Anyone who has followed this stock here for a while will know...

Anyone who has followed this stock here for a while will know that I've been highly critical of this entire deal.

Well, I've now changed my opinion (with a twist) and I thought that I should put it on the table, so to speak.

I haven't changed my opinion of CDE's major projects - Kensington has Buckley's of proceeding and Bolivia has huge sovereign risk.

My opinion has changed in relation to two critical aspects and both of them have to do with BSG.

To put things in context, I have owned some BSG since it was 36c and all it had was a tailings dump in Georgia. Most of my current holding was acquired between their first purchase of Mexican tenements (which were sold to Gammon Lake) and their acquisition of Palmerejo. So, I'm not a Johnny-come-lately to the stock.

Those who have been following the BSG threads in recent times will also know that I have been one of the most ardent critics of the deal. The reason for my post today is that I have changed my opinion. I now think that is should be approved.

I haven't changed my opinion about CDE - I still think they are a bit of a dog of a company. I also haven't changed my opinion about BSG's tenements - they appear to be some of the richest silver prospects in the World (and they've drilled out 91,000m, so if there's still any silver left in the ground to mine, there must be bucket loads of the stuff, because that's one hell of a lot of drilled-out earth).

What changed my opinion was today's comment that capital development expenditure is estimated at $US200m vs. the original (Nov 06) estimate from BSG of $US75m.

Now, Bradleyvonx has correctly pointed out that the original $US75m estimate did not include the underground aspects of the project. However, it was also indicated that, when CDE originally announced their bid, they thought the open pit + underground would be about $US125m. It would seem that due diligence has increased this by 60%, to the $200m estimated today.

I had also asked the question as to whether or not anyone had seen a full feasibility study into the project. Once again, Bradleyvonx confirmed that there hadn't been one (because they didn't need one, as they estimated they had enough capital to execute, without a bank loan required).

Having thought about and investigated this, it's an unusual practice to start development work without a feasibility study, even where you have the capital to execute. Having said that, it's also unusual to keep getting the outrageous grades from drill holes which BSG were ostensibly always getting (hell, I remember them putting down a drill hole for a tailings dam about a year ago and having it come up so silver-rich that they had to move it).

So, you kind of don't worry too much when they tell you that the feasibility study is in the works, but in the meantime, we'll build an access road...or buy a
crushing plant...or start concrete works. It's kind of a fait accompli that it will go ahead and be profitable.

Unless...you get halfway through the development and discover that you've underestimated its cost and you'll run out of money before it's finished.

After seeing the new costs estimates, I went back and had a look at the past 18 months' announcements on this project. They were enlightening. The original plan had us pumping out silver ingots around about now.

Then came the Canadian listing of Palmerejo and the $US75m capital raising (April 06). On estimates at the time, that was plenty enough to bring us to production.

However, I just had a look at their latest cashflow report (a few months out of date now) and it indicated that they'd already spent $US35m and only had about the same left over.

In other words, while our directors were proud to announce, over the past few months, outrageously good assay results from drill holes into prospects, they failed to announce to us the most important thing for any mining company - that they would run out of money before the development was completed!

Panic stations were apparently declared - they must either go back to the market and attempt to raise about the same amount they had raised 12 months earlier, or find a suitor who had the cash reserves to carry them through to production. Critically, they had to do it quickly.

Just as critically, they had $US35m left at the end of March 07 and it's now July '07. We have not had any cash update from them recently. They must have spent a fair bit during the intervening 3 months and, if the CDE deal was called off, they would be looking at a significant capital raising, post haste.

Given all this, it's no wonder BSG extended (then extended further) the due diligence period.

So, at the time of announcement, CDE thought they were buying into a company which had a fully-funded-to-production project. Adding underground, they might have to spend an extra $US50m. Lo and behold, after due diligence they realized they would actually need to spend $125m, for a total of $US200m.

The BSG Board were in an invidious position: go back to the market for more money, or find a suitor with enough money to carry them over. Norm couldn't understand why we didn't think it was a good deal - that was because he knew how much it was going to cost to put it into production. We didn't.

In point of fact, my assessment is that CDE didn't know how much it would cost them to get to production when they signed up. I suspect that the reason why the due diligence process was extended, then extended, then extended some more, was because they couldn't believe how much the costs were blowing out on a supposedly fully-costed project (note to self and Bradleyvonx: feasibility studies are worth it, even if a bank isn't involved).

At the time the deal was sealed, BSG was worth around $A1bn. It's now worth about $800m. CDE is worth a few hundred million more. However, CDE has enough cashflow to fund Palmerejo to completion (especially now that Kensington is a write-off). Today's announcement indicated that CDE thought they would have enough cash resources to fund the entire project. No dilution - that's great.

Should this deal go through, BSG shareholders do not get the dilution which would occur if we'd needed to raise an additional $US50m - $US125m of capital. We get the project value as at the date the agreement was signed.

We take on the risk of CDE's assets/structure/management, but here's the key point - until today's announcement, we thought we had a fully-funded, close to development, multi-hundred million dollar company.

As of today, we know we have a company with an almighty project, which was just about to go broke before it mined its first ounce.

I now support the deal, but will never again invest in a company involving Norm Seckhold.

[Disclosure: I sold half my holding today. I will think hard about the remainder - six figures, in dollar terms - but I think the merger is a better option than further dilution of our capital.]