Client Letter

Wistar Holt

Dear Clients,

The recent assault on gold/silver, as well as the major and junior mining stocks since Bear Stearns nearly went bankrupt (March 16, 2008) has been treacherous. During these six weeks, gold has declined from a high of $1033/oz. to a low of $850/oz., an 18% decline. Painfully, we remember the similar sharp decline from May 12, 2006 to October 6, 2006 when gold fell from $724/oz. to $560/oz., a 23% decline. Of course, this time around conditions for the U.S. economy are significantly worse with massive bank write-offs, the housing market near a depression, consumer spending down sharply, unemployment climbing sharply, food and energy prices soaring, and the U.S. dollar plummeting to new lows; all of this causing the Federal Reserve to do everything possible to stabilize the markets and the economy. Let there be no doubt; the rigging/suppression of the gold market, as well as the artificial support of the equity market are significant tools in the government’s desperate attempt to save this economy. Thank goodness for the foreigners (India, the Middle East, Turkey, Russia, Argentina, Korea, and China), for they will continue to buy all of the gold being dumped by Central and Bullion Banks throughout Europe and the U.S. Like others, this storm will pass; the metals will stabilize, and in all likelihood run to new highs as the rest of the world continues to convert unlimited printed, non-intrinsic-valued fiat U.S. paper money into the only rare and hard currency available, gold and silver.

Despite the decline in gold/silver prices, the exploration/developmental mining stocks have undergone a level of pressure which I would describe as ridiculous and absurd. Many of these stocks are now priced below levels of the past when gold was merely $500/oz. and silver only $9/oz. We are in the midst of an uncertain economic environment where not only have the metals declined, but a massive number of retail shareholders have chosen (or been forced by the Canadian brokerage firms) to sell stocks and close out margin positions. At the same time, institutional accounts have decided to maintain their cash positions and buy nothing. Thus, we have had steady selling of these smaller companies, with very little buying demand to offset the pressure. Adding insult to injury, retail investors will often sell, merely because a stock has declined, with little regard for the fundamentals of the company. In time, however, fundamentals will prevail and stocks will return to their efficient valuations.

Specifically, in the precious metal mining sector, this is even more likely to happen because the smaller companies become fodder for the larger miners who must replace millions of ounces of mined reserves year after year.

I’d like to reflect specifically on ECU Silver Mining Co., Inc., not only because it is our largest holding but because it has progressed further than most developmental and exploration companies in this sector. ECU recently reported 170 million silver-equivalent ounces in their 43-101 report, confirmed by the independent mining auditor, Micon and Associates. In addition, it was revealed that ECU has another 400 to 800 million silver equivalent ounces in the not-yet-proven “potential” category. Management will convert additional “potential” ounces to a resource category through additional drilling and lab testing. A milestone will be reached when ECU converts merely 10-15% (80 million) of the “potential” ounces. At this point, it will give ECU a total of 250 million silver-equivalent ounces, or 5 million gold-equivalent ounces (50:1 ratio). At this quantity of ore, major mining companies, hungry to replace their depleted resources, will begin to take a serious look at a company for acquisition or joint venture purposes. Of course, ECU will continue to convert additional “potential” ounces to the higher categories, enhancing the valuation even further. These silver-equivalent ounces only pertain to the precious metals gold and silver, whereas the base metals of copper, zinc, lead, etc. increase the overall quantity even more. With the annual meeting approaching in late June, 2008, I suspect management would very much like to reach this milestone by then.

Notwithstanding the depressed level that ECU’s stock currently trades, let’s examine the appropriate valuation and compare it to the current price. According to independent mining analysts, when the price of silver was as low as $12/oz., the industry assigned a valuation for “in-ground” (yet-to-be-mined) silver of $3/oz. Today, with silver significantly higher at $16+ (down from $21/oz. pre-Bear Stearns), this is a very conservative applied value. Thus, assigning a quantity of merely 170 million silver-equivalent ounces, ECU’s market cap should be $510 million. When the company reaches 250 million silver-equivalent ounces, the market cap of ECU would be fairly valued at $750 million.

Astonishingly, the inappropriate weakness in the stock has driven ECU’s market cap down to $349 million, 32% below fair value with no additional silver-equivalent ounces beyond the previously-confirmed 170 million. At 250 million silver-equivalent ounces, ECU market cap and share price should be 115% higher than it currently stands in this depressed environment. Beyond 250 million ounces, the valuation diversion gets even more ridiculous.

With 28 years’ experience in financial markets, I’ve seen numerous examples of inappropriately priced assets. Oftentimes assets are insanely overvalued, like tech stocks during the 2000-2003 tech bubble; sometimes they are ridiculously undervalued like major bank stocks (ironically) in 1990-91 when they traded below book value with 6-8% dividend yields. In time, patience is rewarded when an asset trades so cheaply. In the case of the mining companies, there is little doubt in my mind that we will prosper as we wait out the current downturn.

Wistar W. Holt

May 1, 2008