Dear Dave,

Jim Puplava's view of the fate of gold juniors has depressed me. So, I'm hoping you can clarify how JP's response to my Q-call today is different from how you see things. It appears that JP doesn't see much up-side in the juniors for some time to come unless they get bought out before the "last phase of the cycle". (see the Q&A below).

My Q-call:

("Jim, Last week you mentioned that you were changing your gold stock strategy to where you are now investing more heavily in the precious metal producers and not in the lower cap "micros"... Jim, could you explain why the change?")

Today JP answered it on minute 28:33 of FSN's Q-line, last hour.

Here's what JP said:

("I think it's the dynamics of the market. And a lot of it is the credit cycle, and then also where I think the gold markets are going to go. In other words, if we're going to see the next lift off in the gold market, the companies that are going to have the wherewithal to produce at low cost are going to have the increasing cash flow, increasing margins, and also the market value to go out and buy things, and that's what going to make them a power house. And I think the concept in the early part of this cycle was the exploration stocks, you know they'd raise money, they'd drill and try to put ounces on the balance sheet, and the more ounces they put on the balance sheet, and you know over the two, three, four year cycle...very much like what happened to Minefinders, I think that's behind us.

I think before that is resurrected again, you're going to have to see a major increase in the price of metals and then at the late stage deposits eventually will get bought up. And then in the last phase of this cycle when things get really goofy again it'll rotate back to the small caps.")

Here is Dave Webb's paraphrased response:

I think Jim is correct. With the odd exception, the market will not pay for exploration any more. This is a temporary situation.

One significant exception is Canadian and possibly Australia exploration. Canada has flow through tax rules, and Australia is looking to implement them. Basically most countries have tax laws that allow exploration expenses to be deducted from income. Junior explorers however have no income from which to deduct these costs, no they allow certain qualified exploration expenditures (most basic exploration expenditures) to “flow through” or be transferred to investors or those who provided the funds for the exploration. Some provincial jurisdictions and to a lesser extent the federal government expand on “flow through deductions” allowing for a multiplier effect on some exploration expenses, or “super” flow through. Thus it is possible for an investor to buy $1,000 in flow through shares (ordinary shares purchased from a company with an undertaking that the money will only be spent on allowable exploration expenses AND that the company agrees to renounce these deductions to the individual investor), and receive $1,300 or even $1,600 in deductions on their income tax. At the highest income tax rate they may save $900 on a $1,000 investment. Essentially they are only risking $100.

I think developers will be able to get money, and I agree with Jim, they always could get bought out.

Tyhee accomplished many things in 2008, but most significantly we demonstrated the economic viability of the Yellowknife Gold Project (under certain conditions and assumptions). We then proceeded to increase our gold resource by 500,000 ounces, materially most in our additions in the Measured and Indicated categories. In fact, our current M&I gold resource at 1.85 million ounces is 15% bigger than the entire M, I, and Inferred resource considered in our Preliminary Assessment. That was our second goal; to demonstrate that we can add ounces quickly, cheaply and easily.

Tyhee is moving forward on the engineering and permitting. This is in keeping with our goal to become a producer, and as we move forward we are and will remain in the wheelhouse of what can and will be financed (or bought out as Jim points out). The key with gold as Peter Munk points out, is that in good times and bad times gold attracts investors (I would suggest there are some times when it is exceptionally cheap however). We are comfortable that we can move our Yellowknife Gold Project forward.

I have seen and lived through many examples of when market distortions lead to a virtual abandonment of investment in the exploration for one commodity or another. The markets accommodate that, and the recovery may take some time, but when it happens, it is always fast, furious, and exciting. The wholesale abandonment of mineral exploration will not happen, or if it happens it will be very short lived. Major companies cannot survive without the junior market. One way or another, the junior market will thrive. Its focus may jump from one commodity to another, but companies that can make the switch from explorer to producer can step off the merry-go-round and become much more.

Dave