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Emeralds, Sapphires, and Rubies

Bob Moriarty
August 2, 2004

Junior mining stocks offer both opportunity and great risk at the same time. While I remain confident that we are in a resource bull market, the carnage since December last has done great damage to those not swift of foot. But given the current political situation, I can think of no investment with as much potential price appreciation as in natural resources. (Are our "Leaders" really thinking about canceling the elections? Do they have any idea of what that will do to the dollar as the world's reserve currency?)

The war in Iraq has become just as much a fiasco as I warned a year ago. Our chances of bringing "Democracy" to a region which hasn't known democracy in 5000 years is about as good as teaching a baboon to lap dance. In the end, after a long and bloody civil war, Iraq will become three countries because there isn't a chance in hell of any of the three factions ever working together. The concept of "Country" doesn't exist in the Middle-East. The "Tribe" counts but not the country. And that's just as true in Israel as in Iraq or Iran.

Meanwhile back in the US, the Bush administration spends money like a drunken sailor in the feeble hope of preventing an economic disaster far worse than the Great Depression. And this fall, we get to look forward to two fools fighting over who gets to rearrange the deck chairs on the Titanic. You may safely assume I have as much money stashed in resource stocks as I can.

Three weeks ago I had the pleasure of being invited on a tour of True North Gems' emerald property deep in the Yukon. The invite came as I was on my way to Reno to a Marine helicopter reunion so I was quick to agree.

I wrote a few lines about True North Gems (TGX-V $.82 Canadian TNGMF.PK $.62 US, 25,000,000 shares outstanding: website) months back but this trip allowed me to follow up and see for my own eyes just what they had in the Yukon.

The emerald find at Regal Ridge near Finlayson Lake began as an accident. On a chilly late August day (winter comes early in the heart of the Yukon) in 1998, a geologist working for Expatriate Resources named Bill Wengzynowski spotted a patch of green rock. Hoping to find malachite, a copper ore, Bill found something far more rare and infinitely more interesting, emeralds. But Expatriate Resources wasn't interested in pursuing emeralds, they were in the base metals business.

Expatriate showed samples at a Canadian mining trade show where Bernard Gaboury was interested enough to form a new mining company to exploit the property. So True North Gems started in the summer of 2001 to try to develop the Regal Ridge property. They signed a deal with Expatriate where they could earn a 100% interest in the property for cash of $1.4 million and shares of True North. And each summer since then True North has been advancing the property.

Projects such as this take a lot of time and money to bring to fruition. True North knows they have high quality emeralds but the issue is, do they have emeralds of sufficient size and value to justify the expense of creating a mining interstructure? That's a tough question as yet without an answer. True North did a bulk sample last year but has yet to be able to put a firm value on their stones.

All exploration companies are crap shoots and an emerald company has to be even more of a long shot since there isn't all that much experience around in emerald mining and marketing, there being only about six emerald producing regions in the world. And most emerald mines are pretty much mom and pop operations so True North has to spend a lot of time and money inventing the wheel.

Last year, True North CEO Andy Smith accomplished a lot to level the playing field. Realizing that the experience they were paying to learn could be leveraged, he made several other deals on other gem stone mining properties. The two most important are a sapphire property on Baffin Island called the Beluga occurrence and a recently-acquired ruby property called the Fiskenaesset property. Rubies were discovered at Fiskenaesset in Greenland as far back as 1953 and the area has seen intermittent exploration and minor production since 1972.

Gem stone mining can be either feast or famine. In 1991, Aber Diamonds was one of those awful penny dreadfuls trading on the Vancouver Stock Exchange. Diamonds were found in a most remote area of the NWT and Aber shot from a penny stock to a market cap today of over $2 billion Canadian. Ultimately the mine Aber owns part of will be producing over 8 million carats of diamonds per year.

To be honest, I'm not crazy about diamonds myself. There are two processes for producing diamonds which are just as good as the real stone. But the history of diamonds is the story of a master stroke of brilliance in marketing. DeBeers and the CSO created the market for diamonds. For 100 years, the cartel has maintained total control of the diamond market. How the new synthetic diamonds will affect them has yet to be determined. But if you like diamonds, you just have to like emeralds, sapphires and rubies. And if you don't like diamonds you just have to love emeralds, sapphires and rubies.

In any case, IR whiz Ken Shortt of True North put together an interesting group to do a tour of the Regal Ridge emerald property. We had institutional investors, individual investors, an English reprobate pool shark named Michael Phair - who I had to promise I wouldn't publicly identify (see photo here :) - and, of course, me.

We met at Vancouver Airport Friday, two weeks ago, and flew Air Canada to Whitehorse. From Whitehorse, we loaded our gear into a pair of Piper Navahos for the hour-long flight into the outback of the Yukon. Rains have been sparse this year in the Yukon and while we were there, over 300 forest fires were burning, casting a layer of smoke across the territory.

In real estate, there are three important factors to consider when buying a property, they are, (1) location, (2) location and (3) location. As far as True North Gems and their emerald find at Regal Ridge is concerned, I think they have a winner as far as location is concerned. True North uses the Inconnu Lodge as a staging point for people and fuel. The location couldn't possibly be more superb.

Since it was too late in the day to fly out to Regal Ridge, we were forced to stay at the Inconnu which is run by Roy Clark and Warren LaFave -- no roughing it for this crew. (note: I do get a slapped wrist here, because I'd implied to Barbara that I'd be camping out miserably in the wilds, getting attacked by midges galore ...and black bears).

On Saturday we all piled aboard a turbine Beaver for the 20 minute leg to the airstrip at Regal Ridge. The 2004 program for True North at Regal Ridge consists of a $2.2 million dollar program to expand and evaluate the known emerald bearing areas. They plan on doing 3,000 meters of diamond drilling to define the mineralized structures. And they will continue to process the bulk samples from last year.

There are a couple of key issues True North needs to solve at Regal Ridge. The key issue in my view is going to be the size of the stones. While the quality of the emeralds found in sampling from last year is high, the size is small. Stones averaged under .25 carat. Basically with all precious stones, as size increases, price goes up on a curvilinear scale. I think CEO Andy Smith told me 75% of the profit in diamonds came from the biggest 25% of the stones.

Of course, being in the Yukon, the surface goes through an annual cycle of bitter cold in winter and then the heat of summer. True North geologists believe that the surface weathering has pretty much ruined the near surface stones. Part of the drilling will be to define the quantity of stones but also they hope to increase and determine the quality and size of the stones. True North hopes that both size and quality will increase as they go down in the system. That will be a key issue.

The second issue is interesting and I believe in a very subjective way True North is going to score a giant touchdown. That goes to the issue of marketing. DeBeers created the diamond market and for 100 years has created the image of diamonds being both rare and valuable. Anyone who actually believes that should try selling one. As a matter of fact, emeralds, rubies and sapphires are all more rare and more valuable than diamonds.

So Andy Smith stole the lesson from the CSO and has embarked on a major marketing push to brand their Regal Ridge stones as a Canadian product of both high quality and high value. One of our fellow travelers on this trip was Nick Houghton of Vancouver, a diamond broker, jewelry designer and newly appointed director of True North Gems. I'm subjective as hell but I think it's a brilliant move on their part.

A large part of the problem of natural resources producers is their reluctance to think of their end users. It's hard to buy gold and silver and I can think of few companies who would even consider their actual consumers. But True North Gems realized early on that they need to create a market demand and then fill it. Andy Smith also realizes that if you can create a brand name for emeralds, it's just as easy to do the exact same thing for sapphires and rubies.

True North Gems lacks a single simple objective way of measuring their true value. They need more work at Regal Ridge to define the ore body and to come up with an objective measure of what revenues a ton of ore will bring in once it's been whittled down to a few carats of green beauty. This isn't a gold mine where you can say they have X grams of gold per ton.

So any judgment on the quality and value of the company has to be pretty much subjective.

I was impressed at Regal Ridge. They obviously have emeralds, the morale is sky high, the drillers were hurling lengths of drill rod around like they were match sticks. I've never seen a more professional drill rig team. The guys I watched didn't waste a moment, they knew what they were doing. Everyone was busy and seemed to be productive.

By chance, Heather Neufield, a company geologist, had just made a major discovery in a valley about a mile away of a large surface showing of emerald and tourmaline veins with emeralds literally littering the surface. At the end of the tour, the head geologist had a head lock on Andy Smith going pss, pss, pss into his ear and sounding like a swarm of bees. Obviously something was going on, everyone was acting like they had ants in their pants and was walking around with big grins.

Sure enough, two days after the visit True North made an interesting press release. They were carving out a road to the discovery while we were there. True North intends to begin trenching operations at the new Howdy Ridge find by the end of July/early Aug.

And a week after that announcement, True North issued another press release, this one on the sapphire property on Baffin Island.

I'm not sure my visit was proof the emerald deposit at Regal Ridge is a viable large scale mining property. Too much has to be done to say that. But I did see a lot of excellent people who knew their jobs and they felt it was showing very positive results. I actually like the Greenland ruby property more, it has a longer record behind it. And I'm as excited as True North is about their sapphire property.

I like the quality of management, where they don't have all the answers, at least they have a good handle on all the questions. I think True North is undervalued today with a $15 million dollar market cap. It has far higher potential than the market now recognizes.

Should either of the three properties prove up, True North could be worth ten times more than they are now. Should all three prove up, as with Aber, True North has the potential to have a giant market cap. Everything they are paying to learn at Regal Ridge is just as true at Baffin Island or in Greenland.

Obviously I cannot say enough about the Inconnu Lodge. The food and service were brilliant:
the setting was to die for.

I have not been paid to write this piece. Barbara did buy some shares after the press releases... a modest amount. We like the management, the projects and the company. This is not a recommendation to buy or sell any stock, it's your money, you determine that for yourself.

July 31, 2004
Bob Moriarty
President: 321gold Inc
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