World Of Wallstreet

The Shape Of Things To Come, 10/15/2007 Update

Here's another look at the metal future curves. The future prices from the original "Shape Of Things To Come" are compared to current prices in the graph below.

Here's the conclusions I draw from this graph:

1. Futures prices are not very accurate predictors of the future. The nickel price was, a month ago, 14% lower than the and this was not predicted by the futures curve which expected, at that time, relatively flat nickel prices. Similarly the lead (Pb) prices was, a month ago, 20% lower than the current month and the futures prices were predicting a falling price over the next three months.
2. The prices are, across the board, significantly higher than a month ago with Ni and Pb leading the way.
3. The shape of the curves have not changed significantly, but they have just shifted up in price.

Weekly Inventory Levels 10/12/2008

Here's the graphs giving the inventory levels updated for this week. There was no post last week because of the week long Golden Week Chinese holidays. If it weren't for those holidays, I'd be concerned about how both the overall copper and overall zinc inventory levels rose. If they don't go down next week, I may begin to lighten up some of my holdings.

Best Of The Boards: IV RNO 10/10/2007

When I see something particularly interesting on the investing boards I track I'm going to provide a link on this blog. Please post a comment if you know of a board or blog you think would be of interest to me or this blog's readers.

These two are from the InvestorVillage.com RNO board (home of base metal mining discussions):

tobinator00, Gold Market Update - Last call to get on board provides a bullish technical analysis of gold, platinum and several large-cap gold mining companies. I find it pretty compelling. I generally stay away from gold stocks, but am probably going to enter a swing trade on margin today. Here's my favorite of the charts:

bigenergybull, My First Energy Buy in over a year BigEnergyBull is the highly respected (also proud and sarcastic) guru who originally piqued my interest in base metal mining stocks. He's recommending South Africa's Sasol (SSL), the leading provider of coal to liquids technology. I've been thinking about this company for years. As the need for crude oil increases and available supplies (even with the offsetting effects of Canadian Oil sands) diminish, the benefits from resorting to Coal to Liquids conversion will be just to compelling to the Chinese (and others) regardless of its CO2 emissions and their effect on global warming.

Resource Investing In Politically Safe/Unsafe Locations... Today's Buzz

Here's a couple of news stories of interest:
Kremlin Writing On The Wall For Mittal - discusses how Russia is not granting access to the world's largest steel manufacturer, headed by India's Mittal, to Russia's resources. A perfect example of why Russia is an unsafe place to invest.
Commodities Producers Focus Of China Takeovers - here's the lead: "Mining companies in China, the largest consumer of copper, iron ore and coal, are likely to buy more metal deposits and oil fields in Africa, Latin America and Australia to feed rising domestic demand, an official from Citigroup said Tuesday." I picture this as a case where China realizes more investment is needed for increased mine capacity. Initially this will be good for mining stocks as their valuation should rise to match the prices China pays. China's interest lie not from making profit from mining companies but in lowering metal prices. China's investing may, eventually, turn the tide to the point where adequate mining capacity comes online and metal prices fall to the marginal cost of production. This is something to watch, although its impact is years away.

Outlook For China And Other LME Week Presentations

This is LME Week for the London Metals Exchange. They are having a conference and have posted some presentations.

My favorite is the one giving the China 20 year outlook. Anyone interested in what is happening in the world should take a look at this. The basic conclusion is that China's economy probably will keep growing at the current rate for a least a few more years and then should continue to grow, but at a lower rate (although still faster than the rest of the world and the USA).

There are also some other presentations worth looking at by metal:
Copper, by Macquerie - they expect Cu to trade slightly higher in 2008 than 2007. This is the best copper presentation I've seen in quite a while. Page 17 is particularly interesting where they graph how much, by year, copper production has failed to achieve the "planned" output.
Lead(Pb), Tin, Zinc, Nickel, by CRU - bearish (as usual for CRU) across the board for 2008 and bearish further out for Zinc.  Bearish factors for Zinc are not what is usually enumerated (a wave of supply), but rather that high prices are creating demand destruction (economizing on use of Zinc) and that Zinc production is a fragmented industry leaving it with little pricing power.
Aluminum, Barclays - I'm starting to get interested in Aluminum as a peak-oil play. Producers with low-cost access to hydropower should have a big advantage over other producers.

Why The "Terrible Tuesdays" For Jr Mining Canadian Stocks?

Since the beginning of August, Tuesdays seem to have been pretty bad for Jr Canadian mining stocks.

Here's my opinion of what is happening and why it won't happen today:

1. These Jr Canadian Mining stocks are dominated by retail investors because they are too small in terms of market cap, liquidity and stock price to be in a respectable institution's universe of stocks.
2. Retail investors look things over during the weekend and realize how undervalued these stocks are and come in on Monday and buy, pushing the prices up.
3. When Tuesday comes, retail investors have blown their wad, have nothing further to invest. There are no buyers and the stock prices fall.

That won't happen today (I predict) because yesterday the Canadian markets were closed. As such, today is more like a Monday than an ordinary Tuesday.

Copper Concentrate Tightness Does Not Necessarily Imply Higher Copper Prices

You may have recently read articles mentioning how tight the supply of copper concentrates is. Here's a bunch of links to articles referring to a tight copper concentrate market:

http://www.forbes.com/markets/feeds/afx/2007/10/08/afx4196036.html

http://www.mining-journal.com/Breaking_News.aspx?breaking_news_article_id=3988

http://www.forbes.com/markets/feeds/afx/2007/10/02/afx4177959.html

http://money.cnn.com/news/newsfeeds/articles/newstex/AFX-0013-20034704.htm

http://today.reuters.com/news/articleinvesting.aspx?type=fundsFundsNews&storyID=2007-10-02T160809Z_01_L02281315_RTRIDST_0_MARKETS-METALS-UPDATE-5.XML

http://www.forbes.com/markets/feeds/afx/2007/09/27/afx4163231.html

The natural interpretation of this is that it means that there is a corresponding tightness of copper mine output and thus an expectation of higher profits for out copper mining companies and for higher copper price. And this may be the case, but...

There is another reason for copper concentrates to be tight independent of the tightness on overall copper mine output. That is, what is mined is shifting from the sulfide ore mining (where the mine produces copper concentrates that go to smelters) to oxide ore which goes thru a heap leach process with electrowinning and where the mine output is pure copper (in the form of cathodes) which needs no smelter.

This shift, at the margins, is significant. As a matter of fact, I believe I have read that copper concentrate production globally is slightly falling (say 2% a year) while overall copper production is growing (say 4% a year) and the overall growth comes from expansion of the heap leach mining. Feel free to comment if I don't have these numbers exactly right.

An obvious example of this is a favorite  of mine, Quadra Mining (QUA.TO), where current production is concentrates and production from the mine that is under construction (Carlota) will be heap leach produced cathode. This transition is also taking place in Chile, the world's largest copper producer (although to a lesser extent).

Now smelter capacity is static (unless smelters are built or mothballed), so if copper concentrate production falls, the smelter are undersupplied and thus concentrates are "tight".

I think the most bullish thing about the "tight concentrate" supply is the fact that it highlights that mines do not last forever and that the old mines (which are mining primarily sulfide ore) are not producing as much as they used to.

But whether concentrates being tight means that copper overall is "tight" and will continue to have a rising price is another question which I am not trying to prognosticate in this post.

P.S. There is a side-effect of the transition to heap/leach electrowinning that is important and non-obvious. Concentrate mines are able to produce biproducts, especially Moly (and in Africa Cobalt). Now, South America is where most of the moly as a biproduct production comes from. The trend of South America (Chile especially) transitioning to heap/leach is bullish for moly as biproduct moly production has been and should continue to be either static or falling.

This would be all the news, all the time...

on all the cable news channels 24x7 if it were in the USA:

3200 hundred people trapped a mile below the surface!

(http://www.bloomberg.com/apps/news?pid=20601087&sid=aReXssQIho60&refer=home):

"Harmony Gold Says 3,200 Miners Stuck Underground

By Stewart Bailey

Oct. 3 (Bloomberg) -- Harmony Gold Mining Co., Africa's third-largest gold producer, said 3,200 workers are stuck more than a mile underground at its Elandsrand mine in South Africa after a falling pipe damaged the shaft.

A pipe broke from a column near the surface ``due to fatigue'' and plunged down the length of the 2,200-meter (1.4- mile) shaft, spokeswoman Amelia Soares said today. An adjacent shaft, used to transport waste, needs to be ``reconfigured'' to lift the miners to the surface, she said, without saying how long that will take..."

NOTE: Image is of a formerly-trapped gold miner who survived a collapse in 2005.

I'm praying they get out safely and soon. Mining is still one of the "Most Dangerous Jobs".

Monty

Peru Copper Strike Is Actually A Moly Strike

Here's a link to my first post on the Peru copper strike from June 27.

Now that the strike has finally started, its worth reiterating its significance.

Sothern Peru's Toquepala and Cuajone mines which went on strike today produce roughly 325,000 tonnes per year of copper. This is roughly 1.7% of world-wide production.

These same two mines also produce 34 million lbs of Moly. With worldwide moly production around 374 million lbs, that's 9% of world-wide annual production.

Now, that means that the Peru strike should affect Moly prices 5 times as much as copper prices.

When you consider that the closure of Ivernia's Magellan mine (3% of world-wide annual Pb production) seems to be a main factor in the doubling of Pb (lead) prices this year, its seems like things may be very, very bullish for Moly prices if this strike persists for some time.

There's a good chance this strike may go on for sometime as the same company has had a strike of its Mexican mines going since July.

My favorite Moly stocks are:

• ROK.V - which should start production any day. Who knows whether the production announcement will try a "sell the news" reaction, no reaction (as was the case for a similar announcements for BN.V and ADA.V) or a price jump. I've got a good sized position in this.
• TCM.TO - the leading independent Moly producer. This stock is liquid enough that you could do a sizable swing trade based on the strike. I don't know when, if ever, it will make the headlines that the Peru strike has severely impacted Moly production. I'm currently not holding any of this.
  

Microeconomics 101: What Analysts Mean By "Long-Term Price"

From time to time you'll see news articles where analysts from prestigious wall-street firms discuss the long-term price for metals, for example, for copper. Then, if you hold a copper mining company you have one of two reactions:

• Fear - my stock is going to get creamed if prices fall this low.
• Laughter - these guys are complete bozos, the price of copper will never go that low again.

Here's an example:            

"For 2009, Citigroup sees its returning closer to long-term prices, at $1.50 a pound." Now, current prices are roughly 145% higher than this long-term price.

So, where do these analysts get these numbers and what do they really mean by "long-term price".

We turn to our Microeconomics text book in the "Pure Competition" chapter. Economists talk about analyzing markets and prices in the "Long Run". This is the equivalent of the market analyst's "Long-Term".

Here's what economists mean: "... in the long run firms already in an industry have sufficient time either to expand or to contract their plant capacities. More important, the number of firms in the industry may either increase or decrease as new firms enter or existing firms leave.".

Economists then conclude (for markets/industries with perfect competition): "After all long-run adjustments are completed, product price will be exactly equal to, and production will occur at each firm's minimum average cost."

So, when these analysts talk about long-term prices they are assuming that a wave of supply will come online until the price falls to match the marginal cost of production. That is, they say they are talking about long-term prices, but actually they are talking about long-term what it will cost to have a mine produce the metal.

They are assuming "pure competition" in the manufacturing model where there are no barriers to entry and where once a factory is built it can produce forever.

I would claim that the mining industry is not "pure comptetion" and thus it can continue to sell their metals (copper, zinc, nickel, moly...) at higher prices and can continue to make what economists call "economic profits" but which investors call "outsized profits" for a long time.

Here are some ways I see the mining industry following the "pure competition" manufacturing model:
(1) Mines deplete - that means that, unlike the factory model, the industry has to continually be opening new mines to make up for falling production from existing mines.
(2) Mines have significant barriers to entry:

• The have, in the past, created environmental disasters and social disruption (workers getting laid-off) on mine closure. As a result there are huge regulatory barriers to opening a mine.
• Mines consume non-renewable resources - there are big political barriers to opening a mine because all different levels of politicians need to argue over how big a share of the profits they will get. A good recent example of this is what is happening to TGB.TO in what was thought to be politically safe British Columbia. The "First Nations" there have recently disrupted plans to handle the depletion of an existing mine by opening a mine for a nearby deposit.
• Mines take huge capital investments and take years to bring into production and have many risks which cannot be hedged. This minimizes the investment that is made to those which are sure things and sure things are those whose marginal cost is way below current prices. Thus enough supply to bring the price down to marginal cost never comes online. These risk include:
  • Metal Prices - which cannot be hedged beyond a couple of years.
  • Regulatory Problems - look at what happened to Ivernia which is basically going to go bankrupt due to environmental screwups.
  • Mining Accidents - a prime case is the flooding of Cameco's uranium mine although other problems can include wall collapses in open-pit mines and accidents which involve injury or fatalities which result in mine closure during post-mortem investigations.
  • Labor Problem - strikes, work stoppages.
  • Political Problems - from the raising of taxes to out and out nationalization (see Zimbabwe this week).

• The mining industry has consolidated with the few biggest companies reaching the point where the pure competition model no longer applies. This is particularly prevalent for Nickel and Iron Ore although it is significant for Copper and Molybdenum (where China operates like a single entity) and is growing for other metals.

(3) Unlike the text book's "pure competition model" the demand for base metals is rapidly growing, but in an unpredictable fashion. As the "equilibrium point" moves upwards in a non-deterministic fashion, the industry cannot converge on the appropriate supply level. Given the past history of mining and associated price collapses, investment is conservative and there has been, and I think will continue to be, a gap between the marginal cost and the price.

Finally, even with a pure competition model there is a stigma associated with the mining industry. The stigma is one of being:

• Dirty - environmental damage.
• Destructive - to the health of the miners
• Cruel, Heartless, Exploitive - again of the miner's and their countries.

I don't know for certain, but I believe that this stigma, at least for Canadian-based companies, is either not as warranted or no longer warranted.

Regardless, this stigma means that no one wants to be associated with mining even if it is making money. In the same way that trash collectors make more per hour than secretaries, the mining industry can expect to reap excess profits compared to industries which are considered "cool", e.g. biotech or solar power. The record of tobacco companies provides an example of how companies with stigmas can provide investors with excess returns. As the profits rapidly pile up, the stock prices of these companies will ramp up even if they never get the P/E expansion they deserve based on their long-term outlook and growth.

At this point, I don't think we'll see anytime soon prices approaching what these analysts call "long-term" prices.

I'll try to provide an update to this post when I make if further through my economics text book to the chapters on monopolistic and oligarchic industries (which I think more closely match the mining industry).

Weekly Inventory Levels 9/28/2007

Here are the inventory graphs for this week. Both look very bullish, although a couple of things:

1. The magnitude of this week's Shanghai drops may be due to next week being the Chinese Golden Week holiday.
2. The vanishing LME Cu cancelled warrants indicates some weakness as far as further LME inventory declines are concerned.

Copper:

Zinc:

What I'm Holding Now

I've been doing a little rearranging lately (around the edges). I love my two biggest positions (ROK.V and TAM.V) although when the time is right I'll probably try to move some of the ROK.V money into some of the other unrecognized opportunities that also look great. I'm holding ROK.V until they get at least most of the credit that will be their due when they get production going and start cranking out enormous piles of money. Or maybe I'll wait until their drilling results come in which could indicate a real bonanza.

Here's the portfolio by stock:

Here's the portfolio by metal:

Weekly Inventory Levels

This week I've begun to factor in LME inventory levels (including cancelled warrants) as I've found a decent data source for this. I continue to be grateful to my annonymous source who provides the Shanghai numbers and started collecting the weekly data.

While Copper had a good week with both the Shanghai deliverables and LME inventory levels, the sharp decrease in LME cancelled warrants leaves, as I look at them, the overall inventory levels flat. This is not so bullish, but there are other factors (existing strike in Mexico, looming strikes in Peru, Grasburg's falling production) that are supporting Copper prices. I'm holding QUA.TO, CS.TO and NRDS.PK.

Zinc inventory continues to fall steadily in Shanghai and LME inventories have reversed and are dropping. Including the big jump in cancelled warrants two weeks ago, Zinc overall inventories are falling rapidly which, of course, is pretty bullish. Its not too late to look at investing in TAM.V, SRZ.TO, ADA.V and BN.V. I'm holding TAM.V and SRZ.TO. I wish I had some money to put into BN.V.

Shanghai Copper And Zinc Inventory Levels

Will have to find a way to get the LME stock numbers. For now these graphs are Shanghai only. Copper appears to be pretty bullish to me and Zn has moved from bearish to slightly bullish in my view.

Shanghai Copper And Zinc Inventory Levels

Didn't get the inputs for LME changes this week so there's only two graphs for your review:

Comparing Tamerlane Ventures And Augusta Resources

Here’s a comparison of Augusta Resources (an open-pit Cu/Moly mine) and Tamerlane Ventures. Both, within the last couple of weeks, announced their Bankable Feasibility Studies. Tamerlane Ventures is a great story stock with a huge long-term upside, but I won't recount the story in this post.

I wish it were easier to do an Apples-to-Apples comparison, but it isn’t. Here’s the tabular comparison:

Criteria	August	Tamerlane	Comment
Amount To Be Financed (MM$)	782	127	Advantage to Tamerlane
Project Type	Greenfield	Brownfield	Advantage to Tamerlane
Expected Permitting Date	10/1/2008	1/1/2008	Advantage to Tamerlane
Expected Production Start From Financing/Permitting	No Estimate	12 to 15 Months	Advantage to Tamerlane
Additional Drilling To Get N43-101 For Plan	None	Something like 10 holes	Advantage to
IRR At Current Prices	30%	89%	: $2.61 per pound (lb) copper (Cu), $31.06/lb molybdenum (Mo), $11.37 per ounce (oz) silver (Ag), TAM: Zn $1.30, Pb $.8
NPV / Market Cap Fully Diluted	2.8	4.8	: NPV 10%, TAM: NPV 7.5%

Overall, Tamerlane seems very much preferable, especially if you believe (like I do) that the additional drilling is basically a formality. Tamerlane opens earlier, seemingly will have an easier time getting permitting (because its brownfield and the process is well along) and has to finance much less to get into production.

The IRR and NPV / Market Cap Fully Diluted ratios seem to favor Tamerlane as well although this is a case of apples and oranges as Augusta’s assumptions, on the whole, seem more conservative.

These assumptions are the main thing that prevents us from performing an Apples-To-Apples comparison of the two stocks. The BFS IRR don’t use comparable pricing. uses 60% trailing 36 month historical pricing. The resulting $2.61 Cu price seems pretty low. Tamerlane uses Zn and Pb prices that are lower than current but seemingly pulled out of thin air. Additionally, the NPV calculations are not comparable because of varying interest rate assumptions.

The duration of the calculations favor Tamerlane in that its IRR and BFS are over a seven year period while Augusta’s is over tens years of operation.

So, overall, Tamerlane looks much preferable to me primarily because there are less unknowns associated with the start date, permitting and financing and even, because of the shorter time frame, the metal prices, but its really not a complete slam-dunk as I'd like because of the varying IRR and BFS assumptions. 

I hope you find this, in its current form, useful. Full Disclosure: I am very long Tamerlane Ventures.

Weekly Cu/Zn Inventory Graphs

Many thanks to Kevin T for providing the data. Copper looks to be turning bullish with both SHFE and Net LME inventories going down this week. Zn is going down this week in Shanghai, but I think it popped up a little in LME inventories.

This last graph shows the LME Cu inventory numbers. The fact that this turned downward on the Net (includes cancelled warrants) together with SHFE falling inventories is the most bullish thing I've seen on Cu on a while.

Shanghai Cu And Zn Inventory Trends

The data for this come from the Investor Village RNO board's KevinKT (many thanks). The falling trend in both Cu and Zn is bullish for Cu and Zn Jr Canadian mining stocks.

Here's the actual data in spreadsheet form:Download shfeinventories.xls (20.5K)

"It's the most volatile market in the world, these little mining stocks", Doug Casey quote

"It's the most volatile market in the world, these little mining stocks", Doug Casey quote
http://www.howestreet.com/articles/index.php?article_id=4555

"...so where am I personally, what do I do with all my money? Well, not all of it, but a lot of it: I speculate in mining stocks. It's always been a specialty of mine. It's the most volatile market in the world, these little mining stocks. More volatile than the internet stocks you saw ten years ago."

Given what has happened to my portfolio value since the beginning of July to now (up breathtaking rise, followed by a dramatic fallback), I think this quote is worth listening to.  Anyone who buys these stocks on margin is cruising for a "blow up".

Monty

Comparing Favorite Jr Copper Mining Companies

Here's a tabular comparison of what is currently my three favorite Jr Canadian Copper mining stocks. Leave me a comment if you have another favorite that you think is worth some in-depth due-diligence (or if you think this needs some clarification/correction, etc.)

Symbol	Name	Money Year	Est Cash Cost	Est Price To Cash Cost Based Earnings Ratio			Est Price / Minerals In Ground Ratio	Price To Net Cash + Investments	Short Term Catalysts	Long Term Upsides And Other Comments	Mine Loc	(Open Pit/ Under Ground)	Ore Grade
				Current Prices	Half Current Prices	1/3 Current Prices
QUA .TO	Quadra	2008	1.53	2.4	60.8	-8.5	0.04	15.19%	Hedges are off. Sierra Gorde drilling results. Production up in 2008 with Carlotta mine coming online	Sierra Gorde, big Cu project in Chile. Greenland Moly mine.	USA	OP	0.62%
CS.TO	Capstone	2008	0.47	2.2	5.2	9.6	0.19	51.96%	Doubled mill capacity 6/2007. Increased mineral estimates due 9/2007	Low cost producer, 100M$ cash and investments; Zn, Pb and Ag exposure.	MX	UG	2.15%
NRDS .PK	NORDS	2008	1.10	1.7	7.2	-96.8	0.01	-22.54%	Reopening SX-EW heap leach mine late 2007	Expect to up production to 40 million lbs/year	USA	OP	0.62%

I like all three. Here's some comments on each:

• Quadra Mining (QUA.TO) - is a current producer with excellent financials at current copper prices. Quadra has significant upside with a new mine coming online in 2008 and excellent advanced projects lined up for production in 2009 and beyond. Its main weakness in my view is its current high cash cost which makes it more subject to loss of profit on a falling copper price. This gets better as the further out projects come on line. Quadra also has the advantage of being more liquid than most other Jr Canadian mining companies allowing one to trade small or medium-sized positions in and out according to market and copper price outlook considerations.

• Capstone Mining (CS.TO) - is a current producer with excellent financials at current copper prices whose production is set to grow substantially over the next year. It is a low cost producer which makes it, from a fundamental point of view, less subject to falling copper prices. This makes it relatively safe (in my view) for a Jr copper miner. This is theoretical. In fact, Quadra held up better in the recent stock market down turn. One should keep in mind that its mine is in Mexico. I consider this to be a somewhat risky location, politically.

• Nords (NRDS.PK) - is a pre-production company coming online in Q4. This stock is very much under the radar screen with extremely low volume. It seems to be more undervalued than its peers.

I like all three and hold all three. I've got way more Quadra than the other two and would probably like to pick up some more Nords if I can get it at a reasonable price. I would also like to balance some Quadra into Capstone.

Of course, everyone bets their own money and should do their own due diligence.

I'd like to express my gratitude to the Investor Village RNO board's BigEnergyBull (Quadra), Firecracker070445 (Capstone) and Crucible401 (Nords) for introducing me to these stocks. Its much easier to be successful when you are just double-checking cherry-picked stocks than sifting through all of the potential candidates.

Here's the spreadsheet with the backup for the above table.

 

Panic Selling Of Jr Canadian Mining Companies

Somebody is going to make a ton of money buying Jr Canadian mining stocks today (IMO). I'm buying just a little, but really don't have any more money to buy with. I'm all in and it hurts, but these things are so undervalued that I'm certainly not attempting to get out.

Here's my spreadsheet that gives the backup for the P/Es below.

Looking for the closest to a sure thing out there, here's what stands out to me this morning:
o QUA.TO - current producer, cash in the bank, my crude estimated Price to Earnings (before taxes, depreciation, etc, just revenue vs cash cost) of 2.3. You can't call me a pumper because this isn't my biggest position.
o ROK.V - almost a current producer, same crude estimate Price to Earnings ratio of 1.2.
o ADA.V - just started producer, same crude estimate Price to Earnings ratio of 2.3

Honorable mentions (all 2008 producers):
o TCM.TO - highest reputation moly producer, 2008 P/E of 3.2.
o BN.V - just started producer, 2008 P/E 1.9, but has a difficult process.
o SRZ.TO - starts production Q4 2007, 2008 P/E of 1.4, gets better when gallium and germanium byproduct production comes online.

What about:
o CML.V - starts production too late in 2008 to make my list.
o FNI.TO - should probably be on the list.
o TAM.V - biggest home run opportunity (with a pretty high probability, e.g. > 70%, of hitting a home run), but needs financing. Can't be on my close to sure thing list. I own a ton of this and its recent performance really hurts. I'm holding on until it produces or goes to zero.
o GMO, MOL.TO, AUA.TO - all need big financing. Pretty scary to me.

Mined Metals Annual Production Reference

Here's a reference that makes it easier to get some perspective from mining news stories. It gives the annual production of each of the metals. So, if you see an announcement that the APEX Silver/Zinc mine is going into production and its producing 180,000 tonnes of zine per year you can, with this table, in your head determine that Zinc supply is going up 2%.

                                                                                                                                                       

Metal	Units	2006 Production	Source
Crude Steel	Million Tonnes	1,140	http://www.abareconomics.com/interactive/ac_june07/pdf/ac_june07.pdf
Iron Ore Exports	Million Tonnes	781	http://www.abareconomics.com/interactive/ac_june07/pdf/ac_june07.pdf
Metallurgical Coal Exports	Million Tonnes	206	http://www.abareconomics.com/interactive/ac_june07/pdf/ac_june07.pdf
Gold Mine Production	Tonnes	2,474	http://www.abareconomics.com/interactive/ac_june07/pdf/ac_june07.pdf
Gold Mine Production	Million Oz	87.3	http://www.abareconomics.com/interactive/ac_june07/pdf/ac_june07.pdf
Silver Mine Production	Tonnes	18,317	http://www.silverinstitute.org/supply/index.php
Silver Mine Production	Million Oz	647.1	http://www.silverinstitute.org/supply/index.php
Aluminum	Million Tonnes	33.9	http://www.abareconomics.com/interactive/ac_june07/pdf/ac_june07.pdf
Nickel	Million Tonnes	1.35	http://www.abareconomics.com/interactive/ac_june07/pdf/ac_june07.pdf
Nickel	Million Lbs	2,976	http://www.abareconomics.com/interactive/ac_june07/pdf/ac_june07.pdf
Copper Mine Production	Million Tonnes	15.23	http://www.abareconomics.com/interactive/ac_june07/pdf/ac_june07.pdf
Copper Mine Production	Million Lbs	33,585	http://www.abareconomics.com/interactive/ac_june07/pdf/ac_june07.pdf
Zinc Production	Million Tonnes	10.76	http://www.abareconomics.com/interactive/ac_june07/pdf/ac_june07.pdf
Zinc Production	Million Lbs	23,721	http://www.abareconomics.com/interactive/ac_june07/pdf/ac_june07.pdf
Pb Mine Production	Million Tonnes	3.31	http://minerals.usgs.gov/minerals/pubs/commodity/lead/lead_mcs07.pdf
Pb Mine Production	Million Lbs	7,288	http://minerals.usgs.gov/minerals/pubs/commodity/lead/lead_mcs07.pdf
Molybdenum Production	Million Tonnes	0.18	http://www.gold-eagle.com/editorials_05/reser013106.html
Molybdenum Production	Million Lbs	405	http://www.gold-eagle.com/editorials_05/reser013106.html

 

Here's the spreadsheet this is contained in.

"Dhandho 402: Invest in Low-Risk, High-Uncertainty Businesses" And Jr Canadian Base Metal Mining Stocks

Here's another post applying Mohnish Pabrai's excellent book, “Dhandho Investing”, to Canadian junior base metal mining stocks. This post focuses on Chapter 13, “Dhandho 402: Invest in Low-Risk, High-Uncertainty Businesses”.

First a couple of valuable quotes:

• “Wall Street sometimes get confused between risk and uncertainty, and you can profit handsomely from that confusion.”

• “This is great, because whenever Wall Street gets confused, it means we likely can make some money.”

The oil shipping company, Frontline, is a Pabrai example of “Low Risk, High Uncertainty”, that is fairly close to Canadian junior mining companies. With Frontline, what was uncertain was the daily rate for the use of one of Frontline's crude oil tankers. These had ranged historically from 6,000$/day to 100,000$/day with Frontline's breakeven at 18,000$/day. What made Frontline low-risk was that its cash balance sheet allowed it to operate for years at the lowest rate, the fact that its fleet of tankers were worth more than Frontline's market-cap and the fact that its fleet was entirely double-hulled crude oil tankers at a time when regulations were requiring the phase out of single-hulled tankers. Pabrai bought Frontline when the day rates were low in the fall of 2002 and sold for 60% gain shortly after day rates recovered.

With Canadian junior base metal mining companies (juniors) what is uncertain is the price of the metals they are mining.Wall Street is uncertain about whether they can stay at their current levels. The recent more than 50% fall in Ni prices indicates that this uncertainty is very real. Another major source of uncertainty is whether a preproduction company will achieve its guidance regarding when and how it produces.

What makes the best of them low-risk is that they can still make excellent profits even if the commodity prices fall.

The following table is based on my crude Junior Canadian fundamental analysis spreadsheet. (NOTE: I understand this analysis is crude and is for illustrative purposes. You should do your own due-diligence and fundamental analysis prior to actually investing in any of these stocks). The table shows the price to earnings ratios (where earnings are simply the sales minus the “cash cost”) for the various stocks. The year shown is either 2008 or 2009, whichever the stock looks more impressive for at current prices. (NOTE: Years with asterisks indicate that either production is scheduled to start sometime in that year (MOL.TO and AUA.TO) and annualized production is assumed or, in TAM.V's case, that a little more than one year's production is assumed). It then shows the same results assuming the price of its metal falls by 50% or 66.6%. You can download and analyze the spreadsheet if you want to see how I calced the table and the assumptions involved.

The table highlights a few things:

(a) Nickel stocks with relatively high cash costs (FNI.TO, BMC.V, LBE.V, FNX.TO) become unattractive should Nickel prices (which are already down more than 50%) have suffer further price collapse. CML.V (the only Ni stock in the list which is pre-production) is the exception. CML.V is so undervalued and has such a low cash cost that it remains attractive even with a further 50% price collapse. So, in the case of CML.V, Wall Street has excessively been spooked by the combined uncertainty of Ni prices and being preproduction to apparently undervalue CML.V.

(b) The copper stocks (QUA.TO and NRDS.PK) have a margin of safety against a 50% copper price fall (to $1.82/lb) but not the 66% price fall (to $1.21/lb).

(c ) The flagship of Molybdenum stocks, TCM.TO, becomes unattractive should Moly prices fall more than 50%.

(d) Of the Jr Zinc producers, ADA.V, shows itself to become unattractive should the Zn/Pb prices fall more than 50%.

(e) The stocks that seem most immune to dramatic metal price reductions (ROK.V, AUA.TO, MOL.TO, TAM.V, SRZ.TO and BN.V) are those that are either preproduction or have just started production.

The conclusion is that by looking at metal price sensitivity in the fundamental analysis of Jr Canadian Base Metal mining stocks can help distinguish which stocks are fundamentally most susceptible to dramatically falling metal stocks and can help identify stocks where Wall Street has caused High Uncertainty to undervalue what are really Low Risk stocks. Perhaps a good approach is to invest in several of the near-production (or just starting production) stocks which remain attractive in the face of falling metal prices. Having several reduces the going into production risks while their huge margin of safety provides undervaluation even in the face of falling metal prices. Having stocks in different metals further reduces the risk metal price collapse. 

 

Perspective On Yesterday's Market Hiccup

Yesterday the market took its first big drop after a long run up. Its worth looking at how these Jr Canadian base metal mining stocks I have been discussing perform and what their volatility is.

It turns out that my IRA has been entirely in these stocks since around Sep 2006 and I have been keeping daily track of my account in a spreadsheet since the end of 2006. So, I'll present some graphs based on this account value as a way of getting a feel for what happens when you are concentrated in these stocks.

First let's look at drawdown, that is, the percentage that the portfolio is down from its previous peak. To make it more intuitive, I've shown negative values to indicate a drawdown. That is, -5% means your account value is down 5% from its peak.

Looking at this I conclude that the portfolio was down 5% to 10% most of the time, was down 10 to 15% more than a dozen days this year and was down more than 15% once. This can leave your emotions feeling poorly much of the time.

Now let's look at a "how have I been doing lately" graph, that of the rolling 5 day performance. There is one point for each day since the beginning of the year.

Unlike the drawdown graph, most points are up substantially, but there are many days where the previous week's performance is negative and quite a few where its worse than 5%.

Finally, let's look at performance year to date which is nothing less than spectacular. And when I look at how these Jr Canadian mining stocks are still valued, with projected 2008 price to cash flow ratios under 3 and projected 2009 price to cash flows under 2, I really think the party is not over yet. I'm watching the metal prices andinventory levels closely looking for signals that "the jig is up" and I just don't see it. I'm very bullish and pretty close to "all in". I particularly like the Zinc Jrs right now.

Is This To Valuable To Just Post On The Internet? Pay It Forward

Here's the link to my spreadsheet analysis of some favorite Canadian Jr Base Metal Mining stocks. I'm starting to question whether it makes sense to post this information, because it is too valuable. I am basically using this chart, along with my own judgements on the danger of collapse of the commodity price in question, to do my own investing.

I'm going to go ahead and post it as a "Pay It Forward" in honor of those who pointed out these stocks to me. Folks in my personal life ask me for stock tips and I always decline because I really think you need to know and care about what your are doing. A a close examination of this table and learning and caring about what's in it could perhaps help you achieve the kind of fantastic investment returns I've had for the last year. I expect the good times are not over and that continued fantastic returns are likely.

I guess I'm going to just post this table (bold-face indicates for each stock the result that I think is most important) along with the assumptions that go into it and then make some observations on the table in separate posts over the next few days.

Here's a link to the results table below (in case it doesn't display well in your browser). Here's the whole spreadsheet in Excel format.

Assumptions:
(1) Company gets the full metal price for their production
(2) Current spot prices apply in the future
(3) Complete guess on ROK cash cost
(4) Hedges make it hard to estimate BMC.V 2007 cash flow
(5) Liberty cash cost is a complete guess
(6) BMC.V does not include the upcoming guidance of 2007/2008 production increase expected by Crucible (another double)
(7) FNX M&I and Inferred Minerals in ground is an estimate from number of M&I and Inferred tonnes of ore in ground together with the current ore grade.
(8) QUA.TO 2007 Cash Flow does not include the effect of hedges on Q1
(9) QUA.TO takes the 5 billion Lbs copper for future mine at face value.
(10) QUA.TO assumes current cash cost going forward (conservative).
(11) ADA.V now includes a $.15/lb smelting cost.
(12) Includes the 6/28/2007 announced 50% CML.V production increase for 2009
(13) TCM.TO: My estimated cash flow is way bigger than TCM's. TCM's operating expenses and revenues are way higher than I'd expect. The processing (roasting) must be high cost and significant revenue.
(14) AUA.V, Assume they actually get full production in 2009 just so we can see what it looks like going forward.
(15) AUA.V assume $100M in dilution and 350M$ debt. Assume they already have 75M debt. Include this in the net cash ratio
(16) MOL.TO, Assume they get full production in 2009 just so we can see what it looks like going forward. Actual projected start is Q3 2009
(15) MOL.TO assume $150M in dilution and 350M$ debt. Assume they already have 75M debt. Include this in the net cash ratio
(16) MOL.TO, Assume same cash cost as AUA.V
(17) TAM.V, Assume pine point R190 is mined in 2009. Assume same cash cost as ADA.V. Assume historic reserves from R-190, GO-3, N-204, W-85 count as measured and indicated. There are 30 other known deposits.
(18) TAM.V, Assume 100M of debt and 30M of equity to get production started. This appears in the net cash and the diluted shares.
(19) TAM.V, Ore grad e is just for R-190 (by far the best)
(20) Could not find any estimate of the size of BN's mineral resources. This is a big red flag for me.
(21) Unless noted, net cash is based on latest quarterly's balance sheet.

Whoops There Goes Another 2% Of World-Wide Moly Production

Things are getting violent with the striking Codelco contractors. Contractors have thrown rocks a buses bringing non-striking workers. At least one rock as gone through a window and cracked someone's face open. Horrible.

The result is that Codelco has closed one of its largest divisions, the Andina division.

Andina produces 3308 metric tons of moly, that's 7.29 million lbs or (at Abare's reported 370 million lbs of annual production) that's 2% of world-wide production. Be interesting to see how long this goes.

Now this 2% is on top of the 3% of production knocked out by Chile's Collahausi Mine (XStrata and Anglo American) whose miners are on strike and which is set to go remain on-strike indefinitely.

Its interesting to me that there seems to be a positive feed back loop: Strikes raise prices... Higher prices make strikes happen as workers want a fair share of an bigger pie which came about from higher prices.

Thompson Creek (TCM.TO) Endako Mine Increases Moly Reserves 200 Million Lbs

Thompson creek announced revised reserves of 300 M Lbs for its 75% owned Endako mine. Previously the reserves were at 100 M Lbs.

Here's my calculations for how big this is relative to Thompson Creek overall:

Thompson Creek Endako Mine Reserves Increase Analysis
143	Million Shares
18.97	Price ($)
2,713	Market Cap Million $
200	Extra Lbs Reserves (Millions)
Moly Price	Asset Value Increase (Millions $)	Asset Increase $/ Share	Asset Increase As % Per Share
35	7,000	48.95	258%
20	4,000	27.97	147%
15	3,000	20.98	111%
10	2,000	13.99	74%

Now, I'm not saying that Thompson Creek's stock price should go up 258% as a result of this increase in reserves, just that it is a significant change.

Furthermore, this is for the smaller of their three mines and they expect to have revised estimates for the other two shortly. So there is some upside catalysts for Thompson Creek beyond Moly price increases and earnings announcements.

I'm pretty jazzed about Thompson Creek and would move more money into it if I had a big chunk of new money to invest now.

Moly Strike Update... Not So Bullish Right Now

As has been discussed here twice (here and here), the "Copper" strikes that are in the headlines affect world-wide Molybdenum production much more than copper.

Here's the update on Moly related strikes:

• Chile's Collahausi Mine (XStrata and Anglo American) - producing roughly 3% of world-wide Molybdenum is set to go on-strike indefinitely today.
• Sothern Peru's Toquepala and Cuajone mines, producing 9% of world-wide Moly was on strike for a week. The strike has been suspended for further negotiations. The suspension, which was expected to expire today, has been extended for another week. So, this production is online.
• Contractors at Codelco's El Teniente mine, producing 3% of world-wide Moly, are still on strike, but don't seem to be affecting production.
• One and two day strikes have been called in Mexico and Peru, but given their short duration they should not affect world-wide production extensively.

So, while we have been looking at up to a 15% loss of world-wide Moly production, to date we seem to have had only .2% of 2007's total world-wide production lost at Toquepala and Cuajone mines in Peru. This strike could resume and if it does its very significant. We also have 3% of production going offline at Chile's Collahausi Mine. This strike has to persist for three weeks to have the same impact that the Toquepala and Cuajone has had to date.

In conclusion, the strike situation, while not hurting Moly price rises, doesn't at present seem to be something that will trigger a Moly price spike. However, stay tuned... the impact will be very significant if the Toquepala and Cuajone strike starts back up and the Collahausi strike persists.

Molybdenum Stock Comparison

This post compares the Molybdenum mining stocks that are either in production or have plans for production starting prior to 2010. This leaves out Idaho General (GMO) which yesterday jumped 13% on the release of increased mineral resources, but is not expected to enter production until sometime in 2010.

The post introduces the companies in the order they are expected to begin production, provides some fundamental analysis in tabular format assuming Moly prices stay at $32/lb (a guess that, while not conservative, is as good as any) and concludes with an evaluation and my own investing preferences.

Thompson Creek Mining (TCM.TO, previously BLE.TO) is the only pure moly mining stock that is currently producing other than an IPO trading on the Shanghai exchange. TCM.TO has:

• an open-pit mine operating in Idaho,
• 75% of an open-pit mine operating in British Columbia,
• an underground mine in British Columbia scheduled to begin production in late 2008 and
• a Molybdenum processing plant (aka Roaster) in Pennsylvania.

Production is expected to be down in 2007 to 21 million lbs from 24 million lbs, but then should grow to 27 million lbs in 2008 and 29 million lbs in 2009. TCM.TO has a small amount of debt that they are paying off with their current production.

Roca Mines (ROK.V) is expected begin production this summer with its underground Moly mine in British Columbia. This mine was scheduled to open in Q1 2007, then slipped to "mid-year 2007" and now is estimated to open in late July or early August. ROK.V will be a smallish producer with an estimated 3 million lbs of Moly in 2007 and 5 million lbs thereafter. The mine opens with a small-mine permit which restricts the amount of ore than can be processed, but Roca claims they will get an extension to this permit once in production such that output is not restricted going forward. Roca's property has not been fully drilled and drilling scheduled to take place this summer has some hope of finding a massive deposit, like that of the world's largest Moly mine in Henderson, Idaho.

Adanac Mines (AUA.V), which is Canada spelled backwards, is hoping to open large open-pit Moly mine in British Columbia in Q1 2009 which is expected to produce 13 million lbs on Molybdenum annually. AUA.V has a bankable feasibility study and has ordered long-lead equipment. AUA.V must obtain 450M$ of financing to complete their mine. They are hoping for 100M$ of equity and 350M$ of debt from stainless steel producers that want to gain access to AUA.V's output. Investor relations claims AUA.V is going to get an environmental certificate that will lead to permitting on July 25, 2007.

Moly Mines (MOL.TO) is hoping to open an even larger open-pit Moly mine in Australia in the first half of 2009. This mine is expected to produce 20 million lbs of Moly per year. MOL.TO was hoping to complete a bankable feasibility study in Q2 2007, but has slipped that date. After that comes something like 500M$ of financing which I assume to be in the form of 150M$ of equity and 350M$ of debt. Long-lead equipment is on-order.

Here's my tabular summary of these four stocks (AUA.V and  MOL.TO 2009 production is their annual full production even though they don't come online until somewhere within 2009. This gives a look at how well they can be expected to perform if Moly prices hold up indefinitely):

Symbol	Name	Mineral	Est 2007 Price / Cash Flow	Est 2008 Price / Cash Flow	Est 2009 Price / Cash Flow	Est Price / Value Of Indicated & Inferred Minerals In Ground	Net Cash / Price	Catalysts	Long-Term Upsides / Other Comments	Mine Loc	Mine Type (OP/ UG)	Ore Grade	Current US Market Cap (M$)	Net Cash	Indicated & Inferred Minerals In Ground (M lbs)
TCM.TO	Thompson Creek	Mo	4.18	3.25	3.02	0.07	-15%	Moly price, increased reserves	Davidson UG mine startup late 2008 / Has a Moly roaster	USA, CA	OP	0.09%	2121	-308	1000
ROK.V	Roca	Mo	2.95	1.77	1.97	0.06	0%	Q2 2007 Production Start	Possibly huge Moly deposit under currently drilled ore body	CA	UG	0.12%	257	1	132.4
AUA.TO	Adanac Mining	Mo	NA	NA	0.97	0.04	-131%	Q3 Financing, Permits (jul 25?), Q1 2009 Production Start	/ Must get at least $450M financing or dilution	CA	OP	0.06%	326	-425	285
MOL.TO	Moly Mining	Mo	NA	NA	0.78	0.02	-104%	Q3 BFS, Permits, Financing, Q3 Full Production Start	/ Must get at least $466M financing or dilution	AU	OP	0.06%	410	-425	620.37

Backup for this table and the assumptions used can be found in this spreadsheet.

The bold-face entries emphasize what I think are the most distinctive aspects of these stocks:

• TCM.TO is already producing and has a history of meeting its guidance. Although it is the market leading Moly company it is still trading at a very attractive price/cash flow ratio and can be expected to directly benefit from the continued high (or even increasing) Moly prices that I expect. Given that it is already producing with a track-record, it seems less risky than its peers. Having its own roaster is both a risk reducer and possible upside as some analysts predict that Moly roasting capacity is going to be the bottleneck to increased Moly production. I've got a medium-small position in TCM.TO, primarily because the position I have in ROK.V is as large as I'm willing to maintain given its relative illiquidity.
• ROK.V can be expected to get into production and be very undervalued on a price to cash-flow basis in 2008. It will enter into production with nearly no debt. This is my favorite Moly play and I have a large position.
• AUA.V and MOL.TO can be expected to be enormous money makers if the price of Moly can hold up from 2009 onward. They will be entering into production with a significant amount of debt and will dilution of equity is coming. The sub 1.0 price to cash flow estimate for these mines certainly leaves plenty of margin of safety, but although I'm bullish on Moly, I'd rather make money on it right away (with ROK.V and TCM.TO) than take on debt and wait two years. This is only because there are so many great Canadian Jr base metal mining stocks that you've got to focus on the best. If these were the only base metal stocks that existed, I'd have big positions in each. I do have a smallish position in AUA.V because I'm hoping for a pop when it gets its permits and financing similar to what happened with DY.TO (Madagascar Nickel Mine) last year when it got its financing and permits.

Any investment is risky. There are many risks with these stocks including the Molybdenum price dropping, but I'm partially invested as I describe here. You should do your own due-diligence.

More Moly Supply Problems

First a strike update:

• The PCU Peru mine strikes continue and have 9% of worldwide Moly supplies offline.
• The union of the Chilean Collahuasi mine, controlled by Anglo American and Xstrata, just voted to go on strike. It will take about a week to get underway, but that's another 3% of worldwide Moly supplies set to go offline bumping the total offline to 12%! of worldwide production.

Now we get a report that Chile's Moly production (without any strikes) is down year-over-year by 6.2%. Here's some calculations:

• Production is down 238 tons/month or 5.7 million lbs/year.
• That's 1.5% of worldwide production.

Meanwhile, the Chinese are expected to cut their Moly exports by 50%. In the past, Moly shortfalls were made up by the Chinese, but its pretty clear its not happening that way this time. This analyst (don't know how reputable he is) is expecting Moly prices to jump above their previous record sometime after labor day.

Meanwhile, Moly demand is growing by something like N 4% per year (see this and that and that).

Overall, it seems likely to me that Moly prices are about to start jumping. I've been reducing my Jr Nickel mining stocks to make room for more Jr Moly mining stocks. Jr Moly stocks are now the biggest fraction of my holdings at 31% of my portfolio.

"Copper" Strikes Are Actually Molybdenum Strikes, 14.9% Of Annual Production Affected

South American copper strikes are all over the news. Actually the impact on Molybdenum will be much higher.

Abare says the worldwide annual copper production for 2007 is estimated to be 18.5 million tonnes. By the way, I see that Codelco produces 12.8 million tonnes a year (69% of worldwide production). This seems out of whack, but I'm pulling the best numbers I can find.

Collahuasi, controlled by Anglo American and Xstrata, is one of the world's largest producers of copper, with output of between 440,000 and 450,000 tonnes per year of copper in cathodes and in concentrates. That's 2% of world output.

Codelco's El Teniente mine (considered the world's largest underground mine), that the Codelco contractors union is trying to shut down, produces, as best I can tell, about 450,000 tonnes per year of copper or another 2% of world output. Its not clear whether the contractors union can actually shut the mine down.

Sothern Peru's Toquepala and Cuajone mines also on strike produce roughly 325,000 tonnes per year of copper (1.7%).

The total copper "on strike" is 5.7% of world-wide annual production.

Southern Peru's mines also produce 34 million lbs of Moly. With worldwide moly production around 374 million lbs. That is 9% of world wide production. Codelco's mines produce 60 million lbs of Moly and El Teniete 10.5 million lbs (2.8%). Collhusi produces 11.9 million lbs (3.1%).

Thus the total "on strike" Moly is a stunning 14.9% of worldwide production. The impact of the strikes on Moly is almost 3 times the impact on copper.

ADA.V, Acadian Mining Due Diligence

Here's my due diligence on Acadian Mining (ADA.V), a recently-producing Zinc/ Lead mining company. It has just reopened a mine in Nova Scotia. It also has advanced development Gold projects in Nova Scotia. This analysis covers only the Zn/Pb mine.

The mine has reopened as an open pit mine. It has 5 years mine life as an open pit mine with an additional 2.5 years life as an underground mine. The mine is close to the coast and the concentrate is of supposedly high-quality allowing ADA to supposedly get good prices for its concentrate.

The Proven and Probable resource is 4.59 M tonnes of 3.6% Zn and 1.7% Pb (364 M lbs Zn, 172 M lbs Pb). The inferred resource is 1.8 M tonnes of 3.1% Zn and 1.1% Pb (123 M lbs Zn, 44 M lbs Pb). This puts the value of the proven, probable and inferred minerals in the ground at roughly 1B$ at current Zn and Pb prices.

There is also nearby a roughly the same size Zn/Pb deposit which has not yet been drilled to 43-101 standards. The hope is to eventually truck ore from this site to the current mine's mill.

The mine is expected to produce 17 M lbs Zn and 8 M lbs Pb in 2007 with a cash cost of .54$/lb. At current Zn and Pb prices (1.60/lb and 1.09$/lb) that would provide a cash flow of roughly 23M$ for 2007.

The mine is expected to produce 37M lbs Zn and 17 M lbs Pb in 2008 and thereafter with a cash cost of .34$/lb. At current prices that would provide a cash flow of roughly 59M$ for 2008 and thereafter.

There are currently 126M fully diluted shares outstanding. At today's closing price of $C1.04 and a Canadian dollar worth $.93 we get a market capitalization of 122M$ and thus estimated price to cash flow ratios of 5.32 for 2007 and 2.06 for 2008 and thereafter (at current Zn and Pb prices).

This seems like an attractive stock if you think Zn and Pb prices can at least stay close to current prices. Its about the same from a price to cash/flow ratio as my favorite Moly stock, ROK.V, but does not have either as much reserves or potential reserves long-term. Its not as favorable from a price to cash flow or a reserves in the  basis long-term as my favorite Nickel stocks, CML.V and FNI.TO assuming no change to Ni prices.

Here's an updated version of my spreadsheet analysis of some of the investorvillage RNO board's favorite junior base metal mining stock. Includes an analysis of ADA.V, CML.V, ROK.V, FNI.TO, LBE.V, FNX.TO and QUA.TO.

FULL DISCLOSURE: I am invested in ADA.V, but its currently my smallest position. I have larger positions in CML.V, ROK.V, QUA.TO and FNI.TO (and also TAM.V).

 

Zinc As A Pattern For Nickel

Zinc recently went thru a period of falling inventories followed by modestly rising inventories followed by falling inventories. This seems like a pattern Ni may be following. So, let's look at the price action of our favorite leveraged jr zinc producer, Breakwater Resources (BWR.TO) to get a clue of what may happen to our favorite jr nickel mining stocks.

First here's the one year zinc inventory chart. As you can see, inventories rose from 12/1/2006 to roughly 3/15/2007.

The price closely followed the inventory action. With the price falling from a peak of $2.05 to a low of $1.40 for a 32% price drop.

Breakwater (BWR.TO)'s price action followed roughly the zinc price action. However, it did not fall as much as the Zinc prices fell. From BWR's max to minimum prices during the period the price fall was 23% vs 32% for the Zinc price. From 1-Dec-2006 to 15-Mar-2007 the price decline was less than 1%!. So even when the Zinc price fell more than 25%, BWR.TO's price stayed basically unchanged!

This brings us to Nickel. The Nickel price has already fallen from a high of roughly $24.25 to the current price of around $19.21. That's a 21% decline. If it, like Zn, falls 32% it will be at $16.49. That seems like a long way yet to fall.

And yet, looking at what happened with Breakwater, there is reason to believe that even if Nickel falls all the way to $16.49, the top Junior Nickel mines (e.g. CML.V, BMC.V, FNI.TO...) will move up from their current values back to where there were in mid may when Nickel inventories started their current rise.

This is pretty contrary to what you would expect, but BWR.TO shows that these kind of mining stocks can have a price rise even in the face of rising commodity inventories and falling prices.

Nickel And Other Selected Jr Mining Stocks Revisited

This morning I went through my price to cash-flow evaluation of various Jr mining stocks (mostly Jr Nickel mining stocks) and brought them up to date. Here's a link to the spreadsheet. Just send me a comment here on this blog or an InvestorVillage private message to MontyHigh if you'd like some clarification. I admit this is not a professional analysis, but it helps me think more quantitatively rather than emotionally about my investments.

My brief observations on each stock as it currently stands are as follows:
(1) CML.V - spreadsheet says price to cashflow of 1.2 after the mine is going at full production assuming the cost of nickel holds. Even at half current price CML.V is a money machine. Guess that's why its going up even though Ni is going down.
(2) ROK.V - shows a price to cashflow of 2.2 for 2008. Seems very attractive as I think Moly pricing is independent of Ni so you get some diversification.
(3) FNI.TO - spreadsheet says price to cashflow of 1.1 in 2008 and lower in 2009 if the price of Ni holds and if they execute according to plan. They have a history of not executing and I've downsized this position quite a bit to make room for BWR.TO and QUA.TO and a little ADA.V. Still have more than enough to hope they execute to plan.
(4) BMC.V - its too hard for me to figure, from their presentations and guidance, what their price to cash flow is going forward. It doesn't seem as good as CML or FNI. I guess I need Crucible to straighten me out, but I've reduced this position to make room for QUA.TO.
(5) FNX.TO - significantly higher price to cash flow projects (e.g. 6.8 to 1 at current Ni prices), but with their recent announcement they are close to CML and FNI on price to indicated and inferred minerals in the ground (0.09 vs 0.06). I believe Daniel, thewahlmighty's assertion that its better quality management and maybe resources that you get, but I'm not willing to pay up for it right now.
(6) QUA.TO - estimated (by me using a rough rule of thumb) 2008 price to cash flow of 2.0 at current copper prices and Carlotta getting half its expected 75 M lbs annual production going. This is probably conservative as I didn't reduce Robinson's cash cost. Would be happy to compare with others. Anyway, I'm a convert, at least as long as LME copper inventories are falling.

Will perhaps try to model BWR.TO and ADA.V next. Any suggestions, corrections or comments I'd be happy to receive. Be as gentle or brutal as you like.

Nickel: One Of The Big Three Has Fallen

Here's an important bit from today's Metal Insider:

"Metals Insider - 30 May 2007 Brazil’s Companhia Vale do Rio Doce (CVRD) is planning to delay two projects—one nickel and one copper—because of a looming power shortage in Brazil, according to company president Roger Agnelli, as quoted by local media. The company will press ahead with committed, large-scale projects such as the 100,000tpy Salobo copper mine and the 27,000tpy Onca Puma nickel project but the 118 copper project (36,000tpy and the Vermelho nickel project (46,000tpy) will be subject to unspecified delay."

According to Forbes Vermelho is a 1.2B$ laterite Nickel project targeted for a Q4 2008 production start.

This is one of the three big projects (along with Goro and Ravensthorpe) scheduled to come online in 2008. For some perspective, Abare page 37, states global 2005 Ni production was 1.38 million tpy, so Vermelho is roughly 3% of global production. If I calced it right, Vermelho is 7 time's bigger than Rio Narcea's (RNO's) annual Nickel production and 9 times bigger than FNI.TO's expected 2008 production. This means that this kind of "Big" project dwarfs the projects of what are considered to be mid-tier Nickel producers.

I note that the above article gives no revised timetable for these projects. I couldn't find it anywhere after googling around. The background I found on the power-situation indicates that there is no easy solution and CVRD certainly would not have postponed a 1.2B$ project indefinitely if a quick fix was available.

If you will permit me a little breathless enthusiasm, I think this is the most bullish piece of news for Nickel mining stocks this year, certainly since the wave of buyouts (LIM, RNO, DY).

Clearly this means the Nickel shortage (and high prices) can be expected to continue thru 2010 (apart of a major global slowdown) as one of the three big new projects before then has been delayed indefinitely.

Also, what banker is going to invest in a 1.2B$ big Ni project after something like this occurring (and after all the delays and cost overruns for the other two big projects, Goro and Ravensthorpe)? Particularly given the banking industry's reversion to the mean outlook on base metal prices.

This means that the big mining companies (CVRD, NORILSK...) can effectively control the price of Ni as they are the only ones with the guts to do the big projects that make a difference. They have already shown a willingness to buy out any Juniors that are showing significant production growth relative to world production. As result, the big mining companies can space out their big projects to support Nickel prices.

I think this means that the Jr Nickel mining companies will be making tonnes of money for years to come provided they don't get bought out. My favorites are BMC.V, CML.V and FNI.TO. Of the three, FNI.TO is the shakiest, in my view, as FNI.TO has had some problems executing to match their very exciting guidance.

P.S. Here's some other links on the subject:
Reuters - sounds like the lack of power has no short term fix and that this may be an arm twisting exercise to get permits for more hydro power. Also sounds like Laterite Ni projects are power intensive meaning (in the world of peak oil), Sulphide Ni projects should have a lower cash cost and should trade at a premium to Laterite projects.
Mineweb - describes Vermelho as one of the three big projects (also Goro and Ravensthorpe) due in 2008.

Base Metal Investing For Dummies, Part 1, How Much Metal Is There?

Over a rather uneventful stay at a CanCun resort last week, I finished a pass thru Kernot's Valuing Mining Companies. Over the next couple of weeks I intend to post a few entries here giving some of the fundamentals that the experts would probably consider rudimentary. What I post is simplified and you can get the full details by buying the rather expensive book.

One of the big questions for valuing a mining company is determining how much metal is there is and what its worth. The term is, defining the mine's Mineral Resources.

Qualitatively, you can guess from what you find at the surface and from local geology that there may be some minerals underground. The next step is to drill holes in the ground and carefully store what is found at each level for subsequent analysis. This lets you get a sample of what is actually down there in the ground.

When Kernot 2nd edition was coming out (1999) an International Standard for defining mineral resources was getting close to being finalized. I presume that it is now finalized.

The mineral resources that a mine has, according to this standard, are categorized as follows (most reliable first):
(1) Measured - that part of mineral resources that has been explored, sampled and tested... with drill holes which are spaced closely enough to confirm geological and/or grade continuity and to allow tonnage, densities, shape, physical characteristics, grade and mineral content to be estimated with a high level of confidence. MEASURED RESOURCES ARE "IN THE BAG".
(2) Indicated - that part of mineral resources that has been explored, sampled and tested... with drill holes which are too widely spaced to allow a Measured classification, but which are spaced closely enough to allow continuity to be assumed and to allow tonnage, densities, shape, physical characteristics, grade and mineral content to be estimated with a reasonable level of confidence.
(3) Inferred - that part of a mineral resources inferred but not verified from limited drill holes and on the basis of which tonnage, densities, shape, physical characteristics, grade and mineral content to be estimated with a reasonable level of confidence.

I presume that in some fashion there are detailed standards or a body of "case law" that are used by experts to interpret drilling results to come up with the above Measured, Indicated and Inferred resources where, at least for measured, two experts can be expected to come up with similar results that are close to what eventually is mined.

Now, a mine's Reserves are the economically mineable part of the Measured and Indicated (M&I) mineral resource. I presume this done by setting a cutoff grade depending on estimates of how much it will cost to extract and process (concentrate and/or smelt) the ore and how much the processed output can be sold for.

The discussion on this investorvillage RNO board of Crowflight (CML) has recently illustrated this in that there was a discussion of Crowflight having a larger body of lower grade ore that is not considered to be reserves, because it was below Crowflight's current cutoff grade. I guess this larger body is part of the M&I but Crowflight is not sure enough of the future price of Nickel to allow a cutoff grade that allows them to be considered to be reserves. At today's relatively high Nickel prices, they would be considered reserves.

To try to prevent fraud, it seems there are rules regarding what a mining company can say about its mineral resources. This was not covered in the text book. They seem to be able to report:
(1) Drill results without interpretation.
(2) Measured, Indicated and Inferred resources per this international standard.
(3) Nothing else.

This explains a great deal about the Tamerlane (TAM.V) situation. There was a whole big bunch of drilling done back when it was Canada's largest operational zinc/lead mine, but it was well before the standards for defining the mineral resources were established. There is a report authored by Tamerlane floating about on the Internet that describes the results of that drilling quantitatively, but not according to the standard. The resources described are GIGANGOUS. Tamerlane has pulled that report from its web site and the web site does not report anything quantitative about those earlier drilling results, presumably to comply with the rules of what you can say. The earlier report was probably some kind of inadvertent violation of the rules. 

This presents an enormous opportunity for investors because there is good reason (from the old drilling results) to believe that TAM has an enormously big, valuable Zn/Pb resource base, but TAM cannot promote it until it does enough additional drilling to get it to comply with the standards. The bankable feasibility study, which I'll introduce in a subsequent "For Dummies" post, is expected to come out this summer and it will have at least a fraction of the total resource base defined according to the M&I standards. As time goes by, additional drilling should clearly be able to increase the resource base closer and closer to the GIGANGOUS value in the no longer easily obtained report.

Here's a link to the withdrawn report: http://www.resourcexmetals.com/TAM/Tamerlane_Corporate_Summary.pdf

Here's a link to a nice summary evaluation of Tamerlane: http://www.stockhouse.ca/shfn/editorial.asp?edtid=18902&page=2

Here's a link to an evaluation of the older Tamerlane drilling results: http://www.mveirb.nt.ca/upload/project_document/1171322078_Giroux%20consultants%202001%20report%20for%20Tamerlane.pdf

Here's a link to a "pump" Tamerlane article: http://www.resourcexmetals.com/TAM/Tamerlane_Report.pdf

Jr Nickel Mines Compared To Each Other And A Top Natural Gas Stock, Copper Mine And Moly Mine

Here's a link to this article's spreadsheet analysis. Download this if you can't see the entire table or you want to see the backup: Download holdingscomp.xls (62.2K)

Here's the results of a few hours work where I compare various Ni mining stocks often discussed with a top Moly stock and a top copper stock. I even threw in a top Natural Gas stock just for comparison purposes. The goal is to do a simple analysis and compare the expected:

• Price to Cash Flow Ratio For 2007, 2008 and 2009 – based on current commodity prices and best estimates of production and cash cost from the company web sites. Lower is better.

• Price to Minerals In The Ground – based on current commodity prices and M&I and Inferred resources as given by the company web sites. Again, lower is better.

I also include a couple of qualitative items based on near-term catalysts for price moves and long-term upsides. Here's the results of the analysis:

Symbol	Name	Biz	Est 2007 Price / Cash Flow	Est 2008 Price / Cash Flow	Est 2009 Price / Cash Flow	Est Price / Value Of Indicated & Inferred Minerals In Ground	Catalysts	Long-Term Upsides	Mine Loc	Mine Type (OP/ UG)	Ore Grade	Current US Market Cap (M$)	2007 Production (M Lbs)	2008 Production M lbs	Est 2009 Production	Indicated & Inferred Minerals In Ground (M lbs)
CML.V	Crowflight	Ni	NA	1.64	0.65	0.063	Q2 2007 Financing	Nearby exploration	CA	UG	1.92%	308.45	0	9.38	23.6	208
FNI.TO	First Nickel	Ni	2.58	1.16	0.96	0.058	Increased Lockerby production feasibility study (double 2007); Premier ridge production 2008 (double 2007); Further exploration	Nearby exploration	CA	UG	1.78%	236.21	5.2	11.5	14	173.14
BMC.V	Brilliant	Ni	?	1.40	1.40	0.202	Production to double in 2008; Deacon mining announcement might double 2008 again; Hedges come off in July	Sally Malay takeover target	AU	UG	2.01%	193.77	4.13	9		40.63
LBE.V	Liberty	Ni		0.84	0.84	0.462	Production increase Q2 2007 and 2008	Cobalt development nearby; Ni exploration possibilities	CA	UG	2.62%	220.29		25.57		20.21
FNX.TO	FNX	Ni	8.70	6.47	5.66	0.276		Nearby exploration	CA	UG	1.20%	2278.67	13	17.5	20	350.12
QUA.TO	Quadra	Cu	2.09	1.30	1.30	0.029	Hedges are off. Production up in 2008.	Sierra Gorde. Greenland Moly mine.	USA	OP	0.62%	565.7	125	200	200	5208
ROK.V	Roca	Mo	2.67	1.78	1.78	0.055	Q2 2007 Production Start. Same mine exploration results.		CA	UG	0.12%	216.6	3	4.5	4.5	132.4
CHK	Chesapeake	Ng	3.80	3.49	2.57	0.119	Increasing NG prices	Exploration produces more reserves	USA	NA	NA	16250	670	752	842	18200

Here's the assumptions:
(1) CML.V gets the full metal price for their production
(2) Current Ni & Mo & Cu apply to all of 2007 and continues without change thereafter
(3) Complete guess on ROK cash cost
(4) Hedges make it hard to estimate BMC.V 2007 cash flow
(5) Liberty cash cost is a complete guess
(6) BMC.V does not include the upcoming guidance regarding “Deacon” of 2007/2008 production increase expected by Crucible (another double)
(7) QUA.TO 2007 Cash Flow does not include the effect of hedges on Q1
(8) QUA.TO, we take the 5 billion Lbs copper for Sierra Gorde future mine at face value. Without this, QUA is selling for 73% of its minerals in the ground.
(9) QUA.TO assumes current cash cost going forward (conservative).
(10) 1 mcfe is the equivalent unit to 1 lb for CHK
(11) CHK Fully diluted shares is what the recent SEC filing gave for “diluted” shares.
(12) The analysis includes only the company's primary commodity (e.g. FNX copper production is not included).
(13) The CHK cash flow values are from their latest presentation for the $7.50 NG price rather than being calculated from production, commodity price and estimated cash cost directly.
(14) CHK has significant debt. None of the mining companies have any debt.

Here's some things to be gleaned from the above table by comparing the various Ni mining stocks:

1. FNX is clearly much more expensive on both a cash-flow basis and a minerals in the ground basis.

2. LBE.V has problem, relative to its peers, with minerals in the ground, but should have the best price to cash/flow for the next couple of years.

3. FNI looks the best overall with the values in the table. CML.V is close, but does not go into production until next year.

4. BMC, if the upcoming Deacon announcement in fact doubles production guidance for 2008 again would have astonishingly good cash flow at current price levels.

5. Overall, FNI, BMC.V and CML seem very attractive. I have positions in all three.

 

Now, let's compare our top three Ni mines with what some say is the top Jr copper mining company, Quadra Mining (QUA.TO).

1. QUA has the better price to cash/flow short-term and even in 2008 (at current Cu prices).

2. QUA has excellent minerals in the ground if you include what is claimed for their upcoming Sierra Gorde project. Without that it has a problem. I have not included QUA's Moly project as it is beyond the timeframe I'm concerned with and its not QUA's primary metals.

Now, let's compare our top three Ni mines with a near-term Moly producer. ROK.V is supposed to open its mine in the next month or two.

1. ROK.V is comparable with FNI for 2007 cash flow.

2. For 2008 ROK.V does not have as good a cash flow ratio.

3. Overall, ROK.V's going into production catalyst seems very strong. I'm holding my ROK.V  for this reason.

Finally, let's compare our top three Ni mines with a top, large-cap NG producer, CHK. If current commodity prices hold, the top Nickel mines are between 66% and 50% cheaper on a cash flow basis and FNI and CML.V have approximately twice as much minerals in the ground. Also, the Ni mines have little or no debt compared to upcoming cash-flow while CHK has a significant amount of debt. 

Overall, I think the top three Nickel candidates (FNI.TO, CML.V and BMC.V) are where I'd like a lot of my investment dollars. QUA.TO seems very attractive in the short term, but may not be as good after their Carlotta mine opens. ROK.V and CHK also seem attractive, in that order.

Finally, I'm hoping to keep this up to date and add more stocks over time. Let me know if you can make suggestions for improvements or notice important factors that have been left out.

 

One aspect of the Junior Mining stocks I've been discussing (and that I’m investing in) that should not be underestimated is how illiquid they are. This affects how much you are going to pay (or how long it is going to take you while the stock price keeps falling) to get out if you decide conditions have changed. Let’s take a look at the dollar volume of some board favorites and a couple of other representative stocks to see what this looks like. We are looking at the first-hour's volume for today.

The dollar volume is in USD. Now, with NEM and CHK I have been able to day trade 200K$ positions with trades at the market paying just .1% in slippage (change of price for the worse due to my selling). As you can see, the dollar volume of "our" stocks is way, way smaller. This means that if you want to buy or sell a 200K$ position you won’t be able to put your order in as a market order. For ROK.V, TAM.V, BMC.V and GMI.V your buying or selling would have taken more than 50% of all the trading in the first hour of trading.

This explains why big institutions usually don’t invest in these stocks. It also explains why those that do like private placements. They can get a decent sized position without perturbing the market. They will still have to slowly find sellers for that stock when they decide to get out.

I still find it amazing that an upper-middle-class person’s retirement funds can move the price of these stocks by several percent when trying to get into or out of the stock over the course of an hour or two.

Revisited: Today Was My 5th Biggest Spanking This Year

On April 24th I wrote: "my accounts are down 4.2% since yesterday...This one didn't seem so bad, so I'm expecting I'll be hitting a new high in less than week from today."

Today they hit a new high. So it took seven trading days and a little longer than I expected.

I'm still really jazzed about my base metal holdings. I honestly expect another 50% to a double from here in the next year. Look for a comparison of Nickel stocks that I'll be posting over the weekend for some good candidates to investigate.

Moly Mining Stock Comparison

Company	Symbol	Summary	Million Lbs Moly	Est Production Date	Ore Grade	Mine Type (Open Pit /UnderG)	Price / Lb Of Moly
Blue Pearl Mining	BLE.TO	Premier Producer	744	Current	0.10%	Open Pit	3.22
Roca Mines	ROK.V	Next Producer	113	mid 2007	0.12%	UnderG	2.05
Adanac Molybdenum	AUA.V	Awaiting Financing	286	h1 2009	0.06%	Open Pit	0.66
Moly Mines	MOL.TO	BFS Q2 2007	600	h2 2009	0.06%	Open Pit	0.48
Idaho General Mines	GMO	Biggest Resource	1300	2010	0.06%	Open Pit	0.28
U.S Energy Corp	USEG	Best Resource, PreBFS	967	TBD	0.22%	UnderG	0.18

This table provides a thumbnail comparison of a selected set of Molybdenum mining stocks. The selected stocks cover current and near-term producers plus one exploration company with an excellent resource.

Probably the most important column is the price to lb of moly ratio. This shows that current and near-term producers have the highest such ratio (as there is less risk in them getting a good payoff from that underground resource) and that furtherout producers have a lower price per lb ratio.

Another important column is the ore grade as that pretty much correlates with the cost of extracting a lb of moly. Open pit mines generally have a lower cost per tonne of ore mined than underground mines. This cost is important in offsetting the risk of the price of Moly falling from its current lofty level of 30$/lb over the life of the mine. The lower cost mines will survive and make money, should the moly price drop off, while the higher-cost producers will go bankrupt.

With this in mind, here's a quick qualitative survey of these mining stocks:

• Blue Pearl is the premier producer with a high-quality ore. Its production is expected to ramp up around 30% in 2008. If you are convinced that Moly prices will stay high, then Blue Pearl seems like a low-risk way of benefiting. It does have the highest price per lb of moly ratio, however.
• Roca Mines is expected to start production of a high-grade underground mine by "mid-2007". Investor relations says they are targeting June 2007. They are hoping to mine 3million lb of Moly this year and 4 or 5 next year. I like mines that are near production and am heavily invested in Roca hoping to benefit from its going from zero earnings to significant and growing earnings after production starts.
• Adanac, Moly Mines and Idaho General are on their way to becoming producers. If you are convinced that the price of Moly is going to stay high (or go higher) then you can expect the price of these stocks to increase as their price per lb of moly increases to those of Blue Pearl and Rocaas they get closer to production. They are all mining roughly the same grade of ore which is half as rich as Blue Pearls. Thus, they are more at risk to falling Moly prices than Blue Pearl. Adanac is expecting to get financing lined up this quarter. This is the final hurdle to getting mine construction started. It should get a nice pop up in price when this occurs in the same way that Nickel Mining companies DY.TO and CML.V popped on getting financing. Moly Mines is expecting to complete its BFS this quarter. This also could be the catalyst for a price rise. I may open positions in Adanac and Moly Mines to benefit from these expected price catalysts.
• U.S. Energy is listed because it has a large, very rich ore grade, but is not even close to the Bankable Feasibility Study (BFS) that is the key to getting to production. I'll be looking at opening a position in this after more due diligence.

Today Was My 5th Biggest Spanking This Year

My accounts are down 4.2% since yesterday.

The number of days to recover from the previous big spanking days were as follows:
3/5 - 2 days
2/20 - 16 days -- this was the big one, 8.6% in one day! Yee Haw!
2/12 - 2 days.
1/3 - 4 days

It seems like a big spanking, but they come more than once a month. I'm starting to get used to them. This one didn't seem so bad, so I'm expecting I'll be hitting a new high in less than week from today. We'll see. If you are going to trade these junior mining stocks you have to be ready for real volatility.

And its not like I can get out when the going gets bad. As of around noon today, one of my biggest holdings (TAM.V) was down over 6% and the volume so far that day was less than 1/3 my number of shares. So, its going to take several days to get out of TAM.V when the time comes.

If the business fundamentals of these stocks were not so incredibly outstanding (see yesterday's Breathless Enthusiasm post), I'd be looking for something a little more tame. But a 4% hit isn't so bad when you are up 100% and can see, from the fundamentals, another double coming.

Breathless Enthusiasm For Nickel Stocks

This may seem over-enthusiastic, but if you look at my other posts you'll see that I generally hold a reasonably level-headed stance. Nonetheless, as I consider things, the situation is so, very, very bullish for Canadian Junior Nickel Mining stocks that I'm concentrating more or my portfolio in just Nickel mining stocks (CML, FNI, LBE). Here's the situation, as I see it:
(1) There's a takeover ocurring roughly every other week and very, very few stocks remaining to be taken over. Everytime there's a takeover every remaining stock jumps 10% or more. VERY BULLISH.
(2) The Ni prices themselves are at all time highs and the stocks that are producing are making tonnes of money compared to their valuation. Even assuming Nickel prices are cut in half the stocks are still undervalued. VERY BULLISH.
(3) Demand is growing, China has virtually no supply of their own. VERY BULLISH.
(4) No significant new production coming online for at least a couple of years. VERY BULLISH.
(5) There really aren't any good substitutes. VERY BULLISH.
(6) Together, 3, 4 and 5 mean Nickel prices are probably going to continue to go up. VERY BULLISH.
(7) The stocks I'm holding all have significant production growth coming online over the next year (but are still so small as to have that production not impact the supply/demand imbalance). VERY BULLISH.

This is so very, very bullish that even though I want to pay attention to other opportunities, I'm going to keep a really big chunk of my portfolio in these Nickel mining stocks, at least as until my three stocks are taken-over (or until 1..7 changes).

Here's the thumbnail portfolio of my three favorites:
FNI.TO - current Nickel producer with huge reserves in politcally safe Canada. Is planning on tripling production next year.
CML.V - a Canadian junior which is expecting to start production about a year from now. Large and growing reserves in politically safe Canada. Biggest Nickel project coming online of any that I know between now and 2010.
LBE.V - a very small company that has reopened an existing mine. Will be ramping up production substantially over the next two months and is drilling to increase reserves. Look out if you want a big position because the stock is very illiquid.

Crazy Good/ Crazy Bad... Perspective On Base Metal Mining Volatility

Base metal mining stocks are in quite a little downdraft and this is the second day of that downdraft. Its time for some perspective.

I've been almost completely in base metals since last fall and have been keeping daily account balances since Dec 2006. It worth looking at my five day gain / loss statistics to get a feel for the volatility of these stocks. I think its representative of what someone would have experienced if they also were completely in a few base metal junior producing or near producing stocks. In these graphs there is one data point for each five day period, that is, there are five data points per week. This five day percentage change can give you a feel for how you can expect your moods to swing if you are heavily in these stocks.

This first graph shows how the five day gains look over time. The obvious messages are:
(1) Most five day periods you would have been making serious money if you had been in these kind of stocks.
(2) The biggest five day loss was around 17% !!! Wow, this stuff can be crazy bad when its bad.
(3) There were quite a few days where the five day loss was worse than 5%.
(4) VERY IMPORTANT: The five day loss days have been mostly isolated. That means that if you had held on during these bad period you would have quickly recovered and things would not have gotten worse.
THIS IS VERY IMPORTANT: If you are sure about the fundamentals of supply / demand of your commodities and the value (e.g. price to cash /flow) of your stocks then you've got to have the guts to hold on even thru these difficult periods of downard volatility.

This next graph shows the distribution of these five day results. Key points are:
(1) Things have been very good. Only 11% of the days had five losses worse than 5% while 40% of the days have five day gains of greater than 5%. More than 70% of the days had positive five day gains. Almost 20% of the days had greater than 10% five day gains.
(2) Only one day had a five day loss worse than 10% and it was a doozy at 17%.

When I consider that:

• the fundamentals do not seem to have changed, especially for Nickel and Moly, and that
• LME inventory levels and prices are improving for Cu, Ni, Zn and Pb and that
• these mining stocks remain at extremely attractive valuations...

I feel like I know what I'm doing. I am confident about staying in base metal junior producing or near-producing stocks going forward despite the terrifying and exhilerating volatility recently seen.

Dumpster Diving With Amerigo Resources (ARG.TO)

I've recently, upon the recommendation of Investor Village's BigEnergyBull, opened a 5% of portfolio position in Amerigo Resources (ARG.TO). Its a mining stock with an unusual story. Instead of operating a mine, it processes the leftovers from a Codelco copper mine. The leftovers are referred to as tailings. It finds a decent enough concentration of copper and molybdenum in the tailings (which are nicely pre crushed), to make extracting from the tailings a profitable business.

Here are some of the things to like:
o A deal with CODELCO (world's largest copper mining company, Chilean govt owned) thru 2021.
o A roughly 4% dividend.
o A P/E of around 6 with current copper prices.
o Significant institutional support (something like 11% Merrill Lynch ownership).

The thing that makes it extraordinary is captured in the slide from their corporate presentation below:

Amerigo is about to start processing an even richer set of tailings from the Colihues mine's tailings pond. The copper grade is three times richer than what is found in the tailings they are currently processing. Adding tailings from this pond should double Amerigo's production without any stock dilution or debt added. That's the kind of catalyst for a stock price jump that Big Energy Bull loves and I'm with him. The only puzzling thing is that Amerigo has not announced when this production increase is supposed to occur, although it seems to be less than a year out.

Moly As A Peak-Oil Play

Yet another bullish article about Moly prices.

http://ezinearticles.com/?Will-A-Base-Metals-Correction-Affect-the-Price-of-Molybdenum?&id=252680

Says, among other things, that Moly is better able to weather a US housing slow down as it isn't used much in houses. Its used mainly in oil and gas pipes, which won't slow down much if any given that you have to drill more to get less. So, peak-oil (with its increased drilling) is good for Moly (and for Ni).

Moly Substitution For Ni In Stainless Steel

My largest position is now ROK.V, Roca Mines. ROK.V is a soon to be in production molybdenum mining company. As such, I am very interested in future price of Moly.

The linked article provides some very impressive, bullish material on this: "Structural Changes in Molybdenum Demand, Author: Denis Battrum, http://www.bluepearl.ca/s/Update.asp?ReportID=179497

I was particularly impressed with the idea that Moly, with the recent Ni price jumps, provides a cost-effective replacement for Ni in type 316 and 304 stainless steel applications.

So, I thought I would do some due-diligence and check some critical numbers. As a result, I discovered a very significant error in the paper's calculation wherein they assume that Moly Oxide (currently selling for 30.25$ / lb) is100% moly when its only 57% moly. Despite this inaccuracy, I find the report to be very valuable.

Even so, I see that the 2204 duplex stainless steel is significantly cheaper per lb than the corresponding type 304 stainless steel. Type 304 is the most common form of stainless steel. So, at current and even higher moly prices,there is a big opportunity to substitute moly for Ni in the largest stainless steel application. Type 2205, the higher-moly content substitute for Type 316 stainless steel is currently almost the same price as Type 316.

CONCLUSION: The ability of Moly to be substituted for Ni in the most common form of stainless steel at current Ni and Moly prices provides a fundamental reason for the Moly price to rise relative to Ni.

Primary source (highly recommended): "StructuralChanges in Molybdenum Demand, Author: Denis Battrum

Other sources:

    

• http://www.bluepearl.ca/s/Update.asp?ReportID=129037

      

• http://www.largoresources.com/pdf/metals_report.pdf

      

• 'The    Magic of Nickel', By Dr. David Jenkinson,    

      

• http://www.imoa.info/FileLib/About_Molybdenum.pdf

      

• http://www.mii.org/Minerals/photonickl.html

      

• http://www.chemlink.com.au/nickel.htm

      

• http://www.metalprices.com/FreeSite/metals/mo/mo.asp

      

• http://www.azom.com/details.asp?ArticleID=863

Lessons From The 5yr Copper Charts

As hopefully everyone who is investing in mining stocks knows, the underlying commodity price (and changes thereto) are very, very important. Also, for Cu, Ni and Zn you can get both price charts and London Metal Exchange (LME) inventory levels from www.kitcometals.com. Changes to the inventory levels provide as good an indicator of the relative supply and demand as is available.

This post examines the relationship between Cu inventory levels and price. This is particularly instructive for Ni mining investments as Cu has, unlike Ni, gone thru a period of rising inventory levels after multiyear falling  inventory levels while Ni seems to have gotten to the end of multiyear falling inventory levels and a rise in inventory levels seems possible.

Here's a view of the 5yr cu chart that offers some bullish lessons for Ni miners.

Region (A) shows a period of time where copper prices declined even though LME inventories were sharply declining. This is not all that bullish but is worth noting. Its also worth noting that at no time in the 5yr chart was there a catastrophic fall in copper prices.

Region (B) shows cu prices rising to all time highs even while inventories are recovering a little from their all time lows. My eyeball says that even though inventories quintupled from their all time low of around 25K tonnes to 125K tonnes the price continued to rise 30% over this 7 month period. Region B is probably about where Ni is right now. The implication is that prices can continue to rise even if Ni inventories stay the same or rise.

Post-Region (B) shows cu prices spiking to their final (to date) all time high when after this period of rising inventories and prices the  inventories started falling again. This is another 70% price rise. The implication for Ni is that there could be another 70% Ni price rise coming should inventories start falling again. That would be a 37$/lb Ni price. This seems like a very possible outcome.

Region (C) shows that when inventories start falling again, and the market is convinced that the worst is over, that the Cu price dropped 30% in a 3 month period. If Ni were at this point now, the price could fall to 15$ pretty quickly.

Well, I think this is pretty instructive. A couple of next steps would be:
(a) Look how this compares with the Ni and Zn 5yr charts to see if these same patterns apply.
(b) Look at how Cu stock prices reacted to these same three regions to get a hint of how our Ni stocks might behave under these circumstances. Seems to me like the rough equivalent in stocks is:
      DY.TO and CML.V are equivalent to EQN.TO
      RNO is equivalent to PCU.

Your Worst-Draw Down With Junior Mining Stocks

The saying goes "Your Worst Draw-Down Is Yet To Come". A draw down is the farthest far down your account value has been since its previous high, or for an individual stock how far down the lowest low is since the previous high".

So, I thought I'd play around with this to see for some of the investorvillage RNO board's favorites how big drawdowns can be. The data is taken from the previous 12 months or so, which is about as bullish a time as you can find, I think. The data is base on the closing price of the day.

So, the first figure has as its Y axis the percentage draw down for the stocks and the date the corresponding lowest, low occurred. What I gather from this is that most draw downs are less than 15% (still pretty big) and that they tend to cluster date wise. This means if you are holding a portfolio of these mining stocks you are likely to have multiple get clobbered at the same time. The three worst drawdowns are NTO, BWR.TO and HBM.TO and range between 35 and 47%. So, on an individual stock, even with these low P/Es you can still lose half your money even during a good year (if you sell at the maximum draw down).

The next graph shows the distribution of draw downs. For example, 10% of all draw downs are drawdowns where you lose more than 20% of your money (if you sell at the low).

So, I hope you find this worth a couple of minutes pondering. For me it means I should be prepared for significant volatility (e.g. losing 20% easy) since my portfolio is concentrated in these stocks.