Tom: my comments are highlighted below:

Evaluating Gold Juniors: Are You Missing the Big Picture?

Posted: Apr 25 2009 By: David Duval Post Edited: April 25, 2009 at 7:52 pm

Filed under: David Duval

Dear CIGAs,

Evaluating the merits and future prospects for a junior exploration company is a highly subjective process. Intangibles such as political risk, financial risk, market risk, commodity risk, technical risk and a host of other variables confront companies across the entire minerals industry spectrum. Nonetheless, no matter what the relative size of the company or the commodities segment it’s actively involved in, the best place to start your evaluation is with management.

This is especially true for junior gold explorers, the segment of the minerals industry that accounts for the largest proportion of global exploration expenditures and, predictably, the vast majority of new gold discoveries.

In reality, these are the “feeder companies” for the major gold producers whose primary focus is usually weighted to production (i.e. bread and butter issues) rather than exploration. In order to maintain the annual production rates that underpin their share price valuations, these majors need new sources of gold production and junior explorers are usually the ones that feed their insatiable appetites. Not surprisingly, when push comes to shove they are generally willing to pay a king’s ransom for undeveloped, economically viable gold resources in the ground.

Let’s have a broad look at several important criteria one should examine before determining a suitable investment in this often complex but infinitely exciting investment sector.

Management: Do the Litmus Test

It shouldn’t come as any surprise that good management can spell the difference between success and failure. So how does one determine if management is good or bad?

First and foremost past success is arguably among the best litmus tests for gauging management, although it’s certainly no guarantee. In this Internet age, regulatory filings and Google searches can often reveal a library of information on specific individuals and corporate entities.

A good CEO with a track record that includes at least one notable success generally has the ability to attract risk capital because people like to bet on a jockey that’s won a race already. In addition to having market recognition from past successes, they often tend to be magnets for high quality exploration projects.

** Victoria is the first public company at which I have been CEO. However, I have an established track record of success as an analyst (especially related to anticipating gold price movements and being early to identify new gold discoveries). John McConnell was the CEO of Western Keltic which was acquired by Sherwood Copper, Raul Madrid was the CEO of Conquistador which made a large discovery in Colombia, and several of our board members have been CEOs of junior companies in the past – in other words we have lots of experience on our team.

Most investors in this market sector have observed seemingly well qualified management ruin good exploration companies because of bad technical judgments and even poorer market decisions. In the latter case, non-market oriented executives often forget that markets and exploration-related activities are closely aligned - if not joined at the hip. Those who manage one without paying attention to the other do so at their peril.

These days it’s quite uncommon for industry executives to have a personal investment in the companies whose future they control. Instead, they elect to take large salaries and award themselves cheap stock options which are typically re-priced lower when the company’s stock price reflects their lack of success.

** As publicly disclosed, I have purchased about $1.3 million of VIT stock at full market prices -- ie no “cheap stock” – this an important position for me and it’s a strong motivating factor. We also encourage all of our employees to purchase VIT shares so that they have a further motivation to ensure VIT’s success.

Executives who are willing to risk their own money with ordinary shareholders have an added incentive to be successful. In old fashioned terms, it’s called “putting your money where your mouth is” - a lesson that unfortunately is largely ignored by most contemporary mining executives. Their shareholding need not necessarily be large but it should at least be meaningful.

It’s also wise to look for management with a broad knowledge of the minerals industry and capital markets, both of which are integral to running a successful company. These attributes need not be exclusive to the CEO but they should feature prominently within the corporate management team including the board of directors.

** My personal opinion is that we have the very best operating and exploration team of any company of our size; in fact, we compare favorably to most companies many times our size.

Senior executives don’t necessarily have to be geologists or engineers but they should at least have the ability to attract, manage and motivate a multi-disciplined group of industry professionals who share the corporation’s philosophy and objectives. Who can forget Paul Penna who brokered penny stocks in Toronto before he became the guiding force and chief executive behind one of the most successful mining companies in the world, Agnico-Eagle?

Personal integrity and the ability to communicate the company’s message to shareholders and the marketplace round out the critical attributes that one should look for in public company management.

** We stress the concepts of integrity, honesty, and transparency both in how we manage our day-to-day tasks and how we interact with people outside of Victoria.

Summary:

In the minerals business, past performance is often a good indicator but not a guarantee of future success. Pick management with strong track records and preferably at least one notable success (i.e. mineral discovery).

** Raul Madrid and his team have discovered several gold deposits in their careers

The ability of management to raise capital to fund the company’s activities on an ongoing basis is also critical as the price of any exploration company’s stock is results driven - and getting those results costs money.

** We have raised about $30 million, some of which was raised in a very challenging financial environment

Management integrity can be determined by examining the way a company conducts its business, especially in foreign jurisdictions. In the case of developing economies, this would include a strong commitment to the principles of sustainable development.

Also, one should keep in mind that a company can be a success in the marketplace without taking a project to commercial production. In fact, the majority of mineral explorers never achieve such a distinction, selling out instead to an operating company with production expertise, perhaps retaining a royalty in future production.

Project Selection: The Best Place to Find a Mine is Where There is One

There are many aspects to selecting a good minerals project. But smart companies attempt to reduce some of the geological risk by exploring areas with known mineral potential as well as active mining operations.

Most of the world’s gold production comes from greenstone belts, ancient volcanic and sedimentary rocks that feature prominently in the mining industries of Canada , Australia and South Africa . These belts typically host a broad range of metals including gold, silver, platinum, nickel, copper, lead, zinc and even diamonds.

** This concept is exactly what Victoria is built on. All of our properties either contain former gold mines, are located next to existing gold mines, or are on major gold structures (“belts”)

When you examine the evolution of these belts from a precious metals standpoint, new discoveries are being made well over one hundred years after the initial discoveries. Emerging greenstone belts, including the Lake Victoria Greenstone Belt in Tanzania , are relatively early in their development and will likely account for increasing amounts of gold and base metals production in the years ahead. In these regions, the larger the land position you have the better!

Companies exploring such areas are generally good exploration bets because the infrastructure in these regions tends to be better and the local population generally has a cultural affinity towards mining.

Summary:

Pick companies with large strategic landholdings and exploration projects in areas with proven geological potential, active mining operations (= good infrastructure), and a recent history of discovery and new mine development.

** The Yukon, Nevada, and Guyana are such locations. I would add that locations with a culture of gold mining are attractive because the chance of having permitting problems is lessened.

Project Development: Establishing the Big Picture

Exploration methodology has changed little in decades with the exception of data processing which today is understandably highly computerized. “Boots on the ground” remains the most effective method of discovering mineral deposits and that’s not likely to change any time soon - if ever.

** Agreed. This is exactly what we do at VIT

Evaluating an exploration project is most meaningful at the drilling stage and this is when investors usually step into the marketplace. Market activity during this period is generally based on the timely release of exploration results. Understandably, diamond drilling or rotary drilling results are considered the “Gold Standard” during this phase of exploration because these results comprise most of the input data for resource calculations.

In Canada , geologists must adhere to the 43-101 standards when reporting resources for any commodity. This standard is a codified set of rules and guidelines for reporting and displaying information related to mineral properties; and it applies to any company listed on a Canadian exchange which is where the majority of the world’s junior explorers are trading.

Resource estimates are by far the most misunderstood feature of the 43-101 reporting standard. Investors like to apply values to resources that have not been proven economically viable which is a long, costly process. This is particularly true for “Inferred Resources” which have a great amount of uncertainty as to their existence, along with their economic viability. It cannot be assumed that all or any part of any Inferred Mineral Resource will ever be upgraded to a higher category.

** Note that 3.2 million of VIT’s 4.4 million aggregate gold inventory is in the higher-quality Indicated category.

For large exploration projects, most companies focus on developing the property-wide potential with widely-spaced drill holes. The reason for this is actually quite simple and practical. Drilling is expensive so rather than expend money tightening up drill hole spacing to produce a resource with no economic legitimacy, companies prefer to assess the global potential to ensure they end up testing the most attractive targets.

Summary

When assessing the potential of a mineral property, make sure your analysis falls within a big picture context. One thing to look for is a broad distribution of gold values on the property. You can find comprehensive information on exploration companies from publicly disseminated news releases and regulatory filings. The technical information in these filings has to be 43-101 compliant, providing a high measure of security to investors. Be careful not to apply economic viability to any resource category, especially inferred resources. Even resources that are included in a full fledged feasibility study are subject to various assumptions including future commodity prices.

Exploration Agreements: The Devil is in the Details

Minerals exploration is often conducted under joint venture agreements. In these situations a corporate entity has the right to earn a specific interest in an exploration project for a set expenditure over a specific period of time. In most cases, the expenditure commitment would include money for exploration and staged option payments to the property owner. Look closely at the JV agreement to determine what interest the optionee can earn (the larger the better) and the cost associated with earning that interest.

Junior partners involved in exploration joint ventures with major companies are at a distinct disadvantage. Make sure they have the internal ability or have sought professional help to ensure their joint venture agreements do not subject them to any derivative-related exposure or accounting related issues at production that will prevent them from achieving a timely return on their investment.

** We have exploration agreements with Newmont and Barrick, the two largest gold companies in the world. The key information in our agreements is available in our public disclosure documents. In my opinion, these agreements are fair to both parties. Kinross owns 21% of VIT’s shares and Hugh Agro from Kinross is on our Board -- Kinross has no other ties to Victoria.

Summary

Exploration agreements are important and can make or break a company. Make sure you know exactly what interest the company will end up with after the earn-in period. Also, beware of excessive financial commitments (including non-exploration related option payments) that can put the company at risk during periods of market weakness. In the event commercial viability is established, ensure the production agreement with the major allows for a timely return on the junior partner’s investment.

Royalty Agreements: Low Risk, Premium Market Valuation

Some companies opt for Net Smelter Royalty agreements (NSR) which limits the financial risk associated with funding exploration work themselves. The royalty model allows for industry partners to earn up to a 100% working interest in an exploration project for a firm exploration commitment and rental (option) payments over a specific time period. In this particular case the property vendor would receive a sliding scale royalty (based on the gold price) should the property achieve commercial production. Because achieving commercial production is the responsibility of the project operator, the royalty partner does not suffer any dilution of shareholder’s equity or development capital risk.

A net smelter royalty (NSR) is the amount actually paid to the mine or mill owner from the sale of ore, minerals and other materials or concentrates mined and removed from mineral properties. This type of royalty provides cash flow that is free of any operating or capital costs and environmental liabilities. A percentage of an NSR royalty on an ore body can effectively equate to a larger percentage of the economic value of the ore body.

Royalty companies have low overhead, are relatively easy to evaluate, and generally command a premium in the marketplace.

Summary

The royalty model is virtually risk free but realizing royalty income from an exploration property is dependent upon the project operator achieving commercial production. For exploration companies, holding a strategic land position in a developing gold camp is an essential requirement to attract royalty partners. Royalty exploration companies operate under the principle that you can find gold cheaper through exploration than you could by purchasing production through royalty agreements on the open market. Royalty companies are attractive because they typically command a premium in the marketplace.

** Victoria is not a royalty company