Animas Resources Ltd.
Talent and Luck

Kevin Graham
Dec 11, 2007

I was invited to attend the first-ever site tour of Animas' Santa Gertrudis gold deposits and exploration lands. With no obligation, this invitation was extended with the potential for an independent and objective review of the project from an investor perspective. No consideration exchanged hands. None was promised. None was expected. I am not, at the time of writing, a shareholder of the Company, though this may soon change.

At noon on December 5th, I met up with Jeff Phillips (the brains behind the creation of this Company/project), Greg McKelvey (geologist, President and CEO), and Marina Trasolini (geologist, Lawrence Roulston's Resource Opportunities) at the airport in Phoenix. We traveled to Rio Rico, Arizona (near the Mexican border) for an overview briefing on the Company that evening. Also attending the briefing were John Wilson (geologist, VP Exploration), John Reynolds (geologist and geophysicist, consultant), and Odin (Odie) Christensen (geologist, advisor).

Next morning (December 6th), we crossed the border, heading south to Magdalena, where we met with Bob Moriarty for breakfast, and then on to the property. Meeting us on site was Alberto Navarro (geologist). The day was spent touring the property, visiting a number of formerly mined pits, reviewing geologic maps, and grappling with the scope of the project. That evening, we returned to the hotel at Magdalena for dinner and the opportunity for more 'getting to know you' conversation.

The People

I begin with the people running the show because I think and feel that this is the most important consideration in looking at any organization. Frankly speaking, a company could be sitting on Fort Knox, but if I didn't feel that the team leading the charge was both competent and trustworthy, it wouldn't see a penny of my investment dollars.

Jeff Phillips appears to be living out one of the main themes from Jim Collins' excellent book, Good to Great. Collins postulated that one of the key foundations for building a great company is to ensure first that you have the right people 'on the bus' before deciding which direction to drive. Working with Greg McKelvey, Phillips has created a core team of staff, consultants, directors, and advisors. I will highlight here only those whom I have met. Detailed descriptions of others can be found at:

http://www.animasresources.com/s/Management.asp
and
http://www.animasresources.com/s/AdvisoryBoard.asp

Phillips' background is in corporate finance, marketing, and communications (including work with Metallica Resources, Ultra Petroleum, Silver Standard Resources, Strathmore Uranium, Penaco Energy, Guyana Goldfields, and Boron Chemicals). Essentially, he's the dealmaker who conceived and created the Company. He's also one of the Company's largest shareholders.

Greg McKelvey is the President and CEO. McKelvey brings over 40 years of experience in both exploration (including discovery) and mining, including postings with Newmont, Homestake, Kennecott, and as VP Exploration Latin America for Phelps Dodge, one of the former operators of a major section in the Animas property. He sees his role as guiding the strategic development and tactical implementation of exploration efforts. Given the scope of the project, maintaining focus for the Company will be a significant factor in determining whether or not that path leads to success. Both in our discussion in transit (four hours from Phoenix to Magdalena) and during the formal presentation, McKelvey stressed the need for what he called a balanced 40/40/20 strategy. This strategy is comprised of three major components: to rapidly extend known resources (40%), to discover additional resources along strike and under post mineral cover (40%) and to develop and test new ideas (20%), including deeper targets.

John Wilson is VP Exploration. Wilson brings more than 35 years of experience around the world in all of: exploration (including discovery), resource definition, and mine development. Wilson led the overview presentation, and provided a clear and concise understanding of the potential of this project. Not a desk jockey, he'd be happier if he never left the field.

John Reynolds is a consulting geologist/geophysicist with more than 35 years of direct related experience. He has worked around the world, leading successful geophysics programs for numerous mining companies. This includes working on the current property for 18 months for Phelps Dodge. His role is that of counterpart in the field to Wilson, leading efforts to compile and understand existing data, as well as collecting new data in the targeting of new resources.

Alberto Navarro is a consulting geologist who has worked on the property for many years, bringing historical context to the effort. We did not converse much, as my facility with the Spanish language is more than 30 years into a stage of rust.

Phillips and McKelvey stressed their feeling of a need to ensure that Animas has at its disposal a wealth of expertise and connections in the form of a carefully selected Advisory Board. This group includes specialists in corporate finance, business development, mining engineering, geologic exploration, marketing, and mining law. On this last count, one of these advisors was a co-writer of current mining laws in Mexico, and has recently served as an advisor to the government in amendments to these laws. Clearly, Phillips is doing his best to cover all the important bases.

Odie Christensen is an active member of the Advisory Board who, in his own words, plans on becoming even more involved. Christensen's involvement in this project is better understood with reference to the Behre Dolbear report, commissioned by another former operator of the property in 1997. See the link at:

http://www.animasresources.com/i/pdf/BehreDolbearonSGCarlinPotential.pdf [BIG file]

In a nutshell, this report was tasked with evaluating the potential for the Santa Gertrudis deposit to contain deep Carlin-type gold mineralization. Carlin-type mineralization means low-grade, high tonnage, with a host of associative characteristics, including: structure; alteration; geophysics; geochemistry; mineralization; and soil geochemistry. Without going into great detail, their conclusion was that this potential was very strong. Carlin-type mineralization refers to Newmont's Carlin Trend in Nevada, advanced in the 1980s by a team led by none other than Odie Christensen. When he arrived on the scene, the project had identified some 300,000 ounces of gold. By the time he left, that figure had been raised to more than 20 million ounces. As Exploration Manager, he was instrumental in transforming the Carlin Trend from a single mine into the largest gold district in the United States. For the skeptics who might suggest that his presence at Carlin was merely coincidental with this transformation, his next appointment was as Newmont's Chief Geologist, Worldwide. An impressive member to have on your team, I say. To the point in question, I heard Christensen say on more than one occasion during the site tour that this "sure looks like a Carlin-type deposit."

History of the Property

To call this a 'property' would be a misnomer. The folks at Animas term it a 'district' and rightly so. This district is a consolidation of properties formerly controlled by as many as ten different companies at one time. The largest of these was formerly under the Phelps Dodge umbrella. The collection of properties has just been expanded to include in total approximately 630 square kilometers of land, all of which is described as 'prospective'. There are hundreds of kilometers of roads already built. Bonus: the road that leads to the property stops at the property. As a result, the chances for cross-border hanky panky traveling through the area are slim to nil. Power, water, and workers have been available in past on this property, and are expected to pose no great challenges to the project on a go forward basis.

The total cost of acquisitions is estimated at about $5 million. To find the district, open Google Earth. Set the Tools/Options to Universal Transverse Mercator. Find the coordinates 543000 mE and 3388000 mN. Most of the black spots you will find there represent the water table at the bottom of previously mined pits. The rectangular black spots are heap leach pads, left by prior operators.

Since this past summer, data has been gathered from a variety of sources, now being fed into a computer model that will be a prime source of guidance for drilling activity, set to begin in the New Year. The enormity of this task is reflected in the following description of available data: 1,017 reverse circulation drill holes, totaling 98,620 meters; 225 diamond drill holes totaling 21,122 meters; 34,000 rock samples; and 21,000 soil samples. Moreover, 55% of the district is covered by a soil geochemical survey. In today's dollars, the value of this data would be in the tens of millions of dollars. In other words, while Animas Resources is only five months old, this early stage explorer is already well advanced by a wealth of information now being modeled for the first time using previously unavailable computer techniques. District-wide data, sourced from different property acquisitions, offer synergy in consolidation, pointing to potential for resource extension (along trending structures) much larger than offered by piecemeal consideration.

Between 1991 and 2000, previous operators mined 564,000 ounces of gold (with an average grade of 2.13 grams per tonne) from an historic (non-compliant) resource estimate of some 1,280,000 ounces. This means that historic estimates would leave 720,000 (non-compliant) ounces still on the property. Of the total district, gold was produced from 22 open pits in an area of 72 square kilometers, or just 11.4% of the total land area.

Campbell Resources, the last major operator in the district, had acquired its portion of the property from Phelps Dodge in 1995 for $10 million. Campbell ceased operations in 2000, resulting from gold prices falling to under $300/ounce.

An Expanded Paradigm

As intimated above, efforts going forward, in part, will be targeted at fleshing out the potential for this district to offer a multi-million ounce Carlin-type deposit. Geologists on the scene described the ore bodies at surface to be showing very little erosion. Suggested by this is that already mined ore may represent just the beginning, with potential for more ore and even better grades at depth. With very little past production and exploration below 300 meters, a Carlin-type deposit (to depths of 1,000+ meters) remains to be tested and proven.

As a bonus, all mineralization is seen as post major structure on the property. This means that 'following the bread crumbs,' as it were, will be much easier, and much more predictable than would otherwise be the case.

Of significance, the framework of past exploration and production was restricted to oxide-based mineralization. This was because the only extraction method then under consideration for this property was heap leaching. For a backgrounder on heap leaching, see the links:

http://www.rthiel.com/Heap_Leaching-GRI_Dec03.pdf
and
http://www.bullion.org.za/MiningEducation/Gold.htm#science

This process offers lower relative capital and operating cost in comparison to other methods, but is restricted (without adding another intermediary stage) to oxide ore. While a heap leach production facility (if I heard correctly) could cost as little as $20 million to build, the process is not nearly as effective as other, more expensive, extraction methods. The gold now sitting in the tailing dumps for the 22 mined pits at Santa Gertrudis could range to 50% of the original contained metal. These tailing dumps may re-enter the picture at some future date, either in newer technology heap leach processing or in some other, larger more sophisticated facility.

The property adjacent to a number of mined pits is covered by 20-30 meters of post-mineralization gravel. Much of this area (of many square kilometers) remains untouched by exploration. John Reynolds means to extend efforts meaningfully into this area in the immediate future, seeing no reason to believe that mineralization stops with the arrival of this gravel. The potential, he says, is huge, yet remains to be proven.

Because of the mindset to extract gold using the low cost heap leach method, whenever sulphide ore was encountered, exploration by prior operators stopped. Animas, however, views this property/district through a much wider angle lens. In all fairness to prior operators, the rising price of gold allows Animas to do so. Sulphide ore is not seen as an impediment but as a valued resource. With the Carlin-type target in mind, identified a full decade ago by a former operator, Animas sees its potential as entirely open, both in lateral extent and at depth.

The upside potential for this project is significant. As an investor, though, one should always be asking the question, "What's my downside risk?" Here's what I see as the worst-case scenario. Animas is an exploration company, not a producer. The clear objective of this Company is to take the resource definition to a level where a larger operator (perhaps on a joint venture basis) can take it to full realization of its potential. As exploration activities ensue, however, this big picture objective (in the worst-case scenario) may slip further from reach, perhaps only on a delayed basis, but out of reach nonetheless. For a relatively low end capital investment, and within a year from the start date, Animas could put the heap leach model back into action, producing 60,000 ounces per year. Back in 2000, one site targeted to be mined (but abandoned when the price of gold dropped below $300) had been estimated to contain 125,000 ounces of gold. That site alone, within two years of production, could both pay for its capital cost, and generate new cash flow in the range of double its current market capitalization, hence funding future exploration activities. From a risk reduction viewpoint, that's not a bad Plan B. Keep in mind that the Company has inherited an historic resource estimate (non-compliant) of some 720,000 ounces.

As I see it, the greatest challenge facing this Company may be the size and scope of the district and what it offers for exploration. To get 'permission' from the market to take this project to the next stage, Animas must find and remain focused on the best bet target(s). It would be far too easy to become enamored with too many targets. Greg McKelvey recognizes this as key to his success as the project leader. This balancing act for staged growth will be pivotal, as the Company progressively earns enough rope by which to hang itself, striving all the while not to do so. Nature of the beast.

Country Risk

In an unrelated Behre Dolbear report (2006) (see the link: http://ratcliffephotos.free.fr/kamoto/CountryRankings2006.pdf), Mexico was tied for 4th in a ranking of 25 countries for risk in mining investment, behind only Australia, Canada, and the U.S.A. This low level of country risk, in the general case, coupled with pre-existing mining activity on the Santa Gertrudis property suggest that, while nothing is airtight, this element is on the periphery of the radar screen. Nonetheless, the appointment to the Advisory Board of a fellow who co-drafted Mexico's current mining laws indicates that Animas takes nothing for granted.

Plans for Near-term Activity

• Mine Development Associates (Reno) has been engaged to work on future resource estimates
   
• Major Drilling of Mexico (subsidiary of Major Drilling Group International) has been contracted for a program to drill 8,000-10,000 meters, beginning in early 2008. One drilling rig is scheduled to arrive in January, another in March. This said, McKelvey insists that the drilling program will be driven by data (of which there is much), not the other way around. At the same time, drill rigs are not plentiful in supply, so the Company may bite the bullet and acquire rigs as they become available, whether or not the timing is perfect from a data-driven perspective. Assay results will lag drill hole completion by about six weeks. Waiting time, with just a couple of drills turning, will create some slowdown in using results to guide subsequent drilling. Not great, but par for the course in this part of the world
   
• Hire two new geologists in the New Year. Geologists are a scarce resource these days. This shortage will continue to be a challenge in the immediate future
   
• Finish refurbishment of residential facilities at the base camp in preparation for the upcoming drilling program. Looks pretty much done already. Paint on the exterior of the main buildings was being applied during our site visit
   
• The hope is for an NI43-101 Technical Report by the end of the first quarter of 2008, but a shortage in those qualified to write such a report may push this into a May-June 2008 time frame
   
• Complete infill drilling to elevate the resources as necessary
   
• The current budget for 2008 of $2.5 million is likely to be raised, with new available funding. The next 18 months of operations is covered by current resources.

Bonus Program Tied to Performance in the Business of the Company

While officers of the Company are shareholders, they are not 'huge' shareholders. Their opportunity to earn significant shareholdings, however, is not insignificant. Rather than a 'willy-nilly' share granting program, Animas has constructed a bonus program that rewards officers of the Company when they place the Company in a position to reward shareholders at large. Their bonus plan is tied to defined resources. One million shares will be granted when 1.6 million ounces of 43-101 compliant resource has been achieved. Another one million shares will be granted when 2.7 million ounces of 43-101 compliant resource has been achieved. Were I a shareholder in this Company, with current outstanding shares of less than 22 million, and a market capitalization of just $27 million (with a hope to quadruple that to $100 million before the end of 2008), I'd be pleased to share the inevitable rewards of such a program. With completion of the current financing, the Company will hold greater than $7 million in cash. This should provide a good kick-start in efforts to bring the management team (and shareholders at large) one step closer to sharing in the bonus program.

Animas Resources has acquired a huge exploration opportunity at a significant discount, and possessing what I see as minimal downside risk, if managed well. Considering the historic resource, the caliber of the team in place, and the exploration potential of this district the market capitalization of just $27 million sounds to me like opportunity knocking. With a share price of $1.25, opportunity knocks loudly.

Buying at a discount what someone else has created at great expense has always been a good business practice. Looking at such a project through a newer, wider, and deeper lens, and utilizing technology tools not previously available, offers great potential to the talented and the lucky. The Animas team is clearly talented. As for the lucky, what's that old saying? Luck is the place where preparation meets opportunity. As always, time judges all. This writer is neither a licensed financial analyst nor a geologist. Please do your own due diligence.

Kevin Graham
email: kevin@lookoutmanagement.com

Animas Resources website

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