Excerpts from Trey Wasser's initial report on Geologix Explorations (GXEFX.PK), written on September 4, 2008:

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But, I just can’t get comfortable with KRY.

Perhaps the most important point that Mr. Bane brings up is regarding the copper. The fact that the KRY plan does not include processing the copper and their MOA does not even include the rights to mine copper. If they are not going to process the copper, what will they do with it? If the copper is left in the waste rock, the resulting AMD (acid mine drainage) could be a very serious environmental problem. This is one of the key differences from Brisas, where copper will be processed from the ore. If they have to change their mine plan to include processing the copper, not only could this cause an extended delay, it would open the door for the government to re-negotiate the MOA.

It appears that they are finding more ore just about everywhere they drill on the property. Even condemnation drilling outside the pit and at one of the leach pads gave indications of mineable, near surface ore. The leach pad just got larger and shareholders just got richer.

But the drill bits found much more!

Mexico is very mining friendly. They have reasonable environmental laws and are consistent in their assessments and permitting. Mexico’s long history of mining has produced a large labor force that is very talented. Labor costs are reasonable and foreign ownership of Mexican Mines is widely accepted. Social programs are helping to cement local relations and stimulate the economy. Several junior companies have recently discovered and are developing some very productive and profitable mines in Mexico.

One of my favorites is Gammon Lake Resources (GRS). Gammon Lake discovered a significant gold/silver deposit in the Ocampo District in 1998. Production at Ocampo began in 2006, and after a few problems with metallurgy, is now in full commercial production. What is especially impressive about GRS is that in only 8 years they went from initial discovery to becoming Mexico’s largest gold producer.

I first reported on Novagold during their takeover fight with Barrick (ABX). In the Novagold Empire, I covered some of the major power and logistic problems at Donlin Creek. There is no doubt that Donlin Creek is a world class asset. The problem is that the power does not exist in Western Alaska to develop a 1.4MM ounce/year mine. It will probably be a mine some day, but it will take at least 7 years to permit and build the power generation and transmission. Anyone who believes the tales of windmills and diesel generators to provide the 140MW of power, needed at DC, does not understand the logistics of this site.

Prior to the Spanish exploitation, Mexico’s rich mining history dated back as far as 950AD. The Totec and Mayan civilizations had huge mining operations. They were master craftsmen and are credited with being some of the first metallurgists; melting their gold, silver and copper and creating masterpieces that defined the term “precious metal”.

The majors are getting very selective in the partners and projects they choose. Most have an attractive portfolio of in-house projects. They are looking for large deposits and are willing to spend the money to find them. They have large staffs of seasoned geologist and engineers. They have access to the drilling rigs, equipment and labor. They have the experience of mine development, construction and operation that most juniors lack. They have valuable political and industry relationships in foreign countries. And most importantly, they have access to the capital needed to develop a mine.

I have been warning for months of the problems at Rackable Systems (RACK) regarding margin pressure, increased competition and insider sales. After a depressing Q4 conference call, I think we can add poor management execution and cascading street credibility to the problems at RACK.

While sales for the quarter were within guidance, earnings disappeared as gross margins dropped to19.8% vs. their 23-24% estimate in October. The Company blamed the margin miss on the following:

It also seemed that everything I read pointed to three dynamics for precious metal stocks in 2007.

1) Mine construction costs are escalating while the availability of equipment, supplies and labor are getting very tight. This is not only causing budgets to increase, but construction delays are becoming the norm, further straining project economics. While capital may be available, it is becoming increasingly difficult for junior mining companies to attract skilled workers and make the transition from explorer to producer.

The company is projecting a loss of $683,000 to a profit of $194,000, or a loss of 2 cents per share to a profit of a penny per share:

The well-known acronym for real estate investing is LOCATION, LOCATION, LOCATION. This also applies to the mining business. Large remote deposits can have serious developmental and operational problems. Environmental concerns seem to multiply in the wilderness. Infrastructure, access roads, power lines and ore transport can be very expensive. Construction cost increases and delays seem to be more prevalent in remote locations as Murphy’s Law always prevails.

On the other hand, the junior mining companies are using these studies as marketing tools to support their stock price. Unlike the majors who want a realistic conservative evaluation, the JMCs are generating studies that are primarily for public consumption. After the Bre-Ex scandal in 1997, which almost destroyed the Canadian Mining Industry, stock exchanges around the world instituted strict requirements for the valuation of mining assets. Canada set up parameters for drilling, metallurgy and reserve estimates with NI 43-101. Compliance also includes the disclosure of exclusions, project risks and cost estimates. Australia did the same with ValMin. The American Stock Exchange and the SEC set maximum metal prices at a 3-year average. All the exchanges required the public filing (within 45 days) of the study if any details are disseminated to the public.

Galore Creek is a huge copper/gold deposit high in the mountains that NG is trying to ‘fast track” into production by 2010. NG is actively seeking a joint venture partner to help shoulder the $2B capital costs to turn Galore Creek into producing mine. Unfortunately, Novagold is not alone. Several large in-situ projects owned or optioned by JMCs have opened data rooms to find partners. These include Northern Orion (NTO), Peru Copper (CUP), Northern Dynasty (NAK) and several others with projects that will require major mining partners with deep pockets.

All restricted shares were provided with “registration rights” through the IPO. There was a 180-day “lock-up” on all shares. After 180 days shareholders had the right to have 1/3 of their shares registered by the Company. Another 1/3 of their holdings have registration rights after 365 days.

The key to this purchase is the cash flow that it will generate to facilitate the development of some 1100 drilling sites in East Texas/Northern Louisiana. Most of those drilling locations came from the Winchester acquisition earlier this year.

By comparison, the Devon well that GMX is trying to emulate has flowed about 10Mmcfed for the first 45 days. GMX has a significant part of their 2007 cap-ex budget dedicated to horizontal drilling in the CV. Not only will more poor results strain their finances, it may raise other questions about their relatively small acreage position.

Goodrich Petroleum (GDP) will have results on their horizontal drilling in the next few weeks.

First, no news from CEO Doug Miller regarding the Company’s East Texas assets since the postponement of the MLP filing. However, Melissa Davis at theStreet.com and Harry Chernoff of Pathfinder have provided an update on the horizontal drilling activity in the Cotton Valley. According to Davis, Chernoff is a little put off with Comstock Resources (CRK) for not being more assertive with their acreage and developing a more aggressive horizontal drilling program. After all, companies like GMX Resources (GMXR) and Goodrich Petroleum (GDP) are commanding much higher multiples. Devon (DVN) is currently reporting great initial success in its first two Cotton Valley horizontal wells.

Chernoff insists that Comstock, with its huge acreage position should be selling other assets and changing their cap-ex budget to immediately start horizontal drilling in the Cotton Valley Trend. Clearly Chernoff is an analyst and not an oilman.

After a dismal third quarter that was a disappointment to every bullish analyst, the Company has promised big sales increases for Q4 and 2007.

Margins, however, will remain a challenge. RACK is competing for the top tier of Internet companies for the bulk of their business. These sales are becoming increasingly competitive as the “Rackable Advantage” in the low-end server/storage market continues to evaporate.

The Barrick offer expired midnight November 21st. They were tendered some 13.2 million shares, which would have made them Novagold’s largest shareholder. Barrick’s “best and final” offer has turned out to be “not so final” as they chose to extend it until December 6. It remains to be seen if $16 is indeed their “best” offer. The stock has continued to trade slightly above the offer price. It remains to be seen how many shares will be tendered after the new deadline. One would assume that there are substantially more shares in the hands of arbitrageurs, as this battle has raged on now for over four months. A controlling stake would be about 55MM shares. Will Barrick raise its bid to wrestle additional shares from the arbitrageurs? Do the arbitrageurs have enough shares for Barrick to gain control, even if the bid was raised?

• Accelerating activity in the Cotton Valley Trend as discussed on the recent XCO conference call.
• The recent breakouts of Goodrich Petroleum (GDP) and GMX Resources (GMXR) as clear indications of heightened interest surrounding horizontal drilling in the trend.
• The pipeline business is also seeing new activity and opportunities, as a result of recent drilling success and subsequent production increases.

A new report on the Cotton Valley Trend, issued by Harry Chernoff of Pathfinder, caught the eye of Melissa Davis at TheStreet.com last week.