Malcolm Bucholtz B.Sc, MBA Analyst

Trading Note

Orsu Metals ( TSXv:OSU) was formed in June 2008 by way of the amalgamation of Lero Gold and European Minerals Corporation.

Since being formed in June 2008, Orsu's main focus has been ramping up operations at Varvarinskoye. Varvarinskoye is the first new mine to open in Kazakhstan since the nation became independent in 1991. President Nazerbayev has even visited the site several times in a show of his support. Here at www.themarkettraders.com we too have been watching this story with piqued interest as well.

You see, anytime a new mine goes into production, the entire mining industry – and thousands of investors - watch. Getting a mine into production can take a decade or more of exploration, development, financing, construction and so on. There are so many variables – commodity prices and the market for financing being the primary two – that can delay a new mine or even kill it. So it really is a big deal to see a mining project move forward.

With the project now starting to fire on all cylinders, the broad array of institutional and retail investors in Orsu (as well as many people in the mining industry) are all watching closely.

Orsu recently provided a progress update, and it appears the mine is on track to be in full production at the start of 2009. As usual, you have to read deep in the press release to get the salient points, which are:

-mining and milling is operating at 80% capacity

-mill throughput capacity has now increased by 17% from 4.2 million tons per year to 4.9 million tones per year

-forward hedge positions were recently bought back at a gold price which was close to the low for the 3rd quarter

- mill design has been improved and a low cost mill expansion program has begun that will eventually see gold production rise to 163,000 ounces annually. A $66M financing earlier this year means Orsu has a strong balance sheet to see this expansion program through to completion.

Orsu has produced 26,000 ounces of gold and 5,000,000 pounds of copper for revenue of $35 million in total so far during the operational ramp up. Orsu believes it can produce $200 million in sales revenue in 2009 (140,000 ounces and 40 million pounds of copper) with very low cost per ounce. If operational cash flow comes in at say, $100 million, that will equate to about 22 cents a share cash flow. The stock price of Orsu last week was 22 cents, or a paltry 1 x multiple to future projected cash flow. I hope you now understand why we follow this company

To underscore just how big a deal it is to see a mining project move ahead, all one need do is take a look back at the history of this particular project. Mineralization on this property was first discovered in the 1930's. A publicly traded entity in the 1990's advanced the project forward and even traded as high as $20 a share. But in the late 1990's as metal prices slumped into what many described as a nuclear winter for mining stocks, the share price of this entity collapsed to pennies. So when we say there are many variables that can affect a mining project, we really mean it.

The most recent efforts by European Minerals to advance this project against a backdrop of strong and improving metals prices also had its challenges and some would even say bad luck. Mid-way through mine construction, management had to change the construction contractor when it looked like the contractor was headed for financial problems. This put the entire project behind schedule by about 1 year. This delay meant that European Minerals would not be able to meet its hedge commitments (half of the first eight year's production, or 70,000 oz per year at $574/oz). So European Minerals had to merge with Lero Gold and that is how Orsu came into being.

As the junior mining sector recovers (and it will !!), Orsu will come to trade at a more substantial multiple to cash flow. Investors getting in now, or adding to current positions now will be sure to reap the rewards.

Varvarinskoye has arrived. 70 years after first being discovered. 14 years and two economic cycles after going public. The value is compelling. We are initiating coverage of Orsu with a strong buy rating. The junior sector will recover. In fact, we may now be seeing the bottom on many junior mining stocks. Take a hard look at Orsu and start building your position.