Speculative BUY – Target: $0.30 (previously $0.44), Jul 22/10 closing price: $0.15 ,

The Company reported pre-feasibility study results for its Yellowknife Gold project. The economics were lower than expected but the project still shows a viable operation. The stock should react neutrally to this news.

The pre-feasibility study showed that the company could produce 108,000 ounces of gold over a 7.5 year mine life (total 811,200 ounces) at an average cash cost of US$541 per ounce. The operations are a mixture of open pit and underground mines from three different deposits. Initial capital costs are estimated to be C$170 million. With a base case of US$950 per ounce of gold, and a 5% discount rate, the project has an NPV of C$71.3 million pre-tax. The internal rate of return is 16.1% pre-tax. At US$1,150 per ounce gold the NPV is $217.7 million and we estimate that the breakeven (10% IRR pre-tax) is approximately US$900 per ounce. These are not stellar numbers and lower than the economics of the preliminary economic assessment (PEA).

The main culprits appear to be three main factors. The first is that only 52% of the measured and indicated resources made it into reserves (811,200 ounces). We had expected 77% to be converted. Secondly, we were using an open-pit strip ratio of 6:1 in computing cost. The pre-feasibility showed a very high strip of 14.2:1. The study obviously is favouring more open-pit mining over underground mining which we were estimating. Thirdly, the PEA used inferred resources (269,000 ounces) which are not allowed in a PFS.

Despite the lower than expected results, the gold project is still viable at these high gold prices. There will obviously be an effort to reduce the stripping ratio by drilling on the margins of the mineralization and probably by reanalysing the pit slopes. Also there will be an effort to increase reserves and resources at Clan Lake.

We have lowered our target price to $0.30 per share (NPV of $72 million based on a 10% discount rate and US$1050 per ounce gold) from $0.44 to reflect lower economics. The stock still remains a Speculative Buy.

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Baires note:

You may also find this report a bit odd since LOM expected a 77% conversion rate of M&I to reserves, when Webb has said about 50% tops (Romarco's wasn't much higher). Also odd, is that they omitted how robust Tyhee's economics get at current gold prices, i.e, NVP> $220M and an IRR> 40%!

B.