In light of the significant decline in precious metal prices over the last several months, as previously announced the company has been reviewing its operations to identify any potential cost saving measures to better adapt to the new price environment. One of the review's key findings is that dilutive practices of mining contractors for ore production at Ying Mining District has contributed to head grade decline as reported in the previous two quarterly financial reports. The mining contractors at the Ying Mining Camps are paid based on tonnes of ore mined. To determine the amount of ore mined, ore-trucks were scale weighed at the gates of each tunnel. This review has revealed that some mining contractors however were blending waste rock from development tunnels with the ore to obtain higher mining fees, resulting in dilution of ores and reduction of head grades. This also caused an increase in operating costs as waste tonnage was shipped and milled. The company has taken immediate remedial action by modifying the method of calculating the actual amount of ore mined by contractors (the "New Method"). The New Method uses assayed grade to determine ore/waste contact and measured length, width, and height of ore bodies in each mining stope mined during the month plus allowed mining dilution (from 10% to 30%) to calculate the amount of ore to be extracted by the contractors. The ore will continue to be scale weighed at the gates of the tunnels, but only as a reference. In August, the company ordered the contractors to implement the New Method. As a result silver and lead head grades at the SGX mine improved by almost 35% and 21% respectively with an approximate 45% reduction in ore production (a 25% reduction in overall silver metal production) compared to July. The New Method has eliminated significant waste rock resulting in less ore being produced. Additionally, some drillers and miners left the mine sites as they feel that under the New Method their pay would be uncertain, which also caused reduced ore production. During this transition period the company expects that ore production with improved head grades may remain at a reduced level for one to two more quarters as the company is fully implementing the New Method. The company believes that this will lead to long term cost savings and improved head grades.
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