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Metals and Mining -- Exploration and Development

NEW HIGH-GRADE ZONE DISCOVERED AT

MINTO; TARGET INCREASE ON HIGHER

PRECIOUS METAL PRICES AND

ACQUISITION POTENTIAL

Event

Capstone Mining (CS : TSX : C$1.26 | Not Rated) reported the discovery

of a new high-grade zone at the Minto Mine, the Minto North Zone.

Silverstone has a royalty stream on 100% of the life of mine silver and

gold produced from the Minto Mine.

Impact: Positive

The Minto North Zone is one of five high-grade zones that have been

identified at the Minto mine. Any mine life extension and/or increase in

production resulting from development of these zones is a net benefit to

Silverstone, with no associated capital obligations. An updated resource

estimate for the Minto mine is expected in late-Q1/09.

Valuation

We have revised our near-term gold and silver price forecasts upwards

to reflect the strong precious metals environment. The net impact of

these pricing revisions is a slight increase in our estimate of NAVPS (5%)

to C$2.34, up from C$2.30 per share previously. We have also adjusted

our peak gold price forecast to US$1100 per ounce, up from US$950/oz

previously. Based on our revised peak gold pricing scenario, our target

NAVPS has increased to C$2.52, up from C$2.40. M&A activity in the

mining sector has increased and a slew of equity offerings have

bolstered the balance sheets of larger-cap mining companies.

Silverstone is the most inexpensive precious metal royalty company in

our coverage universe. Therefore, we believe that an acquisition bid on

the company is likely. To account for a potential acquisition bid, we are

increasing our target multiple to 1.0x NAV, up from 0.8x previously.

This gives us a new target price of C$2.50 per share, up from C$2.00

per share. We maintain our SPECULATIVE BUY recommendation on the

shares of Silverstone.