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Malcolm Bucholtz B.Sc, MBA Analyst
Trading Note
May19, 2008

Columbia Metals (TSXv:COL) A Hidden Gem�.

Lluvia de Oro -Lives Again

Let's face it. The landscape of the current junior resource market is scattered with lower grade Copper-Gold deposits. Many of these stories have been looked at, mulled over, kicked about and unceremoniously cast aside. Among the hubris is a company called Columbia Metals. I recently ran into Columbia's CEO Chris Berlet at the Hard Assets Show in New York. As Chris started to tell me his story, my mind shifted into "metallurgy mode" and I quickly realized that Columbia Metals was an under-appreciated, mis-understood story that has not been marketed very well at all. In fact, Columbia Metals is a gem and those investors acquiring it right now at 15 cents a share are setting themselves up for some very good times ahead.

A quick visit to the Columbia Metals website will probably leave you wondering just what that guy at the Market Traders is talking about. How can a 15 cent stock get him so excited when the website does not adequately tell the story? Well, let's take a closer look and I will attempt to show you just why I am so excited about this story.

Columbia's flagship project - the Lluvia-Jojoba project-is located near Santa Ana, Mexico in Sonora State, just south of the US border with Arizona. The nearest border crossing is at Nogales, Arizona. This flagship property consists of the Lluvia de Oro gold mine and deposit plus a refurbished mill plus the La Jojoba deposit plus 5074 hectares of surrounding land. The 43-101 compliant resource right now on this project consists of 148,951 ozs gold in the measured category, 150,516 ozs gold in the indicated category (for a total of 299,467ozs) plus a further 215,100 ozs gold in the inferred category. The property also hosts copper mineralization and right now the contained Copper is pegged at 12,129,830 lbs at a 0.3g/t cutoff. 

Here is the Defining Difference

At this point, any similarities to other lower grade Copper-Gold deposits stops. You see, normally with a copper-gold type deposit, a mining company would use cyanide leaching. Because of the copper content in the gold bearing ore, high cyanide consumption, poor gold recovery and poor copper recovery would be the story of the day and the project would run into trouble. But, Chris Berlet and his team have taken steps to effectively re-write the textbook on how these lower grade deposits can be processed. Enter BioteQ Environmental (TSX:BQE). BioteQ is a Canadian based company that I first met back in 2004 in Bisbee, Arizona where it was busy working at the old waste rock pile associated with the Lavender Pit Copper Mine. BioteQ has now perfected the science of using sulfide generated from bacteria to remove copper mineralization from effluent and is now enjoying huge success with various joint venture projects around the world. Based on what I have seen from BioteQ, I say Columbia's joint venture with BioteQ is a stroke of genius. 

SART Process

The process that will be used to recover mineralization at the Columbia Metals project is known as the SART process. SART is an acronym for Sulphidization, Acidification, Recycling, Thickening (SART) and was developed through joint collaboration between Teck Corporation and SGS Lakefield Research in Canada back in the late 1990's, although variations of this process have been in use since the 1930's.

Without going into a chemistry lecture, what happens is:

Crushed and ground ore is exposed to a sodium cyanide solution which leaches out gold and if copper is present, leaches out copper as a copper cyanide complex. The resulting leached solution is passed through a CIL (Carbon in Leach) process to recover the gold. But, the creation of this copper cyanide complex results in an undue consumption of cyanide and a steep rise in processing costs which for a lower grade type deposit would hinder the project economics. Hence, if this copper cyanide complex can be dealt with to recover the copper and the cyanide, project economics will dramatically improve. This is where BioteQ comes in.

The resulting copper cyanide complex is exposed to sulfide ions (which are generated by the bacterial solution in the BioteQ process) in an acidic (pH <7) environment. Normally, the use of sulfide ions would come from sulfuric acid which is expensive, but the BioteQ process takes care of that. The resulting products are copper sulfate and hydrogen cyanide. The copper sulfate is sold to a nearby copper smelter for cash revenue and the cyanide is recycled back to the leaching part of the process to effectively save on operating costs. 

Production is Imminent

Right now, the finishing touches are being put on the SART plant and leaching of the ore pile is underway. In the next few weeks, expect to see a press release announcing that production has officially started. Once things get rolling, BioteQ will be taking 1/3 of gross cash flows until their capital expenditures have been paid back. Once BioteQ has recovered its capex, all gold production cash flow will belong to Columbia Metals. BioteQ will then simply receive on ongoing percentage of copper sales revenue. The exact formula shows that BioteQ will take 90% of the 1st million pounds of Copper, 80% of the 2nd million pounds, 70% of the 3million pounds and after 4 million pounds of Copper has been produced BioteQ and Columbia will share ongoing future Copper revenues on a 50/50 basis. 

Columbia - Do the Math

Columbia currently has 93 million basic shares outstanding. There are warrants and a convertible debenture with higher strike prices in play and if these ever do get exercised, the share structure will grow to something in the neighborhood of 122 million. With the shares trading in the $0.15 range, this gives Columbia a current market capitalization of about $14 million. I will be talking to Chris Berlet in the next short while to get some more detailed figures, but for now if we just focus on the 514,577 ounces of gold resource, we see that Columbia is valued at about $27 of market cap per ounce of gold resource in the ground. Relative to a peer group, Columbia is seriously undervalued. Now, add in the notion of a future share of copper revenues once BioteQ has been paid back on its capex and factor in the idea that the 5074 hectares of property that comprise the Lluvia-Jojoba project have multiple targets but have not been thoroughly explored in 10 years and it is fair to say that Columbia really is undervalued. 

Accumulate Columbia (TSXv: COL)

The SART process combined with the BioteQ expertise is going to re-write the mineral processing textbooks for lower grade Copper-Gold mineralization deposits in places like Mexico, South America and the south-eastern part of the USA which all host numerous examples of such deposits. Once Lluvia de Oro is up and running, I dare say we are going to see Columbia Metals move quickly to add to its project portfolio so as to ensure a brilliant future. At the Market Traders, we will be watching the Columbia story with great interest. We are initiating coverage of Columbia Metals with an "accumulate" rating on the stock. Use any market volatility and short term market weakness to start building your position in Columbia. Once cash flow starts to accrue, we feel you will be more than pleased that you started to build a position in Columbia Metals at the under-appreciated price of 15 cents a share. For further information, be sure to visit the Columbia website at www.columbiametals.ca.

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