Malcolm Bucholtz B.Sc, MBA Analyst

Trading Note

In these tough, challenging markets, Arian Silver continues to forge ahead and continues to keep its nose to the grindstone. Over the past couple months, Arian has issued preliminary inferred resource estimates for its San Jose project and also for its Tepal project. For regular visitors to this site, you will know that these projects are located in Mexico. Problem is, with the negative sentiments swirling about in the markets I think the greater meaning of these resource estimates has been lost. So, let's take a closer look shall we…..

The preliminary inferred resource estimate at the Tepal property shows: 1.18 Million ounces Gold (grading 0.47 g/tonne) and 421 Million pounds Copper (grading 0.24 g/tonne). This estimate is based on the historical data from Tepal plus an additional 23 holes drilled by Arian.

The San Jose preliminary resource calculation shows 27.7 Million ounces Silver, 64.6 Million pounds Lead and 147.5 Million pounds of Zinc.

So, the question now becomes one of assigning some value to these resource estimates. I am going to resort to my usual "back of the envelope" calculations that are fast becoming a trademark here at the SuperCycle Report. Let me stress one more time that these calculations really are "back of the envelope" and are not based on any detailed scientific or engineering number crunching. However, they have yet to steer me wrong as a very basic method of determining whether a stock is overvalued or undervalued.

For starters, Arian's resource estimates fall into the inferred category. So, let's assume that 80% of what is stated in the inferred category will eventually end up in the proven category. This leaves us with:

1.18 Million oz Gold x 0.80=944,000 ozs

421 Million lbs Copper x 0.80 = 336.8 M lbs

27.7 Million ozs Silver x0.80 = 22.1 M ozs

64.6 Million lbs Lead x0.80=51.7 M lbs

147.5 M lbs Zinc x0.80 = 118 M lbs

Some deep digging helped me find a Technical Report for the Tepal property. It turns out that back in 1994 when Teck Cominco was seriously looking at the Tepal property, it did a series of metallurgical studies on a bulk sample of ore. These tests showed that using flotation techniques, 89.9% of Copper could be recovered as could 79% of Gold. I also found a Technical Report on San Jose and there was a fragment of data in the report that suggested a flotation recovery technique could recover 70% of the resource.

So, applying these recovery rates, tells me the following would be recoverable:

746,000 ounces Gold

303 Million pounds Copper

15.5 Million ozs Silver

36.2 Million pounds Lead

82.6 Million pounds Zinc

Now, let's suppose I wanted to buy these properties from Arian Silver right here and right now. I would have to spend the capital dollars to build a mine and milling complex on each property and assume all the risks associated. That being said, I will offer Arian Silver a nominal amount of money for what I have calculated above as being the recoverable economic resource. I will apply a value of $60 per ounce of Gold, $0.06 per pound of Copper, $1.50 per ounce of Silver, $0.10 per pound of Lead and $0.10 per pound of Zinc. At these rates, I would pay Arian a total of about $95 million.

Right now Arian has 131 million shares outstanding. Expressing my offer as a per-share value yields $0.72 per share.

I am going to stop here as I have built in a lot of rough assumptions. The whole point of these "back of the envelope" calculations is to determine if a stock is undervalued or not. In the case of Arian Silver we see that at current prices in the 20 cent range, it is undervalued when compared to the economic potential it is sitting on at Tepal and San Jose. These rough calculations show that a share price of something closer to $0.72 is where Arian should be trading.

In a press release issued last week, Arian is now indicating it focused intently on the San Jose property. An internal scoping study has now been initiated to evaluate the economics for a 500 tonne per day contract mining and custom milling of some of the stopes at the existing underground mine workings at San Jose. Discussions are now ongoing with local mining and milling operators and the various permitting applications are being processed.

The cash flow from such a contract mining operation would allow Arian to press ahead to develop the bigger potential of San Jose.

Arian Silver may be down, but it is not out. As the expression goes, you can beat me but you cannot break me. Here at The Market Traders we maintain our STRONG BUY rating on the stock. For further information, be sure to visit the Arian website at www.ariansilver.com

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