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Desert Sun Mining

Bob Moriarty
October 25, 2002

One secret to success in any endeavor is to mimic the behavior of those who have been successful in the past. Two of the very most respected minds in the metals markets belong to David Tice of Prudent Bear fame and Ian Gordon of Canaccord who does such a wonderful job of educating people about the K-Wave and where we stand economically.

With the junior gold stocks, those investors who have sufficient resources to be investing early in the game in big numbers are the guys who make the big bucks. It's participation in the private placements where the leverage takes place since not only are the placements often priced below the market - guaranteeing an immediate profit - but almost always the placements allow for warrants. Warrants provide a way of betting on the future movement of a stock with limited risk. And since most often each share purchased has a certain value of warrants attached, the warrents give the large investor far greater leverage than for individual investors.

However, there are times when small investors have a real advantage over the large investors. The big boys can buy in cheap but when it comes time to sell, the small investors have a very real advantage. Almost all gold stocks have a liquidity issue. Trading can be so slow that a large position simply will not trade.

I have a rule that I don't ever place market orders. If you enter a market order, you are telling the market maker it's OK for him to steal from you. And they will on a regular basis. If you have a large position, you may well be stuck with it until liquidity improves and this happens to institutional investors all the time. At least small investors can exit a position without making a big move in the stock.

You can copy the behavior of those who do get in on the ground floor, they do have the best information and get it the soonest. David Tice and Ian Gordon recently took good sized positions in Canadian Junior gold mining stock Desert Sun Mining. I personally followed in their footsteps after spending a couple of hours with the President and CEO of Desert Sun at the New York Gold Conference.

I have been saying the same thing for years about the junior gold stocks. The companies who are investing now are the companies who will benefit from the coming gold share explosion. And I expect an explosion which will make the dot-com boom look like a picnic. The total value of all the gold mines in the world is about $60 billion dollars. That's chump change and when the public, the mob, tries to get through the door at the same time, gold stocks are going to explode.

But the shares you want to own are those of the companies working now. As gold goes up and more interest is generated in precious metals, new fast buck companies are going to be popping up out of nowhere like mushrooms in manure. Buy the companies with management and properties.

Desert Sun has one of the strongest management teams I have seen in the small gold companies. Don't believe a word I say, pick up the phone and talk to them yourself, they are accessible. If you don't take the opportunity to go to any of the gold "dog and pony" shows or won't call and talk to management, you are missing a great opportunity.

One of my favorite questions is to ask the president of the company how many shares he owns. If management doesn't control a lot of the shares, walk away. They know far more about what is actually going on in their company than you or I ever can. If they won't buy their own shares, why should you and I?

Stan Bharti of Desert Sun controls about 2 million shares, he owns 1.6 million and has options. That's a serious number in a company with only 24 million shares on a fully diluted basis. In effect, he stands to make a lot of money if he makes Desert Sun successful or will lose a lot of money if he fails.

Desert Sun's primary asset other than a superb management team is the Jacobina Mine in Brazil. This is an actual gold producing mine in operation until 1998 capable of processing 4000 tons of ore a day. When gold plunged below $275 in 1998, the owners put the mill into care and maintenance mode until the price of gold justifies opening again.

Early in 2002, Desert Sun took up an option on the Jacobina mining district. The option provides for Desert Sun to earn a 51% share in Jacobina by spending US $2 million before the end of 2004. And in September of this year, Desert Sun announced a purchase agreement whereby they have agreed to purchase the remaining 49% of Jacobina for Canadian $5 million.

The Jacobina district consists of a gold bearing conglomerate covering a strike length of 57 kilometers some 2.5 to 4 kilometers wide. The property is similar in nature to the Witswatersrand Basin in South Africa which has produced 40% of the gold ever produced from its 300 mile length. Jacobina resource calculations from 1998 show 3.67 million ounces of resources grading 3.01 grams per tonne and a proven and probable reserve of 964,000 ounces.

At this point, Stan Bharti and his team have determined two possible choices of action. They can earn their interest by spending money for exploration or they can explore and go into production at the same time. Naturally it would cost millions of dollars to go back into production but they would increase shareholder value considerably. Of all the companies I have covered in the past, Desert Sun has done one of the best jobs of using their web site to communicate with shareholders.

Desert Sun did a "what if" model to show how going into production would place them in comparison to other small gold companies. Naturally the "what if" is based on spending millions of dollars and they make it clear that these are only projections not a production plan. But the study does give some interesting numbers and any investor should look at it.

Desert Sun has the capacity to produce 73,000 ounces of gold a year at a cash cost of $188 yet is valued at a very low percentage of what other similar producing companies are valued. For example, Bema Gold is valued at $50 per ounce P&P while Desert Sun is valued at only $17.50 per ounce P&P.

But Desert Sun will hold plans for production in abeyance until gold goes higher. They commissioned a study by T. S. Ortslan & Associates in July to review the Jacobina property and their options. The report concluded Desert Sun should pursue an aggressive exploration strategy to bring the property to a critical mass of at least 6 million ounces. At today's price, Desert Sun has a market cap of US $6 million. According to Ortslan & Associates, the cap would increase to $10 per ounce or $60 million if Desert Sun can prove 6 million ounces, thus becoming a takeover target for the major gold companies.

Just as an aside, for those investors fairly new to the gold stocks, something missing from today's markets which was always present before, is constant wheeling and dealing by the majors. In the past, the giants were taking over exploration companies on a regular basis or buying out properties.

That is one important function of the exploration companies, to funnel mining properties to the majors. Each day that goes by, the majors consume more reserves. And those reserves are not being replaced. It's as predictable as saying that night will follow the day, that at some price of gold a little higher than now, the majors are going to set off on a feeding frenzy to lock up new properties.

This activity is at a near zero basis right now. Indeed, you only need to look at Placer Dome and their activity of the past couple of years. They not only have not been buying new properties, they were shedding existing properties as fast as they could. One day soon the pendulum will reverse and a real gold rush will take place. That's when you will want to be an owner of many of these small juniors.

Stan Bharti isn't going to be satisfied with only 6 million ounces. Even though only 15% of the Jacobina property has been explored, he believes the potential for expanding the resources is much higher. His immediate goal is to locate and prove 10 million ounces at which point he believes the market will value Desert Sun far closer to the industry average of $10 per ounce or $100 million.

Originally, Stan Bharti and his team planned a 2,000 meter phase 1 drilling program to expand the resource base higher from 3.6 million ounces. Cost savings have allowed them to increase the drill program to 2,800 meters. So instead of two drills working, they now will have three drills on the property churning away. The phase 1 drill program will consist of at least 18 holes and will be completed by mid-December. Drill results will be released on a regular basis as work progresses.

One aspect of working in Brazil which might concern a potential investor would be possible government problems in the event of a debt problem. As we all should know, Brazil is going to hold a Presidential election this coming Sunday and there has been some concern about the possibility of a debt default by the new government.

Regardless of the debt issue or government in power, Brazil needs jobs. Desert Sun's project at Jacobina is providing jobs and outside investment in the country when Brazil needs it most. I personally feel that any government in Brazil will look at foreign investment in a highly favorable light.

I am a paid consultant to Desert Sun and they pay us for advertising. Of course I am biased about the company but I wouldn't write about a company where I didn't feel a bias. Investing in gold shares has been the safest sector of investing for the last 18 months. I see a bright bull market continuing for some time and after the latest correction gold and gold shares have again come down to fire sale prices. When the mob wakes to the potential of Desert Sun and all the other Desert Suns out there, you want to be fully invested.

Nothing we say is designed in any way other than to educate potential investors. You are responsible for your own due diligence and I would highly suggest you call the company yourself. I like this company and this management team. In my view they have an excellent chance of meeting their goals. At a higher price of gold, I like the idea they might open the mill again.

But don't just listen to me, call them and talk to them yourselves. When gold companies get too busy to talk to ordinary investors, sell.

-Bob Moriarty
October 25, 2002

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