Excellent Market Opportunities

Why I'm not worried.

Silver Stock Report

by Jason Hommel, August 16, 2007


My portfolio has suffered a 15% drop since July 31st.  I suppose this is not too bad, considering that others in the precious metals industry have lost 50% to 60%.  And I suppose this is great, considering that some who invested in junk mortgages have lost everything.

Three times in the past 7 years, my portfolio has suffered 50% drops, and recovered to gain over 1000%.  So, hopefully, this is about the bottom.  After all, many mining stocks are literally dirt cheap, and trading at 52 week lows.

I do not sell out of the sector; I never have, not in 7 years.  I trade, but only to trade one stock for another, never holding more than about 5% in cash.  The reason is because I can never predict these short term moves.  Tomorrow, things could go up 10%, across the board in the metals stocks, who knows.

All I know to do is to invest long term, and to buy things that are dirt cheap.  My stocks were cheap yesterday, and they are even better bargains today.

My top stock pick, and largest holding, remains Baja Mining.  I own 588,700 shares.

Market Cap: $231 million USD.
BAJ.TO: $1.75 Cdn/share.

Baja has a copper/zinc/cobalt/manganese project in Baja, Mexico.  They have completed a bankable feasibility study, and need to raise $568 million, and can earn, profit, $800 million per year.  Even if copper prices dropped to $2/lb., Baja will still earn about $500 million per year. 

Thus, Baja is not just a "resource play", Baja is a great deal regardless of the sector.  Baja has a forward P/E of less than 1, or about 1, even if copper prices sell off to $2/lb.!

But that's not all.  They also have reserves that could last 100 years; about 10 billion pounds of copper.  That's leverage, which is great, because I think copper prices will break out over $4/lb. within 6 months to a year (that's the short term, in my way of thinking).

I'm not concerned that the U.S. housing market will affect copper prices very much.  China's one-year increase in copper demand exceeded all the copper used in housing in the U.S.  For more, see:  http://silverstockreport.com/2007/vancouver_copper.html
and
http://www.sprott.com/pdf/marketsataglance/04-2007.pdf

I've challenged my 800 paying subscribers to find a similarly leveraged stock in the mining industry, with a lower forward P/E ratio, and I've not found one.

So, it remains my top stock, my top holding, and I see no reason to sell. 

The other reason to not sell is the spread, and lack of liquidity.  In Baja Mining, the spread is not so bad, about 2-5 cents/share, which is about 1-3%.  And the stock is more liquid than most of my other holdings. 

But in many other stocks, the spread is about 10-20%.  So, if you sell in a panic, you sell at the bid, and the stock price drops to the bid.  But if you buy back in a panic, then you pay 10-20% more, and the stock trades at the ask.

Therefore, it makes no sense to sell out of stocks with a wide spread in times when a few other people are not so certain of things.  Even if my entire portfolio were sure to go down 20% tomorrow, I would not sell today.  Because I'd be lucky to be able to buy back and break even.

Many people in our industry have been sitting in cash during the consolidation in the last year and a half since May, 2006.  Their fortunate break has finally come.  They can now buy back in at good prices.

I hate cash, because it is worse than an abominable "unjust weight and measure" and in reality is no measure at all, not even a promise, but merely a broken promise.

Nevertheless, I put 1% of my overall portfolio into physical paper cash that I have in my physical possession, which is just over $100,000.  Why?  I've never been more scared of bank failures than I am today.

See: Major Frauds of the U.S. Monetary System
http://www.silverstockreport.com/revised/Major_Frauds_of_the_U_S__Monetary_System(revised).html

I know, from my research, that local banks have no cash.  If a bank branch has $8.5 million of deposits, then the cash reserve requirement is zero.  Then, for the next $8.5 million to $45.8 million, the amount is 3%. Then, for amounts larger than $45.8 million, it is 10%. See www.federalreserve.gov/monetarypolicy/reservereq.htm

A bank with $10 million on deposits is required to have $300,000, minimum.  I don't know if they have a limit on how much they can pay to one customer, but here's my experience:

I had to go to three different branches of Bank of America today from Nevada City to Grass Valley to take out $20,000 from each of them to get a hold of $60,000.  Although I had $70,000 in my account, each branch would only let me remove $20,000.  More cash can always be ordered in advance, but I'd have to wait a week.  And in today's market, who knows what the next week will bring?

I've never been more comfortable with my physical silver position, which is now 22% of my overall portfolio.  Regardless of today's price of silver, I have not lost an ounce.  In the long term, I have more cash than I need for two or more years, and my silver position is rock solid, all paid in full.

The Fed bailouts of the mortgage morass are highly inflationary.  Buy physical assets that are cheap, and beware of bankruptcies.  Gold and silver can never "go broke".

For those inclined to take risks, you might be interested in the following:  A stock I bought recently now has a market cap of $27 million, U.S.  I think that's cheap considering they have 19 billion pounds of copper in the ground, at about .8% grades.  One problem with this stock is that they are in a Latin American country, and there have been protests by the locals, which creates additional risk, so I own far less of this stock than Baja Mining.  Also, this other company has no feasibility study yet; they are too busy confirming the historic resources.  But this stock has held up well recently, since it was already down 50% when I bought it.  For the name of this stock, you can sign up to "Look at my Portfolio" at silverstockreport.com.

Thank you.