MACDONALD MINES EXPLORATION LTD. · Independent Equity Research Corp., 130 Adelaide Street W.,...

Independent Equity Research Corp., 130 Adelaide Street W., Suite 2215, Toronto, Ontario, Canada M5H 3P5 www.eresearch.ca

Initiating Report February 22, 2008

MACDONALD MINES EXPLORATION LTD. ($0.455; BMK-TSX-V)

Data Source: www.BigCharts.com

Recommendation

Speculative Buy

Risk

High

Target Price

1-Year: $1.35 3-Year: $3.50

Price (Feb. 21)

$0.455

52-Week Range

$1.32-$0.06

Potential Return

1 Year: 3.0x3 Year: 7.7x

Shares O/S

137 million

Market Cap

$62.3 million

Average Daily Volume

20-day: 2,254,000 150-day: 5,177,000

Year-End

December 31

C$ BVPS EPS

2005 $0.09 ($0.02)2006 $0.09 ($0.00)2007E $0.13 ($0.01)2008E $0.14 ($0.02)

BVPS: Book Value Per ShareEPS: Earnings Per Share

Analysts

This report was written by a contracted analyst, and was vetted and approved by the eResearch Investment Committee

Bob Weir, B.Sc., B.Comm, CFA Director of Research

UPFRONT A rising tide raises all ships! Five or six companies are expected to drill 70-80 holes this year in the “Ring of Fire” around Noront Resources’ nickel-copper discovery in the James Bay Lowlands of northern Ontario. A signifi cant “hit” by any one of them should benefi t all participants, including MacDonald Mines.

RECOMMENDATIONeResearch is initiating coverage of MacDonald Mines Exploration Ltd. (“MacDonald Mines” or the “Company”) with a Speculative Buy Recommendation. Our 12-month Target Price is $1.35 per share and our three-year Target Price is $3.50 (see Investment Conclusions on page 12).

PROFILE MacDonald Mines Exploration Ltd. is involved in exploration for nickel-copper in the Webequie area of the James Bay Lowlands of northern Ontario.

HIGHLIGHTS • MacDonald Mines offers investors a play on one of the most promising nickel

discoveries since Voisey’s Bay.• The Company has the largest geologically favourable land position in the region

surrounding the recent spectacular Noront Resources (“Noront”) nickel-copper - PGE discovery.

• Significant exploration funding in place following recent $10 million private placement.

• High-profi le investors Robert McEwen, Pierre Lassonde, Sheldon Inwentash and Randall Oliphant have recently taken signifi cant ownership positions.

• The Company has already discovered nickel mineralization on its McNugget property, with further diamond drill results expected shortly.

• Major new drilling program to commence in March 2008 (approximately 5,000 metres) on both the Company’s and joint-venture properties.

• Main challenges include the risk that no economic mineralization is discovered, accessibility to the property, and weather-related delays.

eResearch MacDonald Mines Exploration Ltd.

2 February 22, 2008

CONTENTS

Upfront 1Recommendation 1Profi le 1Highlights 1Next Voisey’s Bay? 3The Company 3Projects 5Strategy 5Management And Directors 6Strengths And Challenges 7Financial Review And Outlook 8Valuation 11Appendix 1 - Properties 14

MacDonald Mines Exploration Ltd. 141 Adelaide Street West,

Suite 1000 Toronto, Ontario, Canada

M5H 3L5

[email protected]

Tel: (416) 364-4986 Fax: (416) 364-2753

MacDonald Mines Exploration Ltd. Initiating Report

3February 22, 2008

NEXT VOISEY’S BAY?

Toronto-based MacDonald Mines is well-positioned near Noront Resources’ exciting nickel-copper discovery in the James Bay Lowlands of northern Ontario. The Noront discovery of spectacular grade Ni-Cu-PGE at its Double Eagle property in September 2007 sparked a major staking rush in the region.

COMMENT: MacDonald Mines has operated in the area since 2003, and had a signifi cant fi rst-mover advantage in the staking rush. Management immediately hired a helicopter and was staking the region the day after Noront’s announcement.

The Company’s land holdings in the region amount to approximately 60,000 hectares, including both wholly-owned properties and properties held with partners. MacDonald Mines’ partners are Temex Resources Corp. (TSX-V: TME) and Baltic Resources Inc. (TSX-V: BLR).

Along with numerous other juniors in the region (referred to as the “Ring of Fire”), MacDonald Mines is undertaking an accelerated exploration program, with a 2,067-metre diamond-drilling program completed in late 2007 and another approximately 5,000 metres planned to start in March 2008 in the area of, and immediately adjacent to, the Noront discovery.

It is now clear that the Noront strike is a large one. The discovery includes high-grade nickel, copper, platinum, palladium, and indications of rhodium. Drill core results over signifi cant widths are highly encouraging. A total of more than 5,000 metres of drilling in 27 holes has defi ned a mineralized zone that remains open to the south and at depth.

COMMENT: Comparisons have already been made between Noront’s fi nd and that of the gigantic Voisey’s Bay discovery. Noront’s fi nd is a magmatic massive sulphide with some genetic similarities to Voisey’s Bay. However, Double Eagle has high levels of platinum and palladium included, while Voisey’s Bay was only nickel-copper-cobalt.

THE COMPANY

MacDonald Mines Exploration Ltd. is engaged in the exploration for gold and base metals in the Webequie District of Ontario’s James Bay Lowlands. The Company’s activities are carried out for its own account and through joint ventures.

The map on the following page illustrates where the Company’s properties are located, with particular signifi cance to the location of Noront’s Double Eagle property.


4 February 22, 2008

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5February 22, 2008

PROJECTS

The Company’s properties are shown in the following table:

STRATEGY

MacDonald Mines’ management has created a business model in which the key focus is to create critical mass. For MacDonald Mines, this critical mass is provided by being part of a consortium of four separate operating public companies, as follows:

• MacDonald Mines Exploration Ltd. (TSX-V: BMK)• Uranium Star Corp. (OTCBB: URST) (TSX-V listing expected soon)• VenCan Gold Corporation. (TSX-V: VCG)• Telkwa Gold Corp. (TSX-V: TKW)

This collaboration allows each Company to create synergies and employ/attract high-calibre geologists, geophysicists, and support staff, and build relationships with key suppliers as a much larger entity than each could possibly do on its own.

MacDonald Mines operates with a strategy governed by four cornerstones:

1. The right people.2. The right properties.3. Financial strength and security.4. Ongoing science and operating enhancements to ensure the successful evolution of the

Company.

As a relatively small, but growing, exploration company, these principles are expected to change and evolve over time.

COMMENT: On the fi rst point there have been several recent changes within the Board of Directors as well as additions to management, as the Company expands its team. On the third point, the fi nancial strength of junior mineral exploration companies is sensitive to market conditions and any exploration success. Market conditions are typically driven by underlying commodity prices.

Properties Claim Blocks Area Ownership (hectares) Interest

McNugget Property 55 13,000 100%

Big Mac Property 47 11,300 25% JV with WSR Gold Inc.

MacDonald-Temex Joint Venture 97 24,000 50%/50%

MacDonald-Temex-Baltic Joint Venture 50 12,500 50%/25%/25%

Table 1: Project Properties

Note: The Company recently announced the sale of 75% of its full ownership of the Big Mac Property to WSR Gold Inc.Source: MacDonald Mines


6 February 22, 2008

MANAGEMENT AND DIRECTORS

A. Management

Kirk McKinnon - CEO and PresidentKirk McKinnon has held senior management positions in several high-profi le Canadian corporations, including Nestle Canada. He is President and Chief Executive Offi cer of Yukon Resources Corp. and VenCan Gold Corporation. Mr. McKinnon is also a Director of MacDonald Mines, Yukon Resources and VenCan Gold Corp.

Richard Schler - CFO and VP Finance Richard Schler is a management consultant with over 25 years’ experience in the manufacturing sector. Mr. Schler is Chief Financial Offi cer and Vice President of Yukon Resources Corp., and Chief Financial Offi cer and Vice President of Finance of VenCan Gold Corp. He is also a Director of MacDonald Mines, Yukon Resources, and VenCan Gold. Corp. Mr. Schler has an MBA as well as a background in Mechanical Engineering.

Hadyn Butler, Chief GeologistHadyn Butler, B.Sc. Hon, P. Geo, is a Professional Geologist and Professional Geoscientist, with over 40 years of geological experience. He is also a Consultant to Vencan Gold, and a Director of MacDonald Mines and Yukon Resources. Mr. Butler is a member of the Association of Professional Geoscientists of Ontario.

B. Directors

John Sanderson, Chairman of the BoardJohn Sanderson Q.C. is a mediator, arbitrator, consultant and lawyer. He is a principal of Confl ict Managers Group, an alliance of senior professionals from different disciplines, formed to provide advice on all aspects of confl ict management in the public and private sectors in Canada. Mr. Sanderson is the author of several books.

Hadyn Butler(see bio above)

Andrew Chater Andrew Chater, P.Geo, is President of Teddy Bear Valley Mines Limited and a Director of Vault Minerals Inc. Mr. Chater is a Professional Geologist.

Julie Lassonde-GrayJulie Lassonde-Gray is Vice President, Corporate Development of Southampton Ventures Inc. Prior to joining Southampton, Ms. Lassonde-Gray spent 10 years in a variety of fi elds, including four years as a Credit Analyst at Macquarie Bank Ltd. in Sydney, Australia. She was also a Senior Portfolio Manager at Macquarie Real Estate Structured Finance in Seattle, Washington. She has been a Director of MacDonald Mines since 2007. Ms. Lassonde-Gray holds a degree in Civil Engineering from Queen’s University.

Kirk McKinnon(see bio above)


7February 22, 2008

William NielsenWilliam Nielsen, P.Geo, is the VP of Exploration at Nevsun Resources Ltd. He has been instrumental in identifying many opportunities for Nevsun, including the discovery of the world-class Bish gold-VMS deposit in Eritrea. He has over 34 years of fi eld experience, project management and consultancy in various parts of the world. Mr. Nielsen is also a Director of Vencan Gold Corp., Uranium Star Corp. and Telkwa Gold Corp.

STRENGTHS AND CHALLENGES

1. Strengths

• Exciting Exploration Opportunity: MacDonald Mines is actively involved in an exciting new exploration play in the Webequie District of northern Ontario. There was little exploration in the area prior to the Noront discovery at a nearby property.

• Well Positioned Properties: The Company’s properties are in close proximity to the Noront discovery, with some claims within 1.5 kilometres of the main strike. Moreover, the Company has a large land position, and a high inventory of drill targets compared to others in the area.

• Funding: Having recently raised gross proceeds of $10 million in a private placement funding, MacDonald Mines is well positioned to accelerate its exploration program.

• High-Profi le Investors: Strong interest from several high-profi le investors has added credibility to the Company’s exploration projects. These include Robert McEwen (US Gold Corporation/Goldcorp Inc.), Pierre Lassonde (Franco-Nevada), Sheldon Inwentash (Pinetree Capital) and Randall Oliphant (Western Goldfi elds), among others. No other junior explorer has similar mining sophisticates for potential guidance and advice, except for Noront, given that it recently completed a private placement with the participation of most of these investors.

• Relations with Local Native People: The Company has had a long and constructive relationship with the local native band. This is important, given that the Company has its base camp in the native community of Webequie.

• Business Model: MacDonald Mines’ business model allows for greater synergies and cost benefi ts, given that it is part of a larger group of companies that share staffi ng and administrative resources.


8 February 22, 2008

2. Challenges

• Exploration Risk: MacDonald Mines has yet to hit the high-grade mineralization that was discovered on the nearby Noront property. Should this fail to occur, the share price could return to the trading levels that existed prior to the Noront strike.

• Shareholder Dilution: The Company has approximately 43 million of warrants and options (worth approximately $18 million) that should convert over the next several years, adding to shareholder dilution. This is in addition to other expected fi nancing necessary to accelerate the exploration program. The number of shares outstanding has increased from 76 million at June 30, 2007 to 137 million at present.

• Accessibility: At present, the property must be accessed by helicopter from the native community of Webequie, a 50-km distance, so inclement weather can easily shut down operations. There is no road or power access, and much of the land is covered with signifi cant overburden.

COMMENT: In a sign of confi dence in MacDonald Mines, Rob McEwen recently acquired a 14.4% ownership position in the Company. Mr. McEwen’s track record of success at Goldcorp and other fi rms sends a positive signal for the Company. Furthermore, he will provide much valued guidance and advice for management.

FINANCIAL REVIEW AND OUTLOOK

Year-End: December 31

Currency: MacDonald Mines reports its fi nancial results in Canadian dollars. Given that precious metals are priced in US dollars, producing mining companies are being negatively impacted by the strong Canadian dollar.

Revenue: As a mineral exploration company, the Company is not currently generating revenue, earnings, or cash fl ow.

Cash: The Company currently has cash of approximately $10 million, following the completion of a $10 million fi nancing in October 2007. Cash is held in bank deposits, and there is no exposure to asset-backed commercial paper (ABCP) investments.

Exploration Spending: Capital spending increased sharply in Q4/07, and we anticipate total capital spending of approximately $8 million in 2008, up from $4.5 million in 2007. This will depend on the extent and timing of further drill programs following the completion of the spring 2008 drill program.

Burn Rate: The Company’s (non-exploration) non-discretionary expenses, i.e. salaries, offi ce and administrative, accounting fees, etc., for the fi rst nine months of 2007 were $40,000 per month. However, refl ecting an increase in activity and hiring, we anticipate that the average monthly burn for F2008 will be in the range of $60,000-$80,000.


9February 22, 2008

Financing: MacDonald Mines recently completed a brokered private placement, raising gross proceeds of $10 million. The funds are being allocated towards exploration at the Company’s Webequie District properties. Given the accelerated exploration program underway, eResearch anticipates that the Company will return to the capital markets later in 2008 to fund the next phase of exploration. Proceeds of $345,690 are expected in 2008 from the conversion of warrants and options.

Debt Funding: MacDonald Mines has no debt outstanding.

Capital Structure: The Company currently has 137 million shares issued and outstanding, and 181 million on a fully diluted basis.

Options and Warrants: The Company has the following warrants and options outstanding:

COMMENT: For our fi nancial forecasts, we include all options and warrants that are expected to be in-the-money based on our Target Price and expire within our 12-month forecast period. Accordingly, as shown in italics in the above table, we are calculating that an additional 1.92 million warrants may be exercised, adding $345,690 to shareholders’ equity.

Financial Statements: Set out on the following page are the Company’s fi nancial statements:

1. WarrantsExercise Expiry Potential

Number Price Date Comment Equity1,920,500 $0.18 20-Apr-08 In-the-money $345,6905,000,000 $0.12 13-Sep-09 In-the-money $600,000

450,000 $0.10 13-Sep-09 In-the-money $45,00020,312,500 $0.50 26-Oct-09 In-the-money $10,156,2502,500,000 $0.40 26-Oct-09 In-the-money $1,000,000

30,183,000 $12,146,940

2. OptionsExercise Expiry Potential

Number Price Date Comment Equity4,280,000 $0.22 13-Sep-11 In-the-money $920,2001,350,000 $0.29 2-Oct-11 Out-of-the-money $384,7503,430,000 $0.48 15-Oct-11 In-the-money $1,646,4004,050,000 $0.86 25-Oct-11 In-the-money $3,483,000

550,000 $0.92 12-Nov-11 In-the-money $506,00013,660,000 $6,940,350

Table 2: Options and Warrants Outstanding

Source: Company and eResearch


10 February 22, 2008

Table 3: Selected Consoldated Financial Information

9 Months ended Sept 30: Year Ended Dec 312006 2007 2005 2006 2007E 2008E

Statement of Income/(Loss):Operating Income 0 0 0 0 0 0Non-Operating Income (inc.) 0 4,548 8,460 6,828 9,000 9,000General & Administrative Expense (354,401) (350,222) (460,473) (468,928) (500,000) (800,000)Stock-based Compensation (149,930) (842,185) (135,312) (149,930) (1,100,000) (2,000,000)Amortization (438) (2,550) (650) (585) (3,400) (3,400)Gain (loss) on marketable securities 138,804 90,733 (80,000) 131,282 100,000 0Other Income/(Expenses:fees) (26,997) 79,459 (2,436) 0 0 0Income Taxes Recovery/(Expense) 401,026 288,000 72,000 577,444 380,000 400,000Net Income/(Loss) 8,064 (732,217) (598,411) 96,111 (1,114,400) (2,394,400)

Total Shares Outstanding (basic) 55,575,319 91,044,315 43,078,237 66,067,319 137,232,900 142,788,456Weighted Average Shares O/S 49,326,778 78,555,817 36,078,237 54,572,778 101,650,110 140,010,678Earnings (Loss) Per Share $0.00 ($0.01) ($0.02) $0.00 ($0.01) ($0.02)

Statement of Cash Flow:Net Income (Loss) 8,064 (732,217) (598,411) 96,111 (1,114,400) (2,394,400)All Non-Cash Items (293,964) 466,002 138,398 150,515 1,103,400 2,003,400Cash Flow (285,900) (266,215) (460,013) 246,626 (11,000) (391,000)Capital Expenditures (Properties) (891,344) (2,206,288) (330,181) (1,448,560) (4,500,000) (8,000,000)Capital Expenditures (Other Assets) 354,454 76,719 0 458,804 0 0Free Cash Flow (822,790) (2,395,784) (790,194) (743,130) (4,511,000) (8,391,000)Working Capital Changes (46,789) 372,414 20,168 (802,206) (737,614) (1,808,400)Equity Financing (net) 1,335,761 2,773,409 986,000 1,980,746 12,773,409 5,000,000Debt Financing 0 0 0 0 0 0Change in Cash 466,182 750,039 215,974 435,410 7,524,795 (5,199,400)

Cash, Beginning of the Period 390,629 826,039 174,655 390,629 826,039 8,350,834Cash, End of the Period 856,811 1,576,078 390,629 826,039 8,350,834 3,151,434

As at Sept 30: As at Dec 312007 2005 2006 2007E 2008E

Balance Sheet:Cash and equivalents 1,576,078 390,629 826,039 8,350,834 3,151,434Marketable securities 26,761 320,000 28,327 30,000 30,000Other Current Assets 113,380 98,950 166,673 200,000 300,000Mineral Properties 7,220,559 3,553,711 5,014,271 9,514,271 17,514,271Other Assets 11,334 5,847 5,262 15,000 20,000Total Assets 8,948,112 4,369,137 6,040,572 18,110,105 21,015,705

Current Liabilities 413,294 211,047 108,494 500,000 800,000Future Income Tax 80,982 0 80,982 100,000 100,000Debt Obligations 0 255,000 0 0 0Shareholders' Equity 8,453,836 3,903,090 5,851,096 17,510,105 20,115,705Total Liabilities & Equity 8,948,112 4,369,137 6,040,572 18,110,105 21,015,705

Book Value (S.E.) Per Share $0.09 $0.09 $0.09 $0.13 $0.14Source: Company and eResearch


11February 22, 2008

VALUATION

Junior mineral exploration companies create value through the skill and competence of management in evaluating, acquiring, exploring and developing properties. In addition to an assessment of these activities and management itself, eResearch is valuing MacDonald Mines using a Peer Comparison analysis. Given that MacDonald Mines has been actively involved in an exciting staking rush and will soon be starting its second drilling program since the Noront discovery, it is far too early to conduct a valuation based on an estimated mineral resource.

Peer Comparison Analysis – Webequie/McFauld’s Lake Explorers

For the Peer Comparison analysis, we have selected several junior mineral resource companies with properties in the “Ring of Fire” around Noront’s discovery.

Stock Market Premiums

COMMENT: In our opinion, Fancamp Exploration does not belong near the top of this ranking of stock market premiums, but we include it for full disclosure purposes. Fancamp has the closest property to the Noront discovery, but has yet to invest in any property exploration and, in our opinion, it is unlikely that it will. Given a lack of fi nancings, Fancamp’s shareholders’ equity is extremely low, resulting in an infl ated premium to book value.

MacDonald Mines currently has the second-highest market capitalization of the peer group, while its premium to book value is at the median of the peer group. eResearch believes a higher premium is justifi ed by: (1) The strong land position (approximately 60,000 hectares) in the area surrounding the original

Noront discovery, with favourable geology and geophysical signatures. MacDonald Mines’ fi rst-mover advantage during the staking rush and its large inventory of drill targets provides the Company with a competitive advantage over others exploring in the region;

(2) The Company is well-funded to undertake the next stage of diamond drilling; (3) The existence of nickel-copper-zinc on the Company’s McNugget property, as found in the

spring 2007 drilling program; and (4) The Company’s long established and supportive relationship with the local First Nations people

of Webequie, where the Company has its base camp.

Company Recent Shares Market Premium toStock Stock Outstanding Capitalization Book Value Book Value

Symbol Price (millions) ($ millions) ($ millions) (x)Noront Resources NOT $4.83 118.2 570.9 21.0 27.2Fancamp Exploration FNC $1.62 27.5 44.5 1.9 23.0Northern Shield NRN $0.68 46.4 31.6 3.0 10.5Baltic Resources BLR $1.85 33.5 62.0 6.7 9.3Probe Mines PRB $0.76 30.7 23.3 3.1 7.4MacDonald Mines* BMK $0.46 137.2 63.1 17.5 3.6UC Resources UC $0.31 106.2 32.9 11.5 2.9Spider Resources SPQ $0.11 299.5 32.9 13.6 2.4Freewest Resources Canada FWR $0.30 156.4 46.9 20.3 2.3Temex Resources TME $0.57 70.9 40.4 17.3 2.3KWG Resources KWG $0.09 244.6 22.0 17.2 1.3

Table 4: Stock Market Premiums

*Book value includes the $10 million equity issue in October 2007.Source: eResearch



Valuation Scenarios

1. If we assume MacDonald Mines’ premium to book value is one-half of Noront’s, the Company’s intrinsic value would be $1.73.

2. If we assume MacDonald Mines’ premium to book value is one-third of Noront’s, the Company’s intrinsic value would be $1.16.

3. If we assume MacDonald Mines’ premium to book value is on par with the average of the peer group, the Company’s intrinsic value would be $1.13.

Investment Assumptions

As previously mentioned, the Company has had a long-term presence in the Webequie area. However, drill results up until the September 2007 staking rush were relatively modest, but indicated favourable geological potential. As MacDonald Mines is an early-stage explorer, with little additional analytical information, we have made certain assumptions to support our valuation of MacDonald Mines’ share price target:

• The Company allocates significant financial resources to an accelerated exploration program.

• MacDonald Mines experiences drilling success in discovering nickel-copper mineralization equating to one-quarter of the grade and intersection discovered by Noront.

• Further infi ll drilling leads to an economic mineral deposit on its property.• The Company maintains access to the capital markets to raise signifi cant ongoing exploration

funding.• The Company proceeds to a pre-feasibility, bankable feasibility, and eventual development

of the project. • Infrastructure spending is minimal, based on the assumption that ore is processed at a future

Noront (and partner)-owned facility.• The Company is either acquired, or it partners with a major player that will lead the project

through to production.

Investment Conclusions

• eResearch has based its analysis on: (1) the assumptions outlined above; (2) our discussions with management; (3) a review of the underlying geology and geophysics; and (4) early exploration results to date.

• MacDonald Mines has benefi ted from its well-established presence in the Webequie area, and the Company’s advantaged position in the September 2007 staking rush has positioned it well from a property perspective - both with its joint venture partners and its wholly-owned properties.

• Signifi cant share price volatility is to be expected following a staking rush, as drill results are gradually released by the group of companies in the area.

• With fi ve or six companies soon to be drilling approximately 70-80 holes in the “Ring of Fire”, any news of a “hit” should raise the share prices of all of the companies.

• Our Target Price considers the above assumptions, and we apply a weighted average premium to book value of the scenarios outlined. The scenarios are weighted as follows:

Scenario 1 (one-half of Noront’s premium): 40% Scenario 2 (one-third of Noront’s premium): 40% Scenario 3 (peer group average premium): 20%• Giving consideration to the foregoing, eResearch has derived a 12-month Target Price of

$1.35.


13February 22, 2008

• By applying Noront’s current premium of 27.2x to MacDonald Mines’ current book value, we get a three–year price objective of $3.50.

• In the event that mineralization of only limited economic value is discovered on the Company’s properties, eResearch anticipates the current share price would decline.

• eResearch recommends the shares of MacDonald Mines Exploration Ltd. as a Speculative Buy, suitable only for risk-tolerant investors.

Risk Factors

• Commodity Price Risk: Volatility of the price of the underlying commodities will impact the value of assets in the ground being pursued by the Company.

• Revenues: The Company has no source of operating revenue, and signifi cant additional expenditures will be required before meaningful operating revenues will be generated, if any.

• Capital Raising: Signifi cant ongoing capital will be required to conduct exploration, maintain ownership interest in the mineral claims, develop the properties, establish mining operations, and operate a mine.

• Stock Price Volatility: The stock price will be heavily infl uenced by the results of exploration at MacDonald Mines’ own properties, and those of its neighbouring explorers.

• Future Production: If mineral resources are developed, there is no guarantee that production will be profi table.

• Regulatory Risk: Government regulations could change, particularly environmental requirements.

• Competition: The resource industry is highly competitive, and the Company competes with many companies with greater fi nancial resources, management resources and technical facilities than itself.

• Uninsurable Risks: The Company may become subject to liability for accidents, pollution and other hazards, against which it cannot insure, or it may choose not to insure due to high insurance premiums.

COMMENT: These risks are common to most junior explorers, but to varying degrees. Given that MacDonald Mines is involved in an early-stage staking rush, its stock volatility is signifi cant, and will be infl uenced by the results of other companies operating in the surrounding area.



APPENDIX 1 - PROPERTIES

Webequie District - James Bay Lowlands

The Noront Resources discovery of high-grade nickel-copper mineralization in September 2007 in the James Bay Lowlands sparked a staking rush in the region. MacDonald Mines was well positioned to acquire geologically attractive property there, given the Company’s long-term presence and infrastructure in the area. Management reacted quickly following Noront’s announcement, and had a helicopter hired and was staking the day after Noront’s news. This fi rst-mover advantage appears to have served the Company well, as it has a strong land position.

Certain of the MacDonald Mine claims are within 1.5 kilometres of the Noront discovery, and are known to host favourable geology and geophysical signatures.

MacDonald Mines has partnered with Temex Resources and Baltic Resources on certain recently staked land, due to the high cost of land acquisition and associated exploration work in this area. MacDonald Mines now controls in excess of 600 square kilometers of land in the so-called “Ring of Fire”.

Additional claims were staked on both the McNugget and Big Mac claim groups. Four claim groups were established as a 50/50 joint venture with Temex while an additional three claim groups are in joint venture with Baltic (50%), Temex (25%) and MacDonald Mines (25%).

MacDonald Mines completed an exploration program that commenced in late October 2007 to test, with ground geophysical surveys and drilling, additional airborne geophysical anomalies defi ned in its 2004 survey. It is anticipated that this exploration program will also test geophysical anomalies located within several kilometres of the Noront discovery.

MacDonald Mines and its joint-venture partners have conducted an extensive helicopter borne geophysical survey of the newly acquired properties. This work was contracted to Fugro Airborne Surveys, who began surveying in the latter part of October 2007. In excess of 9,000 kilometres of airborne survey work was completed on the new claim groups at 100-metre line spacing. This work was designed to assess the potential of the geologically favourable ground to host nickel and or volcanogenic massive sulphide (VMS) deposits. Ground geophysical work has also commenced.

The 2004 airborne geophysical survey fl own over both the Big Mac and McNugget properties has been re-interpreted and additional target areas have been selected for exploration work programs. On the McNugget property, eight airborne defi ned targets have been selected for additional ground geophysical surveys, which will be followed by diamond drilling of favourable responses.

On the Big Mac property, 10 airborne geophysical anomalies have been selected for follow-up work. The geological environment is favourable for nickel, massive sulphide and gold deposits, and the area warrants additional exploration work. Line grids have been designed and there are plans to survey them with horizontal-loop EM (HLEM), magnetometer and gravity work. Appropriate targets will be diamond drilled. Current plans anticipate that this work should start in late February 2008.


15February 22, 2008

McNugget Property

Following the completion of a $10 million private placement fi nancing, the Company announced the commencement of a diamond-drill program on its McNugget Property. The program consisted of 2,067 metres of diamond drilling, focused initially on seven identifi ed target areas on the property. Drill assays were reported on February 21, 2008 (see Recent Development page 17).

In the spring of 2007, ground geophysical surveys and diamond drilling were conducted on the Salo, Pullen and Campbell Grids located within the McNugget Property. A total of 17 diamond drill holes (2,437 metres) were completed. The diamond drill program tested known mineralization and geophysical anomalies:

• Five diamond drill holes, east of the previously defi ned Campbell Zone intersected narrow massive sulphide horizons.

• Two drill holes were put down to test magnetic “bulls-eye” anomalies believed to be caused by kimberlite, which was not intersected in either hole.

• Two drill holes were drilled into conductors on the Pullen Grid and assay results indicated no economic mineralization in these two holes.

• Eight diamond drill holes were drilled to test conductors on the Salo Grid located on the eastern part of the property. Nickel sulphide mineralization was intersected in two of the eight drill holes.

Figure 2: Macdonlad Mines Land Positions

Source: Company



Drill hole MN-07-39 assayed 0.36% Ni over 4.5 metres and 0.26% Ni over 27.0 metres hosted by Gabbro (including 0.37% Ni over 6.0 metres and 0.40% Ni over 4.5 metres). In addition, drill hole MN-07-40 intersected 0.23% Cu and 0.17% Ni over 3 metres in Gabbro. Drill hole MN-07-40 is located 1.1 km west of MN-07-39 on what is interpreted to be a separate conductor array. Mineralization in both holes occurs as stringer sulphides. Drill hole MN-07-39 is the sole drill hole to sample the conductor that has been well defi ned by high resolution airborne TEM and extends over a distance of 1 km.

COMMENT: These earlier drill results are positive in that they indicated nickel is present in the region outside of the Noront discovery, although the grades were modest. The results also showed higher grades of zinc, including 7.94% zinc over 1.5 metres.

Figure 3: BMK McNugget Property

Source: Company


17February 22, 2008

Recent Developments

February 15, 2008: The Company announced that it will sell 75% of its Big Mac Property in the “Ring of Fire” to WSR Gold Inc. (“WSR”), through a joint-venture agreement.

COMMENT: The strategic thinking behind this transaction is that MacDonald Mines has more than suffi cient exploration targets to focus on over the next 18 months, and by joint venturing the Big Mac Property, the Company will accelerate exploration on the property and still maintain some upside potential, both through its 25% ownership of Big Mac and through its ownership of WSR shares that it will receive as payment.

WSR plans to commence exploration immediately on the Big Mac Property, adding to the number of companies actively exploring the region.

February 21, 2008: MacDonald released assay results from its fall 2007 diamond drilling program, including those from the McNugget property.

In the fall program, diamond drill holes at McNugget were selected to (i) sample various conductors and (ii) systematically sample specifi c geological units present on the property.

Highlights of the fall program include the following:

• Drill hole MN07-46 encountered peridotite throughout its entire 170-metre length and assayed 0.18% nickel over 112.0 metres including 0.20% nickel over 41.0 metres.

• Drill hole MN07-47 encountered 0.36% Cu, 10.6% Zn, 3.7% Pb and 115 g/t Ag over 3.0 metres.

The massive sulphide intersection in hole MN07-47 is deemed signifi cant and additional work will be focused on this VMS target.

Accessibility

Given that there is very little infrastructure in the area, the Company is operating from a base camp at the First Nations Community of Webequie, which is about a 15-minute helicopter fl ight (50 km) from the McNugget Property. In co-operation with the local community, the Company has set up a permanent core building and storage area located near the airport. The Company has looked to the community to supply both infrastructure and personnel to support the exploration programs. Management has held a town hall meeting with the First Nations Community to improve communication and cooperation, and demonstrate the Company’s respect for the community. This is the seventh program the Company has conducted using Webequie as a base camp.



Next Steps

An accelerated airborne geophysical survey is currently being completed (to offset prior delays), and will then be analyzed to determine target selection. The geophysical survey will fl y in excess of 60,000 line kilometres, at 100-metre line spacing. Consequently, the data will be of high quality, and target selection will be made easier.

The Company announced that a major drilling program would commence shortly on MacDonald Mines’ property and on joint-venture ground with Temex Resources, Baltic Resources and Hawk Uranium. The size of the drill program has not been disclosed, but eResearch anticipates approximately 5,000 metres of drilling, with further drilling to follow after a period of analysis.

COMMENT: Several other companies will be drilling concurrently, resulting in a considerable future exploration news fl ow from the region. Any highly positive news should benefi t all companies in the region, as this would increase the potential of another Noront-type discovery. We believe, therefore, that the upside exploration potential for MacDonald Mines is highly attractive, compared with a company exploring a single property in isolation.


19February 22, 2008

ANALYST CERTIFICATION

Each Research Analyst who was involved in the preparation of this Research Report hereby certifies that: (1) the views, opinions, and recommendations expressed in this Research Report refl ect accurately the Research Analyst’s personal views concerning any and all securities and issuers that are discussed herein and are the subject matter of this Research Report; and (2) the fees, earnings, or compensation, in any form, payable to the Research Analyst, is not and will not, directly or indirectly, be related to the specifi c views, opinions, and recommendations expressed by the Research Analyst in this Research Report.

eResearch analysts on this report: Bob Weir, B. Comm, B.Sc., CFA. Bob Weir has 40 years of investment research and analytical experience in both the equity and fi xed-income sectors, and in the commercial real estate industry. He was at Dominion Bond Rating Service (DBRS) from 1994 to 2001, latterly as Executive Vice-President responsible for conducting the day-to-day management affairs of the company. He joined eResearch in 2004.

Financial ServicesRobin Cornwell

Biotechnology/Health CareScott DavidsonMarita Hobman

Transportation & Environmental Services/Industrial Products

Bill Campbell

Special SituationsAsim BukhtiarBill Campbell

Eric EngBob Leshchyshen

Ross DeepNigel Heath

Amy Stephenson

Mining & MetalsAsim BukhtiarGeorge CargillJames Darcel

Eric EngNigel Heath

Adrian ManlagnitKirsten MarionOliver Schatz

Amy StephensonGraham WilsonMichael Wood

Oil & GasEugene BukoveczkyAchille Desmarais

Dick Fraser Ross Deep

eRESEARCH ANALYST GROUP

Director of Research: Bob Weir

For further information: Independent Equity Research Corp.

130 Adelaide St. West, Suite 2215, Toronto, ON, Canada M5H 3P5Telephone: 416-643-7650 Toll-free: 1-866-854-0765

www.eresearch.ca

eResearch Disclosure StatementeResearch accepts fees from the companies it researches (the “Covered Companies”), and from fi nancial institutions or other third parties. The purpose of this policy is to defray the cost of researching small and medium capitalization stocks which otherwise receive little or no research coverage. In this manner, eResearch can minimize fees to its subscribers.

MacDonald Mines Exploration Ltd. paid eResearch a fee of $19,000+GST to conduct research on the Company on an Annual Continual Basis.

To ensure complete independence and editorial control over its research, eResearch follows certain business practices and compliance procedures. For instance, fees from Covered Companies are due and payable prior to the commencement of research, are accepted only in cash or currency and will not accept payment in shares, warrants, convertible securities or options of Covered Companies.

All Analysts are required to sign a contract with eResearch prior to engagement, and agree to adhere at all times to the CFA Institute Code of Ethics and Standards of Professional Conduct. eResearch analysts are compensated on a per-report, per-company basis and not on the basis of his/her recommendations. Analysts are not allowed to accept any fees or other consideration from the companies they cover for eResearch. Analysts are also not allowed to trade in the shares, warrants, convertible securities or options of companies they cover for eResearch.

In addition, eResearch, its offi cers and directors, cannot trade in shares, warrants, convertible securities or options of any of the Covered Companies. eResearch’s sole business is providing independent equity research to its institutional and retail subscribers.

eResearch will not conduct investment banking or other fi nancial advisory, consulting or merchant banking services for the Covered Companies. eResearch is not a brokerage fi rm and does not trade in securities of any kind.

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Additional distribution of our research may be done through agreements with newswire agencies.

eResearch Recommendation SystemStrong Buy: Expected total return within the next 12 months is at least 40%.

Buy: Expected total return within the next 12 months is between 10% and 40%.

Speculative Buy: Expected total return within the next 12 months is substantial, but Risk is High (see below).

Hold: Expected total return within the next 12 months is between 0% and 10%.

Sell: Expected total return within the next 12 months is negative.

eResearch Risk Rating System A company may have some, but not necessarily all, of the following characteristics of a specifi c risk rating to qualify for that rating:

High Risk: Financial - Little or no revenue and earnings, limited fi nancial history, weak balance sheet, negative free cash fl ows, poor working capital solvency, no dividends.

Operational - Weak competitive market position, early stage of development, unproven operating plan, high cost structure, industry consolidating, business model/technology unproven or out-of-date.

Medium Risk: Financial - Several years of revenue and positive earnings, balance sheet in line with industry average, positive free cash fl ow, adequate working capital solvency, may or may not pay a dividend.

Operational - Competitive market position and cost structure, industry stable, business model/technology is well established and consistent with current state of industry

Low Risk: Financial - Strong revenue growth and earnings over several years, stronger than average balance sheet, strong positive free cash fl ows, above average working capital solvency, company may pay (and stock may yield) substantial dividends or company may actively buy back stock.

Operational - Dominant player in its market, below average cost structure, company may be a consolidator, company may have a leading market/technology position.

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