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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington D.C. 20549

SCHEDULE 14A

(Rule 14a-101)

INFORMATION REQUIRED IN PROXY STATEMENT

SCHEDULE 14A INFORMATION

Proxy Statement Pursuant to Section 14(a) of the

Securities Exchange Act of 1934

 

Filed by the Registrant		x
Filed by a party other than the Registrant		¨

Check the appropriate box:

 

¨

Preliminary Proxy Statement

¨

Confidential, for the use of the Commission only (as permitted by Rule 14a-6(e)(2))

x

Definitive Proxy Statement

¨

Definitive Additional Materials

¨

Soliciting Material Pursuant to §240.14(a)-12

CAPITAL GOLD CORPORATION

(Name of Registrant as Specified in its Charter)

n/a

(Name of Person(s) Filing Proxy Statement, if other than the Registrant)

Payment of Filing Fee (Check the appropriate box):

 

x

No fee required.

 

¨

Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.

 

1.

Title of each class of securities to which transaction applies:

2.

Aggregate number of securities to which transaction applies:

3.

Per unit price or other underlying value of transaction computed pursuant to Exchange Act Rule 0-11 (set forth the amount on which the filing fee is calculated and state how it was determined):

4.

Proposed maximum aggregate value of transaction:

5.

Total fee paid:

 

¨

Fee paid previously by written preliminary materials.

¨        Check box if any part of the fee is offset as provided by Exchange Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid previously. Identify the previous filing by registration statement number, or the Form or Schedule and the date of its filing.

 

1.

Amount Previously Paid:

2.

Form, Schedule or Registration Statement No.:

3.

Filing Party:

4.

Date Filed:

 

 

 

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PROPOSED MERGER TRANSACTION — YOUR VOTE IS VERY IMPORTANT

Capital Gold Corporation, or CGC or Capital Gold, has entered into an Agreement and Plan of Merger, dated October 1, 2010, as amended on October 29, 2010, which we refer to collectively as the merger agreement, among CGC, Gammon Gold Inc., or Gammon Gold, and Capital Gold AcquireCo, Inc., a wholly-owned subsidiary of Gammon Gold, which provides for Gammon Gold to acquire CGC. If the merger is completed, you will receive 0.5209 common shares of Gammon Gold and a cash payment in the amount of U.S.$0.79 per share (plus cash in lieu of any fractional share interests) for each share of CGC common stock you hold immediately prior to the completion of the merger, unless you exercise and perfect your appraisal rights under the Delaware General Corporation Law, or DGCL. The exchange ratio of 0.5209 Gammon Gold common shares for the stock consideration portion is fixed and will only be adjusted in limited circumstances. The exchange ratio will not be adjusted to reflect changes in the stock price of Gammon Gold or CGC. The dollar value of the stock consideration portion CGC stockholders may receive will change depending upon changes in the market price of Gammon Gold common shares and will not be known at the time you vote on the merger.

Based upon the closing price of Gammon Gold common shares of U.S.$7.26 as reported on the New York Stock Exchange, or NYSE, on September 24, 2010, the last trading day preceding the announcement by Timmins Gold Corp. detailing its previous non-binding proposal to merge with CGC, the merger consideration represented approximately U.S.$4.57 in value for each share of CGC common stock. Based upon the closing price of Gammon Gold common shares of U.S.$7.01 as reported on the NYSE on September 30, 2010, the last trading day before public announcement of the proposed merger, the merger consideration represented approximately U.S.$4.44 in value for each share of CGC common stock, and based upon the closing price of Gammon Gold common shares as reported on the NYSE on February 14, 2011, the last practicable date before the date of this document, the merger consideration represented approximately U.S.$5.34 in value for each share of CGC common stock. Gammon Gold’s common shares are listed on the NYSE and the Toronto Stock Exchange, or TSX, under the symbols “GRS” and “GAM”, respectively, and CGC’s common stock is listed on the NYSE Amex Equities market, or NYSE Amex, and the TSX under the symbol “CGC”. You should obtain current market quotations for both securities. As of the closing of the merger, it is expected that current CGC stockholders will own approximately 20% of Gammon Gold’s outstanding shares on a fully diluted basis. If the merger is completed, CGC’s common shares will no longer be traded on the NYSE Amex or the TSX.

You are invited to attend a special meeting of CGC’s stockholders to be held at Ballard Spahr LLP, 1735 Market Street, 51^st Floor, Philadelphia, Pennsylvania 19103, on March 18, 2011, at 10:00 a.m. local time. At the special meeting, you will have the opportunity to vote on the proposal to approve and adopt the plan of merger contained in the merger agreement. The CGC board of directors unanimously recommends that you vote “FOR” the proposal to approve the plan of merger and “FOR” the proposal to approve any adjournment or postponement of the special meeting, if necessary or appropriate, including to permit further solicitation of proxies. Once the proposed merger has been approved by CGC’s stockholders and the other closing conditions under the merger agreement have been satisfied or waived, Capital Gold AcquireCo, Inc. will merge with and into CGC, and the separate corporate existence of Capital Gold AcquireCo, Inc. will cease and CGC will survive as a wholly-owned subsidiary of Gammon Gold.

Your vote is very important. Holders of a majority of CGC shares of common stock issued and outstanding and entitled to vote at the special meeting must be present in person or by proxy in order to hold the special meeting and conduct business. Approval of the plan of merger contained in the merger agreement requires (i) the affirmative vote of a majority of the votes entitled to be cast at the special meeting by the holders of CGC common stock and (ii) the affirmative vote of a majority of the votes cast by holders of CGC common stock present in person or represented by proxy at the special meeting and entitled to vote on the matter, excluding the votes cast by certain persons entitled to receive change of control payments in connection with the merger. An abstention or failure to vote or to instruct your broker how to vote will have the same effect as voting against the plan of merger contained in the merger agreement. Whether or not you plan to attend the meeting, please promptly return your completed proxy so that your shares are voted at the meeting. If your shares are held in “street name,” you must instruct your broker in order to vote. The merger does not require the approval of Gammon Gold’s shareholders.

This proxy statement/prospectus contains detailed information about the special meeting, the proposed merger, documents related to the merger and other related matters, and we urge you to read it carefully, including the section entitled “Risk Factors” beginning on page 19.

We appreciate your continued support.

Sincerely,

Chairman of the Board of Directors

NEITHER THE SECURITIES AND EXCHANGE COMMISSION, OR SEC, NOR ANY U.S. STATE OR CANADIAN PROVINCIAL OR TERRITORIAL SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED OF THE SECURITIES TO BE ISSUED IN CONNECTION WITH THE MERGER OR DETERMINED IF THIS PROXY STATEMENT/PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.

The date of this proxy statement/prospectus is February 16, 2011, and it is first being mailed or otherwise delivered to CGC stockholders on or about February 17, 2011.

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REFERENCES TO ADDITIONAL INFORMATION

This proxy statement/prospectus incorporates important business and financial information about CGC and Gammon Gold from documents that are not included in or delivered with this proxy statement/prospectus. This information is available to you without charge upon your written or oral request. You can also obtain the documents incorporated by reference into this proxy statement/prospectus by accessing the SEC’s website maintained at http://www.sec.gov.

In addition, CGC’s filings with the SEC are available to the public on CGC’s website, http://www.capitalgoldcorp.com, and Gammon Gold’s filings with the SEC are available to the public on Gammon Gold’s website, http://www.gammongold.com. Information contained on CGC’s website, Gammon Gold’s website or the website of any other person is not incorporated by reference into this proxy statement/prospectus, and you should not consider information contained on those websites as part of this proxy statement/prospectus.

You can also obtain documents related to CGC and Gammon Gold that are incorporated by reference in this proxy statement/prospectus, other than certain exhibits to the documents, without charge, by requesting them in writing or by telephone from the appropriate company.

 

Gammon Gold Inc. Investor Relations 1701 Hollis Street, Suite 400 Founders Square P.O. Box 2067 Halifax, Nova Scotia, B3J 2Z1 Canada (902) 468-0614 anne.day@gammongold.com		Capital Gold Corporation Investor Relations 76 Beaver Street, 14th Floor New York, New York 10005 (212) 344-2785 kelly@capitalgoldcorp.com

Such documents are also available free of charge under CGC’s and Gammon Gold’s respective profiles on SEDAR (the System for Electronic Document Analysis and Retrieval which has been established by the Canadian Securities Administrators) at http://www.sedar.com.

In addition, if you have questions about the merger or the special meeting, need additional copies of this document or need to obtain proxy cards or other information related to the proxy solicitation, you may contact the appropriate contact listed below. You will not be charged for any of these documents that you request.

Laurel Hill Advisory Group

Toll free telephone: 1-800-385-3006

Brokers and banks, please call: (917) 338-3181

In order to receive timely delivery of requested documents in advance of the special meeting, you should make your request no later than March 4, 2011.

See “Where You Can Find More Information” beginning on page 156.

Information contained in this proxy statement/prospectus regarding Gammon Gold has been provided by, and is the responsibility of, Gammon Gold and information contained in this proxy statement/prospectus regarding CGC has been provided by, and is the responsibility of, CGC. No one has been authorized to give you any other information, and neither Gammon Gold nor CGC take responsibility for any information that others may give you. This proxy statement/prospectus is dated February 16, 2011. You should not assume that the information contained in, or incorporated by reference into, this proxy statement/prospectus is accurate as of any date other than that date. Neither CGC’s mailing of this proxy statement/prospectus to CGC stockholders nor the issuance by Gammon Gold of common shares in connection with the merger will create any implication to the contrary.

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CAPITAL GOLD CORPORATION

NOTICE OF SPECIAL MEETING OF STOCKHOLDERS

TO BE HELD ON MARCH 18, 2011

To the Stockholders of Capital Gold Corporation:

We will hold a special meeting of stockholders of Capital Gold Corporation at Ballard Spahr LLP, located at 1735 Market Street, 51^st Floor, Philadelphia, Pennsylvania, on March 18, 2011, at 10:00 a.m., local time, to consider and vote upon the following matters:

 

1.

a proposal to approve and adopt the plan of merger contained in the Agreement and Plan of Merger, dated as of October 1, 2010, among Gammon Gold Inc., Capital Gold AcquireCo, Inc. and Capital Gold Corporation, as amended on October 29, 2010, pursuant to which Capital Gold AcquireCo, Inc. will merge with and into Capital Gold Corporation, and the separate corporate existence of Capital Gold AcquireCo, Inc. will cease and Capital Gold Corporation will survive as a wholly-owned subsidiary of Gammon Gold Inc., as more fully described in the attached proxy statement/prospectus. A copy of the Agreement and Plan of Merger, as amended, is included as Annexes A and A-1 to the proxy statement/prospectus;

 

2.

a proposal to approve the adjournment or postponement of the special meeting, if necessary or appropriate, including to solicit additional proxies if there are not sufficient votes to adopt the merger agreement at the time of the meeting; and

 

3.

such other business as may properly come before the special meeting or any adjournments or postponements thereof.

The close of business on February 14, 2011 has been fixed as the record date for determining those CGC stockholders entitled to notice of, and to vote at, the special meeting and any adjournments or postponements of the special meeting. Only the holders of record of CGC common stock at the close of business on that date are entitled to notice of, and to vote at, the special meeting and any adjournments or postponements of the special meeting. A list of CGC stockholders eligible to vote at the special meeting will be available for inspection at the special meeting and at the executive offices of CGC during regular business hours for a period of no less than ten days prior to the special meeting.

Approval of the plan of merger contained in the merger agreement requires (i) the affirmative vote of a majority of the votes entitled to be cast at the special meeting by the holders of CGC common stock and (ii) the affirmative vote of a majority of the votes cast by holders of shares of CGC common stock present in person or represented by proxy at the special meeting and entitled to vote on the matter, excluding the votes cast by certain persons entitled to receive change of control payments in connection with the merger.

If you wish to attend the special meeting and your shares are held in the name of a broker, trust, bank or other nominee, you must bring with you a proxy or letter from the broker, trustee, bank or other nominee to confirm your beneficial ownership.

All properly signed and dated proxies that CGC receives prior to the vote at the special meeting, and that are not subsequently revoked, will be voted in accordance with the instructions indicated on the proxies. All properly signed and dated proxies received by CGC prior to the vote at the special meeting that do not provide any instructions as to how to vote with respect to the proposal to approve and adopt the plan of merger contained in the merger agreement will be voted “FOR” the proposal to approve and adopt the plan of merger contained in the merger agreement.

By order of the Board of Directors,

Christopher M. Chipman, Chief Financial Officer and Corporate Secretary

February 16, 2011

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		Page
QUESTIONS AND ANSWERS ABOUT THE SPECIAL MEETING AND RELATED MATTERS			1
SUMMARY			7
RISK FACTORS			19
COMPARATIVE PER SHARE DATA			26
COMPARATIVE PER SHARE MARKET PRICE AND DIVIDEND INFORMATION			28
CURRENCY EXCHANGE RATE DATA			30
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA OF GAMMON GOLD			31
SELECTED HISTORICAL CONSOLIDATED AND COMBINED FINANCIAL DATA OF CAPITAL GOLD			32
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION			35
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS			48
THE SPECIAL MEETING			49
PROPOSAL NO. 1: THE MERGER			54
Background of the Merger			54
CGC’s Reasons for the Merger; Recommendation of the CGC Board of Directors			78
Opinion of Stifel, Nicolaus & Company, Incorporated			80
Review of Cormark Process			88
CGC Unaudited Prospective Financial Information			89
Gammon Gold Unaudited Prospective Financial Information			92
Gammon Gold’s Reasons for the Merger			95
Interests of CGC’s Directors and Executive Officers in the Merger			96
Anticipated Accounting Treatment			97
Regulatory Matters Related to the Merger and Stock Exchange Listings			98
Merger Fees, Costs and Expenses			99
Procedures for Exchange of CGC Stock Certificates			99
Treatment of CGC Warrants, CGC Options and Other Equity-Based Awards			100
Appraisal Rights			100
Resale of Gammon Gold Common Shares			103
Interests of Gammon Gold’s Directors and Executive Officers in the Merger			104
Board of Directors and Executive Officers of Gammon Gold After the Merger; Operations Following the Merger			104
Litigation Related to the Merger			104
Delisting and Deregistration of CGC Common Stock			105
MATERIAL U.S. FEDERAL INCOME TAX CONSIDERATIONS			106
MATERIAL CANADIAN FEDERAL INCOME TAX CONSIDERATIONS			113
THE MERGER AGREEMENT			117
The Merger			117
Closing; Effective Time			117
Merger Consideration			117
Treatment of CGC Warrants, CGC Stock Options and Other Equity-Based Awards			118
Exchange and Payment Procedures			118
Representations and Warranties			119
Conduct of CGC’s Business Pending the Merger			122

 

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TABLE OF CONTENTS (CONT’D)

 

				Page
Conduct of Gammon Gold’s Business Pending the Merger					124
CGC Stockholder Approval; Board Recommendation					125
No Solicitation					126
Regulatory Matters					128
Other Covenants					128
Conditions to the Closing of the Merger					128
Termination					130
Effect of Termination					132
Termination Fees and Expenses					132
Indemnification					133
Amendment and Waiver of the Merger Agreement					133
THE VOTING AND SUPPORT AGREEMENTS					134
INFORMATION ABOUT THE COMPANIES					135
BENEFICIAL OWNERSHIP OF CAPITAL GOLD COMMON STOCK					137
GAMMON GOLD’S BOARD OF DIRECTORS AND EXECUTIVE OFFICERS					138
DESCRIPTION OF GAMMON GOLD SHARE CAPITAL					142
COMPARISON OF SHAREHOLDER RIGHTS					145
PROPOSAL NO. 2: ADJOURNMENT OF THE CAPITAL GOLD SPECIAL MEETING					153
INDEPENDENT AUDITORS					154
LEGAL MATTERS					154
EXPERTS					155
OTHER MATTERS					155
SHAREHOLDER PROPOSALS FOR NEXT ANNUAL MEETING					156
WHERE YOU CAN FIND MORE INFORMATION					156
Annex A —		Agreement and Plan of Merger
Annex A-1 —		Amendment No. 1 to Agreement and Plan of Merger
Annex B —		Form of Voting and Support Agreement
Annex C —		Opinion of Stifel, Nicolaus & Company, Incorporated
Annex D —		Delaware General Corporation Law Section 262
Annex E —		Unaudited Interim Consolidated Financial Statements of CGC’s wholly-owned subsidiary, Nayarit Gold Inc.

 

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QUESTIONS AND ANSWERS ABOUT THE SPECIAL MEETING AND RELATED MATTERS

The following are some questions that you, as a stockholder of CGC, may have regarding the special meeting and the proposed merger, and brief answers to those questions. For more detailed information about the matters discussed in these questions and answers, please read the entire document. CGC and Gammon Gold urge you to read this document carefully because the information in this section does not provide all the information that might be important to you with respect to the proposed merger and the other matters being considered at the special meeting. In this proxy statement/prospectus, the terms “Capital Gold” and “CGC” and any derivation thereof, refer to Capital Gold Corporation prior to the merger with Capital Gold AcquireCo, Inc., a wholly-owned subsidiary of Gammon Gold. All references in this proxy statement/prospectus to dollars, $ or U.S.$ are to U.S. dollars and all references to C$ are to Canadian dollars.

 

Q:	Why am I receiving this proxy statement/prospectus?

 

A:

Under the terms of the merger agreement that is described in this proxy statement/prospectus, Gammon Gold will acquire CGC and CGC will become a wholly-owned subsidiary of Gammon Gold and will no longer be a publicly held corporation. Please see “Proposal No. 1: The Merger” and “The Merger Agreement.” A copy of the merger agreement is included in this proxy statement/prospectus as Annexes A and A-1.

This document is both a proxy statement of CGC and a prospectus of Gammon Gold. It is a proxy statement of CGC because the CGC board of directors is soliciting proxies from its stockholders to vote on the proposal to approve and adopt the plan of merger contained in the merger agreement at a special meeting of its stockholders, as well as the other matters set forth in the notice of the special meeting and described in this proxy statement/prospectus, and your proxy will be used at the special meeting or at any adjournment or postponement of the special meeting. It is a prospectus because Gammon Gold will issue Gammon Gold common shares to the holders of CGC common stock in the merger. This document contains important information about the merger agreement, the merger and the special meeting of the stockholders of CGC. You should read this document carefully.

 

Q:	What are CGC stockholders voting to approve and why is this approval necessary?

 

A:

CGC stockholders are voting on a proposal to approve and adopt the plan of merger contained in the merger agreement. The approval by the majority of CGC stockholders of the proposal to approve and adopt the plan of merger contained in the merger agreement is required by Delaware law and is a condition to the completion of the merger. In addition, Canadian securities law requires the proposal to approve and adopt the plan of merger contained in the merger agreement to be approved by a majority of the holders of shares of CGC common stock present in person or represented by proxy at the special meeting and entitled to vote on the matter, excluding the votes cast by certain persons entitled to receive change of control payments in connection with the merger. See “Proposal No. 1: The Merger — Regulatory Matters Related to the Merger and Stock Exchange Listings — Canadian Securities Law Matters.” CGC stockholders are also voting on a proposal to adjourn or postpone the special meeting, if necessary or appropriate, to permit further solicitation of proxies if there are not sufficient votes at the time of the special meeting in favor of the proposal to approve and adopt the merger agreement. The approval by CGC stockholders of the proposal to adjourn or postpone the special meeting is not a condition to the completion of the merger.

 

Q:	What will I receive in exchange for my CGC common stock in the merger?

 

A:	If the merger is completed, you will receive 0.5209 common shares of Gammon Gold and a cash payment in the amount of $0.79 per share for each share of CGC common stock you hold immediately prior to the completion of the merger, unless you exercise and perfect your appraisal rights under the DGCL.

Gammon Gold will not issue fractional shares in the merger. Instead, it will pay cash in U.S. dollars for fractional shares of common stock in an amount equal to the fractional interest in a Gammon Gold common share multiplied by the average of the closing sale prices of a Gammon Gold common share on the NYSE for the five trading days immediately preceding the date of completion of the merger.

 

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Q:	How much stock will the current CGC stockholders own in Gammon Gold after the merger?

 

A:	As of the closing of the merger, it is expected that current CGC stockholders will own approximately 20% of Gammon Gold’s outstanding shares on a fully diluted basis.

 

Q:	Will CGC stockholders be taxed on the Gammon Gold common shares that they receive in exchange for their CGC common stock?

 

A:

For U.S. federal income tax purposes, the merger is intended to qualify as a “reorganization” within the meaning of Section 368(a) of the Internal Revenue Code of 1986, as amended, or the Code. If the merger is treated as a reorganization for these purposes and certain other requirements are met, then U.S. Holders (as defined in “Material U.S. Federal Income Tax Considerations”) of CGC common stock that receive both cash and Gammon Gold common shares generally will recognize gain, but not loss, to the extent of the cash received. See “Material U.S. Federal Income Tax Considerations.” CGC stockholders who are resident in Canada will recognize gain/loss as a result of their receipt of cash and Gammon Gold common shares in exchange for their CGC common stock for the purposes of the Income Tax Act (Canada). See “Material Canadian Federal Income Tax Considerations — Shareholders Resident in Canada.”

Generally, Canadian Resident Shareholders (as defined in “Material Canadian Federal Income Tax Considerations”) will realize a capital gain (or sustain a capital loss) on the disposition of their CGC common stock to the extent that the Canadian Resident Shareholder’s total proceeds of disposition, net of any reasonable costs of disposition, exceed (or are less than) the adjusted cost base of such CGC common stock to the Canadian Resident Shareholder. Generally, one-half of any capital gain realized by a Canadian Resident Shareholder in a taxation year will be included in computing the Canadian Resident Shareholder’s income for such year (a “taxable capital gain”), and one-half of any capital loss realized by a Canadian Resident Shareholder in a taxation year (an “allowable capital loss”) may be deducted from the Canadian Resident Shareholder’s taxable capital gains realized in that year in accordance with the rules in the Tax Act.

Tax matters can be complicated, and the tax consequences of the transaction to you will depend on your particular tax situation. You should consult your tax advisor to determine the tax consequences of the transaction to you.

 

Q:	When do you currently expect to complete the transaction?

 

A:

We expect to complete the transaction during the first quarter of 2011. However, CGC and Gammon Gold cannot assure you when, or if, the transaction will occur or that it will be completed. CGC and Gammon Gold must first obtain the required approvals of the CGC stockholders and the necessary regulatory approvals.

 

Q:	How will Gammon Gold be managed after the merger? Will CGC have representation on the Gammon Gold board of directors?

 

A:

Following the merger, CGC will become a wholly-owned subsidiary of Gammon Gold, subject to the management of the Gammon Gold board of directors. Upon the closing of the merger, one current member of the board of directors of CGC will be appointed to Gammon Gold’s board of directors. At each of Gammon Gold’s annual shareholder meetings in 2011 and 2012, the CGC nominee will, if deemed advisable by the nominating and corporate governance committee comprised of Gammon Gold directors, be nominated for election as a director of Gammon Gold.

 

Q:	Do persons involved in the merger have interests that may conflict with mine as a CGC stockholder?

 

A:

Yes. When considering the recommendation of CGC’s board of directors, you should be aware that certain CGC directors and officers have interests in the merger that are different from, or are in addition to, yours. These interests include the possible employment of certain of CGC’s executive officers by Gammon Gold after the merger, although no agreements have been proposed or entered into, the immediate vesting of stock options and other equity-based awards granted to executive officers and directors of CGC, change in control

 

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agreements that provide severance to executive officers upon a qualifying termination of employment in connection with the merger, the expected appointment of one CGC director to the Gammon Gold board of directors, and the receipt of indemnification and liability insurance benefits by directors and officers of CGC from Gammon Gold.

 

Q:	How does the CGC board of directors recommend that CGC stockholders vote?

 

A:

After careful consideration, and upon the recommendation of a special committee of the CGC board of directors, which is referred to as the M&A Committee, comprised solely of independent directors, the CGC board of directors unanimously approved the plan of merger contained in the merger agreement and determined that entry into the merger agreement is advisable and in the best interests of CGC and its stockholders. Accordingly, the CGC board of directors unanimously recommends that CGC stockholders vote “FOR” the proposal to approve and adopt the plan of merger contained in the merger agreement and “FOR” the proposal to adjourn or postpone the special meeting, if necessary or appropriate.

 

Q:	Are there risks associated with the transaction that I should consider in deciding how to vote?

 

A:	Yes. There are a number of risks related to the transaction, risks related to the combined company if the transaction is completed and risks relating to each of Gammon Gold and CGC that are discussed in this proxy statement/prospectus.

Please see the section entitled “Risk Factors” beginning on page 19 for a discussion of the risks associated with the transaction.

 

Q:	When and where will the CGC special meeting be held?

 

A:	The CGC special meeting will take place at Ballard Spahr LLP, 1735 Market Street, 51st Floor, Philadelphia, Pennsylvania 19103, on March 18, 2011, at 10:00 a.m., local time.

 

Q:	Who can attend and vote at the CGC special meeting?

 

A:

Only holders of record of CGC common stock at the close of business on February 14, 2011, are entitled to notice of, and to vote at, the special meeting. As of the record date, there were 61,338,136 shares of CGC common stock outstanding and entitled to vote at the special meeting, held by 970 holders of record. Each holder of CGC common stock is entitled to one vote for each share of CGC common stock owned as of the record date.

 

Q:	What constitutes a quorum?

 

A:

In accordance with CGC’s amended and restated bylaws, which are referred to as CGC’s bylaws, holders of a majority of the shares of stock issued and outstanding and entitled to vote at any meeting of stockholders must be present in person or by proxy in order to hold the special meeting and conduct business. This is called a quorum. Shares of CGC common stock are counted as present at the special meeting if the holder of such shares (i) is present and votes in person at the special meeting or (ii) has properly submitted a proxy card by mail, telephone or Internet. Abstentions will be counted as present for purposes of determining a quorum.

 

Q:	What vote of CGC stockholders is required to approve the proposal to approve and adopt the plan of merger contained in the merger agreement and the proposal to adjourn or postpone the special meeting?

 

A:

In accordance with Delaware law and CGC’s governing documents, the approval by CGC stockholders of the proposal to approve and adopt the plan of merger contained in the merger agreement requires the affirmative vote of the holders of a majority of the outstanding shares of CGC common stock entitled to vote on the matter. In addition, Canadian securities law requires the affirmative vote of a majority of the

 

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votes cast by holders of shares of CGC common stock present in person or represented by proxy at the special meeting and entitled to vote on the matter, excluding the votes cast by certain persons entitled to receive change of control payments in connection with the merger. The approval of the proposal to adjourn or postpone the special meeting requires the affirmative vote of the holders of a majority of the shares of CGC common stock present in person or represented by proxy at the special meeting, whether or not a quorum is present.

 

Q:	Are any stockholders already committed to vote in favor of the merger?

 

A:

Yes. In connection with the execution of the merger agreement, Gammon Gold entered into voting and support agreements with CGC’s directors and executive officers, which provide, among other things, that each such person will vote all of the shares of CGC’s common stock beneficially owned by such person in favor of the proposal to approve and adopt the plan of merger contained in the merger agreement. CGC’s directors and executive officers, as of the record date for the special meeting, collectively held 449,196 shares of the then-outstanding CGC common stock, or less than 1% of the shares entitled to vote at the special meeting, all of which is subject to the terms of the voting and support agreements. For additional information, please see the section entitled “The Voting and Support Agreements” beginning on page 134 of this proxy statement/prospectus. The form of voting and support agreement is also attached to this proxy statement/prospectus as Annex B.

 

Q:	What should CGC stockholders do now in order to vote on the proposals being considered at the special meeting?

 

A:	Stockholders of record of CGC as of the record date may submit a proxy in any of the following three ways:

 

•

By Internet, following the instructions to vote online that appear on the proxy card;

 

•

By telephone, using the telephone number printed on the proxy card; or

 

•

By mail, by completing, signing, dating and returning the enclosed proxy card in the accompanying pre-addressed postage-paid envelope.

Submitting a proxy means that you give someone else the right to vote your shares in accordance with your instructions. In this way, you ensure that your vote will be counted even if you are unable to attend the special meeting. If you execute your proxy, but do not include specific instructions on how to vote, the individuals named as proxies will vote your shares as follows:

 

•

“FOR” the proposal to approve and adopt the plan of merger contained in the merger agreement; and

 

•

“FOR” the proposal to adjourn or postpone the special meeting.

If you hold CGC shares in “street name,” which means your shares are held of record by a broker, bank or nominee, you must provide the record holder of your shares with instructions on how to vote your shares. Please refer to the voting instruction card used by your broker, bank or nominee to see if you may submit voting instructions using the Internet or telephone.

Additionally, you may also vote in person by attending the special meeting. If you plan to attend the special meeting and wish to vote in person, you will be given a ballot at the special meeting. Please note, however, that if your shares are held in “street name,” and you wish to vote in person at the special meeting, you must bring a proxy from the record holder of the shares authorizing you to vote at the special meeting. Whether or not you plan to attend the special meeting, you are encouraged to grant your proxy as described in this proxy statement/prospectus.

 

Q:	What are broker non-votes?

 

A:	Broker non-votes occur when nominees, such as banks and brokers holding shares on behalf of beneficial owners, do not receive voting instructions from the beneficial owners at least ten days before the special meeting and do not have discretion to vote on a specific matter.

 

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Q:	What will happen if I abstain from voting, fail to vote or do not direct how to vote on my proxy?

 

A:	The failure of a CGC stockholder to vote or to instruct his or her broker, bank or nominee to vote if his or her shares are held in “street name” may have a negative effect on the ability of CGC to obtain the number of votes necessary for approval of the proposals.

An abstention or the failure of a CGC stockholder to vote or to instruct his or her broker, bank or nominee to vote if his or her shares are held in “street name” will have the same effect as voting against the proposal to approve and adopt the plan of merger contained in the merger agreement. An abstention will have the same effect as a vote against the proposal to adjourn or postpone the special meeting; however, a failure to vote or a broker non-vote will have no effect on such proposal. All properly signed proxies that are received prior to the special meeting and that are not revoked will be voted at the special meeting according to the instructions indicated on the proxies or, if no direction is indicated, they will be voted “FOR” the proposal to approve and adopt the plan of merger contained in the merger agreement and “FOR” the proposal to adjourn or postpone the special meeting.

 

Q:	What happens if I sell my shares after the record date but before the special meeting?

 

A:

The record date for the special meeting is earlier than the date of the special meeting and the date that the merger is expected to be completed. If you transfer your CGC shares after the record date but before the date of the special meeting, you will retain your right to vote at the special meeting (provided that such shares remain outstanding on the date of the special meeting), but you will not have the right to receive the merger consideration to be received by CGC’s stockholders in connection with the merger. In order to receive the merger consideration, you must hold your CGC shares through completion of the merger.

 

Q:	Can I change my vote after I have delivered my proxy?

 

A:	Yes. If you are a holder of record, you can change your vote at any time before your proxy is voted at the special meeting by:

 

•

delivering a signed written notice of revocation to the Secretary of CGC at:

Capital Gold Corporation

76 Beaver Street, 14th Floor

New York, New York 10005

Attn.: Secretary

 

•

submitting another proxy bearing a later date (in any of the permitted forms); or

 

•

attending and casting a ballot in person at the special meeting, although your attendance alone will not revoke your proxy.

If your shares are held in a “street name” account, you must contact your broker, bank or other nominee to change your vote.

 

Q:	What should CGC stockholders do if they receive more than one set of voting materials?

 

A:

You may receive more than one set of voting materials, including multiple copies of this proxy statement/prospectus and multiple proxy cards or voting instruction cards. For example, if you hold your shares in more than one brokerage account, you will receive a separate voting instruction card for each brokerage account in which you hold shares. If you are a holder of record and your shares are registered in more than one name, you will receive more than one proxy card. Please complete, sign, date and return each proxy card and voting instruction card that you receive.

 

Q:	Should CGC stockholders send in their CGC stock certificates now?

 

A:	No. Please DO NOT send your CGC common stock certificates with your proxy card. After the transaction is completed, CGC stockholders will be sent written instructions for exchanging their shares of CGC common stock for the merger consideration.

 

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Q:	Who pays for the cost of proxy preparation and solicitation?

 

A:

CGC will pay for the cost of proxy preparation and a portion of the cost of solicitation, including the reasonable charges and expenses of brokers, banks or other nominees for forwarding proxy materials to street name holders; however, CGC and Gammon Gold will share equally the costs and expenses incurred in connection with the filing, printing and mailing of this proxy statement/prospectus and the registration statement of which this proxy statement/prospectus forms a part. In addition, Gammon Gold will pay the cost of engaging the proxy solicitor, Laurel Hill Advisory Group, to solicit proxies from CGC stockholders.

 

Q:	Will I have appraisal rights in connection with the merger?

 

A:

Under the DGCL, holders of CGC common stock who do not vote for the proposal to approve and adopt the plan of merger contained in the merger agreement have the right to seek appraisal of the fair value of their shares as determined by the Delaware Court of Chancery if the merger is completed, but only if they comply with all requirements of Delaware law, which are summarized in this document. This appraisal amount could be more than, the same as, or less than the amount a CGC stockholder would be entitled to receive under the merger agreement. Any holder of CGC common stock intending to exercise appraisal rights, among other things, must submit a written demand for appraisal to CGC prior to the vote on the proposal to approve and adopt the plan of merger contained in the merger agreement and must not vote or otherwise submit a proxy in favor of approval and adoption of the plan of merger contained in the merger agreement. Failure to follow exactly the procedures specified under Delaware law will result in the loss of appraisal rights. Because of the complexity of the Delaware law relating to appraisal rights, if you are considering exercising your appraisal rights, CGC encourages you to seek the advice of your own legal counsel. These procedures are summarized in this proxy statement/prospectus in the section titled “Proposal No. 1: The Merger — Appraisal Rights.” Please see Annex D for the text of the applicable provisions of the DGCL.

 

Q:	Who can help answer my questions?

 

A:	If you have any questions about the merger or how to submit your proxy, or if you need additional copies of this proxy statement/prospectus, the enclosed proxy card or voting instructions, you should contact:

Laurel Hill Advisory Group

Toll free telephone: 1- 800-385-3006

Brokers and banks, please call: (917) 338-3181

 

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RISK FACTORS

In addition to the other information included or incorporated by reference in this proxy statement/prospectus, you should carefully consider the matters described below relating to the proposed merger in deciding whether to vote for approval of the plan of merger. Although Gammon Gold and CGC believe that the matters described below cover the material risks related to the merger, they may not contain all of the information that is important to you in evaluating the merger. Accordingly, we urge you to read this entire proxy statement/prospectus, including the appendices and the information included or incorporated by reference in this document. Please also refer to the additional risk factors identified in the periodic reports and other documents of Gammon Gold and CGC incorporated by reference into this proxy statement/prospectus and listed in the section entitled “Where You Can Find More Information” beginning on page 156.

Risk Factors Related to the Merger

Because the exchange ratio for the stock consideration is fixed and the market price of Gammon Gold common shares may fluctuate, you cannot be certain of the dollar value of the stock consideration that you will receive upon completion of the merger.

Upon completion of the merger, each CGC stockholder of record will be entitled to receive, in exchange for each share of CGC common stock owned by such stockholder 0.5209 Gammon Gold common shares and a cash payment in the amount of $0.79 per share (plus cash in lieu of any fractional share interests), unless such stockholder exercises and perfects his or her appraisal rights under the DGCL. Because the exchange ratio for the stock consideration of 0.5209 Gammon Gold common shares is fixed, the value of the Gammon Gold common shares that may be issued to you as stock consideration in the merger will depend on the market price of Gammon Gold common shares at the time they are issued. There will be no adjustment to the fixed number of Gammon Gold common shares that may be issued to you as stock consideration based upon changes in the market price of Gammon Gold common shares or CGC common stock prior to the closing.

The market price of Gammon Gold common shares at the time the merger is completed may vary from the price of Gammon Gold common shares on the date the merger agreement was executed, on the date of this proxy statement/prospectus and on the date of the special meeting as a result of various factors that are beyond the control of Gammon Gold and CGC, including the following:

 

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the prices of gold and silver;

 

•

changes in the business, operations or prospects of Gammon Gold or CGC;

 

•

governmental or regulatory developments, including any limitations on or conditions to consummation of the merger;

 

•

changes in the interest rate environment;

 

•

changes in general economic conditions and the outlook for economic conditions;

 

•

changes in securities markets, including changes due to terrorist activities, other world events or other factors;

 

•

changes in currency exchange rates including changes in U.S. dollar/Canadian dollar exchange rates, which may affect the trading prices of Gammon Gold’s common shares as reported in U.S. dollars;

 

•

the outcome of litigation related to the proposed merger; and

 

•

the timing of the completion of the proposed merger.

In addition to the approval of CGC’s stockholders, completion of the merger is subject to receipt of regulatory approvals and satisfaction of other conditions that may not occur until some time after the special meeting. Therefore, at the time of the special meeting you will not know the precise U.S. dollar value of the stock consideration you may become entitled to receive at the closing of the merger. You are urged to obtain a current market quotation for Gammon Gold common shares.

 

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Many of the anticipated benefits of combining Gammon Gold and CGC may not be realized.

Gammon Gold and CGC entered into the merger agreement with the expectation that the merger would result in various benefits including, among other things, synergies, cost savings and operating efficiencies. The success of the merger will depend, in part, upon Gammon Gold’s ability to realize these anticipated benefits and cost savings from combining the businesses of Gammon Gold and CGC. However, to realize these anticipated benefits and cost savings, Gammon Gold must successfully combine the businesses of Gammon Gold and CGC, including CGC’s recently acquired subsidiary, Nayarit Gold. If Gammon Gold is not able to achieve these objectives, the anticipated benefits and cost savings of the merger may not be realized fully or at all or may take longer to realize than expected.

Gammon Gold and CGC have operated and, until the completion of the merger, will continue to operate independently. It is possible that the integration process could take longer than anticipated and could result in the loss of key employees or the disruption of each company’s ongoing businesses, which could adversely affect Gammon Gold’s ability to achieve the anticipated benefits of the merger. Gammon Gold may have difficulty coordinating the operations and personnel of the two companies and addressing possible differences in corporate cultures and management philosophies. Integration efforts between the two companies will also divert management attention and resources. These integration activities could have an adverse effect on the businesses of both Gammon Gold and CGC during the transition period. The integration process is subject to a number of uncertainties. The uncertainties regarding the outcome of these integration efforts are heightened by the recent completion by CGC of a significant acquisition, Nayarit Gold, on August 2, 2010. CGC has not fully integrated Nayarit Gold’s operations and personnel into CGC and, as a result, the integration efforts between CGC and Gammon Gold will also depend upon the ability of Gammon Gold to integrate both CGC and Nayarit Gold’s operations and personnel into Gammon Gold. Although Gammon Gold’s plans for integration are focused on minimizing those uncertainties to help achieve the anticipated benefits, no assurance can be given that these benefits will be realized or, if realized, the timing of their realization. Failure to achieve these anticipated benefits could result in increased costs or decreases in the amount of expected revenues and could adversely affect Gammon Gold’s future business, financial condition, operating results and prospects. In addition, Gammon Gold may not be able to eliminate duplicative costs or realize other efficiencies from integrating the businesses to offset part or all of the transaction and merger-related costs incurred by Gammon Gold and CGC.

CGC may not terminate the merger agreement to accept a superior proposal to acquire CGC after CGC stockholders have adopted the merger agreement.

In certain circumstances, prior to the adoption of the merger agreement by CGC’s stockholders, CGC may furnish nonpublic information to and participate in discussions or negotiations with a person making an unsolicited competing proposal to acquire CGC, provided, that the CGC board of directors determines in good faith (after consultation with its financial advisors and outside legal counsel) that such proposal constitutes, or would reasonably be expected to result in, a superior proposal. After the CGC stockholders adopt the merger agreement, CGC may not participate in discussions or negotiations with a person making a competing proposal and may not terminate the merger agreement in order to accept a superior proposal to acquire CGC.

Any delay in completing the merger may substantially reduce the benefits that Gammon Gold expects to be obtained from the merger.

In addition to obtaining the required governmental clearances and approvals, the merger is subject to a number of other conditions beyond the control of Gammon Gold and CGC that may prevent, delay or otherwise materially adversely affect its completion. See “The Merger Agreement — Conditions to the Closing of the Merger.” Gammon Gold and CGC cannot predict whether or when the conditions required to complete the merger will be satisfied. The requirements for obtaining the required clearances and approvals could delay the effective time of the merger for a significant period of time or prevent it from occurring. Moreover, each of Gammon Gold and CGC may terminate the merger agreement if the merger is not consummated by July 1, 2011.

 

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Any delay in completing, or failure to complete as a result of such delay, the merger may materially adversely affect the synergies and other benefits that Gammon Gold expects to achieve if the merger and the integration of their respective businesses are completed within the expected timeframe.

Upon completion of the merger, holders of CGC common stock will become holders of Gammon Gold common shares, and the market price for Gammon Gold common shares may be affected by factors different from those that historically have affected CGC.

Upon completion of the merger, holders of CGC common stock will become holders of Gammon Gold common shares. Gammon Gold’s business differs from that of CGC and, accordingly, the results of operations of Gammon Gold will be affected by some factors different from those currently affecting the results of operations of CGC. For a discussion of the businesses of CGC and Gammon Gold and of some important factors to consider in connection with those businesses, see the documents incorporated by reference in this proxy statement/prospectus and referred to under “Where You Can Find More Information” beginning on page 156.

Some directors and executive officers of CGC have interests in the merger that may differ from the interests of stockholders including, if the merger is completed, the receipt of financial and other benefits.

Some of the directors of CGC who recommend that you vote in favor of the proposals to be considered at the special meeting of CGC stockholders, and the officers of CGC who provided information to CGC’s board of directors relating to the merger, have employment, indemnification and severance benefit arrangements, rights to ongoing stock options and other equity-based awards and rights to ongoing indemnification and insurance that provide them with interests in the transaction that may differ from, or be in addition to, yours. The receipt of compensation or other benefits in the merger might result in these directors and officers being more likely to support and vote to adopt the merger agreement than if they did not have these interests. CGC stockholders should consider whether the interests and benefits of the directors and officers may have influenced these directors and officers to support or recommend adoption of the merger agreement. These interests are described in more detail in the section entitled “Proposal No. 1: The Merger — Interests of CGC’s Directors and Executive Officers in the Merger” beginning on page 96.

The merger agreement contains provisions that may discourage other companies from trying to acquire CGC for greater merger consideration.

The merger agreement contains provisions that may discourage a third party from submitting a business combination proposal to CGC that might result in greater value to CGC’s stockholders than the proposed merger. These provisions include a general prohibition on CGC from soliciting, or, subject to certain exceptions, entering into discussions with any third party regarding any acquisition proposal or offers for competing transactions and the requirement that CGC pay a termination fee of up to $10.3 million if the merger agreement is terminated in specified circumstances. The termination fee may result in a potential competing acquiror proposing to pay a lower per share price to acquire CGC than it might otherwise have proposed to pay. For further information, please see the section entitled “The Merger Agreement — Termination Fees and Expenses” beginning on page 132.

Certain rights of CGC stockholders will change as a result of the merger.

Following the completion of the merger, CGC stockholders will no longer be stockholders of CGC, a Delaware corporation, but will instead be shareholders of Gammon Gold, a Quebec, Canada corporation. There will be certain differences between your current rights as a stockholder of CGC, on the one hand, and the rights to which you will be entitled as a shareholder of Gammon Gold, on the other hand. For a more detailed discussion of the differences in the rights of shareholders of CGC and Gammon Gold, see “Comparison of Shareholder Rights” beginning on page 145.

 

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Future results of the combined company may differ materially from the Unaudited Pro Forma Condensed Combined Financial Information of Gammon Gold and CGC presented in this proxy statement/prospectus.

The future results of Gammon Gold, as the combined company following the merger, may be materially different from those shown in the unaudited pro forma financial information presented in this proxy statement/prospectus that show only a combination of Gammon Gold’s and CGC’s historical results, after giving effect to the acquisition by CGC of Nayarit Gold and the merger. Gammon Gold has estimated that Gammon Gold will record approximately $7 million of aggregate acquisition-related fees and expenses, as described in the notes to the pro forma financial information included in this proxy statement/prospectus. In addition, the final amount of any charges relating to acquisition accounting adjustments that Gammon Gold may be required to record will not be known until following the closing of the merger. These expenses and charges may be higher or lower than estimated.

Gammon Gold expects to maintain its status as a “foreign private issuer” in the U.S. and thus will be exempt from a number of rules under the U.S. Securities Exchange Act of 1934, as amended, or the Exchange Act, and will be permitted to file less information with the SEC than a company incorporated in the United States.

As a “foreign private issuer,” Gammon Gold is exempt from rules under the Exchange Act that impose disclosure requirements, as well as procedural requirements, for proxy solicitations under Section 14 of the Exchange Act. In addition, Gammon Gold’s officers, directors and principal shareholders are exempt from the reporting and “short-swing” profit recovery provisions of Section 16 of the Exchange Act. In addition, Gammon Gold is permitted, under a multi-jurisdictional disclosure system adopted by the United States and Canada, to prepare its disclosure documents filed under the Exchange Act in accordance with Canadian disclosure requirements, including preparing its financial statements in accordance with Canadian GAAP, which differs in some respects from U.S. GAAP.

Gammon Gold is chartered under the laws of Quebec, Canada and a substantial portion of its assets are, and many of its directors and officers reside, outside of the United States. As a result, it may not be possible for shareholders to enforce civil liability provisions of the securities laws of the United States in Canada.

Gammon Gold is chartered under the laws of Quebec, Canada. A substantial portion of Gammon Gold’s assets are located outside the United States, and many of Gammon Gold’s directors and officers and some of the experts named in this proxy statement/prospectus are residents outside of the United States. As a result, it may be difficult for investors to effect service within the United States upon Gammon Gold and those directors, officers and experts, or to realize in the United States upon judgments of courts of the United States predicated upon civil liability of Gammon Gold and such directors, officers or experts under the United States federal securities laws. There is uncertainty as to the enforceability in Canada by a court in original actions, or in actions to enforce judgments of United States courts, of the civil liabilities predicated upon the United States federal securities laws.

If Gammon Gold’s disclosure controls and procedures and/or internal control over financial reporting are found to be ineffective, Gammon Gold’s financial results or its stock price may be adversely affected.

Gammon Gold’s most recent evaluation by management of its disclosure controls and procedures and its internal control over financial reporting resulted in management’s conclusion that, as of September 30, 2010, in compliance with Section 404 of the Sarbanes-Oxley Act of 2002, Gammon Gold’s disclosure controls and procedures and its internal control over financial reporting were effective. However, during the preparation of Gammon Gold’s first quarter financial statements for fiscal year 2010, Gammon Gold determined that a restatement of its previously issued financial statements was necessary. As a result of the restatement, Gammon Gold reassessed its disclosure controls and procedures and its internal control over financial reporting and determined that a material weakness existed at December 31, 2009 and, as a result, its disclosure controls and procedures and its internal control over financial reporting were not effective. As defined in the standards

 

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established by the Public Company Accounting Oversight Board of the United States, a “material weakness” is a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis. The material weakness identified related to a deficiency that resulted in the correction of future income tax liability balances that arose from a business acquisition during Gammon Gold’s 2006 fiscal year. Gammon Gold restated its financial statements for the years ended December 31, 2008 and 2009 to correct the accounting treatment for this item. See “Management’s Discussion and Analysis—Controls and Procedures” in Gammon Gold’s filings with the SEC for additional information with respect to the deficiencies identified in its internal control over financial reporting. Management of Gammon Gold engaged in efforts to address the material weakness in internal control over financial reporting identified above by performing a thorough review of Gammon Gold’s recognition of future income tax liabilities arising from business acquisitions in accordance with Canadian GAAP. Management also amended procedures related to business acquisitions to include procedures to consider and record assets and liabilities acquired in the appropriate currency. Gammon Gold believes that it currently has adequate internal control procedures in place for future periods. However, if Gammon Gold’s disclosure controls and procedures and/or internal control over financial reporting were found to be ineffective or if Gammon Gold identifies a material weakness or significant deficiency in its financial reporting, investors may lose confidence in the reliability of Gammon Gold’s financial statements, which may adversely affect its financial results or its stock price.

CGC’s merger with Gammon Gold is subject to certain conditions to closing that could result in the merger not being completed or being delayed, either of which could negatively impact its stock price and future business and results of operations.

Completion of the merger is subject to a number of customary conditions, including, but not limited to, the approval of the agreement and plan of merger by the stockholders of CGC, the effectiveness of the Form F-4 registration statement, of which this proxy statement/prospectus forms a part, filed by Gammon Gold with the SEC to register the shares of Gammon Gold common shares to be issued in connection with the merger and expiration of the applicable waiting period under the HSR Act, the Mexican Antitrust Commission and other mining, regulatory and other authorities in the U.S., Canada and Mexico. These authorities may impose conditions on the completion of the merger or require changes to the terms of the merger. Gammon Gold and CGC received early termination of the HSR waiting period on November 5, 2010. While Gammon Gold and CGC do not currently expect that any such conditions or changes would be imposed, there can be no assurance that they will not be, and such conditions or changes could have the effect of imposing additional costs on or limiting the revenues of Gammon Gold following the merger, any of which may have an adverse effect on Gammon Gold. In addition, if any action is taken or legal or regulatory restrictions or conditions deemed applicable to the merger that would be reasonably likely to have a material adverse effect on CGC or Gammon Gold, Gammon Gold may elect not to consummate the merger. There is no assurance that CGC will receive the necessary approvals or satisfy the other conditions necessary for completion of the merger. If any of the conditions to the merger are not satisfied or, where waiver is permissible, not waived, the merger will not be consummated. Failure to complete the merger would prevent CGC from realizing the anticipated benefits of the merger. CGC has already and expects to continue to incur significant costs associated with transaction fees, professional services, taxes and other costs related to the merger. In the event that the merger is not completed, CGC will remain liable for these costs and expenses. Furthermore, if the merger is not consummated, under some circumstances, CGC may be required to promptly pay a $10.3 million breakup fee to Gammon Gold, which could impact CGC’s liquidity and results of operations. In addition, the current market price of CGC common stock may reflect a market assumption that the merger will occur, and a failure to complete the merger could result in a negative perception by the market of CGC generally and a resulting decline in the market price of CGC’s common stock. Any delay in the consummation of the merger or any uncertainty about the consummation of the merger could also negatively impact CGC’s stock price and future business and results of operations. The merger may not be consummated, there may be delay in the consummation of the merger or the merger may be consummated on the terms contemplated by the merger agreement.

 

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Whether or not the merger is completed, the announcement and pendency of the merger could impact or cause disruptions in CGC’s business, which could have an adverse effect on CGC’s business and results of operations.

Whether or not the merger is consummated, the announcement and pendency of the merger could cause disruptions in or otherwise negatively impact CGC’s business and results of operations. Among others:

 

•

CGC’s employees may experience uncertainty about their future roles with the combined company, which might adversely affect CGC’s ability to retain and hire key personnel and other employees;

 

•

the attention of CGC’s management may be directed toward the completion of the merger and transaction-related considerations and may be diverted from the day-to-day operations and pursuit of other opportunities that could be beneficial to CGC’s business; and

 

•

business partners may seek to modify or terminate their business relationships with CGC.

These disruptions could be exacerbated by a delay in the completion of the merger or termination of the merger agreement and could have an adverse effect on CGC’s business, results of operations or prospects if the merger is not completed or on the business, results of operations or prospects of the combined company if the merger is completed.

CGC stockholders will have a reduced ownership and voting interest after the merger and will exercise less influence over the management and policies of Gammon Gold than they do over CGC.

CGC stockholders currently have the right to vote in the election of the board of directors of CGC and on other matters affecting CGC. When the merger occurs, each CGC stockholder that receives Gammon Gold common shares will become a shareholder of Gammon Gold with a percentage ownership of the combined company that is much smaller than the stockholder’s percentage ownership of CGC. It is expected that the former stockholders of CGC as a group will own approximately 20% of the outstanding shares of Gammon Gold, on a fully diluted basis, immediately after the merger. Because of this, CGC stockholders will have less influence over the management and policies of Gammon Gold than they now have over the management and policies of CGC.

The receipt of Gammon Gold common shares in the proposed merger may be taxable to CGC stockholders.

If the proposed merger is not treated as a reorganization within the meaning of Section 368(a) of the Code, the exchange of CGC shares for shares of Gammon Gold in the proposed merger will be taxable to U.S. Holders of CGC shares for U.S. federal income tax purposes. Certain Non-U.S. Holders of CGC shares may also be subject to U.S. federal income tax liability if the merger is not treated as a reorganization. The merger agreement does not require counsel to Gammon Gold or CGC to render opinions at the closing of the proposed merger that the proposed merger will qualify as a tax-free reorganization under Section 368(a) of the Internal Revenue Code.

In addition, because Gammon Gold is organized in Canada, even if the transaction qualifies as a reorganization within the meaning of Section 368(a) of the Code, a U.S. Holder may have certain reporting obligations under Section 367 of the Code. Failure to comply with these reporting obligations may cause a U.S. Holder to recognize gain, but not loss, on the transaction.

If the proposed merger does not qualify as a reorganization under Section 368(a) of the Code, the proposed merger will be treated as a taxable sale of CGC common stock in exchange for cash and Gammon Gold common shares. If that occurs, U.S. Holders of CGC shares and certain Non-U.S. Holders of CGC shares will be required to recognize gain or loss based on the value of both the cash consideration and stock consideration received in the proposed merger. The related tax liability may exceed the cash received in the transaction. See “Material U.S. Federal Income Tax Considerations.”

CGC stockholders should consult their tax advisors to determine the specific tax consequences to them of the proposed merger, including any federal, state, local, foreign or other tax consequences, and any tax return filing or other reporting requirements.

 

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Several lawsuits have been filed against Capital Gold and other parties challenging the proposed merger, and an adverse judgment in such lawsuits may prevent the merger from becoming effective or from becoming effective within the expected timeframe.

CGC, the members of CGC’s board of directors, Gammon Gold, and in some instances CGC’s CFO, or Capital Gold AcquireCo, Inc. have been named as defendants in purported class action lawsuits brought by CGC stockholders challenging the proposed merger, seeking, among other things, to enjoin the defendants from consummating the merger on the agreed-upon terms.

The outcome of the pending and potential future litigation is difficult to predict and quantify and the defense of such claims or actions can be costly. In addition to diverting financial and management resources and general business disruption, we may suffer from adverse publicity that could harm CGC’s reputation, regardless of whether the allegations are valid or whether we are ultimately held liable. A temporary or permanent injunction could delay or prevent completion of the merger and such delay or failure of the transaction could cause the adverse results discussed above.

A judgment or settlement that is not covered by or is significantly in excess of CGC’s insurance coverage for any claims, or CGC’s obligations to indemnify the individual defendants, could materially and adversely affect CGC’s financial condition, results of operations and cash flows.

The fairness opinion obtained by CGC from Stifel Nicolaus will not reflect subsequent changes.

In connection with the proposed merger, Stifel Nicolaus delivered to the CGC board of directors its opinion dated as of September 30, 2010. The opinion of Stifel Nicolaus stated that, as of such date of its opinion and based upon and subject to the factors and assumptions set forth in such opinion, the total amount of cash and stock consideration to be received pursuant to the merger agreement was fair, from a financial point of view, to the holders of the outstanding shares of CGC common stock. The opinion does not reflect changes that may occur or may have occurred after the date of the opinion, including changes to the operations and prospects of Gammon Gold or CGC, changes in general market and economic conditions or regulatory or other factors. Any such changes, or other factors on which the opinion is based, may materially alter or affect the relative values of Gammon Gold or CGC.

Gammon Gold may pursue strategic transactions in the future, which could be difficult to implement, disrupt its business or change its business profile significantly.

Gammon Gold will continue to consider opportunistic strategic transactions, which could involve acquisitions or dispositions of businesses or assets. Any future strategic transaction could involve numerous risks, including:

 

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potential disruption of Gammon Gold’s ongoing business and distraction of management;

 

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difficulty integrating acquired businesses, such as CGC, or segregating assets to be disposed of;

 

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exposure to unknown and/or contingent or other liabilities, including litigation arising in connection with the acquisition, disposition and/or against any businesses Gammon Gold may acquire, and

 

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changing Gammon Gold’s business profile in ways that could have unintended consequences.

If Gammon Gold enters into significant strategic transactions in the future, related accounting charges may affect its financial condition and results of operations, particularly in the case of any acquisitions. In addition, the financing of any significant acquisition may result in changes in its capital structure, including the incurrence of additional indebtedness. Conversely, any material disposition could reduce its indebtedness or require the amendment or refinancing of a portion of its outstanding indebtedness. Gammon Gold may not be successful in addressing these risks or any other problems encountered in connection with any strategic transactions.

 

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COMPARATIVE PER SHARE DATA

The following tables present, as at the dates and for the periods indicated, selected historical and pro forma consolidated per share financial information of Gammon Gold and CGC. You should read this information in conjunction with, and the information is qualified in its entirety by, the consolidated financial statements and accompanying notes of Gammon Gold and CGC incorporated into this proxy statement/prospectus by reference. See “Where You Can Find More Information” beginning on page 156.

The pro forma amounts in the tables below are presented for informational purposes only. You should not rely on the pro forma consolidated or pro forma equivalent amounts as being necessarily indicative of the financial position or results of operations of Gammon Gold or CGC that would have actually occurred had the transaction been effective during the periods presented or of the future financial position or results of operations of Gammon Gold or CGC. The pro forma consolidated financial information as at or for the periods presented may have been different had the transaction actually been effective as at or during those periods. The pro forma information, although helpful in illustrating the financial characteristics of the pro forma consolidated company under one set of assumptions, does not reflect the benefits of expected cost savings, opportunities to earn additional revenue, the impact of restructuring and merger-related costs, or other factors that may result as a consequence of the merger and, accordingly, does not attempt to predict or suggest future results.

Gammon Gold Historical and Pro Forma Common Share Data

The following table presents the earnings (loss) per share, dividends per share and book value per share with respect to Gammon Gold on a historical basis and pro forma consolidated basis giving effect to the merger. The Gammon Gold pro forma consolidated amounts are presented as if the transaction had been effective for the period presented based on the acquisition method of accounting. The Gammon Gold pro forma consolidated amounts do not include any cost savings or revenue enhancements which may arise from the merger, and do not include restructuring or integration costs.

 

		As at and for the Nine Months Ended September 30, 2010				As at and for the Year Ended December 31, 2009
		(U.S.$)				(U.S.$)
Basic Earnings (Loss) Per Share:
Gammon Gold historical (Canadian GAAP)			(1.24	)			0.07
Gammon Gold historical (U.S. GAAP)			(1.33	)			(0.08	)
Gammon Gold pro forma consolidated (U.S. GAAP)(1)			(1.06	)			(0.06	)
Diluted Earnings (Loss) Per Share:
Gammon Gold historical (Canadian GAAP)			(1.24	)			0.07
Gammon Gold historical (U.S. GAAP)			(1.33	)			(0.08	)
Gammon Gold pro forma consolidated (U.S. GAAP)(1)			(1.06	)			(0.06	)
Dividends Per Share:
Gammon Gold historical and pro forma(2)			—				—
Book Value Per Share at Period End:
Gammon Gold historical (Canadian GAAP)			4.59				5.77
Gammon Gold historical (U.S. GAAP)			3.87				5.13
Gammon Gold pro forma consolidated (U.S. GAAP)(1)			4.59				N/A

 

(1)

Pro forma consolidated amounts are calculated by adding together the historical amounts reported by Gammon Gold and CGC based on each entity’s most recent financial information as filed with the SEC, reconciled to U.S. GAAP as adjusted for certain items related to the proposed merger, including (i) estimated acquisition accounting adjustments to be recorded in connection with the merger (consisting of fair value adjustments for assets acquired and liabilities assumed and adjustments for intangible assets established, and the resulting amortization/accretion of these adjustments over appropriate future periods)

 

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and (ii) the estimated number of Gammon Gold common shares to be issued upon closing of the merger based upon the terms of the merger agreement. The pro forma adjustments assume completion of the merger as at the beginning of the period indicated.

(2)

Gammon Gold pro forma consolidated results for the nine months ended September 30, 2010 and year ended December 31, 2009 were calculated using the latest annual financial information filed with the SEC. CGC’s results for the six months ended January 31, 2010, the twelve months ended July 31, 2010 and the three months ended October 31, 2010 have been used to calculate the Gammon Gold pro forma combined results for the nine months ended September 30, 2010 and the year ended December 31, 2009. Financial information for the three months ended October 31, 2010 of Nayarit Gold is included in the unaudited consolidated interim financial statements of CGC for the three months ended October 31, 2010 because CGC’s acquisition of Nayarit Gold was completed on August 2, 2010. Nayarit Gold’s results prior to the acquisition by CGC for the twelve months ended September 30, 2009, the three months ended December 31, 2009 and the six months ended June 30, 2010 have been used to calculate Gammon Gold’s pro forma consolidated results for the nine months ended September 30, 2010 and the year ended December 31, 2009, in order to provide the additional information necessary to assess the implications of the merger between CGC and Nayarit Gold on August 2, 2010.

CGC Historical Share Data and Unaudited Pro Forma Equivalent Share Data

The following table presents the earnings per share, dividends per share and book value per share with respect to CGC on a historical basis and an equivalent basis. The equivalent amounts with respect to the CGC common stock are calculated by multiplying the CGC historical amount by the exchange ratio of 0.5209 Gammon Gold common shares constituting the stock consideration.

 

		As at and for the Three Months Ended October 31, 2010				As at and for the Year Ended July 31, 2010
		(U.S.$)				(U.S.$)
Basic Earnings Per Share:
CGC historical		$	0.05			$	0.25
CGC equivalent			0.03				0.13
Diluted Earnings Per Share:
CGC historical		$	0.05			$	0.25
CGC equivalent			0.03				0.13
Dividends Per Share:
CGC historical			—				—
CGC equivalent			—				—
Book Value Per Share at Period End:
CGC historical		$	1.70			$	1.04
CGC equivalent			0.89				0.54

 

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COMPARATIVE PER SHARE MARKET PRICE AND DIVIDEND INFORMATION

Gammon Gold’s common shares are listed on the NYSE and the TSX under the trading symbols “GRS” and “GAM,” respectively. CGC’s common stock is listed on the NYSE Amex and the TSX under the trading symbol “CGC.” The following table sets forth, for the respective periods and dates indicated, the high and low closing prices per share of CGC common stock as reported on the NYSE Amex and the TSX, and the high and low closing prices per Gammon Gold common share as reported on the NYSE Composite Tape and the TSX. The TSX closing prices of Gammon Gold common shares and CGC common stock are presented in Canadian dollars, and the NYSE closing prices of Gammon Gold common shares and the NYSE Amex closing prices of CGC common stock are presented in U.S. dollars. For comparison purposes, the following table uses calendar quarters, but it should be noted that CGC’s fiscal year end is July 31 and Gammon Gold’s fiscal year end is December 31.

 

		NYSE (U.S.$)								TSX (C$)								NYSE Amex (U.S.$)								TSX (C$)
		Gammon Gold Common Shares								Gammon Gold Common Shares								CGC Common Stock								CGC Common Stock
		High				Low				High				Low				High				Low				High				Low
Period
August 2010		$	7.26			$	5.80			$	7.64			$	6.00			$	3.75			$	3.25			$	3.84			$	3.45
September 2010			7.50				6.75				7.70				6.98				4.83				3.32				4.95				3.42
October 2010			7.35				6.67				7.40				6.88				4.82				4.30				4.91				4.41
November 2010			7.11				6.23				7.12				6.35				4.61				4.22				4.68				4.32
December 2010			8.19				6.82				8.20				6.92				5.13				4.60				5.19				4.64
January 2011			8.31				7.20				8.22				7.15				5.24				4.58				5.07				4.57
February 2011 (through Feb. 14, 2011)			8.73				7.83				8.66				7.71				5.39				4.87				5.34				4.81
2008
First Quarter		$	10.26			$	6.02			$	10.17			$	6.05			$	3.12			$	2.48			$	3.32			$	2.32
Second Quarter			10.88				7.24				10.96				7.41				2.86				2.42				2.92				2.40
Third Quarter			11.23				6.58				10.81				6.81				2.80				1.76				2.80				1.80
Fourth Quarter			7.19				2.28				7.73				2.95				1.84				1.08				2.12				1.28
2009
First Quarter		$	7.88			$	4.59			$	10.00			$	5.43			$	2.84			$	1.56			$	3.60			$	1.86
Second Quarter			8.57				5.92				9.46				7.26				2.86				2.08				3.16				2.52
Third Quarter			8.51				6.14				9.16				6.63				2.68				2.20				2.92				2.48
Fourth Quarter			12.20				7.84				12.80				8.45				4.24				2.36				4.40				2.56
2010(1)
First Quarter		$	12.02			$	7.19			$	12.44			$	7.27			$	3.90			$	2.94			$	4.00			$	3.12
Second Quarter			8.04				5.46				8.30				5.82				4.24				3.16				4.39				3.31
Third Quarter			7.50				5.27				7.70				5.47				4.83				3.25				4.95				3.42
Fourth Quarter			8.19				6.23				8.20				6.35				5.13				4.22				5.19				4.32
2011
First Quarter (through Feb. 14, 2011)		$	8.73			$	7.20			$	8.66			$	7.15			$	5.39			$	4.58			$	5.39			$	4.57
Last five calendar years
2006		$	18.38			$	9.25			$	21.27			$	10.49			$	1.72			$	1.04			$	1.92			$	1.22
2007			18.56				6.89				21.55				6.84				3.24				1.42				3.08				1.56
2008			11.23				2.28				10.96				2.95				3.12				1.08				3.32				1.28
2009			12.20				4.59				12.80				5.43				4.24				1.56				4.40				1.86
2010			12.02				5.27				12.44				5.47				4.95				2.94				4.99				3.12

 

(1)	Amounts reflected in the two CGC columns have been adjusted for the 4-for-1 reverse stock split that occurred during the fiscal year ended July 31, 2010.

 

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As of February 14, 2011, there were approximately 170 stockholders of record of Gammon Gold common shares and approximately 970 stockholders of record of CGC common stock. Neither Gammon Gold nor CGC has ever paid cash dividends on its common shares or common stock, respectively, and neither anticipates paying cash dividends in the foreseeable future.

Following completion of the merger, Gammon Gold common shares will continue to be listed on the NYSE and the TSX, and there will be no further market for CGC common stock.

The following table shows the closing prices for Gammon Gold common shares and CGC common stock and the implied per share value in the merger to CGC stockholders for September 24, 2010, the last trading day preceding the announcement by Timmins Gold Corp. detailing its previous non-binding proposal to merge with CGC, September 30, 2010, the last trading day before the public announcement of the proposed merger, and on February 14, 2011, the last practicable day before the date of this proxy statement/prospectus. We urge you to obtain current market quotations for both Gammon Gold common shares and CGC common stock.

 

		Gammon Gold Common Shares (U.S.$)				CGC Common Stock (U.S.$)				Implied Value of One Share of CGC Common Stock (U.S.$)(1)
September 24, 2010		$	7.26			$	3.80			$	4.57
September 30, 2010		$	7.01			$	4.83			$	4.44
February 14, 2011		$	8.73			$	5.37			$	5.34

 

(1)

The implied value per share reflects the value of Gammon Gold common shares that CGC stockholders would receive in exchange for each share of CGC common stock if the merger were completed on the date indicated. Such price reflects the 0.5209 of a Gammon Gold common share that CGC stockholders will be entitled to receive for each share of CGC common stock in the merger and a cash payment in the amount of $0.79 per share. Holders of CGC common stock will also receive cash in lieu of any fractional share interests.

 

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CURRENCY EXCHANGE RATE DATA

The following tables show, for the date or periods indicated, certain information regarding the U.S. dollar/Canadian dollar exchange rate and the Canadian dollar/U.S. dollar exchange rate. The information is based on the noon buying rate as reported by the Bank of Canada.

 

		C$ per U.S.$1.00				U.S.$ per C$1.00
September 30, 2010		C$	1.0298			U.S.$	0.9711
(the last trading day before public announcement of the proposed merger)
February 14, 2011		C$	0.9885			U.S.$	1.0116

 

		Average Rate(1)
		C$ per U.S.$1.00				U.S.$ per C$1.00
Year Ended December 31,
2005		C$	1.2085			U.S.$	0.8275
2006			1.1308				0.8843
2007			1.0666				0.9376
2008			1.0716				0.9332
2009			1.1374				0.8792
Nine Months Ended September 30,
2009			1.1631				0.8598
2010			1.0416				0.9601

 

(1)	The average rate is calculated as the average of the noon buying rate as reported by the Bank of Canada on the last day of each month during the period.

The following table shows the high and low U.S. dollar/Canadian dollar exchange rates for each of the months indicated. The information is based on the noon buying rate as reported by the Bank of Canada.

 

		High				Low
		(C$ per U.S.$1.00)
August 2010		C$	1.0642			C$	1.0158
September 2010			1.0520				1.0222
October 2010			1.0320				1.0030
November 2010			1.0264				1.0013
December 2010			1.0178				0.9946
January 2011			1.0022				0.9862

 

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SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA OF GAMMON GOLD

The following table sets forth certain selected consolidated financial information of Gammon Gold prepared in accordance with generally accepted accounting principles in Canada, which we refer to as Canadian GAAP, except as otherwise indicated. The information as at and for each of the years in the five-year period ended December 31, 2009 has been derived from the consolidated financial statements of Gammon Gold as filed with the SEC. The information as at and for the nine months ended September 30, 2010 and 2009 has been derived from the unaudited interim consolidated financial statements of Gammon Gold and the notes thereto filed by Gammon Gold with the SEC, which reflect, in the opinion of Gammon Gold’s management, all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of such information. Results for interim periods are not necessarily indicative of results which may be expected for any other interim period or for the fiscal year as a whole. The information presented below is only a summary and should be read in conjunction with the respective audited financial statements of Gammon Gold, including the notes thereto, incorporated by reference in this proxy statement/prospectus. See “Where You Can Find More Information” beginning on page 156.

Amounts determined under generally accepted accounting principles in the U.S., which we refer to as U.S. GAAP, are different from those determined under Canadian GAAP. For a reconciliation to U.S. GAAP of Gammon Gold’s consolidated financial statements for the nine months ended September 30, 2010, see Gammon Gold’s Form 6-K for the nine months ended September 30, 2010, filed with the SEC on December 10, 2010, and for a discussion of the principal differences between Canadian GAAP and U.S. GAAP and a reconciliation to U.S. GAAP of Gammon Gold’s consolidated financial statements for the year ended December 31, 2009, see Exhibit 99.4 to Gammon Gold’s Amendment No. 1 to Form 40-F/A for the year ended December 31, 2009, filed with the SEC on May 13, 2010, which Exhibit 99.4 is incorporated by reference in this proxy statement/prospectus. A reconciliation to U.S. GAAP for other periods presented is included in the notes to the applicable historical consolidated financial statements of Gammon Gold filed by Gammon Gold with the SEC. See “Where You Can Find More Information” beginning on page 156.

 

		At and for the Nine Months Ended September 30,								Fiscal Year Ended December 31,																Five Months Ended Dec. 31, 2005(1)				Twelve Months Ended July 31, 2005(1)
		2010				2009				2009				2008				2007				2006
		(U.S.$ in thousands, except per share data or otherwise noted)
		(unaudited)
Statement of Operations Data:
Revenues from mining operations		$	167,249			$	138,581			$	206,801			$	212,522			$	152,059			$	64,236			$	—			$	—
Earnings before other items			35,135				5,891				27,434				12,884				(61,622	)			(21,238	)			(10,865	)			(16,352	)
Interest on long-term debt			(2,374	)			(2,467	)			(3,314	)			(1,936	)			(3,897	)			(5,273	)			(206	)			—
Foreign exchange (loss)/gain			(1,945	)			(3,276	)			(4,896	)			17,600				2,961				(4,132	)			570				251
Interest and other income			1,243				500				633				410				772				785				170				1,147
Net earnings (loss) applicable to common shares			(170,945	)			(5,448	)			8,205				38,652				(89,690	)			(27,943	)			(10,152	)			(15,943	)
Net earnings (loss) applicable to common shares (U.S. GAAP basis)			(184,063	)			(17,437	)			(9,735	)			27,309				(89,868	)			(30,060	)			(10,135	)			(26,491	)
Per Common Share:
Net earnings (loss) (basic)		$	(1.24	)		$	(0.04	)		$	0.07			$	0.33			$	(0.79	)		$	(0.32	)		$	(0.14	)		$	(0.23	)
Net earnings (loss) (basic) (U.S. GAAP basis)			(1.33	)			(0.14	)			(0.08	)			0.23				(0.79	)			(0.34	)			(0.14	)			(0.40	)
Net earnings (loss) (fully diluted)			(1.24	)			(0.04	)			0.07				0.32				(0.79	)			(0.32	)			(0.14	)			(0.23	)
Net earnings (loss) (fully diluted) (U.S. GAAP basis)			(1.33	)			(0.14	)			(0.08	)			0.23				(0.79	)			(0.34	)			(0.14	)			(0.40	)
Consolidated Balance Sheet at period end:
Total assets		$	788,372			$	830,616			$	964,368			$	796,563			$	753,952			$	716,321			$	222,107			$	171,582
Net assets			637,270				667,011				792,337				646,257				595,693				478,524				167,011				155,067
Capital stock (excluding long term debt and redeemable preferred stock)			881,811				755,181				866,716				719,426				699,512				463,333				168,759				156,132
Common shares outstanding (in millions)			138				123				137				120				117				102				76				73

 

(1)	Gammon Gold changed its fiscal year end from July 31 to December 31. The reason for the change of fiscal year end was to make the reporting period of Gammon Gold consistent with other emerging precious metal producing issuers.

 

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SELECTED HISTORICAL CONSOLIDATED AND COMBINED FINANCIAL DATA

OF CAPITAL GOLD

The following table sets forth certain selected consolidated financial information of CGC prepared in accordance with U.S. GAAP. This information as at and for the three months ended October 31, 2010 and 2009 and as at and for each of the years in the five year period ended July 31, 2010 has been derived from the consolidated financial statements of CGC and notes to the consolidated financial statements as filed with the SEC. The information presented below is only a summary and should be read in conjunction with the respective audited financial statements of CGC, including the notes thereto, incorporated by reference in this proxy statement/prospectus. See “Where You Can Find More Information” beginning on page 156.

 

		At and for the Three Months Ended October 31,								Fiscal Year Ended July 31,
		2010(4)				2009				2010				2009				2008				2007				2006
		(unaudited)								(in thousands)
		(in thousands)
Statement of Operations Data:
Revenues(1)		$	18,952			$	11,727			$	60,645			$	42,757			$	33,104			$	—			$	—
Net income (loss)			2,954				2,939				11,994				10,407				6,364				(7,472	)			(4,805	)
Income (loss) per share — Basic(2)			0.05				0.06				0.25				0.22				0.15				(0.20	)			(0.17	)
Income (loss) per share — Diluted(2)(3)			0.05				0.06				0.25				0.21				0.13				—				—
Weighted average shares outstanding — Basic			60,970,736				48,482,400				48,512,828				48,315,116				43,760,000				37,452,816				28,051,118
Weighted average shares outstanding — Diluted(3)			61,158,138				48,669,802				48,703,035				49,882,770				48,867,282				37,452,816				28,051,118
Balance Sheet Data:
Cash and cash equivalents		$	9,254			$	6,773			$	12,125			$	6,448			$	10,992			$	2,225			$	2,741
Inventories			39,239				24,988				34,849				21,405				13,113				3,171				—
Property and equipment, net			68,913				19,467				21,390				18,492				22,617				17,817				1,036
Total assets			144,026				57,332				72,495				52,484				53,189				30,806				9,979
Reclamation and remediation liability			2,665				1,652				2,373				1,594				1,666				1,249				—
Long-term debt			400				3,500				800				4,400				8,375				12,500				—
Total debt			3,500				7,100				4,400				8,000				12,500				12,500				—
Total stockholders’ equity			104,434				39,356				50,929				35,765				32,507				15,241				9,453

 

(1)	There were no revenues for the fiscal years ended July 31, 2007 and 2006 because CGC’s first gold sale from production was in August 2007. Certain reclassifications and restatements have been made to conform to the current presentation.

(2)	Amounts were adjusted for retroactive effect of 4-for-1 reverse stock split.

(3)	The effect of stock options and warrants was considered anti-dilutive because CGC incurred losses for the fiscal years ended July 31, 2007 and 2006. Accordingly, CGC’s presentation of diluted net loss per share is the same as that of basic net loss per share.

(4)	Amounts include CGC acquisition of Nayarit Gold as of August 2, 2010.

 

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Acquisition of Nayarit Gold Inc.

On August 2, 2010, CGC completed its acquisition of Nayarit Gold Inc. As a result of this transaction, Nayarit Gold became a wholly-owned subsidiary of CGC. In connection with the transaction, each outstanding share of Nayarit Gold common stock was converted into 0.134048 shares of CGC common stock, plus cash paid in lieu of any fractional share. CGC issued 12,454,354 shares of its common stock to Nayarit Gold’s then current stockholders in the transaction and has reserved for issuance an additional 1,621,981 and 903,483 shares of CGC common stock upon the exercise of former Nayarit Gold warrants and options, respectively. Based upon the closing price of CGC’s common stock on August 2, 2010, the consideration received by Nayarit Gold shareholders had a value of approximately $47.6 million as detailed below.

 

		Conversion Calculation				Estimated Fair Value				Form of Consideration
		(In thousands, except per share amounts)
Number of Nayarit Gold shares outstanding as of the transaction date			92,910
Exchange ratio(1)			0.134048
Number of shares issued to Nayarit Gold shareholders			12,454
Value of Capital Gold common stock issued(1)		$	3.71			$	46,206				Capital Gold common stock
Value of Nayarit Gold’s options and warrants to be exchanged for Capital Gold options and warrants(2)							1,393				Capital Gold stock options and warrants
Total consideration transferred						$	47,599

 

(1)

In accordance with ASC 805, the fair value of equity securities issued as part of the consideration transferred was the closing market price of CGC’s common stock on the effective date of the acquisition. The pro forma shares issued equaled 12,454,354 shares of CGC common stock, which is calculated by multiplying 0.134048 by 92,909,659, being the number of shares of Nayarit Gold common stock outstanding on August 2, 2010. Nayarit Gold shareholders own approximately 20.4% of the issued and outstanding shares of CGC common stock.

(2)	Represents the fair value to acquire 1,621,981 and 903,483 shares of CGC common stock upon the exercise of former Nayarit Gold warrants and options, respectively. The fair value of the warrants and options were estimated using the Black-Scholes valuation model utilizing the assumptions noted below.

 

Stock price		$	3.71
Post conversion strike price		$	3.28 — 9.92
Average expected volatility			70	%
Dividend yield			None
Average risk-free interest rate			0.29	%
Average contractual term			0.79 years
Black-Scholes average value per warrant and option		$	0.57

The expected volatility of CGC’s stock price is based on the average historical volatility, which is based on daily observations and duration consistent with the expected life assumption and implied volatility. The average contractual term of the warrants and options is based on the remaining contractual exercise term of each warrant and option. The risk free interest rate is based on U.S. treasury securities with maturities equal to the expected life of the warrants and options.

 

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The transaction has been accounted for using the acquisition method of accounting which requires, among other things, the assets acquired and liabilities assumed to be recognized at their fair values as of the acquisition date. The following table summarizes the estimated fair values of major assets acquired and liabilities assumed on August 2, 2010:

 

		Fair Value
		(in thousands)
Cash and cash equivalents		$	50
Short-term investments			2
Prepaid expenses and sundry receivables			1,238
Property, plant and equipment			196
Mineral interests — indicated and inferred			43,780
Exploration interests			16,730
Goodwill			3,394
Accounts payable and liabilities assumed			(1,336	)
Deferred tax liability			(16,455	)
Net assets acquired		$	47,599

A single estimate of fair value results from a complex series of judgments about future events and uncertainties and relies heavily on estimates and assumptions. CGC’s judgments used to determine the estimated fair value assigned to each class of assets acquired and liabilities assumed, as well as asset lives, can materially impact CGC’s results from operations. CGC’s management allocated the acquisition cost to the assets acquired and liabilities assumed based on the estimated fair value of Nayarit Gold’s tangible and identifiable assets and liabilities. The amount allocated to the mineral and exploration interests was based on a valuation report prepared by a third party appraisal firm. The allocation is considered final as of the date of this report as management reviewed certain of the underlying assumptions and calculations used in the allocation to the assets and liabilities of Nayarit Gold that were acquired.

During the three months ended October 31, 2010, CGC incurred transaction costs consisting primarily of legal, professional, investment advisory and accounting fees of $945. These costs are included in general and administrative expenses on the consolidated statement of operations.

Pro forma Information

The following unaudited pro forma results of operations of CGC for the three months ended October 31, 2010 and 2009 assume that the acquisition of the operating assets of the significant business acquired during 2010 and 2009 had occurred on August 1 of the respective year in which the business was acquired and for the comparable period only (i.e., 2010 acquisitions are reflected in 2009). These unaudited pro forma results are not necessarily indicative of either the actual results of operations that would have been achieved had the companies been combined during these periods, nor are they necessarily indicative of future results of operations.

 

		Three Months Ended October 31, 2010				Three Months Ended October 31, 2009
		(in thousands)
Revenues		$	18,952			$	11,727
Net income (loss)		$	2,954			$	2,037
Income (loss) per common share:
Basic — net income (loss)		$	0.05			$	0.03
Diluted — net income (loss)		$	0.05			$	0.03

 

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UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION

(Expressed in thousands of U.S. dollars, unless otherwise noted)

The unaudited pro forma condensed consolidated income statement for the fiscal year ended December 31, 2009 and for the nine months ended September 30, 2010 combine the historical consolidated income statements of Gammon Gold and CGC, giving effect to the merger of Gammon Gold and CGC as if it had occurred on January 1, 2009.

The unaudited pro forma condensed consolidated balance sheet as of September 30, 2010 combines the historical consolidated balance sheets of Gammon Gold and CGC, giving effect to the merger as if it had occurred on September 30, 2010. The historical consolidated financial information has been adjusted to give effect to pro forma events that are (1) directly attributable to the merger, (2) factually supportable, and (3) with respect to the income statements, expected to have a continuing impact on the consolidated results. The unaudited pro forma condensed consolidated financial information has been prepared in accordance with U.S. GAAP and should be read in conjunction with the accompanying notes to the unaudited pro forma condensed consolidated financial statements.

On August 2, 2010, prior to the proposed merger of Gammon Gold and CGC, CGC acquired Nayarit Gold pursuant to a merger agreement. Following the completion of this transaction, the combined entity became known as CGC. The operating results and financial position of Nayarit Gold are reflected in the financial statements of CGC as at and for the three months ended October 31, 2010. The operating results of Nayarit Gold are not reflected in the financial statements of CGC for any periods prior to August 2, 2010. Management of Gammon Gold has reflected the consolidated financial information of Nayarit Gold in the pro forma condensed consolidated income statements for the year ended December 31, 2009 and the nine months ended September 30, 2010 in order to provide the additional information necessary to assess the implications of the merger with CGC.

Management has determined that no material adjustments to the CGC or Nayarit Gold financial statements are required to comply with the accounting policies used by Gammon Gold in the preparation of its consolidated financial statements.

In addition, the unaudited pro forma condensed consolidated financial information was based on and should be read in conjunction with the:

 

•

separate historical consolidated audited financial statements of Gammon Gold as at and for the year ended December 31, 2009, prepared in accordance with Canadian GAAP, and the supplemental financial statement schedule entitled “Reconciliation with United States Generally Accepted Accounting Principles,” and the related notes included in Gammon Gold’s Annual Report on Form 40-F for the fiscal year ended December 31, 2009, as amended by Amendment No.1 to Form 40-F/A for the fiscal year ended December 31, 2009, which are incorporated by reference to this proxy statement/prospectus;

 

•

unaudited consolidated financial statements of Gammon Gold as at and for the nine months ended September 30, 2010, prepared in accordance with Canadian GAAP and the supplemental financial statement schedule entitled “Reconciliation with United States Generally Accepted Accounting Principles,” and the related notes included in Gammon Gold’s Report of Foreign Issuer on Form 6-K filed on December 10, 2010 which is incorporated by reference into this proxy statement/prospectus;

 

•

audited consolidated financial statements of CGC as at and for the fiscal year ended July 31, 2010 and 2009, prepared in accordance with U.S. GAAP, and the related notes included in CGC’s Annual Report on Form 10-K for the fiscal year ended July 31, 2010, which is incorporated by reference into this proxy statement/prospectus;

 

•

unaudited consolidated financial statements of CGC as at and for the six months ended January 31, 2010 and 2009, prepared in accordance with U.S. GAAP, and the related notes included in CGC’s

 

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Quarterly Report on Form 10-Q for the fiscal quarter ended January 31, 2010, which is incorporated by reference into this proxy statement/prospectus;

 

•

unaudited consolidated financial statements of CGC as at and for the three months ended October 31, 2010 and 2009, prepared in accordance with U.S. GAAP, and the related notes included in CGC’s Quarterly Report on Form 10-Q for the fiscal quarter ended October 31, 2010, which is incorporated by reference into this proxy statement/prospectus;

 

•

unaudited interim consolidated financial statements of Nayarit Gold as at and for the nine months ended June 30, 2010, prepared in accordance with Canadian GAAP and reconciled to U.S. GAAP, and the related notes included in Annex E to this proxy statement/prospectus, which is incorporated by reference into this proxy statement/prospectus; and

 

•

audited consolidated financial statements of Nayarit Gold as at and for the year ended September 30, 2009, prepared in accordance with Canadian GAAP and reconciled to U.S. GAAP, and the related notes included in Amendment No. 1 to CGC’s Current Report on Form 8-K/A, as filed with the SEC on October 13, 2010, which is incorporated by reference into this proxy statement/prospectus.

The pro forma condensed consolidated financial information should be read in conjunction with the description of the proposed merger in this document and the financial statements, together with notes thereon, that are included in this document, or incorporated by reference herein.

The financial information presented for Nayarit Gold was prepared based on the historical financial statements of Nayarit Gold prepared and presented in Canadian dollars and was translated from Canadian dollars to U.S. dollars at the average exchange rate for the applicable period for the income statement data. In addition, the historical income statements for Nayarit Gold used in the preparation of the pro forma condensed consolidated income statement were adjusted in the pro forma only to reflect the reconciliation from Canadian GAAP to U.S. GAAP. The main adjustments in the pro forma income statements as it relates to the unaudited consolidated income statements of Nayarit Gold for the nine months ended June 30, 2010, the twelve months ended September 30, 2009, and the three months ended December 31, 2009 and 2008, were adjustments to exploration expense of C$934, C$6,865, C$360 and C$2,310, respectively.

Financial information for the three months ended October 31, 2010 of Nayarit Gold is included in the unaudited consolidated interim financial statements of CGC for the three months ended October 31, 2010, as CGC’s acquisition of Nayarit Gold was completed on August 2, 2010. The income statement data of Nayarit Gold for the six months ended June 30, 2010, prior to the acquisition by CGC, has been reflected separately in the unaudited pro forma condensed consolidated income statement. Nayarit Gold’s unaudited consolidated income statement for the six months ended June 30, 2010 was constructed by deducting the three months ended December 31, 2009 from the nine months ended June 30, 2010.

The unaudited consolidated income statement for Nayarit Gold for the year ended December 31, 2009 was constructed by adding and deducting the three months ended December 31, 2009 and the three months ended December 31, 2008, respectively, from the year ended September 30, 2009.

The audited consolidated financial statements of Capital Gold for the years ended July 31, 2010 and 2009, the unaudited consolidated financial statements of Capital Gold for the six months ended January 31, 2010 and 2009 and the unaudited consolidated financial statements of Capital Gold for the three months ended October 31, 2010 have been used to approximate the year ended December 31, 2009 and the nine months ended September 30, 2010. The unaudited consolidated income statement for the nine months ended October 31, 2010 was constructed by adding and deducting the three months ended October 31, 2010 and the six months ended January 31, 2010, respectively, from the year ended July 31, 2010. The unaudited income statement for the year ended January 31, 2010 was constructed by adding and deducting the six months ended January 31, 2010 and the six months ended January 31, 2009, respectively, from the year ended July 31, 2009.

 

 

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The unaudited pro forma condensed consolidated financial information has been presented for informational purposes only. The pro forma information is not necessarily indicative of what the combined company’s financial position or results of operations actually would have been had the merger been completed as of the dates indicated. In addition, the unaudited pro forma condensed consolidated financial information does not purport to project the future financial position or operating results of the combined company. There were no material transactions between Gammon Gold and CGC during the periods presented in the unaudited pro forma condensed consolidated financial information that would need to be eliminated. Transactions between Capital Gold and Nayarit Gold during the periods presented in the unaudited pro forma condensed consolidated financial information have been eliminated as a pro forma adjustment. See notes to the pro forma condensed consolidated financial information below.

The unaudited pro forma condensed consolidated financial information has been prepared using the acquisition method of accounting under U.S. GAAP, which is subject to change and interpretation. Gammon Gold has been treated as the acquirer for accounting purposes. Assumptions and estimates underlying the pro forma adjustments are described in the accompanying notes, which should be read in connection with the unaudited pro forma combined financial information. In the opinion of Gammon Gold’s management, all adjustments considered necessary for a fair presentation have been included.

The acquisition accounting is dependent upon certain valuations and other studies that have not yet begun or are not yet completed, and will not be completed until after the closing of the merger. Accordingly, the pro forma adjustments are preliminary and have been made solely for the purpose of providing unaudited pro forma condensed consolidated financial information and are necessarily based upon preliminary information available at the time of the preparation of this proxy statement/prospectus. Differences between these preliminary estimates and the final acquisition accounting will occur and these differences could have a material impact on the accompanying unaudited pro forma condensed consolidated financial information and the combined company’s future results of operations and financial position.

The unaudited pro forma condensed consolidated financial information does not reflect any cost savings, operating synergies or revenue enhancements that the combined company may achieve as a result of the merger, the costs to integrate the operations of Gammon Gold, CGC and Nayarit Gold or the costs necessary to achieve these cost savings, operating synergies and revenue enhancements. The merger is currently expected to be completed during the first quarter of 2011, subject to receipt of CGC stockholder approval and other usual and customary closing conditions.

 

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Gammon Gold Inc.

Unaudited Pro Forma Condensed Consolidated Balance Sheet

As at September 30, 2010

 

(in thousands of U.S. dollars)		Gammon Gold				CGC								Pro Forma Adjustments (note 6)				Consolidated
ASSETS
Current assets
Cash and cash equivalents		$	106,998			$	9,254				(v	)		$	(48,457	)		$	60,795
											(iv	)			(7,000	)
Accounts and other receivables			16,266				2,665												18,931
Stockpiles and ore on leach pads			77,534				36,933				(vi	)			44,586				159,053
Material and supply inventories			20,379				2,306								—				22,685
Other current assets			3,449				898								—				4,347
Total current assets		$	224,626			$	52,056							$	(10,871	)		$	265,811
Mining interests, property and equipment			338,247				68,948				(vii	)			73,397				480,592
Exploration property interests			79,599				17,666								—				97,265
Intangible assets, net (note 5, vi)			3,549				734								—				4,283
Goodwill			—				3,480				(viii	)			124,812				128,292
Other assets			16,516				1,142				(ix	)			(1,065	)			16,593
Total assets		$	662,537			$	144,026							$	186,273			$	992,836

 

 

 

See accompanying notes

 

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Gammon Gold Inc.

Unaudited Pro Forma Condensed Consolidated Balance Sheet

As at September 30, 2010

 

(in thousands of U.S. dollars)		Gammon Gold				CGC								Pro Forma Adjustments (note 6)				Consolidated
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
Accounts payable and accrued liabilities		$	40,083			$	7,584							$	—			$	47,667
Current portion of deferred tax liability			7,909				7,666				(x	)			12,484				28,059
Current portion of long-term debt and capital leases			4,399				3,100								—				7,499
Current portion of other long-term obligations			1,872				—								—				1,872
Total current liabilities		$	54,263			$	18,350							$	12,484			$	85,097
Reclamation and remediation liabilities			6,533				2,665								—				9,198
Other liabilities			3,632				308								—				3,940
Long-term debt and capital leases			29,596				400								—				29,996
Employee future benefits			2,785				—								—				2,785
Deferred tax liability			28,713				17,869				(x	)			20,551				67,133
Total long-term liabilities			71,259				21,242								20,551				113,052
Total liabilities		$	125,522			$	39,592							$	33,035			$	198,149
Stockholders’ equity
Common stock			881,811				6				(i	)			(6	)			1,143,170
											(ii	)			261,359
Contributed surplus			20,267				—				(iii	)			3,313				23,580
Additional paid-in capital			—				113,354				(i	)			(113,354	)			—
Accumulated deficit			(367,459	)			(7,150	)			(i	)			7,150				(374,459	)
											(iv	)			(7,000	)
Accumulated other comprehensive income (loss)			2,396				(1,776	)			(i	)			1,776				2,396
Total stockholders’ equity			537,015				104,434								153,238				794,687
Total liabilities and stockholders’ equity		$	662,537			$	144,026							$	186,273			$	992,836

 

 

See accompanying notes

 

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Gammon Gold Inc.

Unaudited Pro Forma Condensed Consolidated Income Statement

For the Nine Months ended September 30, 2010

 

																		Pro Forma
(in thousands of U.S. dollars)		Gammon Gold				CGC				Nayarit Gold								Adjustments (note 6)				Consolidated
Revenue from mining operations		$	167,249			$	54,642				—				(xi)			$	1,403			$	223,294
Expenses
Production costs, excluding amortization and depletion			(87,483	)			(20,492	)			—				(xi)				(1,403	)			(109,378	)
Refining costs			(1,424	)			—				—								—				(1,424	)
General and administrative costs			(19,302	)			(8,447	)			(751	)							—				(28,500	)
Amortization, depletion and accretion			(38,337	)			(2,657	)			(26	)			(vii)				(4,769	)			(45,789	)
Exploration			(13,487	)			(1,558	)			(599	)							—				(15,644	)
Impairment charge			(212,090	)			—				—								—				(212,090	)
Loss on disposal of assets			(2,437	)			—				—								—				(2,437	)
			(374,560	)			(33,154	)			(1,376	)							(6,172	)			(415,262	)
Earnings (loss) before other items			(207,311	)			21,488				(1,376	)							(4,769	)			(191,968	)
Interest on long-term debt			(2,374	)			(966	)			(2	)							—				(3,342	)
Foreign exchange gain (loss)			(1,945	)			—				3								—				(1,942	)
Interest and other income (expense)			656				(57	)			1								—				600
Transaction costs			—				—				(630	)							—				(630	)
			(3,663	)			(1,023	)			(628	)							—				(5,314	)
Earnings (loss) before income taxes			(210,974	)			20,465				(2,004	)							(4,769	)			(197,282	)
Income tax expense (recovery)			(26,911	)			11,401				—				(x)				(1,335	)			(16,845	)
Net earnings (loss)		$	(184,063	)		$	9,064			$	(2,004	)						$	(3,434	)		$	(180,437	)
Earnings (loss) per share
Basic (xii)			(1.33	)																			(1.06	)
Diluted (xii)			(1.33	)																			(1.06	)
Weighted average number of shares outstanding (in thousands)
Basic (xii)			138,339																				170,793
Diluted (xii)			138,339																				170,793

 

See accompanying notes

 

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Gammon Gold Inc.

Unaudited Pro Forma Condensed Consolidated Income Statement

For the Year ended December 31, 2009

 

(in thousands of U.S. dollars)		Gammon Gold				CGC				Nayarit Gold								Pro  Forma Adjustments (note 6)				Consolidated
Revenue from mining operations		$	206,801			$	47,168			$	—				(xi	)		$	1,096			$	255,065
Expenses
Production costs, excluding amortization and depletion			(104,491	)			(15,921	)			—				(xi	)			(1,096	)			(121,508	)
Refining costs			(2,855	)			—				—								—				(2,855	)
General and administrative costs			(37,054	)			(6,686	)			(2,091	)							—				(45,831	)
Amortization, depletion and accretion			(48,327	)			(2,292	)			(46	)			(vii	)			(6,359	)			(57,024	)
Exploration			(11,801	)			(1,385	)			(4,267	)							—				(17,453	)
			(204,528	)			(26,284	)			(6,404	)							(7,455	)			(244,671	)
Earnings (loss) before other items			2,273				20,884				(6,404	)							(6,359	)			10,394
Interest on long-term debt			(3,314	)			(1,383	)			(16	)							—				(4,713	)
Foreign exchange loss			(4,896	)			—				(124	)							—				(5,020	)
Interest and other income			633				27				22								—				682
Loss on change in fair value of derivative			—				(1,397	)			—								—				(1,397	)
Other expense			—				(143	)			—								—				(143	)
			(7,577	)			(2,896	)			(118	)							—				(10,591	)
Earnings (loss) before income taxes			(5,304	)			17,988				(6,522	)							(6,359	)			(197	)
Income tax expense (recovery)			4,431				6,830				—				(x	)			(1,780	)			9,481
Net earnings (loss)		$	(9,735	)		$	11,158			$	(6,522	)						$	(4,579	)		$	(9,678	)
Earnings (loss) per share
Basic (xii)			(0.08	)																			(0.06	)
Diluted (xii)			(0.08	)																			(0.06	)
Weighted average number of shares outstanding (in thousands)
Basic (xii)			125,689																				157,640
Diluted (xii)			125,689																				157,640

 

 

See accompanying notes

 

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Gammon Gold Inc.

Notes to the Unaudited Pro Forma Condensed Consolidated Financial Statements

September 30, 2010 and December 31, 2009

(In thousands of U.S. dollars, unless otherwise noted)

1. Description of the transaction

Gammon Gold and CGC have entered into a definitive merger agreement pursuant to which Gammon Gold will offer to acquire all of the issued and outstanding common stock of CGC in a cash and share transaction. In order to effect the merger transaction, CGC will merge with and into a wholly-owned subsidiary of Gammon Gold. As a result of this merger, the shares of CGC common stock will no longer be listed on any stock exchange or quotation system.

Under the terms of the merger agreement, each share of common stock of CGC will be exchanged for 0.5209 common shares of Gammon Gold and a cash payment in the amount of $0.79 per CGC share.

2. Basis of presentation

The unaudited pro forma condensed consolidated financial information was prepared using the acquisition method of accounting under U.S. GAAP in accordance with Accounting Standards Codification, or ASC, Topic 805, Business Combinations (“ASC 805”). Gammon Gold is considered the legal and accounting acquirer and Capital Gold is the legal and accounting acquirer of Nayarit Gold. The unaudited pro forma condensed consolidated financial information was based on the historical financial statements of Gammon Gold, CGC and Nayarit Gold. Certain reclassifications have been made to the historical financial statements in preparation of the pro forma condensed consolidated financial information to conform to the financial statement presentation currently adopted by Gammon Gold.

The acquisition accounting is dependent upon certain valuations and other studies or events that have yet to progress to a stage where there is sufficient information for a definitive measurement. Accordingly, the pro forma adjustments are preliminary and have been made solely for the purpose of providing unaudited pro forma condensed consolidated financial information. Differences between these preliminary estimates and the final acquisition accounting will occur and these differences could have a material impact on the accompanying unaudited pro forma condensed consolidated financial information and the combined company’s future results of operations and financial position.

ASC 805 establishes that the consideration transferred be measured at the closing date of the acquisition at the then-current market price. This particular requirement may result in the equity consideration being valued differently from the amount reflected in this unaudited pro forma consolidated financial information. See note 4 for the estimate of consideration expected to be transferred.

Under the acquisition method of accounting, the assets acquired and liabilities assumed of CGC will be recorded as of the completion of the merger, primarily at their respective fair values and added to those of Gammon Gold. The results of operations of CGC and will be included in the financial statements of the combined company entity as of the date of the completion of the merger.

Under ASC 805, acquisition-related transaction costs (i.e., advisory, legal, valuation, other professional fees) and certain acquisition-related restructuring charges affecting the target company are not included as a component of consideration transferred but are accounted for as expenses in the periods during which the costs are incurred. Total acquisition-related transaction costs expected to be incurred by Gammon Gold are estimated to be approximately $7,000. The estimated transaction costs are reflected in the unaudited pro forma condensed consolidated balance sheet as a reduction to cash and cash equivalents and an increase to accumulated deficit. The unaudited pro forma condensed consolidated income statements do not reflect any acquisition-related transaction costs, or restructuring charges expected to be incurred in connection with the merger; these charges are expected to be in the range of approximately $7,000 and $5,000, respectively, on a pre-tax basis.

 

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Gammon Gold Inc.

Notes to the Unaudited Pro Forma Condensed Consolidated Financial Statements—(Continued)

September 30, 2010 and December 31, 2009

(In thousands of U.S. dollars, unless otherwise noted)

 

3. Accounting policies

The pro forma condensed consolidated financial information has been prepared using accounting policies consistent with the policies used in preparing Gammon Gold’s audited consolidated financial statements for the year ended December 31, 2009, in accordance with Canadian GAAP, reconciled to U.S. GAAP.

Upon consummation of the merger, Gammon Gold will review, in detail, the accounting policies of CGC and Nayarit Gold. As a result of that review, Gammon Gold may identify differences between the accounting policies of the two companies that, when conformed, could have a material impact on the consolidated financial statements. At this time, Gammon Gold is not aware of any differences that would have a material impact on the pro forma condensed consolidated financial information.

4. Estimate of consideration expected to be transferred

The following is a preliminary estimate of consideration to be transferred to effect the acquisition:

 

		Conversion calculation		Estimated fair value		Form of consideration
Total Capital Gold shares outstanding immediately prior to the acquisition by Gammon Gold		61,338,136
Multiplied by the exchange ratio of 0.5209 common shares of Gammon Gold for each share of CGC outstanding		31,951,035 Gammon Gold shares to be issued
Multiplied by Gammon Gold’s stock price as at February 7, 2011		$8.18		$261,359		Gammon Gold Common Stock
Number and estimated fair value of vested CGC stock options and warrants expected to be exchanged for stock options and warrants in the combined company (1)		1,522,084		$3,313		Gammon Gold Options and Warrants
Cash payment in the amount of $0.79 per share		$48,457		$48,457		Cash
Estimate of consideration to be transferred (2)				$313,129

 

(1)

For this pro forma condensed consolidated financial information and for determining the fair value of consideration paid with regard to Capital Gold’s options and warrants, weighted average exercise prices of $6.53 and $8.79 have been used for all options and warrants, respectively. The additional purchase price of approximately $3.3 million relating to the stock options and warrants represents a weighted-average fair value of $4.30 per replacement option and $0.48 per replacement warrant, which was calculated using the Black-Scholes option pricing model.

This calculation considered the closing price of Gammon Gold common shares of $8.18 per share as at February 7, 2011, and the following assumptions:

 

Expected volatility:			61.98%
Expected life:			3.6 years (options); 0.1 years (warrants)
Expected dividend yield:			0%
Risk-free interest rate:			1.83%

 

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Gammon Gold Inc.

Notes to the Unaudited Pro Forma Condensed Consolidated Financial Statements—(Continued)

September 30, 2010 and December 31, 2009

(In thousands of U.S. dollars, unless otherwise noted)

 

The expected life of the replacement stock options and warrants was determined by taking into account the contractual life of the replacement stock options and warrants and estimated exercise pattern of the replacement stock option and warrant holders. The expected volatility and risk-free rates were determined based on current market information, and the dividend yield was derived from historical experience as well as information available to management.

 

(2)

The estimated consideration expected to be transferred reflected in this unaudited pro forma condensed consolidated financial information does not purport to represent what the actual consideration transferred will be when the merger is consummated. In accordance with ASC 805, the fair value of equity securities issued as part of the consideration transferred will be measured on the closing date of the merger at the then-current market price. This requirement will likely result in a per share equity component different from the $8.18 assumed in this unaudited pro forma condensed consolidated financial information and that difference may be material. For purposes of determining the consideration transferred within this unaudited pro forma condensed consolidated financial information, the closing Gammon Gold common share price of $8.18 on February 7, 2011 was used in the calculation. Management has used a 5% variability factor to illustrate the impact share price movements have on consolidated goodwill and shareholders’ equity. Gammon Gold management deems this variability factor reasonable in light of current share price volatility.

 

		Pro forma purchase price allocation				Increase in Gammon Gold share price by 5%				Decrease in Gammon Gold share price by 5%
Price per share applied in the determination of consideration		$	8.18			$	8.59			$	7.77
Shares issued			31,951,035				31,951,035				31,951,035
Consideration issued to CGC shareholders (excluding warrants and stock options)		$	309,816			$	322,917			$	296,717
Estimated fair value of replacement stock options and warrants		$	3,313			$	3,701			$	2,966
Total consideration		$	313,129			$	326,618			$	299,683
Consolidated goodwill		$	128,292			$	141,780			$	114,845
Consolidated shareholders’ equity		$	794,687			$	808,175			$	781,241

5. Estimate of assets to be acquired and liabilities to be assumed

The following is a preliminary estimate of the assets to be acquired and the liabilities to be assumed by Gammon Gold in the merger, reconciled to the estimate of consideration expected to be transferred as a result of the acquisition as at September 30, 2010:

 

Book value of net assets acquired		$	104,434
Fair value adjustments to:
Stockpiles and ore on leach pads (i)			44,586
Mining interest and property and equipment (ii)			73,397
Exploration property interests (iii)			—
Other assets (iv)			(1,065	)
Deferred income taxes (v)			(33,035	)
Intangible assets (vi)			—
Goodwill (vii)			124,812
Estimate of consideration expected to be transferred		$	313,129

 

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Gammon Gold Inc.

Notes to the Unaudited Pro Forma Condensed Consolidated Financial Statements—(Continued)

September 30, 2010 and December 31, 2009

(In thousands of U.S. dollars, unless otherwise noted)

 

 

i.

Reflects an adjustment of $44,586 to record CGC’s stockpiles and ore on leach pads inventory at their estimated fair values. In connection with the merger, Gammon Gold is required to record this asset on the consolidated balance sheet at fair value. Gammon Gold’s assumptions as to the fair value of this asset may change as it conducts a valuation of CGC’s stockpiles and ore on leach pads following the completion of the merger. Gammon Gold’s pro forma fair value adjustment to stockpiles and ore on leach pads is based on CGC’s balance at October 31, 2010, adjusted as follows based on the estimates of Gammon Gold management:

 

a.

Estimated selling prices of finished goods less the sum of costs to complete, costs of disposal and a reasonable profit allowance for the completing and selling effort of a market participant based on profit for similar finished goods.

 

ii.	Reflects an adjustment of $73,397 to record the preliminary fair value adjustment allocated to Capital Gold’s mining interests.

iii.	The carrying value of the exploration properties acquired is assumed to approximate fair value, as CGC recorded these properties at fair value upon its acquisition of Nayarit Gold on August 2, 2010.

iv.

Reflects an adjustment of $1,065 relating to eliminating deferred financing fees previously deferred by CGC. The adjustment reflects the net balance as of October 31, 2010. Gammon Gold management has determined the fair value of this account to be nil. The associated tax benefit for these charges has not been recognized as it does not meet the “more likely than not” criteria for recognition. The carrying value of all other assets and liabilities is assumed to approximate fair value.

 

v.

Represents the estimated deferred income tax liability, based on an estimated income tax rate of 28%, multiplied by the estimated differences between the fair value of the purchase price allocation adjustments made to assets and liabilities, excluding goodwill, and the estimated tax bases of the associated assets and liabilities, excluding goodwill. The pro forma adjustment to record the effect of deferred taxes was computed as follows:

 

Estimated differences between the estimated fair values and the tax bases:
Stockpiles and ore on leach pads			44,586
Mining interest and property and equipment			73,397
Total estimated differences			117,983
Associated deferred income taxes at 28% tax rate:			33,035
Current portion of deferred tax liability relating to the Stockpiles and ore on leach pads adjustment			12,484
Non-current portion			20,551

 

vi.	The carrying value of the intangible assets acquired is assumed to approximate fair value.

vii.	Goodwill represents the excess of the preliminary purchase price over the estimated fair value of assets acquired and liabilities assumed.

6. Pro forma adjustments and assumptions

Adjustments included in the “Pro forma adjustments” column represent the following:

 

(i)	This pro forma adjustment eliminates the historical equity accounts of CGC and Nayarit Gold.

 

 

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Gammon Gold Inc.

Notes to the Unaudited Pro Forma Condensed Consolidated Financial Statements—(Continued)

September 30, 2010 and December 31, 2009

(In thousands of U.S. dollars, unless otherwise noted)

 

(ii)	This pro forma adjustment reflects the issuance of 31,951,035 shares of Gammon Gold common shares for $8.18 per share in connection with the acquisition of 100% of the outstanding shares of Capital Gold common stock.

 

(iii)

This pro forma adjustment reflects the fair value of 677,196 replacement stock options and 796,011 replacement warrants outstanding. 97,756 of the total 796,011 replacement warrants will be exchangeable for 1.5 Gammon Gold common shares, while the remaining replacement stock options and warrants will be exchangeable on a 1:1 basis for Gammon Gold common shares. The replacement stock options and warrants have a fair value of $4.30 and $0.48, respectively.

 

(iv)

This pro forma adjustment reflects the estimated transaction costs of $7,000 associated with the merger, reflected as an adjustment to cash and cash equivalents, and accumulated deficit as such costs are expensed. These costs are not expected to continue, and as such, an adjustment has not been included within the pro forma condensed consolidated income statements.

 

(v)	This pro forma adjustment reflects the cash payment of $0.79 multiplied by 61,338,136, being the common shares of CGC common stock outstanding on February 4, 2011.

 

(vi)

This pro forma adjustment reflects the estimated adjustment to adjust the stockpiles and ore on leach pads asset to estimated fair market value. The combined company’s cost of sales will reflect the increased valuation of CGC’s inventory as the acquired inventory is sold, which is expected to occur within the first year post-acquisition. There is no continuing impact of the acquired inventory adjustment on the consolidated income statements, and as such, it is not included in the unaudited pro forma condensed consolidated income statements.

 

(vii)

This pro forma adjustment reflects the estimated increase to mining interests associated with the preliminary fair value adjustment of approximately $73,400, and the associated increase to depreciation and amortization of approximately $6,400 and $4,800 for the year ended December 31, 2009 and the nine months ended September 30, 2010, respectively.

 

(viii)

This pro forma adjustment reflects the estimate of acquisition-date goodwill associated with the merger transaction.

 

(ix)	This pro forma adjustment reflects Gammon Gold management’s estimate of the adjustment necessary to reflect the deferred financing fees recorded by Capital Gold.

 

(x)

This pro forma adjustment reflects an estimate of the tax impacts of the acquisition on the balance sheet and income statements, primarily related to estimated fair value adjustments for stockpiles and ore on leach pads, and mining interests. The estimated rate is based on the historical effective tax rate for Gammon Gold, which is 28% for the year ended December 31, 2009 and the nine months ended September 30, 2010. Gammon Gold believes that using its historical effective tax rate is factually supportable in that it is derived from statutory rates. The actual effective tax rate of the combined company could be significantly different (either higher or lower) than the estimated tax rate, and depends on post-acquisition activities, including repatriation decisions. On January 1, 2010, the Mexican government enacted legislation that increases the regular income tax rate from 28% to 30%. The regular income tax rate will decrease to 29% in 2013 and then back to 28% in 2014, according to legislation. The preliminary estimate of the deferred tax liability at September 30, 2010 was computed using a rate of 28% and could be significantly different (either higher or lower) depending upon several factors.

 

 

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Gammon Gold Inc.

Notes to the Unaudited Pro Forma Condensed Consolidated Financial Statements—(Continued)

September 30, 2010 and December 31, 2009

(In thousands of U.S. dollars, unless otherwise noted)

 

(xi)

CGC’s accounting policy is to net revenues from sales of silver against production costs as CGC considers silver to be a by-product. Gammon Gold sells silver directly and, accordingly, such amounts are recognized as revenue. A pro forma adjustment has been presented to classify silver sales on a basis consistent with Gammon Gold’s accounting policy.

 

(xii)

The unaudited pro forma consolidated basic and diluted earnings (loss) per share for the periods presented are based on the combined basic and diluted weighted-average shares. The historical basic and diluted weighted average shares of CGC were assumed to be replaced by the shares expected to be issued by Gammon Gold to effect the merger.

 

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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

Some of the statements contained or incorporated by reference in this proxy statement/prospectus, including those relating to Gammon Gold and CGC’s strategies and other statements that are predictive in nature, that depend upon or refer to future events or conditions, or that include words such as “expects,” “anticipates,” “intends,” “plans,” “believes,” “estimates,” “will,” “should,” “may” or similar expressions, are forward-looking statements within the meaning of Section 21E of the Exchange Act and Section 27A of the Securities Act of 1933, as amended, which we refer to in this document as the Securities Act. Without limiting the generality of the preceding sentence, statements contained in the sections “Proposal No. 1: The Merger — CGC’s Reasons for the Merger; Recommendation of the CGC Board of Directors,” “Proposal No. 1: The Merger — Opinion of Stifel, Nicolaus & Company, Incorporated,” and “Proposal No. 1: The Merger — Gammon Gold’s Reasons for the Merger” include forward-looking statements. These statements are not historical facts but instead represent only Gammon Gold and/or CGC’s expectations, estimates and projections regarding future events.

The forward-looking statements contained or incorporated by reference in this proxy statement/prospectus are not guarantees of future performance and involve certain risks and uncertainties that are difficult to predict. The future results and shareholder values of Gammon Gold and CGC may differ materially from those expressed in the forward-looking statements contained or incorporated by reference in this proxy statement/prospectus due to, among other factors, the matters set forth under “Risk Factors” beginning on page 19, the parties’ ability to obtain the regulatory, shareholder and other approvals required for the merger on the terms and within the time expected, pending litigation, the price of gold and silver, the risks of exploration, development and mining, the risk that Gammon Gold will not be able to integrate successfully the businesses of CGC or that such integration will be more time consuming or costly than expected, the risk that expected synergies and benefits of the merger and other benefits described under “Proposal No. 1: The Merger — Gammon Gold’s Reasons for the Merger” will not be realized within the expected time frame or at all, increased operating costs, labor disruption, civil unrest, employee loss and business disruption following the merger and the factors detailed in each company’s filings with the SEC, including the factors detailed in Gammon Gold’s Form 40-F for its fiscal year ended December 31, 2009, as amended by Amendment No. 1 to Form 40-F/A for its fiscal year ended December 31, 2009, Gammon Gold’s reports on Form 6-K and CGC’s Annual Report on Form 10-K for the fiscal year ended July 31, 2010, as amended by Form 10-K/A, CGC’s Quarterly Report on Form 10-Q for the quarter ended October 31, 2010 and CGC’s Current Reports on Form 8-K.

We caution you not to place undue reliance on the forward-looking statements, which speak only as of the date of this proxy statement/prospectus, in the case of forward-looking statements contained in this proxy statement/prospectus, or the dates of the documents incorporated by reference into this proxy statement/prospectus, in the case of forward-looking statements made in those incorporated documents. Neither Gammon Gold nor CGC undertakes any obligation to update or release any revisions to these forward-looking statements to reflect events or circumstances after the date of this proxy statement/prospectus or to reflect the occurrence of unanticipated events, except as required by law.

 

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THE SPECIAL MEETING

This section contains information for CGC stockholders about the special meeting that CGC has called to allow its stockholders to consider the proposal to approve and adopt the plan of merger contained in the merger agreement. CGC is mailing this proxy statement/prospectus to its stockholders on or about February 16, 2011. Together with this proxy statement/prospectus, CGC is sending a notice of the special meeting and a form of proxy that CGC’s board of directors is soliciting for use at the special meeting and at any adjournments or postponements of the special meeting.

Date, Time and Place

The special meeting will be held on March 18, 2011, at Ballard Spahr LLP, 1735 Market Street, 51^st Floor, Philadelphia, Pennsylvania 19103, local time at 10:00 a.m.

Purpose of the Special Meeting

At the special meeting, CGC stockholders will be asked to:

 

•

approve and adopt the plan of merger contained in the merger agreement;

 

•

approve the adjournment or postponement of the special meeting, if necessary or appropriate, including to solicit additional proxies if there are not sufficient votes to adopt the merger agreement at the time of the special meeting; and

 

•

consider and vote on such other business as may properly come before the special meeting or any adjournments or postponements thereof.

Record Date; Outstanding Shares; Shares Entitled to Vote

Only holders of record of CGC common stock at the close of business on February 14, 2011, are entitled to notice of and to vote at the special meeting. As of the record date, there were 61,338,136 shares of CGC common stock outstanding and entitled to vote at the special meeting, held by 970 holders of record. Each holder of CGC common stock is entitled to one vote for each share of CGC common stock owned as of the record date.

A complete list of CGC stockholders will be available for review at the special meeting and at the executive offices of CGC during regular business hours for a period of ten days before the special meeting.

Quorum and Vote Required

A majority of the shares of CGC common stock entitled to vote at any meeting of stockholders must be present in person or represented by proxy at the commencement of the special meeting to constitute a quorum. A quorum must have been present at the commencement of any meeting before a vote can be taken on the proposal to approve and adopt the plan of merger contained in the merger agreement, or any other matter except adjournment of the meeting due to the absence of a quorum. Abstentions and broker non-votes, if any, which are described below, will be counted as present for purposes of determining the presence of a quorum at the special meeting. If a quorum is not present or if there are not sufficient votes in favor of the proposal to approve and adopt the plan of merger contained in the merger agreement, CGC expects that the special meeting will be adjourned or postponed to solicit additional proxies. At any subsequent reconvening of the special meeting, all proxies will be voted in the same manner as the proxies would have been voted at the original convening of the special meeting, except for any proxies that have been effectively revoked or withdrawn prior to the subsequent meeting.

In accordance with Delaware law and CGC’s certificate of incorporation and bylaws, the proposal to approve and adopt the plan of merger contained in the merger agreement requires the affirmative vote of the holders of a majority of the outstanding shares of CGC common stock entitled to vote thereon. In addition,

 

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Canadian securities law requires the affirmative vote of a majority of the votes cast by holders of shares of CGC common stock present in person or represented by proxy at the special meeting and entitled to vote on the matter, excluding the votes cast by certain persons entitled to receive change of control payments in connection with the merger. CGC’s board of directors urges CGC stockholders to complete, date and sign the accompanying proxy card and return it promptly in the enclosed postage paid envelope, or to vote by telephone or through the Internet.

If you do not vote, or you abstain from voting your shares with respect to the proposal to approve the plan of merger, it will have the same effect as a vote against the approval of the plan of merger contained in the merger agreement. Unless you have exercised your appraisal rights in accordance with the DGCL, if the proposal to approve and adopt the plan of merger contained in the merger agreement receives the required approval of CGC’s stockholders and the merger is completed, your shares of CGC common stock will be converted into the right to receive the merger consideration even though you did not vote.

The affirmative vote of a majority of the votes cast by the holders of the CGC common stock at the special meeting is required to approve the proposal to adjourn or postpone the special meeting, if necessary or appropriate, including to solicit additional proxies. If you do not vote, or you abstain from voting, your shares with respect to the proposal to approve such adjournment or postponement, it will have no effect on such proposal.

Additionally, even if you do not vote your shares with respect to either of the proposals that are the subject of the special meeting, your vote will still be counted toward the quorum requirement at the special meeting.

Under the rules that govern brokers who are voting shares held in “street name,” which means such shares are held of record by a broker, bank or other nominee, brokers who hold shares of CGC common stock in “street name” for a beneficial owner of those shares typically have the authority to vote in their discretion on “routine” proposals when they have not received instructions from beneficial owners. However, brokers are not allowed to exercise their voting discretion with respect to the approval of matters that are “non-routine,” such as approval of the proposal to approve and adopt the plan of merger contained in the merger agreement, without specific instructions from the beneficial owner. Broker non-votes are shares held by a broker or other nominee that are represented at the meeting, but with respect to which the broker or nominee is not instructed by the beneficial owner of such shares to vote on the particular proposal and the broker does not have discretionary voting power on the proposal. If a CGC stockholder’s broker holds such stockholder’s CGC common stock in “street name,” the broker will vote such stockholder’s shares only if the stockholder provides instructions on how to vote by filling out the voter instruction form sent to the stockholder by his or her broker with this proxy statement/prospectus. It is expected that brokers and other nominees will not have discretionary authority to vote on the proposal to approve and adopt the plan of merger contained in the merger agreement. A broker non-vote will have the same effect as a vote “against” the proposal to approve and adopt the plan of merger contained in the merger agreement. Abstentions also will have the same effect as a vote “against” the proposal to approve and adopt the plan of merger contained in the merger agreement.

For purposes of the proposal to adjourn or postpone the special meeting, abstentions will have the same effect as voting “against” the proposal, however a failure to vote or a broker non-vote will have no effect on such proposal. It is expected that brokers and other nominees will not have discretionary voting authority on this proposal.

Voting; Proxies; Revocation

Holders of CGC common stock as of the record date may submit a proxy or vote in person at the special meeting. Votes cast by proxy or in person at the special meeting will be tabulated and certified by American Stock Transfer & Trust Company, LLC.

 

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Voting in Person

CGC stockholders who plan to attend the special meeting and wish to vote in person will be given a ballot at the special meeting. Please note, however, that CGC stockholders who hold their shares in “street name,” and who wish to vote in person at the special meeting, must bring to the special meeting a proxy from the record holder of the shares authorizing such CGC stockholder to vote at the special meeting.

Voting by Proxy

The vote of each CGC stockholder is very important. Accordingly, CGC stockholders who hold their shares as a record holder should complete, sign and return the enclosed proxy card whether or not they plan to attend the special meeting in person. CGC stockholders should submit their proxy even if they plan to attend the special meeting. CGC stockholders can always change their vote prior to the vote being taken at the special meeting. Voting instructions are included on the enclosed proxy card. If a CGC stockholder properly gives his or her proxy, and submits it to CGC in time to vote, one of the individuals named as such CGC stockholder’s proxy will vote the shares as such CGC stockholder has directed. A proxy card is enclosed for use by CGC stockholders of record.

The method of voting by proxy differs for shares held as a record holder and shares held in “street name.” If a CGC stockholder holds shares of CGC common stock as a record holder, he or she may submit a proxy by completing, dating and signing the enclosed proxy card and promptly returning it in the enclosed, pre-addressed, postage-paid envelope or otherwise mailing it to CGC, or by submitting a proxy over the Internet or by telephone by following the instructions on the enclosed proxy card. If a CGC stockholder holds shares of CGC common stock in “street name,” the CGC stockholder will receive instructions from his or her broker, bank or other nominee that the CGC stockholder must follow in order to vote his or her shares. CGC stockholders who hold their shares in “street name” should refer to the voting instructions from their broker, bank or nominee that accompany this proxy statement/prospectus.

All properly signed proxies that are received prior to the special meeting and that are not revoked will be voted at the special meeting according to the instructions indicated on the proxies or, if no direction is indicated, they will be voted “FOR” the proposal to approve and adopt the plan of merger contained in the merger agreement and “FOR” the proposal to adjourn or postpone the special meeting, if necessary or appropriate.

Revocation of Proxies

A CGC stockholder may revoke his or her proxy, and change his or her vote at any time before the proxy is voted at the special meeting. If you are a holder of record, you can change your vote at any time before your proxy is voted at the special meeting by:

 

•

delivering a signed written notice of revocation to the Secretary of CGC at:

Capital Gold Corporation

76 Beaver Street, 14th floor

New York, New York 10005

Attn.: Secretary

 

•

submitting another proxy bearing a later date (in any of the permitted forms); or

 

•

attending and casting a ballot in person at the special meeting, although your attendance alone will not revoke your proxy.

If you hold your shares in “street name,” contact your broker, bank or other nominee regarding how to instruct your broker, bank or other nominee to revoke your proxy and change your vote and any deadlines for the receipt of these instructions.

 

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Stock Ownership and Voting by CGC’s Directors and Executive Officers

At the close of business on February 14, 2011, the record date for the special meeting, CGC’s directors and executive officers had the right to vote 449,196 shares of the then-outstanding CGC voting stock at the special meeting. At the close of business on February 14, 2011, these shares represented less than 1% of CGC common stock outstanding and entitled to vote at the special meeting. In connection with the execution of the merger agreement, Gammon Gold entered into voting and support agreements with CGC’s directors and executive officers, which provide, among other things, that each such person will vote all of the shares of CGC’s common stock beneficially owned by such person in favor of the proposal to approve and adopt the plan of merger contained in the merger agreement.

Delivery of Proxy Materials

To reduce the expenses of delivering duplicate proxy materials to CGC stockholders, CGC is relying upon SEC rules that permit us to deliver only one proxy statement/prospectus to multiple stockholders who share an address unless we receive contrary instructions from any stockholder at that address. If you share an address with another stockholder and have received only one proxy statement/prospectus, you may call us at (212) 344-2785 or write us as specified below to request a separate copy of this document and we will promptly send it to you at no cost to you:

Capital Gold Corporation 76 Beaver Street, 14th floor New York, New York 10005 Attn.: Investor Relations

Recommendations of CGC’s Board of Directors

CGC’s board of directors has unanimously approved the plan of merger. The board of directors believes that the merger and the merger agreement are advisable and in the best interests of CGC and its stockholders, and unanimously recommends that CGC stockholders vote “FOR” the approval of the plan of merger and “FOR” the proposal to adjourn or postpone the special meeting, if necessary or appropriate, including to solicit additional proxies.

Solicitation of Proxies

The enclosed proxy is being solicited by or on behalf of the board of directors of CGC. CGC will bear the entire cost of soliciting proxies from its stockholders, which is estimated to be approximately $40,000, except that Gammon Gold and CGC will share equally the costs of filing, printing and mailing this proxy statement/prospectus and Gammon Gold will pay the cost of engaging the proxy solicitor, Laurel Hill Advisory Group, to solicit proxies on behalf of CGC’s board of directors from CGC stockholders. In addition to solicitation of proxies by mail, CGC will request that banks, brokers and other record holders send proxies and proxy material to the beneficial owners of CGC common stock and secure their voting instructions, if necessary. CGC will reimburse the record holders for their reasonable expenses in taking those actions.

Gammon Gold has also made arrangements with Laurel Hill Advisory Group to assist in soliciting proxies on behalf of CGC’s board of directors in connection with approval of the plan of merger and in communicating with stockholders. Gammon Gold has agreed to pay Laurel Hill Advisory Group up to $50,000, plus reimbursement for any additional services requested, and out-of -pocket disbursements incurred in connection with its engagement by Gammon Gold. Proxies may also be solicited by directors, officers and employees of CGC or Gammon Gold in person or by telephone or other means, for which such persons will receive no special compensation.

Appraisal Rights

Under Delaware law, holders of record of CGC common stock who do not vote in favor of adoption of the plan of merger contained in the merger agreement have the right to seek appraisal of the fair value of their shares

 

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of stock if the merger is completed. To exercise your appraisal rights, you must strictly follow the procedures prescribed by Delaware law, including, among other things, submitting a written demand for appraisal to CGC before the vote is taken on the adoption of the plan of merger contained in the merger agreement, and you must not vote in favor of adoption of the merger agreement. These procedures are summarized in the section titled “Proposal No. 1: The Merger — Appraisal Rights.” The text of the applicable provisions of Delaware law as in effect with respect to this transaction is included as Annex D to this proxy statement/prospectus.

Other Business; Adjournments

CGC does not expect that any matter other than the proposals presented in this proxy statement/prospectus will be brought before the special meeting. However, if other matters incident to the conduct of the special meeting are properly presented at the special meeting, the persons named as proxies will vote in accordance with their best judgment with respect to those matters. An adjournment or postponement may be made from time to time by approval of the holders of shares representing a majority of the votes present in person or by proxy at the special meeting, whether or not a quorum exists, without further notice other than by an announcement made at the special meeting.

 

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PROPOSAL NO. 1: THE MERGER

The following discussion contains material information about the merger. The discussion is subject, and qualified in its entirety by reference, to the merger agreement included as Annex A and A-1 to this document. We urge you to read this entire document carefully, including the merger agreement included as Annex A and A-1 to this document, for a more complete understanding of the merger.

Gammon Gold and CGC’s boards of directors have unanimously approved the merger agreement. The merger agreement provides for the acquisition of CGC by Gammon Gold through the merger of Capital Gold AcquireCo, Inc., a wholly-owned subsidiary of Gammon Gold, with and into CGC, with CGC as the surviving corporation. Following the merger, CGC will operate as a wholly-owned subsidiary of Gammon Gold.

In the merger, each share of CGC common stock will be converted into the right to receive 0.5209 Gammon Gold common shares and a cash payment in the amount of $0.79 per share (plus cash in lieu of any fractional share interests), subject to the exercise and perfection of appraisal rights under the DGCL. Gammon Gold common shares issued and outstanding at completion of the merger will remain outstanding and those stock certificates will be unaffected by the merger. Gammon Gold’s common shares will continue to trade on the NYSE and the TSX under the symbol “GRS” and “GAM”, respectively, following the merger. See “The Merger Agreement” for additional and more detailed information regarding the legal documents that govern the merger, including information about the conditions to the completion of the merger and the provisions for terminating or amending the merger agreement.

Background of the Merger

Prior to the strategic alternatives review described in this section, CGC’s management and board of directors had from time to time considered strategic alternatives to enhance stockholder value and held informal discussions with other companies concerning strategic combinations and as set forth herein, certain of those discussions resulted in proposals, but did not result in the execution of a definitive agreement. The gold mining industry is fragmented and as a result, gold mining companies frequently consider merger and acquisition proposals.

In early December 2008, CGC began discussions with Nayarit Gold with respect to a potential business combination. These discussions were terminated shortly after they began without entering into a definitive agreement.

During the ensuing twelve months, CGC explored several other opportunities, two of which proceeded to confidentiality agreements and non-binding letters of intent, but none of which led to a definitive agreement.

In January 2009, CGC and Gammon Gold entered into discussions with respect to a potential business combination.

On January 15, 2009, CGC entered into an agreement with a financial advisor, which we refer to as the January 2009 Advisory Agreement, for financial advisory services for a term of one year.

On February 27, 2009, CGC and Gammon Gold entered into a non-binding letter of intent, or the 2009 LOI. Pursuant to the 2009 LOI, Gammon Gold proposed to acquire CGC in an all-stock transaction that implied a value of $0.75 per share (prior to a 4-for-1 reverse stock split in February 2010) of CGC common stock based upon the then closing price of Gammon Gold shares. From late February 2009 through March 31, 2009, CGC and Gammon Gold negotiated a definitive merger agreement.

On March 12, 2009, CGC and Gammon Gold announced the execution of the 2009 LOI.

 

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On March 31, 2009, CGC announced its determination to end merger discussions with Gammon Gold. This determination was based upon a number of factors including, but not limited to, the parties’ inability to resolve all of the terms of, and arrive at, a definitive agreement.

In early April 2009, a representative from the financial advisor to a company in the gold mining business, which we refer to as Company A, contacted CGC and expressed an interest in a potential business combination with CGC.

During April and May 2009, representatives of Company A met with management of CGC to negotiate a non-binding letter of intent with respect to a potential business combination.

On May 21, 2009, CGC executed a non-binding letter of intent with Company A with respect to a proposed business combination. CGC subsequently amended the non-binding letter of intent with Company A and entered into negotiations with respect to a definitive agreement. The parties were unable to agree on the terms of a definitive agreement and ultimately determined to allow the letter of intent to expire.

On December 17, 2009, CGC and Nayarit Gold entered into a letter of intent.

On January 15, 2010, CGC and its financial advisor entered into an extension to the January 2009 Advisory Agreement to extend the term of such agreement until June 30, 2010.

On February 10, 2010, CGC and Nayarit Gold entered into a definitive business combination agreement pursuant to which Nayarit Gold would become a wholly-owned subsidiary of CGC.

During the week of March 1, 2010, Gammon Gold met with Mr. John Brownlie, CGC’s then Chief Operating Officer and President, to discuss the opportunity of reviving the previous year’s merger discussions.

Gammon Gold contacted Mr. Brownlie during the week of March 15 to express its interest in meeting with the CGC board of directors to discuss a potential business combination.

In March 2010, Mr. Leonard Sojka, at that time a member of the CGC board of directors, Mr. Christopher Chipman, CGC’s Chief Financial Officer, Mr. John Cutler, a member of the CGC board of directors and a consultant to CGC, met with Mr. Rene Marion, President and Chief Executive Officer of Gammon Gold and Gammon Gold’s financial advisor in Toronto to discuss the merits of a possible transaction between CGC and Gammon Gold. At the meeting, it was agreed that Gammon Gold could update its technical due diligence investigations on CGC’s properties, but CGC’s representatives explained that it would be in the best interests of CGC to complete the Nayarit Gold transaction before considering any substantive discussions with Gammon Gold.

At the request of certain of the directors of CGC, Mr. Marion presented a draft non-binding letter of intent with respect to a potential business combination with CGC on April 8, 2010 to describe the proposed terms of a transaction with Gammon Gold. At that time, CGC authorized Gammon Gold to continue its technical due diligence on CGC’s mineral projects upon both parties confirming that the confidentiality provisions of their previous confidentiality agreement applied to information provided in connection with this technical due diligence.

On May 3 and 4, 2010, Mr. Richard Peevers from Ausenco Vector Engineering, visited CGC’s El Chanate mine to conduct due diligence on behalf of Gammon Gold. Mr. Peevers provided Gammon Gold with a summary of the results of his site visit.

On May 7, 2010, Mr. Cooper, CGC’s Chairman of the Board, and Messrs. Sojka, Cutler and Chipman met with Mr. Marion in Dallas, Texas to discuss the merits of a possible business combination. Mr. Marion also updated the group with respect to the status of Gammon Gold’s operations and provided feedback with respect to Mr. Peevers’ site visit.

 

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On June 14, 2010, Mr. Chipman met with Mr. Scott Perry, Gammon Gold’s Chief Financial Officer, in New York City. The discussions at that meeting were focused upon certain operational and financial matters of Gammon Gold and CGC.

On June 22, 2010, Messrs. Cutler, Cooper, Sojka and a financial consultant met with Mr. Marion and Mr. Chris Richter, Gammon Gold’s Vice President, Corporate Development, in New York City. At the meeting, Mr. Marion discussed the shutdown at Gammon Gold’s El Cubo mine and its potential long-term implications, and the parties discussed the merits of a potential business combination transaction. The representatives of Gammon Gold were again informed that CGC’s board of directors remained focused on closing the Nayarit Gold transaction and that CGC might be willing to revisit a potential transaction involving Gammon Gold after this had occurred.

The January 2009 Advisory Agreement in connection with a proposed business combination with each of Gammon Gold and Nayarit Gold in 2009 was to expire on June 30, 2010. CGC considered it desirable to have a financial advisor on retainer for the purposes of assisting in connection with any future transactions. In early July 2010, CGC had discussions with three investment banks to provide financial advisory services as well as services relating to a potential sale of CGC. Cormark was invited to make a proposal as part of this process.

On July 1, 2010, Mr. Scott Hazlitt was promoted to Chief Operating Officer of CGC, following Mr. John Brownlie’s resignation as an officer and director.

On July 13, 2010, Mr. Colin Sutherland, then President of Nayarit Gold, provided the CGC board of directors with an analysis of a potential acquisition by CGC of Timmins Gold Corp., or Timmins Gold, prepared by Cormark. Mr. Hazlitt visited Timmins Gold’s San Francisco Mine on July 28. During that visit, Mr. Hazlitt met with Arturo Bonillas, President of Timmins Gold and other members of Timmins Gold’s management.

On July 16, 2010, the CGC directors considered the analysis presented by Cormark, together with the consideration that any transaction would likely be structured as an acquisition of Timmins Gold by CGC. Accordingly, the CGC board of directors determined not to pursue a potential transaction with Timmins Gold at that time and remained focused on closing the Nayarit Gold transaction.

August 2, 2010, CGC completed the acquisition of Nayarit Gold and Mr. Sutherland was appointed as CGC’s President and a member of the CGC board of directors.

On August 2, 2010, Mr. Hazlitt was appointed a member of the CGC board of directors.

On August 3, 2010, Mr. Sutherland and a representative from Cormark met with Mr. Marion and discussed a potential business combination transaction between CGC and Gammon Gold.

On August 4, 2010, Mr. Sojka resigned from the CGC board of directors for personal reasons.

On August 5, 2010, Mr. Marion submitted another non-binding letter of intent, or the August LOI, to CGC. The August LOI was substantially identical to the draft non-binding letter of intent submitted on April 8, 2010. The August LOI proposed an all-stock transaction at an approximate 30% premium based upon the 20-day volume weighted average trading price of CGC’s common stock. The August LOI included certain deal protection provisions, including an exclusivity period, a non-solicitation covenant, subject to certain conditions, and the obligation to pay a break fee if the transaction was terminated for certain reasons. After August 5, 2010, the respective managements of CGC and Gammon Gold negotiated the terms of the August LOI and held various discussions about the terms and conditions of any potential transaction as well as the potential advantages to each company of such a transaction.

 

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On August 9, 2010, Mr. Sutherland and a representative from Cormark met with Mr. Bragagnolo, Chief Executive Officer of Timmins Gold, in Vancouver, British Columbia. During this meeting a potential business combination transaction between Timmins Gold and CGC was discussed.

On August 10, 2010, Mr. Sutherland and a representative from Cormark met with the Chief Executive Officer of Company A in Toronto, Ontario where a potential business combination transaction between Company A and CGC was discussed.

On August 12, 2010, CGC received a revised letter of intent from Gammon Gold that was on substantially the same terms as the August LOI.

On August 16, 2010, the CGC board of directors met via conference call and discussed the letter of intent received from Gammon Gold and the process for responding to it, including the establishment of a special committee of independent directors and the appointment of financial advisors.

Mr. Hazlitt and Mr. Sutherland visited Timmins Gold’s San Francisco Mine on August 18, 2010 where they met with Mr. Bragagnolo, Mr. Bonillas and other members of Timmins Gold management.

On August 18, 2010, the CGC board of directors met via conference call with Ellenoff Grossman & Schole LLP, or Ellenoff Grossman, counsel to CGC, and determined that, in response to the Gammon Gold proposal, it was appropriate to commence a process to assess CGC’s strategic alternatives. The alternatives to be considered included the following:

 

•

remaining independent, which would require financing to fund the capital expenditures necessary to move from contract mining to owner/operator mining at the El Chanate mine and develop CGC’s Orion asset;

 

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entering into strategic partnerships and/or joint ventures; and

 

•

pursuing a sale of CGC as a whole or some other form of merger or business combination.

In order to facilitate the review of sale possibilities as part of the overall strategic review, the CGC board of directors designated a special committee, or the M&A Committee, of the CGC board of directors to act as the representative of the CGC board of directors with respect to all merger and acquisition matters presented to management of CGC. John Cutler was appointed Chairman of the M&A Committee. The other committee members are the other independent directors of CGC, including CGC’s Chairman of the Board, Mr. Stephen Cooper. In addition, Mr. Chipman was appointed to assist the M&A Committee and to interact with potential strategic partners on behalf of the M&A Committee. At its August 18, 2010 meeting, the CGC board of directors authorized the M&A Committee to select legal and financial advisors.

On August 18, 2010, the M&A Committee retained the law firm of Ballard Spahr LLP, or Ballard Spahr, to act as special counsel to the M&A Committee.

On August 19, 2010, Cormark was formally engaged by the M&A Committee on behalf of the CGC board of directors to provide financial advisory services and to assist CGC in assessing, structuring and negotiating a business combination to the extent a suitable transaction could be identified. Cormark’s engagement was based upon several factors, including but not limited to, the experience of its team, its focus on the junior mining sector, and its role as advisor in an aggregate of $10 billion in merger and acquisition transactions.

The M&A Committee met via conference call on August 19, 2010, with Mr. Chipman, Ballard Spahr and Ellenoff Grossman to review and discuss the process for evaluating strategic alternatives. Cormark attended this meeting and gave a presentation to the M&A Committee that reviewed CGC’s strategic alternatives; namely, a transformational merger of equals or an outright sale of CGC to a larger company. Cormark reviewed the key

 

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considerations for each of these alternatives and presented in detail the operational and financial implications of potential merger transactions and potential sale transactions. Ballard Spahr advised the M&A Committee that if it determined to proceed with a strategic alternative, the CGC board of directors has the fiduciary duty of determining the best transaction reasonably available to CGC stockholders. Mr. Chipman also reviewed for the M&A Committee the history and terms of the Gammon Gold transaction that did not go forward in 2009 and the reasons therefor. With the advice of Cormark, the M&A Committee determined that it was appropriate under the circumstances to conduct a process to identify additional interest in CGC beyond the Gammon Gold proposal. The M&A Committee and CGC board of directors determined that it would initiate a process to solicit interest from a select group of qualified buyers or potential merger partners.

From August 19, 2010 to August 23, 2010, Cormark, the M & A Committee and the other members of the CGC board of directors reviewed the list of qualified potential buyers and potential merger partners identified by Cormark and assessed each potential partner or buyer on the basis, among others, of its likely strategic fit and ability to effect a transaction on a timely basis. During this period, the M&A Committee, certain members of management and certain CGC board members also considered the possibilities of either pursuing an acquisition by CGC or a merger of equals and whether such potential transactions would meet CGC’s long term goal to enhance stockholder value, specifically the need to finance its growth plans. Following discussions with Cormark, the CGC board of directors discussed the option of remaining independent, which would require CGC to obtain financing. Accordingly, the M&A Committee came to the preliminary view that it should explore a sale of CGC as an alternative to a strategic partnership or remaining independent, if a suitable transaction was presented.

On August 21, 2010, the August LOI, as revised, was sent to the full CGC board of directors and the CGC board of directors met via conference call to review and discuss the status of negotiations with respect to the August LOI.

From August 23, 2010 to September 9, 2010, Cormark was in contact with a total of 11 companies including Gammon Gold. The companies contacted were selected based on the following factors:

 

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those that had previously expressed interest in a business combination with CGC;

 

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those that had similar regional interests as CGC; and

 

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those that were believed to be acquisitive in the mining sector and potentially interested in a business combination with CGC.

Of the 11 companies contacted, three companies (in addition to Gammon Gold) participated in discussions with Cormark and were given access to CGC’s due diligence data site. Four companies submitted formal proposals, including Gammon Gold and Timmins Gold. The two other companies are referred to as Company A (with whom CGC had negotiated the terms of a non-binding letter of intent in May 2009) and Company B.

On August 26, 2010, the CGC board of directors, Ellenoff Grossman, Ballard Spahr and Cormark held a conference call and had a discussion with respect to the process of evaluating strategic alternatives. At that meeting, Ellenoff Grossman and Ballard Spahr provided the CGC board of directors with a description of its fiduciary duties in connection with the process. In particular, Ellenoff Grossman and Ballard Spahr advised the CGC board of directors that if it determined to proceed with a strategic alternative, the CGC board of directors has the fiduciary duty of determining the best transaction reasonably available to CGC stockholders.

On August 27, 2010, Mr. Gary Huber was appointed to the CGC board of directors and to the M&A Committee.

On August 28, 2010, Mr. Hazlitt conducted a due diligence site visit with respect to Company A’s mining operations.

On August 29, 2010, Gammon Gold submitted a revised letter of intent to CGC, which we also refer to as the Gammon LOI. This letter of intent proposed an all-stock transaction at an approximate 30% premium based upon the 20-day volume weighted average trading price of CGC’s common stock. It also included certain deal

 

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protection provisions, including an exclusivity period, a non-solicitation covenant, subject to certain conditions, and the obligation to pay a break fee if the transaction was terminated for certain reasons.

On August 30, 2010, Mr. Cooper met with a representative of Company A to discuss why Company A believed a business combination with Company A was in the best interest of CGC.

On August 31 and September 1, 2010, Mr. Hazlitt conducted a due diligence site visit with respect to Gammon Gold’s Ocampo mining operations.

On September 1, 2010, Timmins Gold submitted a proposal to acquire CGC. This proposal contemplated an all-stock transaction that implied a value of approximately $3.76 (C$4.00) per share of CGC common stock, based upon the closing price of Timmins Gold common stock on August 31, 2010.

On September 1, 2010, Company A submitted a non-binding proposal that also contemplated an all-stock transaction that implied a value of approximately $4.60 (C$4.83) per share of CGC common stock based upon the closing price of Company A common stock on September 1, 2010.

On September 2, 2010, Mr. Russell Tremayne, Gammon Gold’s Chief Operating Officer, conducted a due diligence site visit to CGC’s El Chanate mine.

On September 3, 2010, Timmins Gold submitted a revised non-binding proposal. Such proposal was also an all-stock transaction and represented an implied value of approximately $4.28 (C$4.50) per share of CGC common stock based upon the closing price of Timmins Gold common stock on September 1, 2010. In addition, Timmins Gold sent CGC a letter on September 3, 2010 in which it requested a meeting with CGC at which it could be afforded the opportunity to formally present its proposal.

On September 3, 2010, Company B submitted a non-binding proposal to Cormark pursuant to which Company B proposed an all-stock transaction that implied a value of approximately $3.36 (C$3.49) per share of CGC common stock based upon the closing price of Company B common stock on September 3, 2010.

The value of the Gammon Gold proposal on September 1, 2010 and September 3, 2010 was $4.68 (C$4.88) and $4.58 (C$4.76), respectively, per share of CGC common stock based on the closing price of the Gammon Gold common stock on such dates.

On September 3, 2010, the M&A Committee met via conference call to review and discuss the status of the sale process. Also in attendance were Messrs. Chipman and Hazlitt and representatives of Cormark, Ballard Spahr and Ellenoff Grossman. Cormark presented the M&A Committee with a summary of each of the proposals received to date. Mr. Hazlitt summarized his due diligence review of the Gammon Gold operations, the Timmins Gold operations and Company A operations. Cormark then presented the M&A Committee with a detailed financial and transactional analysis of each of the proposals. Cormark evaluated the following financial and transactional aspects of each proposal:

 

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immediate premium to CGC’s stockholders;

 

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the financial strength of the acquiror and the resultant combined company, which included a proforma review of figures based upon:

 

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2011 and 2012 estimated cash flow;

 

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2011 and 2012 estimated production;

 

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estimates of net asset value; and

 

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the relative liquidity of the consideration offered;

 

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the potential for a long-term re-rating;

 

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the opportunity for synergies; and

 

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the likelihood of closing.

 

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At this meeting, Cormark advised the M&A Committee that the transaction proposed by Company A, while structured as a premium offer to acquire CGC, would result in a reverse takeover of Company A by CGC. Cormark analyzed the valuation multiples of Company A and CGC and advised that the transaction as proposed would result in significant dilution to the shareholders of Company A. Cormark indicated that this, combined with the fact that Company A was significantly smaller than CGC, would likely have a material negative impact on the share price of Company A, if a transaction were pursued, which would result in a significantly lower implied value per share to CGC stockholders than represented in Company A’s proposal. Cormark also advised that the combined company would likely need to raise additional capital in order to fund CGC’s growth initiatives. The obligation of Company A to seek the approval of its shareholders, as a condition to closing any transaction with CGC, was considered to increase overall transaction risk.

Cormark advised the M&A Committee that the transaction proposed by Company B was a no premium merger of equals. Cormark advised that, in the context of the current process to identify a proposal that provided, among other things, a material premium, the proposal by Company B did not fit the M&A Committee’s criteria.

Cormark advised the M&A Committee that the transaction proposed by Timmins Gold would result in a merger of equals, with CGC receiving a small upfront premium. Cormark indicated that the Timmins Gold proposal presented certain financial risks to CGC given Timmins Gold’s current cash balance and its outstanding, short term gold loan, which required repayment of the cash equivalent value of a fixed number of gold ounces on a monthly basis. Cormark advised the M&A Committee that the estimated liabilities of Timmins Gold exceeded its current cash resources. The M&A Committee also discussed the Timmins Gold going concern issue. The obligation of Timmins Gold to seek the approval of its shareholders, as a condition to closing any transaction with CGC, was considered to increase overall transaction risk. Cormark also advised that the combined company would likely need to raise additional capital to fund CGC’s growth initiatives.

At the September 3, 2010 meeting, after reviewing the above proposals, Cormark advised the M&A Committee, based on the factors listed below, that the Gammon Gold proposal was, of the proposals received to date, the best transaction reasonably available to CGC’s stockholders. Cormark advised the M&A Committee that the Gammon Gold proposal offered a material premium when considering the volume-weighted trading prices of Gammon Gold’s common shares over periods of five to 30 trading days and represented an implied value of approximately $4.58 (C$4.76) based upon the closing price of Gammon Gold’s common shares on September 3, 2010. Cormark noted that Gammon Gold’s significant cash balance and cash flow from operations would likely be sufficient to fund CGC’s growth initiatives without the need to raise additional capital. In addition, Cormark advised that the superior trading liquidity of Gammon Gold’s common shares, when compared to that of Timmins Gold, Company A and Company B, would provide the ability for stockholders of CGC to better monetize value achieved in the merger transaction. Furthermore, the size of Gammon Gold relative to CGC would serve to mitigate the potential negative market impact of dilution once Gammon Gold shares were issued to acquire CGC. Cormark also noted the potential synergies with Gammon Gold due to the possibility of redeploying idle surface mining equipment owned by Gammon Gold to CGC’s El Chanate mine, providing for capital savings should CGC transition to owner-operated mining. Finally, Cormark advised that while the long-term valuation re-rating was potentially greater under a transaction with Timmins Gold or Company A, than under a transaction with Gammon Gold due to Gammon Gold’s size and established position as a mid-tier producer, a transaction with Timmins Gold or Company A presented greater overall risk to CGC stockholders when compared to the Gammon Gold proposal as a whole.

On September 5, 2010, the M&A Committee met via conference call with Mr. Chipman, representatives of Cormark, Ballard Spahr and Ellenoff Grossman to review and discuss the status of the sale process. The M&A Committee reviewed and discussed the remaining open deal terms in Gammon Gold’s August LOI. Cormark reaffirmed its advice that the Gammon Gold proposal was, of the proposals received to date, the best transaction reasonably available to CGC’s stockholders for the reasons discussed at the September 3, 2010 meeting.

On September 7, 2010, the M&A Committee met via conference call with Mr. Bruce Bragagnolo, Chief Executive Officer of Timmins Gold, and Arturo Bonillas, President of Timmins Gold, and their respective

 

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financial advisors. During the course of this meeting, a formal presentation was made with respect to the Timmins Gold proposal. The M&A Committee then discussed the merits of the Timmins Gold proposal compared to the Gammon Gold proposal.

On September 8, 2010, the M&A Committee met with Mr. Chipman and representatives of Cormark, Ballard Spahr and Ellenoff Grossman to review and assess each of the proposals received to date. At the meeting, Cormark presented its updated analysis of each of the proposals. Ballard Spahr provided the M&A Committee with information regarding their fiduciary duties under Delaware law and related matters in connection with the potential transactions. The M&A Committee discussed and reviewed the Timmins Gold proposal as compared to the Gammon Gold proposal and determined that it was inferior to the Gammon Gold proposal. Such determination was based upon factors including: (i) the transaction proposed by Timmins Gold would result in a merger of equals, with CGC receiving a small upfront premium, (ii) the Timmins Gold proposal presented certain financial risks to CGC given Timmins Gold’s current cash balance, the going concern issue with respect to the Timmins Gold financial statements and its outstanding short term gold loan, which required repayment of the cash equivalent value of a fixed number of gold ounces on a monthly basis, and (iii) the combined company would likely need to raise additional capital to fund CGC’s growth initiatives, presenting incremental dilution to stockholders of CGC. It was determined that the proposed share exchange ratio with respect to the Gammon Gold transaction represented a value of approximately $4.58 (C$4.76) per share of CGC common stock based upon the closing price of Gammon Gold’s common shares on September 3, 2010 and the Timmins Gold transaction represented a value of approximately $4.33 (C$4.50) per share of CGC common stock based upon the closing price of Timmins Gold’s common shares on such date. The Company A transaction represented a value of approximately $4.68 (C$4.92) per share of CGC common stock and the Company B transaction represented a value of approximately $3.32 (C$3.49) per share of CGC common stock based upon the closing price of their respective common stock on such date. Based on the proposals received to date, Cormark advised the M&A Committee that the Gammon Gold proposal continued to represent the best alternative reasonably available to CGC’s stockholders based on the factors discussed at the September 3, 2010 meeting. Such factors included Cormark’s indication that the transaction proposed by Company A, while structured as a premium offer to acquire CGC, would result in a reverse takeover of Company A by CGC, resulting in significant dilution to the stockholders of Company A. Cormark analyzed that this would likely have a material negative impact on the share price of Company A, if a transaction were pursued, which would result in a significantly lower implied value per share to CGC stockholders than represented in Company A’s proposal. The M&A Committee compared the Gammon Gold proposal to the alternative of remaining independent. It was acknowledged that to remain independent would require a financing to strengthen CGC’s financial position for its growth plans. It was also acknowledged that no other strategic alternatives or joint ventures had been proposed or were under consideration by CGC at that time, other than the four proposals received to date. The M&A Committee determined to recommend to the CGC board of directors to proceed with the Gammon Gold proposal.

On September 9, 2010, the full CGC board of directors met via conference call to review and discuss the four proposals and received the recommendation of the M&A Committee. Also at the meeting were Mr. Chipman and representatives of Cormark, Ballard Spahr and Ellenoff Grossman. Ballard Spahr and Ellenoff Grossman provided the CGC board of directors with information regarding its fiduciary duties under Delaware law and related matters in connection with the potential transactions. Representatives of Cormark presented to the CGC board of directors their analysis of each of the proposals and advised that the Gammon Gold proposal was, of the proposals received to date, the best transaction reasonably available to CGC’s stockholders for the following financial reasons as well as those discussed at the September 3, 2010 meeting:

 

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the consideration represented a material premium to CGC’s stockholders;

 

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Gammon Gold’s cash balance and operating cash flow would likely be sufficient to fund CGC’s growth initiatives;

 

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Gammon Gold’s trading liquidity offered a near-cash alternative for CGC stockholders;

 

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the lower risk associated with a transaction with Gammon Gold; and

 

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the potential for significant synergies with Gammon Gold, including, but not limited, to the potential to move excess equipment from Gammon Gold’s Ocampo mine to the CGC El Chanate mine, and the potential to utilize excess mill infrastructure from El Cubo at the Orion Project.

 

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The M&A Committee presented its view that Gammon Gold had a strong management team with open pit, underground and extensive heap leach operating experience that can be leveraged at CGC’s El Chanate and Orion properties. Cormark also advised the CGC board of directors that certain stockholders of CGC had expressed their indication of support of a potential transaction with Timmins Gold while acknowledging that they were unaware of any terms of any alternative proposals. The CGC board of directors discussed the potential stockholder support for the Timmins Gold proposal and the M&A Committee discussed its understanding that each of the stockholders that had expressed their support to Cormark were also stockholders of Timmins Gold and one such stockholder was the lender with respect to the Timmins Gold short term gold loan. The CGC board of directors discussed the need to garner the support of the stockholders for any transaction that the board of directors approved. The board of directors discussed the importance of negotiating a definitive agreement that would be approved by CGC’s stockholders. Based on Cormark’s advice that the Gammon Gold proposal was, of the proposals received to date, the best transaction reasonably available to CGC’s stockholders, and the recommendation of the M&A Committee, on the basis of the premium of Gammon Gold’s offer, Gammon Gold’s strong cash balance and cash flows, Gammon Gold’s liquid trading market, Gammon Gold’s experience in the mining industry, the potential for significant synergies, the strength of Gammon Gold’s management team and the lower risk associated with this transaction, the CGC board of directors unanimously resolved to proceed with the negotiation of a definitive agreement with Gammon Gold and approved CGC entering into the most recent draft of the non-binding letter of intent with Gammon Gold pursuant to which CGC agreed to, among other items, an exclusivity period which would expire on September 27, 2010.

Gammon Gold and CGC entered into the non-binding letter of intent on September 9, 2010.

On September 9, 2010, Cormark notified the other parties that submitted bids that the CGC board of directors had determined not to proceed with their proposals.

The nature of Cormark’s role as financial advisor to CGC was to provide advice in connection with a sale of CGC. The terms of Cormark’s engagement letter provided for payment of advisory fees upon successful completion of a sale of CGC. As such, the board determined to engage an independent investment banker to consider the fairness of the transaction, from a financial point of view, to CGC stockholders. For that reason, the M&A committee determined to engage Stifel Nicolaus.

On September 14, 2010, the M&A Committee engaged Stifel Nicolaus to provide investment banking services, including using its commercially reasonable efforts to provide its opinion as to the fairness, from a financial point of view, of the consideration to be paid to the CGC stockholders in connection with the Gammon Gold transaction.

On September 14, 2010, Gammon Gold and CGC gave each other access to their respective secure data sites in order to facilitate Gammon Gold’s ongoing due diligence and permit CGC to start its due diligence.

On September 14, 2010, Company A submitted a revised proposal wherein it proposed an all-stock transaction (with a cash component of up to an aggregate of $10 million reserved for payment in the event that the implied value of the shares of Company A fell below the proposed offer value) pursuant to which CGC stockholders would receive value of approximately $4.75 (C$4.88) per share of CGC common stock based upon the closing price of Company A common stock on September 13, 2010. On this date, the Gammon Gold proposal was valued at $4.43 (C$4.56) per share of CGC common stock based upon the closing price of Gammon Gold common shares on such date.

On September 16, 2010, the full CGC board of directors met via conference call with Cormark, Ballard Spahr and Ellenoff Grossman. A lengthy discussion ensued regarding the break up fee provision in the September 9 non-binding letter of intent and CGC’s ability to accept and negotiate alternative proposals. Ballard Spahr and Ellenoff Grossman advised the CGC board of directors that pursuant to the Gammon LOI, CGC was permitted to accept and negotiate an alternative proposal if it was determined that a proposal is, or would likely lead to, a superior proposal. The CGC board of directors also discussed the receipt of the revised proposal from

 

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Company A. Cormark advised the CGC board of directors that while the revised proposal appeared to offer greater consideration than the Gammon Gold proposal, the share exchange ratio had actually been reduced, based upon significant volatility in the trading of the common stock of Company A. At this juncture, the Gammon Gold proposal had emerged as the one most likely to offer the best value to CGC’s stockholders and Cormark’s presentation featured a comparison of each other proposal to the Gammon Gold proposal, a more detailed analysis of the Gammon Gold proposal and a comparison of the Gammon Gold proposal to recent precedent transactions. The detailed analysis of the Gammon Gold proposal included a summary of recent investment analyst’s ratings for Gammon Gold, target prices and analyst commentary. After consultation with its financial advisors, the CGC board of directors determined that, notwithstanding the revision of Company A’s proposal, the Gammon Gold proposal continued to represent the best transaction reasonably available to CGC stockholders for the reasons including but not limited to, the following:

 

•

Gammon Gold’s cash balance and operating cash flow would likely be sufficient to fund CGC’s growth initiatives;

 

•

Gammon Gold’s trading liquidity offered a near-cash alternative for CGC stockholders;

 

•

the potential for significant synergies with Gammon Gold, including through redeployment of excess surface mining and mill equipment of Gammon Gold; and

 

•

the strength of Gammon Gold’s management team, including experience with underground mining and with heap leaches.

On September 16, 2010, CGC sent an initial draft merger agreement to Gammon Gold.

From September 16, 2010 until the execution of the merger agreement on October 1, 2010, CGC, Gammon Gold and their respective advisors negotiated the terms of the merger agreement.

On September 17, 2010, Timmins Gold sent a letter to CGC in which it reiterated its proposal and expressed its disappointment that CGC had rejected it.

On September 19, 2010, the M&A Committee met via conference call with representatives of Cormark, Ballard Spahr and Ellenoff Grossman and discussed the September 17, 2010 letter from Timmins Gold and determined to reiterate to Timmins Gold its determination not to accept the Timmins Gold proposal. Such determination was based upon the following reasons: (i) the transaction proposed by Timmins Gold would result in a merger of equals, with CGC receiving a small upfront premium, (ii) the Timmins Gold proposal presented certain financial risks to CGC given Timmins Gold’s current cash balance, its going concern issue with respect to its financial statements and its outstanding short term gold loan, which required repayment of the cash equivalent value of a fixed number of gold ounces on a monthly basis, (iii) the obligation of Timmins Gold to seek the approval of its shareholders, as a condition to closing any transaction with CGC, was considered to increase overall transaction risk, and (iv) the combined company would likely need to raise additional capital to fund CGC’s growth initiatives.

On September 20, 2010, the M&A Committee met via conference call with representatives of Cormark, Ballard Spahr and Ellenoff Grossman to review and discuss the status of negotiations with Gammon Gold.

On September 20, 2010, counsel to CGC sent a letter to Timmins Gold in which it reiterated that the CGC board of directors had determined not to accept the Timmins Gold proposal based upon its determination that such proposal was not in the best interest of its stockholders.

On September 20 and 21, 2010, Mr. Chipman and Mr. Mike Aiello, Corporate Controller of CGC, traveled to Gammon Gold’s corporate offices in Halifax, Nova Scotia in connection with CGC’s due diligence review of Gammon Gold.

On September 21 and 22, 2010, the M&A Committee met via conference call with representatives of Ballard Spahr and Ellenoff Grossman to discuss the status of negotiations with Gammon Gold.

 

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On September 22, 2010, Messrs. Scott Perry, Dana Hatfield and four other Gammon Gold employees visited CGC’s offices in New York to conduct financial due diligence.

On September 23, 2010, CGC executed an amendment to the Cormark engagement letter, pursuant to which Cormark’s compensation was amended to provide that Cormark is entitled to a percentage-based fee typical in an advisory mandate where several possible transactions are contemplated, such fee to be payable if any transaction is consummated within 12 months of the date of the agreement. The M&A Committee intended that Cormark receive the same consideration regardless of with whom CGC consummated a transaction.

On September 24, 2010, the full CGC board of directors met via conference call with representatives of Ballard Spahr and Ellenoff Grossman and discussed the potential necessity to extend the exclusivity period of the Gammon LOI. Open issues related to the merger agreement included, but were not limited to, representations and warranties, forbearances, tax treatment, the exchange ratio and the termination fee.

On September 25, 2010, the M&A Committee met via conference call with representatives of Cormark, Ballard Spahr and Ellenoff Grossman and discussed the remaining open items with respect to the merger agreement.

On September 26, 2010, the full CGC board of directors met via conference call with representatives of Ballard Spahr and Ellenoff Grossman and discussed the status of negotiations with Gammon Gold. Open issues related to the merger agreement included, but were not limited to, tax treatment, the exchange ratio and the termination fee.

On September 26, 2010, the parties agreed upon September 24, 2010 as the date on which the exchange ratio would be based.

On September 27, 2010, the full CGC board of directors held a meeting via conference call at which it approved an amendment to the Gammon LOI, pursuant to which the exclusivity period would be extended from September 27, 2010 to September 30, 2010. Such extension was approved to provide for more time to negotiate a definitive agreement with Gammon Gold.

On September 27, 2010, Timmins Gold issued a press release in which it publicly announced the proposal which had been submitted to CGC on September 1, 2010. The Timmins Gold press release also stated that its proposal had garnered support from holders of approximately 17% of CGC’s outstanding shares. Following the issuance of the press release, the price of CGC’s common stock increased by 14% on September 27, 2010 and another 9% on September 28, 2010, resulting in an aggregate increase over the two trading days of 24.5%. During those trading days the trading volume was approximately 25 times the average daily trading volume of CGC’s common stock.

On September 27, 2010, the M&A Committee met via conference call with representatives of Cormark, Ballard Spahr and Ellenoff Grossman to discuss the Timmins Gold release. The M&A Committee discussed the statement made in the press release with respect to stockholder support and noted that Timmins Gold was unable to provide confirmation of such support. In addition, the M&A Committee considered that certain of the CGC stockholders would likely remain undecided until the terms of the transaction with Gammon Gold and full pro forma disclosure with respect to the combined company were publicly disclosed in a Registration Statement on Form F-4. The M&A Committee re-affirmed its decision not to accept the Timmins Gold proposal. Notwithstanding Timmins Gold’s statement, the CGC board of directors acknowledged it had a fiduciary obligation to present the best transaction reasonably available to its stockholders and continued to believe that the Timmins Gold proposal was not the best transaction reasonably available. Such determination was based upon the following reasons: (i) the transaction proposed by Timmins Gold would result in a merger of equals, with CGC receiving a small upfront premium, (ii) the Timmins Gold proposal presented certain financial risks to CGC given Timmins Gold’s current cash balance, its going concern issue with respect to its financial statements and its outstanding short term gold loan, which required repayment of the cash equivalent value of a fixed number of gold ounces on a monthly basis, (iii) the obligation of Timmins Gold to seek the approval of its shareholders, as a

 

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condition to closing any transaction with CGC, was considered to increase overall transaction risk, and (iv) the combined company would likely need to raise additional capital to fund CGC’s growth initiatives.

On September 27, 2010, at the request of the TSX, CGC issued a press release in which it responded to the Timmins Gold press release and announced that the CGC board of directors had authorized CGC to engage in a process of exploring strategic alternatives. In addition, CGC announced that it had received and reviewed the Timmins Gold proposal and had determined to reject such proposal as it was not in the best interest of CGC’s stockholders.

On September 29, 2010, a conference call was held with Mr. Cooper, Mr. Marion and Mr. Chris Richter of Gammon Gold as well as representatives of Ellenoff Grossman and Fasken Martineau DuMoulin LLP, Canadian counsel to Gammon Gold, to discuss the remaining open issues in the merger agreement.

On September 30, 2010, the full CGC board of directors held a meeting via conference call to review the final merger agreement with Gammon Gold. Also attending the meeting at various stages were Mr. Chipman, and representatives of Cormark, Ballard Spahr and Ellenoff Grossman and Stifel Nicolaus. Ballard Spahr and Ellenoff Grossman reviewed the duties of directors under Delaware law in connection with the consideration of the proposed transaction. Representatives of Cormark presented to the CGC board of directors its analysis of the proposed transaction with Gammon Gold as reflected in the merger agreement and advised the CGC board of directors of its conclusion that the Gammon Gold transaction was, of the proposals received to date, the best transaction reasonably available to CGC’s stockholders. Cormark advised the GCG board of directors that such conclusion was based upon factors, including but not limited to, the following: (i) the Gammon Gold proposal offered a premium to CGC stockholders of approximately 30% to the 20-day volume weighted average price of CGC as of September 24, 2010, (ii) Gammon Gold’s cash balance and operating cash flow would likely be sufficient to fund CGC’s growth initiatives, (iii) Gammon Gold trading liquidity offered a near cash alternative for CGC stockholders, (iv) the potential for significant synergies with Gammon Gold, and (v) the Gammon Gold proposal had the least amount of transactional risk of the four proposals. Messrs. Chipman and Hazlitt presented a due diligence review of Gammon Gold to the CGC board of directors. Representatives of Ellenoff Grossman summarized the material terms of the merger agreement to the CGC board of directors. Representatives of Stifel Nicolaus reviewed a presentation to the CGC board of directors with respect to the Gammon Gold transaction and delivered a verbal fairness opinion, which was subsequently confirmed in writing, and stated that the consideration to be received by CGC’s stockholders was fair from a financial point of view. See the section entitled “—Opinion of Stifel, Nicolaus & Company, Incorporated” beginning on page 80 and the opinion attached as Annex C and incorporated by reference to this section of the proxy statement. The CGC board of directors then discussed the advantages and disadvantages of the Gammon Gold transaction and its reasons for proposing to merge with Gammon Gold and the challenges of remaining independent, including the reasons discussed at the September 3, 2010 meeting. Based upon such discussions and several considerations, including Cormark’s advice and Stifel Nicolaus’ fairness opinion, the CGC board of directors unanimously determined that the proposed merger agreement and the merger were advisable, fair, and in the best interests of CGC and its stockholders and authorized CGC management to execute the merger agreement on the terms described to the CGC board of directors.

On October 1, 2010, CGC and Gammon Gold finalized the merger agreement and the related schedules thereto. Gammon Gold and CGC then executed the merger agreement and issued a joint press release announcing the transaction.

On October 5, 2010, Timmins Gold issued a press release indicating that since its announcement on September 27, 2010, additional stockholders of CGC had indicated they would support the Timmins Gold proposal.

On October 8, 2010, the full CGC board of directors held a meeting via conference call with representatives of Cormark, Ballard Spahr and Ellenoff Grossman to discuss the October 5, 2010 Timmins Gold press release.

On October 11, 2010, the M&A Committee met via conference call with representatives of Ballard Spahr and Ellenoff Grossman to continue discussions with respect to the Timmins Gold press release.

 

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On October 12, 2010, the full CGC board of directors held a meeting via conference call. Also attending were Messrs. Richter and Marion and representatives of Ballard Spahr and Ellenoff Grossman. Mr. Marion presented to the CGC board of directors the presentation that had been prepared for CGC’s stockholders and filed with the SEC.

On October 12, 2010, Timmins Gold sent CGC a letter in which it resubmitted its proposal to acquire CGC in an all-stock transaction which implied a value of approximately $4.63 (C$4.68) per share of CGC common stock based upon the closing price of Timmins Gold common stock on October 12, 2010.

On October 13, 2010, the M&A Committee met with representatives of Cormark, Ballard Spahr and Ellenoff Grossman via conference call to discuss the October 12, 2010 Timmins Gold letter. Representatives of Cormark advised the M&A Committee that the letter presented materially the same proposal that Timmins Gold had previously submitted. In addition, Cormark advised the M&A Committee that, from a financial point of view, it did not believe the Timmins Gold proposal constituted a “superior proposal” as defined in the merger agreement, owing to the factors discussed at the September 19, 2010 and September 27, 2010 meetings and the volatility in the trading of Timmins Gold shares.

On October 14, 2010, the CGC board of directors held a meeting with representatives of Cormark, Ballard Spahr and Ellenoff Grossman via conference call to discuss the October 12, 2010 Timmins Gold letter, or the Timmins October Proposal. Representatives of Cormark advised the CGC board of directors that the letter presented materially the same proposal that Timmins Gold had previously submitted. In addition, Cormark advised the CGC board of directors that, from a financial point of view, it did not believe the Timmins October Proposal constituted a “superior proposal”, as defined in the merger agreement, based upon the factors discussed at the September 19, 2010 and September 27, 2010 board meetings and the volatility in the trading of Timmins Gold shares. Based upon that discussion, the CGC board of directors resolved that the Timmins October Proposal did not constitute a superior proposal to the Gammon Gold transaction.

On December 2, 2010, Timmins Gold sent CGC a letter, or the Timmins December Proposal, in which Timmins Gold resubmitted its proposal to acquire CGC in an all stock transaction under which each share of CGC stock would be exchanged for 2.27 common shares of Timmins Gold, which implied a value of approximately $4.76 (C$4.77) per share of CGC common stock based upon the closing price of Timmins Gold common stock on December 2, 2010. In addition, Timmins Gold indicated that based on the average closing share prices for the prior 20 trading days, the Timmins December Proposal had a per share value of $4.48 per CGC share and exceeded the per share value of the Gammon Gold transaction by $0.22 per CGC share. The Timmins December Proposal eliminated a due diligence condition, but otherwise contained the same terms as Timmins October Proposal.

On December 3, 2010, Timmins Gold issued a press release in which it publicly announced the submission of the Timmins December Proposal to CGC.

On December 3, 2010, the CGC board of directors held a meeting with representatives of Cormark, Ballard Spahr and Ellenoff Grossman via conference call to discuss the Timmins December Proposal and related press release. Cormark advised the CGC board of directors that:

 

•

the Timmins December Proposal was at the same exchange ratio as set forth in the proposals previously submitted by Timmins Gold;

 

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the only material change from the prior Timmins Gold proposals was the removal of the due diligence condition;

 

•

due to the volatility of the closing price of the stock of each of CGC, Gammon Gold and Timmins Gold, there have been periods of time where the implied value of the Gammon Gold transaction has been at a premium to CGC’s stock and there have been periods of time where the implied value of the Timmins December Proposal has been at a premium to both CGC’s stock and the implied value of the Gammon Gold transaction; and

 

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•

Cormark did not believe that Timmins Gold had demonstrated the ability to pay the break fee required by the Gammon Gold merger agreement to pursue a transaction with Timmins Gold.

Cormark was asked whether the Timmins December Proposal could likely lead to a superior proposal (as that term is defined in the Gammon Gold merger agreement). Cormark advised the CGC board of directors that Cormark needed to conduct its analysis with respect to the Timmins December Proposal before arriving at a conclusion of whether it is, or could likely lead to, a superior proposal. Cormark advised the CGC board of directors that it would conduct such an analysis and present its analysis to the CGC board of directors.

On December 5, 2010, the CGC board of directors held a meeting with representatives of Cormark, Ballard Spahr and Ellenoff Grossman via conference call to discuss Cormark’s analysis of the Timmins December Proposal. Cormark advised the CGC board of directors that:

 

•

the Timmins December Proposal offered the same exchange ratio as proposals previously submitted by Timmins Gold to CGC;

 

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the only material change in the Timmins December Proposal from the prior Timmins Gold proposals was the removal of the due diligence condition;

 

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when assessing the Timmins Gold proposal, Cormark considered the following:

 

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implied premiums and trading volatility;

 

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balance sheet strength, the ability of Timmins Gold to pay the break fee required by the Gammon Gold merger agreement and Timmins Gold’s requirement to raise capital;

 

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the quality of assets and management team, including questions surrounding high-grading and the lack of resource growth;

 

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the potential for long term re-rating;

 

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the opportunity for synergies; and

 

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the ability to execute the transaction;

Cormark advised the CGC board of directors that:

 

•

based upon the closing share prices of Gammon Gold and CGC on December 3, 2010, the implied value of the Gammon Gold transaction was at a premium to CGC’s stock and represented a premium to the implied value of the Timmins December Proposal;

 

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Timmins Gold is currently in debt in the amount of $22 million due to its gold loan;

 

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Gammon Gold had the current cash resources to develop CGC’s Orion project;

 

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Gammon Gold has an experienced management team;

 

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there was a greater potential for re-rating with Timmins Gold, assuming certain achievements; and

 

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while the Timmins December Proposal may present an opportunity for synergies given the close proximity of the CGC and Timmins Gold properties in Mexico, the necessity for Timmins Gold shareholder approval of a transaction with Timmins Gold presented additional risk.

Cormark then presented its analysis with respect to the arguments raised by Timmins Gold in the Timmins December Proposal with respect to the reasons CGC disclosed in this proxy statement/prospectus as to why CGC determined that the former Timmins Gold proposals were not a superior proposal to the Gammon Gold proposal:

CGC Reason. The Timmins Gold transaction would result in a merger of equals.

 

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Timmins Gold Counter Argument. On October 1, 2010, the date upon which CGC executed the Gammon Gold merger agreement, the Timmins Gold proposal exceeded the value of the Gammon Gold proposal by $0.44 per CGC share.

 

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•

Cormark Analysis. The trading volatility has resulted in the Timmins Gold proposal exceeding the implied value of consideration of the proposed Gammon Gold transaction on occasion, but this situation has not persisted and, as of December 3, 2010, was not the case.

CGC Reason. The proposed Timmins Gold transaction presented certain financial risks, including its current cash balance, its going concern issue and its outstanding gold loan.

 

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Timmins Gold Counter Argument. Timmins Gold is cash flow positive and has letters from financial advisors indicating a high degree of confidence in their ability to raise funds for Timmins Gold.

 

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Cormark Analysis. Based upon Cormark’s review of the Timmins Gold financial statements with respect to its last three fiscal quarters, Timmins Gold is in a net deficit position (current liquid assets minus current liabilities). Gammon Gold’s most recent balance sheet and available sources of liquidity offer greater certainty that growth can be financed internally without dilution.

CGC Reason. The obligation of Timmins Gold to seek shareholder approval is considered to increase overall transaction risk.

 

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Timmins Gold Counter Argument. Timmins Gold is confident it would obtain shareholder approval. The Gammon Gold merger agreement is conditional on Gammon Gold stockholder approval, if required. The inclusion of unusual conditions in the Gammon Gold merger agreement including a mutual break fee should raise concerns about certainty of closing.

 

•

Cormark Analysis. A mutual break fee is not an unusual term in this type of agreement. The merger with Gammon Gold, as structured, does not require the approval of Gammon Gold’s shareholders. The requirement for a Timmins Gold shareholder vote presents incremental transaction risk.

CGC Reason. The combined company would likely need to raise additional capital to fund CGC’s growth initiatives.

 

•

Timmins Gold Counter Argument. Timmins Gold is cash positive and has the ability to raise financing. Expected re-rating of combined company as a mid-tier producer should result in a reduced cost of capital and diminish concerns regarding dilution.

 

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Cormark Analysis. While Cormark agreed that Timmins Gold could likely raise capital in the current market, its current cash balance would not satisfy the requisite break fee under the Gammon Gold merger agreement and any equity financing by Timmins Gold would dilute the interests of CGC’s stockholders in the combined company. Further, the Timmins Gold financial statements suggest that Timmins Gold needs to raise capital now. In addition, Gammon Gold’s existing cash and non-dilutive sources of capital are expected to adequately cover the anticipated growth of the combined company.

Cormark then presented to the CGC board of directors its balance sheet review of each of Timmins Gold and Gammon Gold. Cormark advised the CGC board of directors that:

 

•

Gammon Gold has a superior cash position to Timmins Gold;

 

•

the increase in the price of gold may not yield sufficient cash flow for Timmins Gold because one-third of its gold production is pledged to be paid in satisfaction of its gold loan;

 

•

the assertion of Timmins Gold that it is cash flow positive is not supported by its financial statements. Cormark advised the CGC board of directors that in the most recent quarter, Timmins Gold realized a net cash reduction of C$1.0 million, compared to a net gain of C$4.0 million for Gammon Gold.

Cormark noted that the removal of the due diligence condition is a material change to the Timmins October Proposal; however, other terms remain unchanged. Cormark advised the CGC board of directors that when assessing whether the Timmins Gold proposal constitutes a superior proposal to the Gammon Gold proposal, Cormark considered the following: (i) total consideration to CGC’s stockholders including implied premiums

 

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and trading volatility; (ii) balance sheet strength, the ability of Timmins Gold to pay the break fee required by the Gammon Gold merger agreement and Timmins Gold’s requirement to finance growth opportunities and possibly current operations; (iii) the quality of Timmins Gold’s assets and its management team, including questions surrounding high-grading and the lack of resource growth; (iv) the potential for long term re-rating; (v) the opportunity for synergies; and (vi) the ability to execute a transaction.

Based upon Cormark’s review and analysis of the Timmins December Proposal and the above considerations, Cormark concluded that, from a financial point of view, the Timmins December Proposal did not constitute a superior proposal. In addition, Cormark indicated that in view of the fact that this is essentially the same proposal that Timmins Gold has now submitted to the CGC board of directors three times, this is likely the best proposal Timmins Gold has the ability to submit and, accordingly, this proposal is not likely, from a financial point of view, to lead to a superior proposal. Following a discussion by the members of CGC’s board of directors, and based upon Cormark’s analysis and conclusion that the Timmins December Proposal did not, and is not likely to lead to, a superior proposal to the Gammon Gold transaction, the CGC board of directors unanimously resolved to continue to recommend the Gammon Gold proposal as the best deal reasonably available to the Company’s stockholders.

On December 21, 2010, Shearman & Sterling LLP, or Shearman & Sterling, legal advisor to Timmins Gold, contacted Ellenoff Grossman and indicated that the Timmins December Proposal remained open for consideration by the CGC board of directors. Shearman & Sterling advised Ellenoff Grossman that Timmins Gold believed its proposal was superior to the proposed merger between Gammon Gold and CGC and also represented that Timmins Gold had sufficient funds to pay the termination fee.

On December 22, 2010, the M&A Committee held a conference call with representatives from Ballard Spahr and Ellenoff Grossman and discussed the telephone conversation between Shearman & Sterling and Ellenoff Grossman.

On December 23, 2010, the M&A Committee held a conference call with representatives from Cormark, Ballard Spahr and Ellenoff Grossman. Cormark advised the M&A Committee that, based upon the stock price of each of Gammon Gold and Timmins Gold on December 23, 2010, the implied per share value of the Timmins December Proposal exceeded the implied per share value of the merger consideration in the Gammon Gold transaction as of such date. That day, Ellenoff Grossman contacted Shearman & Sterling and advised that the M&A Committee had met to consider the Timmins December Proposal and would be making a recommendation to the full CGC board of directors.

On December 28, 2010, the full CGC board of directors held a conference call with representatives from Cormark, Ballard Spahr and Ellenoff Grossman. At the meeting, Cormark presented its analysis of the Timmins December Proposal. Cormark advised that the implied per share value of the Timmins December Proposal was $5.74 (C$5.83) per share of CGC common stock based upon the closing price of Timmins Gold common stock on December 22, 2010 and that this value exceeded, as of such date, the implied per share value of the merger consideration in the Gammon Gold transaction by $0.98 (C$0.99) per share of CGC common stock. Cormark advised that, during the preceding three weeks, shares of Timmins Gold had outperformed shares of Gammon Gold, resulting in the implied per share premium of the Timmins December Proposal over the implied per share value of the merger consideration in the Gammon Gold transaction.

Ballard Spahr and Ellenoff Grossman advised the CGC board of directors of their fiduciary duties pursuant to Delaware law. Ellenoff Grossman advised the CGC board of directors that pursuant to the terms of the Gammon Gold merger agreement, prior to participating in any discussions with Timmins Gold with respect to the Timmins December Proposal, a confidentiality agreement must be executed with Timmins Gold on terms substantially similar to the confidentiality agreement between Gammon Gold and CGC. The full CGC board of directors then unanimously resolved, after consulting with its legal and financial advisors, that: (i) the Timmins December Proposal, if consummated in accordance with its terms, is reasonably likely to lead to a superior proposal, and (ii) based on its determination that the Timmins December Proposal is reasonably likely to lead to

 

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a superior proposal, a failure to participate in discussions with Timmins Gold would constitute a violation of the CGC board of director’s fiduciary duties. The CGC board of directors also determined that the CGC advisors should finalize a confidentiality agreement with Timmins Gold and, upon the execution of a satisfactory confidentiality agreement, schedule a meeting with Timmins Gold.

On December 28, 2010, Ellenoff Grossman contacted Shearman & Sterling and advised that the CGC board of directors had determined that the Timmins December Proposal was reasonably likely to lead to a superior proposal and wished to meet with Timmins Gold and its advisors to discuss the Timmins December Proposal. Ellenoff Grossman further advised that in order to hold discussions with Timmins Gold, the parties would need to enter into a confidentiality agreement. On December 30, 2010, Ellenoff Grossman and Ballard Spahr sent a draft mutual non-disclosure and confidentiality agreement to Shearman & Sterling. Over the course of the next five days, the parties negotiated the agreement and, on January 4, 2011, CGC and Timmins Gold executed and delivered a mutual non-disclosure and confidentiality agreement.

On January 3, 2011, a representative of Shearman & Sterling spoke with a representative of Ellenoff Grossman regarding the proposed meeting. During the discussion, Shearman & Sterling advised that Timmins Gold expected the meeting to include a presentation to the M&A Committee and a discussion of the manner in which the parties may proceed with negotiations. Ellenoff Grossman informed Sherman & Sterling that, at this time, the M&A Committee wished to use this time to better understand all of the significant terms of the Timmins December Proposal.

On January 6, 2011, the M&A Committee met at the offices of Ballard Spahr in Philadelphia, Pennsylvania with representatives from Ballard Spahr, Ellenoff Grossman, Cormark, Bruce Bragagnolo, chief executive officer of Timmins Gold, and representatives of Shearman & Sterling and M Partners, financial advisors to Timmins Gold. Timmins Gold made a presentation to the M&A Committee in which, among other things, Timmins Gold advised that it had sufficient cash to pay the termination fee required by the Gammon Gold merger agreement and that it had written support agreements from stockholders representing approximately 20% of CGC’s outstanding common stock and written indications of support from stockholders representing approximately 15% of CGC’s outstanding common stock. CGC has not received copies of the written support agreements or written indications of support. Following this presentation, Timmins Gold and its advisors left the meeting. Cormark advised the M&A Committee that the implied per share value of the Timmins December Proposal continued to exceed the implied per share value of the merger consideration in the Gammon Gold transaction as of such date. During the meeting, representatives of CGC asked a variety of questions of Timmins Gold and its advisors. Ballard Spahr and Ellenoff Grossman advised the M&A Committee of their fiduciary duties pursuant to Delaware law and the M&A Committee unanimously agreed that comprehensive legal, operational, financial and technical due diligence with respect to Timmins Gold was critical to the determination of the relative intrinsic value with respect to the Timmins December Proposal compared to the merger consideration in the Gammon Gold transaction and whether the Timmins December Proposal would constitute a superior proposal for purposes of the Gammon Gold merger agreement. Timmins Gold and its advisors returned to the meeting and the M&A Committee advised Timmins Gold and its representatives that the M&A Committee would recommend to the CGC board of directors the undertaking of comprehensive due diligence. Timmins Gold emphasized the necessity for such due diligence to be conducted in an expeditious manner.

On January 9, 2011, the full CGC board of directors held a conference call with representatives from Cormark, Ballard Spahr and Ellenoff Grossman. At the meeting, Cormark presented an updated analysis of the Timmins December Proposal. Cormark advised the CGC board of directors that the implied per share value of the Timmins December Proposal was higher than the implied per share value of the merger consideration in the Gammon Gold transaction by $0.77 (C$0.76) per CGC share, based upon closing prices of Timmins Gold and Gammon Gold common stock as at January 7, 2011. Cormark advised the CGC board of directors that the observed premium represented by the Timmins December Proposal, combined with the representation by Timmins Gold that they have sufficient cash to pay the termination fee required by the Gammon Gold merger agreement, were both material changes to the Timmins December Proposal. The CGC board of directors then unanimously resolved that CGC commence the recommended due diligence.

 

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On January 10, 2011, CGC notified Timmins Gold that it intended to conduct due diligence and, on January 12, 2011, due diligence commenced.

On January 12, 2011, representatives of Ballard Spahr discussed the due diligence process with representatives of Shearman & Sterling. Ballard Spahr expressed the M&A Committee’s desire to conduct due diligence expeditiously. Also on this date, CGC engaged SRK Consulting to perform site due diligence and review the operations of Timmins Gold.

On January 14, 2011, Mr. Hazlitt conducted a due diligence mine site visit with representatives of SRK Consulting of the Timmins Gold San Francisco mine site operations and met with certain members of management of Timmins Gold.

On January 17, 2011, the M&A Committee met via conference call with Mr. Chipman and representatives from Ballard Spahr and Ellenoff Grossman to discuss the status of the due diligence with respect to Timmins Gold. The M&A Committee expressed concerns that the due diligence process was not moving quickly.

On January 18, 2011, the M&A Committee met via conference call with Mr. Chipman and representatives from Cormark, Ballard Spahr and Ellenoff Grossman to discuss the scope and nature of the due diligence materials received to date from Timmins Gold. Following this meeting, the M&A Committee sent correspondence to Timmins Gold regarding the progress of the due diligence review, notifying Timmins Gold of particular open items that the M&A Committee considered essential to its review of the Timmins December Proposal that had not yet been provided, in particular financial due diligence materials, and reminding Timmins Gold of the need to provide such due diligence materials expeditiously.

On January 20, 2011, Timmins Gold sent correspondence to the M&A Committee regarding the provision of due diligence materials.

On January 27, 2011, the M&A Committee met via conference call with Mr. Chipman and representatives from Cormark, Ballard Spahr and Ellenoff Grossman to discuss the status of the due diligence process and the extent of the due diligence materials received from Timmins Gold to date. The M&A Committee again expressed its concerns that Timmins Gold was not providing the due diligence materials expeditiously.

Later on January 27, 2011, the full board met via conference call with Mr. Chipman and representatives of Cormark, Ballard Spahr and Ellenoff Grossman to discuss the status of the due diligence review of the Timmins December Proposal. The M&A Committee informed the full board that several items that it considered essential to its review of the Timmins December Proposal had not yet been provided. Following this board meeting, the M&A Committee sent correspondence to Timmins Gold regarding the due diligence review, again notifying Timmins Gold of particular open items that were essential to the M&A Committee’s review of the Timmins December Proposal and reminding Timmins Gold of the need to provide such due diligence materials expeditiously. The M&A Committee requested that Timmins Gold provide all such materials by 5:00 P.M. on January 28, 2011.

On January 28, 2011, Timmins Gold provided certain of the requested due diligence materials, which were then reviewed by management of CGC and its advisors. Representatives of Shearman & Sterling informed representatives of Ballard Spahr that the due diligence materials provided by Timmins Gold to date were all of the materials that Timmins Gold intended to provide. Shearman & Sterling advised Ballard Spahr that Timmins Gold believed that the due diligence materials it had provided, in its view, constituted all of the material information.

Later on January 28, 2011, the M&A Committee met via conference call with Mr. Chipman and representatives from Cormark, Ballard Spahr and Ellenoff Grossman to discuss the due diligence materials received that day and to discuss the process for reviewing such due diligence materials. The M&A Committee expressed its belief that it was important to review the due diligence materials provided earlier that day carefully and undertook to do a thorough review. The review of the due diligence materials provided was completed on January 31, 2011.

 

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On January 30, 2011, the M&A Committee met informally to discuss the status of the review of the due diligence materials.

On January 31, 2011, the M&A Committee met via conference call with Mr. Chipman and representatives from Cormark, Ballard Spahr and Ellenoff Grossman to discuss the due diligence review of the Timmins December Proposal. During this meeting, the M&A Committee discussed numerous operational, financial and technical considerations based upon their review of the due diligence materials provided to date. The M&A Committee determined that the information submitted did not support the representation made by Timmins Gold that Timmins Gold had sufficient cash to pay the termination fee required by the Gammon Gold merger agreement, and to pay the other costs and fees associated with a potential transaction with CGC, without risk to the future day-to-day operations of the proposed combined entity. In addition, the M&A Committee discussed specific concerns related to the Timmins Gold going concern issue, concerns related to management of Timmins Gold, and concerns relating to the financing of operational costs of a combined entity and the achievement of the proposed combined entity’s operational goals. Based on a combination of the aforementioned financial and operational concerns, the M&A Committee determined that continuing to pursue a combination of Timmins Gold and CGC would not be in the best interests of CGC stockholders. Cormark advised the M&A Committee that, having reviewed the due diligence materials provided by Timmins Gold, its conclusion as of such date with respect to the Gammon Gold proposal remained unchanged from its earlier conclusion, referring to that conclusion made on September 30, 2010, and reiterated on October 14, 2010, and December 3, 2010, that the Gammon Gold proposal represented the best transaction reasonably available to CGC’s stockholders. Ballard Spahr and Ellenoff Grossman provided the M&A Committee with information regarding its fiduciary duties under Delaware law and related matters in connection with a potential transaction with either Timmins Gold or Gammon Gold. Based upon the M&A Committee’s review and analysis of the Timmins December Proposal and the due diligence materials provided by Timmins Gold, the failure of Timmins Gold to substantiate its ability to pay the termination fee and other costs and expenses of a transaction with CGC without risk to the future day-to-day operations of a combined entity, and the failure of Timmins Gold to provide all of the due diligence requested by CGC, the M&A Committee concluded that it would recommend to the full board that the Timmins December Proposal did not constitute a superior proposal.

Later on January 31, 2011, the full board met via conference call with Mr. Chipman and representatives of Cormark, Ballard Spahr and Ellenoff Grossman to discuss the Timmins December Proposal and the due diligence materials provided by Timmins Gold. The M&A Committee reviewed with the full CGC board of directors the operational, financial and technical concerns it had with respect to Timmins Gold and its ability to achieve the proposed combined entity’s operational goals and advised the CGC board of directors that it could not recommend the Timmins December Proposal. Cormark advised the CGC board of directors that, having reviewed the due diligence materials provided by Timmins Gold, its conclusion as of such date with respect to the Gammon Gold proposal remained unchanged from its earlier conclusion, referring to that conclusion made on September 30, 2010, and reiterated on October 14, 2010, and December 3, 2010, that the Gammon Gold proposal represented the best transaction reasonably available to CGC’s stockholders. Ballard Spahr and Ellenoff Grossman advised the CGC board of directors of its fiduciary duty obligations. After discussing the various concerns raised by the M&A Committee, the full board determined, based on the representations of the M&A Committee, that the information submitted by Timmins Gold did not support the representation made that Timmins Gold had sufficient cash to pay the termination fee required by the Gammon Gold merger agreement and other costs and expenses of a transaction with CGC without risk to the future day-to-day operations of the proposed combined entity. Accordingly, the CGC board of directors concluded unanimously that the Timmins December Proposal did not constitute a superior proposal. One director concluded that the Timmins December Proposal did not constitute a superior proposal solely on account of the fact that, based on the information and analysis presented by the M&A Committee, Timmins Gold did not have sufficient cash to pay the termination fee. Four out of five directors based their conclusion that the Timmins December Proposal was not a superior proposal on a variety of different factors, including a review and analysis of the Timmins December Proposal, the due diligence materials provided by Timmins Gold, the failure of Timmins Gold to substantiate its ability to pay the termination fee and other costs and expenses of a transaction with CGC without risk to the future day-to-

 

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day operations of a combined entity, and the failure of Timmins Gold to provide all of the due diligence materials requested by CGC.

On February 1, 2011, the M&A Committee notified Timmins Gold that the CGC board of directors decided to terminate its consideration of the Timmins December Proposal and discontinue negotiations with Timmins Gold regarding the Timmins December Proposal because the CGC board of directors determined that the Timmins December Proposal is not a superior proposal. CGC issued a press release to this effect. In addition, the M&A Committee sent a letter to the CEO of Timmins Gold to this effect, the text of which follows:

Dear Mr. Bragagnolo:

On January 31, 2011, the Board of Directors of the Company (the “Board”), based upon the recommendation of the M&A Committee of the Board (the “Committee”) has made the determination that the proposal submitted by Timmins Gold Corporation (“Timmins”) does not constitute a Superior Proposal (as that term is defined in the Agreement and Plan of Merger between the Company, Gammon Gold Inc. and Capital Gold Acquireco, Inc. dated October 1, 2010, as amended), and as such, the Board has determined to terminate its consideration of the Timmins proposal. This determination incorporates a review of the due diligence materials provided by Timmins through January 28, 2011. Each of the members of the Board considered the factors he considered relevant in making this determination. Some of the factors considered by various members of the Board for terminating discussions with Timmins include the following:

Financial Concerns

 

•

We have significant concerns regarding Timmins’ financial position if we were to consummate the proposed transaction. First, Timmins’ consolidated financial statements for the quarter ended September 30, 2010 were prepared assuming that Timmins will continue on a going-concern basis. Timmins has incurred losses since inception and Timmins’ ability to continue as a going-concern depends upon its ability to achieve profitable operations or to continue to raise adequate financing. As of September 30, 2010, current liabilities were in excess of current assets and cash and cash equivalents was approximately $3.9 million. The working capital deficit was approximately $8.0 million as of September 30, 2010. Cash and cash equivalents were approximately $4.3 million as of December 31, 2010, as provided by you in due diligence materials. This represents an increase of cash and cash equivalents of only $0.4 million during the quarter ended December 31, 2010. Second, although you indicated that Timmins had the ability to pay the termination fee by including certain gold sale receivable and IVA receivable balances within cash and cash equivalents, you stated that Timmins’ net cash position as of December 31, 2010 was only $8.6 million. This is insufficient to pay the termination fee and other fees and expenses associated with the proposed transaction. Further, we believe that gold sale receivables and IVA receivable balances are not forms of cash that can be used to pay the termination fee and other costs associated with consummating a transaction with the Company and therefore should not be included in cash and cash equivalents. Based on the information you provided, paying the termination fee would put Timmins in a position where it may have to delay vendor payments, which we believe would cause financial issues for Timmins. We believe, based on the information provided by you, that even if Timmins was able to pay the termination fee and other transaction costs, it may significantly hinder Timmins’ ability to continue day-to-day operations. We cannot recommend a proposal to our stockholders where we have these concerns about the financial viability of the combined entity.

 

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•

It appears that you do not opine on the effectiveness of Timmins’ internal controls over financial reporting on an annual basis. As you are aware, the Company and its auditors are required by the Sarbanes-Oxley Act of 2002 to opine on its internal controls. We also noted that the audit opinion provided by Timmins’ external auditor did not opine on the effectiveness of Timmins’ internal controls. A chief financial officer would play a key role in maintaining internal controls over financial reporting, however, this position, as you represented, is outsourced. If disclosure controls and procedures and/or internal controls over financial reporting were found to be ineffective or if a material weakness or significant deficiency in Timmins’ financial reporting were disclosed, investors may lose confidence in the reliability of Timmins’ financial statements, which may adversely affect Timmins’ financial results or its stock price. The recent restatement of Timmins’ financial statements further accentuates this concern.

Management Concerns

 

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Based upon discussions with Timmins management and the due diligence materials received, we have concerns over the current management structure and experience level and its ability to successfully consummate and integrate a transaction with the Company.

Operational Concerns

 

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We have concerns regarding Timmins’ ability to execute on its growth plans. We note that in Timmins’ most recent Annual Information Form filed on January 26, 2011, Timmins is planning to increase the crusher capacity to 18,000 tons per day at a cost of $11.2 million. This capital expenditure is necessary to increase production to the life-of-mine levels set forth in Timmins’ 43-101 report. This expenditure is planned for the fiscal quarter ending June 30, 2011 with commissioning anticipated in July 2011. Based on Timmins’ current cash position and after paying the termination fee and transaction costs, and ordinary course payments such as anticipated property payments, exploration costs and loan repayments, we are skeptical that cash on hand and cash flow from operations will be sufficient to generate the funds necessary to implement the revised mine plan in accordance with the time frame set forth in the 43-101 report.

 

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We noted that the press release dated January 20, 2011 disclosed that Timmins mined an average grade of 0.939 g/t during the quarter ended December 31, 2010. During our meeting on January 6, 2011, you had represented that the mine was mining at a level of 0.81 g/t. We have concerns over the large variance between the life-of-mine grade disclosed in the 43-101 report of 0.695 g/t and the actual grade that has been mined at the project to date and what impact this has on the mine life.

 

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Based on the extraction being approximately 52% project-to-date, we have concerns as to whether 70% recovery is achievable in the near term, especially considering that you only have actual results from leaching the first lift on your leach pad.

 

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The Timmins press release dated January 20, 2011 disclosed that life of mine cash costs were anticipated to be $489, which is now consistent with Timmins’ 43-101 report. Our due diligence showed that, for the six months ended September 30, 2010, actual cash costs have been at an average of approximately $650 per ounce sold. Timmins will have to decrease its cash costs significantly to achieve the levels documented in its 43-101 report and we have concerns whether Timmins will be able to achieve this goal in the near term.

 

•

We thank you again for your interest in consummating a transaction with the Company. However, for the reasons set forth above, we have concluded that the Timmins proposal

 

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is not a Superior Proposal and will not be engaging in further discussions regarding the Timmins proposal.

 

On February 9, 2011, Timmins Gold sent a letter to the CGC board of directors responding to CGC’s rejection of the Timmins December Proposal.

On February 10, 2011, Timmins Gold issued a press release disclosing the February 9 letter it had sent to CGC’s board of directors and announcing Timmins Gold’s intention to make its offer directly to CGC’s stockholders. Later on that day, Timmins Gold filed with the SEC a registration statement containing a preliminary prospectus/offer to exchange, a preliminary proxy statement soliciting proxies in opposition to the Gammon Gold transaction and a preliminary consent statement. The preliminary consent statement is soliciting written consents from CGC stockholders to (i) repeal certain provisions of CGC’s by-laws, (ii) remove members of the CGC board of directors and (iii) elect certain individuals nominated by Timmins Gold to the CGC board of directors.

On February 11, 2011, the M&A Committee met to discuss Timmins Gold’s registration statement, preliminary proxy statement and preliminary consent statement and determined to call a meeting of CGC’s board of directors to review and discuss a response to Timmins Gold.

On February 14, 2011, the CGC board of directors met to discuss CGC’s response to Timmins Gold’s registration statement, preliminary proxy statement and preliminary consent statement. At this meeting, a representative from Cormark advised that no new financial information had come to light that would impact the CGC board of directors’ prior determination that the Timmins Gold proposal was not a superior proposal. Later that day, CGC issued a press release affirming the CGC board of directors’ support for the Gammon Gold transaction, the text of which follows:

Capital Gold Responds to Timmins Gold Hostile Bid

and Reaffirms Support for Gammon Transaction

NEW YORK, February 14, 2011 – Capital Gold Corporation (TSX:CGC; NYSE AMEX: CGC) acknowledges that on February 10, 2011, Timmins Gold Corp. (“Timmins”) filed a Form F-4 Registration Statement (the “F-4”) to proceed with an unsolicited exchange offer to acquire control of Capital Gold Corporation (“Capital Gold”).

In the F-4, Timmins questions Capital Gold’s rejection of its previously announced proposal, the due diligence process undertaken by the special committee of the Board of Capital Gold (the “Special Committee”) and the Capital Gold Board’s unanimous determination to terminate consideration of the Timmins proposal.

In response to Timmins’ assertions, Capital Gold wishes to provide additional information about the process undertaken, to summarize its concerns about the Timmins’ proposal and to highlight a number of the reasons why the Capital Gold Board supports a transaction with Gammon Gold Inc. (“Gammon”).

 

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Timmins’ Proposal and the Special Committee’s Due Diligence Process

On December 23, 2010, a representative of Timmins contacted Capital Gold’s legal advisor to indicate that the proposal previously made by Timmins for a “merger of equals” remained open. The proposal was not materially different from that made on September 3, 2010, which proposed an all-stock transaction in which each share of Capital Gold’s stock would be exchanged for 2.27 shares of Timmins’ stock. Notwithstanding the fact that Capital Gold’s Board had unanimously determined, on three separate prior occasions, that the Timmins proposal was not superior to the terms set forth in the agreement and plan of merger, dated as of October 1, 2010, by and among Gammon, Capital Gold Acquireco, Inc. and Capital Gold (the “Merger Agreement”), based on the price at which Timmins’ stock traded during the month of December 2010 and advice of financial and legal counsel, it was determined that the Capital Gold Board had a fiduciary duty to further explore the Timmins proposal and to determine if it was a superior proposal, as defined in the Merger Agreement.

On January 6, 2011, members of the Special Committee and its financial and legal counsel met with representatives of Timmins and its advisors to discuss aspects of the Timmins proposal. During that meeting, Timmins represented that Timmins had sufficient cash available to pay the termination fee and other transaction expenses required by the Merger Agreement and to fund ongoing operations of both Timmins and Capital Gold going forward. During that meeting, Timmins was advised that, in order for the Capital Gold Board to determine if the Timmins proposal was a superior proposal, Capital Gold would need to conduct and be satisfied with the results of comprehensive legal, operational, financial and technical due diligence with respect to Timmins. The Special Committee informed Timmins that such due diligence was necessary because of, among other factors, the “going concern” issue set forth in Timmins’ most recent financial statements and concerns that Timmins had insufficient cash to pay the termination fee, other transaction costs, and the ability to finance operations of the combined companies going forward. As such, Timmins was given a due diligence production request, together with a list of detailed financial and operational questions that were appropriate considering the nature of the transaction.

After initial resistance from Timmins, a site visit to Timmins’ San Francisco Mine was arranged; however, Timmins refused to grant Capital Gold’s Chief Financial Officer access to the site or critical financial documents at that time. Subsequent to the site visit, representatives of Capital Gold provided Timmins with a second due diligence request list focused particularly on Timmins’ operations.

In the weeks that followed, Timmins was unresponsive to Capital Gold’s due diligence requests and tried to dictate the depth and scope of Capital Gold’s due diligence review by limiting access to certain financial and technical information. Capital Gold was never provided access to Timmins’ financial books and records. Despite these challenges, Capital Gold invested a considerable amount of time and money reviewing the limited due diligence materials produced by Timmins and publicly-available information. While individual members of Capital Gold’s Board based their determination on different reasons, they unanimously determined to terminate consideration of the Timmins proposal based on the due diligence conducted and determination made by the Special Committee that the Timmons proposal presented too high a level of financial risk. Specifically:

 

1.

Financial Concerns

According to the information provided (and subsequently publicly disclosed by Timmins), Timmins had approximately $4 million in available cash on hand as of December 31, 2010, with current liabilities exceeding current assets. Timmins has set forth its financial requirements for 2011 at the bottom of page 60 of the F-4 to include “exploration

 

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expenditures of C$21 million, capital expenditures of C$5 million for plant and equipment at the San Francisco Mine and expenditures of C$5 million for general and administrative expenses.” A further $2.55 million in property option payments are also due in 2011. Should Capital Gold choose to enter into an agreement with Timmins, additional one-time expenses of approximately $20 million would be payable, including the Gammon termination fee, change of control payments and advisory fees. Additionally, with Timmins’ gold loan owing to Sprott Asset Management LP of approximately $13 million plus Capital Gold’s 2011 capital requirements of approximately $30 million, the combined entity would have 2011 capital requirements of in excess of $95 million. It is estimated that a substantial portion of these expenditures would need to be funded from capital raised from third parties in the public markets.

Capital Gold believes that there is considerable risk associated with Timmins’ ability to raise that amount of capital. Timmins clearly agrees with this assessment, as the F-4 highlights this risk on page 38: “Timmins’ inability to access additional capital could have a negative impact on its growth strategy”. Moreover, even if Timmins were able to raise the necessary funds, given the volatility of Timmins stock price, it is reasonable to conclude that Timmins may be required to raise capital at a significant discount to prevailing market prices, which would cause immediate and perhaps substantial dilution to the proposed all stock consideration to be received by the Capital Gold stockholders under the Timmins proposal. The Special Committee does not believe stockholders should be subjected to this amount of financial risk.

In addition to the above financial concerns, the Special Committee unanimously based their determination on the fact that the information provided by Timmins with respect to its financial position was not consistent with prior statements thus raising concerns about its management, internal financial controls, the ability to fund transaction costs and the operations of the combined company going forward. The Special Committee had the following concerns that led to their determination to terminate negotiations with Timmins:

 

2.

Operational Concerns

To the extent that Capital Gold was permitted to conduct timely due diligence on the operations of Timmins, the Special Committee noted that Timmins’ principal asset, the San Francisco Mine in Mexico, is in its initial start-up phase and has yet to reach the operating goals set forth in the November 2010 Micon Technical Report. Capital Gold has concerns with respect to (i) the short mine life (ii) the variance in the life of mine grade disclosed and the actual grade that has been mined to date and what impact that has on the mine life, (iii) the variance in projected life of mine cash costs and the costs that have been published to date and what impact this will have on future cash flows and valuations, and (iii) ultimate leach recovery not reaching the life of mine expectation of 70%.

Capital Gold believes that the risk of operational issues is not insignificant. Timmins clearly agrees with this assessment, as the F-4 highlights this risk on page 39: “Timmins has a limited operating history and therefore cannot ensure the long-term successful operation of its business or the execution of its business plan”. The Special Committee does not believe its stockholders should be subjected to this amount of operational risk.

 

3.

Management Depth

Timmins’ inability to respond to Capital Gold’s due diligence requests in a timely manner, its lack of a full time chief financial officer and apparent lack of appropriate internal financial controls raises significant concerns among members of the Special Committee. In the assessment of the Special Committee, the management of Timmins lacks sufficient depth to

 

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execute a transformational merger and to operate the combined companies going forward. The Special Committee does not believe its stockholders should be subjected to this amount of management risk.

 

4.

Other Transaction Risk

Capital Gold has completed sufficient due diligence to determine, in the prudent exercise of its fiduciary duties and following a full and fair evaluation process, that the proposed exchange offer made to Capital Gold stockholders on February 10, 2011 by Timmins is not in the best interests of the Capital Gold stockholders. However, the proposed Timmins exchange offer remains subject to a number of conditions as set forth in the F-4. The most critical include the reinstatement of a due diligence condition, a shareholder approval condition on the part of Timmins’ shareholders and a listing condition (Timmins’ common stock is not listed on any United States securities exchange), all of which raise material transaction risk in the Timmins offer. The Special Committee does not believe its stockholders should be subjected to this amount of transaction risk.

By contrast, Gammon:

 

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Has sufficient cash on hand to fund its own and Capital Gold’s operational goals going forward;

 

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Does not require approval of its stockholders for the transaction with Capital Gold;

 

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Has an established and experienced board and management team;

 

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Is a New York Stock Exchange-listed company with financial controls in place consistent with the requirements of the Securities Exchange Act of 1934, as amended, the Sarbanes-Oxley Act and all applicable legal and regulatory requirements;

 

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Has experienced four quarters of consecutive growth; and

 

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Has expanded their reserves in the last 6 months.