Precious Metals Equity Research - Merrex Gold Inc.

Precious Metals Equity ResearchPhone No. 604-607-5348Email: gold@goldenbar.comMali Exploration Update: Papillon (PIR:ASX),IAMGOLD (IAG), Merrex Gold (MXI:TSXV)Wednesday July 31, 2013By Ed BugosThe news flow from the development of Mali’snewest up and coming gold district has beenpositive so far with,>> An “excellent” prefeasibility study completedby Papillon Resources (PIR:ASX) on its Fekoladeposit resulting in target upgrades and theaddition of those shares to Van Eck’s GDXJ ETF,which has allocated ~1.5% to it so far ;See: (http://www.vaneck.com/marketvectors/equity-etfs/gdxj/holdings/);>> A maiden resource estimate for IAMGOLD’s(IAG:NYSE) Boto gold discovery in Senegal,about 15km south of Papillon’s Fekola (on thesame structure), and lying just across the riverfrom strong geochem targets on its 50/50 Siribayajv shared with Merrex Gold (MXI:TSXV);>> The completion of about 5,300 meters ofdrilling on Merrex’s permits, mostly at the Kono-Tila geochem anomaly 10km east of Boto in Mali(the permits are shared with IAMGOLD (50/50));>> The increase in control of Merrex by its JVpartner IAMGOLD from 14.8% to 19.3%, bringingIAMGOLD’s interest to an important threshold.Exploration has stopped in this district for all threecompanies now due to the onset of rainy season(the river rises and makes it difficult to transportequipment). For Papillon it has ended for theyear. For IAMGOLD and Merrex much maydepend on the results they get from recent drilling.Papillon’s shares have seen a nice run from their60 cent low in June, registered just before theannouncement of its prefeasibility results, up tomore than A$1.10 recently on additional explorationnews (drill results from 102 holes) pointing to thepotential that Fekola is larger than the 4.2 million ozcurrently estimated. Included in these results werestep outs reinterpreted at depth to indicate,“…the potential for a high grade zonemarginally deeper than the end point ofthese previously drilled holes”, which were“highly successful with broad zones of highgrade mineralization intercepted.”Examples included one hole returning a 75-meterintercept grading 4.7 g/t starting from a down-holedepth of 306 meters, extending the deposit furtherdown dip. The drill results, along with all thosereported since the last resource estimate inPrecious Metals Equity ResearchPO Box 187, Sunwood Square, 3025 Lougheed Hwy –Unit #930, Coquitlam, BC, Canada V3B 652Email: gold@goldenbar.com; Phone: 604-607-5348

Phone No. 604-607-5348Email: gold@goldenbar.comJanuary, will contribute to an updatedresource estimate for the current quarter(Q3), and we are looking for a slightexpansion at depth and along strike –butperhaps leading to a larger increase in theglobal estimate than in the pit constrainedone, as a lot of what they are getting atdepth will probably require undergroundmining methods. What is apparent is thatFekola is typical of the deposits in thisregion. They all tend to be structurallycontrolled, north-north-west oriented,steeply dipping, and sometimes containinghigher grade and more shallow plungingpay shoots, and pretty much from surfacein oxides in the first couple hundred metersthen w/sulphides. And they mostly occuralong the Senegal-Mali shear zone –eitherdirectly off it or from a splay.According to a note I saw by geologistQuinton Hennigh, based on an interviewwith Papillon’s CEO Mark Connelly withwhom he worked at Newmont in a past life,“Fekola is one of several depositssituated along the north-southtrending Senagalo-Malian shearzone, a +100 kilometer long zoneof faults that served as conduitsfor gold-bearing fluids at the timeof formation. About 60 kilometersto the north of Fekola are two largedeposits belonging to Randgold:Gounkoto (5.4 million ounces) and Loulo(12.5 million ounces).”Papillon’s Fekola is near the south end of this longshear and a key inlier, with IAMGOLD and Merrexcontrolling essentially the southernmost andrelatively underexplored end, which only started togarner interest 5 years ago. Yet, it is geologicallyas prospective as any other part of the structure.With regard to the potential growth of Fekola,adds Hennigh,“Mr. Connelly presented geochem datafrom surface sampling along the structuralzone that clearly indicates several newtargets are emerging on Papillon’sground”, and “...it is not unreasonable toassume that there may be several moredeposits, each with potential for a fewhundred thousand to a million ounces,nearby. Other mines in the region tend tohave clusters of such deposits.”Indeed, some of those clusters already exist onIAMGOLD and Merrex Gold’s permits 10-20kmsouth and southeast of Fekola (see map above).Papillon is moving the Fekola deposit through adefinitive feasibility study and updated resourceestimate with a plan to put it into production soonafter – so we expect Connelly’s promotionalmachine to start up over here at around the timethe company goes to market for a financing.IAMGOLD yesterday announced its first resourceestimate for the Boto deposit in Senegal adjacentto its 50/50 Siribaya JV with Merrex Gold in Malijust across the faleme river.The company reported an indicated resource of1.14 million ounces averaging 1.6 g/t Au plusanother 81,000 ounces at a lower grade of about1.4 g/t. This is lukewarm, bordering on non news,for IAMGOLD, who has a ~3 million oz thresholdbefore something is taken seriously.We were expecting 2 million ounces plus.However, this may be very good news for MerrexGold (MXI:TSXV) who has a 50% interest in the2

Phone No. 604-607-5348 Email: gold@goldenbar.com605,000 ounce higher grade (2.3 g/t Au) Siribayadeposit about 20km east of IAMGOLD’s Botodiscovery in Senegal (IAMGOLD has the other50% interest).I have always argued that Merrex’s Siribayaproject (consisting of six separate and adjacentpermits as outlined in black above –all shared50/50 with IAMGOLD) is far more prospectivethan most of IAMGOLD’s other explorationprospects in West Africa, and at least asprospective as Papillon’s.Based on the geochem and other data that we’veseen, and what I know of the structures, I thinkthe 910 sq km Siribaya permit area representssome of the best exploration real estate in thedeveloping district south of Papillon’s Fekola...andI believe that IAMGOLD knows it.That could be one reason it agreed to increase itsstake in Merrex a week and a half ago.Another reason may be related to the fact that ithas been aggressively drilling two of Merrex’sseven best targets on the other side of the falemeriver (adjacent to its 100% owned Boto discoveryin Senegal) – results are due in August – andperhaps it likes what it sees so far. The gold isnot easily visible, but they might have a sense ofwhether they are drilling into the right material.Let’s just say that if it were wrong maybe theincrease in control wouldn’t have occurred.Either way, given that Boto came in underexpectations (I speculate), the exploration team atIAMGOLD is going to be highly motivated to provesomething up in the region. If they need 3 millionounces, and they have 1.2 million at Boto plus605,000 at Siribaya, all they need is another 1.2 orso...i.e. just two more ore bodies like Siribaya.I’m confident they can do that along the mainSiribaya megastructure alone –without testing theseven geochem targets that are the goal of thisseason’s exploration. So it is possible that theweaker than expected outcome for Boto increasesthe value of Siribaya, especially if those targets onMerrex’s ground can help IMG get over the goalline (3Moz +) in the district.Apart from IAMGOLD’s debt settlement at 6 centsannounced recently, which frees up some workingcapital for Merrex, Merrex’s previously announcedfinancing has been postponed until the results areout, assuming they are good, or until better marketconditions if they are not.Conclusions and RecommendationsMy belief is that Papillon may already be inplay. Someone may be ready to take a run at it –

Phone No. 604-607-5348 Email: gold@goldenbar.comAnglo, Randgold, IAMGOLD, or one of a bunch ofother companies –based on how it’s been trading.Fekola is clearly a very robust project and can beacquired at a serious discount in this market.The market is giving it a value at around $70 perounce, which is reasonable in this market.But our target for the stock is AUD 2-3 per share,this year, which is at least a double, if we are rightabout: the fundamentals, the ability of Connelly topromote the story, or if someone buys them out.IAMGOLD is a buy just as a decently valued midtier gold producer. It is the lowest risk of the threefor exposure to the district. Plus it pays a 4.7%dividend, and is sitting on almost $1 billion inworking capital. It has capex needs so thedividend could always get reduced if they arepressing. However it has a strong balance sheetand has recently filed a shelf prospectussuggesting that it is going to raise some capitalover the next little while. So unless gold goessignificantly lower I don’t see very much risk to thedividend other than the company trying tonormalize it with the sector.At the speculative end, where you get the highestrisk-reward, my concern as an investor andadvisor in Merrex Gold, currently sporting lessthan $10 million in market cap, is that it may getgobbled up too cheaply because the market isasleep. That is after all how IAMGOLD acquiredOrezone after the 2008 crash. They bought it foraround $280 million, or about $56 per ounce.Was that a good deal?Consider the fact that in 2012 IMG made $292million in “profit” from the acquired Essakane minealone, in addition to about $324 million in2011. The mine contributes half the company’soperating earnings. The company is worth $2 bnin market cap. You do the math.share of the known ounces at about $23 perounce with nothing attributed to the furtherexploration potential of its permits.In light of developments in this district, and shareprices, we have to continue to rate Merrex as anoutstanding buy for our speculative capital.So that was a good strategy.They gotta know they have another suchopportunity facing them right now with Papillonand Merrex.But would they buy Merrex??I think if they get good drill results, the answer hasto be yes.Certainly it benefits someone to consolidate theounces in this region in order to take advantage ofthe economies.At 5 cents the market is valuing Merrex’s 50%

Phone No. 604-607-5348 Email: gold@goldenbar.comEdmond J BugosMr. Bugos has been a dedicated investment professionalsince 1989, initially performing as a financial advisor, thenstockbroker and futures trader during the nineties -with afocus on exploration and venture finance. Although not ageologist, he was mentored by one of the best exploration,venture, and mining analysts in the industry throughoutthe nineties at one of Vancouver's leading brokerage firms.Ed left the brokerage industry in 2000 warning his clientsthat the tech bubble would burst, and lead to a secular bullmarket in gold, a collapse in the dollar, and a repeat of the1970’s style stagflation in the decades ahead.Building on a reputation for putting clients first, Mr.Bugos launched The Goldenbar Report: a subscription driven gold and currency digest that published arelatively broad based asset allocation returning over 20% per year from 2001-06 without a down year.Since the late nineties, Mr. Bugos has been a prolific writer and vociferous proponent of an investmentstrategy modeled after the hard assets theme –with special focus on the gold story…the story of the fall of aglobal empire, and currency; indeed, of a very precarious and government supported financial system.He has written about this story since Y2K, throughout the subsequent bubbles in tech, real estate, and somecommodity prices. All along, the gold story percolated in the background as a stealth bull market, at leastuntil the 2008 crisis when it came out into the open.Ed’s allocation has historically recommended investment weightings of between 25 and 50 percent inphysical gold and/or other commodities (not using leverage) at various times over the last decade, andcurrently recommends about a 30% weighting in gold/silver/platinum, a 10% short position against the 10yrUS government note, and the rest allocated between gold stocks and other equity/commodity sectors.Since 2009, Mr. Bugos has been the CEO of his own independent research company (Precious MetalsEquity Research), which sells research to small and medium sized broker-dealers, and other providers offinancial content. Mr. Bugos is also the senior analyst and partner at The Dollar Vigilante, a newsletteraimed at helping investors survive the eventual collapse of the dollar system, and of American freedom.His equity research is currently focused on the precious metals exploration and mining sectors, as well asbase metals and rare earth mining/exploration (including uranium but not oil & gas). Using a model forevaluating exploration risk and early stage assets, Mr. Bugos tries to identify value across all the relevantsegments in the resource sector. Ed’s economic research is focused on macro asset trends with a focus onmoney supply analysis. He is a student of the Austrian School of economics, and a self-taught economist.Research Disclosures: The research analyst(s) who is primarily responsible for this research and whosename is listed on the front cover certifies that: (1) all of the views expressed in this research accurately reflecthis personal views about any and all of the subject securities or issuers; (2) the author may hold positions incertain securities mentioned; (3) the author of this report may offer advisory services on a private and subadvisorylevel; and (4) the author may have sell-side or advisory relationships with some of the companiescovered – but where this is the case or where conflicts may exist the author will disclose it. In general,information contained in this report is obtained from sources believed to be reliable, but its accuracy cannotbe guaranteed. The information contained in such publications is not intended to constitute individualinvestment advice and is not designed to meet your personal financial situation. The opinions expressed insuch publications are those of the publisher and are subject to change without notice. The information insuch publications may become outdated and there is no obligation to update any such information.