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Rationalize the Silver Valley

Bob Moriarty
May 8, 2010

I have a long history with the Sunshine silver mine in the Silver Valley: a history going back 100 years. Most people don't know about it, I didn't learn about it until my older brother came to visit a few years ago. He has gone dotty in his old age, unlike the rest of us. He took up genealogy as a hobby a few years back. He told me some interesting history about our family.

Much to my surprise, my grandparents operated a small grocery store in Kellogg, Idaho in the early days of the 20th century. They raised their children, including my father, from the money they made at the store. Their customers were the silver miners from the famous Sunshine mine who were busy producing more silver from one mine than any in US history. From its discovery in 1884, the Sunshine produced over 360 million ounces of silver. The mine still has silver resources over 260 million ounces left to be mined.

With the successful auction of the Sunshine Mine to Silver Opportunity Partners in late April, a sorry saga of silver and outrageous mismanagement from the Sunshine Mine ended. A new day with a new owner is going to bring sunshine to the Silver Valley for the first time in many years.

If you watch a lot of television; and average Americans watch something like eight and a quarter hours a day; you might have come to believe that ranching was the bedrock of the economy in the US in the early days. That's dead wrong.

Mining has a long history in the United States and was a key industry as last as the last depression when Roosevelt raised the price of silver to $1.29 an ounce to put silver miners to work in the west. Silver had dropped to the unimaginable price of $.24 in late 1932 and something had to be done. The Sunshine with its 22-ounce to the ton ore was one of the few profitable silver mines in the world. Stamp collectors may well remember the $.50 an ounce tax stamp that all silver producers gladly paid. The silver producers were thrilled to be taxed at $.50 an ounce; after all, their net price went from $.24 in 1932 to $.79 in 1933. Even the silver bugs can't remember that.

The reason the US government had billions of ounces of silver in reserves in 1940 was government subsidies in the way of artificially high prices to keep high wage earning miners hard at work.

It was mining that settled the West, not ranching. All the ranchers were doing was raising the food for the miners. Have we forgotten the effect of the discovery of gold at Sutter's Mill in 1848 that resulted in the most important mass migration in US history even if gold production wasn't all that significant? Have we forgotten the importance of the silver discovery in Nevada in 1857 called the Comstock Lode?

The seemingly endless flow of silver from Virginia City and the Comstock Lode created the wealth that built San Francisco and paid for the cost of the Civil War for the Union. Without the silver from the Comstock Lode, it's entirely possible that the Union would have had to sue for peace leaving a totally different continent today.

I visited Ray Demotte in mid-2003 shortly after he did the deal with Robert Mori to lease the world-famous Sunshine Mine for $10,000 a month for 15 years with an option to buy it outright for $5 million. Demotte thought the mine would make Sterling shares worth $2-$3 apiece in a year or so. I thought the shares would be worth $7-$8. As it turned out, we were both wrong. In eight months the stock shot up to $14 a share.

I told him he needed to do three things. He needed to get the shares onto a real exchange; the pink sheets were the home of grifters and scam artists. Institutions weren't going to be willing to invest the major money he needed to revitalize the Sunshine in a pink sheet scam. Demotte told me he would have a fully reporting company on the OTC in four months. His four months turned into two years.

I also told him that he needed to raise $50 million dollars to put the Sunshine mine and mill back into operation. I eventually stopped following Sterling after I realized Demotte wasn't telling the truth about getting the company off the pink sheets but he went from 10 million shares outstanding to 40 million shares outstanding between 2003 and 2009 when he took it into bankruptcy. I'm sure he raised the $50 million and more, the average price was probably $5 a share during the period. I really don't know how much money he raised but there was never a time that he didn't have a healthy kitty and he never did focus on what he was doing so the money gradually got frittered away.

My last suggestion to Demotte was that he hire professional management to run the company. If he had gotten off the pink sheets in four months and he did raise $50 million while he had a $210 million dollar market cap and he hired professionals to run the company, he would have been regarded as one of the top mining professionals in the business. As it stands, I don't think Ray Demotte could ever be hired as a janitor at a real mine.

The Silver Valley has more than its shares of companies that are run as hobbies for the edification of the giant egos of the "management" running those companies. It's time to rationalize the Silver Valley and bring in professional management backed by investors with deep pockets. Instead of a hand full of tiny inadequately managed and poorly funded struggling silver companies, we need one big and well run, well founded company.

This is a conversation I have had with a lot of people in the Silver Valley. Minco Silver wanted to buy the Sunshine Mine at the auction and put in a bid of $30 million but felt that going higher would be not in the company's best interests. We spent a lot of time talking about the very real need of making one big and profitable silver company rather than having a bunch of poorly run and unprofitable companies.

Silver Opportunity Partners is backed by the multi-billion dollar fortune of Thomas Kaplan. He is the definition of adequate financing with very deep pockets.

Thomas Kaplan is exactly what the Silver Valley needs right now. Before the auction, no one could figure out who was behind the privately held SOP. As soon as the auction finished, the word was quickly leaked out.

For those who don't recognize the name and that's most of us, you should go here. Thomas Kaplan was the business partner of George Soros and started Apex Silver in 1993. He retired from the company and cashed in his chips in 2004. That was good timing. After spending hundreds of millions of dollars, the election of Evo Morales in Bolivia whacked the company and it went bankrupt in early 2009.

In any case, Thomas Kaplan has deep pockets; is one of the most experienced financial resource bugs; and he is quick to move when he sees opportunity.

There are three properties/companies that should be merged. None has been well run, none makes any money. Obviously the core property is the Sunshine Mine. But not necessarily because of the two hundred plus million ounces of silver. Most of those quoted ounces will never and can never be mined. There are pockets of unmined ore all over the mine. It's a mess.

And there is a 7% NSR on much of the deposit owed to the EPA. In my uneducated opinion, a 7% NSR is real close to a deal killer. Most mines don't make 7% profit, they couldn't pay a 7% NSR.

But there is a nice unmined deposit right across the street from the Sunshine called the Crescent Mine. It sits on strike between the Sunshine with its well-mapped structure and the Bunker Hill Mine with its known and well-mapped structure. An incredibly miss-managed company named SNS Silver owned the Crescent, spent years talking about how rich it was and how their sole goal in life was to put it into production and then did a Joint Venture with a small private company called United Mine Services.

The Crescent Mine has the highest-grade ore in the Silver Valley at 18.7 ounces of silver per ton in M&I. SNS spent over $17 million to define some 10 million ounces of silver and preparing the mine for production. United Mine Services was the contractor so certainly knew the project better than anyone else.

David Greenway, President of SNS Silver and John Ryan, former Chairman and CEO of US Silver became directors of Sterling Mining in early 2009. Even though John Ryan had helped found US Silver in 2006, US Silver concluded that his becoming President of Sterling Mining was a conflict and he was asked to resign from US Silver in January of 2009.

In a very convoluted and interesting way in terms of a giant conflict of interest, Ryan, Greenway and another director of Sterling who was also a director of SNS set it up to cancel the lease of the Sunshine Mine with Bob Mori, the landowner. Mori would immediately sign a new lease with SNS Silver increasing the monthly payment from $10,000 to $100,000 a month and eliminating the $5 million dollar option to purchase the mine and mill that was in place with the original lease with Sterling.

If you are the president of a company or a director of a company and you vote to give away the only asset of that company, aren't you destroying the company that is paying you? And if you agree to give it to another company that is also paying you, isn't that a conflict of interest. Whose interests other than your own are you serving?

I was on a trip to Mexico and David Greenway called me up to chortle about how smart his was. Of course he resigned from Sterling the day before Sterling agreed to abandon the lease. But does anyone with an IQ over the number of legs on a frog actually believe that one company with common management agrees to abandon an asset that is immediately picked up by another company with common management without months of discussion and planning. I have always believed the Mori, Greenway and Ryan schemed to steal the Sunshine from Sterling shareholders. Anyone holding Sterling shares during that time frame would have an easy case to prove in court.

There was the minor issue of Minco Silver being owed over $5 million for money Minco had advanced to Sterling that was supposed to be secured by the assets of the Sunshine Mine. Minco figured out what the unholy trio was up to and filed a lien against the project before Ryan and Greenway could throw it away.

That issue is settled now. Ryan put Sterling into bankruptcy and a judge took control. SNS and Mori did try to slip through a deal but the court didn't fall for it. SNS managed the mine for a few months before turning it back over to Sterling that was backed up financially by Minco Silver.

I was an advisor to Minco Silver at the time. My advice to them was that all by itself, the Sunshine wasn't worth owning and I would be just as happy for them to not get it. True, it was worth something but it's not a slam-dunk project by any means and the Ryan, Mori, Greenway three musketeers stirred up so much mud in the Silver Valley that it would take months if not years for everything to settle down.

It only made sense to own the Sunshine if you also owned the Crescent Mine. The Crescent is right across the street from the Sunshine mill and it would be cheaper and faster to mine the Crescent than to mine the Sunshine. And it's my belief that there is no 7% NSR agreement on the ore from the Crescent.

We will see what Mr. Kaplan thinks about the issue. A public company called United Mining Group has just done a deal with the privately held United Services Group that holds an option on 80% of the Crescent and they will be in production soon. There will be about 50 million shares outstanding and it would be easy to do a deal with them to take control.

The last portion of the equation would be the US Silver Corporation. In 2006, the new US Silver (USA) did a deal with Coeur d'Alene Mines to buy the Galena Mine and Mill, the Coeur Mine and Mill and the Caladay Project for $15 million in cash. USA opened at about $.60 a share, shot up to over $1.50 a share by early 2007 under the management of John Ryan and now trades at $.20.

Tom Parker now runs US Silver. I like him. I talked to him at PDAC a couple of months ago about merging companies in the Silver Valley. In theory, he agrees but obviously the terms would be an issue.

So here's the math. It could cost $10 million to $50 million to put the Sunshine back on its feet and develop some new clean ore. United Mining Group will be coming public at about $50 million and USA has a market cap of about $50 million. You could probably buy a control block in each of those for $100 million total. Kaplan has sunk $30 million into 100% ownership of the Sunshine. With another $150 million to buy control of United Mining Group and US Silver and startup money for the Sunshine Mine and mill and something to SNS for their remaining 20% interest in the Crescent, you would have a company that would support a professional mining staff and probably have a market cap of over $1 billion.

My family was involved with the Sunshine 100 years ago. I was buying 10-ounce Sunshine silver bars last week. I will follow the story closely even if I don't have any skin in the game.

It's all up to Thomas Kaplan now. I wish him well; there are a lot of snakes in the Silver Valley.


Bob Moriarty
President: 321gold

321gold Ltd