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Treasures of the Sierra Madre
Palladon, Mag Silver, Sydney, Excellon

Bob Moriarty
Sep 8, 2004

I recently made a trip to Mexico to visit the Santa Cruz property of Endeavour Silver. I also made plans to visit a copper property in Utah on behalf of Palladon Ventures. When I was setting up the trip with CEO George Young of Palladon, he suggested I extend my trip to Mexico and see more of the properties in his stable. I did... and other than a bad case of the Quang Tri Quickstep, the trip was nothing short of remarkable.

Most gold/silver sites, including ours, tend to expand on the potential for the precious metals. In a way we do a disservice to our readers and for that I apologize. My main fixation is the precarious state of the US and World financial system and that results in my fixation on silver and gold as solutions to our monetary problems.
But there is a world of commodities out there which offer just as much, if not more, financial reward than do gold and silver. If you disagree, just look at a charts of moly or uranium for the last year or so.

We are in a bull market for real goods. We are in the midst of a transition from financial instruments of mass destruction, as Warren Buffett likes to call derivatives, and going into a massive bull market for real goods of all kinds. And for those who want to believe a cartel of some kind controls the price of silver and gold, I hold that Chinese demand for commodities of all sorts has far more effect on gold and silver than any mysterious cartel.

This bull market began in 2001 after gold hit a low in 1999. For the metals stocks a strong correction began last December. I think we had a bottom in May but we may well test the lows again. All bull markets go through corrections and this is no different. It has lasted nine months. It may last another nine months and it won't make any difference in the end. If you are swift on your feet, you can trade in and out as Harry Schultz suggests or simply buy and hold as Richard Russell says.

Across the board you can see many many stocks selling at what appear to be absurdly low prices. The primary reason they appear to be selling at absurdly low prices is that they are selling at absurdly low prices. If you are a contrarian - and that's the only tried and proven way to make money that I am aware of - low prices are an opportunity, not a problem. When I write about a stock or a group of stocks, I am not trying to suggest these are the best or the only stocks you should consider. We are in a gold/silver bull market and hundreds of stocks are selling at giveaway prices. That's a good time to buy, when no one wants them. When everyone wants them, sell.

Before I expound on Mag Silver - the first of George Young's companies in North America - I need to give you a little information on silver in general and Mexico in particular.

Mexico produces more silver than any country in the world. Mexico's largest producer is Penoles with production of 48.4 million ounces last year. And Penoles' largest mine is the Fresnillo mine in the state of Zacatecas with production of about 31 million ounces yearly. So the Fresnillo mine produces about 2/3s of all the silver produced by the largest silver producer in Mexico. Silver at Fresnillo was discovered in 1566 in a surface outcrop.

From 1566 until 1976, the production of silver continued at the mine based primarily on drifting on the surface outcroppings. Eventually these ore veins, averaging 700 grams of silver to the ton as well as high grade zinc and lead, began to run out. Plans were made after 410 years of production to close the mine in 1976 after total silver production of 500 million ounces.

The veins at Fresnillo are pretty unusual. While there was minor outcropping, that's how the Indians found silver in the first place, most of the veins lie deep. As much as 500 meters below the surface. In the over 400 years of production, little exploration had been done. So Penoles tried drilling to see if there were any silver veins in the neighborhood they had overlooked. And indeed they had. They drilled deep and found half a dozen more veins. In the first 410 years they produced 500 million ounces and since 1976 have produced another 500 million ounces.

A commonly held truism in the mining business is that the best place to explore is within the shadow of the headframe of an old mine. With that in mind, Peter Megaw brought the Juanicipio property to the Sunshine Mining Company years back.

When the Sunshine went belly up two years ago as a result of $4 silver, Peter snapped up the property and vended it into Mag Silver.

In April of 2003 Mag Silver went public at $.50. (Mag Silver Corporation MAG-V $.91 Canadian 25.5 million shares 29 million fully diluted Market cap of about $27 million Canadian MSLRF-OTCBB - website).

Mag Silver has acquired six major silver properties including the Juanicipio/Lagartos properties surrounding the Fresnillo mine.

I saw but two out of the six Mag Silver properties. Mag Silver is hunting elephants and when hunting elephants, looking in elephant county is always a good idea.

Drilling during 2003 and earlier this year on the Juanicipio property just 5 km from the Fresnillo Mine proves Peter's thesis. The property lies right on the NW trending structure. As Peter explained patiently to me, Mexico has been compacted like an accordion and then expanded just like an accordion expanding.

I took a picture out of the aircraft when I was flying from Mexico to Dallas and it shows the nature of the silver structures perfectly.

If all that Mag Silver wanted to accomplish is hunting elephants, they have already demonstrated that not only are they hunting elephants, they have nailed an elephant. Penoles is currently using two drill rigs to drill right up to Mag's Juanicipio property where Mag has found Fresnillo grade silver/lead/zinc mineralization with with a high grade gold kicker (10 grams to the ton).

But what I saw that interested me wasn't the Juanicipio property. It is identical to Fresnillo with a gold kicker and no doubt Penoles will be tapping on the door of Mag soon wanting to talk JV. But Peter Megaw isn't just hunting elephants in the very heart of elephant country, he's using nuclear weapons to hunt them. While I was at the property, they were in the midst of moving the drill rig 25 km to the NW of Fresnillo.

Mag Silver did a magnetic IP study on the entire district and the results showed it's possible the district extends not just 5 km from Fresnillo to the Juanicipio property to possibly 25 km to the NW where the ground is identical to that of Fresnillo. By now the 800 meter hole has been completed at Lagartos which targeted two distinct IP anomalies. If the assay results show Fresnillo grade structures, Peter Megaw and Mag Silver may well have bagged their elephant. Expect results to be released in 4-6 weeks.

If it was all that simple to discover millions of ounces of silver or gold, it's pretty logical to wonder just why it hasn't been done before in the same area. And the answer is fairly simple. All in costs to drill in the area run about $200 US per meter. So an 800 meter hole which will only test two structures about 500 meters below the surface costs about $160,000. Those sort of holes blow big holes in budgets rather quickly.

All investing in penny juniors is crap shooting and don't let anyone kid you
elsewise. [Barb swears I just made up this word]. What you are looking for is good management who have come up with some good projects with 10-bagger or higher potential. Earlier this year Mag was selling in the $2.50 range. Three weeks ago it was selling barely above the IPO price. That doesn't make a lot of sense. They have made a lot of progress, are on the verge of potential stardom and have six good properties in their stable. At $2.50 I wouldn't be waving my arms and legs but at below $1 making money on Mag is about as difficult as falling off a bike.

Peter Megaw is one of the genuinely nice people in the industry. While he is a PhD, he does speak English and does a great job of communicating complex geological theory to boneheads such as me. And he speaks fluent Spanish and Swedish and can get by in French. Figure that one out. And the four days we spent together driving across Mexico were a delight (with the exception of this click | click | click | click).

Our next stop after the Fresnillo district was to see the gold property of Sydney Resources at Inde in the state of Durango.

(Sydney Resource Corporation SYR-V $.41 Canadian 16.5 million shares outstanding 22.5 million total including options and warrants at higher prices $6.7 million market cap SYROF-OTCBB - website).

Sydney has entirely different management from Mag Silver, the common denominator is Peter Megaw as geological consultant. Sydney optioned the Inde property earlier this year and stands to earn up to a 70% interest over time. Full details can be found on their website.

Inde shows production of gold going back as far at 1532 and has produced between 1-2 million ounces of gold. Miners sought high grade structures consisting of oxide ore in both vein and carbonate hosted mineralization. While sulfides are known, no mining has been done below the water table.

Sydney has been working on a surface mapping and trenching program to define potential drill targets. Trenching results already received indicates the potential for a low grade surface bulk operation previously not envisioned.

Inde wasn't the sort of project that grabs you by the throat and screams "Buy me, Buy me" at you but if you subtract the cash on hand from the market cap, you come up with a net market cap of about $4.7 million. Having an office and a two line phone in Vancouver makes any company worth $5-$6 million so it's not much of a stretch to see the company is pretty cheap.

Good results on the search for low grade, bulk tonnage would hit the stock like a shot of Cuban coffee so it's worth keeping Sydney on the radar screen. Unlike the other projects I saw on the trip, I didn't demand Peter stop the truck so I could call my broker and buy some shares but at any lower price, I personally would be a buyer.

The next project we visited was enough to stop the truck and make a phone call to my broker. From the minute Peter started talking about it, it sat up like a tiny puppy in a pet shop window on its back legs and barked, "Buy me, Buy me." So I did.

The Platosa Project is a very high grade silver property(11900 grams to the ton over 5.6 meters for one intercept) in the State of Durango. Excellon Resources - (EXN-V $.18 Canadian,
110 million shares outstanding, 147 million shares fully diluted, market cap $19.8 million Canadian (corrected) - website) - is in the process of driving a ramp with the intent of going into a large scale bulk test mining with December as a production date.

According to Excellon, "Platosa strongly resembles several of the world-class Carbonate Replacement Deposits (CRDs) of Mexico such as the Santa Eulalia, Naica and Ojuela deposits, all of which have produced millions of tons of high-grade mineralization. Like Platosa, these deposits had minor surface expressions that were followed to the bulk of the deposits."

It's a complicated project. Part of it is a JV with Apex silver with Excellon holding a 51% interest and Apex holding the remaining 49% and part of it (the most interesting part) being 100% owned by Excellon.

Excellon is going into production. Over the next 14 months they expect to produce about $15 million US in free cash flow after expenses. It will cost them $10 million US to open a ramp and do the mining. But they have the cash in hand. The website has barely been updated in two years and it's largely responsible for the dismal state of the stock. I have talked to Peter Megaw at some length about it. And I have seen a Power Point Presentation which is brilliant, but it isn't available through their website.

Basically, Excellon and Apex have gone to an area of old production in NE Durango State. Peter and his people have found a Carbonate Replacement system which seems pretty large. Certainly it is high grade. On what they refer to as the Core property, a property not part of the Apex JV, they have drilled an indicated 65,000 tons of high grade silver/lead/zinc. It averages 75 ounces of silver to the ton, 12% zinc and 15% lead.

Generally it is considered heresy in the mining industry for junior mining companies to be considered exploration companies yet to go into production. It's perfectly OK for 99 out of 100 to waste every dime of their shareholders' money drilling holes until states like Nevada look like Swiss cheese but the very suggestion of going into production brings out the garlic and silver crosses.

Basically Excellon is going to produce between $20 and $30 million dollars in the next 14 months. Depending on the prices received, they should net between $10 and $20 million dollars. I consider that a smart move. $15 million in cash buys a lot of professional exploration.

Their $10 million dollar website fails to mention anything about going into production on what is a tiny scale. I call it a $10 million dollar website because they have a brilliant story and the website utterly fails to tell the story. So the website, the $10 million dollar website, is costing shareholders $10 million in market cap. If they earn $10 million, which is on the low side for the metals, ($.25 Lead, $.35 zinc and $4.80 silver) in the next year or so, the stock ought to be much higher than a $9 million dollar market cap.

Peter Megaw believes the known 65,000 ton resource is merely the end cap of a far bigger system. Post mineralization faulting has broken the deposit into 6 distinct zones but by working backwards in exploration, Peter believes he can chase down a lower grade but far bigger bulk target.

Since Excellon plans on using contract labor as much as possible and direct shipping the ore to a refinery nearby, their costs will be relatively high on a per ton basis but with $650 per ton ore, a few bucks higher cost is relatively meaningless. Excellon is adding only three people to their staff to run the operation and that doesn't take a brain surgeon or rocket scientist to manage.

I like the concept and the stock. We were buyers at $.20 a share. Making money on Excellon is going to be about as difficult as falling off a bike. Be careful should you decide to buy. The liquidity just isn't there. It would be there if they ever got around to telling their story but right now it's not. If you put in a market order to buy shares, you will get scalped. Naturally you are responsible for your own due diligence.

A week in Mexico was all that my system could handle, I flew out of Torreon after my visit to Platosa to my next stop in Salt Lake City to meet with George Young, CEO of Palladon.

Palladon Ventures - (PLL-V $.41 Canadian 20.6 million shares, $8 Million dollar market cap, $4 million in cash on hand, PLLVF-OTCBB - website) - has put together a commanding land position by consolidating a number of claims in the Milford area 200 miles SW of Salt Lake City. The area is probably the last and best chance for a major copper property in the United States.

George picked me up at the airport and we went over to Bingham Canyon to see what he would like to find for Palladon. Bingham Canyon is the first and largest open pit copper mine in the world. Since opening in 1906 they have mined over 6 billion tons of rock. Bingham Canyon has produced enough copper to wire every house and factory in Mexico, the United States and Canada. But they are soon to run out of ore.

Palladon Ventures is a work in progress. Right now George and his crack management team are trying to define their business model. There were a dozen or more mines operating in the Milford district in the past and there is already milled ore waiting to be processed. They have an option to earn into 65% of the 70,000 acre district. They are considering going into production ala Excellon albeit on a far smaller scale.

What they have accomplished is to consolidate the district. All by itself, that is a major victory. The project will look far more attractive to a tentative JV partner the larger it is.

I've owned the stock for months, bought at a higher price on the recommendation of a good friend. With a net market cap of $4 million, it wouldn't take much in the way of news to bump up the stock. Probably the ideal situation would be to get into a JV with one of the copper majors but management is looking quite seriously into bootstrapping themselves into cash flow by processing the already-stockpiled ore.

In addition to the Western Utah Copper Project, Palladon has a slew of mostly gold properties in Patagonia, Argentina. With management as experienced as George Young, I look forward to more and better news.

Our opinions are our own, we are not paid in any way to write about companies. Most of them are companies we have invested in so read anything we write with an eye to our potential bias. And please take some responsibility for doing your own due diligence.

By the time you read this (Tuesday 7th) I will be winging my way to Las Vegas to the gold show, I'll be back on Friday, so please don't send me email until Friday.

September 7, 2004
Bob Moriarty
President: 321gold Inc
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