First Asset Morningstar Emerging Markets Composite T.EXM.A

BRE-EX Revisited

[mrmrre]

I have seen a few posts on this board (and others) regarding Bre- Ex. Mostly they compare this company or that company to the fraud associated with the Bre-Ex phenomenon. For those not familiar with Bre-Ex, the company "salted" samples, many of which were simply surface or "trenching" samples. The company then used the media to create a hype that the precious metals markets could not resist. The penny stock went to $100 per share, before plummeting over night. Along the way, the head geologist "fell" out of a helicopter and all records were burned in a mysterious fire. I would like to share my thoughts on this topic and how it relates to the current market. I believe another Bre-Ex sized fraud is very unlikely. However, I do feel that, on a smaller scale, a similar type of fraud is possible. The Canadian government responded to the Bre-Ex fraud with legislation that required companies to produce drilling results that are sent to independent labs to evaluate, confirm and compile. Once enough drilling is completed, the engineer produces what is known as a 43-101 compliant report. This is used to describe and define a resource as measured and indicated ore. There is a significant amount of drilling that must be done to produce a 43-101 compliant report. This does not mean that the resource is mineable or economical. It mainly confirms that the company has done a certain amount of drilling and those cores have produced a certain amount of ore bearing rock. Today, it is a requirement of the Toronto Stock Exchange that a company must have at least one 43-101 compliant project for listing. This includes the Venture exchange. To move from the Venture to the TSE, the company must prove reserves and establish an actual net asset value. This is how Exmin is progressing. A TSE listing is not far off. The Bre-Ex project was in Indonesia. A foriegn land where this type of fraud could be perpetrated. I doubt you see any significant fraud from operators in the US or Canada. However, I think that it is possible that we are seeing problems begin to surface in Mexico with certain junior mining companies deceiving shareholders. Fraud is a hard thing to prove. But, clearly the market has lost its focus on quality and deception is becomming very common, in my opinion. Let me explain where I think some companies and some analysts MAY BE deceiving shareholders. 1. Many companies are now bypassing listing on the TSE or Venture exchange. Companies like TaraGold (and their JV partners) are establishing a bulletin board OTC presence and then getting a Frankfurt listing. I am not saying that just because a company does not list on the Venture exchange means they do not have a legitimate project. For me, however, it is a major red flag. The BB and Frankfurt markets are easily manipulated by market makers, hedge funds and gold stock analysts. Karl knows this and will not play that game. He wants a TSE listing and will not let his stock be traded OTC or Frankfurt until he has that listing. From the TSE, the next stage for a "real company" is usually an ASE listing. 2. The "gold stock analyst game" is being perpetuated by many of the services. This is where analysts are given stock, other compensation and/or allowed to participate in private deals in exchange for their recommendations. Most of the analysts play this game and many sell their cheap shares into the market. Doug Casey and Bob Moriarty are two examples. Casey never discloses his positions, Moriarty always does. The companies send them on trips to visit projects, advertise on their websites and pay for research. I really like to read Moriarties writeups. His knowledge of mining and markets is vast. But, he only writes up advertisers and he almost always has low-priced shares before the writeup. At least he fully discloses his conflicts. Most do not. And suffice it to say that only a couple of gold stock analysts will recommend a company based on pure fundamentals. Karl refuses to play this game. 3. Mexico has a long history of mining. It is therefore an easy place to "get in the game". Many juniors have picked up projects with past producing mines, that will "now be brought back to production". Unfortunately it is just not that easy. Many projects are played out or had serious metalurgical problems that closed them down. Many more have ownership issues. Other companies have picked up projects that are in proximity to producing mines or projects being drilled. Again beware of ownership issues in Mexico. The long mining history has left many previous owners and royalty holders in the wake. Mexico has very poor laws regarding how claims are ultimately handled. In addition, squatters have significant rights in Mexico. Suffice it to say that these claims will not surface until production begins. Anyone with a potential claim will allow a company to do all the drilling and improvements, then exert their claim. EXM has clear title to almost all of its projects. 3. Drilling is still the key to eventually mining. If a company is not drilling, they are suspect. Giribaldi is an example of a company with a big land package, near producing mines, that is not drilling. They are doing alot of aerial surveying with the "latest" high tech infrared cameras. They have "identified" gold on film. They are supported by Moriarty and others. But they are not turning a single drill bit. Nor do they have plans to drill this year. Sorry, but give me EXM with great projects and strong partners drilling holes in the ground. 4. Projects in Mexico tend to show very good reults from trenching and ground samles. Some of this is real geology, but some is a result of 400 years of mining. There are holes and old workings everywhere and it is not hard to find significant amounts of gold and silver in small quatities in trenches, ground samples and old veins. Again, only the drill bit can establish the resources to build a producing mine. 5. Much of the drilling that is going on is kind of a "pyramid scheme" of juniors joint venturing with other juniors. This may work in some cases, but will fail in most. The brokers are using these deals to promote new names, raise the drilling money and avoid dilution. Look very closely and you will see problems with many of the JV deals. TaraGold has some JV partners drilling and they are hyping the results. They fail to disclose, broadly, that some of their JV agreements have "back-in" rights for their partners. If the drilling is successful, they can buy out TGLD for a few million dollars. EXM has solid partners and excellent JV agreements. Let me be clear that the companies I mention here may have great projects and may be the next GRS or MFN. I dont know because they did not pass my initial "smell test" to warrant my due dilligence. There are hundreds of juniors and I simply can not look at them all. I had hoped that this correction would really start to seriously reallocate funds from the over-hyped to the serious contenders. Perhaps it has, I look for the cream to begin to rise in the next leg up. I consider EXM a serious contender.

[gabrielgray]

Good post. Thanks for taking the time to share those insights. It's a fact that questionable promotions in junior explorecos are a growing reality, and as the metals bull market heats up it will only get worse. No one should allow themselves to get caught up in speculative plays without making sure of the fundamentals. Mexico does indeed have a splotchy record on property rights. Even a

[coach247]

Hi Mrmrre! Nice post, and please allow me to add a couple of comments based on my personal opinions. I agree with what you have written about analysts, however I would also add that it is a grey zone in terms of how a company gains publicity. Most here would agree that promotion is a necessity for a junior mining stock. There are right ways and wrong ways to go about it however, and

[Kruzer70]

Sorry to be a wet blanket but I don't see the Bre-X link. Excessive Hype / Pump and Dump schemes are a completely different issue than the outright fraud perpetrated by the staff at Bre-X.

[Kruzer70]

The Bre-Ex project was in Indonesia. A foriegn land where this type of fraud could be perpetrated. I doubt you see any significant fraud from operators in the US or Canada. However, I think that it is possible that we are seeing problems begin to surface in Mexico with certain junior mining companies deceiving shareholders. Fraud is a hard thing to prove. But, clearly the market has lost its focus

[gabrielgray]

He's just referring to Area51--whoops, I mean Reservation18 and his inane obsession with David Walsh, or Joe Walsh, or Welsh Rarebit or whatever. I don't see any similarities to EXM either, but I've heard that schizophrenia is hard to treat.

[uedam]

Thank you for your well thought out post I agree with what (I asume) your premise was, that the next big scam is less likely to follow the BRE-Ex "salting" mode. 43-101 compliance goes some distance in preventing this type of fraud however, other areas you highlight seem particulalry pertinent especially the JV model - which is currently being emphasized buy just about every analyst

[mrmrre]

You are correct on all three points. I did not get into much detail about the JR/JR joint venture, but I have seen case after case that only makes sense for one company to avoid more stock dilution. Again, that is not always all bad as it still results in using "other peoples money" to drill. The problem is not all these companies have the staff and the experience to really drill in the

[mrmrre]

I totally agree with you Coach. Notice I did not say that I thought that Karl was neccessarily right on this topic of analysts. His background just will not allow him to play that game. He is patiently waiting for another writeup from Roulston. I kind of think that paying thousands for the report from eResearch still bothers him. I actually would prefer that he reconsider. Clearly there is a trade

[mrmrre]

This is just one of the reasons I feel the TSE, Venture or NASDAQ listing is important. It requires much more disclosure about title, title problems, JV agreement terms and financials. Any company that can not muster a TSE Venture listing is immediatley suspect in my boat.

[Revelation18]

Next week we can discuss MANY other interesting mining stories!( while investors wait for EXM D Drilling Results) Ontario Court Judge Patrick Sheppard found FORMER Golden Rule Resources President Glen Harper guilty of illegally selling $ 4 million worth of "Calgary-based" Golden Rule shares,when he was aware of undisclosed tests(which he deliberately withheld) that cast doubt on