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Everything is Worth Something

Bob Moriarty
Dec 31, 2006

I love going to auctions. I operate with one overriding philosophy. Everything is worth something. And over the years I have collected some real bargains. When Ebay came along, I thought I had died and gone to heaven. You can buy everything on Ebay. At a price.

Basically, in the mining business, there are two ways to get into mining. You can spend fruitless years drilling holes and pounding on rocks in the faint hope of finding a financially feasible project worthy of putting into production. If you happen to be in the right phase of the resource cycle, you may even be able to get it financed. If you are skillful and really really lucky, you may find yourself mining the one project in thousands that actually makes the cut.

Or you can buy a mine and mill. I am thinking that probably makes a lot of sense right now.

Every time there is a takeover in mining, opportunity is created. Every mining company operates according to their own unique set of rules and what works for one company doesn't work for another. Wise management in juniors looks out for those fleeting opportunities.

After 14 years in the mining business doing financing and managing junior mining companies, Robert Eadie determined it was about time to get into production. He began Starcore International Ventures in November of 2003 with that goal in mind. Barb and I were early investors. We have known Robert for years and believe in him. He has spent the last three years doing little more than just looking at various projects, throughout the world, over 150 projects. In February of 2004, he made his first move into Mexico by entering into a joint venture with Goldcorp on a project called the Cerro de Dolores property.

Goldcorp has 20% of the project and Starcore the remaining 80%. Cerro Dolores is a silver-lead-zinc property which went as far as a pre-feasibility study in 1998 showing a historic (non-43-101) resource of 550,000 mt grading 11.2 oz/t ag and 2.62% lead with 5.33% zinc. Given $2 zinc, a mere 1% zinc ore contains $40 worth of metal. So even though the resource so far is slim, the rock is worth over $415 per ton. Starcore wants to put the project into production and expand the resource. Robert is aiming at expanding the resource to 3-5 million tonnes. Starcore has already added over 2,300 hectares to their land position. The project is worth some $230 million dollars worth of metal at today's prices in resources and could be mined via an open pit. Look for lots of action here in 2007.

The diamond in the rough is the San Martin gold/silver project located just outside Queretaro, some 120 miles northwest of Mexico City on a major highway system. San Martin is a producing gold/silver mine, albeit a small mine with production of 33,000 ounces of gold and 350,000 ounces of silver in 2005.

The mine was put into production by Mexican mining company Luismin in 1994. Wheaton River bought the property in 2002 and in turn Wheaton was taken over by Goldcorp in 2004. Goldcorp determined the project was too small for them but too small for some is just perfect for others. After a suitable period of due diligence, Robert Eadie and his Starcore team signed a deal with Goldcorp to purchase the property in March of 2005. Closing is scheduled on or before January 24 of 2007.

Remember my philosophy about auctions? Everything is worth something. With a mine it's a hell of a lot easier to determine than with a plot of moose pasture that you hope might have minerals in it. First of all, at San Martin there is the mill. It's an 1100 TPD capacity mill operating at about 900 TPD. Robert and his crew estimate that it would take about $3 million in development to add each additional 100 TPD of ore to be processed. I don't doubt that bringing the mill up to capacity will be a top priority and will require about $6 million in CAPEX.

The mill would probably cost about $50 million in today's dollars to replace. Starcore's deal with Goldcorp is to pay a total of $26 million for the mill and two mines, $24 million in cash and $2 million in Starcore shares. Robert has done a brilliant job of keeping the number of shares down and he came into the deal with only 12.7 million shares outstanding. After all is said and done in the financing, there will be about 62.1 million shares fully diluted. So at the very least, he is paying $.50 on the dollar for the plant and equipment which isn't all that bado dealo, as they say in Miami.

But there is the past production history and future potential which must be considered. As I said before, the mine has been in production since 1994 and mined gold/silver at a profit even during the dark ages from 1998-2002. If you divide the price Eadie will pay for the mines and mill, $26 million by the number of ounces of gold alone, you come up with a price of $68.50 an ounce US. And that's cheap. Other companies are paying from $130 an ounce to as high as $170 an ounce.

It's not a ultra-low cost producer, cash costs are about $280 an ounce. But if you believe as I do that gold and silver prices are headed higher, you don't want the lowest-cost producer, you want the highest-cost producer. You want the leverage. And while the production costs have gone up from about $180 in 2001, the cost of labor and fuel have gone up far more. The forecast production in gold equivalent is about 45,000 ounces in 2006 and remains stable as far out as 2010.

While I was there a month ago, we saw development work being done on a new zone called the Eastern Dome and it has both bulk tonnage potential and the grade is higher than the ore being produced today. I don't want to take anything away from the management team running the mine today, they are both qualified and motivated, but the mine has been in a state of flux since the takeover in 2002. Stability will improve production and profit. It's nice to know you are working for a company that won't be dumping you tomorrow. And frankly, small companies are a hell of a lot more motivated and efficient than big companies.

Often, with really outstanding large projects, success means little more than painting a bull's eye on your back, as NovaGold will testify. While a 45,000 ounce producer is on the small side, at least you aren't in the sights of the monster gold companies. The San Martin project has excellent economics, excellent expansion potential and will serve as a wonderful building block to get the Cerro Dolores project into production.

I really like Starcore President Robert Eadie. We were early investors when Starcore was little more than a twinkle in his eye and my visit to the San Martin mine impressed me enough that we have also participated in the private placement. While Starcore is an advertiser, I don't need their money to be biased. This is one of the best moves on the part of a junior I have seen in years. Our long term readers should remember my writing about Desert Sun at $.50 when it was little more than a good idea. Well, Desert Sun went into production and when they were producing about 105,000 ounces a year, they got bought out for about $700 million. Using those numbers as a matrix, SAM is easily worth $4 a share in the right market. We are buyers of Starcore.

Starcore Intl Ventures Ltd
SAM-V $.60 Canadian (December 29, 2006)
64.6 million shares fully diluted

Bob Moriarty
President: 321gold