ECU SILVER MINING – STILL AN EXTRAORDINARY OPPORTUNITY

Adrian Douglas

Exactly three years ago in October 2006 I wrote an in-depth article on ECU entitled “ECU Silver Mining – An Extraordinary Junior Mining Company” and you can read the article here. An update to the article was written in July 2008 which you can find here.

The theme of the articles was to demonstrate how out of the ordinary, indeed, “extraordinary” ECU Silver Mining Company was compared to its peer junior mining companies and how undervalued it was. What is truly extraordinary is that three years later the fundamental value of the company has increased dramatically yet it is trading at 28% of its very under-valued price of 2006! They say opportunity never knocks twice but in my view not only is the ECU opportunity knocking for a second time but it is an even better opportunity than the first time it knocked!

After an interview with Michel Roy, CEO of ECU Silver Mining I would like to review some of the changes from 2006 to 2009 to demonstrate what an extraordinary opportunity ECU still presents for investors.

43-101 Compliant Resource Inventory

In October 2006 the Measured, Indicated and Inferred resources stood at 100 Million ounces of silver equivalent. It now stands at 431 Million ozs, an increase of 331%

In 2006 the potential category was 33-55 Million ozs silver equivalent, today it is 570-930 Million ozs of silver equivalent, an increase of 1,590%. It should be noted that the criteria now used makes the potential category not too far away from being able to be upgraded to become “inferred” resources.

Production

In 2007-2008 the company diverted most of its efforts away from production toward exploration. Its small production facility was mainly used as a pilot plant to experiment and fine tune laboratory testing in order to determine the ideal processing procedures and to make small scale tests for bulk mining.

In 2006 the company produced 678 ozs of gold and 304,486 ozs of silver during the year. This gives a monthly average of 57 ozs of gold and 25,373 ozs of silver. This equates to 38,400 ozs of silver equivalent on average per month.

The company re-purchased an oxide mill earlier this year, which it had sold to Hecla in 2001. It was able to get this plant up and running very quickly. In 2006 the company was only mining sulfides and the output from the sulfide mill was concentrates which needed to be further processed by a third party smelter to extract base metals and precious metals. The smelting costs were high and reduced the operational profit. The oxide mill produces dore bars of high gold and silver content that can be sold directly to a refiner with no requirement for smelting.

ECU has been ramping up the new oxide mill and trying to optimize the recoveries. In September the company produced 702 ozs of gold and 13,744 ozs of silver. That equates to 61,100 ozs of silver equivalent, an increase of 60% over the average for 2006.

The mineral material being processed has increased from an average of 210 tpd in 2006 to 530 tpd in October 2009, an increase of 152%.

The company continues to expand the throughput of the mill and to make improvements in metal recoveries. Currently there are 29 mining crews operating in the mine and this will shortly be increased to 39.

Profitability

In Q4 2006 the company reported a net loss of $7.6 Million. It should be noted that Q2 2006 was the first ever profitable quarter for the company. It is highly likely that Q4 2009 will be profitable for the company. Looking at the projected expansion of production the company should be able to generate profit margins well in excess of 30% in 2010 without factoring in any increase in the costs of precious metals.

It should be noted the extraordinary difference between ECU and most of the junior explorers. ECU has resources of 431 Mozs with a potential to exceed 1.3 Billion ozs. For most other juniors when such a resource is proved up they would need to invest $500 million dollars or more to construct a mine. The ECU properties have existing mines in place that were acquired from the previous owners and the exploratory work has been to successfully discover and define more mineral material both laterally and at depth. These additional mineral resources are accessible and able to be mined by expansion of the current mine infrastructure. Most junior explorers have to assume large debt burdens to take a discovery to production and it typically takes years to reach profitable production. ECU has less than $25 Million in long and short term debt and is in a strong position to deliver free cash flow to fund its expansion and growth!

Mineralized Systems

Up until 2006 ECU resources were contained in thin mineralized veins that did not lend themselves to bulk mining. But the discovery of a massive “mineralized corridor” comprised of mineralized stockwork zones has opened up the potential for bulk mining which could transform the company’s production capacity leading to much higher revenues and profits. The company is finalizing a scoping study in this regard.

Sustainability

In 2006 ECU was establishing a large mineral resource but was spending cash to do so. When the credit crisis hit in 2008 the company changed its focus. It aggressively switched from exploration to production. The company is now generating more revenue than its costs and does not plan to dilute its shareholdings by any equity financing. It plans to grow organically and fund its future exploration and development from operational profits. This gives the company a significant differentiation from its peers, most of which depend on debt or equity financing for sustaining their operations.

Metals Prices

In October 2006 the gold price was $600/oz while in October 2009 it is $1050/oz, an increase of 75%.

In October 2006 the silver price was $11.90/oz while in October 2009 it is $17.5/oz, an increase of 47%.

Exploration Potential

In October 2006 there was a strong geological model that suggested that the massive sulfides in two deep skarns could be the source of the mineralization that is found in the shallower vein systems throughout Velardena. In 2008 some drilling was performed to test the model. Two very large intercepts were made of high grades:

· 3.66 g/t Au, 295 g/t Ag, 7.87% Pb and 12.07% Zn over core length of 12.04 metres (40 feet).

· 7.90 g/t Au, 550 g/t Ag, 11.25% Pb and 27.68% Zn over core length of 1.75 metres (6 feet).

You can read the press release here. Unfortunately due to a depth capacity limitation the drilling equipment was unable to cross the entire target zones. The size and grades of these intercepts suggests that some astonishingly large and high grade resources are lying at depth. These grades and widths are like nothing found anywhere else on the property! The assays revealed silver and gold content was increasing with depth. While more exploration work is required the chances of making a major high grade discovery that has long been postulated to be the biggest exploration jewel of the Velardeña property have significantly increased since my article of October 2006.

ECU Stock

In October 2006 there were 213 Million shares outstanding while to date there are 283 Million, an increase of 33%.

In October 2006 ECU was trading at C$2.65 while currently it is C$0.75.

In October 2006 ECU was selling for C$5.6 for each ounce of measured, indicated and inferred (MI & I) silver in the ground; that equates to 42% of the above ground spot price of silver. Today it is selling for C$0.49 for each ounce of measured, indicated and inferred (MI & I) silver in the ground; that equates to 3% of the above ground spot price of silver!

Extraordinarily Undervalued!

When all the characteristics of ECU are taken into consideration it appears to be extraordinarily undervalued:

- ECU is operating in Mexico which has a low political risk and is traditionally mining friendly

- Very competent and experienced management for both exploration and production activities

- A massive increase of M.I. & I resources to 431 million ozs silver equivalent has been achieved

- Almost 1 billion ozs of silver equivalent is logged in the “potential” resource category

- Daily mineral processing has increased by 152% and is still being ramped up

- Recovery of metals from the feedstock has been optimized

- Oxide mill output is dore bars that eliminate any need for high cost smelting

- ECU is now generating revenues that are significantly above the operating costs bringing sustainability to the company to expand and grow without equity dilution or taking on new debt

- Total debt burden is less than 25 million dollars

- Possibility to move to bulk mining in the future pending conclusions of a scoping study that is nearing completion

- Still the opportunity for a “bonanza” high grade discovery in the deep massive sulfides as the source of higher level mineralization

- The company is selling for US47 cents/oz of M.I. & I silver in the ground! Traditional valuation of mining companies when silver was around $12/oz was in the range $2-$4 per oz in the ground

When all the progress that has been achieved by ECU since my article exactly three years ago is considered it is unbelievable that the stock is trading 72% less than it was then! As the precious metal bull market gets into full gear investors will come pouring into the junior mining sector like a modern day gold rush. They will be hunting out companies like ECU that are priced at bargain basement levels with a very low risk profile. This extraordinary opportunity may not last for very much longer because markets over time price all things in line with their value. For the time being though ECU is an extraordinary junior mining company that is extraordinarily cheap!

Adrian Douglas

October 18, 2009

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For full disclosure I am pleased to say that I am a long standing share holder of ECU. This article has not been commissioned by ECU and I have not, nor will I, receive any compensation for writing it. Mineral exploration is a tough business with many risks involved; please factor your own risk tolerance into any investment decisions.