321 Gold

The Perfect (Mexican Gold) Storm

December 19th, 2007

By Bob Moriarty

This has been an exciting year for me, not so exciting for investors. I've been to about 25 different projects and some are world class, as good as any I have ever visited. Southern Arc (SA-V) has what looks to be one of the biggest porphyry targets in the world. ATW (ATW-V) and Pediment (PEZ-V) picked up wonderful mid-size producers for pennies on the dollar. Peak Gold (PIK-V) is polishing up a large 150 thousand ounce a year gold producer in Brazil.

But it hasn't been all that red hot for investors and that may be good. While gold and silver were up a lot, gold going from $640 at the first of January to $840 and silver from about $13 starting the year to a high of $15.80, costs of mining went up higher and faster. One of the industries biggest projects was put on the back burner in November, Galore Creek, because of surging costs. That whacked NovaGold investors 50% of their investment overnight. And while gold going up day after day got the pulse of investors pumping, a $55 tumble in four days in November has convinced many gold investors to throw in the towel.

I think any investor crying into his or her beer may be missing the big picture. The BIS recently announced derivatives have soared to a mind-boggling $516.4 trillion as of June 2007. That's earth shaking and I doubt if 50 people in the financial world actually understand the implications. The wheels are coming off the world's financial system; much of the $516 trillion is pure fraud. The Fed keeps slapping on billion-dollar kid's Band-aids and that's like trying to bail out the Titanic with a sieve. The problem isn't a billion dollars or ten billion dollars or a hundred billion dollars. It's not even a trillion dollar problem looking for a trillion dollar solution. It's a hundreds of trillion dollars problem and no one gets it. Yet. They will soon.

There is danger in every possible investment you can make. Nothing is absolutely safe. Real Estate is crashing, bonds are on the verge of falling off a cliff and the stock market is about as safe as a long-tailed cat in a room full of rocking chairs. Even gold shares have been hit hard. But at the end of the day, when the banks close, you had better believe precious metals and mining shares are the only safe haven. Because they are the only safe haven.

Corrections in mining shares are perfectly normal and are nothing more than a good opportunity to pick up great shares cheap. You should always be buying when no one wants them and selling when everyone wants them. Right now, the gold shares are all on sale and are as good a deal as you will ever see.

My last trip of the year was a quick trip to one of my favorite areas in Mexico, Senora where I went to visit a brand new company that has somehow managed to piece together an entire gold DISTRICT. If I hadn't recently visited Pediment and ATW and seen just what people are still managing to put together, I wouldn't have believed it.

Animas Resources (ANI-V) was formed recently to consolidate the Santa Gertrudis district in Northern Sonora State Mexico, right on the border with Arizona. Animas has assembled an entire 125 square mile district (34,800 hectares). Phelps Dodge first discovered gold in the area in 1986. PD advanced the project into production as an open pit, heap-leach operation before selling it to Campbell Resources in 1995. Campbell continued operations at the Santa Gertrudis mine until shutting down in October of 2001 due to low metals prices. In addition an Australian company operated a nearby mine they called the Amelia Mine.

Over the ten-year period, the two mines produced an average of 60,000 ounces of gold a year at a grade running between 2.1 and 2.88 g/t. Animas has access to all the data from about 120,000 meters of core and r/c drilling from 1200 holes, 34,000 rock samples and 21,000 soil samples. Remarkably the prior operators focuses on only the near surface oxide ore and ignored sulfide results. There has never been a hole drilled below 400 meters. The entire district has barely been scratched even though bright red areas of alteration can be seen in all directions.

The project comes with a historic resource of about 720,000 ounces of gold. The resource was developed prior to NI 43-101 and naturally one of Animas's first priorities is to bring it up to 43-101 standard.

While Campbell Resources ran the mine, they commissioned Behre Dolbear to conduct a study. The report makes for interesting reading:-

"the property contains potential for a deep, Carlin-type target from an examination of the property and the presently available data for the project. The geology, structure, geochemistry, geophysics and mineralization are indicative of this type of system and the similarities to the Post-Betze deposit are very striking. Santa Gertrudis is at the same position the Carlin Trend was at the point in time Barrick bought the Gold Strike property from Western States Minerals and started their deep exploration program. The deep exploration potential at SG is very positive and the chance for deep mineralization is very good. The surface potential, as you know, is without question."

One of the directors of Animas, Don Ranta was the head of Phelps Dodge, North America and actually put the Santa Gertrudis mine into production for PD. Another member of the team, Odie Christianson, former head geologist for Newmont, was generally credited for much of the development of the Carlin Trend for Newmont.

We spent a day driving around the property. It's so big that we barely scratched the surface but the alteration and mineralization is obvious everywhere you can see. PD and Campbell chased the surface expressions of massive alteration but it's obvious to the most casual observer that to the south the alteration is under only a thin cover of post-mineralization material.

It's pretty amazing but obviously still true that a junior can put together a remarkable project even at $800 gold. There are two leach pads still in place with material on them that could be put into production quickly. 720,000 ounces of gold resource is worth twice times the total market cap of the company right now. But you can have all the gold in the world, if you don't have the people, you are out of luck. And while there are lots of good, maybe great gold projects we are running into shortages of good people at every level.

Animas has an excellent project. Even today, few juniors manage to put together entire districts. But their real strength is in the management team led by Greg McKelvey as President and CEO. With 40 years of experience, Greg was VP of Exploration for Phelps Dodge and actually was the person who helped PD sell the project to Campbell for $10 million in 1995.

With over 35 years of experience, John Wilson, Animas VP of Exploration has made discoveries in Brazil, Nevada and Peru and has worked all over the world. He has generated over 25 high potential drill targets over four prospective trends after consolidating the data from prior operators.

I've met and worked with Dr Stephen Reynolds at the Baja Sur project of Pediment and have the utmost respect for him. Steve is a brilliant structural geologist and a Professor of Geology at Arizona State University. From what I saw of preliminary data, the real problem Animas faces from a geological point of view is to understand just how the structures control the mineralization. I've been to a lot of projects where exploration and drilling went on for years yet management still didn't have a firm grip on the structural controls of the system. While we were driving out to the project I was talking to Greg McKelvey, I suggested they put their hands on the best structural geo they could find right away. He answered by asking if Steve Reynolds was good enough for me. I just smiled.

Steve has a brother, John Reynolds, who did the IP work for Pediment at Baja Sur. He is also working at Santa Gertrudis.

The ultra-high quality geological experience Animas has put together in a team is a double-edged sword. The good aspect is that there aren't any spring chickens. There isn't any incentive for the management team to make this a 10-year exploration project. I've seen a lot of people far more interested in cashing paychecks for as long as possible and it bugs me big time. I want people to hustle and move a project forward.

Greg, John, John and Steve aren't in the business of collecting paychecks. They want to define more than 3 million ounces of gold and either sell it off or put it into production. Since the majors have been consuming their young for the last 10 years, a 3 million ounce project will be ultra-attractive and will command a big premium. The $1.1 billion buyout of Bolnisi is the model Animas intends to follow.

But the downside of having a grey-headed team is that either we train our replacements or we won't have replacements. The industry not only has a people shortage, it has a critical young people shortage. People are working 5 years beyond reasonable now. I told Greg that whatever number of young people he intended to hire and train, he should double that number. Mining will be crippled 10 years from now unless we initiate an aggressive training program right now.

The Animas team hit the ground running. Major Drilling has been hired and will begin an aggressive 10,000-meter program in early 2008. 25 drill targets have been chosen and by the time Major completes the 10,000-meter program, there will be a phase II program to follow. Animas knows they need to conduct an aggressive program.

I'd like to see the leach pads loaded and turned on to provide cash flow. It's something Greg looked at. The team has spent a lot of time discussing. But portions of the mineralization contain carboniferous material and sulfide ore. The carbon sucks up the gold from the leaching solution so even a small amount of carbon can destroy the economics. Sulfide ores can be better recovered by milling and running through a CIL or CIP process. That costs a lot more money and won't make sense until Animas can get down below the water table and start exploration in the untouched 300-meter deep levels. Chances are they will have a big sulfide resource but you have to define that resource before you can start planning on how to recover it.

There are a lot of aspects that make up a good junior exploration company. Access to capital is important, projects are always a key element, management is mandatory. It's rare that I come across a company as well balanced as is Animas. As a new company, they have a tight share structure; cash in the bank, a world-class gold district and world-class management. When you factor in a way under priced gold share market, you pretty much have the perfect storm.

We invested in Animas early on. We invested even more in the last placement after I got to visit the project. By no means am I a disinterested observer. I own shares and I am biased. In addition, Animas advertises on 321gold. You must do your own work and look into Animas before buying but the company is about as sweet a deal as any I have seen in quite a while.

Animas Resources Ltd
ANI-V $1.33 Canadian (Dec 18)
23.9 million shares outstanding
Animas website

321 Gold
http://www.321gold.com/

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