Trey Wasser (III-D Capital) submits: Last week, Minefinder's (AMEX: MFN) released the drilling results from their 2006 program at their advanced stage gold and silver project in Chihuahua State, Mexico. The results were impressive and should translate into a significant upgrade for resources, reserves and production at Dolores. The new resource report is due out any day.

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!

The 2006 drilling program had four goals:

1. To convert inferred resources within the proposed pit to measured and indicated reserves.
2. To test near-pit inferred resources to extend the proposed pit.
3. To test areas outside the existing open pit and extend the mine life.
4. To test mineralization at depth and confirm the potential for underground mining at Dolores.

Drilling results of the inferred resources in and near the pit were very good. This should result in a significant upgrade to measured and indicated as well as a possible extension of the open pit. M&I resources are currently over 5.4MM gold equivalent ounces [GOE] while inferred resources represent additional 1.1MM GOE. Dolores reserves are about 60/40, gold to silver.

A new zone north of the pit that was previously drilled show significant results on three separate structures. Condemnation drilling to the east, west and south all produced results that will require more work. 2007 drilling locations will include all four areas.
Dolores is becoming "Mucho Grande"

While the open pit mine continues to expand, deep drilling at Dolores is what really got my attention. 2006 results almost insure that an underground mine will be constructed at the project. Gold intercepts at 400 to 550 meters occurring below the open pit were impressive not only in grade, but in width. These include widths of 48 to 104 meters averaging 6.1 gpt and 3.81 gpt (Aueq) respectively, with internal intervals grading 22 gpt over 4 meters. Smaller intervals of 2-4 meters were also intersected with grades as high as 1-2 ounces per ton. The Company is moving quickly into a feasibility study which includes a bulk cave and traditional underground mine plan.

But the good news does not stop there. With the underground mine, will come a mill and floatation system. The current mine plan, production and economics are based strictly on a heap leach operation with no mill. Annual production of about 200,000 GOE is based on recoveries rates of only 74% for gold and 51% for silver. The addition of the mill and floatation will enhance recoveries from the open pit on about half of the reserves. Metallurgical testing has shown that this process should yield gold recoveries of greater than 90%, and silver recoveries from 82% to 94%. This will add about 650,000 GOE of production to the current mine plan, a 23% increase. Add to this, the production from the underground mine plus the additional resource areas and Dolores may have just doubled in size.

With these enhanced recovery rates, cash costs could easily drop to under $200/GOE, adding even more leverage to the economics at Dolores.

If a mill and floatation system would have this impact on production, why not build the mill now?

The answer is that the deposit at Dolores is a combination of oxide and sulphide ores. The oxide material is lower grade and the silver recoveries would not be enhanced, at the mill, from the oxide ore. Rather than dilute shareholders with the expense of the mill, the plan is to leach the oxide ore first. Cash flow will be then be used to build the mill and the underground mine.

Yesterday, Coeur D'Alene (NYSE: CDE) announced a merger with Palmarejo [PJO:CVE] for $1.1B. Palmarejo has a "fast-tracked" project, near Dolores, that CDE clearly believes is going to be a world class asset. PJO is projecting production of 300,000 GOE starting in late 2008 from an open pit mine with a mill. With production on schedule to begin in Q4 2007, MFN is at least a year ahead in mine construction. The defined resource at Palmarejo is about 3MM GOE and is approximately 2/3rds silver. PJO has no proven reserves and no feasibility study to define cash costs. Dolores already has over 4MM GOE in proven/probable reserves and a bankable feasibility study. CDE is excited about the underground potential at Palmarejo, but very little drilling has been done at depth and grades are nowhere near those at Dolores.

Minefinders' current market cap is about $600MM. The stock remains extremely undervalued based on my matrix and Coeur D'Alene's.

Disclosure: The author is long MFN and considers it a core holding with a 12 month target of $18. He has no position in other stocks mentioned in this report.