Great Investments

Update: Stocks Sell Off, Gold/Nasdaq 100 Ratio Buy Signal

2010-05-04T21:53:00.001-07:00

From Sunday's update:

This breakdown from the rising wedge, along with the weekly bearish engulfing candlestick, VIX breakout over 20, and the excessive bullishness of newsletter writers, increases the likelihood that the market is in for more selling. A number of other indicators point to more selling to come, though there's a possibility of a short-term bounce first after Friday's sharp sell-off. Any market bounce should be used to sell non-mining stocks.

Monday's short-term market bounce proved to be a great opportunity to sell stocks, and this pullback in silver and mining stocks, which were caught up in today's 225-point market selloff (likely hedge fund liquidations in thin markets), should prove to be a great buy opportunity for anyone doing this portfolio re-allocation.

As for the monthly Gold/Nasdaq 100 ratio chart, the stochastics lines have crossed back up:

Right now, this portfolio re-allocation strategy indicates a shift to long gold and short the Nasdaq 100 should be made. This ratio is just coming off the 36-month EMA, and the stochastics lines are oversold below 20, and look like they should cross back up soon.

Sunday's chart:

As you can see above (bottom pane), the black stochastics line was 11.84 while the red stochastics line was still above it at 13.50.

After today's action, the black stochastics line (16.62) has crossed back above the red stochastics line (13.93) to trigger a stochastics buy signal:

Keep in mind that this is a monthly chart, and May has just begun. It's the end of the month that counts on a monthly chart, so the stochastics lines will need to remain crossed back up at the end of May for this buy signal to be valid. Also, May is just one month -- this longer term chart could take several months to generate a stochastics buy signal if this cross doesn't hold.

It's a good start so far for this portfolio re-allocation strategy shift, but it won't be proven a success for a few more months.

Portfolio Re-allocation: Sell Stocks, Buy Gold and Silver

2010-05-02T19:57:00.000-07:00

From our last Great Trades blog update, in March:

If recent history repeats itself, we should soon see a short-term pullback, which should be followed by new highs in the S&P 500.

The previous 10 times this EMA has peaked over 600 in the past year, the market has had a short-term pullback. Every one of those pullbacks has proven to be a buying opportunity, followed by new highs in the S&P 500.

Unlike the previous 10 times the TICK 10-day EMA peaked over 600, this time the market pullbacks were very brief, primarily limited to intra-day sell-offs. After this EMA dipped back under 200, it bounced back up toward 600 as the S&P 500 (SPX) rallied to a new high, peaking at 1219.80 this past Monday.

On the next day, Tuesday, something happened that we warned about in the last update:

However, a break of 20 resistance in the VIX could again spur a sharper pullback in the market.

Tuesday's break of 20 resistance in the VIX coincided with the largest market drop in months, as the SPX dropped from near 1220 on Monday to near 1180 on Tuesday. Since that VIX spike sent the VIX well above its upper Bollinger Band, and also sent other short-term indicators into very oversold territory (e.g., TRIN), the SPX bounced back to as high as 1209.36 on Wednesday and Thursday, dropping the VIX back under 19. On Friday, the VIX broke through 20 resistance again, as the market plunged again, with the SPX closing at 1186.69, closing out the week with a bearish engulfing candlestick sell signal on the weekly chart.

Now, the VIX is again above its upper Bollinger Band, but only slightly, at 22.05 vs. 21.59. The upper Bollinger Band is rising sharply, so the VIX can likely continue higher and still stay near its upper Bollinger Band. The TICK 10-day EMA is back under 200, but it can go significantly negative before rebounding, as it did in February, October, and a number of times in the previous 12 months.

The key level to watch for now is this past week's low, which was 1181.62 on the SPX. The Russell 2000 has already broken below its Tuesday low by over 3 points, and that small-cap index has been leading the market higher in recent months. If the other market indices follow, we should see a more significant market pullback. As this article points out, the three to one ratio of bullish to bearish newsletter writers is a red flag warning that could mean the market is in for a sizable correction.

On the Nasdaq 100 (NDX or QQQQ), the rising wedge uptrend since the February low was finally broken on Friday:

This breakdown from the rising wedge, along with the weekly bearish engulfing candlestick, VIX breakout over 20, and the excessive bullishness of newsletter writers, increases the likelihood that the market is in for more selling. A number of other indicators point to more selling to come, though there's a possibility of a short-term bounce first after Friday's sharp sell-off. Any market bounce should be used to sell non-mining stocks.

While the stock market looks like it's in for some more selling, the gold and silver markets look very strong. We've advocated accumulating gold, silver, and quality mining stocks on pullbacks, and that strategy has worked quite well:

Considering the longer-term trend higher in gold in its powerful bull market, this pullback should prove to be a great buying opportunity for longer term, for gold and silver as well as quality mining stocks.

After the strong rally in stocks over the past year+, this looks like a particularly good time to reallocate portfolio assets from non-mining stocks into gold and silver. While stocks look like they could be in for more selling, gold is breaking out to new highs on the year, and is very close to breaking out to new all-time highs.

Holding a portfolio allocation of long gold and short the Nasdaq 100 from early 2000 for 9 years would have made over 10 times your money, with similar results for silver:

Shifting portfolio allocation from gold and silver to the Nasdaq 100 and back based on stochastics signals (bottom pane) would have yielded even much better results, particularly when combined with the 36-month EMA and Bollinger Bands. Moving from gold to the Nasdaq 100 when this ratio was well above its upper Bollinger Band and the faster black stochastics line crossed below the slower red stochastics line above the 80 level, and then moving from the Nasdaq 100 back to gold when this ratio came back to meet the 36-month EMA while the stochastics lines were below the 20 level would have yielded tremendous returns with very little drawdown, and particularly strong outperformance during market corrections.

Right now, this portfolio re-allocation strategy indicates a shift to long gold and short the Nasdaq 100 should be made. This ratio is just coming off the 36-month EMA, and the stochastics lines are oversold below 20, and look like they should cross back up soon. Quality gold and silver mining stocks are also recovering from their financial crisis lows, and those that are well-financed with large deposits are poised to move up much faster than gold and silver because of their leverage. Mining juniors that have survived the financial crisis while maintaining large deposits and improving or maintaining healthy cash positions may perform the best of all because of their extreme leverage.

Silver has been more volatile than gold in recent years, but remains severely undervalued relative to gold on a historical basis. Currently, the gold/silver ratio is around 63.5, but the historical average over the centuries has been around 16. That means that if silver returns to its historical ratio with gold, it should quadruple relative to gold, even if gold is headed to much higher levels. This article discusses some reasons silver should move much higher relative to gold. For long-term investors, silver and silver mining stocks, particularly quality juniors with large deposits, could have exponential returns if the precious metals bull market continues.

As for fundamentals, the sovereign debt crisis around the world is starting to evidence itself with the crisis in Greece and the downgrades of Spain and Portuguese debt. As sovereign debt issues decrease the value of paper currencies around the world, the value of the hard currencies, gold and silver (the word for money in many languages is the same as the word for silver), will increase significantly.

This article describes the fundamental issues pointing to much higher gold and silver prices

This NY Post article from April 11 described the gold and silver price manipulation to keep prices down.

This article from this weekend points out that the Department of Justice Antitrust Division is now considering launching an investigation into silver market manipulation by JP Morgan. Could such an investigation be the catalyst that propels silver back up toward its historic ratio with gold?

Given the current technicals as well as the fundamentals, it looks like a strategic shift of portfolio allocation from stocks to gold and silver will likely pay off handsomely, especially if anything comes of any DOJ investigation into silver market manipulation. Aggressive traders can go short the Nasdaq 100 while going long gold and silver to fully participate in this ratio strategy. Even if the stock market continues higher unabated, the likely faster increase in gold and silver should reward investors who make this shift. If stocks should finally experience a significant pullback while gold and silver break out, this shift could be a life changer for some.

Trading Again

2009-01-12T20:30:00.000-08:00

In 2006, we didn't like the fundamentals for the U.S. stock market, so we decided to "cease active trading in the U.S. stock market" on expectations of "a tougher market for traders in coming months/years." We did "a strategic reallocation from the overall U.S. stock market to undervalued commodity stocks." Unfortunately, we didn't anticipate that the collapse in the U.S. financial markets would have such far-reaching ramifications, devastating commodity stocks along with the rest of the stock market.

While we continue to hold our portfolio of undervalued commodity stocks for the long term, as we believe commodity stocks will be big winners when the global economy recovers from the current recession amidst decreased future supply combined with recovering demand and high inflation, we have resumed active trading of the U.S. stock market in our trading accounts. We believe that for the foreseeable future, the overall U.S stock market will be a great market for active trading, and not such a great buy and hold market outside of commodity stocks.

We resumed active trading of the overall U.S. stock market in our dormant trading accounts 3 months ago (on October 10, when we had a buy signal), focusing on the market indexes rather than individual stocks, as the wide swings in the overall market have overwhelmed most stock picking in this volatile market. During this time, we've been developing our trading model based on a variety of technical indicators to time the significant turns in the U.S. stock market. We've had tremendous success with this model to date, as it has predicted every significant turn in the market over the past 3 months. It's still a work in progress, and we continue to fine tune it, but we plan to post its changes to market allocation to establish a published track record.

For those interested in the trading model's market allocation changes, please see the Great Trades blog.

Warren Buffet: Buy American. I Am.

2008-10-17T11:39:00.000-07:00

By WARREN E. BUFFETT
Omaha

THE financial world is a mess, both in the United States and abroad. Its problems, moreover, have been leaking into the general economy, and the leaks are now turning into a gusher. In the near term, unemployment will rise, business activity will falter and headlines will continue to be scary.

So ... I’ve been buying American stocks. This is my personal account I’m talking about, in which I previously owned nothing but United States government bonds. (This description leaves aside my Berkshire Hathaway holdings, which are all committed to philanthropy.) If prices keep looking attractive, my non-Berkshire net worth will soon be 100 percent in United States equities.

Why?

A simple rule dictates my buying: Be fearful when others are greedy, and be greedy when others are fearful. And most certainly, fear is now widespread, gripping even seasoned investors. To be sure, investors are right to be wary of highly leveraged entities or businesses in weak competitive positions. But fears regarding the long-term prosperity of the nation’s many sound companies make no sense. These businesses will indeed suffer earnings hiccups, as they always have. But most major companies will be setting new profit records 5, 10 and 20 years from now.

Let me be clear on one point: I can’t predict the short-term movements of the stock market. I haven’t the faintest idea as to whether stocks will be higher or lower a month — or a year — from now. What is likely, however, is that the market will move higher, perhaps substantially so, well before either sentiment or the economy turns up. So if you wait for the robins, spring will be over.

A little history here: During the Depression, the Dow hit its low, 41, on July 8, 1932. Economic conditions, though, kept deteriorating until Franklin D. Roosevelt took office in March 1933. By that time, the market had already advanced 30 percent. Or think back to the early days of World War II, when things were going badly for the United States in Europe and the Pacific. The market hit bottom in April 1942, well before Allied fortunes turned. Again, in the early 1980s, the time to buy stocks was when inflation raged and the economy was in the tank. In short, bad news is an investor’s best friend. It lets you buy a slice of America’s future at a marked-down price.

Over the long term, the stock market news will be good. In the 20th century, the United States endured two world wars and other traumatic and expensive military conflicts; the Depression; a dozen or so recessions and financial panics; oil shocks; a flu epidemic; and the resignation of a disgraced president. Yet the Dow rose from 66 to 11,497.

You might think it would have been impossible for an investor to lose money during a century marked by such an extraordinary gain. But some investors did. The hapless ones bought stocks only when they felt comfort in doing so and then proceeded to sell when the headlines made them queasy.

Today people who hold cash equivalents feel comfortable. They shouldn’t. They have opted for a terrible long-term asset, one that pays virtually nothing and is certain to depreciate in value. Indeed, the policies that government will follow in its efforts to alleviate the current crisis will probably prove inflationary and therefore accelerate declines in the real value of cash accounts.

Equities will almost certainly outperform cash over the next decade, probably by a substantial degree. Those investors who cling now to cash are betting they can efficiently time their move away from it later. In waiting for the comfort of good news, they are ignoring Wayne Gretzky’s advice: “I skate to where the puck is going to be, not to where it has been.”

I don’t like to opine on the stock market, and again I emphasize that I have no idea what the market will do in the short term. Nevertheless, I’ll follow the lead of a restaurant that opened in an empty bank building and then advertised: “Put your mouth where your money was.” Today my money and my mouth both say equities.

Warren E. Buffett is the chief executive of Berkshire Hathaway, a diversified holding company.

Panic Creates Opportunity

2008-09-17T17:26:00.004-07:00

This has been a brutal market, not only for housing and financial stocks, but for mining stocks as well. In May, we thought the bottom may have been put in for the junior mining sector selloff. However, that bottom lasted only a couple of months, as the sector broke to new lows and headed much lower during the summer amid the financial sector collapse. The selling accelerated in recent weeks, resulting in panic liquidation of junior miners at prices that would have been unthinkable just a few months ago. Panic and fear among investors has forced many to capitulate and sell whatever they could to raise cash as stocks seemed to endlessly move lower and lower. Though a number of marginal mining juniors won't make it because of high costs, insufficient ore, low grades, onerous debt, or political risk, the selloff has been driven primarily by the lack of liquidity, not by fundamentals (other than for high-cost producers that are losing lots of money while depleting their reserves).

Last week, the selling of mining stocks hit a crescendo, as the XAU and HUI mining indices dropped nearly in half from their highs less than 2 months earlier. Junior miners have been hit even harder than the larger cap indices, with many losing as much as 90%+ of their value since last year. However, since last week's panic lows, the XAU and HUI mining indices have rebounded 20% and 24%, respectively, even as the overall stock market had selloffs of over 500 Dow points on Monday and around 450 points today. Our favorite mining junior, Metalline Mining, has rebounded 30% since last week's low, closing higher on both big market selloff days. However, even after these rebounds, the junior mining sector is still much, much lower than it was a few months ago.

Metals have begun to decouple from the stock market, showing relative strength. Zinc has actually moved higher since it hit a low on August 12, even as the stock market has dropped over 1200 Dow points to new 3-year lows, and other commodities have been selling hard, with oil dropping from near $150/barrel to $91/barrel yesterday. With the oldest U.S. money-market fund failing to maintain the trusted $1.00 par value today, and with 3-month T-bills dropping to the lowest rate since 1954, spot gold surged $85 higher, the biggest one-day gain ever, and silver jumped even more -- 15% higher, for the biggest one-day gain since 1979. With the safety of paper dollars in question, even at the bank, gold and silver represent the safest stores of value. The flow of money that has been leaving commodities and commodity stocks in recent months is starting to flow back.

If money continues to flow back into the sector and the bottom is indeed in for the junior mining sector this time, there are some incredible investment opportunities for long-term investors, including our favorite, Metalline Mining. When we first wrote about Metalline Mining (MMG) here, it was under $1.00. It was coming out of a mining bear market selloff to under $.80 and proceeded to rally to over $5.00 within 6 months as zinc and other metals rallied. Many investors looked back and wished they'd loaded up on MMG when it was under $1.00. Now, MMG's back below $.80 again and we believe it will again make a move much higher. We're not sure about the timing, as we've been wrong about short-term price action before, but we're confident that investors will again look back and wish they'd loaded up on MMG under $1.00. Insider buying shows that MMG management recognizes this buying opportunity.

Since the beginning of summer, MMG has lost over half its market value from what we believe was already a deeply undervalued level, even as the fundamentals have improved dramatically. In late July, the company announced a new resource model more than doubled the amount of zinc present in the oxide zinc deposit covered by the ongoing feasibility study, with preliminary analysis indicating open pit mining on the much larger resource would be much more profitable than the previous plan for underground mining. The stock rallied sharply, but quickly fell back amid the sector weakness. In late August, a president's letter to shareholders provided more details on the new expanded plans, which would include both the more than doubled oxide zinc deposit as well as the adjacent Silver Polymetallic deposit, which previously was a separate project planned for later on. The stock again rallied, but again fell back to new lows as the financial crisis on Wall Street worsened.

In a healthier market, we believe MMG would have had sustained rallies from this great news. With what will likely be one of the biggest and lowest-cost zinc (plus silver, copper, lead, cobalt) mines in the world in a politically safe location with a huge amount of infrastructure in place, the stock should be at least several times the current price. With less than 40 million basic shares outstanding (and most of the outstanding warrants and options well out of the money), the current market cap is a small fraction of 1% of the metal value covered by the new feasibility study, not even counting any of the Silver Polymetallic mineralization, which could end up being even more valuable than the oxide zinc deposit. Of course there will be significant costs to build the mine and extract the metal, but, especially once the feasibility study's done, MMG should be worth many times the current price. Even the much smaller, much higher cost, remote Yukon Zinc project got bought out earlier this year (even after failing to get financing for 2 years during zinc's rally to record highs) for several times MMG's current valuation, and the Skorpion oxide zinc project got bought out for far more than that at the trough of the metals bear market when zinc was much lower than it is today. MMG's expanded project should be worth far more than those 2 were in their post-feasibility buyouts, and with the dearth of large zinc or silver projects scheduled for production the next few years, MMG's huge zinc/silver/polymetallic project should be even far more valuable as zinc and silver prices recover. We believe multiple bidders for the project will ensure that value will be realized after the new expanded feasibility study's completed.

As for the new path forward in these lean times, with the more than doubling of the oxide zinc resource and the drilling up of more and more silver, zinc, lead, and copper in the north side Silver Polymetallic deposit, combined with the current condition of the financing and metals markets, it made sense to combine the two sides into one much more efficient, huge, open pit project. The previous plan was to extract the oxide zinc via underground mining methods and address the north side Silver Polymetallic deposit in a separate project/feasibility study later. The new approach means they won't need to raise cash for the previously planned underground test mining and can put the feasibility study contractors on hold while they focus on drilling up the much larger resource, thereby significantly decreasing the cash burn rate. Metalline has a huge advantage over other juniors, as their drilling with their own local Mexican employees and their own drills costs a small fraction of what other miners have to pay, so they can make a lot of progress increasing their resources in lean times while preserving capital.

When the market conditions are better and the two huge deposits are drilled up enough for an expanded feasibility study, Metalline can raise the relatively small amount of money needed to complete the feasibility work (which can be financed a number of different ways). The end result will be one enormous, proven feasible, high-grade, high-volume, open pit oxide zinc/silver/polymetallic project, rather than 2 separate underground projects with much lower production rates. The timing of financing should be much better than under the old plan, which would have required financing much earlier, and the much higher production rate and economies of scale should mean far better economics.

Capex costs will be higher for the much bigger project, but operating costs will be much lower. Open pit means MMG won't be limited on the production rate like they would have been with underground mining, and could have a production rate at least 5 times higher, and maybe much more depending on how much they prove up on the north side Silver Polymetallic deposit.

Time to production won't change much under the new approach, as there's a lot more prep work that would have been needed for an underground mine vs. open pit -- plus, production will now likely be much earlier for the north side Silver Polymetallic deposit. However, the oxide zinc feasibility study, which would have been done around year-end on the smaller underground oxide zinc-only project, will now likely be done at least a year later; Instead of doing two separate feasibility studies for the two mineral systems, the expanded feasibility study will include both the (more than doubled) south side oxide zinc and the north side silver/zinc/lead/copper/cobalt. The focus now is on drilling up the resources to have them ready to include in the expanded feasibility study.

We believe the new timing will be much better for a likely post-feasibility buyout, as both the financial markets and the metals markets should be in much better shape at that time, especially with all the big zinc mines starting to shut down by then. Even bearish analysts project large zinc supply deficits starting by 2010 because of the large mines running out of ore and the dearth of large new mines to replace them. The much bigger size of MMG's expanded project, with much improved economics, makes us more confident than ever that MMG will get bought out after feasibility at a much higher price.

Although junior miners have been beaten down badly in recent months, we agree with BMO's Don Coxe, who asserts that “the next phase of history's greatest commodity boom will have some new characteristics that should make commodity stocks even greater out-performers once the world emerges from the current economic downturn.” While it has brought their stock prices down, the current sector washout and resultant mine/project shutdowns should turn out to be a positive for the survivors longer term, as it will mean far less metal supply than projected for coming years. It's been a very tough period to be a junior mining stock investor, but we still believe that the quality juniors will reward long-term investors handsomely for their patience.

An Intriguing Oil/Nickel Investment: Victory Nickel

2008-05-22T22:10:00.000-07:00

Victory Nickel is a nickel junior with a huge amount of nickel in 3 different projects with excellent infrastructure -- a relatively small one with very high grades requiring minimal capex to go to production, a very large one with lower grades but a huge amount of tonnage, and a third project in between the two with respect to size and grade. In addition, they have what's becoming an intriguingly attractive oil and gas related project in their frac sand overburden overlying the proposed open pit for their largest project (Frac sand is used to enhance recoveries in the oil and gas industry).

We first wrote about Victory Nickel back in August:

Victory Nickel

Another baby being thrown out in this market selloff is Victory Nickel (NI in Canada, or VNCKF in the U.S.). Victory Nickel is a fairly new nickel junior, having been spun off from Nuinsco Resources earlier this year. With a market cap of under $100 million , they have 3 promising projects, the main one being the Minago project in Manitoba, which, based on a recent scoping study, has an NPV@8% (Net Present Value using an 8% discount rate), assuming $7.43 nickel, of $334 million. They also have frac sand overburden at Minago with an NPV@8% of that resource of $32 million. Minago has excellent infrastructure, with a nearby paved highway, port, rail, and low power rates.

Victory also has the Mel project, with 83 million lbs of Measured and Indicated contained nickel, and the Lac Rocher project in Quebec with 25 million lbs of Measured and Indicated contained nickel (including a phase one section with 50,000 tonnes of 4.06% nickel, which can go to production with minimal capex).

Victory plans to get all 3 projects in production by 2009 or early 2010, using the early cash flow from the Minago frac sand and Lac Rocher's phase one to minimize the dilutive financing required to get the huge Minago project (one of the largest nickel projects in Canada) into production.

While we don’t like the outlook for nickel nearly as much as we do zinc and silver, if Victory can get to production with these projects as planned and nickel doesn't completely collapse below $6/lb (currently around $12/lb), the stock should move much higher in the next couple of years. With the recent weakness in the sector, market, and nickel price, the stock has dropped back to all-time lows (currently $0.53, less than half the high of 2 months ago, which was less than the stock's first day close of $1.21 in February), which we believe is a great buying opportunity for risk-tolerant long term investors looking for near-term production of sulphide nickel.

You can see more details on Victory nickel in this recent presentation.

(Here's the more recent presentation, from December)

Last month, Victory announced a dramatic increase in the potential for its frac sand project, with over 5 times the projected annual net revenue. More of the frac sand has been identified as potentially saleable, and with the increasing demand for oil and gas, the demand for frac sand at oil and gas projects in Canada and the U.S. has risen dramatically. Just yesterday, Victory announced the commissioning of Outotec to design the frac sand production plant, showing they're serious about moving this project to production quickly. Since the original scoping study on the frac sand project showed an NPV@8% of $32 million, and the projected annual net revenue is now over 5 times higher, Victory, with a market cap of around $100 million, is arguably undervalued based solely on the frac sand overburden project, which requires very low capex investment.

On the nickel front, Victory announced impressive drill results from Lac Rocher in October, as well as excellent metallurgical results for Lac Rocher in December, and then last month the receipt of a key approval for Lac Rocher's very high-grade Phase 1 extraction, all of which moves them closer to the goal of beginning Phase 1 extraction by the end of 2008. On Wednesday, Victory also continued to report impressive drill results for the huge Minago project, for which they plan to complete a feasibility study later this year. With one of Canada's largest nickel resources moving toward production, we believe Victory is undervalued for their nickel projects, and is a strong takeover candidate within the next year.

Just as with Metalline Mining (MMG), which, as we outlined earlier this month, we believe is undervalued based solely on their zinc project and also based solely on their north side silver project, we believe Victory Nickel is another company that has projects with excellent infrastructure in a politically safe location where you get outstanding value from 2 different types of projects. We really like the 2-for-1 concept where you get a huge base metal project combined with a precious metals/oil and gas project which can help the base metal project get to production without excessive dilution and/or hedging. The precious metals/oil & gas projects provide diversification in case the base metals don't do well, and also provide tremendous upside. Both of these companies' valuations should move up significantly as they move toward production, with stong potential for takeover bids within the next year.

Bottom in for mining juniors?

2008-05-15T07:03:00.000-07:00

It's been a tough period for mining juniors. Many investors have "thrown in the towel" on juniors as they've moved lower month after month, trying the patience of even the most patient long-term investors.

Gold, silver, and the XAU/HUI mining stock indices all hit a bottom on May 1. Many juniors have moved off their lows since then, coming off deeply oversold levels. Is the worst over for mining juniors? We think there's pretty good evidence that it is, or at least that the bottom is very close...

In recent years, May has marked an important turning point for the sector, with tops in May 2001 and 2002, bottoms in May 2004 and 2005, and the last major top in May 2006. If this month marks the bottom of this painful correction within this long-term mining bull market, we expect a powerful reversal higher to commence soon.

In this May 1 article, based on technical analysis, Alf Field said that "there is a strong probability that the correction in the gold market from the $1033 peak of 17 March 2008 is complete." So far, the May 1st low has held, making this call look pretty good.

This May 8 article by Troy Schwensen of The Global Speculator (posted publicly May 13) has some interesting technical analysis of gold, silver, and the XAU index. The closing comments provide a good description of what's been happening in the junior mining sector over the past couple of years:

As the gold sector presently looks to find a low and begin yet another climb up to new highs, many have been left wondering what on earth happened to the junior sector over the last 12-18 months. The lack luster performance of the juniors was reminiscent of the 2001/02 rally in the gold sector, where only the majors had any meaningful movement. Interestingly enough, 2001/02 was also a period of significant market uncertainty as the Dow Jones lost over 30% in the wake of the Technology bubble bursting. What followed in 2003/04 was a powerful display in the junior sector which made some impressive gains as the general market found some stability and investor confidence returned. Whilst 2007/08 has certainly been very different in many respects to 2001/02, the mood of the markets has been very similar and investor sentiment has consequently been poor. It is my belief that we may see a repeat of 2003/04 in 2008/09 as many of the loose sellers in these mining juniors have been cleared out, leaving the shares in primarily tighter hands. This clean out has been necessary when you consider the vast number of placements that occurred in the period of 2004-2007 leading up to the shake out. Valuations are attractive yet again and the stage is set for an explosive move. Where 2003 - 2006 saw most junior gold mining companies participate in the upward move, I get the feeling it will be primarily the quality companies that will be the beneficiaries this time around. That is, the entities which have substance and therefore a demonstrable exposure to higher metal prices going forward. Having been burned by many mining juniors over the last 18 months, I just can't see investors blindly investing with the same bravado they did previously. This makes prudent due diligence essential if you want to isolate the most appropriate candidates to buy.

Is the bottom in for mining juniors? We believe it is, at least for some of the best quality juniors, and we think long-term investors in these juniors will be very well rewarded for their patience in coming months/years.

Sustained rally in zinc starting?

2008-05-13T05:45:00.000-07:00

Zinc on the London Metal Exchange (LME) is up over 6% this morning as news gets disseminated about the zinc mines being shut down by yesterday's earthquake in China's Sichuan province. This could be a big supply disruption that could last quite a while, as this was a serious quake with a number of zinc mines near the epicenter.

This article predicted this reaction yesterday:

Another London broker said the Chinese earthquake will have a bigger impact on the LME base metals than anyone anticipates. He said the majority of operations in the area of the epicenter are lead and zinc underground mines.

"By (Tuesday) you might find all base metals prices are higher and everyone will be saying it's because of this," a trader said.

Metals Insider reported yesterday that with zinc testing key technical support, the November lows, "black box" technical funds were short zinc to around 75% capacity, a net change of around 880,000 tonnes in the last 2 months:

It was also within touching distance of $2,150, which marks the last line of technical defence, representing the market lows dating back to November 2007.

Our fund-watching sources estimate that the CTA “black box” community is collectively positioned short of zinc to around 75% of historic capacity. As recently as March it was still in net long territory but has sold aggressively into the most recent down leg. The change of positioning over that period is equivalent to around 880,000t (compared to LME inventory of 125,475 tonnes).

These players are purely technically driven, responding to the deteriorating chart dynamics captured above.

Such a huge short position in a relatively small and thinly traded market, combined with key support holding and the big supply disruption from the Chinese earthquake, makes for an explosive move. The bottom put in back in November has held, as we suggested it might at the time, and this successful retest should solidify the bottom. LME zinc inventories have already indicated that the expected huge surge in zinc supply this year is disappointing the bears, as those inventories have been declining in recent weeks rather than climbing, and remain well over 80% down from just a few years ago.

The technicals and the fundamentals may have finally set the stage for a sustained rally in zinc. If so, stocks that have priced in much lower zinc, such as Metalline Mining, which we highlighted last week should do very well from the current depressed levels.

Metalline Mining's Silver Lining

2008-05-07T09:28:00.000-07:00

With the fears of global recession and the subprime-induced credit crunch, junior mining stocks have been clobbered in recent months. Investors have been liquidating whatever they can to get through this rough period, with even large producers taking big hits. As this article points out, "The juniors are in the midst of a fear-driven sentiment storm that is fierce and unforgiving... But eventually... those speculators positioned in the elite juniors should win legendary gains." Many investors have thrown in the towel on the sector, dropping some top-notch juniors to incredibly undervalued levels.

We believe the big money will be made by those investors who take advantage of rough periods like this to accumulate the junior mining stocks with the best long-term outlooks. As this article points out, "A temporary slowdown [was] predictable: Each decade has some sort of pause. What will follow this one will be, we believe, an even greater boom - that will last for many, many years... For miners, the best is yet to come."

Metalline Mining's Oxide Zinc Project Progress

In our last update, we mentioned Metalline Mining's (MMG) "best of both worlds" status with a world-class low-cost zinc project as well as an aggressive silver exploration program. Since then, Metalline has updated their oxide zinc feasibility study progress, including the announcement of plans to drive the production decline to the center of the resource and test mining to back up the information in the paper feasibility study. In the current environment where many projects that hadn't done test mining (and a good number that hadn't even done a feasibility study) have encountered unexpected difficulties going to production, we believe this test mining will significantly reduce the risk of the project and make it much more attractive for financing and/or potential acquisition. Driving the production decline before the completion of the feasibility study will give the project a head start on the move to production, saving significant mine construction time later. It also will provide much better information on both the oxide zinc and the north side silver/copper/zinc/lead mineralization.

The zinc feasibility study progress update also introduced an economic model involving selling their concentrate to existing refineries rather than building their own, which would eliminate the vast majority of the project's capex costs and accelerate the move to production. If the evaluation of this option proves fruitful, the economics would be extremely attractive in an environment of tighter credit. The operating costs would be higher with this approach, but still likely much lower than other zinc miners.

On Monday, Metalline announced the hiring of a large international engineering team (which had worked on the Skorpion zinc project) to complete work on the concentrator plant studies by September in order to accelerate completion of the feasibility study, expected to be completed by the end of the year. In an environment where many mining projects endure repeated delays because of a shortage of qualified personnel, this news shows that management is aggressively moving toward timely completion of the oxide zinc feasibility study.

Zinc bottom

In November, in an update explaining Why Zinc has Underperformed This Year, we mentioned that "We believe zinc is near a bottom and won't go much lower." Zinc was testing the $1/pound level then, and it's still testing that level now, nearly 6 months later. The fact that LME zinc inventories have increased over 50% in those 6 months (still historically very low and down well over 80% from the 2003 peak), yet the price of zinc hasn't dropped lower, indicates the worst may already be priced in. As we explained, "The surge in new supply is only temporary, and doesn't provide the consistent growth in supply needed to meet the growing world zinc demand and offset depleting reserves at existing mines."

As this article points out, there will be an "extremely large" shortage of zinc in coming years because of slow mine supply growth, leading to much higher zinc prices. In addition to lower mine supply growth, a number of the largest zinc mines in the world will start shutting down because of depleted reserves soon, including Teck Cominco's Lennard Shelf mine, scheduled for closure next year, and Xstrata's Brunswick mine, the world's fourth largest, scheduled for closure in 2010. We don't believe there will be enough new supply to overcome the loss of production as well as meet the increasing demand from emerging economies and infrastructure rebuilding in developed countries, resulting in the predicted "extremely large" zinc shortage.

We saw last year during zinc's big drop while LME inventories decreased significantly that the market was already looking forward to a recession and the bounce back in inventories caused by a short-term surge in supply during the last 6 months. We believe it's only a matter of time before the forward-looking market starts to recognize the coming shortages and starts to move zinc much higher.

The Silver Lining in the Oxide Zinc Project

On the silver front, the aforementioned oxide zinc feasibility study progress update also indicated that metallurgical studies on the oxide zinc materials showed "better than 80% recovery of the contained silver." Previously, we had not been expecting any silver by-product in the oxide zinc project. If further work confirms the feasible recovery of this by-product silver, that could have big ramifications for the financing of the move to production.

Last week, a deal was announced between Silver Wheaton and Augusta Resources where Augusta will sell to Silver Wheaton 45% of the payable silver from its mine, or about 1.2 million ounces per year for 18 years, starting in 2011, for a total upfront cash payment of $165 million. As explained on their web sites, companies like Silver Wheaton and Silverstone Resources have a business model of growth by pursuing such silver by-product stream deals. With good silver projects becoming more and more scarce, these companies are actively in the hunt for silver by-product streams

If MMG could do a deal like this with one of these companies for the oxide zinc project's by-product silver, they might be able to finance the move to production without any dilution, especially if they choose the option of outsourcing the zinc refining (at least initially). Perhaps the biggest worry investors have about late stage mine developers like MMG is about financing the move to production during a credit crunch. If MMG can do a deal that allows them to finance the move to production without dilution, while still keeping significant silver upside for shareholders from the north side, it would be an ideal scenario for current shareholders, and the stock would be worth a heck of a lot more.

The beauty of MMG's zinc project is that they may be able to finance the move to production with little or no equity dilution either with the very low capex option of outsourcing the refining, which most zinc miners do (MMG has a big cost advantage because of their huge amount of existing infrastructure and the cheap processing of oxide zinc), or with a silver stream deal on the project's silver by-product, or both. That would be a very unusual situation for a world-class zinc project, and would give current shareholders tremendous upside.

The Big Silver Upside

Since our last update, in addition to some promising drill results, the announcement of ramping up to 4 drills working 2 shifts, and the implementation of an on-site assay lab to guide operations, MMG also completed a 3D evaluation of the silver and copper content of an initial block of mineralization on the north side based on the drilling compiled to date. This evaluation indicated that there are approximately 30 million ounces of silver and 30 million pounds of copper in this block for a rough total of over $600 million of gross value using current prices. There also is significant zinc and lead in this block, but the evaluation of that content is still in progress. The 3D evaluation also showed in Powerpoint images that the block is a nearly flat-lying, wide and thick body, which would be amenable to low-cost bulk tonnage mining.

This initial block is just a small portion of their prospective property. It covers only 600 meters east-west within the 1,100 meters east-west they've been drilling, within the 3,100 meters east-west they've been sampling, within the over 5,000 meters east-west of the historic mining district. In addition, they have 14,000 more meters west of the district that has similar geology, as well as other prospective areas. So this 600 meters east-west is less than 1/8th of the east-west length of the historic mining district, and less than 1/30th of the east-west length of highly prospective geology. It's really the proverbial "tip of the iceberg," with 2 shifts working "4 diamond drills, 3 percussion drills, channel sampling and geologic mapping," all guided by an on-site assay lab to efficiently prove up the rest of the iceberg.

Given MMG's market cap under $80 million, this initial $600 million+ of gross metal value, which will be added to when the zinc/lead evaluation of the block is completed, is a great start to the evaluation of the north side mineralization, especially when combined with the several billion dollars of zinc in the oxide zinc project.

With MMG considered to be just a zinc junior, with a world-class zinc project on the south side of the property, this huge amount of silver on the north side just in this initial block indicates that MMG is well on their way to establishing themselves as a huge silver miner, too. Since silver juniors get valued much higher than zinc juniors, MMG should be getting a very nice revaluation as the market recognizes the transformation of the company. Watch for far more drill results and more evaluations in coming months as this aggressive transformation progresses.

Unique Value

With a world class zinc project being run by the same team that put the similar world class Skorpion zinc project into production a few years ago at historic low zinc prices (about 1/3 current prices), MMG clearly has enormous upside. Skorpion was valued much higher than MMG's current market cap when it got bought out by Anglo American upon completion of the feasibility study 8 years ago, at the trough of the metals bear market -- and they didn't have any silver. The oxide zinc project's silver by-product has the potential to allow MMG to finance the move to production without significant equity dilution, which would be a huge positive for current shareholders, especially during a credit crunch.

Separately, MMG's big silver upside from their north side mineralization that they're very aggressively working to prove up could end up being worth many times MMG's current market cap. The aggressive work being done to prove the silver value has already shown significant value, and will likely prove up much more value in coming months.

There's still much work remaining to be done on both projects, but it's clear that the work being done in coming months should add enormous value for MMG's shareholders. With the junior mining sector potentially recovering strongly from its doldrums in coming months, with zinc likely to start rebounding soon as the market begins to recognize the looming shortages, and with silver likely rebounding from its correction soon, the timing for MMG completing all this work to transform themselves into a near-term zinc producer and significant silver miner could be excellent.

Best Time to Invest

Some of the best returns in the stock market are made by investing in out-of-favor stocks during slumps in long-term bull markets, especially those that are improving their fundamentals by transforming themselves to increase shareholder value. The recent sector weakness has been a difficult period for junior mining investors, but we continue to believe that long-term investors in quality junior miners will be very well rewarded for their patience.

The Perfect Investment for an Uncertain Economy?

2007-11-23T05:49:00.000-08:00

We've previously written about Metalline Mining's (MMG) world class, low cost zinc project at Sierra Mojada and the fact that the similar Skorpion oxide zinc project was valued at more than Metalline's current market cap when it was bought out by Anglo American upon completion of their feasibility study in 1999. Now, even though the price of zinc has dropped in half over the last year, it's still about triple what it was when GTI (Green Team International) put Skorpion into production, and we believe it is near a bottom and should be strong for years to come: http://greatinvestments.blogspot.com/2007/11/why-zinc-has-underperformed-this-year.html .

When GTI completes the feasibility study for Metalline's zinc project next year, we believe the project should be valued much higher than Metalline's current market cap, even if zinc drops much more from here, as it's one of the few projects that can make significant profits at far lower zinc prices, and it could be the largest one in the world going to production in the next few years. Given GTI's success with the similar Skorpion mine, there's relatively very little execution risk.

Metalline's project has many advantages over the Skorpion project, which was the first of its kind, built in tough conditions with no infrastructure in the remote Namibian desert. By contrast, we've seen first hand the incredible amount of infrastructure already in place at Sierra Mojada, as we reported in our site visit report in May: http://greatinvestments.blogspot.com/2007/05/real-deal.html .

Unfortunately, since our visit, the price of zinc has dropped 44%. Junior zinc miners have been devastated, with many projects now unlikely to make it to production because of their small size and/or high costs. MMG has dropped 23% in that time, which is a significant drop, but much stronger performance than most zinc juniors. Because of their project progress (one of the few sizable zinc projects well into their feasibility study) and likely profitability at much lower zinc prices, MMG has been able to far outperform other zinc juniors as well as zinc itself, and we believe this relative strength bodes well for when zinc rebounds.

While Metalline has been known as a zinc junior, few investors realize that they were a silver junior before the positive Skorpion feasibility study made them shift their attention to their world class oxide zinc deposit. Considering their 45 former producing silver mines never even had a mill to concentrate the ore, and only direct shipped the very high grade silver, we believe Metalline has an enormous amount of silver at Sierra Mojada, probably more than enough to justify the current market cap without consideration of the zinc.

On Wednesday, Metalline announced that they intersected 95 meters of 166 grams/tonne silver in a new zone that hadn't previously been drilled (http://biz.yahoo.com/prnews/071121/law018.html?.v=101 ), and await assay results from a number of other drill holes. This silver exploration work is completely separate from the zinc project, and much exploration work was done in the late 1990's. They've built a huge database of silver results from that previous work, and plan to construct a resource model and put together silver block model estimates soon.

The previous drill results included some very impressive intercepts, including one hole which "intersected mineralization with grades averaging 11 kilograms over a thickness of 9 meters" (http://sec.edgar-online.com/2005/06/15/0001031093-05-000002/Section3.asp -- top of page 4). We've never seen any other silver miner hit anywhere near as rich an intercept over that thickness. We believe the database of previous drill results will indicate that Metalline's already found many millions of ounces of silver, and we eagerly await the initial grade and tonnage estimates from their exploration.

Perhaps the most impressive part of Wednesday's news was that Metalline will have their own crews of trained local staff working 2 shifts on 4 drills on their huge historic silver district plus the rest of their enormous, highly prospective property. They also will have their own assay lab to provide quick assays for timely feedback to direct the placement of new holes. With their extremely inexpensive Mexican labor costs compared to other miners who hire expensive contractors in much more expensive labor markets, Metalline will be able to very efficiently accomplish an immense amount of drilling in coming years. This efficient exploration work should enable Metalline to quickly grow into a sizable silver miner.

Being a silver explorer, Metalline provides a hedge for investors in case of extended economic unrest. In addition to being an industrial metal useful for many applications, silver is also a precious metal that is considered money. In fact, in many languages (e.g., most Romance languages, Chinese) the word for money is the same as the word for silver. Like gold, people buy silver to save, particularly in case paper money collapses in value. That gives it extra value in case of global economic disaster. In the recent economic uncertainty, silver has been breaking out to new highs along with gold. Because silver's considered a precious metal, silver miners receive a much higher valuation than base metal miners, even if they are nowhere near production. With their stock undervalued based on their premier zinc project alone, Metalline receives no recognition in the market for their silver as of yet. We believe that will change soon when Metalline constructs their resource model and releases large volumes of results from their aggressive silver exploration program.

With the current turmoil in the stock market amid fears of recession, some people fear a weak U.S. economy will result in a global recession, while others are confident that the global economy will continue to go strong led by developing nations such as China and India along with oil-producing nations. In such an environment, savvy investors look for investments that will do well in either scenario, such as base metal miners that can still make profits at rock bottom metal prices but have enormous volumes of base metals for huge upside leverage in a strong economy, or precious metal miners that will profit if the global economy hits hard times, sending gold and silver higher, or if economic strength continues to send inflation and precious metals higher. In Metalline Mining, investors get the best of both worlds, with one of the world's largest zinc projects, likely to be make it to profitable production at rock bottom zinc prices (as the Skorpion mine did a few years ago), as well as a huge amount of silver that they are aggressively and efficiently proving up.

Why Zinc has Underperformed This Year

2007-11-20T17:41:00.000-08:00

Zinc's Underperformance vs. Other LME Metals

Despite the ongoing commodities bull market, zinc has been clobbered over the past year, with the price dropping nearly 50%. Zinc's underperformance relative to other base metals over the past year is puzzling when one looks at the LME inventories. LME zinc inventories have dropped more percentage-wise than any other LME metal over the past year, yet the price of zinc is down far more than any other LME metal. Here's a summary of each of the other LME metals and their inventories:

o LME lead inventories are actually up on the year, yet the price of lead has doubled this year.

o LME copper inventories are up over the past year, now at nearly double July levels, yet copper is also still up significantly this year.

o LME nickel inventories are about 6 times higher than a year ago, with a significant new source of nickel coming on line recently (pig nickel), yet nickel is still at around the same price as a year ago. LME nickel inventories are actually at the highest level since 2000, yet the price of nickel is up from about $3 to near $14 over the last 5 years.

o LME aluminum inventories are up about 35% over the past year, yet aluminum is only down about 3% in that time.

Despite the weakness over the past year, zinc remains in a longer term bull market. In the past 4-5 years, it has tripled, about the same or more than gold and oil, but it has been a much more volatile path.

Reasons for Zinc's Weakness

There are a number of reasons why the price of zinc has been weak the last year. Here are some of them:

1) Too far, too fast -- From late 2005 to late 2006, the price of zinc tripled. It moved up too far too fast, so it was bound to correct from that parabolic rally. It went from the best performing metal in 2006 to the worst performing one in 2007.

2) A surge in new supply from mine restarts and San Cristobal -- As a result of the huge rally in 2005-2006, a number of old mines that were shut down when zinc prices were much lower because they were uneconomic then have been reopening, as much higher zinc prices made them economically viable again. Another significant new source of zinc is the San Cristobal mine in Bolivia, which just recently started production after many years of development. The market is forward looking, so this surge in new supply has been factored into the price of zinc, even though it hasn't yet resulted in an oversupply situation, at least as measured by LME inventories.

The surge in new supply is only temporary, and doesn't provide the consistent growth in supply needed to meet the growing world zinc demand and offset depleting reserves at existing mines. There are only so many old mines that were uneconomic at lower metal prices and had enough reserves left to be mined economically today. After San Cristobal, the pipeline of sizable zinc projects for the next few years is pretty empty -- Metalline Mining's Sierra Mojada project is probably the only world-class sized zinc project that will be proven feasible in the next year or so. Despite the recent additions to supply, LME inventories indicate that the zinc market is still tighter than other metals, as it had a huge supply deficit to overcome from the last few years -- LME inventories have dropped nearly 90% over the last 3 1/2 years.

We'll soon see if the oversupply situation everybody and their brother have been saying is coming in the zinc market actually materializes, and how long it lasts. Per Scotia Capital's China Commodities Weekly, "China has been sucking up the world’s growing supply of zinc mine output, turning it to refined metals, and then using it for domestic consumption."

3) The perception that China produces more zinc than they can consume -- With the weakness in the zinc price, there has been a plethora of bearish articles on zinc focusing on China increasing their supply of refined zinc without mentioning that they've had to import far more zinc concentrate in order to increase their refined zinc output. China has significantly ramped up their smelting capacity, but their mine supply hasn't been able to keep up -- it's much easier to build a smelter than it is to find and develop a sizable zinc deposit. As a result of the ramped up smelting capacity, China has significantly increased their refined zinc output, but they've had to import a lot more zinc concentrate from foreign mines in order to do so.

The headlines discuss China's increased refined zinc output as if they had a glut of zinc when in actuality their imports of zinc concentrate have increased 178% YOY in the first 9 months this year -- that's an enormous increase in imports, dwarfing any refined zinc exports (China actually became a net refined zinc importer in September despite all these concentrate imports). Once the growth in global zinc mine output slows after the recent supply surge, China may not be able to continue to increase their concentrate imports, and we may have a zinc crisis on our hands rather than the expected zinc glut.

4) Fear of global recession -- With the subprime crisis and weakness in the U.S. housing sector, many fear that the world is headed for recession. Many argue that a U.S. recession means we'll get a global recession, which would mean less demand for base metals. However, even if the U.S. goes into a housing-led recession, that doesn't mean the world will go into a recession, though global growth may slow. Even if China's growth slows dramatically from 10%+ to even 5%, that would still likely mean increased demand for base metals, as the growth in base metals demand has been coming from developing countries, not the U.S. The U.S. doesn't drive the global resource markets any more -- with their huge savings rate and increasing consumption, China is becoming less and less reliant on the U.S. for their own growth. China and other developing countries have a heck of a long way to go to come anywhere near the standard of living of the U.S.

5) Technical shorting of zinc futures -- For most of this year, technical hedge funds have been shorting zinc futures based on a head and shoulders top pattern with a target in the $.90-1.00 area. In the fairly small futures market, these funds dominate, and yesterday's Metals Insider says, "The CTA systematic fund community is running short of this market to over 90% of historic capacity and they are not alone, we suspect." With everybody short zinc, it has been pressured down, but should rebound strongly when the shorts cover. Since zinc hit as low as $1.0185 overnight, it looks like the technical bottom is close.

6) A short-term surge in Chinese zinc exports ahead of an expected tax law change -- The recent uptick in LME zinc inventories may not be an indication of increased supply, but may instead be a reflection of a scramble to beat the impending tax law change in China where refined zinc will no longer receive a 5% export rebate but will instead be assessed a 5% export tax. As Metals Insider explained yesterday, "In China particularly, traders were looking for production and exports to rise ahead of a probable removal of export tax rebates and the possible introduction of new export levies."

Once this short-term surge is over and the tax law change is implemented, look for zinc to rebound, especially with the world's largest producer of zinc likely to export much less refined zinc, if any. Despite the short-term selling it's causing, this tax law change will be bullish for the price of zinc longer term: "The policy will result in a significant drop in China's zinc exports and tight global supply, which will in turn dramatically increase both global zinc prices and zinc concentrate prices. Domestic zinc smelters will have no choice but to accept soaring imported concentrate prices, and will probably be forced to reduce production, Wang explained." (http://www.resourceinvestor.com/pebble.asp?relid=37724)

The Future Looks Bright

We believe zinc is near a bottom and won't go much lower. Mining costs have risen significantly in recent years, especially as measured in U.S. dollars, so fewer mines are economic at lower prices. If zinc prices move even lower, some marginal mines will need to shut down, as they have in the past when prices have dropped. Combine those shutdowns with the approaching shutdowns of mines whose reserves are being depleted, along with the dearth of sizable zinc projects in the pipeline, and the supply picture looks dire even if demand doesn't continue to grow. New, smaller projects or restarts that can only succeed at higher metal prices wouldn't make it at much lower prices. Even if prices rebound strongly, if there are any supply disruptions like there have been with nearly every other metal, the supply increase that everybody has been expecting may not come as planned.

Even most bearish analysts admit that the expected oversupply of zinc won't last very long -- most expect it to only go through 2008, with a deficit returning in 2009 because of the lack of new supply. In our opinion, zinc is pricing in a huge supply glut over the next year, and even if it comes as expected, with the forward-looking market likely realizing that a deficit will be returning soon, longer term the price is more likely to strengthen from here than weaken.

Although shorter term, zinc prices will fluctuate based on such factors as those mentioned above, longer term the prices will be driven by supply and demand. We're confident that growing demand for zinc combined with a dearth of new supply beyond the short term will lead to strong zinc prices for many years.

Roxmark Mines Plans Drilling Programs, Production Next Year

2007-11-20T16:30:00.000-08:00

Roxmark Mines today announced upcoming plans on some of their gold properties.

As we mentioned in our update last month , "With the only operational and permitted mill in the area, and with a huge amount of existing infrastructure, Roxmark is much closer to production than any other juniors in the area." Indeed, Roxmark plans to re-open the Northern Empire Mine in late 2008. The Northern Empire Mine was operated successfully by Newmont Mines from 1934 to 1941, when gold was fixed at $35/oz. Now, with their recent drilling showing grades higher than when Newmont operated the mine, with gold over $800/oz, and with their onsite mill and existing underground workings, Roxmark should be able to quickly put the Northern Empire Mine back into production at minimal cost.

While they prepare the Northern Empire Mine for reopening, Roxmark is also planning a winter drilling program on the still undrilled 1,200 meter known strike length on the west extension of the Contact Zone at the Northern Empire property. Work is also planned for 2008 on the Leitch Gold Mine (once Canada's richest gold mine) and the Nortoba-Tyson property (a new source of gold and molybdenum), including "drilling of promising gold showings at the Nortoba-Tyson property."

Meanwhile, with Roxmark focused on the aforementioned properties, their joint venture partner Premier Gold is actively drilling on Roxmark's former-producing gold mines in the Geraldton Camp. Premier would like to quickly prove up the gold deposits there to quickly move those mines back to production in order to earn their joint venture interest. The local news had a story earlier this month on Premier's efforts: http://www.tbsource.com/Localnews/index.asp?cid=101750.

To get the word out to investors, Roxmark has scheduled a road show in Montreal, Mississauga, and Toronto next week. Here are the details on this road show: http://www.renmarkfinancial.com/en/clients/file/?idClient=179&idCategory=2 .

As we explained last month , the Geraldton-Beardmore area has received a lot of interest recently, with Kodiak Exploration (KXL in Canada), Sage Gold (SGX in Canada), Ontex Resources (ONT in Canada), Mantis Minerals (MINE on the CNQ in Canada, MNTCF in the U.S.), and others all attracting a lot of investor attention with their promising gold exploration. With all of their programs in the works over the next year, Roxmark is well positioned to be the first in the area to realize profits from all this excitement.

The Transformation of Pediment Exploration

2007-11-04T20:42:00.000-08:00

When we first invested in Pediment Exploration (PEZ in Canada, PEZFF in the U.S.) in the spring, it was an early stage explorer with 10 promising properties. With the developments announced over the last 2 weeks, Pediment has now transformed into a potential powerhouse future gold producer. Now Pediment seems to have a large resource, a past producing mine, a top-notch advisory board, and growing institutional support. Meanwhile, gold has broken out over $800/oz, and the HUI gold stock index has broken out to a new all-time high.

Normally, when a stock moves up so much in such a short period of time, it's a good idea to take some profits off the table. However, we believe that Pediment Exploration is now a completely different company than just a couple of weeks ago, and the current environment is very favorable for such a promising gold miner.

We continue to view pullbacks as buying opportunities for aggressive investors and believe Pediment shares have a good chance to move much higher during this gold bull market.

NOTE: In our last update, we mentioned that Mantis Minerals (MINE on the CNQ exchange in Canada) didn't have a U.S. symbol. Since then, the stock has begun trading under the symbol MNTCF in the U.S., though on the pink sheets with no bid/ask. Investors need to choose the price for their order based on converting the price in Canada, which can be viewed at the CNQ exchange web site: http://www.cnq.ca/Page.asp?PageID=2013&AA_RecordID=202 (the Canadian dollar is worth about U.S. $1.07 now).

Thriving Babies Ready to Grow

2007-10-28T20:28:00.000-07:00

In August, we highlighted 3 quality junior mining stocks that we believed represented outstanding buying opportunities amid sector weakness -- the proverbial babies being thrown out with the bathwater. That week, the sector selling hit a climactic bottom, and these 3 stocks have since rebounded very nicely, rewarding those investors who took advantage of the market weakness to buy them, rather than selling out with the panicking crowd. We believe these 3 "babies" still have a long way to go as they grow up.

Metalline Mining

Metalline Mining (MMG) has rebounded over 50% from the August panic low, but still needs to rally over 35% just to recover to its June high. After that August low, the company issued a project status report full of very positive developments:

1. Geotechnical analysis results confirmed earlier analysis indicating that "either underground or open pit mining of the rocks is feasible." If Metalline can use open pit mining for a portion of this first zinc project and efficient underground bulk mining methods for the rest, mining costs will be extremely low.

2. The water exploration program confirmed that they would have enough water to support the project. We believe sufficient water availability was the one issue that could have been a showstopper for the project, so the resolution of this issue was a huge development. We discussed this issue in previous updates over the last year.

3. The geological review of both the Iron Oxide and Smithsonite mantos were incorporated into the resource model by Ken Hart, who had been the lead geologist at the Skorpion Mine in Namibia. We had met Mr. Hart on our May site visit and learned quite a bit from him about the many advantages Metalline's project had over Skorpion's, which GTI (the contractor doing Metalline's feasibility study) had put into profitable production 4 years ago when zinc was at a historically low $.35/pound. This first zinc project was already of world class size based solely on the Iron Oxide manto, so the inclusion of the very high grade Smithsonite manto ("5,431,050 metric tons with a grade of 12.08% zinc" using a very conservative 5% cutoff grade) in the resource model means this zinc project could be the biggest in the world scheduled to start production in the next few years.

4. With the completion of the geotechnical drilling, the Hagby diamond drill was moved back to silver/copper exploration as part of the previously announced aggressive exploration program. Local workers have been trained to drill using the company's own equipment, which was to include another diamond drill that was scheduled for delivery last month. The aggressive silver/copper drill program should now be ramped up to 4 drills owned by the company using their own local workers, avoiding the issues of very high costs and lack of availability of drilling contractors and equipment that other junior miners have been facing. With the implementation of a number of improvements to the drilling and analysis process and the highly prospective nature of their enormous property (over 2 1/2 times the size of Manhattan), Metalline should be able to efficiently add to their proven resources in coming months, years, and decades.

Unlike other companies that would announce such project developments with multiple promotional news releases, Metalline Mining continued their history of understated yet pithy news releases by including all of this news under one unassuming headline, "Metalline Mining Company Announces Project Status."

Given their conservative promotion and the market perception of them as just another zinc explorer, MMG remains severely undervalued, but we believe that will change soon with the completion of the zinc mine plan (expected by year end) and the release of the first estimates of their silver/copper mineralization. We believe the numbers from those 2 events will establish Metalline as a future world class size and extremely low cost zinc producer, as well as potentially a future world class silver producer. With the premium valuations assigned to world class size projects, which are prime takeover targets for major mining companies, MMG is far from just another zinc explorer, and should soon be the object of significant market attention. MMG investors should be very handsomely rewarded in coming years as their projects advance to production.

Victory Nickel

Victory Nickel (NI in Canada, or VNCKF in the U.S.) has rebounded nearly 50% from the August panic low, but still needs to rally over 74% just to recover to its June high. Earlier this month, Victory announced impressive drill results from their high-grade Lac Rocher project, possibly extending the volume of massive sulphide mineralization. They also announced a Memorandum of Understanding with the Waswanipi Cree First Nation, whereby the two parties have agreed to work together to support the Lac Rocher project. Roche Engineering is evaluating the economics of the project in a Preliminary Economic Assessment. Although Lac Rocher is the smallest of their 3 projects, the cash flow from this low capex project should help finance the development of the Minago (one of the largest nickel projects in Canada) and Mel projects with minimal equity dilution.

Investors looking for a future mid-tier producer of nickel, few of which remain after several recent takeovers, should consider Victory Nickel, which we believe should move much higher in coming years as their projects advance to production.

Pediment Exploration

Pediment Exploration (PEZ in Canada, PEZFF in the U.S.) has rallied over 135% from the August panic low, consistently making new highs in recent weeks. Pediment has had consistent news flow in recent weeks, with impressive drill results and the announcement last week of the acquisition of La Colorada, a promising past-producing gold-silver mine property in Mexico.

We believe Pediment's acquistion of La Colorada is by itself a potential company making deal. Bob Moriarty of 321Gold wrote a great description of this project this past week, saying "Pediment has moved into the big time with the purchase of the La Colorada gold mine and mill": http://www.321gold.com/editorials/moriarty/moriarty102607.html .

In that article, Moriarty also discusses the San Antonio project in Baja, which we believe is another company maker. Every drill hole has hit gold mineralization, and the deposit remains open in every direction.

Pediment has been receiving more and more recognition as their exploration success continues and as awareness of the company spreads. It remains a top pick of several newsletter writers, including Greg McCoach and Jay Taylor, both of whom highlighted Pediment on Canadian television network BNN recently. Canadian brokerage firms are beginning to cover the company, and more should do so following the La Colorada acquisition. Pediment should be getting listed on the Amex in the U.S. soon, so they should start to get the attention of U.S. brokers then as well.

Pediment Exploration is still an early stage explorer, and the stock has moved up significantly recently, but we believe it still has a lot of upside, especially if they continue to have as much exploration and acquisition success as they've had recently. Despite the very strong price performance recently, we continue to like Pediment for the more risk-tolerant investors and view any pullbacks as buying opportunities.

Others Mentioned in August

We also mentioned Crowflight Minerals (CML in Canada or CMLGF), Metanor Resources (MTO in Canada or MEAOF in the U.S.), and Mantle Resources (MTS in Canada or MTSZF) in August as other great juniors to buy in the August weakness. Since the August panic low, they have rebounded 49%, 68%, and 48% respectively. We continue to like them all for long term investors.

Roxmark Mines Update

Roxmark Mines (RMK in Canada or RMKMF) has rallied 124% since the August panic low, which was a retest of the temporary sale price we highlighted in February, but still needs to rally 45% to recover to its price when its shares were first listed on the Toronto Venture exchange in April.

The recent strength in Roxmark shares has been driven by the excellent gold exploration results from neighboring Kodiak Exploration (KXL in Canada). KXL has rallied to over 10 times its August low (about 8 times Roxmark's current market cap) based on their very successful gold exploration work, and other junior explorers in the Geraldton-Beardmore area have also rallied strongly.

Interestingly, in Kodiak's drill results press release last week, they emphasized that they may have gold in extensions of structures hosted by several former-producing mines:
http://www.usetdas.com/TDAS/NewsArticle.aspx?NewsID=9784
"Gold bearing quartz veins which have been exposed on surface through removal of overburden on other properties acquired by Kodiak include extensions of the structures that host the Leitch Mine, which produced over 1,000,000 ounces of gold from meter wide quartz veins mined to a depth of 1.4 km with average grades of 31.5 gpt (0.92 opt) gold, the Little Long Lac gold mine which produced over 600,000 ounces at a grade of 11.7 gpt (0.34 opt) gold and the Magnet gold mine which produced over 152,000 ounces at an average grade of 14.4 gpt (0.42 opt). These mines were operated to depths of up to 4,600 feet and remain open at depth and on strike."

Savvy investors will recognize that Roxmark owns all 3 of these mines and the claims around them. Here are more details on these mines and others from Roxmark's web site: http://www.roxmark.com/prop_gold.html. Roxmark is actively working to put them back into production, using their fully permitted and operational mill.

Last month, Roxmark announced a joint venture on several of their Geraldton properties with Premiere Gold whereby Premiere's proven mining team will aggressively drill and move those properties to production to earn their interest in the partnership. Premiere already has 2 drills actively drilling in the Geraldton camp. Meanwhile, Roxmark is actively drilling to prove up more 43-101 resources in the Beardmore camp, and is also assessing production techniques on their Nortoba-Tyson molybdenum resources.

There has been a lot of excitement in the market recently surrounding "area plays" near recent high-grade discoveries in Canada, with exploration finds by Noront (NOT in Canada) in the James Bay Lowlands, Kodiak, and VMS Ventures (VMS in Canada) in Manitoba sending nearby junior miners rallying by as much as 12 times their prices of just last month. With Kodiak bringing much attention to the Geraldton-Beardmore area, news from Roxmark's drill programs should be very well received.

With the only operational and permitted mill in the area, and with a huge amount of existing infrastructure, Roxmark is much closer to production than any other juniors in the area. As the Geraldton-Beardmore area attracts more attention, and as Roxmark and Premiere advance Roxmark's properties to production, Roxmark shares should move much higher.

Mantis Minerals

Aggressive, risk-tolerant investors who would like to participate in the area plays that have grabbed the market's attention recently should consider an overlooked junior that has projects in all 3 of the hot Canadian mining areas. Mantis Minerals (MINE on the CNQ in Canada) has a joint venture with Probe Mining (PRB in Canada) on the Tamarack project near Noront's Double Eagle discovery, has the Orphan property neighboring Kodiak's discovery in the Geraldton-Beardmore camp, and recently secured the Grass River project bordering VMS's Reed Lake Discovery. Their flagship property, Rottenstone, was mined by Inco in the 1960's, and has very high grades of Nickel, Copper, and Platinum Group Elements.

Mantis is planning to drill all 4 properties in coming months and also do exploration work on their several other properties. Thursday's press release summarizes the work programs on each of their main projects: http://www.cnq.ca/Storage/1118/99607_Mantis_planning_to_drill_promising_projects_neighbouring_Noront.doc

To finance these programs, Mantis had to raise money via equity financings. Fortunately, one of the sector's prominent institutions, Pinetree Capital, provided much of this financing to become a major shareholder. This press release from last week provides details on Pinetree's investment in Mantis: http://www.cnq.ca/Storage/1118/99562_Pinetree_Capital_Ltd.doc. Pinetree's involvement brings institutional support and credibility to Mantis, and should help them more easily finance future work.

For more details on Mantis Minerals, see this detailed article by David J. DesLauriers, Overlooked Junior Exposed to Noront, Kodiak and VMS Area Plays: http://www.resourceinvestor.com/pebble.asp?relid=37100 . Mr. DesLauriers' analysis, with a breakdown of each project, suggests that Mantis shares, which closed Friday at $.76, "should be trading at around C$3.00, immediately." "And if in the next 4 months Mantis gets a whiff of a big hole on any of its 5+ anticipated drill programs, MINE could have a market capitalization the size of Noront, and a share price in the double digits."

Until its shares get listed in Toronto, Mantis, with no U.S. symbol, will be more difficult to buy than stocks on other exchanges, but most brokers can accept orders for the CNQ exchange over the phone. Although as an early stage explorer, it's more speculative than we normally prefer, we do like the risk/reward ratio for aggressive investors, and think there's a very good chance Mantis shares will move much higher in coming months.

Conclusion

With the decline of the U.S. dollar and the growth of the global economy, especially in developing nations such as China and India, along with limited mine supply, we believe the mining sector represents the best investment area for coming years, and we particularly like the huge potential of high quality junior mining stocks that should reward investors based on the success of their projects even if metal prices move lower. We believe the ones we've highlighted here represent some of the best investment opportunities in the current climate.

Babies being thrown out with the bathwater

2007-08-10T11:19:00.000-07:00

During the recent stock market weakness, many quality mining stocks, particularly the smaller ones, or "juniors," have taken huge hits in the market, as investors panic sell out of a sector that was already severely undervalued and we believe will be very strong in coming years. Liquidations in the market have caused some proverbial babies to be thrown out with the bathwater as nervous investors move to cash either voluntarily or under forced sales caused by margin calls or liquidity needs.

There have been articles predicting the doom of base metals because China’s strong economic expansion is sure to slow down to reduce demand. However, even if China’s economic growth drops in half from the 10%+ rate it’s had over the past 3 decades, their economy will still be significantly larger each year than the previous year and will still demand far more base metals. China has a very long way to go to get to anywhere near half the per capita GDP of western nations. This recent article does a good job addressing the bearish view on base metals.

Metalline Mining

As far as the proverbial babies being thrown out, we’ve repeatedly written about the incredible long term outlook for Metalline Mining (MMG) over the past year and a half, and it remains our favorite risk/reward investment in the stock market, with its world class, low cost zinc project approaching the end of its feasibility study and its huge amount of silver in their 45+ former silver mines, all with mind-boggling infrastructure already in place and other unique advantages: http://greatinvestments.blogspot.com/2007/05/real-deal.html.

MMG’s currently valued at less than what the similar world class Skorpion zinc mine in Namibia was bought out for back in 1999 upon completion of their feasibility study, when zinc prices were a small fraction of the current price, and Skorpion didn’t have the infrastructure or the silver that MMG has. Skorpion also was attempting unprecedented high tonnage processing of oxide zinc via a technology that hadn’t been proven with zinc before.

Now, that oxide zinc processing is proven at the very successful Skorpion Mine, and MMG has hired the same team, Green Team International (GTI -- note their listing of MMG’s Sierra Mojada zinc project along with the Skorpion zinc project on their web site: http://www.gti.co.za/projects.htm), that did the Skorpion feasibility study and put them into profitable production at a time of record low zinc prices. Meanwhile, LME zinc inventories are hitting record lows, there’s a dearth of world class zinc projects in the pipeline for coming years, and the major mining companies are awash with cash and buying out smaller mining companies at a rapid and accelerating pace.

Despite the worldwide shortage of zinc and record low inventories, the market is expecting the surge in zinc supply from earlier this year (we previously discussed 2 temporary factors that caused that surge) to not only be sustainable, but to grow at a similar rate in future years. When that expected increased supply doesn’t come on the market as expected, we believe the price of zinc will strengthen significantly.

Metalline Mining should complete the mine plan portion of the zinc feasibility study soon, and that will show the world class size of their zinc project, which should put Metalline on the map for many institutions and major mining companies that have only considered them to be a zinc explorer in the past. Whereas most mining projects end their feasibility studies after the mine plan is completed, Metalline will also be doing a refinery plan in coming months, and the refinery they build will save them a huge amount vs. other miners who give up a huge chunk of their profits to smelters.

Besides the zinc, Metalline has been ramping up the drilling and proving out of their silver mineralization in an aggressive exploration program. This drill program will add to the drill results from their previous years of silver exploration, allowing Metalline to begin to estimate the size of the silver mineralization. Considering their 45 former producing silver mines never even had a mill to concentrate the ore, and only direct shipped the very high grade silver, we believe Metalline has an enormous amount of silver at Sierra Mojada, probably more than enough to justify the current market cap without consideration of the zinc. The upcoming silver estimates should begin to get Metalline credit in the market for their silver as well as their zinc.

RBC put out a report last month saying that mid-tier and larger zinc producers were pricing in $2.13 zinc for the long term (while copper producers were only pricing in $1.80 copper), and were priced at 7x cash flow. Using those numbers, if valuations for zinc producers stay around the same level, MMG's market cap should be over 20 times higher when they're in production with their first zinc deposit. Add in the silver potential and the upside is phenomenal for the long term. Factor in dilution for production financing and possibly lower valuations in the future, and MMG still has at least 10 times upside potential. If they can finance production with minimal dilution and if zinc producer valuations go higher, the upside increases even more.

We continue to believe that MMG is headed much higher over the long term, and because of its unique position in the market place, they will likely receive multiple takeover bids after they complete their feasibility study next year. We view short-term weakness due to market conditions as an excellent buying opportunity for the long term.

Victory Nickel

Another baby being thrown out in this market selloff is Victory Nickel (NI in Canada, or VNCKF in the U.S.). Victory Nickel is a fairly new nickel junior, having been spun off from Nuinsco Resources earlier this year. With a market cap of under $100 million , they have 3 promising projects, the main one being the Minago project in Manitoba, which, based on a recent scoping study, has an NPV@8% (Net Present Value using an 8% discount rate), assuming $7.43 nickel, of $334 million. They also have frac sand overburden at Minago with an NPV@8% of that resource of $32 million. Minago has excellent infrastructure, with a nearby paved highway, port, rail, and low power rates.

Victory also has the Mel project, with 83 million lbs of Measured and Indicated contained nickel, and the Lac Rocher project in Quebec with 25 million lbs of Measured and Indicated contained nickel (including a phase one section with 50,000 tonnes of 4.06% nickel, which can go to production with minimal capex).

Victory plans to get all 3 projects in production by 2009 or early 2010, using the early cash flow from the Minago frac sand and Lac Rocher's phase one to minimize the dilutive financing required to get the huge Minago project (one of the largest nickel projects in Canada) into production.

While we don’t like the outlook for nickel nearly as much as we do zinc and silver, if Victory can get to production with these projects as planned and nickel doesn't completely collapse below $6/lb (currently around $12/lb), the stock should move much higher in the next couple of years. With the recent weakness in the sector, market, and nickel price, the stock has dropped back to all-time lows (currently $0.53, less than half the high of 2 months ago, which was less than the stock's first day close of $1.21 in February), which we believe is a great buying opportunity for risk-tolerant long term investors looking for near-term production of sulphide nickel.

You can see more details on Victory nickel in this recent presentation.

Pediment Exploration

One baby that has bucked the trend among junior miners and moved up strongly recently is Pediment Exploration (PEZ in Canada, PEZFF in the U.S.). Pediment is an early stage gold explorer with 10 highly prospective properties in Mexico. We normally don’t like the risks of early stage explorers, but we like the risk/reward ratio for Pediment because the upside potential is so high if they continue to be successful with their drilling.

We became interested in Pediment in the spring after a site visit by Greg McCoach, Luke Burgess , and Bob Moriarty. That interest was rewarded last week when the stock moved up strongly upon the announcement of excellent drill results showing 84.12 meters of 3.79 g/t gold. More drill results are due soon, and if they continue to be successful, the stock could move much higher.

As Moriarty concluded in a recent article, “Pediment has done everything right at Las Colinas and the drill results are brilliant. Gary Freeman did a wonderful job of communicating the very real accomplishments of Mel Herdrick. Expect more and better results soon. The stock is a screaming buy even at these prices. It will be millions of ounces of gold. The company has a $45 million dollar market cap and that's tiny."

Others not previously covered

Crowflight Minerals (CML in Canada or CMLGF) is another baby being thrown out in this market selloff. Crowflight is a near-term nickel producer which should be in production next year with a nickel project that has a NPV at $8 nickel far higher than their current market cap. At just $0.65, the stock has now corrected to less than half its high in May. As long as nickel stays above about $6/lb. and they make it to production as planned, Crowflight should go much higher next year.

Metanor Resources (MTO in Canada or MEAOF in the U.S.) is a near-term gold producer which has lost nearly half its value since its February high. The did a recent dilutive financing at .80 to finance their move to production, yet the stock is currently trading below that price on this market selloff. If they get to production as planned later this year, the stock should move much higher. Metanor’s an excellent investment for leverage on gold and near-term production.

Mantle Resources (MTS in Canada or MTSZF) is an early stage zinc explorer that Lundin Mining (LMC) has bought a just under 10% stake in at prices up to $1.25 during the current ongoing financing. Though they have no proven resources and are many years from production, they have a lot of potential to define a world-class high grade zinc deposit, and Lundin may end up buying them out if their drilling is successful. Lawrence Roulston initiated positive coverage on Mantle in May at $1.35.

There are a number of other junior mining stocks that have sold off hard recently and represent great buying opportunities, including the ones we’ve covered here before. From our analysis, we see Metalline Mining and Victory Nickel as two of the best, and Pediment Exploration one of the best early stage gold explorers, with Crowflight, Metanor, and Mantle Resources aso great options.

CalPERS Invests in Metalline Mining

2007-06-05T20:19:00.000-07:00

The California Public Employees Retirement System, the biggest U.S. pension fund, “made its first foray into commodities in March through the Goldman Sachs Commodity Index,” according to CalPERS information officer Clark McKinley. CalPERS also made its first purchase of Metalline Mining (MMG) by March 31, during the first full quarter that MMG was off the bulletin board and listed on the Amex, according to the listing of MMG’s top institutional holders: http://finance.yahoo.com/q/mh?s=MMG

“Strength in commodity markets will be something we should see generally over the next 10 to 20 years,'' said Russell Read, the chief investment officer, in an April 24 interview. “We see a relative shortage of commodities stemming from a boom in demand from emerging markets, particularly India and China.''

Looking at the MMG chart, there's been consistent positive money flow into the stock (green CMF indicator at the bottom of the chart) since late March, after the profit taking from the previous year's financing had pushed the stock down:

Despite recent weakness in the mining sector, MMG has held up very well and formed a bullish flag pattern over the last few weeks. There's been strong accumulation of the stock, as it breaks out from the triangle pattern in the longer term chart we highlighted last month.

Putting 2 and 2 together, it looks like CalPERS, which manages an enormous amount of money and has been increasing their commodity investments, has been accumulating MMG shares.

It's nice to see that, after being an under-the-radar bulletin board stock a few months ago, MMG is starting to get attention from the big boys. After our site visit last month confirmed that Metalline Mining is the Real Deal, we believe the CalPERS buying marks only the beginning of MMG's move to the major leagues.

Risk Reduction for Copper Fox Metals

2007-05-23T11:01:00.000-07:00

As we pointed out in our initial article on Copper Fox Metals (CUU in Canada, CPFXF in the U.S.) in August, Teck Cominco, one of the largest mining companies in the world, is a partner with Copper Fox on the Schaft Creek project, a neighbor to NovaGold's Galore Creek project. Today’s news of Teck Cominco partnering with NovaGold on Galore Creek is great news for Copper Fox. We believe Teck Cominco partnering with NovaGold on Galore Creek means they really like the area and are likely to buy out Copper Fox upon completion of the feasibility study, or at least exercise their option to buy out 75% of Schaft Creek by paying Copper Fox 4 times all prior expenditures and arranging production financing. Teck being involved in both projects also means that Schaft Creek should have an easier time piggybacking on the Galore Creek infrastructure (power, roads, etc.) to go to production, greatly reducing costs.

As this Metals Place article from earlier this year pointed out, Schaft Creek is arguably a better project than Galore Creek for a variety of reasons:

Another Galore Creek neighbor is the Schaft Creek project being developed by Copper Fox [CVE:CUU]. Schaft Creek is only 36km from Galore Creek, but it is on the BC side of the mountains, thus no tunnel or Alaskan environmentalists. The deposit is every bit as big as GC and they have a top notch CEO. The life of mine strip ratio is a much cleaner 0.7:1. The gold grades are higher and it also has molybdenum. The 2004 capital costs were $600MM. While the cost is sure to increase it will still be much less than GC. Copper Fox optioned the property from Teck Cominco in 2002, but Teck retained a back in right for up to 75%. Teck would have to contribute 4 times all prior expenditures and arrange financing after CUU delivers the feasibility study. A preliminary feasibility study and an updated resource estimate were ordered last month. At $2 copper and $500 gold the NPV is $1.2B discounted at 8%. So CUU has arguably a better project and a strong partner already in place. They will undoubtedly have to dilute shareholders to complete the FS, but then they get four times their expenditures to help pay for their 25% of capital costs. The entire market cap of Copper Fox is currently about $40MM. Twenty five percent of Galore Creek would run about $600MM.

Two weeks ago, Copper Fox shares rallied to a new all-time high of C$1.64 in anticipation of a resource estimate update. After the resource upgrade came out, a sell-the-news reaction in combination with a sector correction and the unlocking of shares from a private placement four months ago caused the stock to lose over 40% in a week. As Lawrence Roulston remarked about this selloff, "The fall-off in the share price after the announcement of the resource suggests that some investors don’t fully understand the figures... There is still considerable upside potential as the company advances toward a pre-feasibility study over the course of this year. An updated scoping study expected in the coming weeks should provide greater insight into the economic outlook for the project."

We believe today's news of Teck Cominco becoming the dominant player in the area means the risks for the Schaft Creek project have just been dramatically reduced, which, combined with the recent share weakness, has created a great investment opportunity for Copper Fox.

Zinc's Turn to Shine?

2007-05-15T20:56:00.000-07:00

In December, we responded to readers’ questions about why the consistent drop in LME Zinc inventories had paused. Other than a one-day spike in June 2005, LME Zinc inventories had dropped nearly 90% in a very consistent pattern since April 2004, from 785,000 tonnes to a low of 84,825 tonnes, but that pattern appeared to have changed late last year.

From December through late March, a shallow uptrend developed, and media skeptics came out of the woodwork suggesting that the trend change in zinc LME inventories indicated a permanent shift in the supply/demand situation, as China became a “net exporter” of zinc. The truth was that a couple of short-term factors, delayed shipments from the world’s biggest zinc mine and a change in Chinese export tax law, had helped to create a short-term surge in refined zinc supply, causing a temporary pause in the downtrend.

Despite the media claims, China remained a huge net importer of zinc, as they imported more and more zinc in the form of zinc concentrate, which they then processed in their smelters to create refined zinc. Because they had dramatically increased their refining capacity via rampant smelter construction, China had decreased their refined zinc imports relative to their zinc concentrate imports, using their low-cost advantages to process the zinc raw materials from other countries to the extent that they were exporting more refined zinc than they imported. However, the huge consumption of zinc in China’s growing economy, far exceeding the capacity of their own mines, compelled them to remain huge net importers of zinc overall, importing enormous amounts of zinc concentrate from overseas mines. Conveniently, the media zinc skeptics never mentioned the fact that China was relying on other countries for much of the zinc concentrate they used to produce refined zinc, instead focusing only on the “net exporter” status for the refined zinc finished product.

We said in December that “We expect the zinc crisis to become very evident after the effects of the Red Dog shipment spike have dissipated by the end of Q1.” After the peak in LME Zinc inventories in late Q1, they have steadily declined to hit a new low, at 83,725 tonnes, below the December low of 84,825 tonnes, so we can see that the pause in the downtrend was only temporary. Since the current level represents only about 2 ½ days of inventory, there’s not a lot of room to move lower. There’s a “frictional level” of LME inventories required to maintain an orderly market. It will be interesting to see how the zinc price responds to lower levels of inventories, as at some point the price will have to move high enough to curtail the demand so that the LME inventories don’t get completely depleted.

In addition to the previously mentioned factors for the earlier surge in zinc supply, another factor may decrease future world zinc supply. China has taken actions to decrease their zinc production capacity, requiring new zinc mines to have at least an annual capacity of more than 30,000 tons and an operation life of 15 years, capping the country’s refined zinc production capacity, and reportedly removing the 5% tax rebate on exports of refined zinc. With the enforcement of these new regulations, China will likely need to rely even more on foreign sources of zinc concentrate, and other countries will need to step up their production of refined zinc to make up for China’s supply reduction.

Moving forward, we really like the fundamentals for the zinc market, as we explained in December: “After the short term surge in supply from these 2 temporary events is absorbed by the market, we expect zinc to remain very strong because of the dearth of sizable projects in the pipeline for the next few years combined with growing demand and depletion of reserves at existing mines. We believe the fears in the market that the recent short-term trend change in zinc LME inventories could indicate a permanent shift in the supply/demand situation are misguided, and we expect that to become apparent in coming months. If the downtrend resumes as we expect, we believe the only way the LME Zinc inventories will avoid complete depletion is with zinc prices increasing enough to curtail demand.”

The timing for strength in zinc mining companies is excellent. A year ago, one of the sharpest and most respected institutional commentators, Don Coxe, explained on a conference call that “there are 3 major movements in this metals bull market, and we're nearing the end of the first one. The second one will be a slowdown, where I expect the prices of commodities to correct after the initial big runup. The third one will be a dramatic move that lasts at least 5-7 years.” He specified that “the next 12 months would be 'great fun' but a very different game, and would provide the ‘last great opportunity’ for the next 5-7 years. The next economic cycle after that will be a giant.”

Over the past year, we’ve seen the second movement play out, with sharp corrections in the prices of commodities. Most zinc junior miners remain well off their highs of a year ago, and are poised to bounce back during the strong third movement. In his latest conference call, Coxe reiterated that he feels “as strongly as ever that the best is yet to come.” He also emphasized that although “because of compliance problems and the kinds of clients that we serve, we have to comment on the big cap stocks, that more money is made in any boom like this by buying small caps,” meaning “you’re better off if you can find small cap mining companies who have got reserves in the ground than you are buying big caps – the leverage is terrific, and you can also assume that they’re going to get taken out, if the stock market obstinately refused to bid them high enough.”

After the recent rallies in uranium, nickel, molybdenum, and copper mining stocks, we believe that it is now the zinc miners’ turn to shine. With arguably the best supply/demand fundamentals for at least the next few years, zinc is the only base metal whose price is still down on the year. We believe that laggard status will soon change as the zinc crisis becomes more evident, drowning out the media skeptics’ misguided claims. Quality small cap zinc miners may be the next group to shine in this bull market.

The Real Deal

2007-05-08T09:47:00.000-07:00

We’ve written about Metalline Mining (MMG) as an incredible long-term investment opportunity since the beginning of last year, doing extensive research and analysis of the company, the sector, the metals markets, and many other companies to verify that Metalline truly was an exceptional value. However, even that extensive due diligence didn’t prepare us for what we saw when we visited their Sierra Mojada mine site in Mexico last week.

There were 3 main takeaways we got from this trip:

1) There’s an incredible amount of infrastructure in place at Sierra Mojada. It’s very rare that a world-class deposit will have a rail line, electric power, water, paved road, and 2 local mining towns with many low-cost workers with mining experience eager to work there.

Anglo American’s Skorpion mine, the world-class (8th biggest zinc mine in the world), low-cost (lowest cost in the industry) zinc mine in Namibia, Africa, after which this zinc project has been modeled, had none of that infrastructure. Ken Hart, who had been the Project Geologist for Skorpion, and whose hiring for the feasibility study’s geological report was announced in the recent President’s Letter, was amazed at everything this project has that Skorpion didn’t (including much cleaner metallurgy). He told us that there was nothing there when he started working at Skorpion -- it was 160 km to paved road, 260 km to power, they had to pump water across 60 km and 800 meters up, and the project had to, by contract, use mostly Namibians, many of whom were just out of the bush without much education. Like many other preproduction projects, it was basically just a few holes in the ground in the middle of nowhere. They also had to drill the project entirely from the surface, as there was no underground access. Ken also commented to us that everything at the Sierra Mojada project was incredibly well organized, and he was really enjoying himself. Even with all those drawbacks vs. Metalline, Skorpion was able to go to profitable production at $.35 zinc. Zinc is currently over 5 times that price, at $1.77/pound.

In addition to all the infrastructure at Sierra Mojada above ground, there’s also a tremendous amount of underground workings already there. There are over 45 mine shafts that had been worked by various miners over the last century, though only using old technology and only selecting very high grade ore that could be direct shipped without milling to concentrate it. You can walk 6 kilometers underground across the district, on several different levels. You can even walk over 600 meters directly through the proven resource high-grade ore body, as we did.

2) The enormity of the property and the resource was something we really couldn’t appreciate until we had walked through just a small portion of it. We were in awe that even after our long underground hike through all that amazing mineralization, we hadn’t even gone half way through it, as the proven resource stretches 1.5 kilometers (about 20-100 meters high and about 50-100 meters wide). This zinc proven resource area was only a small portion of the district, as we were only under 3 of the 45+ mines, and the district covered about 6 kilometers by 1 kilometer.

As the President’s letter stated, “Polymetallic mineralization (silver, copper, zinc, lead) north of the Sierra Mojada fault occurs over an area of 6 km east-west and 1 km north- south. This mineralization occurs on the dumps of over 45 shafts that all produced high grade direct shipping silver ore and in the host rocks surrounding the high grade underground stopes in these mines.” The silver that was direct shipped was nearly all likely over 1 kilogram/tonne, which is incredibly high grade by today’s standards. In the old days, the workers had to carry 100 kilogram sacks on their backs climbing out of the mines, so only took the very highest grades – the low-hanging fruit. There’s a huge amount of silver still there, and the drill program Metalline is implementing will begin to prove out just how much there is. Metalline’s training more and more of the locals to do the drilling, which will save a huge amount of time and expense vs. trying to hire gringo drill contractors (the local drillers get paid about $40 a day, whereas it’s hard to get a gringo drill contractor for $40 an hour, and you have to wait months for them to be available).

In addition, similar geology continues on to the Northwest for about 14 kilometers. Metalline also has far more exploration area, totaling over 60 square miles, or over 2 ½ times the size of Manhattan. It’s just staggering to think that the world class zinc ore body we saw a portion of is just the tip of the iceberg.

3) The locals were incredibly supportive of the project. The 2 mining towns, Esmerelda and Sierra Mojada (total combined population about 3000), have families with generations of mining history. Many workers commute 3 hours to an iron ore mine, and would love to be able to give up that commute to work locally at Sierra Mojada. The climate at Sierra Mojada is very comfortable, with a nice breeze and high enough elevation to keep it relatively cool, and the location is beautiful. Metalline is already the biggest private sector employer there, with about 60 employees. The lead Mexican geologist, who had worked at several other projects in Mexico, proudly called this project a 10 on a scale of 1 to 10. A local contractor inquired about how to set up an American brokerage account so he could buy stock in the company. At the Sierra Mojada church, they even end service each week with a prayer for success at the mine site. This type of local support and excitement is a sharp contrast to the resistance other mining companies receive from locals and environmentalists at other projects.

These 3 features really distinguish MMG from the other zinc projects out there. Aside from the enormously discounted valuation based on their world class low-cost zinc proven resource, the incredible amount of infrastructure, the enormous growth potential, and the extraordinary local support make the company’s success a slam dunk in our minds. That combination is extremely rare to find in a junior miner at such a low valuation.

Here are some photographs from our trip:

Here’s the Sierra Mojada rail stop. It no longer is used for passenger traffic, but there’s a dolomite open pit mine next door operated by Penoles that uses the railroad, which has more than enough capacity for Metalline’s project.

Here are the site headquarters – about 7-8 buildings.

Other site buildings (for core storage, cleaning and processing samples, equipment maintenance and storage, etc.) with San Salvador mine shaft in the background.

A miner going down the San Salvador shaft, where we started the underground tour. Putting in a shaft like this would cost about $20-30 million today.

Underground drilling – this drilling was for the geotech analysis on the rock structure to determine pit wall steepness possibilities for potential open pit mining. The 3rd party geotech expert kept saying how solid the rock structure seemed.

Smithsonite mineralization underground – 40%+ zinc – was all around us.

LHD – Load haul dumper that replaced the old underground rail with more efficiency.

Iron Oxide zinc mineralization underground – 20%+ zinc – was all around us as we walked over 6 football fields through the ore body.

Encantada mine shaft – where we came up from the underground tour, with part of Penoles’ open pit dolomite mine in the background.

The Sierra Mojada town church where they pray for success at the mine site each week.

There are many more photographs of the mineralization and underground on slides 45-63 in the Metalline Mining corporate presentation. Those photos also show the mineral content of a lot of the rock samples. We were literally surrounded by this very high-grade rock for what seemed like miles, but was less than a kilometer. Slide 23 gives a good diagram of the ore bodies – we walked from the San Salvador mine to the Encantada mine area, so you can see it was just a small portion of the enormous resource.

On the weekly chart, one can see the triangle we highlighted in March is approaching its apex, meaning the stock is likely to break out from this formation within the next couple of months. The recovery from the financing related selloff has shown strong accumulation and sets the stock up well for a future breakout:

With the company now fully funded through feasibility and for an expanded drill program for the silver, there should be no more financing-related selloffs during the feasibility stage. The March financing had a relatively small number of shares, and those shares are restricted for a year.

With over $10 billion of zinc proven out (far more than producers like HudBay Minerals with many times MMG's market cap) and undergoing a feasibility study, and an enormous amount of zinc, silver, copper, etc. that isn’t yet proven out but we know is there because we've seen and touched it ourselves, MMG’s fully diluted market cap of about $175 million discounts way too much risk into the stock. With that deposit, that team (feasibility study led by Green Team International, who also did the feasibility study for Skorpion), that infrastructure, that local support, and the extremely strong economic advantages coming from their very low-cost processing all the way through to produce SHG refined zinc (not just concentrates sent to smelters, who take a huge cut of profits), we have no doubt that Sierra Mojada will be a world class producing zinc mine and that MMG will be much higher over the long term, even if zinc prices collapse. We also believe their high-grade silver that they’ll be focusing on developing next will provide a huge amount of upside that the market is not yet factoring in. The only real risks we see are short-term volatility that might cost the impatient shareholders who bail out on a dip and possible delays to get to production if the sector-wide shortages continue to affect them (they're bringing a lot of processes in house to avoid delays from 3rd parties). Patient investors who stay with Metalline Mining for the long term should be very handsomely rewarded.

Roxmark Shares Finally Obtain TSX Venture Exchange Listing

2007-04-25T20:03:00.000-07:00

A year ago today, we introduced Roxmark Mines as a long term junior gold and molybdenum investment. We were expecting a stock listing in Toronto (TSXV) within months to allow the stock to escape the thin trading doldrums of the little known CNQ exchange. Today, after a lengthier than expected application process, they were finally able to announce that the stock has been approved for listing on the TSX Venture exchange, starting on Friday, April 27, under the symbol “RMK”.

The new listing could prove to be very timely, as the new Sprott molybdenum fund, which has helped spark a strong rally among molybdenum miners, just IPO’ed last week. Now, Roxmark, with their high-grade Nortoba-Tyson project , can join in the molybdenum rally with their transition to an exchange where funds and institutional investors participate (most won’t touch a stock on the CNQ, and most retail investors have never even heard of the CNQ).

Unlike most junior molybdenum miners, Roxmark has a fully permitted and operating mill, and has already started test production. They plan more test production for this year, followed by full commercial production.

In addition, their mill is permitted and operational for gold processing. With their 10 gold properties, including 6 former high-grade producers (which were still producing high grades when shut down due to low gold prices -- the average recovered grade over the last ten years of the Leitch Mine’s operation was 1.15 oz.Au/ton) with lots of existing infrastructure, Roxmark has huge potential for near-term gold production as well. Their development program calls for using cash flow from their molybdenum production to help fund the development of the gold mines.

With their new listing, Roxmark will be able to obtain the small financing required for full production on their molybdenum and gold properties much more easily than while on the CNQ. If all goes well, they could be in full production with both molybdenum and gold by next year, handsomely rewarding investors.

European Minerals A Warrants

2007-03-15T13:20:00.000-07:00

European Minerals (EPM in Canada, EPMCF in the U.S.) is a gold mining company in Kazakhstan scheduled to go into production in October. Here’s a detailed article from December 7 discussing the potential for European Minerals, which could have cash flow of over 50 cents per share in their first year of production: http://www.resourceinvestor.com/pebble.asp?relid=26951. Today, the stock has broken out of its trading range on strong volume of well over 2 million shares, helped by the huge Kazakhmys stating that they are “"actively looking'' for acquisitions in Kazakhstan and possibly in neighboring countries.

EPM started 2007 at $.89, so it’s up 37% on the year to $1.22. The “A” warrants (EPM.wt.a in Canada, EPMWF in the U.S.), discussed in the above article, started the year at $.47, so despite the sharp move up in the price of the stock, the warrants are still unchanged on the year. At the time of the article, the A warrants, which have an exercise price of $1.20 and an expiration date of April 11, 2010, were priced with an implied volatility of about 80 (using Black-Scholes and a risk-free interest rate of 5%). Plugging the same 80 volatility today into the same Black-Scholes calculation (http://www.blobek.com/black-scholes.html) gives a current value of the A warrants of $.68. When there are takeover rumors on a stock, normally options implied volatility shoots up, so arguably these warrants’ value should be even much higher than that.

Before this month, the A warrants were trading mostly in a tight range between $.45 and $.50 since December, apparently right after that article came out. This month, the warrants have dropped in price to about $.40 before today on the recent global market selloff. We believe if you can get these warrants in this range, at about the same price as when the stock was in the $.80’s in December and again in January, it’s a tremendous value, especially since the shares are breaking out and the gold mine should be in production around October. With the added possibility of a takeover at a significant premium, the upside potential for these warrants that are now “in the money” is very high.

Keep in mind that warrants are leveraged derivatives on stocks, so they are very volatile and can be very risky, and European Minerals has some political risk because they are located in Kazakhstan. Therefore, even though it looks like a tremendous value, it’s best to only buy EPM warrants with money you can afford to lose.

Metalline Mining to Initiate Aggressive Exploration Program

2007-03-13T10:17:00.000-07:00

This morning, Metalline Mining (MMG) announced a private offering financing was completed last week to raise $5.67 million. They will use the proceeds “to initiate an aggressive exploration program on the polymetallic (copper, silver, zinc, lead) mineral system at the Sierra Mojada project.” Despite U.S. rules preventing them from publicly promoting the financing and requiring private offering investors to hold restricted stock for 12 months (vs. 4 months in Canada), MMG was able to price the offering at only a $.07 discount to the market price the day of closing, and an $.08 premium to the market price the day before, and without paying any commissions. The dilution from this financing is relatively small (about 7%), but the potential return to shareholders could be huge if they can prove out significant new resources in this new exploration program.

This financing is great news for shareholders, as MMG can now prove out more of their resources more quickly, particularly the huge amount of silver they have (45+ former-producing mines that only direct shipped very high grade ore), and get valuation in the market for more than just their first zinc deposit. One of our biggest concerns was that the company would get bought out before proving up their silver and other resources, thus not getting credit for that value. If they can get their "aggressive exploration program" going fast enough to prove up new resources before completion of the feasibility study on their first zinc deposit next year, they should succeed in getting additional valuation for those resources.

So far this year, MMG stock has been hit by significant selling pressure as the price of zinc has dropped about 25% on a temporary surge in supply, zinc mining stocks have taken a big hit in a sector correction exacerbated by the recent global stock market correction, and millions of shares have freed up from their 1-year lockup after last year’s private placement financing for the feasibility study. We believe this selloff has created a tremendous buying opportunity just as the two previous selloffs created great buying opportunities:

In this weekly chart, one can see that the two previous selloffs brought stochastics (Full STO) down to very oversold levels well under the 20 line and also dropped the Accum/Dist line down to a low level while the Chaikin Money Flow (CMF) oscillator indicated strong outflows of money. The recent bottom also was characterized by very oversold stochastics and a low level on the Accum/Dist line, but the CMF oscillator showed very little outflow of money despite the millions of shares freed up from last year’s private placement. This positive divergence on the CMF oscillator, with successively higher lows, looks very bullish to us.

We also like that the recent bottom hit exactly on the uptrend line from the two previous lows. If the stock can now move from the lower Bollinger Band (Bollinger Bands are the "BB" lines on the chart above and below most of the stock trading) to the upper Bollinger Band as it’s done after each of the last 2 selloffs, it should break out of the triangle formation by breaking the downtrend line connecting the previous highs. A move to the upper 3’s in coming months should accomplish that and would point to much higher prices.

Now that one of the more difficult time periods for shareholders is behind us, we believe the technicals are lined up with the fundamentals indicating much higher prices for MMG over the long term.

Roxmark Mines Temporary Sale

2007-02-23T07:33:00.000-08:00

Roxmark Mines (RMKMF in the U.S. or RMKL on the CNQ exchange) has been hit by high-volume selling recently. News of a significant shareholder (92 years old and in poor health) selling up to 8.5 million shares for estate tax purposes on the advice of an estate planner explains this recent selling.

A press release from Roxmark Mines pointed out that “no director or officer (other than David Malouf in connection with his interest in Zinc Metal Corporation) intends to sell any of their Roxmark stock,” and “no directors or officers of Roxmark are permitted to purchase Roxmark shares until the above-referenced share sale has been completed.”

Late yesterday, this large shareholder put out a press release to verify that the sale of 8.6 million shares had been completed .

Now that that estate sale is out of the way, we believe the stock price will recover and Roxmark Mines will finally get the Toronto Venture exchange listing they’ve been waiting for. Considering that the chairman of the board and others exercised millions of warrants to buy shares at .17 over the past few months, this temporary sale has presented a rare opportunity for retail investors to get shares cheaper than the insiders.

The fundamentals of the company’s operations have not changed, and Roxmark’s home page http://www.roxmark.com/ has been updated with information on their ongoing programs:

Ongoing programs accelerate gold, moly development on two major fronts:

1. Up to 3,000 tons of moly were recently bulk sampled at Nortoba-Tyson and processed at the Company's Northern Empire mill for sale under contract to a European buyer. In 2007, Roxmark plans to implement an underground development program including drilling and bulk sampling (up to 6,000 tons) at Nortoba-Tyson as a precursor to preparing a feasibility study and development of the moly resource is expected to begin as early as Autumn 2007.

2. Systematic digitization of historic data of the Company’s other properties, including 3-D modelling of gold deposits in three major areas, is underway as the key element in prioritizing exploration program targets on these properties in 2007.

Despite this recent short-term setback in the stock price, we continue to believe in the long-term outlook for the company. "We believe Roxmark shares are likely to go much higher over the long run if things go as planned. We like the molybdenum giving them near-term revenue, the Toronto listing giving them more investors in coming months, and the huge upside with the gold properties."

Red Dog Temporary Zinc Surge Update

2007-02-12T19:19:00.000-08:00

As we mentioned in December, "the world's biggest zinc mine, Teck Cominco's Red Dog in Alaska, had some delays in shipments in Q3, increasing their Q4 shipments significantly." We expected that "the effect of the Red Dog shipment spike will last into Q1."

Today, in their Q4 earnings report, Teck Cominco reported that 60,000 extra tonnes were sold from Red Dog in the 4th quarter vs. a year ago: "These sales volumes were 60,000 tonnes higher than the same period a year ago as poor weather at the port delayed loading in the third quarter, shifting some sales into the fourth quarter." "Sales of metal in concentrates are recognized in revenues when title transfers and the rights and obligations of ownership pass to the customer, which usually occurs upon shipment."

The 60,000 tonne one-time increase in Q4 (that had been shifted from Q3, which had a steeper than normal LME stocks downtrend) has been pretty well absorbed by the world zinc market the last few months, with only a slight blip up in LME stocks of about 15,000 tonnes during the longer term downtrend:

After factoring in the delay from the time Red Dog ships the concentrate to the time it gets refined sold into the market by the smelters, it seems the temporary surge from these delayed shipments should be nearing an end. Considering the effect of these delayed 60,000 tonnes, it appears clear that the underlying supply/demand deficit is still intact in the zinc market, despite what the zinc bears and the media may say.

As we stated last time regarding these Red Dog shipments and the temporary surge from the ending of Chinese export tax rebates, "After the short term surge in supply from these 2 temporary events is absorbed by the market, we expect zinc to remain very strong because of the dearth of sizable projects in the pipeline for the next few years combined with growing demand and depletion of reserves at existing mines. We believe the fears in the market that the recent short-term trend change in zinc LME inventories could indicate a permanent shift in the supply/demand situation are misguided, and we expect that to become apparent in coming months. If the downtrend resumes as we expect, we believe the only way the LME Zinc inventories will avoid complete depletion is with zinc prices increasing enough to curtail demand."

"This is behaving like an underground river"

2007-01-30T11:30:00.000-08:00

As we mentioned in November, some readers had questions about a water source for Metalline Mining (MMG) after an October press release indicated that, as part of the feasibility study, they needed to find sufficient water to supply the mine and concentrator operation. This was the biggest issue for those investors who thought it may be the only obstacle that could prevent the project from being economically feasible.

Today, Metalline Mining announced test results on the first hole they completed. This testing suggests they have hit a large source of water. They experienced little drawdown from the first pump after 24 hours of continuous pumping at the maximum rate possible, so they put in a bigger pump to pump water at a 55% higher rate and still had little drawdown and an almost instantaneous recovery of the water level to the static level when the pump was turned off. With the static water level around 350-500 feet below the surface and the wells going as much as 1200 feet deep, we believe there is ample water there for their operations. Previous testing on the water indicated that the "water is ideal for use in mining applications." The consulting hydrologist stated "this is behaving like an underground river." They also have several other borings nearby that have very good production potential if needed.

Despite the fears of many, it appears securing a water source will not be an issue for MMG's mining and concentrator operation, and continued water testing should confirm that conclusion.

Zinc Miners Buying Opportunity?

2007-01-06T10:54:00.000-08:00

With copper and oil breaking down from recent support levels, investors have been fleeing the commodities sector recently. A pause in the downtrend in LME zinc inventories has some investors fearing that zinc supply has permanently increased to meet demand, though we explained in a recent update why we believe two short-term supply surges have caused this pause . The biggest zinc miner in the world, Teck Cominco (TCK) is down over 20% from its December 15 high, and many other zinc miners are also down significantly, including our favorite, Metalline Mining (MMG), down over 29% in the same 3-week period.

Canadian investment banking firm CIBC World Markets published a report yesterday titled "Base Metal Equities Correct -- Correction Setting up Buying Opportunity." CIBC views the current selloff in base metals mining stocks as a buying opportunity for the long term, particularly for zinc stocks. A table from this report shows why we’re so bullish on zinc miners longer term and why CIBC says, "our preferred equity exposure remains focused on zinc related names":

Exhibit 7. Base Case Supply/demand Summary

(000's tonnes)    2005  2006E   2007E  2008E 2009E  2010E
Aluminium         197    (76)     36    947  1,377  1,642
Copper           (330)    (4)     69    104    714    478
Nickel             17    (60)    (3)    (14)    24     86
Zinc             (538)  (355)   (275)   (96)    47   (380)

With LME Zinc inventories at just 90,000 tonnes at the start of 2007, we don't see how the zinc market can handle a supply deficit of over 700,000 tonnes over the next 4 years. We believe zinc prices will have to move up significantly in order to curb demand so above ground zinc doesn't run out completely. Since zinc is such a minor part of end products and thus is very price insensitive, zinc prices will likely have to go far higher than any analysts project to curb demand enough.

From the action in MMG yesterday it looks like institutions are buying what they can at around 3 and under. After being down about 9% on the day, MMG recovered those losses and closed up 4 cents at 3.07, an over 11% move up from the low and the second day in a row that buyers came in when the stock dipped under 3. Often a big reversal like that after weeks of sharp correction marks a bottom. 3 is a logical support area, as the 200-day moving average is around there and it’s the 50% retrace of the fall rally.

One gold site, http://www.goldstockbull.com/, lists MMG as one of their top stock picks on their current lead story and says they’re buying any dips below $3. It looks like they’re not the only ones.

Another gold site calls zinc "The Most Undervalued Metal on the Market Today" in a detailed report: http://www.goldworld.com/reports/zinc_report_gw.pdf.

We’re not sure whether the correction is over for MMG yet, but it remains our favorite stock for the long term and our top pick for 2007.

Top 5 Picks for 2007

2007-01-02T08:24:00.000-08:00

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: http://www.321gold.com/editorials/moriarty/moriarty042006.html.

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).

Why LME Zinc Inventory Depletion has Paused

2006-12-23T16:56:00.000-08:00

Some readers have asked us if we had an explanation for the recent short-term change in trend for the LME zinc inventories (which has caused recent weakness in zinc mining stocks). The trend change is hardly noticeable on the 5-year and 1-year charts:

but it’s apparent on the 60-day and 30-day charts:

Why has the downtrend in LME zinc inventories paused in the 85,000-89,000 tonne range the last few weeks?

We believe 2 short-term factors have created a short-term surge in zinc supply which has caused the pause in the LME inventory downtrend.

The world's biggest zinc mine, Teck Cominco's Red Dog in Alaska, had some delays in shipments in Q3, increasing their Q4 shipments significantly. Red Dog only can ship a few months out of the year because of their Alaskan climate, so the Q4 spike in zinc supply is much bigger than normal this year. Because of weather conditions, about 50,000 tonnes of zinc in concentrate that was expected to be shipped in Q3 2006 was delayed to Q4 2006 and Q1 2007, with 25,000 additional tonnes of sales in each quarter
There was a surge in zinc exports from China ahead of a December 14 deadline for the ending of export tax rebates. With the extra 5% rebate disappearing, apparently Chinese smelters drew down any inventory they had and exported all they could by the December 14 deadline. The rebate didn't end for the special high-grade zinc (99.995%+ SHG zinc), "which is required by the LME for delivery against its zinc contract," so most of the surge was probably lower grade zinc. The surge in lower grade zinc probably meant some users had less need for SHG zinc, and thus there was likely a resultant short-term decrease in orders for SHG zinc, which is now being reflected in the buildup of inventories in the Singapore LME warehouse.

We believe that the Chinese rebate surge will be absorbed by the market fairly quickly as the Chinese smelters drop back their exports and build back their inventories. On the other hand, the effect of the Red Dog shipment spike will last into Q1. However, with the previous pace of LME Zinc depletion at around 80,000 tonnes per quarter, the additional 25,000 tonnes from Red Dog in Q1 shouldn’t prevent the downtrend in LME inventories from resuming, albeit at a temporarily decreased pace. We expect the zinc crisis to become very evident after the effects of the Red Dog shipment spike have dissipated by the end of Q1.

After the short term surge in supply from these 2 temporary events is absorbed by the market, we expect zinc to remain very strong because of the dearth of sizable projects in the pipeline for the next few years combined with growing demand and depletion of reserves at existing mines. We believe the fears in the market that the recent short-term trend change in zinc LME inventories could indicate a permanent shift in the supply/demand situation are misguided, and we expect that to become apparent in coming months. If the downtrend resumes as we expect, we believe the only way the LME Zinc inventories will avoid complete depletion is with zinc prices increasing enough to curtail demand.

Roxmark Mines Update

2006-12-20T07:10:00.000-08:00

In the spring, we introduced Roxmark Mines (RMKL in Canada on the CNQ exchange, RMKMF in the U.S.) as a Canadian junior gold and molybdenum mining company with 12 properties in Northern Ontario. They were moving toward molybdenum production and a listing on the more senior and much more liquid and well-know TSXV exchange in Toronto. They since have started limited molybdenum production via bulk sampling, and plan to move to full-scale commercial molybdenum mining late next year. However, the TSXV exchange listing still has not happened.

We believe Roxmark will receive the Toronto exchange listing approval in the near future (an October investor presentation had the end of 2006 as a goal for listing), and that listing will bring in new investors who haven't been able to buy the stock on the CNQ exchange. For those able to buy RMKL on the CNQ exchange or RMKMF on the U.S. pink sheets, we believe the current price, still around .21, provides a great entry into this small-cap near-term molybdenum and gold producer. 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.

As we said in the spring, "We believe Roxmark shares are likely to go much higher over the long run if things go as planned. We like the molybdenum giving them near-term revenue, the Toronto listing giving them more investors in coming months, and the huge upside with the gold properties." See the spring article for more details: http://greatinvestments.blogspot.com/2006/04/roxmark-mines-for-long-term.html

What Will Zinifex Do With All Of Its Cash?

2006-12-12T20:56:00.000-08:00

Zinifex and Umicore announced today that both companies will spin off their zinc smelting/refining operations and combine them into one new company, which will have an IPO planned for late next year. The new company will be the largest refined zinc producer in the world, though it really would only be the middle man, processing the valuable and scarce zinc concentrate produced by zinc miners to create the refined zinc whose spot price is widely quoted (over $2.00 per pound now).

Zinifex, one of the largest zinc mining companies in the world, plans to "sell out completely as soon as practicable, thus severing all links with its smelter activities." Zinifex will focus on their higher margin mining business, which we believe means they will be looking to replace their depleting zinc reserves via takeover: "With the cash from the smelter sales and an ungeared balance sheet, Zinifex certainly would have the capacity to undertake large-scale takeovers if it wished, both locally or overseas." Zinifex only has less than 5 years of mine life left at Rosebery and less than 10 years left at the huge Century mine, with its smaller Dugald River project only going through prefeasibility studies at this point. If they can't extend the mine life at the Century mine, they'll need to replace that production with other large zinc projects soon.

If Zinifex decides to buy a world class preproduction zinc project that has already completed a feasibility study to prove economic viability, it won't have much to choose from, as we explained in our last article: "If MMG can successfully complete the feasibility study for their Sierra Mojada project at anywhere near expected production rates, the problems at Mehdiabad and San Cristobal could make Sierra Mojada the only world-class sized zinc project in the world proven feasible and scheduled for production in the next few years. At a time of zinc crisis, where MMG is also the only zinc junior miner listed on a major exchange in the U.S., MMG’s 100% owned Sierra Mojada project could become the premier mining takeover target."

Since that article, the situation with Mehdiabad in Iran has worsened, as the Iranian government has decided to cancel agreements with its Australian partner who was managing the project.

Metalline Mining could be completing their feasibility study on their zinc project around the same time Zinifex sells out from their smelter operations, raising a significant amount of cash. It could be a perfect match for a Zinifex buyout. However, as we explained in January, we believe Anglo American will try to buy Metalline's zinc deposit, and in an August article we explained that there are a number of other major mining companies in a similar situation to Zinifex, filling up their coffers "with incredible sums of cash while their reserves and resources decline. Rather than investing heavily in exploration, decreasing reported profits and making them look less attractive to the financial community, large mining companies are buying other companies with large mineral deposits."

As we expressed last time, "We expect multiple takeover bids at much higher levels from cash rich major mining companies looking to replace their depleting reserves. While we believe shareholders would best be served by MMG going to production alone, takeover bids would ensure MMG a more appropriate market valuation for their premier assets." MMG currently trades at a small fraction of expected annual cash flow from their zinc project, but we don't think that will remain the case for long.

And Then There Were None?

2006-12-04T08:14:00.000-08:00

In August (http://greatinvestments.blogspot.com/2006/08/why-we-think-several-companies-will.html), we mentioned two world-class sized zinc projects scheduled to start production in the next few years, one in Iran and one in Bolivia. These were the only two world-class sized (150,000+ tonnes per year) zinc projects in the world that had completed a feasibility study and were planning to start production in the next three years. Since then, the obvious political risks of those countries have put those projects into doubt:

Mehdiabad in Iran has had difficulties financing the $1.6 billion project because of Iranian political issues, so in order to try to secure financing, management has decided to conduct a scoping study to consider a number of lower cost options to stage the project and start with much lower production. They’ve also had issues with the Iranian government http://www.unioncapital.com.au/UCL/documents/feedback.html. The U.S. recently ordering banks to shut down operations in Iran won't make financing any easier. It looks like if Mehdiabad can get financing and make it into production in the next few years, it will be on a much smaller scale than originally planned.

Apex Silver's San Cristobal in Bolivia, which has presold a huge portion of their zinc production at .48/lb, is still scheduled to start production in late 2007. However, on Sunday, President Evo Morales completed the nationalization of Bolivia’s Natural Gas industry, signing contracts to take control over foreign companies’ operations: http://biz.yahoo.com/ap/061203/bolivia_nationalization.html?.v=3. As that article explains, “Morales has said he plans to nationalize Bolivia’s mining sector.” After nationalizing Bolivia’s petroleum industry in May, some thought his threat to nationalize mining had no teeth, but the nationalization of the Natural Gas industry shows Morales means business. If Morales succeeds in nationalizing mining, that could delay or reduce production from San Cristobol.

If neither of these two world class zinc projects make it to full production as planned in coming years, the zinc crisis we mentioned earlier this year could get much worse than anyone expects. There would be no proven feasible projects of this production size left in the pipeline, which would be very bullish for the price of zinc.

If MMG can successfully complete the feasibility study for their Sierra Mojada project at anywhere near expected production rates, the problems at Mehdiabad and San Cristobal could make Sierra Mojada the only world-class sized zinc project in the world proven feasible and scheduled for production in the next few years. At a time of zinc crisis, where MMG is also the only zinc junior miner listed on a major exchange in the U.S., MMG’s 100% owned Sierra Mojada project could become the premier mining takeover target. We expect multiple takeover bids at much higher levels from cash rich major mining companies looking to replace their depleting reserves. While we believe shareholders would best be served by MMG going to production alone, takeover bids would ensure MMG a more appropriate market valuation for their premier assets.

MMG Cup & Handle Breakout II

2006-11-27T13:02:00.000-08:00

In the spring, we highlighted a chart pattern on Metalline Mining called a Cup & Handle breakout. At the time, the stock was at $3.00 and we stated that the target for that breakout was over $5: http://greatinvestments.blogspot.com/2006/05/mmgg-cup-handle-breakout.html.

That pattern played out perfectly, as the stock proceeded to trade over $5 both in May and in June.

Today, MMG is rallying on drill results indicating a potential new zinc deposit, and the stock is again displaying the same cup & handle chart pattern. In fact, if you look at the chart we showed you in the spring (weekly) next to the current chart (daily), you can see these charts are eerily similar, even down to the volume patterns:

In both cases, the stock was driven down on low volume by impatient sellers, and then exploded back higher on much higher volume when that selling pressure was gone and the fundamentals took over, recovering the previous losses. A handle formed each time as the stock consolidated the big recovery in a relatively tight trading range, as profit takers exited and new investors entered. A breakout from this handle consolidation is very bullish and points to higher prices to come.

With the depth of the current cup about $2.58, the Cup & Handle breakout target is over $6.50, about a dollar higher than the spring high. Interestingly, the P&F chart also points to a preliminary target of $6.50:

We’ve shown how the fundamentals point to a much higher stock price for MMG over the long term. Now, the technical analysis points to a much higher price, too. We don’t know if the current Cup & Handle pattern will play out as well as the last one, but we remain very confident in the long-term upside of the stock.

Acadian Gold -- Hidden Zinc Opportunity

2006-11-14T10:25:00.000-08:00

Acadian Gold Corporation (ADA in Canada, ADGLF in the U.S.) is a Canadian mining company based in Halifax, Nova Scotia. The company is focused on two main projects; the Scotia Zinc Project and the Scotia Goldfields Project.

About a year ago, with zinc trading at about .70/pound, Acadian worked out a deal with HudBay Minerals to purchase 100% of the previously producing ScoZinc from them for CAN$7.5 million, signing the letter of intent in December 2005 and closing the deal in July 2006. ScoZinc’s principal assets are a modern mill and zinc/lead deposits (the Scotia mine) 50km north of Halifax. With the price of zinc nearly tripling since they convinced HudBay to sell them ScoZinc, Acadian really hit it big with this purchase.

Acadian has already completed a positive feasibility study for the Scotia Zinc mine. With much of the infrastructure already put in place by a prior operator, the project is basically a turn-key project with minimal start-up requirements, allowing the mine to be put into production in Q2 2007. The Scotia Zinc mine is expected to produce 39.8 million pounds of zinc annually at a $0.36 cash cost per pound. With zinc over $2, the pre-tax cash flow should be nearly the same as Acadian’s current market cap, which is approximately $60 million U.S. fully diluted. If zinc moves much higher in the next 6 months, which seems likely given the LME zinc inventories are on pace to be gone within 3 months, the Scotia Zinc mine could produce more cash flow than Acadian’s entire market cap.

Acadian’s plan is to use the high cash flow from the Scotia Zinc mine to fund development of the Scotia Goldfields project, which has 4 properties progressing to the pre-feasibility stage to determine their economic viability. This approach of using near-term cash flow from base metals to fund development of their gold properties is similar to that of Roxmark Mines, one of our long-term favorites that we highlighted in April, and helps to balance the risk of base metals with the gold potential. Acadian also plans to issue a dividend to shareholders after zinc production starts, which is unheard of for a junior miner.

Acadian Gold has only a tiny fraction of the zinc of our favorite miner, Metalline Mining, but their near-term cash flow relative to its tiny market cap along with their gold properties make it a very attractive investment for those looking for a near-term zinc producer with good gold potential.

Technically, ADA tested its all-time high last week after recent MACD and money flow buy signals shown in the below weekly chart:

We believe investors who accumulate ADA under the .75 resistance area will be well rewarded in coming months when the stock breaks out from its base and heads much higher where it belongs. The market hasn’t yet recognized the zinc potential of this gold stock, but we believe this hidden zinc upside, which alone is arguably worth much more than the current stock price, won’t remain hidden for long.

How High Can MMG Go?

2006-11-03T19:11:00.000-08:00

Several readers have asked us what our target price for MMG is. We don’t use target prices, but we’ll try to give you a rough idea of how undervalued it is here by using a mining rule of thumb for valuation (additional to our previous valuation analysis which used 3 different methods to show a fair value of $13-21/share when zinc was $1.57).

Here's an article on calculating the value of a mining stock: http://personalfinance.iii.co.uk/articles/articledisplay.jsp?article_id=2278403

Julian Baring, the well known City ‘gold bug’, used to value mining stocks
by taking, as a rough guide, 10% of the value as calculated in the previous
paragraph as being the correct value for the company in question.

Gold mining rule of thumb

Curiously enough, this rough and ready guide seems to hold good today.
Figures calculated by the Mining Business Digest in 2000, based on data for
corporate acquisitions in the gold sector, reckoned that those at the earliest
stages of exploration, with some inferred resources, would be valued at most at
around 3.5% of the underlying metal value in the ground. An average for those
with more tangible metal assets to develop would fetch around 11% of underlying
value while those in the early stages of production could see a value of
anything from 15% to 25% of the value of the underlying ounces of metal in the
ground. It is not a hard and fast rule, however, and those mining base metals
are valued at correspondingly lower rates.

There is some more data confirming this gold mining rule of thumb.
According to figures compiled by Galahad Gold and sourced from broker reports
and the publication Gold Stock Analyst, the average value placed on ‘ounces in
the ground’ in 2005 was $120 for second tier companies about to start
production, $50 an ounce for those with resources that had been measured and/or
indicated, and $32 an ounce for those with simply inferred resources. This
compares with an average gold price for 2005 of $444, making the respective
percentages 27%, 11.2%, and 7.2% – not too far from those quoted earlier.

If you take MMG's 5.8 billion pounds of proven zinc and don't count anything for their high-grade silver and separate zinc for which the resource hasn't been estimated yet (the SEC doesn’t allow U.S. companies to disclose inferred resources), you can see how MMG is worth many times its current price:

Zinc today is at $1.9482/lb.
5.8 billion x $1.9482/lb. = $11,299,560,000 of proven zinc resources
$11,299,560,000 / 49.7 million shares fully diluted = $227.36 worth of zinc per share

10% of $227.36 is $22.74 per share value per Baring’s rough guide.

MMG’s zinc is a base metal, so some would say the value should be lower than for gold miners, but with its zinc project at a very late stage compared to most preproduction miners, and profit margins likely much higher than most gold miners (let’s say conservatively .35/lb. production costs, what Skorpion sold zinc for in 2003, for $1.9482/lb. refined zinc -- equivalent to $112.68 production costs for $627.20/oz gold, which would be very high margins for a gold miner), MMG should arguably get a higher value than gold miners.

To give you an idea of the upside once MMG gets to production, here are the numbers for HudBay:

HudBay Minerals:
3.11 billion lbs. x $1.9482/lb. = $6,058,902,000 of proven zinc resources
$6,058,902,000 / 124,796,513 basic shares outstanding = $48.55 worth of zinc per share

HBM closed at 19.28 CAD today, or about $17.16 USD per share
$17.16 / $48.55 = 35.35% of the value of their proven zinc

Baring used to say about valuing mining shares, “"Buy up to 10% of the in situ value of a deposit using current metal prices, hold up to 40% and sell above 40% taking no prisoners!!!!". Since HudBay is in production, and has other metal byproducts to help give them very high profit margins, we believe it is still undervalued, even as it approaches the 40% level for its proven zinc, as we expect zinc to move higher and HudBay’s profitability to go even higher.

When you add in the additional zinc and high-grade silver to the rule-of-thumb $22.74/share for the proven zinc resources, it seems clear to us that MMG is heading much higher than its current $3.63 now that its shares will be listed on a legitimate exchange and institutions around the world will be able to invest. If the price of zinc moves higher, as we expect given the supply/demand situation, the fair value for MMG will move higher as well. A year ago, HBM was at $3.75, so very high appreciation for zinc stocks as they advance their projects and zinc moves higher is nothing new.

Here’s the final weekly chart of MMGG before the rebirth as MMG (click on chart for larger view). You can see that in addition to the severe undervaluation pointing to higher prices, the chart is turning around and pointing higher as well.

Notably, all the big volume weeks have been up weeks, while the down weeks have been on lower volume. MACD is just hitting a buy signal. As in 2005, there was an extended period of several months in 2006 with negative money flow (the CMF chart at the bottom) and a sharp sell-off on lower volume. The 2005 sell-off ended with a sharp rally from under $1.00 to $5.67 with positive money flow all the way. With money flow just starting to turn positive and new investment from institutions expected on the new exchange, we’ll be interested to see how far this rally takes the stock in coming months/years.

While there may be some short-term pullbacks along the way, with zinc breaking out to new all-time highs and the company’s zinc feasibility study moving toward completion, it looks like the stock is poised to break out of its trading range and begin a new trend higher in coming months.

Mmm, Mmm, Good

2006-11-02T12:36:00.000-08:00

Metalline Mining to Begin Trading on The American Stock Exchange November 6

After months of no action and impatient investors bailing out on low volume, Metalline Mining announced this morning that their application for American Stock Exchange listing has been approved, and they will begin trading on the Amex on Monday.

With zinc breaking out to a new all-time high, LME zinc inventories quickly getting devoured, and management on an international road show with institutional investors, the Amex listing is coming at a perfect time.

Many investors, particularly institutions, won’t buy a stock that’s on the OTC bulletin board, which has a reputation for being a “penny stock” haven with lots of scams. The Amex listing will give Metalline credibility and will put it on the list of many institutions around the world.

As arguably the best metal for investors today (http://greatinvestments.blogspot.com/2006/10/forget-all-other-metals-think-zinc.html), zinc is attracting a lot of investment interest. The above chart of LME Zinc Warehouse stocks shows that the zinc crisis is headed for an explosive event within a few months as the zinc inventory is quickly headed for 0. Of course, the inventory can’t go below 0, so something is going to have to change to keep the inventory positive. Despite the near tripling of the price of zinc over the past year to near $2/lb., the demand for zinc has not slowed down the rapid pace of inventory depletion. The price of zinc would need to nearly triple again to make a new all-time high in real, inflation-adjusted terms. Basic supply and demand economics indicate zinc is headed for an explosive move higher. In the coming zinc crisis, the price of zinc will need to rise high enough to curtail demand significantly.

This article from earlier this year gives a great overview of the zinc market, with great charts as well as text:
http://greatinvestmentarticles.blogspot.com/2006/07/case-for-zinc.html

Because GTI produced a positive feasibility study and got the similar Skorpion mine into production when zinc was at 35 cents, we believe that GTI will produce a very positive feasibility study for Metalline Mining now that zinc is over 5 times higher. With 5.8 billion proven pounds of zinc and a fully diluted market cap around $150 million, we continue to believe Metalline Mining is extremely undervalued for one of the world’s largest zinc projects at such a late stage of development, at about 1% of the value of their proven zinc.

For a quick valuation comparison, let’s compare Metalline to one of the few zinc producers, HudBay Minerals (HBM on the Toronto Stock Exchange).

HudBay:
Zinc reserves = 21,400,000 tonnes of 5.3% zinc (1,134,200,000 tonnes contained zinc),
less about 85 million tons reserves mined in this year’s production so far,
leaving approx. 1,050,000 tonnes contained zinc reserves remaining
Resources = 4,900,000 tonnes of 7.4% zinc (362,600 tonnes)
Total = 1,412,600 tonnes contained zinc, or 3.11 billion lbs.
(from http://www.hudbayminerals.com/oreReserves.php ) on 1/1/06

124,796,513 shares outstanding (unclear what fully diluted is) x 19.07 CAD = $2,379,869,503 CAD x .89 = $2,118,083,858 USD basic market cap
(from http://www.hudbayminerals.com/investorRelations.php )
$2,118,083,858 / 3.11 billion lbs. = $.681 per proven pound of zinc
(HudBay also mines some other metals as byproducts, which they apply as credits to decrease their cost of zinc mined)

Metalline:
Iron Oxide Manto = 28,042,538 tonnes of 7.04% zinc (1,974,185 tonnes contained zinc)
(from page 29: http://www.metalin.com/Metalline,%20Sierra%20Mojada,%20Zinc%20060625.pdf )
Smithsonite Manto = 5,431,050 tonnes of 12.08% zinc (656,070.84 tonnes)
(bottom of page 1: http://www.metalin.com/03-18-05.pdf )
Total = 2,630,255.84 tonnes contained zinc, or 5.8 billion lbs.

49.7 million shares fully diluted x $3.10 = $154,070,000 fully diluted market cap
(there are only 34,126,661 basic shares outstanding per
the last 10Q filing , but we’ll use fully diluted to be conservative)
$154,070,000 / 5.8 billion lbs. = $.0266 per proven pound of zinc

As a zinc producer, HudBay deserves a higher valuation than Metalline’s preproduction zinc project, but assuming Metalline can get to production, this comparison shows that the upside is enormous, even after the recent recovery of the stock from the artificially low prices caused by the one big seller we mentioned in August. Even though zinc is much higher now, the Amex listing has been approved, and its project has advanced significantly, Metalline’s stock remains well below its May high of $5.67. If they don’t get bought out, they’ll likely need to dilute the existing shares significantly during financing for the move to production, but even after discounting heavily for that dilution and the multi-year wait for production cash flows, Metalline has at least 10-fold upside, especially considering the zinc crisis and the high-grade silver they’re drilling.

Some investors have told us they’re worried that the cost of piping water in a long distance (an early October press release indicated Metalline has located water 20 km away from the project site) may make the project unfeasible. However, Skorpion was proven feasible at 35 cent zinc even though they have to pipe water in from 45 km away (http://www.gti.co.za/Skorpion.htm). Also, Metalline could locate the refinery elsewhere, near water, if the nearby water isn’t sufficient. Their earlier testing showed that they can easily produce a concentrate from the ore which they can ship anywhere in the world for refining, meaning they can locate the refinery wherever it makes the most sense from a tax incentive, power, labor, etc. standpoint. This flexibility gives them negotiating power with Mexico and other countries to get the best all-around deal for the refinery.

As we explained in August, we believe several companies will try to buy Metalline’s zinc project after completion of the feasibility study. With the largest proven preproduction zinc project in the world that major mining companies will be able to buy, in a politically safe part of the world, Metalline Mining will be sitting in the driver’s seat when the cash-rich suitors with dwindling reserves come calling.

After suffering through the junior mining sector carnage and being held hostage by one big seller on low volume the past few months, we’re very pleased that Metalline Mining is finally graduating to the big leagues from the pee wee arena. Metalline Mining's typical shareholder profile will be changing drastically from bulletin board traders to high profile international institutions.

To us, the Amex listing under the new MMG symbol is Mmm, Mmm, Good.

Forget All Other Metals; Think Zinc

2006-10-14T07:56:00.000-07:00

Below is a good article on the zinc market and why zinc is the best metal for investors to focus on. The author particularly likes “the upside of junior explorers right now” as the best way to leverage zinc. We agree that zinc junior miners, having taken a huge hit since the highs in May despite zinc itself trading back near the May highs, have incredible upside from the currently depressed levels. They’re pricing in a collapse in the price of zinc because of fears of a global recession, but if zinc holds up or continues higher, they should regain their huge losses and more.

The author is promoting zinc junior explorer Selkirk Metals because of its 60% interest in Ruddock Creek deposit. He says the big story is the metal in the ground, even though it’s an inferred resource, which is the earliest stage, most speculative level of resource. By comparison, Metalline Mining (MMGG) has 100% ownership of 10 times the zinc resource at Sierra Mojada, at a higher grade and a far more advanced stage, yet its market cap is only 3 times Selkirk’s. Even if it tripled to get back over $5, we believe MMGG would still be a much better value than Selkirk is now.

The author cites Ruddock Creek’s “most impressive hole” which showed “16.35% zinc and 3.65% lead over 10.25 meters” within their inferred resource area. Compare that to Sierra Mojada’s hole with 29% zinc over 24 meters that may mean a new zinc deposit separate from their existing resource.

Ruddock Creek is years behind Sierra Mojada in development -- while Ruddock Creek is far from even beginning a feasibility study, Sierra Mojada is well into the feasibility study and nearing completion of the mine plan. Ruddock Creek is also in the snowy mountains with no infrastructure whereas Sierra Mojada is in a warm, flat area with historic silver production and infrastructure.

In addition to all the zinc, Sierra Mojada has historically produced very high-grade silver, with only the ore that was high enough grade to be direct shipped without milling being selectively exploited . Sierra Mojada has never had a mill to concentrate the lower grade mineralization. Metalline Mining recently has been drilling for silver in the Polymetallic Manto of Sierra Mojada and announced very high-grade silver results: http://www.metalin.com/05-11-06.pdf.

Like Metalline Mining and other junior miners, SLK had lost about 2/3 of its value since May in the sector selloff before this article came out on Thursday. However, if you compare what they have, Metalline Mining is far and away the better value. If Selkirk’s “a steal” as the author says, Metalline Mining is grand theft of the highest order.

http://www.stockhouse.ca/shfn/article.asp?EdtID=18829
Thursday, October 12, 2006
By Pure Metals

Tight supplies prompt a closer look at zinc exploration company Selkirk Metals.
You use it.

You may not know it, but I can promise you do.

So it's no surprise, after centuries of use zinc has become one of the most important metals known to man. And while this largely ignored metal may not be as sexy as gold, silver or platinum, it plays a fundamental role in a wide range of industrial and consumer products. In fact, the bluish-white metal is now the fourth most common metal in use today -- trailing only iron, aluminum, and copper.

And that's why we're interested. It's a vital cog in the modern economic machine.

The single biggest use of zinc is for galvanizing steel. Galvanized steel is simply standard cold-rolled steel coated with a thin layer of zinc. The zinc layer protects the steel from rust and corrosion making it ideal for commercial and residential construction.

As a matter of fact, you are no doubt surrounded by galvanized steel as we speak.

The United States alone consumes nearly 40 billion pounds of galvanized steel each year for a multitude of uses resulting in steady and increasing zinc demand. But galvanized metal has a multitude of other uses as well.

Zinc is also used for making die-cast components from door knobs to car parts to nuts and bolts and tens of thousands of other products such as casings for electronic components.

And of course, zinc and copper make the alloy brass, which is used in a vast array of products. The myriad other zinc uses include sun screens, phosphors on TV screens, fireworks, paints, cosmetics, plastics…the list goes on and on.

This rapidly growing catalog of applications is progressively adding to zinc's importance in our industrialized, modern world. And with all these applications, it's no wonder why global demand has increased well over 250% in the past 45 years.

In the three decades from 1960 to 1990, worldwide zinc consumption grew at a steady, average annual growth rate of 2%. But since 1993, global zinc consumption has grown annually by 3.2%. And by all accounts this is just the beginning.

The International Lead and Zinc Study Group (ILZSG), one of the oldest and most respected nonferrous metals organizations, says global demand for refined zinc metal will increase 3.9% over last year's demand to 11.06 million tons in 2006. Next year the ILZSG expects demand to increase again to 11.35 million tons.

This demand has been and will be coming from all corners of the Earth. After falling in 2005, U.S. demand is expected to recover strongly this year with an increase of 7% over last year followed by flat growth in 2007. Similarly in Europe, it is anticipated that demand will rise by 3.4% in 2006 but remain unchanged in 2007.

Growth will be strongest in Asia where demand is forecasted to rise year over year by 9.1% in India, 4.5% in Japan and 4.4% in the Republic of Korea.

And let's not forget about China...

As with most every other commodity, escalating consumption in China has been a major factor in the increased demand for zinc.

In the recent years, China has become the largest consumer of zinc in the world increasing at 8% to 10% per year (although it increased an impressive 22% during first nine months of 2003 and 27.8% in 2004). In fact, it is anticipated that China alone will account for nearly 30% of global zinc usage by 2007.

And get this…From 1990 through 2000, China accounted for about 63% of zinc's global supply growth, resulting in massive exports that undermined prices for years.

But now because of the country's insatiable hunger for the galvanizing metal, China has gone from being a significant zinc exporter to a net importer of the metal.

So what about supplies?

Following several decades of ample supplies, mainly coming from China, a major supply gap is developing in the zinc markets that will likely have a profound impact on future zinc exploration, mine development, and most importantly to you and me, prices. One of the main places we look to gauge base metal supplies as well as the overall the health of the sector is the London Metal Exchange (LME), the largest non-ferrous metals exchange in the world. In April 2004, the LME zinc warehouse stocks topped off at about 784,000 tons. Today, only two and a half years later, these stocks have plummeted a whopping 83% to 133,000 tons.

In the past 12 months alone these warehouse stocks have fallen about 74%. Take a look…

Now here's what really surprises me…

The LME supplies are only enough to satisfy the world's total demand for an unbelievable 4 measly days...talk about tight!

Falling supplies and rising demand have resulted in an unparalleled price rally. Zinc prices have skyrocketed 223.9% since mid-July 2005. Compare that to price changes of other major metals over the same time period:

Aluminum +45.7%
Copper +106.2%
Gold +36.9%
Lead +80.7%
Molybdenum -15.6%
Nickel +128.2%
Palladium +62.9%
Platinum +25.5%
Silver +60.3%
Tin +27.6%
So the obvious question is: have we missed the move?

Not completely.

Zinc prices are currently around $1.70 per pound, a 97.4% increase year-to-date and less than a dime under its all-time high set back in May. And if stock levels continue to descend at their current pace and demand remains as strong as anticipated, I fully expect ongoing price increases.

So how can you leverage higher zinc prices?

Personally, I like the upside of junior explorers right now…especially those trading on the TSX Venture Exchange. And I believe any junior firm with a proven management and decent land package focused heavily on zinc exploration will do well over the next 12 to 24 months.

To be specific, here's one idea…

Selkirk Metals

Selkirk (TSXV: V.SLK, BullBoards) is a tiny $15.8 million mineral exploration and development firm. The company is focused on the acquisition and subsequent development of base metal properties, specifically zinc properties, in Canada.

The company has a nicely diverse portfolio of seven properties ranging from early to advance stages of exploration and development.

But the one that I'm most excited about, and the one I want to tell you about today, is Selkirk's flagship prospect: The Ruddock Creek Property.

Selkirk has recently completed its obligations to acquire a 60% interest from Doublestar Resources (TSX: V.DSR, BullBoards) in the property. But the big story here is the metal in the ground.

Here's the deal…

Located in beautiful South Central British Columbia, just 100 km north of Revelstoke, Ruddock Creek's E-Zone has already been previously explored by two of the biggest names on the base metal industry, Falconbridge (TSX: T.FAL, BullBoards) and Teck Cominco (TSX: T.TCK.A, BullBoards) / (TSX: T.TCK.B, BullBoards). And the results from those explorations were quite impressive.

Get this…An inferred resource was calculated for the E-Zone that showed approximately 4 million tons with an average grading of 7.5% zinc and 2.5% lead.

That's about 600 Million pounds of zinc and 200 million pounds of lead.

Unfortunately, however, this resource was reported prior to (and therefore not compliant with) implementation of National Instrument 43-101, a rule developed by the Canadian Securities Administrators that governs how issuers disclose scientific and technical information about their mineral projects to the public. Nonetheless, the lack of a NI43-101 certainly doesn't mean that the resource isn't there.

In 2004, of a total of 1838.7 meters was drilled in 11 holes to further define the E-Zone. The program was successful in that all 11 holes intersected significant massive sulphide zinc/lead mineralization confirming the continuity and the dimensions of the E-Zone to the west up to the E-fault.

In August of 2005, Selkirk conducted another deep diamond drill program. The program's best hole was RD-05-113, which found 14.05 meters grading 15.79% zinc and 3.33% lead.

Most recently, Selkirk announced four additional diamond drill results from an ongoing drill program at Ruddock Creek.

Three of the holes encountered narrow zones of massive sulphide mineralization and they have served to establish the eastern limits of the E-Zone mineralization. But the most impressive hole was the fourth.

RD-06-123 assayed mineralization grading with16.35% zinc and 3.65% lead over 10.25 meters. Not too shabby. Results released from the company can be seen below...

Selkirk also announced yesterday that that drilling has begun on the first of 12 additional zones of massive sulphide mineralization that serve to outline the SEDEX basin at Ruddock Creek. (Read more about this by clicking here)

Yesterday Selkirk closed at 48 cents, which I think is a steal considering the last time zinc prices were at $1.70/pound the stock was trading in the 80 cents to $1.00 range.

For more information on Selkirk's Ruddock Creek project, check out the company presentation on the property by clicking here. Or for more information on the company in general and their other six properties, visit their website at www.selkirkmetals.com.

Luke Burgess covers Selkirk Metals at his Goldworld.com website, but has no interest in the stock, nor does he accept advertising from the company.

Luke Burgess is the managing editor and publisher of GoldWorld.Com. He also writes a weekly column for EnergyAndCapital.Com, and WealthDaily.Net. Furthermore, Luke co-edits The Pure Energy Report and Secret Stock Files with Michael Schaefer.

Why We Think Several Companies will Try to Buy Metalline Mining’s Zinc Project

2006-08-28T11:12:00.000-07:00

State of the Zinc Market

As we mentioned 3 months ago, there’s a worldwide zinc crisis. As you can see from the zinc production and consumption statistics for the first half of 2006 from the ILZSG (International Lead and Zinc Study Group), zinc consumption is far outpacing zinc production, led by strong and consistent growth in demand in Asia. China’s zinc demand is forecasted to increase by 56% by 2010 , exasperating the current supply crisis. This article from early this year does a good job outlining the case for zinc and zinc stocks.

The below charts of zinc consumption by continent and LME zinc inventories over the last few years help illustrate this current situation:

Zinc consumption has continued to grow so much despite the meteoric rise in the price of zinc, with most of that growth coming from Asia. The average price of zinc for the first half of 06 was more than double the price for the first half of 05, yet Asian consumption still grew 5% during that period. With China building the equivalent of a city the size of Philadelphia every month, with its standard of living still nowhere near that of the West, and with the enormous savings they have, it's hard to imagine Asian consumption slowing for more than a blip on their long-term growth path.

Worldwide consumption exceeded worldwide mine production by 5.44% in H1 06. Asian consumption exceeded Asian mine production by 42.23%, as China become a net importer of zinc in 2004. This excess of consumption over production is reflected in the precipitous decline in LME zinc inventories since 2004. At the current rate of decline, the LME will be out of zinc within months, escalating the severity of the crisis.

Largest Zinc Projects in the World

Metalline Mining's (MMGG's) Sierra Mojada could be the second biggest new zinc project in the world for years to come. Sierra Mojada's similar in size to Apex Silver's San Cristobal in Bolivia on this list of big zinc projects:

The biggest zinc project (by far) is Mehdiabad in Iran. They're currently trying to get financing now for their $1.6 billion in capital expenditures, during this time of political crisis there. If that huge project fails to get to production, that's 6% of the expected world supply of zinc that won't be coming, which would be extremely bullish for zinc and MMGG. Given the enormous Asian demand and the quickly declining zinc inventories, it’s hard to imagine a zinc supply surplus over demand in coming years even if there’s a severe worldwide slowdown.

With many zinc mines scheduled to cease production in coming years, zinc miners with multi-billion dollar deposits in safe areas of the world coming into production during that time should do extremely well, as they help fill the zinc supply gap:

It’s no wonder zinc producers are on the hunt for world class zinc deposits.

What Makes Metalline Mining’s Sierra Mojada Zinc Project Unique

Anglo American plc’s Skorpion mine in Namibia, Africa, is the lowest-cost zinc producer in the world, producing zinc at a cost of about 25 cents/pound. The Skorpion mine is the first and only mine in the world using the solvent extraction electrowinning process for extracting Super High Grade zinc (SHG zinc is 99.995% zinc) from oxide zinc ore. Green Team International (GTI) completed the feasibility study for Skorpion and then designed, supervised the construction and operated the mine and extraction plant through initial production and until they were at 90% of capacity, at which point they turned over operations to Anglo American.

Metalline Mining has hired GTI to do the feasibility study at Sierra Mojada in Mexico, as their experience with the unique process should make going to production almost a “turnkey” process. Using a proven team to implement a proven process that yields the lowest-cost zinc in the world, in one of the largest zinc projects in the world, in a safe area of the world, makes Sierra Mojada a one-of-a-kind project that’s extremely attractive to larger mining companies.

The Potential Bidders

In January, we explained why we think Anglo American, the second largest mining company in the world, will try to buy MMGG's zinc deposit. As the Mining industry continues to consolidate, we believe several other bidders for Metalline’s Sierra Mojada zinc project will emerge after completion of the feasibility study next year.

Other mining majors are likely to bid as their coffers fill up with incredible sums of cash while their reserves and resources decline. Rather than investing heavily in exploration, decreasing reported profits and making them look less attractive to the financial community, large mining companies are buying other companies with large mineral deposits.

Xstrata, which will become the 5th-biggest mining company in the world after completion of their recent acquisition of Falconbridge, is not done with their acquisition spree. After they beat out Inco and Phelps Dodge in the bidding war for Falconbridge, CEO Mick Davis said, “We are always thinking about the next deal.”

Teck Cominco, the world’s largest zinc miner, just lost out in the bidding war for Inco last week, withdrawing their C$17.8 billion bid. CEO Don Linsay said Teck “will now pursue other acquisitions.”

Australian miner Ziniflex, the world’s second largest zinc producer, just announced a more than 4-fold increase in annual profit and a willingness to participate in acquisition opportunities in the global zinc market. CEO Greig Gailey said, “We still think there are opportunities in consolidation, and we would be willing to participate.”

EuroZinc Mining and Lundin Mining, two mid-cap zinc producers, recently announced a merger. The new company, to be called Lundin Mining, will have an interest in 4 of the top 15 zinc mines in the world, and will be looking for more huge zinc deposits. Colin K. Benner, Vice-Chairman and Chief Executive Officer of EuroZinc, stated: "The combined financial strength and collective expertise of our talented personnel will allow the new company to pursue global growth opportunities." Karl-Axel Waplan, President and Chief Executive Officer of Lundin Mining, added: "The combined strengths of Lundin Mining and EuroZinc will allow an acceleration of both companies' aggressive growth strategies… we intend to both maximize our existing assets and also continue to pursue other world-class opportunities..." On the merger conference call, the CEO’s stated that they would be looking to acquire “world-class pre-production base metals deposits wherever they are in the world.”

The bigger zinc producers are on the lookout for world class zinc deposits to extend their cash flow beyond the reserve life of their existing production. With MMGG’s Sierra Mojada likely to be one of the 3 largest zinc projects in the world coming to production in the next few years, and the other 2 largest being in politically risky Iran and Bolivia (and already owned by bigger mining companies), we’d be very surprised if MMGG doesn’t get multiple bidders when they complete the feasibility study next year.

Junior Mining Sector Bloodbath Creates Opportunity

Like other junior mining stocks, MMGG has dropped over 50% from its May high. However, as a recent article pointed out, the sector is prepared to rebound, as it historically does in fall following a summer slowdown.

Despite a recent technical buy signal, MMGG has pulled back to retest the support area in the mid-2’s. A big seller has been pressuring the stock, keeping a lid on it in the relatively low volume trading environment, just like a few weeks ago when a big seller was pressuring Copper Fox (CUU). We mentioned the significant seller of CUU when we first highlighted Copper Fox in early August. Now that its big seller’s gone, CUU has doubled in less than a month. Notice how similar CUU’s chart through the end of July looks to MMGG’s current chart:

Once the big seller who’s been holding MMGG back on low volume is gone, we expect the stock to rebound in a similar manner to how Copper Fox has rebounded. When it breaks the downtrend from May, it will establish a new uptrend and should also trigger a positive divergence MACD buy signal, with a higher low on MACD at a lower low in price.

Any way you look at it, MMGG's valuation is ridiculous at about 1% of the value of the metal in the ground. The late Julian Baring used a rule of thumb for valuing metal shares:
"Buy up to 10% of the in situ value of a deposit using current metal prices, hold up to 40% and sell above 40% taking no prisoners!!!!"

If Metalline Mining can prove up their silver and other zinc deposits, they'll be worth even more.

At the end of last month, in our last update on MMGG, we listed 6 events in coming months that should help the stock move higher. Each of those 6 events are a few weeks closer to fruition, and should start moving the stock up toward a more appropriate valuation.

Conclusion

Once the feasibility study on the Sierra Mojada zinc deposit is done, we think the takeover bidders will come out of the woodwork. However, barring a frenzied bidding war, the best path for shareholders would probably be to move into production alone.

Given the zinc crisis situation that will likely get much worse in coming years due to Asia’s insatiable demand and a lack of new projects to fill the supply gap, we believe that Metalline Mining, with the biggest zinc project in the world that’s in a secure area, will be in the driver’s seat at the right place at the right time.

Copper Fox Metals Breakout

2006-08-23T19:57:00.000-07:00

We highlighted Copper Fox (CUU in Canada, CPFXF in the U.S.) earlier this month as a long-term buy after the formation of an island reversal pattern. Today, after retesting the gap from the island reversal, Copper Fox broke out from the downtrend it's been in since May on good volume.

While it could always retest the breakout area, we believe Copper Fox has changed course and will establish a new uptrend toward its fair value at much higher levels. Copper Fox remains a great buy for the long term.

JER Envirotech Malaysia Production Facility in Operation

2006-08-16T05:41:00.000-07:00

In April, we highlighted JER Envirotech as a long-term investment opportunity in a company ramping up production in coming months to meet global demand for their wood plastic composite products. After their first plant in Canada began production last year, JER announced last night that their Malaysian production facility is now also in operation:

"With our Malaysian operation producing, we are the first company to commercially produce 4 feet by 8 feet wood plastic composite panel boards," stated Mr. Ernie Calica, general manager and vice-president of Asian Operations of JER.

From their Corporate Communications newsletter, we can see some detailed production plans:

1. Delta, B.C.: line#1. 2005 began production. Capability to produce up to 1,400 lbs per hour of WPC (wood plastic compound). Running at 33% capacity. Management expects to ramp up to two shifts (67% capacity) in the fourth quarter.

2. Delta: #2 compound line was ordered in March and is expected, at full capacity, to have 60% greater throughput than the existing line, with the ability to generate monthly revenues of US$500,000. It is expected to begin trial testing this month.

3. The Delta panel board facility is expected to begin trial production this month. At capacity it is expected to produce revenues of $500,000 per line, per month.

4. The Philippine Joint Venture panel board plant has been delayed and the trial production is expected to begin by the end of this calendar year.

5. India: JER and Master Trust Ltd expect to order equipment for its first panel board line in October, with installation and trial testing to be completed by March 2007 and initial production beginning in May 2007.

JER was trading just over $1.00 when we first mentioned it in April. After a summer dip, it’s back near the $1.00 level again. While there have been some production delays, the company still expects to grow sales to over $2 million per month next year. We continue to believe that investors from the $1.00 area and below (market cap below $30 million) will be handsomely rewarded over the long term as the company continues to grow.

Copper Fox Metals for the Long Term

2006-08-03T21:44:00.000-07:00

Copper Fox Metals (CUU in Canada, CPFXF in the U.S.) is a Canadian mining company with an option agreement with Teck Cominco for 93.4% interest in the huge Schaft Creek copper/gold/molybdenum/silver property in Northwest British Columbia. As you can see from Table 1 on page 3 of the April letter to shareholders, the Schaft Creek deposit compares favorably to the Northgate Minerals (NXG) Kemess deposits and could be similar to the NovaGold (NG) Galore Creek deposit, despite having only a tiny fraction of the market cap of those two neighboring projects. While Schaft Creek still has a ways to go before it gets to the production stage of Northgate’s Kemess South deposit, or even the feasibility study stage of NovaGold’s Galore Creek deposit, the market caps of those stocks gives you an idea of the potential for the Schaft Creek project and Copper Fox if everything goes as planned.

Figures 5 and 6 on page 6 of the shareholder letter, showing the potential project economics, indicate how undervalued the project is even when using the extremely low prices of $1.00/lb copper (currently near $3.50/lb.), $375/oz gold (currently near $650/oz), $5.50 silver (currently over $12/oz), and $6/lb molybdenum (currently near $25/lb). These figures, while not official until completion of a feasibility study, suggest a very good likelihood that the project will prove feasible.

The biggest issue for the Schaft Creek project has been that, because of their remote location, the infrastructure isn't completely there yet (which is one reason why it has traded at such a tiny market cap vs. the huge opportunity). They’ve been planning to use a new road being put in by NovaGold, as well as the power plant NovaGold’s planning, so they’re somewhat dependent on NovaGold’s success. Barrick Gold’s unsolicited $1.5 billion takeover bid for NovaGold last week, as well as today’s announced NovaGold acquisition of Coast Mountain Power, help ensure the infrastructure Schaft Creek needs will be in place. Copper Fox and Schaft Creek seem more likely to achieve success than ever.

Despite the extremely favorable and improving risk/reward ratio for Copper Fox and the Schaft Creek project, the stock has been caught up in the junior miners selloff the past few months. Despite trading as high as .90 on May 18, CUU (in Canada) traded under .40 earlier this week, as a significant seller liquidated their position. Apparently, that seller finished pressuring the stock yesterday, as it gapped up and rallied strongly today, closing at .48. The activity this week has created a bullish island reversal pattern, a powerful bottoming indicator created when a stock gaps down, trades for a few days, and then gaps back up, leaving behind an island separated from the rest of the chart:

Along with the bullish island reversal, which usually marks the beginning of a sharp reversal up, MACD is turning up from a low level and about to cross over its trigger line to create a buy signal. Today’s big volume of over a million shares on a strong up day is also very bullish.

Considering that Copper Fox recently completed a private placement of CUU shares at .55 and .60 (Canadian), we believe that investors taking advantage of this buying opportunity under .60 will reap huge rewards over the long term. While we don’t like the fundamentals for copper as much as we do for zinc, Copper Fox should be successful even if the price of Copper drops significantly, and the gold, molybdenum, and silver value in Copper Fox help to diversify the risk of a drop in any one metal’s price.

Copper Fox's web site has a host of great articles and information on the project, with buy recommendations from several analysts, including Lawrence Roulston, John Kaiser, and Brien Lundin's Gold Newsletter. The PowerPoint presentation there is also very informative. Pages 18-19 show the proximity of Schaft Creek to NovaGold’s Galore Creek.

Once Copper Fox proves the economic viability of the Schaft Creek project with the feasibility study, Teck Cominco will have the option to buy out 75% of the property, and may choose to buy out Copper Fox completely (there also have been rumors that NovaGold would buy out Copper Fox). However, that result would be a big windfall to current shareholders. Whether or not Teck exercises that option, Copper Fox looks like a great buy for the long term, with potential for a mine of world-class size.

3rd Technical Analysis Buy Alert on MMGG

2006-07-30T22:51:00.000-07:00

As we expected, the short-term market rally in late May/early June proved to be a great opportunity to “significantly reduce or eliminate exposure to the overall U.S. stock market.” While the commodity stock indices, comprised of large-cap commodity stocks, have rallied back vs. the overall stock market, many junior mining stocks have remained in the doldrums. For those who haven’t yet redeployed capital into undervalued commodity stocks, we believe the recent weakness in these stocks represents a great long-term buying opportunity.

As many of our readers know, Metalline Mining (MMGG) has been and continues to be our favorite stock and best idea for long-term upside potential. We have shown MMGG’s chart and highlighted particularly good buying opportunities based on technical analysis buy signals 2 different times so far this year, first at the beginning of the year in our original, most detailed report and then in early May on the breakout from consolidation. Both times MMGG proceeded to rally sharply (tripling in 2 months at the beginning of the year, and then doubling in 6 days in May, moving above the stated $5 target from the cup and handle buy signal), as you can see in the below chart:

In this update, we are highlighting our 3rd particularly good buying opportunity on Metalline Mining based on technical analysis. As you can see at the bottom of the chart, our 2 previous TA buy alerts coincided with MACD buy signals triggered by MACD crossing above its trigger line from a low level. After the sector correction of the last few months caused impatient investors and momentum investors to sell out, pushing the stock down below 3 to retest the previous consolidation area and the 200 day exponential moving average, a 3rd MACD buy signal has just been triggered with MACD at a more oversold level than the first 2 times. The selloff also filled the gap at $3.00 that was left from the early May rally. Closing above $3.00 on Friday is another bullish signal.

Fundamentals Better than Ever

In addition to the technical analysis looking great here, the fundamentals for Metalline are better than ever, as detailed in previous updates.

In the next few months, the following events should help MMGG move higher:

1. Listing on the American Stock Exchange. Lots of investors, especially funds and institutions, won't buy a bulletin board stock, so have been waiting for Metalline to get listed (likely under a new symbol/name on Amex) to buy. While the company has still not formally announced its application for listing, it did disclose their intent to file the application back in May.

2. New drilling results to reinforce results released the last few months indicating very high-grade silver and another high-grade zinc deposit in addition to the 5 billion pounds of drill-proven zinc.

3. Mine plan completion. This key part of the feasibility study on their proven zinc deposit will show most of the costs involved in mining the zinc. It also may allow the company to remove the silly cautionary note at the end of every press release stating they have no known reserves, which has been scaring investors away.

4. Resolution of the Mexican presidential election. By law, a winner must be declared by September 6. Clarification of this mess should provide a big lift to Metalline, especially if Calderon, the pro-free trade, pro-jobs, pro-U.S. candidate who won the first count, prevails. Mexico would then be seen as a politically stable country friendly to U.S. business and would be very accommodative to a big new employer setting up a big mine and employing lots of Mexicans. The current uncertainty that has affected MMGG and other Mexican mining stocks will be gone once there’s a clear outcome.

5. Road show to Europe. After the stock gets listed, management will meet with European institutions on a road show which should bring in a whole new group of shareholders.

6. Depletion of usable zinc inventories. A large part of the current 186,700 tonnes of LME zinc stocks is in New Orleans and unavailable for use because of contamination after hurricane Katrina. As the usable stocks get used up, it will be interesting to see what happens to the price of zinc if they can't make the New Orleans inventory available. At the recent pace of depletion (over 30,000 tonnes per month over the last year), that could happen within the next few months. Even if all of the New Orleans inventory becomes usable, the current stocks will last less than 6 months if the trend in the below charts continues.

Even the tripling of the price of zinc over the last year hasn’t slowed down the depletion of zinc inventories. What will the price of zinc have to do to slow down this depletion? Zinc inventories can’t go below zero, so something’s going to have to change soon. If the price of zinc moves up significantly because of the zinc crisis, Metalline’s zinc will be worth much more.

Longer term, we believe Metalline can not stay this cheap if the ongoing feasibility study is successful. They have over 100 pounds of proven zinc per share (5 billion pounds using a very conservative 5% cutoff grade, much more using a lower cutoff, and less than 50 million o/s fully diluted), so with zinc around $1.50 and MMGG around 3, the company is valued at 1/50th, or 2% of the proven metal value. Such a low valuation is ridiculous for a miner in a stable area with potentially one of the biggest zinc mines in the world well into the feasibility study. If they move to 10% of the proven metal value, it would move up 5 times the current price (more if they use a lower cutoff, prove out more zinc, or zinc moves higher). In addition, they have very high-grade silver which could also make them a huge silver miner, and they also have extremely high-grade zinc in another potentially huge zinc deposit.

When we look at the technicals combined with the fundamentals and the events expected in coming months, we can’t help but conclude that MMGG is a compelling buy for the long term at the current level and on any dips.

Reallocating from U.S. Stock Market to Undervalued Commodity Stocks

2006-05-26T06:07:00.000-07:00

Given our lack of confidence in the U.S. stock market for the long term at this point, we are doing a strategic reallocation from the overall U.S. stock market to undervalued commodity stocks. On this market rally, which started earlier this week as expected, we will significantly reduce or eliminate our remaining exposure to the overall U.S. stock market other than undervalued commodity stocks like MMGG. We don't know if this rally will last days, weeks, or months, but we're confident select commodity stocks will far outperform the overall market over the long term and are taking advantage of the discounted prices on these stocks during this very sharp commodity stock correction.

As evident from our recent postings, we have been been implementing this reallocation for several months already. We believe this stock market rally and the current correction in commodity stocks provide a great opportunity to complete this reallocation by decreasing exposure to the U.S. stock market and increasing exposure to select commodity stocks, particularly undervalued mining stocks. We don't know if the commodity stocks correction has ended already or will end a few months from now, but we're confident that the secular bull market in commodity stocks has a long way to go, and this correction is only a buying opportunity.

The above chart shows how, despite the recent sharp selloff in the overall stock market, gold and silver stocks have sold off even more sharply, bringing the ratio of the Gold & Silver stock index (XAU) to the S&P 500 (SPX) down significantly in the last 2 weeks. Junior mining stocks, which aren't included in the XAU, have sold off even more sharply than the major mining stocks represented by the XAU, creating what we believe is a significant long-term buying opportunity. You can see that, despite the sharp pullback in this ratio, the long-term trend remains intact. We believe, despite many skeptical analysts calling for a top on the "commodities bubble," the ratio will continue on this long-term uptrend for many years.

We are so confident that long-term investments in good commodity stocks will be extremely rewarding that we plan to cease active trading in the U.S. stock market. We expect a tougher market for traders in coming months/years, so we plan to take advantage of this bull market in commodity stocks and enjoy the ride with some select, undervalued stocks with events coming that should send their prices higher even if the underlying commodity prices head lower. The much lower long-term capital gains tax, the much lower stress level, and the much lighter required workload all tipped the scales in the decision to make this shift from active trading in an overvalued market to long-term investing in undervalued stocks.

We have set up this new Great Investments blog, where we've copied over the long-term investing posts for commodity stocks from here and will continue to post new long-term investing opportunities. We will continue to update Great Trades with the same posts, and may also continue to post shorter-term trades there occasionally. However, our focus and the bulk of our portfolio will be with the long-term investments in commodity stocks.

With sharp price increases in commodities in recent months/years, some may wonder if commodity stocks are in a bubble, and question whether there are any undervalued commodity stocks. However, while commodity prices have had huge price increases, most commodity stocks have lagged the underlying commodities significantly, pricing in far lower commodity prices. If commodity prices don't collapse as some people expect, these undervalued commodity stocks should do very well over the long term. If commodity prices go even higher over the long term, these stocks should be enormous winners with their leverage on the underlying commodities.

Unlike the tech boom, when you really had little idea which companies would become an ultimate growth success, we believe mining is much easier to evaluate, as once a deposit has been drilled, and grades defined, it can become a leading low cost project with very profitable returns, which we believe is the case for Metalline Mining, Avino, and Roxmark. Also unlike the tech boom, only a very small portion of the financial markets has invested in the resource and commodities sector.

While we believe investors in major commodity stocks will do very well, our focus is on junior mining stocks, as some of them provide much more upside given the inefficiency of the market for these stocks, the undervaluation and skepticism towards them given their lack of current income, and the consolidation in the industry that's already started to happen but will continue to increase significantly, in our opinion. Major mining companies have huge mines that are producing enormous cash flow today, but many of these mines will be closing in coming years, so they are running out of resources to develop for future income. With metals prices having increased significantly, they have extremely high levels of cash that they'll need to convert into future cash flow by investing in mining projects.

Finding and developing a resource can take 10-15 years or more, and many of the best resources in the world are in politically unstable areas of the world in the Middle East, Africa, South America, and Asia. As stated in our "Worldwide Zinc Crisis" post, "Other than Metalline Mining's mine in Mexico, the two biggest zinc mines scheduled to start production in the next 5 years are in Iran and Bolivia, two very unstable regions. If there's a war in Iran and if Bolivia nationalizes the mines in their country, the "zinc crisis" could become very dire." Major mining companies don't want to invest heavily in a project for 10 years only to have it seized by a militant government. Recent actions by the governments in Bolivia and Mongolia to potentially seize mines or mining income have raised the desirability of deposits in politically safe areas like North America.

Rather than investing heavily to try to develop productive mines on their own, many major mining companies are on the lookout for junior mining stocks with sizable metals deposits that they can buy out with their enormous cash piles. Junior mining stocks with large deposits that they can show can be economically extracted via a feasibility study will be in high demand. Because Metalline Mining's zinc deposit will likely be one of the top 5 or 10 producing zinc mines in the world, we'll be very surprised if they don't get several buyout offers upon completion of their ongoing feasibility study. However, shareholders of junior miners may be better off if these smaller companies can develop their deposits themselves, as the rewards when they get to production will be enormous, especially if metals prices continue higher in this secular bull market for commodities.

Our focus will be on junior mining stocks with deposits in North America and events coming up that should increase their stock prices even if commodity prices drop. For example, Roxmark Mines is applying for listing on the Toronto Venture exchange, giving it much more exposure than their current listing on the CNQ exchange, where many investors have difficulty buying it. They also will start producing revenue from their molybdenum in coming months and may restart activity on one of their 6 former-producing gold mines. Avino Silver & Gold will start producing revenue from the tailings at the Avino mine before getting the full mine into production in the next year or two. JER Envirotech, a non-mining commodity company, plans to open plants in Canada, Malaysia, the Philippines, China, and India in the next year or so as they focus on taking advantage of the industrialization of much of Asia. Metalline Mining is drill defining their high-grade silver/zinc/copper deposit that is separate from their ongoing feasibility study on the Iron Oxide manto, plus they will be applying for listing on a senior exchange in coming months.

As you can see, all of these companies have events coming up that should reward stockholders even if the underlying commodity prices drop. If commodity prices continue higher, they should be huge long-term winners. We will continue to look for these types of situations.

To help our readers understand why we are such strong advocates of investing for the long term in commodity stocks, we've created a repository of great investment articles at http://www.GreatInvestmentArticles.blogspot.com/. You can see there that some are calling this commodity stock correction "a buying opportunity of a lifetime" and "one of the best entry points into the junior market since the bottom in 2001-2002."

Worldwide Zinc Crisis, MMGG to Apply for Listing

2006-05-23T05:22:00.000-07:00

This article by Tom Dyson shows how bad the worldwide zinc crisis is already. Here's the zinc discussion from the article:

"The world is out of zinc...

I’m not joking. All industrial metals are scarce right now, but none are as scarce as zinc. There simply isn’t any available.

I learned this yesterday on the golf course. Chris Hancock specializes in Asia. He is the author of a publication called the Asia Strategy Report. We were paired together in a corporate golf outing. While contemplating my approach shot to the sixteenth green, Chris started talking about zinc…

Kohler Inc. is a huge manufacturing conglomerate, best known for making bathroom fittings like sinks, latrines and faucets. They coat their products with zinc to stop corrosion.

“I was just in Hong Kong,” Chris told me, “and while I was there, I met up with a friend of mine who’s the manager of several Kohler plants in China. He told me they’re having trouble with zinc… they can’t find it anywhere.”

Chris continued: “At first I didn’t pay much attention. But then at dinner that night, I sat next to a guy from my MBA class. He’s an investment banker with UBS Warburg. He says all the traders at Warburg are buying zinc like crazy and that the zinc price is about to run. But get this...

On the plane back from Shanghai, we start chatting to the lady in the seat next to us. It turns out she manages a plant in Chicago for one of the large office supply retailers. She said she’d been in China visiting factories. We told her we had been doing the same thing. We asked her how her trip went - if she’d had any problems sourcing materials for her plant – and she told us she did. She couldn’t get hold of any zinc!”"

Crisis to get Worse; Metalline Mining in the right place at the right time

With their drill-proven 5 billion pounds of zinc, Metalline Mining (MMGG) has one of the very few huge zinc mines in the world ready to go into production in the next few years. The article shows why they're in the right place at the right time to be an enormous winning long-term investment.

Keep in mind, there are also a number of large zinc mines that will be closing in coming years, with few mines coming online (even fewer if Yukon Zinc's Wolverine project doesn't get financed), making the "zinc crisis" even worse. Other than Metalline Mining's mine in Mexico, the two biggest zinc mines scheduled to start production in the next 5 years are in Iran and Bolivia, two very unstable regions. If there's a war in Iran and if Bolivia nationalizes the mines in their country, the "zinc crisis" could become very dire.

Given that there's already a crisis, and even with these mines there wouldn't be enough zinc produced to match even current production, it looks like the crisis will get much worse. China and India's growth will require a lot more zinc, which is not easily replaceable like some of copper can be. For most applications (e.g., galvanized steel), zinc is only a tiny portion of product costs, so there shouldn't be high price sensitivity to curtail demand.

In addition to their zinc, Metalline Mining's recent stellar silver drilling results means you get a high-grade silver stock thrown in "for free," as the stock is actually down over 17% from where it closed before announcing the silver drilling results, having been caught up in the recent selloff in mining stocks.

Metalline Mining to apply for listing on a "senior exchange"

Metalline Mining recently confirmed their intent to file a listing application with a senior exchange, hidden in their Schedule 14A about the annual meeting July 7, page 21:

"For example, the Company intends to file a listing application with a senior stock exchange. Any senior stock exchange listing would require the Company to have at least 50% of its board comprising of independent directors. Moreover, a senior exchange listing would require adding directors with financial expertise."

Once they get off the bulletin board, they can attract much more investor interest, particularly from institutional investors who won't touch a bulletin board stock. We think when they formally announce their listing application, the stock will rally. After the recent pullback to retest the breakout area around the multi-year high, MMGG's chart is set up very nicely for such a rally...

The future looks very bright for Metalline Mining...

Has the "Commodities Bubble" popped?

2006-05-22T06:21:00.000-07:00

After the biggest weekly decline in commodities in more than 25 years, and with analysts coming out of the woodworks declaring an end to the "commodities bubble," readers may be wondering what to do with their commodity stocks, if they have any and haven't already sold.

We at Great Investments agree with PIMCO, who says there is no bubble in commodities. Our thinking is more in line with those analysts saying the current selloff in mining stocks means we're "heading towards a buying opportunity of a lifetime here" and a "speculative frenzy" is coming for junior mining stocks in the second half of 2006 and especially 2007. Also, investment guru Jim Rogers will no sell any commodity, despite the fall.

We believe, as renowned analyst Marc Faber explains:
"in real terms, commodities are still relatively low compared to equities and therefore, also given the length of the cycle - the cycle for commodities lasts usually 45 to 60 years peak to peak or trough to trough - in other words the upward wave in commodities lasts around 22 to 30 years and we are now in year 2006. The bull market started in 2001 so we are five years into the bull market. I do concede that the markets are overbought and there is a lot of speculation and I expect a correction but I think longer term from here onwards commodities will outperform the Dow Jones and financial assets."

While the current correction in commodities could last a few more months, we believe some commodity stocks have already bottomed and most will bottom before the underlying commodities because they already discount much lower commodity prices. We view this correction as a tremendous buying opportunity in select commodity stocks for the long term.

Metalline Mining (MMGG), the Silver Stock

2006-05-11T07:54:00.000-07:00

Metalline Mining (MMGG) announced drill results on their polymetallic manto this morning (second column from the right in the lower portion should be labeled Silver oz/tonned, not Silver g/tonne). With multiple very high grade silver and zinc veins shown in these initial results, MMGG should now be considered a silver stock as well as a zinc stock.

We've been pounding the table on MMGG for months based on their zinc mining potential, but now they deserve a much higher valuation based on their huge silver potential in addition to the zinc.

Despite the recent sharp rally in the stock that has already met the cup & handle breakout target over $5 we mentioned last Friday, MMGG remains our favorite stock and best idea for long-term upside potential.

MMGG Cup & Handle Breakout

2006-05-05T06:18:00.000-07:00

Yesterday, we discussed the fundamental reasons why Metalline Mining (MMGG) is such a great long-term buy in our valuation analysis update. Today, we'll discuss the technical analysis reasons MMGG is such a great buy.

After yesterday's breakout from a bullish triangle formation to a new yearly high on good volume, the daily chart is flashing buy signals on various indicators:

The weekly chart looks like it's going through a Cup & Handle breakout (http://www.stockcharts.com/education/ChartAnalysis/cupHandle.html):

With the depth of the cup at about $2.17, the Cup & Handle breakout target is over $5. That would be well above the 2004 high of $3.35 and the 2000 high of $4.35.

Given the change in fundamentals since 2004 and 2000, it makes sense that MMGG's stock price should be much higher now. The price of zinc has more than tripled since 2004, with the over $1.00 increase in the per pound price amazingly representing over $5 billion in future profits to MMGG if the price of zinc remains strong. As long as the price of zinc doesn't collapse below the 2004 price, the numbers for MMGG based solely on their zinc are staggering.

Silver and copper have likewise approximately tripled, so if Metalline can show economic grades of these metals, the upside is hard to imagine. Given the indication in the recent President's letter to shareholders that work on the silver/copper side has restarted, we should know fairly soon whether MMGG should be considered more than just a zinc stock:

"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."

Looking at the fundamentals and the technicals, it seems Metalline Mining is destined for much higher prices over the long term.

MMGG Valuation Analysis Update

2006-05-04T07:53:00.000-07:00

Since our original valuation analysis in January, some things have changed at MMGG. Zinc has climbed from .9366/pound to $1.57/pound. UBS Securities, which is notoriously conservative in their metal price projections, has upped its target for the average per pound zinc price to $1.654 for 2006 and $1.85 for 2007, up 95% on the previous outlook. Look for them to up their targets yet again within a year. MMGG also has completed a private placement to raise the funds necessary to complete the feasibility study, which also increased the number of shares outstanding.

Using today's price of $1.57/pound (being more conservative than the UBS targets), we've updated the calculations we did in January on MMGG's zinc deposit, again using ballpark estimates, with the results of the 3 different valuation methods show below:

1. Skorpion mine value -- The Skorpion mine buyout in 1999 valued Skorpion at about $150 million. MMGG's zinc deposit is very similar in size to Skorpion's, and likely has a lower capital cost. With the price of zinc now about triple the 1999 price, and with gross profitability for a 25 cent zinc producer being over 6 times that of 1999, one could guess at a buyout price of about 6 times the Skorpion buyout price. If the zinc shortage continues to worsen and the zinc price continues higher, MMGG's zinc becomes more valuable. Given approximately 49 million fully diluted shares outstanding after the recent financing, such a buyout would be equivalent to about $18-20/share.

2. Multiple of annual earnings -- While it won't be known until the feasibility study is complete, the cost of going into production (building the mine and extraction plant) has been estimated at between $250 and $400 million (Skorpion was over $450 million). Assuming $400 milliion is needed, and is financed with 60% bank debt financing (standard with a bankable feasibility study) and 40% equity financing, 40-50 million shares of dilution would be required at a stock price of $3.20-$4/share (a 50% joint venture for someone to provide only 40% of the cost to go to production would be even better for shareholders). Assuming an 11-year life of the plant, 180 million metric tons/year processed, a 25 cents/pound cost to produce zinc, and the current 1.57 price of zinc, annual revenues would be over $620 million, gross profit over $520 million, and annual earnings (before taxes) of nearly $500 million. A 4x multiple would result in a stock price over $19 while a 5x multiple would result in a stock price over $26. Discounting the 4x multiple back 15%/year for 3 years to production would result in approximately a $13 stock price, while discounting the 5x multiple back 10%/year for 3 years would result in approximately an $20 stock. This method results in approximately a $13-20/share estimated value.

3. Present value of earnings stream -- MMGG's management is negotiating with Mexico (for the mine) and other countries (for the extraction plant) for tax breaks. The present value of an earnings stream of 80% (to net out taxes) of the earnings calculated in #2 above over 11 years using a 15% discount rate is over $2 billion, or over $22.50/share. Using a 10% discount rate results in nearly $28/share. Discounting further by 15%/year and 10%/year, respectively, over 3 years to get to production results in approximately a $15-21/share estimated value.

All 3 of the above methods result in a share price after the feasibility study of about $13-21 based solely on the zinc deposit. If the silver/copper side turn out to be more valuable than the zinc side, MMGG could be worth more than $40/share, especially if the prices of zinc, silver, and copper continue higher.

Lots of assumptions are built into the above calculations, so take them with a grain of salt. However, many of the uncertainties will be removed during the completion of the feasibility study over the next year or so, and the numbers will become clearer to all. Some may be better than assumed and some may be worse. However they turn out, it looks like MMGG at the current price level is extremely undervalued and poised to move much higher.

Roxmark Mines for the Long Term

2006-04-25T10:24:00.000-07:00

Roxmark Mines (RMKL in Canada on the CNQ exchange, RMKMF in the U.S.), is a Canadian junior gold and molybdenum mining company with 12 properties in Northern Ontario. Roxmark is probably the closest junior miner to molybdenum production, which should come in the next couple of months, and they should get listed on TSX soon, too. Both events should help it move much higher from the CNQ doldrums it's been in (CNQ is seen by some as the pink sheets of Canada). They also have great prospects for high-grade gold, with some of the richest old gold mines in Canada.

Here's a good article about molybdenum that mentions Roxmark: http://www.321gold.com/editorials/moriarty/moriarty042006.html.

If Roxmark gets some of the performance that other molybdenum stocks have had in recent months (IGMI has tripled, AUA has quadrupled), the stock should perform very nicely, and their gold properties should help them to tremendous long-term appreciation. If they can reopen some of their six formerly producing gold mines and use new technology to get the gold, Roxmark could be an enormous winner for the long term. The near-term revenue from moly this year will help them fund the development of the old gold mines.

We believe Roxmark shares are likely to go much higher over the long run if things go as planned. We like the molybdenum giving them near-term revenue, the TSX listing giving them more investors in coming months, and the huge upside with the gold properties. RMKL just broke out of its base from the last year under .20, and is trading at around .21.

If you buy RMKMF, it's probably best to get a quote of RMKL (from a broker or the CNQ exchange directly) in Canadian dollars first and calculate the U.S. dollar amount you want to pay for RMKMF. The Canadian dollar is at about .88 vs. the U.S. dollar. It trades really thin, but that should improve once they get listed on the TSX (Toronto) and go into molybdenum production. It will be much easier for Canadians to trade once it starts trading on the TSX.

You can get more info on Roxmark at http://www.roxmark.com.

JER Envirotech for the Long Term

2006-04-21T06:10:00.000-07:00

JER Envirotech (JER in Canada) is a Canadian manufacturer of wood-plastic composite (WPC) products. JER mixes wood waste (sawdust, rice husk) with high-grade plastic to produce a better alternative to pure wood and plastic products. JER's WPC products can be used for a wide variety of products across many industries with better characteristics than pure wood or plastic.

By taking wood waste and incorporating it into useful products, JER helps preserve the environment while decreasing the cost of materials. In the current world climate of rising raw material costs and environmental decline, JER plays a vital role as a socially responsible manufacturer.

To develop their patented technology with 42 different WPC compounds, JER worked jointly with the National Research Council of Canada. This partnership means that JER's patents have the backing of the government of Canada.

In the past year, JER has put its first plant into production in Canada and has had several major companies from different industries test their panel boards and pellets (the only WPC product in the industry that can be injection molded) across many different applications. These companies wanted a lower cost material with similar or better quality and lower life-cycle costs than what they had been using. For example, JER's construction panel board not only costs less than the alternatives, but it doesn't rot or warp with moisture, is termite proof, saves on heating costs, is fire retardant, can be nailed or painted just like wood, is sound resistant, and is lighter and easier to work with. JER's other products offer similar benefits.

This year, JER is ramping up their production capacity in Canada and Asia to meet demand. A plant in Malaysia should be ready in a month or two, followed by expansion in Canada in the summer, the Philippines in the fall, and India around the end of the year. A plant in China is planned for about a year from now. Once all this production is in place, JER will be able to satisfy demand such as an agreement to provide 50,000-200,000 homes in coming years in the Philippines. There's massive demand for housing in Asia as that area develops.

JER is currently trading just over $1 in thin trading. Insider buying at $1.04 and a recent private placement with institutions at $1.10 provide support in the $1 area. JER hit a high of $1.45 in November 2005. As JER's plants move into production over the next year, we expect the stock price to react positively.

Those investors wanting to take advantage of the global shift in coming decades as Asia industrializes, but looking for an alternative to energy and metals stocks for diversification purposes, would do well to add JER to the portfolio. The company has enormous potential and is just getting started. We believe that JER is a great buy in this area for the long term, with tremendous upside if Asian demand grows as we expect.

See http://www.jerenvirotech.com/ for more details on JER Envirotech.

Avino Silver & Gold Mines for the long term

2006-04-19T06:17:00.000-07:00

Avino Silver (ASM.V in Canada, ASGMF in the U.S.) is a silver and gold mining company based in Canada with top silver prospects in Mexico and Canada. Avino recently acquired the 51% of its namesake Avino Mine in Mexico that they didn't already have. Avino plans to get silver revenue from 3 different sources to provide for near-term, mid-term, and long-term revenues:

Near term: Tailings from prior production, which they plan to harvest in coming months
Mid term: The previously operating Avino mine that still has lots of silver and should be back in production within a year or two
Long term: "11,000 hectares of highly prospective land around the mine, of which no one inch has been explored by modern exploration methods." (from article linked at bottom)

Avino hasn't moved up nearly as much as some other silver stocks in recent months, and remains cheap relative to the amount of silver they have and how close they are to production. We also like that it can be bought in the U.S. under ASGMF, which sometimes trades at a higher volume than ASM does in Canada.

Avino hit its high on 4/3/06 when silver was in the 11's. With silver having rallied to over $14 and Avino looking to break out of a triangle pattern in an uptrend, we believe Avino represents a great long-term investment. With silver having run up sharply recently, it may be due for a pullback soon, but we believe any pullback in Avino shares represents a good buying opportunity for the long term.

The author of the Silver Stock report likes Avino because it's one of the most highly leveraged silver stocks there is: http://silverstockreport.com/email/Avino.html

Here's a good overview of Avino from October: http://www.silverstrategies.com/story.aspx?local=1&id=1536

Silver and Zinc Hit Multi-year Highs

2006-03-21T12:22:00.000-08:00

With news about a new silver ETF (Exchange Traded Fund) getting closer to reality, silver today hit a new 22-year high over $10.50/ounce. Meanwhile, zinc also hit a new high over $1.13/pound, as the zinc inventory tracked by the London Metal Exchange fell to "less than 11 days of global consumption. Stockpiles have dropped 48 percent in the past year."

According to Bloomberg, "Zinc rose to a record in London as a decline in stockpiles signaled strengthening demand from China, the largest consumer of the steel-galvanizing metal."

As we mentioned in our original report, Metalline Mining (MMGG) has a large amount of both zinc and silver, though the silver development had been put on hold since 1999 as the company shifted focus to its oxide zinc. As both metals continue on their long-term bull market rally, and as Metalling Mining moves closer to mining these valuable resources, long-term shareholders should benefit greatly.

MMGG and Other Zinc Stocks

2006-02-07T08:11:00.000-08:00

Since our MMGG Valuation Analysis, the price of zinc has continued to climb from $.9366 to $1.08 per pound. Zinc stocks have rallied sharply as well. Amazingly, despite its recent rally, MMGG is still significanly behind in price appreciation relative to other zinc stocks, near historic lows in relative terms. It has a long way to go to catch up...

Here's a comparison chart with EZM showing MMGG was 17.86 times EZM's price in 2003, and is only 1.29 times EZM's price now.

Here's a comparison chart with YZC showing MMGG was 13.49 times YZC in 2004 and is only 3.55 times YZC now.

Here's a comparison chart with BWR showing MMGG was 8.3 times BWR in 2003 and is only 1.92 times BWR now.

With them well into their feasibility study with one of the few huge zinc deposits in the world ready to go into production in the next few years, one would think MMGG would be leading the zinc stock performance, not pulling up the rear. Our original report described the reasons MMGG sold down to such a tremendous value level. Add in the silver/copper potential, and MMGG should improve significantly on its relative performance vs. other zinc stocks.

This article discusses takeovers in the gold industry at a very steep price ($1100 per reserve ounce). Given this premium takeover situation in the gold mining sector, it makes sense that Anglo American is selling their gold mining unit and focusing on investing in base metals and other areas. To give you some idea of how undervalued MMGG is, these gold mining companies were bought out for more than 200% of the value of their gold reserves. By comparison, MMGG is currently valued at 1-2% of its zinc resource.

Why we think Anglo American (AAUK) will try to buy MMGG's Zinc Deposit

2006-01-26T04:06:00.000-08:00

In our valuation analysis of MMGG, we mentioned the Skorpion mine buyout in 1999, when metals prices were depressed and the seller of the 60% interest in the mine (to Anglo American--AAUK, the 40% owner) was in need of cash:
http://www.unquoted.co.uk/forums/showthread.php?threadid=8678&pagenumber=1
"Unfortunately, it did not have the resources to fund these diverse operations and was bought out by one of the majors (Anglo I think) for a knock down price."

Anglo American is now one of the largest natural resource companies in the world, with huge profits and cash flows. They recently changed strategic direction, and will be selling off underperforming assets while increasing their investments in metals such as zinc. Given their huge success with the Skorpion mine, producing zinc for .25/pound and selling over $1/pound now (vs. about .46/pound in 1999 when they bought Skorpion), the blurbs we found (at the bottom of this update) indicate they'll be looking to buy the next Skorpion mine.

With MMGG's zinc deposit being similar in size to Skorpion's, and GTI (the same company that did the feasibility study for Skorpion and took them into production) doing the feasibility study for MMGG, it seems very likely that Anglo American will try to buy MMGG's zinc deposit once the feasibility study's done in about a year. They know the process very well and have done it before very successfully with Skorpion, so it would be a very low risk, high return situation for them. With the zinc shortage becoming more and more obvious as the price of zinc continues higher and zinc inventories keep dropping, other companies will also likely be bidding for MMGG after the feasibility study, possibly creating a bidding war. As the biggest zinc deposit nearing production at likely the lowest cost per pound with all the plans laid out in the feasibility study prepared by the same GTI team that got Skorpion into production, creating almost a turnkey solution, it looks like MMGG will be in the right place at the right time as more and more people understand the zinc supply gap situation...

If MMGG sells their zinc deposit, we'd like to see them hold on to the silver/copper side and develop it, or at least get a good price for it in a transaction.

Here are the indications that Anglo American will be on the lookout for projects like MMGG's zinc mine:

http://www.angloamerican.co.uk/article/?afw_source_key=34C45BAD-090E-483E-AAB1-71E915A67396&xsl_menu_parent=/
"The strong cash flows currently being generated from operations will enable Anglo American to pursue its $5 billion capital expenditure programme and to consider further growth projects."

http://finance.messages.yahoo.com/bbs?.mm=FN&action=m&board=1600684454&tid=aauk&sid=1600684454&mid=2161
Jim Jubak of MSN seems to think it's positive..
Here is the text:
Anglo American (AAUK) is undergoing a restructuring that will eventually involve selling its steel, paper and packaging, and gold mining business. Why invest in a gold mining company that's selling its gold mines? Because Anglo American gets twice the bang for its gold buck by selling its 51% ownership in AngloGold Ashanti over the next year or so. First, the company will sell an underperforming asset at a premium price. AngloGold Ashanti accounted for 8.6% of Anglo American's revenue, but only 4.8% of earnings in 2004. And second, by selling the gold, steel, and paper and packing businesses, Anglo American will free up capital for investing in its other commodity business that produce better returns. The businesses marked for sale make up 45% of invested capital, but generate an average return on invested capital of just 5%, according to Morgan Stanley. Without them, the company's return on invested capital would climb from today's 10.6% to 15.6%. The businesses that will be left for Anglo American to reinvest in are exactly the kinds of hard asset businesses that I'd like to own right now: platinum, diamond, coal, base metals and iron ore. As of Jan. 13, I'm adding Anglo American to Jubak's Picks with a target price of $49 a share by December 2006.

MMGG Valuation Analysis

2006-01-16T21:15:00.000-08:00

As the price of zinc continues to climb (.9366/pound vs. .8599/pound at the beginning of the year when we wrote our first report), MMGG's zinc mining property becomes more valuable. We've done some further analysis on the valuation of Metalline Mining's zinc mining property. While many variables remain to be firmed up during the rest of the feasibility study, we've used ballpark estimates in the calculations below.

Let's look at 3 different ways to value MMGG's zinc mining property:

1. Skorpion mine value -- The Skorpion mine buyout in 1999 valued Skorpion at about $150 million. MMGG's zinc deposit is very similar in size to Skorpion's, and likely has a lower capital cost. With the price of zinc now about double the 1999 price, and with gross profitability for a 25 cent zinc producer being about triple that of 1999, one could guess at a buyout price of 2-3 times the Skorpion buyout price. If the zinc shortage continues to worsen and the zinc price continues higher, MMGG's zinc becomes more valuable. Given approximately 37 million fully diluted shares outstanding after the current financing, such a buyout would be equivalent to about $8-12/share.

2. Multiple of annual earnings -- While it won't be known until the feasibility study is complete, the cost of going into production (building the mine and extraction plant) has been estimated at between $250 and $400 million (Skorpion was over $450 million). Assuming $400 milliion is needed, and is financed with 60% bank debt financing (standard with a bankable feasibility study) and 40% equity financing, 40-50 million shares of dilution would be required at a stock price of $3.20-$4/share (a 50% joint venture for someone to provide only 40% of the cost to go to production would be even better for shareholders). Assuming an 11-year life of the plant, 180 million metric tons/year processed, a 25 cents/pound cost to produce zinc, and the current .9366 price of zinc, annual revenues would be over $370 million, gross profit over $270 million, and annual earnings (before taxes) of well over $200 million. A 4x multiple would result in a stock price over $10 while a 5x multiple would result in a stock price over $15. Discounting the 4x multiple back 15%/year for 3 years to production would result in approximately a $7 stock price, while discounting the 5x multiple back 10%/year for 3 years would result in approximately an $11 stock. This method results in approximately a $7-11/share estimated value.

3. Present value of earnings stream -- MMGG's management is negotiating with Mexico (for the mine) and other countries (for the extraction plant) for tax breaks. The present value of an earnings stream of 80% (to net out taxes) of the earnings calculated in #2 above over 11 years using a 15% discount rate is nearly $1 billion, or about $12.50/share. Using a 10% discount rate results in nearly $16/share. Discounting further by 15%/year and 10%/year, respectively, over 3 years to get to production results in approximately a $8-12/share estimated value.

All 3 of the above methods result in a share price after the feasibility study of about $7-12. The over 1.5 billion pounds of zinc in the Smithsonite manto should add significantly to MMGG's value, probably extending the life of the plant by several years. If the silver/copper side of MMGG turns out to be more valuable than the zinc side, MMGG could be worth more than $25/share, especially if the prices of zinc, silver, and copper continue higher.

Lots of assumptions are built into the above calculations, so take them with a grain of salt. However, many of the uncertainties will be removed during the completion of the feasibility study over the next year or so, and the numbers will become clearer to all. Some may be better than assumed and some may be worse. However they turn out, it looks like MMGG at the current price level is extremely undervalued and poised to move much higher.

MMGG Update

2006-01-07T20:18:00.000-08:00

In the last 2 weeks, MMGG has rallied over 50% off of the multi-year low level, starting to catch up with other zinc stocks. Normally, one might think a 50% rally would make a stock less attractive for new investors, but in MMGG's case, it has a long way to go just to return to the $3+ level it traded at 15 months ago, and this rally makes the company worth far more than if the stock had continued to languish at the lows.

The biggest issue Metalline Mining had 2 weeks ago was getting financing to retain GTI to complete the feasibility study. Now, with this rally, big investors have jumped on the private placement, as they get an immediate 50%+ increase as well as the warrants. Closing this financing will mean a huge risk will be removed, as they'll have enough cash to complete the feasibility study with the team that's done it before at Skorpion, and they may have extra cash to expedite the development of the silver/copper deposit.

We didn't go into the silver/copper side much in the first report, but one seasoned industry investor who has invested in dozens of different mining private placements over the years told Great Trades that he likes the silver/copper potential even more than the zinc potential. Metalline Mining has essentially ignored the silver/copper side since 1999 when the Skorpion mine feasibility study was completed, but it used to be their primary focus. Since then, the price of silver has almost doubled and the price of copper has tripled, both up more than zinc. Most of the current investors probably have no idea there is any silver/copper deposit, as all the focus has been on zinc.

If the work they restarted recently on the silver/copper side indicates economic value, as the original samples did when prices were much lower in 1999, that should provide a major boost to MMGG's stock price. Watch the news over the coming months to see if they get any good silver/copper results.

Metalline Mining (MMGG) for the long term

2006-01-02T22:28:00.000-08:00

Zinc Overview
From the Metalline Mining Web site (http://www.metalin.com/zinc_solvent.html) :

“Zinc is one of the most useful and essential metals. Zinc's primary use is corrosion protection in the galvanized steel industry. The recycle life of galvanized steel can be up to 100 years and the added cost is justified by decreased maintenance cost over ungalvanized steel.

The largest use of galvanized steel is in the automobile industry and in commercial and residential construction. Construction is zinc's fastest growing sector where it is used, for Structural support, as galvanized electric power, microwave, cellular and other towers, steel beams, floor joists, studs and trusses and it is used in ductwork, roofing and decorative interior and exterior covering.

Die cast zinc parts are used in automobiles, appliances, tools and computers.

Zinc alloys with copper, tin, lead, aluminum and magnesium are used in the construction, automotive, electrical and consumer products industries. Other zinc uses are in batteries, tires, rubber goods, paint pigments, ceramic glazes, cosmetics, pharmaceuticals and chemicals.

Zinc is an essential nutrient for all life, plant and animal and is used in the food industries, nutritional supplements, animal feed and fertilizers.

Zinc consumption has grown dramatically over the past 30 years and continues to increase and new uses for zinc are being developed. Zinc fuel cells are under development for generating electricity and could create significant new demand.”

Zinc Supply Gap
Following several decades of ample zinc supply, a major supply gap is developing in the zinc markets that will likely have a profound impact on future zinc exploration and mine development (from http://www.yukonzinc.com/zincMarkets.htm):

China has been a main driver behind the supply gap, as they’ve gone from a major exporter of refined zinc to a major net importer in 2005.

As you can see from the below chart, the London Mercantile Exchange Zinc Warehouse Stocks Level decreased by over 37.5% in 2005, indicating the zinc shortage is getting worse quickly (live zinc charts at http://www.kitcometals.com/charts/ZINC_historical.html):

As the zinc supply shortfall worsens and inventories continue to decline, the price of zinc increases. You can see from the below chart that the price of zinc has more than doubled in the last 18 months:

Unlike other commodities, there are few giant zinc deposits in inventory to fill the gap due to depletion of reserves during the past several years of low zinc prices. While old reserves get depleted, no new large zinc mines are set to come into production in the next two years.

Metalline Mining Zinc
The Skorpion mine in Namibia, Africa, is the 8th largest zinc mine in the world. In 2003, the Skorpion mine became the first mine to use the Solvent Extraction Electro-Winning (SXEW) to produce refined zinc from oxide zinc. The cost of producing refined zinc by SXEW is $0.25 per pound, a 30% advantage over the rest of the zinc industry, which produces zinc from a sulfide concentrate through the smelter process at a cost of $0.35 per pound. This new technological advance has made Skorpion the world low cost zinc producer.

Using the same SXEW process as the Skorpion mine, Metalline Mining’s Sierra Mojada mine in Mexico could be one of the world’s 10 largest zinc mines and one of the lowest cost producers (and possibly the lowest cost producer). With a similar cost to Skorpion’s $0.25 per pound, Metalline would have a margin of over $0.60 per pound at the current zinc price of over $0.85 per pound ($0.85-$0.25=$0.60). With the price of zinc likely headed much higher given the aforementioned supply gap situation, the profit potential for Metalline’s zinc reserve is enormous.

Feasibility Study
After discovering mineralization and doing extensive drilling to show the presence of enough marketable metals to move forward, mining companies go through a feasibility study, a process to define the metals reserve (metallurgy), define the costs and profitability, get regulatory approvals, and design the mine (and refinery/extraction plant in cases where that step is included). The feasibility study provides the extensive proof that the mine will make money, and is used for financing to go into production. Typically, this financing comes from a takeover by a major mining company, a joint venture with such a company, or a combination of bank debt financing and equity financing.

Metalline Mining began the feasibility study process about a year ago, proving they had over $4 billion of Zinc earlier this year in the metallurgy portion. The feasibility study has stalled in recent months because of a lack of funding, which Metalline is addressing with the current private placement. Once the financing is complete (likely in the next couple of weeks), the feasibility study should be complete within 9 months to a year. The cost of building a mine and extraction plant is likely to be in the $250 million to $400 million range.

To conduct the feasibility study, Metalline selected Green Team International (GTI), the same company that conducted the feasibility study on the Skorpion mine. GTI designed, supervised the construction, and operated the Skorpion mine and extraction plant through initial production and until the mine and plant were at 90% capacity. Given Metalline's plan to use the same efficient, cost-saving process as Skorpion, GTI was the perfect choice.

Once the company raises the money required to complete the feasibility study, most of the risk for MMGG will be gone. The remaining part of the feasibility study is mostly defining the costs and profitability. Once that’s complete, virtually all the risk will be gone, and MMGG will likely have several takeover bids to fall back on as the worst-case scenario, with the most lucrative path to move to production with debt and equity financing (at a much higher stock price). Skorpion was bought out by Anglo American (AAUK) at the completion of their feasibility study, resulting in a huge profit for Reunion Mining shareholders even though the price of zinc was near a bottom, much lower than current prices. Anglo American is one likely bidder for MMGG at the completion of the feasibility study.

Valuation Based on Zinc Alone
With nearly 5 billion pounds of zinc, a $0.60 per pound margin would mean nearly $3 billion of gross profits for Metalline Mining. Even if the initial costs are in the $400 million range for the mine and extraction plant and you discount heavily for the approx. 3-year wait to get into production and the profits coming over 10-12 years, MMGG is still extremely undervalued at its current market cap under $30 million. Earnings per year once in production should be several times the current market cap. Metalline's zinc reserve alone is worth over 100 times its current market cap.

Company insiders, recognizing the long-term value, have bought MMGG shares between $1 and $1.66 over the last few years, and none of the current management has sold.

Any way you look at it, MMGG is severely undervalued based on the zinc opportunity.

Private Placements Depress Share Price
Metalline Mining initiated a private placement at $1/share over 2 years ago to raise capital for the reserve definition and feasibility study. Many of those private placement investors sold their shares as the lockup expired beginning in late 2004, pressuring the stock price over the last 15 months. Despite the fundamentals improving dramatically since then, with the price of zinc nearly doubling along with the successful completion of the metallurgy portion of the feasibility study, the stock price has lost most of its value from over $3 in October 2004 because of this selling.

Early in 2005, Metalline Mining attempted to finance the rest of the feasibility study with a private placement at $1.50 per share. However, the aforementioned profit-taking investors and big investors who wanted to get private placement shares cheaper sold, pressuring the stock down to $1.50 after starting the year at $2. Metalline was forced to lower the private placement price to $1.125, after which the stock again sold down to the private placement price. Big investors insisted on a still lower price for the private placement, so the placement price was lowered to .80, with a $1.25 warrant. Yet again, the stock sold down to the new private placement price, as investors sold their old shares to get the new shares and the warrant. Now that the private placement is coming to a close, this selling pressure along with tax-loss selling has decreased. This private placement should get them through the rest of the feasibility study.

Rally Last Week on Big Volume – Buy Signals
With zinc hitting a 16-year high, other zinc exploration stocks like Canadian Zinc and Yukon Zinc have run up over 75% in recent weeks on big volume. MMGG had been lagging because of the aforementioned reasons, but finally began to join the zinc stock rally last week. MMGG rallied 22.5% last week from a 6-year low on the highest volume since it hit $3.28 on October 1, 2004, even though it was a holiday-shortened week and some investors must have been tax-loss selling into the rally.

Last week’s rally triggered some technical buy signals on the MMGG weekly chart:

With the volume increase and accompanying price increase, an On Balance Volume (OBV) buy signal was triggered last week. You can find out more about OBV here: http://stockcharts.com/education/IndicatorAnalysis/indic-obv.htm.

After months of bullish divergence between MACD and the stock price, with the MACD increasing from its summer low while the price continued lower, MMGG also finally broke out of its 15-month downtrend channel last week. This break from the channel triggered a Parabolic SAR buy signal. You can find out more about Parabolic SAR here: http://stockcharts.com/education/IndicatorAnalysis/indic_ParaSAR.htm.

These technical analysis buy signals indicate that MMGG has seen its bottom and is likely to continue higher in coming weeks and months.

Metalline Mining Silver/Copper
In addition to the zinc reserve currently in the feasibility stage, Metalline Mining also has high-grade silver and copper mineralization on the North side of its Sierra Mojada property. Metalline’s Sierra Mojada property has very unusual geology (http://www.metalin.com/geology.html), with 2 distinct mineral systems: high zinc mineralization on the South side of the Sierra Mojada fault and high silver and copper mineralization on the North side. Over 5000 samples had been collected from the North side through 1999, indicating very high grade silver and copper mineralization. In 1999, with the positive feasibility study from Skorpion, Metalline shifted its focus to the enormous potential of its zinc mineralization, putting the silver/copper exploration on hold.

With GTI hired to do the feasibility study, Metalline staff has been able to again give the silver/copper mineralization some attention. Over 2000 new samples have been collected, the results of which should be available shortly. If the results continue to be good, the silver/copper side of MMGG could have as much or more potential than the zinc side. Up to this point, Metalline had not actively promoted the silver/copper side of their property.

Future Plans
Metalline management recognizes that there are two areas that need improvement. First, as a bulletin board stock, they’ve had difficulties attracting big investors, many of whom won’t invest in bulletin board stocks. Look for them to pursue a Toronto or Amex listing, which would give them more credibility and open up doors to a high number of large investors. Secondly, look for them to significantly increase the marketing and PR efforts, possibly hiring a PR firm or two to help them in that area. The lack of news and promotion combined with the private placement sellers hurt the stock last year.

Conclusion
Given the extremely low valuation versus the enormous zinc opportunity, MMGG, trading at less than 1% of the proven value of their zinc reserve, should be several times higher after they complete the feasibility study. If the results from their recent silver/copper sampling continue to be positive, that will also help the stock move significantly higher. At the current level under $1, MMGG looks like a steal, and anything under $2 also looks like a great value with huge upside for the long term.