Great Investments

Great investments with tremendous potential in a modernizing world.

Tuesday, January 02, 2007


Top 5 Picks for 2007

Here are our top 5 stock picks for 2007. We believe all of these stocks should be great long-term investments and are worth accumulating at current levels or lower. Our top 5 picks for 2006 were up over 40% after one month, after which we sold all except the commodity stock and shifted to a focus on long-term investments in undervalued commodity stocks, shifting from the greattrades blog to the greatinvestments blog. The one top pick for 2006 we held on to was up over 266% for the year.

Metalline Mining (MMG, $3.59)

Our top pick from 2006 remains our top pick for 2007. We don’t know of any stock that has as high a likelihood of very high returns in coming years. We expect MMG to remain at the top of our list for years to come, unless someone buys them out in the next year or two, which we expect several companies to attempt.

If you do a comparative valuation analysis of other late stage pre-production world-class zinc projects or mid-tier zinc producers (trading orders of magnitude higher) and discount back for the time and risks to get to production, you'll see how tremendously undervalued MMG is at about 1/4 of one year's projected operating cash flow. That’s an amazing value for what could be, in about a year, the biggest proven feasible preproduction zinc project in the world (and maybe the only one of world-class size). As the projected cash flow numbers get confirmed with the mine plan and the rest of the feasibility study in the coming year, we expect both the time and risk discounts to decrease significantly and the stock price to move up substantially as a result.

Since Metalline Mining only got Amex listing in November and had virtually no institutional interest on the bulletin board before that, there's huge pent-up demand from institutions who will want a piece of the only zinc junior listed in the U.S., especially if zinc stays strong or breaks out to new highs this year. If they make it to production, which seems very likely given that the same team got the similar Skorpion mine into production at .35/lb. zinc (zinc is now over $1.90/lb.), MMG would have to move up enormously in coming years just to get a similar valuation to the zinc miners in production, which are arguably very undervalued. As they prove out their high-grade silver deposit, the market should start to recognize the precious metal value of the company as well.

Roxmark Mines (RMKL in Canada, $0.21)

As we mentioned last month, Roxmark Mines (RMKMF in the U.S. or RMKL on the CNQ exchange) should get listed on the Toronto Venture exchange very soon, which should bring in new investors who haven't been able to buy the stock on the little known CNQ exchange. By the end of the year Roxmark should be in full production with their molybdenum mine and move toward 2008 production with at least one of their 6 former producing gold mines. The current market cap is around the same value or less than the value of their modern mill, which can process both molybdenum and gold, so there’s little downside risk and very high upside from the coming molybdenum and gold production. This article from last spring has a great description of the Roxmark story:

JER Envirotech (JER in Canada, $0.82)

We highlighted JER Envirotech in April and August. Some production delays due to a supplier mixup held up operations at their new Malaysian plant until last month, but now that plant is in production. With both WPC compounds and WPC panel boards now in production, the founder is moving to a technical advisory role and handing over the reins to a new CEO with extensive background in sales and marketing in the polymer industry, who will lead JER as it shifts focus to commercializing their products and expanding their manufacturing operations globally. JER is working toward getting a U.S. symbol to make it easier for U.S. investors to invest in the company.

Acadian Gold (ADA in Canada, $0.98)

We highlighted Acadian Gold (ADGLF in the U.S.) in November. While it broke out to a new all-time high as we expected and has already moved up over 40% since our writeup, we believe it still has lots of upside as they go to production with their zinc mine early this year and use the cash flow from that production to advance their gold projects toward production. There are very few near-term zinc producers, and Acadian Gold could be hitting production right around the time that LME zinc inventories hit crisis levels, though its small production (about 15-16,000 tonnes of zinc per year for the first 5 years) would have little effect on zinc inventories.

Copper Fox (CUU in Canada, $0.60)

We highlighted Copper Fox (CPFXF in the U.S.) in August. A more recent article gives a good description of the Copper Fox story. If Copper Fox can produce strong results from its pre-feasibility study on its huge Schaft Creek project this year, it should move up significantly from its current very small market cap. With recent takeover bids for its neighbors (Barrick’s bid for NovaGold, Imperial’s takeover of bcMetals, Barrick’s takeover of Pioneer Metals), Copper Fox is in an area now more likely to get infrastructure built and is also a likely takeover target down the line (Schaft Creek partner Teck Cominco is the most likely bidder).

Thanks for the great article. I agree that MMG should go up significantly, hopefully soon. MMG is really too volatile for the low volume stock. When the entire market goes up, MMG goes down (as in today). Technically that's not a good sign, hopefully when the fundamentals improve, our investment will pay off.
We believe MMG's an incredible long-term investment, but the volatility ahead of the completion of the feasibility study requires a lot of patience. We view any dips as a buying opportunity, as we expect it to trade well into the double digits within the next year or two.

MMG doesn't move with the entire market. It tends to move more with commodity stocks and the mining sector, particular zinc miners. Watch a leader like TCK for an indication of how the sector is doing in the short term.
Explain the current 75 million market cap valuation given to Yukon Zinc, who has completed a feasibility Zinc study, has significant resources 2.8 b pounds, and also lead, copper, and other... and frankly, market doesnt seem to care. Why should the market care anymore about MMG when they complete theirs??
Yukon Zinc’s stock took a big tumble last year because the results from last May’s feasibility study were horrible, proving that the project was uneconomic because of their high costs associated with being in such a remote location in the Yukon. They lost a lot of credibility when, just a week later, they had to revise the feasibility study to show even worse numbers because of a “computational error.”

The main change in the January reworked feasibility study was the higher assumed metals prices, but the numbers still weren’t great (pre-tax NPV 8% of C$104.8M at the SEC-allowed 3-year backward average metals prices). Yukon Zinc is going to have a big challenge securing financing of the over C$200 million required to go to production. If they can secure financing, they will likely be required to hedge their production significantly because of their high costs, reducing their upside. Their zinc reserves are less than 1.1 billion pounds. Yukon Zinc’s best bet is to find a partner willing to share the risk and help with the financing.

MMG will have much lower costs than Yukon Zinc, as they have existing infrastructure in the form of 45+ previously operating mines, roads, railway, electricity, labor, etc. all in place, and they have no royalties to pay, unlike Yukon Zinc. They also plan to build their own refinery, which would give them a huge cost advantage over other zinc miners. Yukon Zinc’s CEO mentioned on their feasibility study conference call that zinc miners only get about 60% paid from smelters after factoring in the payable amount (smelters only pay on 85% of the zinc), treatment charges, and penalties (they'll need to pay a penalty on the selenium). Zinc smelting is an enormous cost, and MMG, just like the Skorpion mine before it, will avoid that by using their own refinery. Also, because of their much larger project size, they have better economies of scale and will attract more takeover attention from the major mining companies, especially Anglo American, who bought out the Skorpion mine after Green Team International (GTI) finished that feasibility study.

As mentioned on the blog, GTI is the team doing the feasibility study for MMG and the team likely to put the zinc deposit into production. They're the same team that did the feasibility study for the Skorpion mine and put it into profitable production when zinc was at .35/lb. Here's a list of some of their projects, with MMG’s Sierra Mojada zinc project listed, along with the Skorpion project: . Since the Skorpion mine is the lowest cost zinc mine in the world (not including byproduct credits) and one of the largest in the world, there's no team that could possibly be better to work on this project. GTI’s success with the similar Skorpion mine helps to ensure the success of MMG’s Sierra Mojada zinc project.

In addition to the much larger and lower cost zinc project, MMG also has a huge amount of high-grade silver as well as copper, lead, and other metals in deposits that they’re working to define, all for a market cap less than double that of Yukon Zinc.

From their 1/31/2000 10-Q:
"The Sierra Mojada Property has produced in excess of 10 million tonnes of
high-grade ore that graded in excess of 30% lead, 20% zinc, 1% copper and 1
kg (31 ounces) silver per tonne that was shipped directly to the smelter.
The district has never had a mill to concentrate ore. All of the mining
was done selectively for ore of sufficient grade to direct ship; mill grade
ore was left unmined. More than 50 kilometers of underground workings are
spread through the 5 kilometer by 2 kilometer area from which more than 45
mines have produced ore. The deepest workings have ore grade
mineralization and provide some of the best targets for reserve
development. In spite of the amount of historic work, when a map of all of
the historic workings is viewed there is much more unexplored area in the 5
by 2 kilometer area than has been explored and the vertical extent greater
than 100 meters is totally unexplored.

From the 5/1/06 President's letter to shareholders:
Work on the copper silver mineral system has been reactivated. The copper silver mineral system produced high grade direct shipping ore from 1906 until about 1995 from about 45 mines over an area of approximately 5 kilometers east-west by 1 kilometer north-south. The dump material from all of these mines has mill grade copper silver mineralization. There is underground access through these mines continuously for 5 kilometers east-west. Metalline explored the north side copper silver mineralization from 1996 to 1999 and has collected over five thousand channel samples from these workings that have economic grades, particularly at present metal prices. We are drilling and channel sampling this mineralization in the area known as the Polymetallic Manto that runs for a distance of about 1500 meters from the San Salvador mine to the Fronteriza mine parallel to the Iron Oxide Manto to the north. We are evaluating the data that has been collected and analyzed and will announce the results as this work progresses.

Here are some of the results from the recent Polymetallic Manto drilling:

With the over 5000 old channel samples, along with the recent drill results, they should be able to do a resource estimate of the Polymetallic Manto soon.

Yes, there has been recent distribution of the stock with the unlocking of shares from last year’s private placement. However, if you look at the weekly chart, there have been two previous periods of heavy distribution in the last 18 months, and each has proven to be a tremendous buying opportunity: . We believe the same will be the case this time.

The bottom line is MMG will be worth a lot more than Yukon Zinc because they will make a lot more profit. Not only do they have a lot more metals, but they have far lower costs, which means far higher profitability, much easier financing with far less hedging, if any, and far more takeover interest. You can’t just look at how much in resources and what stage a company is at to determine its value – a huge deposit in a remote location could be worthless if the metals can’t be extracted and brought to market profitably.
When is MMG's bankable feasability study scheduled to be completed? It seems that this will be the real turning point in the company's stock price.
MMG's BFS is scheduled to be completed in 2008, with no exact date specified. We expect the mine plan to be completed by summer, followed by the refinery plan. The date for the BFS will be better known upon completion of the mine plan (most miners don't do a refinery plan, so would be finished sooner).
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Disclaimer: Great Investments may have a position in all or some of the stocks discussed in this blog, but is not paid by any company to promote their stock. Great Investments contains opinions, none of which constitute a recommendation that any particular security, transaction, or investment strategy is suitable for any specific person. Great Investments does not provide personalized investment advice.

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