Observations on epithermal gold prospects of the Shyri property, north half, Azuay Province, southern Ecuador

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1 Research applied to mineral exploration Observations on epithermal gold prospects of the Shyri property, north half, Azuay Province, southern Ecuador Gama prospect: quartz-alunite boulders at ~3800 m, looking SE across basin to rhyolite domes in middle distance; Quimsacocha volcano ~12 km SE, on horizon Final report for: Cornerstone Resources Inc. September, 2006 Prepared by: Jeffrey W. Hedenquist Hedenquist Consulting, Inc. 99 Fifth Avenue, Suite 420 Ottawa, Ontario K1S 5P5 Canada Tel: 1(613)

2 Contents page Summary and recommendations 3 Introduction 5 Yanasacha 7 Discussion 7 Gama 9 Discussion 13 Summary and conclusions 17 Recommendations 17 Qualifications 18 Appendix: Geochemistry 19 2

3 Summary and recommendations The early stage Gama prospect consists of typical advanced argillic lithocap alteration, dominated by quartz-alunite, with hydrothermal breccias containing fragments of silicic alteration from deeper in the system. The principal area, encompassed by Ermita and Boqueron, lies on a steep slope over 4 km in a N-S direction, with >300 m of vertical exposure from the highest elevation at 3840 m. Preliminary assays from channels indicate numerous occurrences of >1 g/t Au, particularly in association with silicic fragment-containing hydrothermal breccias, with geochemical characteristics that indicate this typical lithocap has the potential to be a highsulfidation gold (copper) deposit. Despite the abundance of Fe oxide with some of the samples that reported good grades, 1+ g/t Au, the positive relationship of gold and silver assays indicate that the gold grades are largely primary, and do not reflect extensive supergene enrichment. The lithocap exposure lies on the western margin of a basin ~5 km in diameter that is defined by the position of several relatively fresh dacite domes, including the Lama dome on the north, with an intermediate sulfidation vein outcropping on its NW margin from 3840 m elevation down to at least 3600 m. Quartz-alunite continues SW of the western margin of the dome-defined basin at least 2-3 km, along the westward-verging erosional scarp, defining a very large lithocap. Alteration appears to be related to lithologic units, including tuff horizons, which dip at shallow angles to the east or SE, and there is also silicic alteration controlled by structures that may include feeders. The principle target is the silicic zone that breccia evidence indicates is present at depth. Such a zone is likely present beneath the pampas, perhaps as deep as 200 m or more. The degree of mineralization remains to be assessed, but the 1+ g/t Au in hydrothermal breccia that includes silicic fragments is encouraging that the silicic portion of the lithocap is mineralized with gold. The extent of the system remains for an IP survey to help define, followed by test drilling. The center of the system most likely lies beneath cover, within the basin, rather than having been eroded to the west. The Yanasacha prospect, which lies on the NE margin of the Quimsacocha volcanic center, is a similar lithocap target, albeit at an even earlier stage of assessment. Mapping of a portion of the prospect has identified a flat-lying lithologic-controlled silicic horizon with structural ribs cutting the slope that exposes the system at 3600 down to 3300 m elevation. Outcrops include quartzalunite, granular silicic (that may have originally been quartz-alunite), kaolinite±dickite, and propylitic alteration. Preliminary sampling indicates grades up to 0.8 g/t Au, with locally higher values. The question at Yanasacha is whether it represents the margin of a nearby hydrothermal center, perhaps related to the intrusion 2 km to the south that is indicated from a regional magnetic survey, or it is an outflow from the Quimsacocha high-sulfidation ore deposit ~8 km SW. Further mapping and representative sampling are necessary to address this question. At present, the Gama prospect is very attractive, having all the characteristics of a potential highsulfidation deposit alteration style, mineralization indicators, size potential in terms of areal extent with preliminary indications that any silicic-hosted gold mineralization found would be accompanied by sulfides. Yanasacha is smaller in areal extent, but has all the characteristic alteration of a lithocap, including outcropping vuggy and massive silicic that must be inferred from hydrothermal breccias at Gama. Nevertheless, indications to date of mineralization at Gama are more promising and thus higher priority at present. Many questions remain at both prospects, questions that mapping and sampling will help to answer. Such baseline work is essential in order to establish the best targets for drill testing at Gama; at least 6 months of work, 3

4 if not 9 to 12 months, are justified for mapping, sampling, and geophysical survey prior to commencement of drill testing this very large lithocap system. Recommendations Gama Continue mapping of the complete prospect, including the lower slopes as well as the fresh domes. Establish alteration styles with detailed assessment by PIMA; conduct some initial mineralogic checks by XRD. Determine all structural trends and styles. Characterize all hydrothermal breccias, and determine if there are multiple stages of brecciation, some pre-mineralization and others syn- to post-mineralization. Carefully assess the component(s) within breccias that are responsible for reporting gold, silicic fragments, quartz-alunite fragments, and/or matrix, by selective sampling. Conduct an IP survey over Boqueron-Ermita, eventually extending the survey until the margins of the altered system are determined. If fresh rock is indicated in the basin, test the eastern margin of the basin to determine if the silicic occurrences are indeed in place. Interpret the geophysical data with local geological knowledge, and integrate with the geology and alteration to arrive at a model of the system that can be used to establish targets to test by drilling. When complete, test to at least 3500 m elevation, i.e., up to 300 m vertical below the surface. Refine model based on initial results prior to subsequent drill campaign. Yanasacha Map the whole prospect, paying particular attention to the lithology and alteration, plus structures. Collect representative samples, with 80% of samples from silicic styles of alteration. Assess whether the system has mineral potential, or is the (largely barren?) distal expression of Quimsacocha. Apply experience gained at Gama to assessing Yanasacha, and in turn, apply the knowledge from Yanasacha, particularly on lithologic control to the silicic zone, to the assessment at Gama, where the silicic core of the system does not outcrop. Once the size of the alteration zone is known, and the center of the system is postulated, conduct an IP survey over the area to assist in developing a model of the system that can eventually be tested, if warranted, by a drill campaign. 4

5 Introduction Mr. Mike Basha, VP Exploration of Cornerstone Resources, Inc., requested the author to examine five prospects on the Shyri property in Azuay Province, southern Ecuador. A day each from 28 August was spent examining outcrops and preliminary data from the Yanasacha, Lama, Gama, Vetas Grandes, and Canaribamba prospects, with evening discussions, followed by a half a day synthesis in the Santa Isabel office. The author was accompanied during the whole visit by Basha as well as George Smith, Exploration Manager, Ivan Crepeau, Project Manager for Shyri, Leonardo Aquilar, Alexander Cruz, Servio Loayza, and Rene Revelo, and also in the southern two vein prospects of Vetas Grandes and Canaribamba by Santiago Baca. Discussions with all these geologists and their ideas have been incorporated in this report, with thanks. This report discusses the visits to the northern half of the property, including Yanasacha and Gama (Boqueron, Ermita, and Lama). The area was first visited by Cornerstone staff in December, 2004, shortly after announcement in August of that year by IAMGOLD Corporation of a significant intersection at their highsulfidation Quimsacocha deposit, which is partially surrounded by the Shyri property; the Yanasacha and Gama prospects are approximately 8 km NE and 15 km NW of the Quimsacocha discovery, respectively. Acquisition of portions of the Shyri property began in February, 2005, and concessions were first granted in March of the same year. Reconnaissance began in April, 2005, including the establishment of initial community relationships, and further work was done in the south from July. In December, the northern portion was acquired, and new geologists were hired in January, 2006, up to the present. Chip sampling, followed by soil sampling, trenching, and channeling, has been conducted largely only during 2006 in the north. Mapping has been ongoing, and geophysical surveys are being initiated. The prospects are still in an early stage of assessment, and it was these preliminary results that the author focused upon to assess controls on mineralization, determine the potential of each prospect, and to recommend followup work. The property encompasses part of the Ganarin volcanic belt, a NNE-trending zone of Tertiary volcanic activity and associated intrusive-related mineralization, including porphyry Cu-Au and epithermal Au-Ag±Cu deposits, the latter consisting of both high-sulfidation and vein prospects and developments (Chiaradia et al., 2004, Mineralium Deposita). Magmatism has continued from the Eocene-Oligocene, with deposition of the Saraguro Group of andesitic tuffs and volcaniclastics, to the Miocene Santa Isabel, Turi, Turubamba, Quimsacocha, and Tarqui formations. Mineralization in the immediate vicinity has spanned a period of at least 22 to 5 Ma, Quimsacocha being the youngest known. The property area encompasses at least three volcanic centers, an older center in the south, consisting of largely Saraguro Fm rocks and hosting the Vetas Grandes and Canaribamba veins, the latter associated with the Shyri diatreme, and two younger centers to the north, Quimsacocha and Chaucha (Fig. 1). Within and adjacent to the Ganarin trend over a strike length of ~80 km (half that excluding Portovelo) there are numerous deposits, roughly north to south, including: Chaucha porphyry and Rio Blanco (Beroen) veins (10-12 Ma), with an inferred resource of 216 Mt at 0.46% Cu and 0.03% molybdenum at a 0.20% copper cut-off at Chaucha, and measured and indicated resources of 2.15 Mt at 9.5 g/t Au and 69 g/t Au at Rio Blanco; Quimsacocha (5 Ma), with an indicated resources of 22.5 Mt at 3.8 g/t Au, 25 g/t Ag, and 0.16 wt% Cu (at 1 g/t Au cutoff; at 5 g/t Au cutoff, 5.6 Mt with 8.1 g/t Au, 48 g/t Ag, and 0.27 wt% Cu); Gaby porphyry (19.3 Ma), with a historic resources of 212 Mt at 0.12 wt% Cu and 0.8 g/t Au; Tres Chorreras-Guabisay porphyryepithermal (possibly ~18-20 Ma); Ganarin Au veins (21.2 Ma); El Mozo high-sulfidation 5

6 J.W. Hedenquist September, 2006 prospect (15.4 Ma); and the Portovelo-Zaruma intermediate sulfidation veins (15-16 Ma), with 9.1 Mt mined in 1992 at 13.3 g/t Au, 62 g/t Ag, 0.9 wt% Cu, and 1 wt% Zn (compiled by Chiaradia et at., 2004, with resource figures updated for some properties from recent press releases). The region has been particularly fertile for magmatism and volcanism, as well as porphyry and epithermal intrusion-centered gold, silver, and base metal mineralization, from the Eocene to Late Miocene (Chiaradia et al., 2004). 10 km Gama Yanasacha Quimsacocha Vetas Grandes Canaribamba Fig. 1: Cornerstone s Shyri property (black outlined area) in Azuay Province, southern Ecuador, showing three constructional volcanic centers (outlined in yellow hatchured lines), the easternmost and youngest ( Ma) Quimsacocha center (Beate et al., 2001, Earth Planetary Science Letters), and two other more loosely defined centers, Chaucha in the north (~10-12 Ma), and Jubones in the south (>20 Ma), with the Shyri composite diatreme (solid yellow) on its northeast margin. Approximate location of prospects visited are noted with open red ovals. 6

7 PROSPECTS Yanasacha prospect The Yanasacha prospect is located on the NE margin of the Quimsacocha volcanic center, about 8 km NE of IAMGOLD s Quimsacocha high-sulfidation discovery. The outcrops on the slopes between 3500 and 3600 m (Fig. 2) consist of advanced argillic altered lapilli tuff (lithic bearing), both quartz-alunite as well as areas of kaolinite and/or dickite; this alteration is typical of lithocaps that can host high-sulfidation style mineralization. Included in this area is a granular textured alteration of dominant silicic rock than may have originally been quartz-alunite, but with supergene oxidation of the contained pyrite, the alunite was dissolved. One clearly defined horizon at about 3550 m elevation consists of silicic alteration, including minor amounts of vuggy texture, but most massive silicic; this represents a lithologic horizon, with ribs extending down and up the hill of similar silicic alteration (Fig. 3a), presumably along structures. A quarry at lower elevation, ~3300 m, also comprises massive and vuggy silicic alteration of a fine cystal tuff breccia (Fig. 3b). At ~3350 m a lithology controlled horizon of massive pyritic replacement is sandwiched between argillic alteration. The preliminary sampling has examined all alteration types, with up to 1.2 g/t Au in grab samples, but with many assays returning <100 ppb. One potential issue has been the grouping of granular textured quartz-rich rock as equivalent to silicic alteration (Fig. 3c); if the granular texture resulted from late leaching (post mineral) of alunite from the rock, as believed by the author, this texture represents quartz-alunite, which typically does not host significant mineralization. By contrast, true silicic alteration, vuggy or massive, must be the focus of representative sampling. Discussion The alteration style is typical of systems that host high-sulfidation deposits, and the question is to what extent the styles of alteration on the slope reflect alteration further to the SW, located beneath higher elevation outcrops. Mapping the extent of alteration that crops out to the west and SW will help to define the size of this system, and whether or not it may have a center related to the intrusion to the south, as indicated by a magnetic high (Fig. 4), or represents an outflow from the principle system related to the Quimsacocha deposit ~8 km to the SW. The latter is possible, although the distance is rather large to be a continguous system, based on analogies with other large high-sulfidation deposits elsewhere. The complete area within the prospect must be mapped prior to assessing the possible center, whether on or adjacent to the property, or whether the outcrops represent a distal extent of the Quimsacocha system. Once this is done, and there is a more representative sampling of the silicic horizon(s) and structures, a better assessment may be made on the potential of Yanasacha. When mapping, the alteration types should be distinguished as much as possible, by field identification and confirmation later with PIMA. Divisions should include, at a minimum, 1) silicic alteration, with texture either massive, brecciated, and/or vuggy, 2), quartz-alunite, 3) granular silicic (possibly originally quartz-alunite, but noted as a separate alteration type for now; if originally quartz-alunite, it can be expected to be lower in grade, typically <0.5 g/t Au), 4) kaolinite ± dickite (only one sample to date has reported possible pyrophyllite, which should be a separate alteration type) with attention given initially to whether there are distinct kaolinite vs dickite zones, argillic clay (smectite, etc.), and propylitic; the occurrence of illite (or 7

8 muscovite) should be noted separately, like pyrophyllite. Distinguish or split the alteration types in the field, later lump them, if necessary, in the office. Fig. 2: East side of Yanasacha prospect, looking ~SW to the Quimsacocha volcano on far horizon. Near ridge is ~3600 m elevation; slope has scattered outcrops of quartz-alunite, granular silicic, and dickite alteration. The relatively flat horizon (~3550 m elevation) cutting across slope is silicic altered tuff breccia, with ridges that represent silicic alteration along structures; schematically represented by white outline. Horizontal line is canal. Fig. 3: a) (top left) Silicic replacement of tuffaceous unit, with vuggy texture, outcrop at ~3550 m. b) Chips of vuggy and massive silicic alteration, the former reflecting the original texture of the host, ~3300 m from quarry. c) Granular textured silicic, perhaps originally quartz-alunite with alunite having been dissolved during oxidation of sulfides. 8

9 Fig. 4: Map of the northern part of the Shyri property (Cornerstone concessions outlined in black dashed lines). Red contour is the 3600 m elevation, the level of silicic and mineralized lithologic horizons at Quimsacocha highsulfidation deposit (drilling and resource extent, latter projected to surface, shown in yellow and red, respectively, and extent of advanced argillic and silicic alteration outcropping at Quimsacocha shown in light orange; from public presentations lodged at Gama and Yanasacha prospects, with the extent of outcropping quartzalunite alteration noted in orange, lie on the eastern and western erosive margins of the two volcanic centers that host these systems, respectively. Blue dashed lines denote magnetic highs (published Ecuadorian air magnetic survey), possibly related to buried intrusions; in one case a magnetic high corresponds to the Quimsacocha caldera (in green; Beate et al., 2001). Outcrop of flow-banded rhyolite domes, some coallesced, at Gama are shown in grey. Gama prospect: Boqueron, Ermita, Lama The Gama prospect is about 15 km WNW of the Quimsacocha deposit (Fig. 1), and lies at a similar to higher elevation than Yanasacha (Fig. 4), with outcrops of quartz-alunite alteration extending from ~3840 m down along a steep slope to ~3400 m elevation (Fig. 5), although most of the outcrops occur at 3800 m down to 3500 m; one zone of pyrophyllite has been mapped at ~3600 m elevation (Fig. 6), with Servio Loayza (pers. commun.) reporting a gusano (wormy) texture, typical of that near the base of some lithocaps (e.g., Yanacocha, Peru). The prospect is divided into the Ermita zone and the Boqueron zone to the south. To the NE of Ermita, 2-3 km, the Lama flow-banded rhyolite dome (Fig. 4) is locally altered to smectite or illite (or a mixture that may be an interstratified clay), with some silicification. Gold grades in channels are typically up to g/t, and although there are higher values, they are associated with abundant iron oxides, which may indicate supergene enrichment. The summit of the dome with vertical flow banding is ~4100 m. The dome is cut on its NW margin by a quartz vein oriented WNW, with the upper extent present at ~3840 m down to at least 3650 m elevation; the lower extent has yet to be mapped. The vein consists of silicified breccia to coarsely crystalline quartz, mostly with <1 g/t Au but locally up to 3.7 g/t. The Ag ranges from g/t, Ba up to 780 ppm, As to 2000 ppm, and Pb plus Zn up to a few tenths of a wt%; notably, Mn ranges up to 3.5 wt%, suggestive of a rhodochrosite origin of the Mn oxide. Such veins are typical on the margins of lithocaps and associated high-sulfidation ore bodies, and are typically only anomalies, 9

10 indicative of the margins of the overall system. Rarely they constitute ore bodies on their own, such as the Victoria intermediate-sulfidation vein deposit adjacent to the Lepanto highsulfidation ore body in the Philippines, and the similar Chifuen vein next to the Chinkuashih high-sulfidation deposit in Taiwan, both within 1-2 km of the larger lithocap-hosted deposit. The principal outcrop of lithocap is dominated by well-formed and resistant quartz-alunite along the upper 300 m+ of the slope (Fig. 5a), starting at Ermita south to Boqueron, a distance in excess of 4 km; there are more outcrops of quartz-alunite up to 3 km further to the WSW, again on the erosional slope (Fig. 4). To the east of the ridge next to the steep slope is a basin that gently slopes downward less than 100 m in elevation (frontispiece photograph). The basin is rimmed to the north, east and south by flow-banded rhyolite domes (Fig. 4, frontispiece photograph) that are largely fresh, aside from the alteration of the Lama done on the north margin, as noted above. On the eastern margin of the basin, as defined by the domes, there are quartz-alunite boulders of glacial origin, as well as low silicic bodies, with kaolinite-dickite locally; the latter bodies are possibly in place at ~3700 m elevation. If true, this would mean that the extent of known quartz-alunite or silicic alteration is at least 5 km E-W, and 4 km N-S, with extentions 2-3 km NE to Lama done, and 3 km WSE from the southern part of Boqueron, based on scattered outcrops away from the Boqueron-Ermita area. The basin is largely covered by grasses, with one area of flat flow-banding rhyolite indicating that it is a surficial lava flow. Overall, the size of the Gama prospect (Fig. 6), based on the extent of quartz-alunite alteration and not considering the possible outcrop of silicic alteration to the east, compares favorably with lithocaps elsewhere in the Cordillera that host high-sulfidation ore deposits in the silicic portion. As noted, most of the outcropping alteration, seen as float blocks in the foreground of the frontispiece photograph, is characterized by resistant, well-developed quartz-alunite alteration, with coarsely crystalline alunite, up to 1+ mm in size, both white and pink (Fig. 5b). Fig. 5: a) Looking SSW from ~3800 m elevation to ~300 m slope of quartz-alunite alteration at Boqueron; far slopes reportedly contain fresh outcrop. b) Channel at Ermita through quartz-alunite (#29714, 0.5 g/t Au, 100 ppm Ag, As 1400 ppm, Sb 900 ppm, Hg ppb; here oxidized). The Ermita area has returned the best results to date, with several channels of 1 to 6 m, vertical where possible, reporting 0.5 to 3.8 g/t Au (Fig. 6). Many of the outcrops consist of quartzalunite cut by hydrothermal breccia consisting of sub-rounded to sub-angular variably altered fragments, including silicic fragments (Fig. 7). To date selective sampling has not been conducted to determine if the silicic fragments are carrying the gold. Some samples that reported good grades, 1+ g/t Au, are associated with abundant Fe oxide (Fig. 7). Despite this abundance of Fe oxide, the positive relationship of Au and Ag assays (Appendix) support the idea that the 10

11 Au grades are largely primary, and do not reflect extensive supergene enrichment. These outcrops of hydrothermal breccia are critical, in that they indicate the presence of silicic alteration, most likely as a horizon (cf. Yanasacha), with subsequent transport to the present level as the result of hydrothermal breccia eruptions. The abundance of the hydrothermal breccia may account for the numerous >1 g/t Au assays returned. Sub-rounded fragments of silicic alteration where also observed at Boqueron, although not as common as at Ermita, and not yet sampled. Fig. 6: Gama prospect, showing the central extent of quartz-alunite alteration outcropping at the steep western erosional slope from Ermita in the north to Boqueron in the south. Preliminary results for rock chips and channels that returned >100 ppb Au are shown, as of July, Quartz-alunite outcrops from ~3800 m down to below 3500 m in elevation; note the occurrence of a pyrophyllite zone at ~3600 m elevation. 11

12 Fig. 7: a) Ermita, outcrop of hydrothermal breccia consisting of sub-rounded to sub-angular silicic and quartz-alunite fragments; 6-m channel averages 1.6 g/t Au, no selective sampling. b) Ermita, channel through hydrothermal breccia with sub-rounded fragments of quartz-alunite, granular texture with pyrite, silicic, and at pointer, sulfide-rich fragment; #29735, average 3.5 g/t Au, selective sample of sulfide-rich fragment, 3.8 g/t Au. c) Silicic fragments in Ermita hydrothermal breccia, with strong Fe oxide matrix. #27937, 2.2 g/t Au, 60 Ag, 1000 ppm As, 600 ppm Sb, 23 ppm Se, 10 ppm Te. d) Boqueron hydrothermal breccia of sub-angular to sub-rounded fragments of silicic alteration, no sample at time of writing; trend of breccia ~WNW, similar to Lama vein, to ENE. Fig. 8: a) From Boqueron NNE to Ermita on far ridge. Outcrop of quartz-alunite of lithic tuff horizon with dip of 10+ degrees to SE, into hill. b) North over central Boqueron, showing resistant NNE ribs due to structural control. 12

13 The quartz-alunite alteration is dominantly of lithic tuffs, with horizons that consistently dip at shallow angles into the slope (Fig. 8a), with a 10+ degree dip angle oriented ~SE (George Smith, pers. commun.), i.e., horizons are progressively deeper to the east, in the direction of the basin. Between the quartz-alunite horizons, in the valley between Ermita and Boqueron, there is dickite alteration (with 3 ppb Au), also defining the lithologic control to alteration. In addition to this lithologic control, as seen at Yanasacha, there is also clear structural control, as evidenced by the more resistant ribs of silicic and quartz-alunite alteration, trending NNE (Fig. 8b). Discussion The Gama prospect has all the characteristics of a well-developed lithocap, with lithologic control to horizons of alteration indicated, coupled with structural control (likely feeder zones at depth), albeit the extent of the silicic alteration is not yet known. Relatively late hydrothermal breccias provide evidence for silicic alteration at depth, particularly at Ermita, and these breccias are mineralized with 1+ g/t Au. Silicic alteration is the principal host to high-sulfidation mineralization in general, including at the nearby Quimsacocha deposit (Fig. 9; In addition to the initial indications of gold mineralization, possible in the silicic fragments, the Gama system also has size potential, based on the extent of the hypogene quartz-alunite alteration (Fig. 2, 4). This compares favourably with the extent of advanced argillic alteration noted at several high-sulfidation deposits (Arribas et al., 2000, SEG Tahoe), despite much of the area of potential alteration lying beneath cover east of the erosional ridge. Quimsacocha type section, discovery hole ( Fig. 9: NW-SE section through the Quimsacocha deposit, 15 km SE of Gama, including the discovery drill hole, number 122 (from 5 July 2006 presentation, lodged at Note the flat-lying horizons of silicic alteration, controlled by lithology, in this case tuffaceous units. Of the two silicic units, the lower horizon is mineralized, the upper is largely barren, based on IAMGOLD assays reported on this figure. The silicic horizons have halos of quartz-alunite and pyrophyllite alteration, and structurally controlled feeder zones at depth. 13

14 Qtz-alun boulders, possible silicic outcrop Fig. 10: Plan map of Gama prospect, showing the Lama rhyolite dome to the north, with veins on NW margin up to 3840 m elevation, i.e., the top of the outcropping quartz-alunite system. Outcrops of other domes surrounding the basin are shown in grey. Quartz-alunite outcrop of Ermita to Boqueron, 4 km in extent along the break in slope, are shown in orange. Sections A and B in Fig. 11. Lithocap alteration to the east includes glacial boulders of quartzalunite and possible outcrop (in place) of silicic alteration. W Boqueron E??? Hydrothermal breccia w/ silicic fragments, >1 g/t Au NW Ermita SE??? Fig. 11: Sections A (top) and B (bottom), trending E-W and WNW, respectively, through Boqueron and Ermita to a rhyolite dome in the east (Fig. 10). Note the 2X vertical exaggeration. Alteration model shown; see text. Orange, quartz-alunite; red, silicic; grey, dacite dome. Argillic halos not shown. 14

15 Based on the field observations and characteristics of the Gama system noted above, schematic cross sections have been constructed (Fig. 11). The presence of silicic fragments in hydrothermal breccias is the critical evidence that silicic alteration, probably a horizon controlled by a lithologic unit, is present at depth beneath at least a portion of the quartz-alunite lithocap. This is illustrated in Figure 11. Testing the extent of the silicic unit will be assisted by an IP survey, initially, as the silicic unit has a very high resistivity signature. Unless oxidized, the presence of pyrite that accompanies silicic alteration, as well as sulfides that are part of the subsequent mineralization event, provides a chargeable anomaly. Such results, integrated with the geology, structure, and alteration mapping, will help to define initial drill targets. It is likely that the initial drilling will have to be at least ~ m in vertical extent, angled at ~70 degree to intersect the primary dip of lithology at as high an angle as possible, and at the same time test potential feeder structures. West to NW dips of drill holes will test east to SE dipping strata, as well as NE-trending fractures that dip to the east; if other major structural trends are identified, as observed in Fig. 12 (NE strike but steep west dipping), drilling may have to be adjusted to take other orientations into account. Of course, it could be argued that the silicic center of the system was located further west, and hence is now eroded in its entirety. Arguments against this possibility include the apparent lack of a porphyry feeder system immediately to the west, and the fact that the silicic core of lithocaps is the most resistive part of the system, more than the quartz-alunite. Because of the latter, many high-sulfidation deposits are located in areas of steep cliffs consisting of silicic alteration, unless erosion has not exposed the silicic level greatly, e.g., at Pierina (and the subsurface distribution of high-grade mineralized silicic alteration at Quimsacocha; Fig. 9). The top of the Chaucha porphyry occurs at an elevation of ~2800 m about 5 km west of Gama, and it is unlikely that the Gama lithocap extended over such a large distance from source. The Chaucha porphyry deposit is hosted by similar rocks ~1000 m below the base of the nearby Gama lithocap, which is likely of similar age to the porphyry. This is good evidence for a top of a porphyry system to lie at a similar depth below the Gama lithocap, since porphyry deposits are typically 500 to 1000 m below their ubiquitous lithocaps, where preserved (Sillitoe, 1999, PacRim Proceedings). The pyrophyllite occurrence at lower levels at Gama is supportive, as this mineral commonly occurs at the lithocap to porphyry transition (Hedenquist et al., 1998, Economic Geology). Fig. 12: Boqueron, looks SW along a NE-striking, steeply west dipping silicic structure in quartz-alunite, 0.5 g/t Au. Barite, a common gangue mineral in highsulfidation deposits, occurs with sulfide and extensive oxide along the structures. Pre-mineral dacite intrusions are present at lower elevations, to left (outcrop down to ~3500 m elevation), with ppb Au; a tunnel at the base of the intrusions returned a 1 g/t Au assay. Eventually the geophysical IP survey will have to be extended to cover the whole basin, as defined by the domes, to determine the extent of lithocap alteration, particularly to the east, and whether or not there is more than one center of alteration (and mineralization?) at Gama. Marginal structures, such as those NW of Lama, may help define the limits of the system. 15

16 Summary and conclusions The early stage Gama prospect consists of typical advanced argillic lithocap alteration, dominated by quartz-alunite, with hydrothermal breccias containing fragments of silicic alteration from deeper in the system. The principal area, encompassed by Ermita and Boqueron, lies on a steep slope over 4 km in a N-S direction, with >300 m of vertical exposure from the highest elevation at 3840 m. Preliminary assays from channels indicate numerous occurrences of >1 g/t Au, particularly in association with the silicic fragment-containing hydrothermal breccias. The copper and arsenic at Boqueron each have a slight maximum at ~3700 m (Appendix), perhaps consistent with oxidation of a Cu-As sulfide, such as enargite, near this elevation, with migration of the anomaly from the silicic zone to the quartz-alunite halo. Gold at Boqueron is largely <200 ppb in the quartz-alunite, but locally is >1 g/t. By contrast, the restricted vertical interval at Ermita shows many samples with >1 g/t Au, plus up to 100 ppm Ag, 1200 ppm Cu, and 3000 ppm As, most likely due to the transport of mineralized silicic fragments to the surface in that area. The general positive relationship of silver to gold (Appendix) supports the observation that, despite Fe oxide at the surface, particularly at Ermita, the gold values are probably close to their primary values, rather than being remobilized and concentrated, since supergene processes commonly deplete the sample in silver. The lithocap exposure lies on the western margin of a basin ~5 km in diameter that is defined by the position of several relatively fresh dacite domes, including the Lama dome on the north, with an intermediate sulfidation vein outcropping on its NW margin from 3840 m elevation down to at least 3600 m. Quartz-alunite continues SW of the western margin of the dome-defined basin at least 2-3 km, along the westward-verging erosional scarp. Alteration appears to be related to lithologic units, including tuff horizons, which dip at shallow angles to the east or SE, and there is also silicic alteration controlled by structures that may include feeders. The principle target is the silicic zone that breccia evidence indicates is present at depth. Such a zone is likely present beneath the pampas with a surface at ~3800 m elevation, perhaps as deep as 200 m or more. The degree of mineralization remains to be assessed, but the 1+ g/t Au in hydrothermal breccia that includes silicic fragments is encouraging that the lithocap system is mineralized with gold. The extent of the system remains for an IP survey to help define, followed by initial drill testing. As argued above, the center of the system most likely lies beneath cover, rather than having been eroded to the west. The Yanasacha prospect, which lies on the NE margin of the Quimsacocha volcanic center, is a similar lithocap target, albeit at an even earlier stage of assessment. Mapping of a portion of the prospect has identified a flat-lying lithologic-controlled silicic horizon with structural ribs cutting the slope that exposes the system at 3600 down to 3300 m elevation. Outcrops include quartzalunite, granular silicic (that may have originally been quartz-alunite), kaolinite±dickite, and propylitic alteration. Preliminary sampling indicates grades up to 0.8 g/t Au, with locally higher values. The question at Yanasacha is whether it represents the margin of a nearby hydrothermal center, perhaps related to the intrusion 2 km to the south that is indicated from a regional magnetic survey, or it is an outflow from the Quimsacocha system and ore deposit ~8 km SW. Further mapping and representative sampling are necessary to address this question. At present, the Gama prospect is very attractive, having all the characteristics of a potential highsulfidation deposit alteration style, mineralization indicators, size potential in terms of areal extent with preliminary indications that any silicic-hosted gold mineralization found would be accompanied by sulfides. Yanasacha is smaller in areal extent, but has all the characteristic 16

17 alteration of a lithocap, including outcropping vuggy and massive silicic that still must be inferred from fragments in hydrothermal breccias at Gama. Nevertheless, indications of mineralization at Gama are more promising and thus higher priority at present, although Yanasacha has yet to be mapped and sampled in its entirety. Many questions remain at both prospects, questions that mapping and sampling will help to answer. Such baseline work is essential in order to establish the best targets for drill testing at Gama; at least 6 months of work, if not 9 to 12 months, are justified for mapping, sampling, and geophysical survey prior to commencement of drilling. Large systems such as Gama can easily absorb dozens or more of drill holes around an orebody (cf. Quimsacocha exploration history, therefore, as much surface work as can be done should be done prior to drilling. Recommendations Gama Continue mapping of the complete prospect, including the lower slopes as well as the fresh domes. Establish alteration styles with detailed assessment initially by PIMA. Determine all structural trends and styles. Characterize the geochemical signature of all alteration types, particularly relative to the elevation. Characterize all hydrothermal breccias, and determine if there are multiple stages of brecciation, some pre-mineralization and others syn- to post-mineralization. Carefully assess the component(s) within breccias that are responsible for reporting gold, silicic fragments, quartz-alunite fragments, and/or matrix. The best assays in breccia do not necessarily mean the best or only zones at depth to test, but these are certainly initial targets. Conduct an IP survey over Boqueron-Ermita, eventually extending the survey until the margins of the altered system are determined. If fresh rock is indicated in the basin, test the eastern margin of the basin to determine if the silicic occurrences are indeed in place. It is essential to define the silicic center(s) of the system, as these are the principle targets. Interpret the geophysical data with local geological knowledge, and integrate with the geology and alteration to arrive at a model of the system that can be used to establish targets to test by drilling. Keep in mind the hydrologic control(s) on upflow versus outflow. When complete, test to at least 3500 m elevation, i.e., up to 300 m vertical below the surface. Refine model based on initial results prior to second drill campaign. Yanasacha Map the whole prospect, paying particular attention to the lithology and alteration, plus structures. Collect representative samples, with 80% of samples from silicic styles of alteration. Assess whether the system has mineral potential, or is the (largely barren?) distal expression of Quimsacocha. Apply experience gained at Gama to assessing Yanasacha, and in turn, apply the knowledge from Yanasacha, particularly on lithologic control to the silicic zone, to the assessment at Gama, where the silicic core of the system does not outcrop. Once the size of the alteration zone is known, and the center of the system is postulated, conduct an IP survey over the area to assist in developing a model of the system. 17

18 Qualifications I, Jeffrey W. Hedenquist, of Ottawa, Canada, hearby certify that: I am President of Hedenquist Consulting, Inc., incorporated within the province of Ontario. I am an independent consulting geologist with an office at 74 Greenfield Avenue, Ottawa, Ontario, K1S 0X7, Canada; telephone I am a graduate of Macalester College, St. Paul, Minnesota, USA (B.A, Geology, 1975), The Johns Hopkins University, Baltimore, Maryland, USA (M.A., Geology, 1978), and the University of Auckland, Auckland, New Zealand (Ph.D, Geology, 1983). I have practiced my profession as a geologist continuously since 1975, working as a researcher for the U.S. Geological Survey, the New Zealand Department of Scientific and Industrial Research Chemistry Division, and the Geological Survey of Japan until the end of I have published widely in international refereed journals on subjects related to epithermal and porphyry ore-deposit formation and active hydrothermal systems. I consulted to the mineral industry and various governments as a New Zealand government scientist from 1985 to 1989, and I have been an independent consultant since January, I am a Fellow of the Society of Economic Geologists and have served as an executive officer, and am a member of the Society of Resource Geology of Japan and the Geochemical Society. I was Editor of the 100 th Anniversary Publications of Economic Geology, am an editorial board member of Economic Geology and Resource Geology, and have previously served as editorial board member of Geology, Geothermics, Journal of Exploration Geochemistry, Geochemical Journal and Mineralium Deposita. This report is based on information provided to me by Cornerstone Resources, publicly available reports, published or on the Internet, and personal observations in the field. I have no direct or indirect interest in Cornerstone Resources, in the properties described in this report, or in any other properties in the region. I hearby grant permission for the use of this report in its full and unedited form in a Statement of Material Facts or for similar purpose. Written permission must be obtained from me before publication or distribution of any excerpt or summary. Hedenquist Consulting, Inc. Jeffrey W. Hedenquist Date: September 2006 Jeffrey W. Hedenquist, Ph.D. Quito and Denver President 18

19 Appendix: Geochemistry Gama: Boqueron-La Ermita (from Alex Cruz) Gold vs Silver (Boqueron-LaErmita) Boqueron LaErmita Ag (ppb) Au (ppb) Gold/Elevation-Boqueron-LaErmita Elevation(m) Boqueron LaErmita Au(ppb) Silver/Gold Ratio vs Elevation (Boqueron-LaErmita) Elevation(m) Boqueron LaErmita Ag/Au 19

20 Mercury/Elevation-Boqueron-LaErmita Elevation(m) Boqueron LaErmita Hg(ppb) Copper/Elevation-Boqueron-LaErmita Elevation(m) Boqueron LaErmita Cu(ppm) Arsenic/Elevation-Boqueron-LaErmita Elevation(m) Boqueron LaErmita As(ppm) 20