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The next Goldcorp at Red Lake

Bob Moriarty
July 7, 2006

Where are we?

It's a good question and I'm certain one even the most devoted gold bug is asking daily. We have been through a brutal correction and prices are down 25% from where we were only two months ago.

We are in a resource bull market. The base metals may take a long extended vacation until they resume their climb; but for sure, gold, and even silver, are in a bull market and going higher, much much higher.

I wouldn't discount the possibility of a general market crash this September-October, we are due one. If we get a top in August-September and then a crash, it will take the resource shares with it. So if you believe another 1929 or 1987 is coming this way, this year, prepare yourself to take some money off the table in the next 60 days. But gold and silver will recover soon. All of the base metals are contingent on Chinese demand. As Chinese demand goes, so goes the shares of the base metals stocks.

This summer has brought some interesting trips. My last trip was to visit the Gold Eagle property of Exall Resources on McKenzie Island in the Red Lake gold district of Ontario. This district has produced over 28 million ounces of gold since 1930. Exall began in 1934 as the Gold Eagle Gold Mine and produced about 43,000 ounces of gold in the 1930s and 1940s. The company changed direction and names a number of times but the property stayed in the portfolio since 1934.

Southern Star entered into a joint venture with Exall in 2002 and earned a 50% interest in the Gold Eagle property by spending $2 million over an 18 month period. In addition, they paid Exall 3 million shares of SSR and $160,000 in cash. Early drilling concentrated drilling on McKenzie Island along the Red Lake trend and in 2004 had outlined a minor 166,000 ounce inferred resource.

Exall's 2004 discoveries convinced them to move to the east to complete more drilling in the Bruce channel zone. In September of 2005 they announced a barn burning intersection of 21.7 grams of gold over 11.11 meters. The shares which had been as low as $.15 in July began to rocket.

Exall and partner Southern Star are targeting the same Red Lake trend running from the Red Lake Mine, through the Campbell Mine into the Cochenour Willans Mine. The Cochenour Willans property is now owned by Goldcorp and they know very well what is down below. Exall is drilling deep; they have four drills turning and are drilling as deep as 1900 meters. Intercepts of multi-ounce up to 100 GPT are common as they are elsewhere throughout the Red Lake camp.

If this project was located in Mali or Tanzania or New Guinea, it would be interesting and the two companies might have a $20 million dollar market cap between them. But this isn't the hinterlands. This is right in the heart of the richest and most profitable gold belt in North America. The same gold belt where Goldcorp lusted for many years after the Campbell mine a mere 500 meters away but Placer Dome wouldn't consider selling.

A lot of people outside the industry don't realize it but the catalytic element behind the three way merger/takeover between Barrick Goldcorp and Placer Dome was Goldcorp wanting the Campbell mine. Now that Goldcorp owns both the Red Lake mine and the Campbell mine, do you really think they are going to allow someone else back into the district?

So the smart money is betting a lot on Exall and Southern Star increasing the resource at Red Lake in a big way. And the smart money is saying Goldcorp is waiting to jump on the two companies. Even the latest mini-crash didn't do much to slow down the frantic pace of Exall as the stock rocketed higher to $2.62 Canadian before settling back in the $2 range. Even a price of $2 gives them a rich $150 million dollar market cap. That's nothing short of remarkable for a stock that was $.15 a share eleven months ago.

I was impressed with what I saw at Gold Eagle. The drill crews are making a greater use of directional drilling than I have seen before. But the region calls for it. Holes going that deep typically cost in the neighborhood of $150 a meter, 50% higher than near surface targets. And the drill sections they call "wedges" cost $16,000 apiece and get left in the hole. Drilling at Red Lake requires the greatest experience and talent in the business. But those guys could thread a needle at 1500 meters and I was impressed. The geos were pointing the drill crews in what seemed the right direction and the drill crews were working miracles.

Expect a slow but constant flow of information and drill results from Gold Eagle. Drilling is sure but slow. But the results should be worth it. If I was a betting man, I'd say Goldcorp is going to be forced into a corner soon and it's gonna be put up or shut up time. They either pull out their checkbook and see how many zeros they can put on a pair of checks or they will see the welcome wagon visiting their new neighbors at Gold Eagle. It's too rich a deposit not to attract some serious attention.

I really like the management of Exall. They saved the deposit and perhaps the company by doing the joint venture with Southern Star in 2002 but I'll bet with $630 gold they are kicking themselves and wishing they still owned the whole caboodle. We don't own shares but would seriously consider buying shares in a correction.

Exall Resources
EXL-T $2.13 Canadian (July 6, 2006)
76.4 million shares outstanding
Exall Resources

Southern Star Resources
SSR-T $4.06 Canadian (July 6, 2006)
41.4 million shares outstanding
Southern Star Resources

Bob Moriarty
President: 321gold

321gold Inc