August 31, 2011 

Exploration and Development

Goldgroup Mining Inc.
GGA : TSX : C$1.50 | C$180 M
Speculative Buy, C$2.50

Production, development and growth, a new producer emerges in Mexico;  Canaccord initiates coverage with a SPEC BUY rating and C$2.50 target (full report)

We are initiating coverage on Goldgroup Mining with a SPECULATIVE BUY recommendation based on the following rationale:

• Organic growth profile: The Caballo Blanco project (JV with Almaden Minerals) could produce 107,000 oz of gold per year with a production start likely in late 2012. The San Jos� de Gracia gold project (JV with DynaResource de Mexico SA) could produce roughly 87,000 oz Au per year, with production anticipated by 2014. Combined with Cerro Colorado, these projects should enable the company to ramp up gold production to more than 137,000 ounces in 2014.

• Revaluation with production expansion: Goldgroup is trading at 0.40x P/NAV (5%, spot) and 2.1x 2013E CFPS versus the junior producer average of 0.76x and 8.8x 2013E CFPS. As investors recognize Goldgroup's growth profile, its valuation should begin to catch up with the peer group average.

• Potential to rationalize and consolidate: By consolidating Almaden's 30% interest in Caballo Blanco and DynaResource's 50% interest in San Jos� de Gracia, Goldgroup�s share of production could increase to more than 200,000 ounces of gold by 2014.

We estimate a peak gold price NAVPS of C$3.22 (5%, US$1,750/oz Au) for Goldgroup. Our target price is based on a 0.75x multiple to our peak gold NAVPS estimate. This gives us a 12-month target price of C$2.50 per share (rounded). We initiate coverage on Goldgroup Mining Inc. with a SPECULATIVE BUY recommendation.