On February 17, 2009 Beacon Equity Research released this report about Tombstone Exploration Corp.


By Victor Sula, Ph.D. - Senior Analyst

Tombstone Exploration Corp. 
Rating: Speculative buy 
Price target: $0.44
Price 02/13/09:

Company Overview


Tombstone Exploration Corporation (TMBXF) is an exploration-stage mining company involved in the acquisition, exploration and development of precious and base metals properties. The Company primarily focuses on silver, gold, manganese, copper, lead, zinc, iron and other precious and rare earth metals. TMBXF has the mineral rights to approximately 11,500 acres located in Tombstone, Arizona, a known metal and mineral-rich area with a history of production. Its property claims encompass many well-known historical silver deposits such as San Pedro Group (Fox claims), State of Maine, Merrimac, Free Coinage, Chance, Bonanza, Santa Ana, Solstice, Ace-in-the-Hole, Black Horse, the Joseph group, Mamie, Sailor, Randolph, and Groundhog. The Company is currently the largest landholder in the Tombstone Mining District, an area which has produced ore valued at more than $85 million.

In 2007, the Company began an extensive drill program involving geological research, testing, and identification of key target areas and reserve categories. During the Phase 1 drill program, TMBXF identified a very rich mineral zone that potentially represents a significant precious and base metals discovery. The preliminary mineral inventory for the Tombstone project consisted of approximately 2.53 million tons at 141 grams/ton silver; 25,200 ounces of gold; 386,000 pounds of copper; 7.50 million pounds of lead and 1.25 million pounds of zinc. In addition, the drill program indicated 205 million pounds of manganese deposits. This inventory is from discoveries made on only 5% of the Company’s acreage; 95% remains unexplored. In 2009, the Company plans to extend its exploration and drilling program.

Investment Highlights


Business focused on precious/base metals exploration, development and mining 
TMBXF has the mineral rights to approximately 11,500 acres of historical mining land, consisting of over 300 contiguous mineral claims. The property includes eight structures that were prolific producers in the past: State of Maine, Bonanza-Solstice, Merrimac, Black Horse, Santa Ana, Mamie, Groundhog and Randolph.

The area’ss infrastructure is excellent with abundant water, energy, skilled man-power and excellent communications and transportation to support below average extraction costs. The project is easily accessible, located only 70 miles from Tucson and close to an international airport.

Past production from Tombstone mining district valued at $85 million 
The Company’s property portfolio is located in the historical Tombstone mining district and contains many historic mines with confirmed silver mineralization. The Tombstone mining district has produced ore valued at $85 million. Approximately 20 mines in the Eastern or Bunker Hill area contributed ore valued at $79 million, and a dozen mines in the Western or Mellgren area contributed ore valued at $6 million. Most of the Mellgren area veins are located on TMBXF property. At today’s prices, historic production from the Mellgren area would be valued at $194.5 million. In addition, historic production from these mines was minimal due to flooding encountered at 250 feet and drastically declining silver prices during the 1890’s. Operations were shut down decades ago, and most of these mines have been idle since the 1930s.

Drilling program has identified key target areas 
During the Phase 1 drill program, the Company identified a very rich mineral zone that may potentially represent a significant precious and base metals discovery. The preliminary mineral inventory for the Tombstone project included approximately 10.4 million ounces of silver; 25,200 ounces of gold; 386,000 pounds of copper; 7.5 million pounds of lead, 1.25 million pounds of zinc and an estimated 205 million pounds of manganese. Only 5% of the acreage has been explored so far in the drill program.

Value of discovered inventory approaches $400 million 
The results of 2007 and 2008 drilling campaigns were impressive and proved that the Company’s acreage has strong potential as a world-class silver deposit containing significant reserves amenable to both underground mining and open pit mining operations. The value of already identified mineral inventories approaches $400 million at current metals prices. Since only 5% of the lateral extent of the Tombstone acreage has been explored, and the deposit remains open at depth, the overall magnitude of the Tombstone project may be substantially higher.

Rising silver prices 
Higher prices for precious metals are enabling mining companies to profitably develop mineral resources that in a low-prices environment would not be economically viable. Silver prices have increased from $4.39 per ounce in 2001 to $13.38 in 2007. By March 2008, silver prices exceeded $20 an ounce for the first time since November 1980. Analysts expect silver will outperform gold in 2009 and that prices for both metals will exceed near record levels reached in 2008. In 2009, silver is expected to trade in a $11/oz to $18/oz range with some high spikes. According to RBC Capital Markets, the fundamental outlook for silver remains bullish for the next few years.

Business Model


TMBXF identifies, acquires, and develops proven mineral de¬posits in the United States. The Company is focused on silver and gold, as well as base metals such as copper, lead and zinc. In December 2006, the Company acquired full rights to certain mining and exploration claims located in Arizona, along with related equipment and property. TMBXF has the mineral rights to approximately 11,500 acres of historical mining land in an area near Tombstone, Arizona, consisting of over 300 contiguous mineral claims. The property includes eight structures that were significant ore producers in the past: State of Maine, Bonanza-Solstice, Merrimac, Black Horse, Santa Ana, Mamie, Groundhog and Randolph. The Company also intends to invest in rehabilitating old shafts and workings located on its properties to make them safe for renewed exploration and sampling.

TMBXF has spent the last few years laying the groundwork for a comprehensive exploration program. A drill campaign was planned for 23 core holes drilled from 15 distinct drill sites and designed to intercept extensions of the State of Maine mine, Bonanza-Solstice mines, Merrimac zone, and the Ace-in-the-Hole-Black Horse mine sub-parallel trends. The Company has made substantial progress over the last two years, with 15 drill holes totaling 3,051 meters (10,160 ft) already completed. Twelve of the 15 drill holes test the central zone of the Bonanza structure and three drill holes test the Ace-in-the Hole and Black Horse areas. Phase I drilling was done via reverse circulation and core diamond drilling, using HQ diameter and triple tube technology which yields recovery of over 90% in most instances.

TMBXF utilizes modern technologies from advanced geology, geophysical and geochemical sciences to minimize its exploration and production costs and enhance operating efficiency. The Company also uses work product and information derived from historic maps, reports, exploratory drill logs, geological study, radioactive rock samples, state organization reports, consultants and other exploratory information to guide its drilling efforts.

In addition, the Company has established relationships with mineral processing and consulting companies, refineries, assay companies and engineering firms to assist in designing its overall mining operations. TMBXF is also seeking joint venture partners to assist in exploring for precious and non-precious metals on its properties. The Company’s future plans call for two large scale mill sites once drill targets have been identified for key areas and production permits have been obtained.

Corporate Strategy
TMBXF`s strategy is to acquire and develop precious and base metals properties that either contain producing mines, have been the subject of geological exploration, or are known to contain proved mineral reserves. By focusing on known properties, the Company expects to be able to produce metals and minerals at below average extraction costs. In addition, the Company intends to selectively acquire properties with resources that can be tapped through production.

The Company`s strategy is summarized below:

- Expand target areas as drilling progresses and studies develop knowledge of properties;
- Acquire prospective mineral projects at various stages of exploration and development; 
- Continue geological analysis including mapping and identification of drill targets; 
- Utilize modern geophysical, drilling and engineering technologies; 
- Integrate the extraction of precious and base metals through the acquisition of new properties;
- Interface with Arizona state agencies to establish Tombstone as a significant contributor to the state economy; 
- Identify areas on the property for mill site operation; 
- Improve off-road access by working closely with the city of Tombstone; 
- Establish and leverage strong relationships with business partners 
- Initiate marketing discussions with domestic and international utilities; 
- Build well-financed, diversified exploration programs.



Tombstone Silver Project The Company has acquired a portfolio of exploration targets contained within four non-contiguous parcels, consisting of approximately 11,500 acres in the historical western Tombstone silver mining district of Arizona. The largest parcel is in the western part and contains many smaller historic mines with confirmed silver mineralization. The largest historic mines dating from the late 1800s and early 1900s are located east on the central part of the district. The project is easily accessible by paved roads and is located only 70 miles from Tucson and close to an international airport.

Historical mines such as State of Maine, Bonanza, Merrimac and Santa Ana had produced ore valued at over $6.0 million by the late 1930’s. Production from these mines was below expectations due to flooding problems at depths below 250 feet and falling silver prices in the 1890’s. Operations were halted and the mines were worked only sporadically. Most of these mines have been essentially idle since the 1930s.

Tombstone property and mines with historical production

Geology and Mineralization
The Tombstone district sits astride a regional Northeastern trending structure. This structure is visible on topographic maps as well as in satellite images of the American Southwest. It is a northeast trending rift structure or shear, traceable from southwest of the Huachuca Mountains of Arizona northeast to Silver City, New Mexico.

The principal trend of the mineralized structures in the Tombstone silver project area is northeasterly and dipping steeply to the northwest. These structures are complexly intersected by other mineralized structures that trend in different directions. Ore deposits occur in two styles: fracture-fill and strata-bound pod structures. The fracture-fill structures are actually deep-seated fracture/fault zones trending northeast. These are considered feeder conduits for the pod deposits, and represent the upper sector of the mineralization system. At the property, the fracture-fill deposits are the predominant ore bodies.

This structural trend of mineralization presents an area of exceptional exploration potential, with precious metals and base metals distributed along and adjacent to the structure. The property encompasses 10-12 mainly northeast trending structures of manganese oxides carrying strong silver mineralization with gold, lead, zinc and copper. In addition, silver mineralization occurs in certain areas as lensoid bodies of high grade ore suitable for bulk mining.

The majority of veins and mineralized structures within the Tombstone district and neighboring districts exhibit the same northeast alignment. In neighboring districts along the Northeast rift, silver and gold mineralization occur in igneous and sedimentary rocks, suggesting ore mineralization is pervasive and of considerable extent along this northeast trending, regional rift.

Drilling Program Results
In 2007-2008, the Company undertook an active drilling program which resulted in the identification of a very mineral rich zone. The table below summarizes the mineral inventory, grades and tonnages of the various mineral commodities of the Tombstone silver project at November 2008.




2.53 million of tons at 141 g/t (metric)


25,200 ounces


205 million pounds


7.50 million pounds


1.25 million pounds


386,000 pounds


In 2009, the Company plans to continue its aggressive exploration and drilling program.

Industry Outlook


The United States is the world’s largest user of mineral resources. Minerals are essential to the U.S. economy, contributing to the real gross domestic product (GDP) at several levels—mining, processing, and manufacturing of finished products. The estimated value of all mineral materials processed in the U.S. during 2006 totaled $542 billion or 10% more than in 2005 and 23% more than in 2004. Mineral materials processed domestically accounted for more than $575 billion of the U.S. economy in 2007.

The estimated value of U.S. metal mine production in 2006 was over $23.5 billion, or about 51% more than 2005. Principal contributors to the total value of mine production were copper (36%), gold (22%), iron ore (13%), molybdenum (13%), zinc (10%), and lead (3%). Metals with the largest increase in value of mine production were zinc (117%), copper (97%), palladium (65%), gold (68%), platinum (36%), and iron ore (31%) .

Silver Mining
Rising silver demand reflects investment interest in silver exchange traded funds (ETF) which were established in 2006 and modeled after the gold ETFs. Silver is also used in fabrication and industrial applications such as photography, X-ray films, electronics and circuit boards, electroplating, hardening bearings, mirrors, solar cells, catalytic converters and other uses. Consumption in industrial applications posted an impressive 7% gain in 2007 to 455.3 million ounces, the sixth consecutive year of growth in this category . Jewelry demand declined by less than 2% year-over-year to $163 million in 2007 despite large price increases.

Total global silver fabrication grew 1% in 2007 to 843.7 million ounces. Worldwide silver mine production rose by 4% that year, with particularly strong gains from Chile, China and Mexico. Total silver mine production was 670.6 million ounces. Silver is obtained as a by-product from processing and smelting copper, gold, and lead-zinc ores. These polymetallic deposits account for more than two-thirds of U.S. and world silver resources.

1. http://minerals.usgs.gov/minerals/pubs/mcs/2007/mcs2007.pdf
2. www.gfms.co.uk/Press%20Releases/WSS%202008%20Press%20Release.pdf

Silver World Mine Production, 2000-2007, metric tons. Source: U.S. Geological Survey, 2000-2007

Silver Mining in the United States
Silver mining in the United States began on a major scale with the discovery of the Comstock Lode in Nevada in 1858. The industry contracted significantly following the demonetization of silver in 1873, but silver mining continues on a smaller scale today.

The United States produced 1,220 metric tons of silver in 2007, or 35% of the silver it used. The remaining 65% was imported from Mexico, Canada, Peru, and Chile. Alaska continues to be the country’s leading silver-producing state, followed by Nevada. Thirty-six U.S. mines reported silver production in 2007. There are 21 refiners of commercial-grade silver, with an estimated total output of 3,000 tons from domestic and foreign ores and concentrates, and from old and new scrap.

U.S. silver industry, metric tons










- mine









- primary







- secondary




























Inventories, year-end







For the first six months of 2008, domestic mines produced 583,000 kilograms of silver, or 10% less than production in the first half of 2007.

Silver Prices 
Interest in silver mining has increased in recent years because of higher prices: average silver prices have increased from $4.39 per ounce in 2001 to $11.61 per ounce in 2006. Led by continued strong investor interest and industrial demand, silver prices climbed to $13.38 per ounce in 2007. On a percentage basis, silver’s price gain was stronger than that enjoyed by gold, platinum and palladium last year. By March 2008, silver had jumped above $20 an ounce for the first time since November 1980. However, since July 2008, silver prices have dropped after Wall Street’s collapse forced hedge funds and other institutional investors to dump holdings in precious metals to raise badly needed cash.

Analysts expect silver will outperform gold in 2009 and that prices for both metals will exceed the peak highs reached in 2008. The main reason is reduced base metal production (silver is a by-product) and suspension of exploration and development projects by large mining companies in an effort to control losses. In addition, new communications technologies that utilize silver are coming on-line with no apparent slowdown. In 2009, silver is expected to trade in a $11/oz to $18/oz range with some high spikes. According to RBC Capital Markets, fundamentals for silver should remains bullish for the next few years.

Manganese Mining
Most manganese (around 90% of global output) is used in the production of steel and iron, an application in which this metal is essential and has no real substitutes. Trends in manganese consumption reflect those of the global steel industry. Steel production rose on average 6% annually between 2000 and 2007. Steel demand was forecast to increase 7% in 2008 and 4-5% annually through 2015. Based on those forecasts, demand for manganese is expected to reach 18-19 million tons per year by 2015. 3.www.the-infoshop.com/study/ros59657-econo-manganese.html

Forecasts of manganese ore output (`000 million tons). Source: Metal Expert, www.metalexpert-group.com/

The United States does not produce manganese ore, but imports it instead from Gabon (65%), South Africa (19%), Australia (7%) and Ghana (2%). Manganese demand comes mainly from construction, machinery, and transportation applications, which account for about 24%, 10%, and 10% of demand, respectively, and accounted for $730 million of purchases in 2007. In the U.S., manganese ore is consumed mainly by eight firms with plants located in the East and Midwest. Most ore consumption is related to steel production, directly in pig iron manufacture and indirectly through upgrading ore to ferroalloys.

Manganese ore prices skyrocketed in 2007 as steel production grew 7%; manganese alloys supply was up 11% while demand was up 15%; manganese ore production capacity was down 1%; and the dollar depreciated. Ore supply is expected to remain tight until 2011–2012 and prices are expected to remain at historically high levels of $14-16/dry metric ton unit (dmtu).

At 3,547 tons, identifiable gold demand in 2007 was 4% higher than in 2006 . This was equivalent to a rise of 1/5 in dollar terms, which increased the value of demand 19% to $79.2 billion, a fourth successive annual record. The majority of gold is consumed by in jewelry manufacturing. The global jewelry market consumed 2,400 tons of gold in 2007, a 5% increase compared to 2006 and 22% higher in dollar terms, followed by identifiable investment of 657 tons for industrial applications and dental consumption of 4461 tons. Jewelry demand fell 11% in 2008 to its lowest level since 1989, while implied net investment grew by around 20% to over 200 tons in 2008. 

Mine production fell by 88 tons in 2008, the third consecutive year of decline. Declines were recorded in Indonesia, South Africa and Australia while gains were recorded in China and Russia. Output in the first half of 2009 is forecast to grow slightly .
4. www.gold.org/assets/file/pub_archive/pdf/GDT_Q4_2007.pdf
5. www.gfms.co.uk/Press%20Releases/UP208_overview.pdf

Gold Prices
Since August 2007, gold prices have steadily climbed to new records. Gold prices in 2007 averaged slightly less than $700 per ounce and represented an all-time high. By March, 2008, gold prices had surged nearly 20%, fueled by a weak dollar, record crude oil prices, production disruptions at a number of mining operations in South Africa, worries about the health of Wall Street banks and concerns over a faltering U.S. economy. Gold is seen as a safe haven against inflation and GDP outlook play a major role in determining gold prices.

Source: www.goldprices.com, price in $ per oz

In March 2008, gold prices hit $1,009 per ounce on the New York Mercantile Exchange before slipping back. The current turmoil in the financial markets is creating enormous confusion and demand for dollars is rising as investors head for cash, all of which is weighing on gold. GFMS analysts expect gold prices to reach new highs in the first half of 2009 as net investment surges. Overall, analysts expect the bulk of gold trading in 2009 to be within the $700/oz to $1,300/oz range .

6. www.scotiamocatta.com/prec/pdfs/GOLD_Forecast_2009.pdf

Financial Analysis


The Company is in the exploration stage and has yet to generate revenues from operations. TMBXF reported a $1.4 million net loss in 2007. The Company’s 2007 operating expenses consisted mainly of general and administrative expenses and accounting and legal fees related to reporting obligations under the Securities Exchange Act of 1934. We expect the Company’s operating expenses to increase in 2009 as it extends its exploration program for the Tombstone property.

chart missing

At December 31, 2007, TMBXF had cash of $252,718 and liabilities, consisting mainly of accounts payable and related party payables, totaling $122,199.

chart missing

Since its incorporation, the Company has financed its operations almost exclusively through the sale of common shares to investors. TMBXF is still primarily focused on exploration activities and is not likely to produce operating income or cash flow during 2009. Thus, the Company will require external financing and/or assistance from a joint venture partner to implement its 2009 drilling program.



The Company completed two drilling programs during the field sessions of 2007 and 2008, consisting of 15 drill holes totaling 3,051 meters (10,160 ft). Twelve of 15 drill holes tested the central zone of the Bonanza structure and three drill holes tested the Ace-in-the Hole and Black Horse structures.

Results of drill programs exploring about 5% of the lateral extent of the Tombstone acreage indicated very mineral-rich zones and a potentially major precious metals and base metals discovery. The mineral inventory includes some 2.53 million tons of 141 gram/ton Ag (silver), plus significant quantities of gold and base metals and a large manganese discovery.

The Company’s acreage has the signature of a world-class silver deposit. The value of the Company’s mineral inventories approaches $400 million at current metals prices. Since only 5% of the Tombstone acreage has been explored, the value of reserves not yet identified could be significantly greater.

Extraction costs are likely to be comparatively low, given the area’s excellent infrastructure with abundant water, energy, skilled man-power, communications and transportation. The Company is currently identifying targets for this year’s drill program expected to commence in Spring 2009.

TMBXF’s current properties are believed to contain mineral resources worth nearly $400 million at today’s metals prices. The Company’s $8.6 million market capitalization represents a fraction of the value of its mineral resources. In addition, the Company’s market value is well below that of other similar development-stage mining companies.

We assume the following in our valuation calculations:

Free Cash Flow margin – 25%
Additional investment required – $10 million
Commencement of large-scale mining – 2011
Years of operation - 15 years

We derive a future value for the Tombstone project of $29 million. Discounting this 2011 value target at a Weighted Average Cost of Capital of 15%, we obtain a fair value for TMBXF assets of $22 million, or $0.44/share, assuming 50 million fully diluted shares outstanding.

We believe our assumptions are conservative since the Company has explored only about 5% of its acreage. Encouraging results from the 2007-2008 drilling programs suggest TMBXF has a better-than-average likelihood of economic production. Moreover, strong metals prices create a favorable outlook for mining companies. We believe TMBXF is significantly undervalued at current share price levels and are initiating coverage of the Company with a Speculative Buy rating and a $0.44 price target. However, we strongly advise investors to consider the risk factors mentioned below since the Company faces many challenges in achieving its production targets.

Investment Risks


No assurance that properties contain commercially exploitable quantities of metals 
Despite the acquisition of mineral claims and rights, TMBXF has not established that any of its claims contain commercially exploitable mineral reserves. The search for valuable minerals as a business is extremely risky. The probability of any individual prospect having commercially exploitable mineral reserves is extremely remote. Additional challenges that may prevent the Company from discovering or developing reserves include, but are not limited to, unanticipated problems relating to exploration and additional costs and expenses that may exceed current estimates. Most of these factors are beyond the Company’s control, and any of these factors could make extraction of identified mineral resources unprofitable.

Volatility of mineral prices 
The markets for precious metals and other minerals are volatile and prices fluctuate widely. Metals prices are affected by numerous factors, including international economic and political trends, expectations of inflation, currency exchange fluctuations, interest rates and global or regional consumption patterns, speculative activities and increased production due to improved mining and production methods. Supply and demand for metals is affected by political events, economic conditions and production costs in major mineral-producing regions. Volatile metals prices may impact the Company’s ability to raise funds for its exploration and drilling program.

Lack of revenues and operating cash flows
TMBXF has not generated operating revenues in the last five years and will likely continue to incur operating losses until its mining properties are in commercial production. The Company has modest amounts of cash and will require outside financing for its 2009 drilling program. In addition, there is no assurance that the Company will be able to successfully explore and develop its mining properties. Failure to obtain additional financing could result in a delay or indefinite postponement of further exploration and development of the Company’s projects with the possible loss of such properties.

Limited operating history 
TMBXF has no operating history related to the acquisition and exploration of mineral properties. At this early stage in its mining operations, the Company faces risks, uncertainties, expenses and difficulties frequently encountered by companies at the start-up stage of their business development. Moreover, there is no historical track record for evaluating the success of the Company’s mining strategies and business model.



Alan Brown, President/Chief Financial Officer/Director
Prior to founding Tombstone Exploration Corp., Alan Brown spent many years investing in the development and success of Tombstone. He serves as both its President and Chief Financial Officer. Mr. Brown has an extensive background in financial accounting and is very experienced in corporate mergers & acquisitions, real estate acquisitions and real estate development. Prior to founding Tombstone, Mr. Brown was the Controller of a real estate development company involved in multi-million dollar projects. Mr. Brown spent several years working for a Chartered Accounting firm on Vancouver Island.

Scott Davis, V.P. Project Manager
From a 5th generation mining family in Tombstone, Arizona, Mr. Davis has been exposed to mining all of his life. He has over ten years experience in underground mining and worked as the cyanide recovery plant supervisor for PBR Minerals for three years. He has also built or assisted in building various small mills and plants. He worked for the State of Maine Mining Company assisting in the manufacturing of Merrill Crowe Cyanide precipitation plants. He holds an Associate’s Degree as an Environmental Facilities Technician, and has studied electrical controls, HVAC, and mechanical engineering. In addition, Mr. Davis has 15 years experience working with heavy equipment and has held numerous supervisory positions in the construction industry.

Francisco P. Montecinos, VP of Exploration
Mr. Montecinos has worked as an exploration geologist for over 40 years in some 20 countries, including Chile, the United States, Mexico, Central and South America countries and some of the Caribbean island countries. He has spent the last 25 years in North and Central America as a project manager and regional exploration manager for several multi-national mining companies including Glencairn Gold Corp., Montana Gold Corp., TVX and Intrepid Minerals Corp. In addition, he has worked for Codelco (Anaconda Mining Co.), Noranda, Homestake Mining Co., and MAPCO in porphyry copper, uranium and polymetallic deposits exploration and mining, open pit and underground mining. He has degrees from the University of Chile (M.S.-Science Geology), and University of California-Berkeley (Volcanology & Ore Deposits graduate studies). He has also completed studies at the Colorado School of Mines and Harvard University.

Simon Russell, VP of Corporate Development
Mr. Russell is a Magna Cum Laude graduate of the University of Arizona in Geological Engineering. He is also an alumnus of the New Mexico Institute of Mining and Technology, and studied at the Mackay School of Mines, University of Nevada, Reno. He has extensive experience in mine development.