first majestic silver

The Bluest of Blue Sky Potential

(An Analysis of New Guinea Gold)

October 13, 2003

As the bull market in gold proceeds, the market gradually turns its attention from large blue chip mining stocks, to second and third tier stocks and then to precious metal exploration stocks. It is at this stage that the market is now. Rewards from investing in a good exploration company can be fantastic. Up to one hundred times return or even more is possible. However, they are inherently more risky than an established mining company because they have no income from mining until they put a mine into production. A good drill result may attract media attention, but could turn out to be an isolated incident and uneconomical to mine. An exploration stock with proven ore bodies nearing production is far less risky and, yet, may still bring fantastic returns. I think I have found one of those that is likely to bring huge returns on investment.

Imagine a gold exploration company with its first planned production coming by the end of 2004. Imagine a company with, not just one, but seven, advanced stage and highly prospective properties. Four of these properties are along trend from world class gold mining projects and all of them have produced exciting results to date, most with at least some proven resources as well. There is absolutely no question that gold exists in substantial quantities in at least five of these sites. In fact, they all have the potential to be world-class gold projects containing multi-million gold ounce resources. The only major questions that remain are just how much gold there is and how soon these projects can be put into production. The seven properties have exploration and mining leases that cover a total of some 290 square kilometers of some of the most highly prospective land on earth. The company has almost no debt and has just completed an equity financing. And yet the market capitalization of this company's publicly traded shares at this date stands at something around 11 million Canadian dollars fully diluted. The name of this company is New Guinea Gold. (NGG on TSX Venture Exchange) Major shareholders are Macmin Silver and Goldcorp.

Papua New Guinea hosts several giant gold ore bodies: Lihir Island's 45 million ounce resource (Rio Tinto and others), Porgera's 25 million ounces (Placer Dome), Misima's 5 million ounces (Placer Dome), Morobe's 5 million ounces (Harmony) and others.

We first invested in NGG way back in April of 1999. Since then we have considered it to be the best investment we have, assuming the company would survive. Yes, during those dark days of the precious metals bear market and extreme price manipulation of gold and silver, many mining and exploration companies went out of business. Although we could see the fantastic blue sky potential of this company, we hesitated to recommend it to others without better assurances of its survival. Fortunately, NGG has survived by cutting their expenses down to the barest minimum and with the help of its major shareholder, Macmin Silver, Ltd. But, since 1999 this company has made major improvements. Macmin has increased their interest in New Guinea Gold and, in turn, New Guinea Gold has acquired Macmin Silver's wholly owned subsidiary, Macmin (PNG) Limited (Macmin (PNG) ), and has increased its holdings from two major properties to seven..

Conservatism is the key word of the management of this company. The company has lived very conservatively for the past several years, and so it has managed to keep its head above water. But as of two weeks ago, they have completed an equity financing through Canaccord Capital which, not only assures that the company will survive, but will allow them to proceed with their Business Plan. This plan involves putting a small part of three of these projects into production within the next three years or so. This will require another equity financing in the spring of 2004, but only in the amount of about 5 million Canadian dollars. With the rising share price and gold price, this future financing should be minimally dilutive. Management plans to put some high grade ore at all three sites into production first with an expected before tax earnings of approximately 36 million Canadian dollars over a period of four and a half years. (First production is expected in late 2004.) The proceeds will then finance further exploration and development on these properties . This plan will not only avoid diluting shareholders' interests in the company, but also will avoid taking on excessive debt. Note that the expected earnings for 2005 exceed the current market capitalization, fully diluted.

Before considering what the properties are like, let's consider a few points about how gold gets from deep within the earth to near the surface where it can be mined, and why, in the case of New Guinea Gold, it makes their properties so prospective and exciting.

Getting Gold Near the Earth's Surface

(Note: I am not a geologist. But my formal educational background lies in other sciences including physics and chemistry.) Gold is among the heaviest of the elements. In fact, the elements with atomic weights from 74 to 79 (tungsten, rhenium, osmium, iridium, platinum and gold respectively) are all very heavy with densities between 19.3 and 22.57 g/cm3 at 20o C. In the molten state within the mantle of the earth, beneath the earth's crust, these elements will tend to settle downward because their densities are higher than the elements that make up most of the mantle. Certain uplifting forces, however, can move gold, along with these other dense elements, toward the surface. Along the way, these heavier elements will also tend to be the first to be deposited as magma solidifies. So, the more upward forces involved, the closer these heavy elements and their compounds can get to the surface. Uplifting forces include upward moving magma in subduction zones (see picture below), in fracture zones, and in convection currents due to radioactive hot spots. In addition, high pressure hot springs can carry soluble compounds of these elements further upward.

Consider an example of a place where two, perhaps three, major uplifting forces resulted in huge gold deposits near surface. The Incas of South America, in what is present day Peru, were conquered by the Spaniards simply because they had so much gold. Why was there so much gold there?

Because the Incan emperors liked gold so much, the Incas' located their capital city, Cuzco, near where the highest concentrations of gold could be found. There is a subduction zone that runs the entire length of the western portion of the South American continent and results in the Andes Mountain Range. Numerous gold discoveries have been made throughout the length of the Andes. But under water off the coast of Peru, at almost right angles to that subduction zone, in the part of the ocean nearest to Cuzco is a geological structure known as the Nazca Ridge. The uplifting forces that produced that ridge also lifted gold to higher positions in the crust. As this ridge was subducted, further lifting forces then carried huge quantities of gold near the surface. Convection currents due to radioactive hot spots may have been involved in the original Nazca Ridge deposits as well. The mountains of gold ore found near Cuzco illustrate how effective these combined forces can be in getting gold near surface.

This brings us to the Feni Islands. These islands are right at the intersection of a fracture zone and an old subduction zone. Just as in the case of Incan Empire gold finds near Cuzco, 'X marks the spot' where the golden treasure is likely to be found. The fracture zone that created the island chain containing the Lihir and Feni islands produces a "gold corridor" with several major gold deposits, most notably on Lihir Island with some 45 million ounces proven resources. This combination of upward forces, in my opinion, means there is a strong possibility that the Feni Islands have as much or more gold than Lihir Island. More details about Feni and the other properties NGG has follows:

The Properties

A picture is worth a thousand words, so take a look at this map of Papua New Guinea from the New Guinea Gold website. First, notice the pink areas, the gold corridors, and the resources of major gold mining projects within those corridors. Then notice the seven NGG projects with their titles in blue color:

Let's examine some important details at these projects one at a time just to see what kind of true potential this company has.

The Feni Property

The Feni Project covers 37 square kilometers on two islands in the gold corridor between Lihir Island (45 million ounces of gold) and Bouganville (16 million ounces of gold). The mineralization there is geologically similar in grade, mineralogy, and alteration to the mineralization that was found on Lihir Island beforethe large scale deposit that Lihir is presently famous for was discovered. The best diamond drill hole intercept on Ambitle Island, the largest of the two islands, was from 68 meters in depth to 256.5 meters encountering an average of 1.2 g/t gold.and ending in plus one gram mineralization. The proven resources stand at 450,000 ounces of gold. However, an airborne radar survey suggests that the Kabang mineralization could be more than 1.5 km long and 0.5 km wide. With over forty known gold occurrences and anomalies on these islands, the prospect for finding a Lihir-like deposit is excellent.

NGG has found a joint venture partner, Vangold Resources Ltd. (VAN on CNDX), which can earn up to 75% of this project by continuing the exploration over the next three years. For details read the News Release dated 16 September 2003. For further information about Vangold Resources please readVangold Resources at 321gold.

The management at New Guinea Gold plans to put the three projects described next into production over the next three years or so. NGG's conservative approach is to start up three mining projects on auriferous (gold containing) oxide deposits, which are the easiest and least expensive to process. Each of these near surface deposits are found within much larger deposits that can be further developed from the cash generated from these startup projects. Total production is expected to be about 121,000 ozs. of gold over a period of four and a half years at a cash cost of CDN$240/oz (US$177/oz). These three projects will be at the Sinivit, Normanby and Sehulea properties. Gold grades at these three near term projects range from 4.5 to 7.3 g/t.

The Sinivit Property

Sinivit is in the northern portion of New Britain Island. This is the first project that NGG plans to operate on its own. The recent financing will allow the revising an outdated Sinivit Gold Project feasibility study. The initial open pit mine is expected to recover 50,000 oz. from gold oxides.

The mining lease and permits to begin mining for the Sinivit Project covers 355 hectares . However, the vein system is known to be some 26 km in length. So NGG also has the exploration leases covering an additional 43 square kilometers in the areas to the north and south of the mining lease along strike. This is a quartz telluride gold system with proven resources so far of 131,700 oz gold at an average grade of 5.05g/t gold. Typical drill intercepts included 22 m at 4.4 g/t; 14 m at 9.75 g/t, and 5.8 m at 13.54 g/t. Much of the mineralization starts at the surface including an approximately 100 ton bulk sample which assayed 14.1g/t over a width of 2.2m

The area is highly prospective, to say the least. Recent geological mapping has improved the understanding of the hydrothermal system responsible for the mineralization in the area. Three types of gold bearing sulphide targets are to be further explored. See the Business Plan for more details.

The Normanby Property

Now, if you thought Feni and Sinivit sounded good, check this out: The Normanby Project, on Normanby Island, is one of the three projects mentioned above that are going to be put into production over the next three years or so. The Normanby Prospect has several prospective areas, three of which are currently management's focus: Imwauna, the Knob and Wahola. The best results so far are at Imwauna and nearby at the Knob, where production is planned in the near future. Again, a gold bearing oxide system is to be worked first generating the cash needed to continue development. Normanby Island is in the Misima Corridor along strike from the Misima.

At Imwauna, a high grade vein swarm deposit has been discovered. It appears to be similar in size to the Misima project. Auriferous veins and gold disseminations have been discovered over 10 sqaure kilometets. Drill intercepts included 3.8m at 25.3 g/t, 7.2 m at 16.5 g/t and 1.4 m at 7.2 g/t. In the SW corner of the property, rock samples have yielded up to 5800 g/t (186 oz. per ton)

So far, 200,000 ozs in resources have been proven at 6.3 g/t gold equivalents (including some silver).

The initial open pit, vat leach mine is to recover 66,000 oz. over 18 months.

The picture below illustrates the size and near surface nature of many of the veins at Imwauna.

The Sehulea Property

This project, like the Normanby Project above, is also on Normanby Island. NGG recently acquired 100% of this prospective area. The Sehulea Property covers 30.5 square kilometers and includes the Weioko Prospect and the Gwamogwamo Prospect. Surface trenching results at Weioko have been pretty amazing ("Channel sampling results included: 164m of 3.96g/t gold (inc. 16m of 20.03g/t gold); 28m of 5.19g/t gold, 26m of 5.70g/t gold; 20m of 2.69g/t gold; 16m of 2.67g/t gold; and 12m of 3.02g/t gold."). Limited drilling has included drill intercepts of 1.5 m at 19.9 g/t, 46 m at 1.57 g/t and 72 m at 0.96 g/t..

Resources stand at 84,000 gold equivalent ounces oz at 1.5 g/t. The initial open pit heap leach production will recover about 60,000 oz. of gold.

The Crater Mountain Property

This property is along trend from and similar in geology to the 25 million ounce Porgera Mine. Minimal work has been done on the area so far, but drill results so far have revealed wide gold intersections in drill holes, such as 115m at 1.83g/t gold and 24m at 6.55g/t gold, within a 12 sq kilometer prospective area (known to be gold anomalous). Most is completely unexplored except for some surface geochemistry. NGG is looking for a joint venture partner or partners to develop this project and the remaining two below.

The Simuku Property

This property containing a copper and gold porphyry deposit on New Britain Island has a resource of 1 billion tonnes of 0.35% copper with small quantities of gold, silver and molybdenum present. Potential exists for finding higher grade copper and gold.

The Mt. Nakru Property

Mt. Nakru is also on New Britain Island. Preliminary results include 74 m of 0.78% copper and 0.8g/t gold. Trench values include 36 m at 2.54 g/t. Potential exists for finding a major copper-gold system.

Counting only 25% of the proven gold reserves at Feni and the gold reserves at Sinivit, and Normanby, and Sehulea, NGG has about 528,200 ounces of gold reserves. In the 1990's, the general rule of thumb for determining a gold mining company's fair value was that gold in the ground was worth about $100 Canadian per ounce. If the market capitalization was too far above that, the company was overvalued, and too far under that the company was undervalued. (Near surface, high grade, or oxidized deposits would increase the value.) Fully diluted, NGG would have about 44.8 million shares out. Based on the 1990's standard of valuation, NGG should be a $1.18 (Canadian) stock just on the very preliminary results in so far on just four properties. Remember, this does not include the vast mineralization in evidence around the proven ore bodies at Sinivit and Normanby. Nor does it include the fantastic potential at Feni. Nor does it include the copper-gold properties in the gold corridor on New Britain Island (Simuku and Mt. Nakru). Nor does it include the extraordinary potential of the Crater Mountain property in the Grasberg Porgera gold corridor. With seven great projects, NGG is very likely to end up with several million ounces of gold resources, if not tens of millions, and could be a medium sized gold producer within four to five years.

The bull market in gold is still young. And there are still a lot of great buys in gold mining stocks. But it is rare to find this kind of blue sky potential in any gold mining/exploration company.


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