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May 15, 2009

Implications of a "Sullivan-style Massive Sulfide Beds" Project Model
by David Morgan

I almost always focus these weekly missives on the precious metals or economy but seldom write about mining companies. This week I decided to give our readers a little taste of one high potential situation we have been following closely. The name and symbol are left out intentionally because many Internet hosting sites do not want company names involved. This is intended to give the reader some insight into the type of potential a Massive Sulfide discovery may entail.

The following is an excerpt from a special report I wrote just over a month ago. Upon returning from the Las Vegas Money Show just a few moments ago, and calling to receive the latest news on the company referred to below, I wanted to make the point that although I have always stressed real metal as the fundamental starting point for a precious metals portfolio, the art of speculation is also an area that can reap large rewards, especially now when the junior mining sector is an area that most people are ignoring.

Our latest speculative position has indications of being similar to the Sullivan discovery. This can be researched on the Internet by the reader for background information.

From the April Special Update:

We have received many questions relating to the geology model contained in this project, so this update will be essentially in Question and Answer format.

First, I stated three things in the April Morgan Report:

1. Mammoth-sized upside. We will make some basic assumptions, squiggle on the backs of a few envelopes, and divine what the upside potential might be given the geologic model and assays released thus far.

2. They have not yet hit the highest grade bed or layer in the latest drill hole. A miss may not be a project killer or even disprove the geologic model, but a hit suggests a long and relatively flat lying bed of super-high grade ore. As I have often stated a company is not made (or lost) on one drill hole. We should know the outcome within the next few weeks.

3. If this company hits super-massive sulfides similar to that found in the previous drill target, it is my guess they will get samples into the assay labs quickly. The stock would react like crazy if we were in 2004-2006 time frames, but today the market seems to ignore even the most exciting news. This can work to your advantage because the stock price is NOT running away!

A key initial question is what is the cost on a per-ton basis for resource development and mine construction? Another key question for us as investors is what is the potential cash flow?

The Sullivan Mine's sulfide beds were shaped like an inverted saucer, thickest in the middle. The 100 meters thickness number was actually the thickest part, and each lens or bed was itself 3 to 25 meters thick (this makes our company's 15 foot layer of super-high grade easier to understand - it was one of many layers).

The beds are essentially the stratification of metal containing sulfides that occurred in a hydrothermal system. Think of a slowly rising level or horizon of hot water that causes each metal to dissipate out of solution one at a time to form layers. The degree of stratification, as well as the order in which the metals dissipate out of hydrothermal solutions, can be affected by temperature, pressure and chemistry, and tends to work better when it occurs in appropriate host rocks. More stratification equals potentially higher grades due to less dilution.

One could imagine that even if stratification forces were acting on rocks across a vast regional distance, only in certain places would everything align just right so as to produce a fully-stratified series of "Sullivan-style massive sulfide beds." They found one in Kimberly, British Columbia, a little over 100 years ago and it became a world-class mine. Before we get too carried away let's be clear there is lot more verification and drilling that MUST be accomplished but from what we know so far we have a speculation of the variety that quite frankly I have not seen very often.

Let us go a step further and define our analysis down to mining just a 35 foot thick bed of super massive high-grade ore that happens to exist in a deposit shaped like a circle and 6,000 feet across (which are the lateral dimensions of the Sullivan). Its radius would be 3,000 feet. Our company reported 37 feet of 18% Zinc, 3.6% Lead, and 2.2 oz of Silver per tonne, so let's use those numbers and simplify to a 35 foot thickness.

Massive sulfides are very heavy - anybody who has ever hefted a box of massive sulfide core can attest to this. Given some of the mineral types mentioned, I will use a specific gravity of 5.0 for this analysis. Specific gravity is a dimensionless number, the ratio of the weight of rock compared to an equal volume of water. A cubic foot of water weighs 62.4 lbs, so the weight of a cubic foot of sulfides with a specific gravity of 5.0 is 312 lbs. To be comparable to the Sullivan numbers, one metric tonne = 2,200 lbs. Thus, a tonne is about 7 cubic feet of rock.

To find the square footage of a circle with a radius of 3,000 feet, we multiply the radius by itself, and then multiply that number by PI (or 3.14). This comes out to 28,260,000 square feet. If the layer is 35 feet thick, this would come to 989,100,000 cubic feet. Divide by 7 for the tonnes = 141,300,000 tonnes of ore.

This is fairly close to the 130 million total tonnes of ore reportedly mined at the Sullivan, so it appears Cominco mined an average of a just under 35 feet of thickness across the entire deposit. The Sullivan had lower grades, and a cut-off grade would have applied, so it is easy to see how the mineable thickness on our company has the potential to be larger.

What is a tonne of this ore worth? We will use what we think we know so far, at the grades stated above, each tonne (or 7 cubic feet) of ore would contain 396 lbs of zinc (2,200 x .18), 79 lbs of lead, and 2.2 ounces of silver. At $.61 per lb of zinc, $.59 per lb of lead, and $12.55 for each ounce of silver, that tonne is so far worth about $315.78 in the ground. In an earlier analysis at slightly lower metals prices, we figured that the 15 foot zone of extra-high grade was worth almost $600 a tonne.

Using 141,300,000 tonnes at the lowest figure of $315.78 such a deposit would be worth about $44,619,714,000 "in the ground." Nearly $45 billion if it were gold, but we are talking base metals so far, so we might cut that figure it half or even a quarter, yet we are still looking at a significant potential. Please see disclaimer below.

It is an honor to be.

Sincerely,

David Morgan
Silver-Investor.com

Mr. Morgan has followed the silver market daily for over thirty years. Much of this Web site, www.silver-investor.com, is devoted to education about the precious metals.

Mr. Morgan has been published in The Herald Tribune, Futures magazine, The Gold Newsletter, Resource Consultants, Resource World, Investment Rarities, The Idaho Observer, Barron's, and The Wall Street Journal. Mr. Morgan does weekly Money, Metals and Mining Review for Kitco. He is hosted monthly on Financial Sense with Jim Puplava. Mr. Morgan was published in the Global Investor regarding Ten Rules of Silver Investing, which you can receive for free. His book Get the Skinny on Silver Investing is available on Amazon or the link provided. His private Internet-only newsletter, The Morgan Report, is $129.99 annually. To suscribe to the Morgan Report click here.

Information contained herein has been obtained from sources believed to be reliable, but there is no guarantee as to completeness or accuracy. Because individual investment objectives vary, this Summary should not be construed as advice to meet the particular needs of the reader. Any opinions expressed herein are statements of our judgment as of this date and are subject to change without notice. Any action taken as a result of reading this independent market research is solely the responsibility of the reader. Stone Investment Group is not and does not profess to be a professional investment advisor, and strongly encourages all readers to consult with their own personal financial advisors, attorneys, and accountants before making any investment decision. Stone Investment Group and/or independent consultants or members of their families may have a position in the securities mentioned. Investing and speculation are inherently risky and should not be taken without professional advice. By your act of reading this independent market research letter, you fully and explicitly agree that Stone Investment Group will not be held liable or responsible for any decisions you make regarding any information discussed herein.

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