Managing Directors Report

Fellow Shareholders,
The first year for me in the MCO hot seat has passed very quickly. Much has been learned. The company is progressing and our dream of bringing gold production back to the historically prolific and rich Eastern Victorian goldfields is a developing work in progress.

I said last year when I joined the board and became MD that the directors’ prior vision and commitment in creating a high-class gold project in Victoria’s east was a good
precursor to joining the team. We have certainly taken large steps over 2008 to strengthen and enhance our mining assets via intensive exploration, infrastructure improvements, tenements expansion, resource delineation and planned bulk sampling and trial gold production.

I would like to thank my father 
Max Garling, your Chairman, for a constant guiding hand that comes from over 40 years of experience in the public company and gold exploration and mining sphere. 
Max has suffered a significant deterioration in his eyesight over the past year or two but nonetheless; he gets to work for Morning Star and its shareholders every day, just as he has for much of the time since 1992, for a relative pittance. Morning Star’s other directors Mal Bird, Jeff Williams and Peter Jackson are all seasoned mining, technical & public company professionals and their consistent feedback over the year and inexpensive needs helps your company a lot. During the year, our previous Chairman Timothy Allen stepped down from our Board to pursue other corporate interests and we sincerely thank Tim for his contributions to MCO over several years.

I would also like to thank the staff of the Department of Primary Industry Victoria (Minerals Division), for their unwavering support over the year in relation to our mining tenements and programs. Consultants were also of great use to your company in the period including Greenfeeld, GAA, Starwest, Elletson Mining and Gemcom.

Morning Star is undergoing an exciting phase as we build towards a plan for trial gold production and cash flow. Developments immediately after the end of the annual period relating to diamond drilling at surface of the Waverly Dyke structure, the Maxwell Pilot Mining Program and the amalgamation of our greatly increased mining tenements in Eastern Victoria are ongoing. I’d like to look back and briefly overview the annual reporting period of 2008 and note some highlights for your consideration.

 

Mine History and Records Digitisation
The Morning Star mine’s production history is rich and proud, as is the gold production in our part of eastern Victoria overall. Around a million tonnes of ore was extracted from the Morning Star mine for nearly 900,000 ounces of gold gained at over 24.5 grams per tonne excluding tailings estimated by some to be up to 7 grams per tonne (now living somewhere in the Goulburn River system!) Those figures are outstanding in themselves. In fact the Morning Star was once Australia’s largest producing gold mine in the 1940s and probably at times before that too. The tenements MCO have currently assembled produced in the order of 2 Million Ounces of Gold. Surrounding tenements in the Walhalla to Woods Point Synclinorium produced closer to 6 Million Ounces in aggregate at rich grades of close to an ounce per tonne. Luckily for us, Gold Mines of Kalgoorlie (Australia) Ltd or WMC Ltd as they became known kept detailed records of production, stoping, exploration and operations in their 25 years of continuous operations at the Morning Star mine (1934-1959).

At a mining conference in Melbourne recently, the ex-WMC toiler Hugh Morgan reminded me of this fact and others relating to the Morning Star. It turns out his father Sir William (Bill) Morgan who succeeded Sir Lindesay Clark as head of WMC had a particular affection for the old mine at Woods Point. Digitising the GMK (WMC) records is a large job and with limited resources, we have done it slowly but surely and the task will be ongoing for 2009. We are about 40% the way along the job at the close of the period.

 

Focus Moved to Exploration of Gap Zone & Resource Definition
In past years, the company’s focus has mainly been on rehabilitating the main shaft and access ways of the Morning Star mine for future exploration of under explored and partially developed mining areas in the mine. In the 2008 reporting period, underground exploration of the ‘Gap Zone’ of the Morning Star mine has been the main theme. The ‘Gap’ is an area estimated to contain ~60-65MT of dyke and host rocks. It starts at ~150m underground and runs to a depth of around 450m from surface. Much of the Gap is undrilled, underexplored and presently undeveloped for mining. Luckily though we have the benefit of access with a vertical shaft running through the entire zone with several levels either fully or partially developed via horizontal drives or floors.

MCO has drilled over 6kms of diamond drill core in ‘HQ’, ‘NQ’ and ‘LTK64’ in the 2008 period predominantly in the upper Gap Zone between Levels 9 and 7. We have also taken hundreds of samples and assays from this core. In the process, we have discovered several exciting new gold bearing quartz reef structures in the Gap Zone, among them Kenny, Maxwell, Sydney Reefs and an extension to the prolific Whitelaws Reef. MCO estimates drilling to date has indicated an increase in the proportion of mineralised dyke within the total zone from 5% to ~10%.

We completed an extensive channel and reconnaissance-sampling program on under-developed areas of Levels 5-9 of the mine. The results from these rock-chip samples were outstanding particularly in the Burns, Campbell’s and Whitelaw’s Reefs. The good news was these samples were deliberately not taken from remnant mining pillars and the like; they were from walls of stopes and drives where mining had ceased or areas that had been developed for further mining but it hadn’t occurred. The average grade of the overall sampling program which ran into the first quarter of the 2008 reporting period was ~80 grams per tonne from over 200 samples of ~3-5kg each.

Diamond drilling from underground (Level No. 9 @ ~275m U/G) with two Kempe air driven drills returned some outstanding results, which are summarized in the Review of Operations. Suffice to say, the intensive drilling has given us increased confidence that areas of the Gap can be economically extracted as we move towards trial production next year. In general terms, the Maxwell and Sydney Reefs hold potential close to the main shaft in the southern area of the Morning Star dyke at a depth from surface of ~240m. At the northern end of the Morning Star dyke, some 300m away along the 9L drives, the Kenny and Whitelaw Reefs hold exciting potential as well. In both areas, some assays (up to 1,392g/t over .38m at Maxwell Reef) were simply outstanding and beyond our expectations. 
A simple schematic below shows the 9 Level and where we’ve successfully drilled to date and the location of the planned Maxwell trial mining extraction for the upcoming period.

Pilot Mining Program at Maxwell Reef
Just prior to the end of this annual reporting period, your company announced a 3,000 tonne trial mining extraction from Maxwell’s Reef. 
The Maxwell Pilot Mining Program will 
be reported on in the subsequent period. In essence, it’s believed that a trial parcel can be extracted economically and treated at a cost of around $270 per tonne and the company can receive some cash flow. The area of extraction is expected to carry head grades up to half an ounce per tonne. The program will also be a good further study in grade factoring at the Morning Star dyke as detailed below.

Preliminary Resource Report under the JORC Code 2004 and Grade Factoring Study
At the end of the 2008 reporting period, Morning Star was yet to receive the preliminary report undertaken by geological consultants GAA with assistance from Gemcom mining software. The report was commissioned during the period and its completion is expected in July of 2008. The gold resource will be stated in terms of the JORC Code 2004 and will cover only the Morning Star mine and include recent Gap Zone drilling and the historic WMC drill assays digitised to date (only ~40% of archival records). One component of the Resources Report, which was completed in the 2008 reporting period, was a comprehensive grade factoring study looking at historical information gathered from GMK (WMC) records. The grade factoring study has reviewed the largest reef deposits of the Morning Star mine, comparing 438 drill hole intersections through these reefs with 7,570 face samples collected from stope development headings. The results show consistent increases in gold grades, with increasing sample size and density. Stope production grades were found to be consistently 250% to 650% higher than drill hole intersection assays. A full interpretation of this issue will be available in the Preliminary Resources Report, stated under the JORC 2004 guidelines, which is due in July 2008. Some further discussion is in the accompanying Review of Operations.

Waverly Drilling Program Commenced
At the close of the period, Morning Star has completed the first 3 drill holes (WV01-03) ever into the Waverly Dyke structure less than 1,500m from the Morning Star mine site. The Waverly is a dyke-hosted deposit, similar in geology to the prodigious Morning Star and All Nations Mines. Holes WV04-06 in the program were to be completed shortly after the annual period closed.

The Waverly Dyke was historically only mined by hand to around the base of the weathered zone, some 60-80m below surface. The production history is currently under review as we gain more information from the ongoing diamond-drilling program. The Waverly presents Morning Star with the outstanding opportunity to explore and develop a mostly untapped, large auriferous dyke deposit in close proximity to the Morning Star mine. Overall there is scant historical information relating to the Waverly Mine and Waverly line of workings, which are evident along a very straight line, for over 4kms at surface on MCO tenements.

The Waverly has historical reference of grades exceeding 1oz/t and to date, we have assumed a very conservative historical production aggregate of at least 50,000 ounces of gold. It is highly probable that it will be greater than this. There are abundant abandoned mine workings along the line of outcropping dyke. Large mullock dumps have been observed right along the line of workings. MCO views the extensive near surface workings at Waverly as a positive, as although the terrain would have been inhospitable historically, as was nearly 400m in relative height above the nearby Goulburn River, the scope of workings indicates the gold was abundant. The mine shafts along the Waverly may be up to 80 metres deep, but local and regional dykes are much deeper than this with the nearby Morning Star dyke having been mined at 940 metres depth and gold occurrences observed in assays beneath a depth of 1km in drilling.

After the close of the period, drilling in WV04-06 holes, intercepted mineralized dyke and visible gold between 100m–140m from surface and assays were to be reported subsequently.

 

Bulk Sampling for Metallurgical Testing
Morning Star Gold has continued to have independent tests run by NATA certified labs on bulk ores taken from the Morning Star mine, in order to assess ROM metallurgical recoveries and grade factoring analysis. Tests were commenced just prior to this reporting period and results received over 2008. The tests are reported in our Review of Ops but in summary, they were overwhelmingly positive in that they showed that standard gravity processing of Morning Star ore would deliver 93% free milling gold and 99% recovery after 2 hours of leaching. These tests are also helping in our initial plant feasibility. We have run additional tests with Gekko Systems of Ballarat in order to specifically assess modular (underground) gravity concentrator plant options.

Mining Tenements Increased 

Morning Star received final confirmation from the Department of Primary Industry Victoria in the 2008 period, of a significant expansion in its tenement position around Woods Point and Gaffney’s Creek. Two short years back, your company held the Morning Star mine and a 1.3km2 Mining Licence surrounding it. That was increased to 20km2 in the previous period and now Mining Licences and Exploration Licences total over 220 km2 as at the end of the 2008 reporting period. The key high-grade production historical sites are all with 11kms of Woods Point, which is the company’s regional base. The following new Mining & Exploration Titles were granted in the 2008 reporting period: 


MIN 5480 – This Mining Licence covers the Shamrock dyke and various local mine workings. MIN 5481 - This Mining Licence covers the central portion of the Waverly mine. MIN 5482 - This Mining Licence covers the southern portion of the Waverly mine. MIN 5489 - This Mining Licence granted under s25A of the Act, covers the south central portion of the Waverly mine, and the northern line of the Tingha workings.

EL 4320 and EL 5079 – These Exploration Licences, covering Morning Star’s entire tenements, were granted after final ratification from the NNTT of Morning Star’s ILUAs with the relevant Native Peoples. They are adjoining and comprise a large area of around 200km2, which runs to the northwest up along the three notable historically mineralised shear zones proximal to the Morning Star mine. These are the Ross Creek, All Nations and Tingha-Waverly Zones.

Native Title – Morning Star received final confirmation and ratification from the National Native Title Tribunal (NNTT) that it has binding Indigenous Land Use Agreements (ILUAs) in perpetuity with the Taungurung and Gunai-Kurnai native peoples relating to all exploration and mining of resources on it’s entire tenement map. This enormously strengthens the company’s position and future. Morning Star Gold is the first company ever to receive these perpetually binding agreements in Victoria.

Regional Exploration Program

Morning Star Gold is conscious of the need to further develop our regional priority targets and this process was ongoing during the 2008w reporting period. An overall endowment of resources across our increased eastern Victorian tenements was being assessed at period end in order to agree a clear priority exploration list going forward. At this point in time, MCO’s key targets include but are not limited to:

Waverly – A largely untested dyke of over 5kms in strike length very close to the Morning Star mine which yielded high-grade gold in shallow workings in the late 1800s. Preliminary drilling in the period shows promising mineralisation as mentioned above.

All Nations – A significant mine near Matlock and Woods Point which produced more than 130,000ozs 
Au and has yielded its gold historically from a dyke but also two separate reefs outside the main dyke structure. Underground access is available 
via adits.

Loch Fyne – A mine near the 
All Nations, which yielded over 100,000 ounces of gold historically. Although accessible from the Yarra catchment, the mine can also feasibly be explored from the Goulburn River side of the catchment.

Rose of Denmark – One of the larger regional dyke structures with high returns of gold near Gaffney’s Creek.

Shamrock and Comet Mines – Both mines are situated very close to the Morning Star, the Comet having produced over 60,000ozs Au and the Shamrock known to host metals such as copper, cobalt, gold and palladium.

Conclusion
Overall, Morning Star has had a very formative year in its steps to re-ignite the promise of gold production in the historic Eastern Victorian Goldfields. Ahead of your company lies the lure of cash flow from trial mining operations, and the prospect that the Woods Point Gold Project can be strengthened to become a large self-sufficient and viable gold mining enterprise for multiple years. A wise man once said to find elephants, you must be in elephant country. Morning Star Gold is well placed.

Sincerely, 


Nicholas Garling
Managing Director