After another lousy month for the mining stocks I think the tensions and stress level for some investors is creating some rough edges. I have put some thought into the merger deal overnight and wanted to post some points to consider, on why I am excited about this deal.

The issue with ECU is that junior mining stocks are a burning match. There is only so much share capital that can be issued and so much funding that can be generated while still maintaining a positive value bias for shareholders. Getting that mine back into operation was a gamble that cost a huge chunk of money and resulted in high dilution for the stock. If the mine had been able to generate strong profit margins that gamble would have paid off. However at best the new mill was running at break even. Once the stockpiled gold pyrite windfall had been cashed in, the company was back to being nearly broke and still having to deal with the overhang of debt. I think we were dead in the water.

I am not criticizing anyone for this. Mining is a tough business. The delays to get the metallurgy solved last year probably put a nail in the coffin. The market weakness and low premium that was paid across the sector for resources in the ground put a limit on the ability of ECU to raise additional funds at a reasonable offering price. In my opinion the stock was not going to be able to hold gains because the deep drilling was going to use up the last of the capital and the operations were not going to pay down the debt.

I tried to highlight some of these issues in December, and commented on some 'red flags' that were a concern to me. ECU made some great strides to resolve many of these issues but again the entire situation comes down to the reality of hard cash. The gamble was made to get the mine running and make some money FIRST, and then get on to further exploration. I support that decision. However the gamble did not pay off in terms of generating the revenue needed to run the company.

Here is the one fact that I think investors need to understand. I wrote a few months ago that I had concerns regarding the low grade of the throughput and the low recovery efficiency of the mill. There appears to be some improvement in the most recent financial statement and I commend the operating team for getting the most out of the conditions they were working under. However the problem is they are operating with their hands tied. To mine underground efficiently you drive an access tunnel parallel to the veins, as a drift. Then you run tunnels from the drift to access the vein and open mining points called stopes. As you mine, you extract ore from the stope and run that to surface through the drifts.

ECU could not afford to develop the mine access properly. They were drifting right into the vein itself and mucking out everything. This means you can only mine what is at the end of your tunnel, which means you do not have the volume of production enough to keep your mill running at capacity. It also means you end up with a lot of waste rock, since the access drifting must be several metres in height and width to allow room for heavy equipment to operate. All of that extra rock is mixed with the high grade, narrow ore veins, and the end result is a much lower grade running through your mill. You still have to treat all of that rock through the process of crushing, grinding, add reagents, etc. So your costs are up, your production is down, and you dont make enough money to pay off costs and get a profit.

THIS IS WHY ECU HAD TO FIND A PARTNER. Period. The company was going to run out of money, or do another financing that would have destroyed the creditibility of the stock. Even great drill results would have been wasted since the spike in share price would have been shorted down to nothing as investors understood there was no money left for more drilling.

I am very happy with our partner. We could have given up a big chunk of Velardena in a JV deal with ECU carried as a minority partner, and lost control of the project with nothing else to create value. This way we get an equal ownership in a much stronger company, gain access to several other excellent projects that will build further value, and have the cash in hand to go like gangbusters and make the Velardena mine work.

I think Velardena will be a successful and profitable mine. I think a new team with a clean slate and the money to get it going properly will realize the value of the project, and the market will award a premium that is more appropriate for a huge resource and long mine life.

Sorry for the long post.

cheers!

mike

PS: Scout is a good guy and no hard feelings.