz.) Total Mining Cost (US$/oz.) Royalty (%) Gold Pric e (US$) Capex (US$ mlns.) Sustaining Capex/Year (US$ mlns.) Ex ploration Cost ($ mlns.) Production Rate (Avg. tpd)
Source: CIB C Wo rld Markets Inc.

Open Pit 2,500 3.0 100 90 34 461 664 5 1,500 350 25 120 5,250

Underground 1,000 5.5 100 90 105 732 935 5 1,500 100 10 60 1,750

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, at 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 estimates successively 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 drilling, particularly for the underground component of the operation. Underground drilling will 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 Valuation

We have detailed our estimates for development and extraction at the Magambazi project in the previous section and we use the described model as a basis for our valuation. Provided the company is successful in defining a substantial gold resource and obtaining the required capital to develop the asset 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 201 6. We expect that initial pre-production would begin in mid-2015. The initiation of full production 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 mobilization 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 to support diamond drilling but Canaco will need to develop a strategic water usage system in order to maintain the required amount of water on site for mining operations. Exhibit 4 illustrates the estimated development timeline of the Magambazi project, as outlined by Canaco management. We have incorporated this estimated schedule in our valuation.

Exhibit 4. Estimated Timeline For Development Of The Magambazi Project

Source: Company reports.

We expect production from the open-pit operation to begin in the second half of 2015 and that the project will process approximately 1.3 million tonnes of ore to 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 annual average contribution from the open-pit mine will be approximately 150,000 oz. based on a 5,250 tpd production rate. We estimate the underground component 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 project 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 producers 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, ranging 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 within the range noted once a resource estimate has been provided and a PEA released. 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 are 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
20,000 18,000 16,000
Resource oz. (000's)

14,000 12,000 10,000 8,000 6,000 4,000 2,000 0 0 1 2 3 Deposit Grade (g/t) 4 5 6



Source: CIB C World Markets Inc.


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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 Companies Within Our U niverse



Gold Ounces (000's)

15,000 OSK BAA 10,000



SMF RMX LSG 400 500 600 700 SGR 800

Source: CIB C World Markets Inc.

It is evident that Canaco plots among but towards the bottom of the comparative group of companies with similar-sized resources. In this comparison there is not a significant discrepancy with its current valuation with respect to its 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 U niverse

Source: CIB C World Markets Inc.

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 earnings and cash flow sensitivities for the years from 2015 to 2017, which represent the first three years of production 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 issuance of 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)
US$1,200/oz. Gold C$= 0.90/US$ Earnings EPS Cash Flow CFPS Earnings EPS Cash Flow CFPS Earnings EPS Cash Flow CFPS Earnings EPS Cash Flow CFPS Earnings EPS Cash Flow CFPS Earnings EPS Cash Flow CFPS Earnings EPS Cash Flow CFPS 2015E $23 $0.09 $52 $0.19 $29 $0.11 $59 $0.22 $35 $0.13 $66 $0.24 $42 $0.15 $75 $0.27 $48 $0.17 $82 $0.32 $53 $0.20 $89 $0.32 $59 $0.22 $96 $0.35 273 2016E $118 $0.43 $201 $0.74 $134 $0.49 $220 $0.81 $149 $0.55 $239 $0.87 $167 $0.61 $261 $0.96 $183 $0.67 $280 $1.03 $199 $0.73 $299 $1.09 $214 $0.78 $318 $1.16 273 2017E $117 $0.43 $200 $0.73 $132 $0.48 $219 $0.80 $148 $0.54 $237 $0.87 $166 $0.61 $260 $0.95 $182 $0.66 $297 $1.02 $197 $0.72 $297 $1.09 $213 $0.78 $316 $1.16 273

US$1,300/oz. Gold

C$= 0.95/US$

US$1,400/oz. Gold

C$= 1.00/US$

US$1,500/oz. Gold

C$= 1.00/US$

US$1,600/oz. Gold

C$= 1.05/US$

US$1,700/oz. Gold

C$= 1.10/US$

US$1,800/oz. Gold

C$= 1.15/US$

Shares Outstanding
Source: CIB C World Markets Inc.


It is evident that, if our expectations are met, Canaco has a market cap well below 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 billion. This figure exceeds our applied valuation for Canaco; however, given the projects early stage, the lack of cash flow generation for several years and a large number of uncertainties still associated with the project, we believe that proper assessment of valuation 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 based on a US$1,500/oz. gold price, we find that the current average is nearly 0.9x. If 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 premium to the group given its average grade is nearly 50% higher than the next highest within the non-producing group. Similarly, w e 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 the 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, operational costs, foreign exchange and overall deposit grade.

Exhibit 9. NAV/Share Sensitivity To Variable Parameters

6.50 6.30 6.10 5.90

NAV/Share (C$)

5.70 5.50 5.30 5.10 4.90 4.70 4.50 -20% -10% Base Case +10% +20%

Capital Cost

Operating Cost

Gold Grade

US$:TZS$ Exchange

Source: CIB C World Markets Inc.


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The total resource ounces defined at the project also have a strong influence on 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. of 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 and 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 at Magambazi has the greatest influence on our valuation as the substantially lower costs and higher mining rate heavily influence potential revenues. The price of gold also has a significant influence on our NAV estimate. Although 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 NAV with respect to the current share price and relative to a change in the price of gold.

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



US$ Gold Price Per Ounce


0.22x 0.24x


0.26x 0.29x


0.33x 0.37x


0.43x 0.51x



900 0.16x







P/NAV Multiple
Source: CIB C World Markets Inc.

In comparing Canaco to other gold explorers and emerging producers in our coverage 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 gold companies of approximately 0.9x


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Exhibit 11 illustrates a comparative P/NAV of explorers and emerging producers within our gold spectrum that were included in the previous EV/oz. comparisons (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 compared 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

P/NAV Multiple (US$ 1,500/oz)

1 0.8 0.6 0.4 0.2 0

Belo Sun Canaco* Keegan Trelawney Banro San Gold Minefinders Lake Shore Average Romarco Detour Rainy River CGA Mining Osisko Claude Resources Golden Star Semafo Kirkland Lake

* Valuation based on assumed ounces and is not based on a compliant resource estimate. Source: CIB C World Markets Inc.

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 all options and warrants are exercised and include our expectation for a share issue into our estimated count.


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Exhibit 12. Estimate Of Income From Magambazi For 20112016E ($ mlns., except w here noted)
Gold Prices Assumption US$/oz. Production (000 oz.) Cash Costs (US$/oz.) Capital Expenditures Revenues Ex penses Operating Expenses D,D&A, Reclamation S,G&A Ex ploration Other Total Expenses Income Before Tax Income Tax es (Rec.) Net Income EPS ($) CFPS ($) Shares Outstanding (mlns.)
Source: CIB C World M arkets Inc.

2011E $1,650 0 0 0 0 0 0 4 41 2 47 (47) (0) (47) (0.24) (0.23) 199

2012E $2,000 0 0 0 0 0 0 5 40 2 47 (47) (0) (47) (0.24) (0.23) 200

2013E $2,200 0 0 0 0 0 0 5 30 0 35 (35) (0) (35) (0.17) (0.17) 201

2014E $1,500 0 0 275 0 0 0 5 25 0 30 (30) (0) (30) (0.11) (0.11) 264

2015E $1,500 109 495 90 164 54 22 10 20 0 106 58 17 40 0.15 0.26 273

2016E $1,500 277 374 25 416 104 56 8 7 0 177 239 72 167 0.61 0.95 273

Site Visit
We attended a Canaco-organized site visit to the Magambazi project this past June. We travelled via truck on public roadways from Dar es Salaam to the project site. The site visit allowed us to view the access to the site from the closest port location and the amount of regional infrastructure in place. While on site we were provided access to the drilling program and visited all diamond drills in operation on site. We also toured the camp that hosts the core processing facilities and technical services buildings and housing. In our opinion, the site was very well organized and will be sufficiently suited to provide reliable quality results. The site is operated by Tanzanian staff and managed by Tanzania Canaco President, Denis Dillip. The analyst who covers Canaco Resources Inc. attended a site visit to the Handeni property in the Tanzania in June, 2011. During this tour, Canaco provided transportation costs to and from the site via truck from Dar es Salaam. CIBC World Markets Inc. assumed all other costs for transportation to Tanzania.

Price Target Calculation

We calculate our price target of $4.50 based on a 0.8x multiple to our 5% discounted NAV calculated at a US$1,500/oz . gold price. We have incorporated assumptions for the total number of ounces and the overall grade that will be defined at the Magambazi deposit within the next 12 to 18 months.


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Key Risks To Price Target

We highlight a number of factors that could affect our projected price target. Resource Estimate: There is a significant risk that our estimates for the number of ounces and grade incorporated into a future resource estimate at Magambazi may not be realized. Our valuation is based on our own non-compliant resource estimate and the amount of ounces extracted through open-pit and underground mining. If either of these assumptions vary from what may be realized in the future, our NAV may be negatively affected. Gold Price Movements: As shown in Exhibit 9, we have demonstrated that our valuation is significantly influenced by the gold price. Although we expect the project could generate positive cash flow even at a gold price of US$800/oz., our NAV estimate could be substantially reduced with a reduction in the price of gold. Capital Requirements: We have established a capital expenditure estimate for Magambazi based on the evaluation of similar-sized projects in a similar geographic area and incorporating an estimate for inflation over several years . We believe that our estimate accurately reflects the actual requirements that will be incorporated into development of the Magambazi project; however, the early stage of the project and the geographic location could lead to unforeseen costs that negatively affect our valuation. Taxation/Royalties: We have estimated the project royalties will be a 5% NSR based on a 4% royalty to the Tanzanian government and a 1% NSR attributable to the property. Our estimate assumes that 1% of the current 2% property royalty is re-purchased by Canaco. The company has indicated that 1% of the NSR is available for repurchase but that formal agreements for repurchase have yet to be determined. We expect the cost to repurchase 1% of the royalty will not exceed $5 million. It is possible that the property royalty may remain at 2%, which would reduce our NAV by approximately $0.10/share. We also note that there has been discussion within Tanzania over the past several years about a substantial increase in mining royalties or taxation. Although we do not expect a royalty or tax increase within the next decade, it is possible. Any increases would ultimately reduce our NAV estimate. Financing: Canaco has sufficient funding to continue exploration for the next three years based on our exploration spending assumptions. If the exploration budget is reduced from $40 million per year, current finances would allow exploration to continue beyond three years. We also expect that Canaco will be able to sufficiently finance development of the project to production by means of a share issue and securing debt. As we expect Canaco will need to secure debt to develop the project, there is no guarantee that financing will be available through debt in the future. We also cannot guarantee that there will be sufficient demand to warrant a substantial issue of shares in the next two to three years. We have assumed that equity financing will be available within a specific price range. Currency: Variations in the three main currencies incorporated into our valuation, the Canadian and U.S. dollars and Tanzania shilling, have a strong influence on our NAV estimate and potential revenues. We have assumed an exchange rate of 1:1 for US$:C$ and 1:1600 for US$:TZS$. Variation in foreign exchange from our estimates could negatively affect our valuation.


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Appendix A. Property And Geological Overview

Gold mineralization was first recognized in the Magambazi region in 2003 and Midland Minerals (MEXTSX-V) was the first company granted a preliminary prospecting license on the Handeni project in July 2005. Little to no work was completed on the property until March 15, 2007, when Canaco entered into an agreement to acquire a 60% interest in the prospecting license held by Midland. Between March 2005 and July 2007, Canaco successfully increased its land holdings and interest in the area from othe r parties, including Midland Minerals, Douglas Lake Minerals (DLKMOTC) and local miners. Canaco held a 60% interest in the 2,700 km2 New Kilindi Prospecting license from Midland, a 70% interest in the 195 km2 Negero prospecting license, and the 575 km2 Kw adijava reconnaissance license. In 2007 Canaco obtained a 100% interest in the two key tenured blocks of Magambazi and Kilindi. These blocks are nearly 100 km2. There are a number of artisanal mining operations operating on the property, targeting both alluvial cover and hard-rock. Exhibit 13 displays the two primary blocks held by Canaco. There are two small claims within the Kilindi block that are not included in the areas held by Canaco . These claims encompass known mineralization and Canaco is engaging the property holders to potentially obtain rights to the claims . If Canaco is unsuccessful in obtaining these claims, our valuation would not be materially impacted.

Exhibit 13. Handeni Property Tenure Map

Source: Company reports.


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Regional Geology
(Sourced from company reports) The Handeni property has been classified as being located within the Proterozo ic Usugaran-Ubendian System. The system is north-south trending and is dominated by high-grade metamorphic rocks of granulite to amphibolite facies. The Usugaran system is located to the southeast of the Lake Victoria Archean craton that hosts other large gold deposits in the Lake Victoria region such as Geita and Bulyanhulu. Dominant rock types in the region are granulites and biotite gneisses with lesser amphibolites, meta -volcanics, gabbro and ultramafic volcanics. With high-grade metamorphism in the region, mining of colored gemstones from the system has occurred for decades. Exhibit 14 displays the major gold deposits in Tanzania relative to the location of the Handeni property.

Exhibit 14. Gold Deposits Of Tanzania

Source: Company reports.

The Handeni region is thought to be an area of interest for hosting potential orogenically derived gold mineralization, similar to that found in the Lake Victoria Goldfields. It has been theorized that such deposits may be found along the periphery of Archean cratons and that they may be , in fact, reworked Archean orogenic gold deposits, rather than of Proterozoic age. The Archean age of formation has some support through geochronological work completed that suggests the Kilindi-Handeni Superterrane represent Archean belts that have been overprinted by Neoproterozoic orogrenic metamorphism related to the East African Orogen. As such, gold mineralization in the Handeni property and the Magambazi deposit may represent discovery of a large -scale gold deposit in an atypical terrane. Exhibit 15 outlines the major geologic components of Tanzania , including the relationship between the north-south trending Kilindi-Handeni Superterrane and the Archean cratonic rocks that host deposits in the Lake Victoria region.


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Exhibit 15. Regional Geology Map Of Tanzania

Source: Company reports.

Local Geology
The local geology observed by mapping and drilling is recognized to be an analogous representation of the geology within the Kilindi District. There has been limited mapping performed in the area as much of the region is covered by a layer of saprolitic material. Presence of covering material is evidence of a lack of glaciation in the region, as well as abundant weathering. Fabric within mapped outcrop is variable throughout the property and indicates that significant deformation has occurred. The Magambazi ridge has been a source of much of the local understanding of geological relationships as it has a substantial topographical relief and contains some exposure from artisanal mining (Exhibit 16). The two dominant rock types are amphibolites and variable gneisses. The gneissic units are distinguished by alteration assemblage and are noted as quartz -biotite-kyanite, K-feldsparquartz, biotite-quartz and granitic gneiss. The gneissic units typically display stronger fabric with greater foliation and compositio nal banding. The reduced foliation and banding within the amphibolite suggest that it likely had a different protolith than the gneissic units. The Magambazi ridge is recognized currently as the primary host for gold mineralization. Mineralization is observed as high-grade gold hosted within sulphide -bearing gold grains surrounded by lower-grade gold with disseminated sulphides. Exhibit 16 is a photo of the Big Pit at Magambazi that was developed by artisanal miners along recognized gold mineralization. Note that there is a person circled in red for scale.


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Exhibit 16. Photo Of The Magambazi Big Pit

Source: Company reports.

The Magambazi ridge itself has been interpreted to be a regional synformal feature with alternating amphibolite and gneissic units. It was initially believed that the majority of gold mineralization was restricted to the lower amphibolites but Canaco has recently recognized that gold mineralization is present in some of the gneissic material. As such, the co mpany has now begun sampling both the gneissic and amphibolite material. With increased drilling providing further information regarding property geology, structures such as local faulting are recognized to have an influence on ore placement. It is possible that these local structures post-date most of the mineralization and, therefore, are not related to original emplacement but do affect current orientation of ore -grade mineralization. Understanding of the local structures will be a critical task for Canaco in properly interpreting ore relationships and accurately estimating resources. Exhibit 17 displays a typical vertical section within the Magambazi Main Lode. The section displays drill hole traces colored to show an upper-most gneissic unit that is underlain by an amphibolite unit. Mineralization occurs predominantly in the amphibolite unit and is delineated by the shaded regions.


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Exhibit 17. A Vertical Section Of The Magambazi Main Lode (Section 60,670N)

Source: Company reports.

Gold mineralization within the Magambazi lodes is defined as being structurally controlled and having a strong relation to quartz veining that was emplaced due to orogenic deformation. Gold is also associated with sulphide mineralizatio n in the form of pyrrhotite and arsenopyrite with rare pyrite. There is also locally moderate to strong graphite mineralization associated with gold. Gold appears to have a strong correlation to arsenopyrite mineralization as sections of core that have a recognizable increase in arsenopyrite concentration also frequently contain elevated gold content. There is a significant amount of free gold that has been observed in drill core and suggests that some gold may have disassociated from sulphide (arsenopyrite) mineralization during high-grade metamorphism. Although mineralization at Magambazi may be atypical compared to other orogenic greenstone belts, Canaco has suggested that there may be parallels between mineralization at Magambazi and high-grade metamorphic deposits in Western Australia. Exhibit 18 is two photos of drill core from MGBZD001, the first drill hole through the Magambazi Lode. Photo A is of siliceous high-grade gold ore with free gold (circled in yellow). Photo B shows a quartz vein cross -cutting the garnet-rich amphibolite and contains free gold (circled in black). Note that both occurrences of free gold are associated with arsenopyrite mineralization.


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Exhibit 18. Photo Of Drill Core From The Magambazi Main Lode.

Source: Company reports.


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Appendix B. Management Group

Andrew Lee Smith President And CEO
Andrew Lee Smith (BSc. Earth Sciences), the co-founder of Canaco, is a Professional Geologist (Association of Professional Engineers and Geoscientist of British Columbia) with over 25 years experience in exploration and project development. He has over 25 years of experience in exploration, development and operation of North American base and precious metals mining and gem projects. In addition to Canaco, Mr. Smith is the President, CEO and a Director of Tigray Resources Inc. and a Director of True North Gems. His credits include the Mining Entrepreneur of the Year Award in 1994 from the Quebec Prospectors Association, and the Outstanding Alumnus of 2009 by the Science Faculty of the University of Waterloo .

Jeff Heidema Vice President Exploration

Jeff Heidema (P.Geo) has over 25 years of experience in exploration with Cominco, Teck Cominco and Teck. He has been with Canaco since December 2010. Exploration project management has been Mr. Heidemas focus in grass roots to near mine exploration programs. He has extensive experience in agreement and tenure management and specializes in Volcanogenic Massive Sulphide (VMS) and Archean gold exploration. Mr. Heidema is also Vice President Exploration of Tigray Resources Inc.

Shannon Ross Chief Financial Officer

Shannon Ross (CA) has over 25 years experience in accounting and financial management. She obtained a B.Comm from the University of Alberta, beginning her career in public practice. Ms. Ross was formerly the internal auditor for Cominco Ltd., as well as serving as CFO and Corporate Secretary for Northern Orion Resources, ValGold Resources, Sultan Minerals and Emgold Mining. She joined Canaco in December 2010 and is also Chief Financial Officer for Tigray Resources Inc.

Nick Watters Director Business Development

Nick Watters co-founded Canaco with CEO Andrew Smith in 2003 and was appointed to Director Business Development in December 2010. Mr. Watters has been an intricate part of the companys growth, particularly in the raising of nearly $200 million since inception. He began his career in the corporate communications field, working in several sectors, including the mining, high-tech and biotech industries. Mr. Watters has been integral in raising substantial financing for Canaco since its inception. Mr. Watters holds the same position for Tigray Resources Inc.

Meghan Brown Director Investor Relations

Meghan Brown joined Canaco in December 2010 and has 20 years of experience in communications and investor relations, primarily in the resources sector. She holds a BA from the University of British Columbia and an MBA from Queens University. Since beginning her career with Suncor Energy, she has worked for TransCanada, Placer Dome and, most recently, Ventana Gold. During her tenure with Ventana, the company was the top-performing gold equity on the TSX. Meghan is the current President of the BC Board of Directors of the Canadian Investor Relations Institute and is als o Director Investor Relations for Tigray Resources Inc.


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Dr. David Groves Director Project Development

Dr. Groves (P.Geo) is a Professor Emeritus at the Centre for Exploration Targeting of University Western Australia s Centre for Global Metallogeny. He is a multi-published author and co-author of more than 500 papers. Dr. Groves specializes in Archean evolution, the nature and genesis of orogenic gold deposits, global metallogeny and conceptual targeting of mineral deposits. He is the former President of the Geological Society of Australia and the Society of Economic Geologists. Dr. Groves is the President-Elect of the European Society of Economic Geologists and has received distinctions such as the Silver Medal of the Society of Economic Geologists, the Geological Association of Canada Medal, and the Society for Geology Applied to Mineral Deposits SGA-Newmont Gold Medal. Dr. Groves is also Director Project Development for Tigray Resources Inc.

Iain Groves Senior Exploration Geologist

Iain Groves (P.Geo) has 22 years experience in exploration and the elements of implementation of exploration programs. In addition to Canaco, he is the Senior Exploration Geologist with Tigray Resources and True North Gems and a Consulting Geologist to AngloGold Ashanti. Mr. Groves attended the University of Western Australia where he obtained a BSc and First Class Honours Degree in Economic Geology. He has earned seven awards, including the AusIMM Prize for Geology and the GSWA Award for Field Mapping. Mr. Groves is also a multi-published author.

Denis Dillip President Canaco Tanzania

Denis Dillip is Canacos lead Project Geologist in Tanzania and the Chief Geologist for Canaco Tanzania Limited, a wholly owned subsidy of Canaco. Mr. Dillip has over 10 years of experience in planning and execution of regional and detailed gold exploration programs. He holds a BSc (Honours) in Geology from the University of Dar es Salaam and began his career with AngloGold Ashanti as a Mine Geologist. Mr. Dillip has managed two projects, Mkurumu and Njoge where he was Project Geologist. Starting as a Project Geologist, Mr. Dillip has since become Chief Geologist for Ca naco Tanzania Limited.

Sinotech Members (From Company Reports) Chaoxian Zhou Deputy General Manager
Mr. Zhou joined Sinotech Minerals Exploration Co., Ltd. in 2009. He holds a BEng from Jilin University and an MSc from the Chinese Academy of Sciences, and was a PhD student at Washington University in St. Louis. He has 10 years of experience in base and precious metals resources, and oil and gas exploration with Zijin Mining and China National Offshore Oil Company. Mr. Zhou has successfully planned, directed and participated in exploration projects and mining geology with Zijin, and has extensive experience evaluating ore deposits.

Lingling Yang Director Corporate Communications

Ms. Yang is Deputy Manager of the Department of International Cooperation of Sinotech Minerals Exploration Co., Ltd. She is experienced in corporate communications for her skills in corporate culture publication, corporate promotion, info diffusion and internal and external coordination. Since joining Sinotech in 2008, she has been playing an active and beneficial role in the promotion of the image and core competitiveness of the company. Ms. Yang is also Director Corporate Communications for Tigray Resources Inc.


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Our EPS estimates are shown below:

1 Qtr. 2011 Current 2012 Current 2013 Current ----

2 Qtr. ----

3 Qtr. ----

4 Qtr. ----

Yearly ($0.24E) ($0.24E) ($0.17E)

Our CFPS estimates are shown below:

1 Qtr. 2011 Current 2012 Current 2013 Current ----

2 Qtr. ----

3 Qtr. ----

4 Qtr. ----

Yearly ($0.23E) ($0.23E) ($0.17E)


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Analyst Certification: Each CIBC World Markets research analyst named on the front page of this research report, or at the beginning of any subsection hereof, hereby certifies that (i) the recommendations and opinions expressed herein accurately reflect such research analyst's personal views about the company and securities that are the subject of this report and all other companies and securities mentioned in this report that are covered by such research analyst and (ii) no part of the research analyst's compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed by such research analyst in this report. Potential Conflicts of Interest: Equity research analysts employed by CIBC World Markets are compensated from revenues generated by various CIBC World Markets businesses, including the CIBC World Markets Investment Banking Department. Research analysts do not receive compensation based upon revenues from specific investment banking transactions. CIBC World Markets generally prohibits any research analyst and any member of his or her household from executing trades in the securities of a company that such research analyst covers. Additionally, CIBC World Markets generally prohibits any research analyst from serving as an officer, director or advisory board member of a company that such analyst covers. In addition to 1% ownership positions in covered companies that are required to be specifically disclosed in this report, CIBC World Markets may have a long position of less than 1% or a short position or deal as principal in the securities discussed herein, related securities or in options, futures or other derivative instruments based thereon. Recipients of this report are advised that any or all of the foregoing arrangements, as well as more specific disclosures set forth below, may at times give rise to potential conflicts of interest.

Important Disclosure Footnotes for Canaco Resources Inc. (CAN)

2g 7 CIBC World Markets Inc. expects to receive or intends to seek compensation for investment banking services from Canaco Resources Inc. in the next 3 months. CIBC World Markets Corp., CIBC World Markets Inc., and their affiliates, in the aggregate, beneficially own 1% or more of a class of equity securities iss ued by Canaco Resources Inc.


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Important Disclosure Footnotes for Companies Mentioned in this Report that Are Covered by CIBC World Markets Inc.:
Stock Prices as of 10/31/2011: Banro Corporation (2a, 2e) (BAA-TSX, $4.25, Sector Outperformer) Barrick Gold Corporation (2a, 2d, 2e, 2f, 7) (ABX-NYSE, US$49.76, Sector Performer) Belo Sun Mining Corp. (BSX-V, $1.20, Sector Outperformer) CGA Mining Limited (2g, 7) (CGA-TSX, $2.48, Sector Outperformer) Claude Resources Inc. (2g) (CRJ-TSX, $1.95, Sector Performer) Detour Gold Corporation (2a, 2c, 2e, 2g) (DGC-TSX, $33.16, Sector Outperformer) Gabriel Resources Ltd. (2g) (GBU-TSX, $7.26, Sector Performer) Golden Star Resources Ltd. (2g) (GSS-AMEX, US$2.02, Sector Performer) Keegan Resources Inc. (2a, 2c, 2e , 2g) (KGN-TSX, $6.05, Sector Outperformer) Kirkland Lake Gold Inc. (2g) (KGI -TSX, $18.75, Sector Outperformer) Lake Shore Gold Corp. (2a, 2c, 2e, 2g) (LSG-TSX, $1.52, Sector Underperformer) Minefinders Corporation Ltd. (2a, 2c, 2e, 2g) (MFL-TSX, $14.23, Sector Performer) Nevsun Resources Ltd. (2g) (NSU-TSX, $5.34, Sector Performer) Orezone Gold Corporation (2a, 2c, 2e, 2g) (ORE-TSX, $3.61, Sector Outperformer) Osisko Mining Corporation (2a, 2c, 2e, 2g) (OSK-TSX, $12.09, Sector Outperformer) Rainy River Resources Ltd. (2g) (RR-TSX, $7.20, Sector Underperformer) Romarco Minerals Inc. (2g) (R-TSX, $1.00, Sector Performer) Rubicon Minerals Corporation (2g) (RMX-TSX, $4.07, Sector Underperformer) San Gold Corporation (2a, 2e, 2g) (SGR-TSX, $2.08, Sector Outperformer) Semafo Inc. (2g) (SMF-TSX, $7.69, Sector Outperformer) Trelawney Mining and Exploration Inc. (2g) (TRR-V, $3.68, Sector Performer)

Companies Mentioned in this Report that Are Not Covered by CIBC World Markets Inc.:
Stock Prices as of 10/31/2011: AngloGold Ashanti Limited (AU-NYSE, US$45.34, Not Rated) Cluff Gold plc (CLF-L, p91.00, Not Rated) Douglas Lake Minerals Inc. (DLKM-OTC, US$0.19, Not Rated) Midland Minerals Corporation (MEX-V, $0.07, Not Rated) Tigray Resources Inc. (TIG-V, $1.45, Not Rated) Important disclosure footnotes that correspond to the footnotes in this table may be found in the "Key to Important Disclosure Footnotes" section of this report.


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Key to Important Disclosure Footnotes:

1 2a 2b 2c 2d 2e 2f 2g 3a 3b 3c 4a 4b 4c 5a 5b 6a 6b 7 8 9 CIBC World Markets Corp. makes a market in the securities of this company. This company is a client for which a CIBC World Markets company has performed investment banking services in the past 12 months. CIBC World Markets Corp. has managed or co -managed a public offering of securities for this company in the past 12 months. CIBC World Markets Inc. has managed or co -managed a public offering of securities for this company in the past 12 months. CIBC World Markets Corp. has received compensation for investment banking services from this company in the past 12 months. CIBC World Markets Inc. has received compensation for investment banking services from this company in the past 12 months. CIBC World Markets Corp. expects to receive or intends to seek compensa tion for investment banking services from this company in the next 3 months. CIBC World Markets Inc. expects to receive or intends to seek compensation for investment banking services from this company in the next 3 months. This company is a client for which a CIBC World Markets company has performed non-investment banking, securities-related services in the past 12 months. CIBC World Markets Corp. has received compensation for non-investment banking, securities-related services from this company in the past 12 months. CIBC World Markets Inc. has received compensation for non-investment banking, securities-related services from this company in the past 12 months. This company is a client for which a CIBC World Markets company has performe d non-investment banking, non-securities-related services in the past 12 months. CIBC World Markets Corp. has received compensation for non-investment banking, non-securities-related services from this company in the past 12 months. CIBC World Markets Inc. has received compensation for non-investment banking, non-securities-related services from this company in the past 12 months. The CIBC World Markets Corp. analyst(s) who covers this company also has a long position in its common equity securities. A member of the household of a CIBC World Markets Corp. research analyst who covers this company has a long position in the common equity securities of this company. The CIBC World Markets Inc. fundamental analyst(s) who covers this company a lso has a long position in its common equity securities. A member of the household of a CIBC World Markets Inc. fundamental research analyst who covers this company has a long position in the common equity securities of this company. CIBC World Markets Corp., CIBC World Markets Inc., and their affiliates, in the aggregate, beneficially own 1% or more of a class of equity securities issued by this company. An executive of CIBC World Markets Inc. or any analyst involved in the preparation of this research report has provided services to this company for remuneration in the past 12 months. A senior executive member or director of Canadian Imperial Bank of Commerce ("CIBC"), the parent company to CIBC World Markets Inc. and CIBC World Markets Corp., or a member of his/her household is an officer, director or advisory board member of this company or one of its subsidiaries. Canadian Imperial Bank of Commerce ("CIBC"), the parent company to CIBC World Markets Inc. and CIBC World Markets Corp., has a significant credit relationship with this company. The equity securities of this company are restricted voting shares. The equity securities of this company are subordinate voting shares. The equity securities of this company are non-voting shares. The equity securities of this company are limited voting shares.

10 11 12 13 14


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CIBC World Markets Inc. Price Chart

No rating history data found for Canaco Resources Inc.


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CIBC World Markets Inc. Stock Rating System

Abbreviation Stock Ratings SO SP SU NR R O M U NA Sector Outperformer Sector Performer Sector Underperformer Not Rated Restricted Overweight Market Weight Underweight None Stock is expected to outperform the sector during the next 12-18 months. Stock is expected to perform in line with the sector during the next 12-18 months. Stock is expected to underperform the sector during the next 12-18 months. CIBC World Markets does not maintain an investment recommendation on the stock. CIBC World Markets is restricted*** from rating the stock. Sector is expected to outperform the broader market averages. Sector is expected to equal the performance of the broader market averages. Sector is expected to underperform the broader market averages. Sector rating is not applicable. Rating Description

Sector Weightings**

**Broader market averages refer to the S&P 500 in the U.S. and the S&P/TSX Composite in Canada. "Speculative" indicates that an investment in this security involves a high amount of risk due to volatility and/or liquidity issues. ***Restricted due to a potential conflict of interest.

Ratings Distribution*: CIBC World Markets Inc. Coverage Universe

(as of 31 Oct 2011) Sector Outperformer (Buy) Sector Performer (Hold/Neutral) Sector Underperformer (Sell) Restricted (as of 31 Oct 2011) Sector Outperformer (Buy) Sector Performer (Hold/Neutral) Sector Underperformer (Sell) Restricted Count 157 151 25 14 Count 24 22 6 2 Percent 45.1% 43.4% 7.2% 4.0% Percent 44.4% 40.7% 11.1% 3.7% Inv. Banking Relationships Sector Outperformer (Buy) Sector Performer (Hold/Neutral) Sector Underperformer (Sell) Restricted Inv. Banking Relationships Sector Outperformer (Buy) Sector Performer (Hold/Neutral) Sector Underperformer (Sell) Restricted Count 149 135 22 13 Count 21 21 6 2 Percent 94.9% 89.4% 88.0% 92.9% Percent 87.5% 95.5% 100.0% 100.0%

Ratings Distribution: Precious Metals Coverage Universe

Precious Metals Sector includes the following tickers: ABX, AEM, AGI, ANV, ARZ, AUQ, AUY, BAA, BSX, CAN, CDE, CG, CGA, CRJ, DGC , EDR, EGO, FNV, FR, FVI, GBU, GCU, GG, GSS, HL, IAG, KGC , KGI, KGN, LSG, MFL, NEM, NGD, NSU, ORE, OSK, PAAS, PLG, PRU, PVG, QMI, R, RGLD, RIC, RMX, RR, SGR, SLW, SMF, SSRI, SVM, TGZ, THO, TRR. *Although the investment recommendations within the three -tiered, relative stock rating system utilized by CIBC World Markets Inc. do not correlate to buy, hold and sell recommendations, for the purposes of complying with NYSE and NASD rules, CIBC World Markets Inc. has assigned buy ratings to securities rated Sector Outperformer, hold ratings to securities rated Sector Performer, and sell ratings to securities rated Sector Underperformer without taking into consideration the analyst's sector weighting.

Important disclosures required by IIROC Rule 3400, including potential co nflicts of interest information, our system for rating investment opportunities and our dissemination policy can be obtained by visiting CIBC World Markets on the web at under 'Quick Links' or by writing to CIBC World Markets Inc., Brookfield Place, 161 Bay Street, 4th Floor, Toronto, Ontario M5J 2S8, Attention: Research Disclosures Request.


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