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Hint, begins with an "S"

Bob Moriarty
July 29, 2003

During the depths and despair of World War II, Winston Churchill commissioned a Royal Navy Lieutenant named C. Northcote Parkinson to do a study on the nature of growth in organizations. Parkinson discovered a tendency of organizations to grow at a rate of about 3.5% to 5% a year regardless of the work to be accomplished. We are probably more familiar with the derivative of Parkinson's work, now called Parkinson's Law, "Work expands to fit the time allotted."

It's for this reason that every organization, company or government eventually fails. Organizations have a natural tendency to grow. Those without someone trimming them back on a regular basis, such as governments, grow until they become a cancer and devour their own subjects.

So one of the first goals of every manager in business should be to constantly be on lookout for signs of unnecessary growth. It happens in every organization and must be chopped at the first opportunity.

The world famous Sunshine mine of the Silver Valley in Idaho didn't collapse 18 months ago due just to a fall in the price of silver. It's clear looking through the accounting numbers that the organization simply grew beyond its financial resources.

So when Ray De Motte and I were having breakfast in Coeur d'Alene a little over a week ago I had two reactions when he asked the waitress how much two eggs with hash brown potatoes and toast cost. My first reaction was to snicker. My second, more reasoned, thought was that he might just be the perfect manager for Sterling Mining with their acquisition of the Sunshine Mine, he throws nickels around like they are manhole covers. Ray is the CEO of Sterling Mining Company which just picked up the Sunshine Mine.

Just for the record, the meal cost $3.75 in what was one of the finest restaurants in Coeur d'Alene and I picked up the tab for both of us. I felt bad for him. Maybe that was the purpose.

I'm going to admit a goof. Along with everyone else in the industry, I got caught out at the airport when Sterling's ship came in.

Sterling is an advertiser and has been for months. They have some nice claims and are progressing in building value for the company. When the press release came in announcing they had leased the Sunshine Mine, I yawned and Barb posted it. Hardly anyone reads press releases anyway, why should I?

Barb was actually very excited, and I thought it was probably because Ray De Motte is a Brit like her. (He is also a smoker and like all smoking-lepers there is always an immediate triple-bonding). And she did a wonderful banner for them, with Sunshine written in bright yellow, but I just mumbled, and most of the readers mumbled, and the stock just mumbled.

The Sunshine Mine, 360 million ounces of silver production, 120 years of production, the most prolific silver mine in US history, another potential 50 years of silver resources, $200 million dollars worth of plant and equipment, 185 million ounces of resources... Those all sound like pretty good reasons to read the press release. I didn't and no one else paid any attention to it either. So I'm not the only twit in the business.

I went up to Fairbanks Alaska two weeks ago to attend the annual Alaska Pipeline vehicle and equipment auction. I bought a truck for use in Nevada (and as my good luck would have it, it's silver!). While I was in Alaska I drove up to Silverado's Nolan Mine. (Yes Sherrie, they are producing gold) I will be doing a piece on them in a couple of days or so.

I drove down through Dawson in the Klondike and Jasper in BC and into Idaho. I thought it would be a good idea to stop and visit our advertisers in the Silver Valley. Bright idea. Little did I know what was around the corner.

Tom Wobker of Pennaluna wanted to make reservations for me at a fancy place right on the lake. It was magnificent and cost $400 trillion a night. Barbara about had a fit on the phone when Tom told her and promptly advised him that I wouldn't get caught dead in a place like that. As a matter of fact, I have been thrown out on my tail in hotels at half that price. I had just finished driving 4700 miles in 5 days, I had no clean clothes, and I did not need a pillow with a hot and cold running blond on it. I needed a pillow - a $69 a night pillow.

Everyone talking to Ray De Motte told him to not let me see his office. It was supposed to be a dump. He told me about it over our $3.75 breakfast. (plus a nice tip. I ain't cheap.) So I insisted on seeing it. He was right, it was a dump with rock samples and papers all over the place. I loved it. Before you ever invest in any mine, check out the executive offices. If they cost over 4 figures a month, have marble floors and extra-shiny door knobs think about investing elsewhere. Guess who's money is paying for it all?

Ray and John Swallow, a director of the company, took me and Tom Wobker out to the mine. When we arrived, I realized that maybe I should have paid just a little more attention to the figures and facts. For Sterling to purchase a 15 years lease on the Sunshine Mine for $400,000 cash out of pocket is roughly equivalent to the Governor of New York in a drunken stupor selling Manhattan back to the Indians for $24 in glass beads including all the companies, cars and fixtures.

What did Sterling buy? Well, for one, they got a mine with 160 million ounces in silver resources from the most prolific silver mine in US history with production going back to 1884 and another 25 million ounces of silver reserves. And the Sunshine has the highest correlation to silver of any silver company in the world with over 90% of the revenue coming directly from silver with the remainder in antimony, copper and some lead. They had a total cost of production of $4.01 an ounce when they shut down, a permit to mine, virtually no environmental problems as a settlement on past issues was reached by the former Sunshine management team and a major interstate highway a mile from the mine right in the center of an economically-depressed area with thousands of qualified workers just waiting to go back to work.

Basically Ray De Motte decided on the spot to make an offer for the mine, unlike the larger corporate bidders who wanted 6 months to do due diligence. Since a large tax payment was looming, the seller accepted.

The deal is a little confusing but that's meaningless. Sterling has a 15-year lease on the biggest silver mine in US history with an out-of-pocket cost of $400,000. If they did nothing with the mine, it probably would cost them in the neighborhood of $400,000-$500,000 a year. Depending on the price of silver, Sterling can buy the Sunshine Mine for between $3 and $5 million.

Let me try to put that into perspective for you. About 19 months ago I wrote another piece about silver. What I said was interesting. "And the bottom of silver just passed at $4. It might and I repeat, might, go down a tiny bit more. But when you can buy 12 ounces of silver per share of SSRI for $.10 an ounce it's worth doing. That's cheap, do you really think it will go down to $.08 per ounce. Go buy some."

I followed that piece with yet another on Silver Standard, SSRI. I pointed out that Silver Standard was a hell of a deal because they had a great game plan and were buying silver in the ground for $.02 an ounce.

Well, silver cost $4 an ounce then and is $5 an ounce now. Silver Standard did exactly what I believed it would and those wise investors who listened to what I said have watched the stock shoot up from $1.20 to $6.72 as of last Friday. But Silver Standard has no permit and no mill and no mining equipment. They paid $.02 an ounce for silver in the ground. Ray De Motte of Sterling bought the Sunshine Mine for $.002 an ounce, 1/10th of the cost SSRI paid. He got a mining permit and a mill, and it's right in the heart of richest recorded silver district in the world. What's most absurd is that the Sunshine Mine management never attempted real exploration and only 1/4 of a square mile around the property has any drilling done on it. Sterling holds another 10 square miles of claims around the Sunshine mine yet to be drilled.

By now, if you are still reading rather than being on the phone to your broker as you should be, you might be wondering just what Ray has in mind for The Sunshine.

His quote was both memorable and quotable, "I don't have a clue as to what we are going to do with it."

I smiled as he continued, "I told all my guys we are doing nothing but thinking for the first 90 days. I want to leave all our options open." I really liked hearing that. I want to see him keep his options open. At this point, there is no silver bullet, they need to consider all options.

Let me get into the issue of valuation. Before I say anything, I will guarantee the stock is going for a ride this week. It's going to be up and down like a bride's nightie and should you make a decision to invest, understand it's going to be a wild week.

The stock is absurdly undervalued in comparison to any other silver stock, in production or not. Sterling has about 10.5 million shares fully diluted but a couple million shares are tied up as payment to the receiver and basically there are only about 2.1 million shares in the float. The last week or so has seen about 700,000 shares move from weak hands into strong hands. I suspect that once the 2.1 million share float is soaked up, the stock will roar.

What's a stock with 185 million ounces of silver worth? To find the answer, we need to look at similar stocks. When I did my piece on SSRI back 19 months ago, Silver Standard was selling for about $1.20 a share and was backed with 12 ounces of silver in the ground. No mine and no mills or equipment. The price of silver was $4 an ounce. Today silver is $5 an ounce, SSRI is $6.72 and investors value an ounce of silver in the ground at $.76 an ounce.

But Sterling/Sunshine has 18 ounces of silver per share, higher than any other silver company and in my estimation, $100 million dollars worth of plant and equipment and an operating permit which has to be worth something.

Here is what other silver companies sell for based on the silver resources they have.

Western Silver $.305 an ounce
Coeur d'Alene $.46 an ounce
Silver Standard $.77 an ounce
Pan American $.82 an ounce
Apex Silver $1.34 an ounce

If you use the lowest price for silver in the ground from Western Silver which has no mines, equipment or permit, the 10.5 million shares of Sterling should be selling for $5.37 and if you use the highest figure, that of Apex silver which does have mines, mills and permits, Sterling would be valued at $23.75 a share.

As I told Ray De Motte, I am a closet Silver Queen. I don't believe in conspiracies, I don't believe silver is the most critical war material but I do believe in value. Silver is at the lowest cost in 5,000 years so the risk of holding either silver or silver shares isn't very high. Everyone seems to have forgotten how silver can double in 6 weeks time. It will happen again.

And the Sunshine Mine will be back in production. Ray doesn't know exactly how or when and he only has some ideas as to how much it might cost. But he and his team are hiring some of the top minds in the business and they will come up with a plan which works. He has told me that he is copying the concept originally come up with by Rob McEwen of Goldcorp where every employee will be a shareholder. Labor will be his biggest cost and he's spending a lot of time thinking about how he can bring everyone working for the Sunshine Mine onto his team to make it not only the biggest silver mine in the United States but the most profitable as well.

Sounds like a plan to me.

Sterling Mining Company trades in the US on the pink sheets as SRLM. There are about 10.5 million shares fully diluted. As of the close of trade on Friday July 25th, the stock was $1.10 a share.

Sterling Mining Company is a paid advertiser on 321gold. We have not been paid nor will be paid to produce this piece. Our comments are neither an offer to buy nor sell shares of the Sterling Mining Company and any opinion is strictly our opinion. Before making any investment decision, you should consult with your financial advisor. And especially with Sterling being so undervalued in comparison with other silver companies, you should be very careful. It will go up, it will come back down and the swings will be violent. Barb owns shares in the company and we intend to participate in any private placement in the future. We do have a bias and as such, you should be aware we are not strictly neutral. All information presented is to the best of our knowledge, but no guarantee of accuracy is given.

I just love The Sunshine.

Sterling Mining Company

Jul 29, 2003
Bob Moriarty
President: 321gold