60% in 60 days!

by Jason Hommel, May 9, 2006

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60% in 60 days!  That's about what Zinc just did, from about $1 to about $1.60/lb.! ($1.57 on May 9th)




You can find historical charts for zinc prices at kitco.com or kitcometals.com.
see: http://www.kitcometals.com/charts/zinc_historical.html

On Jan. 5th, I wrote "Silver Stock Picks for 2006", and included Metalling Mining, MMGG, a zinc stock, when it was just under $1/share.  Today, it hit $3.85/share, up 285%!  My subscribers are, of course, thrilled!

Sometimes, to multiply your money 1000%, it's easier to take 100% profits every four months, and put it into new deals that will increase by 100%, but other times, it's wiser to stick with a winning trade and ride it up ten fold!  Last week, I foolishly sold a few shares of MMGG at $2.50 to "lock in some short term profits", even as zinc prices rose 60% in 60 days, and the stock of MMGG was about flat during that time.

I'm significantly more bullish on MMGG today, than I was at the start of the year, for several reasons.  First, my understanding of the zinc market has significantly increased.  Second, I'm aware of other comparables.  Third, we have price movement!  60% in 60 days!

Like copper, zinc is tight.  World supplies of zinc are down to about 13 days, and some estimate that by this fall, the world will run out of zinc.  Look at the kitco charts of declining inventories.  From
http://www.kitcometals.com/charts/zinc_historical.html



Of course, we won't run out of zinc.  Instead, prices will rise until they choke off demand before we would run out this fall.  The question is, how high will zinc prices have to rise before demand is reduced?  That's an interesting question, that I tried to think about in my Jan 28th email, where I wrote:

So, what price may zinc rise to? Will zinc rise from $1.04/pound today to $1.50/pound next year? Or are we talking much higher here?

Here’s my thinking: I believe it’s possible for zinc prices to increase well beyond $2/pound--even up to $3.50/pound. Here’s why & what that will mean:

Zinc is a minor ingredient in galvanized steel (3% by weight on average), used to prevent rust, and is absolutely necessary in many, or most applications. Absolutely necessary. And a minor cost. Let those two concepts sink in: necessary & cheap.

It’s like silver, or uranium. Silver is used in tiny quantities in industrial applications in electronics because silver is the greatest conductor of electricity, and thus, absolutely necessary! Furthermore, a significant rise in silver’s price will not reduce demand, because the end product is so very much more expensive than the silver used. And uranium is absolutely necessary to fuel a multi billion dollar nuclear reactor, and those people who run it will buy all the needed uranium, regardless of cost.

Here’s an analogy. Steel is somewhat like a cookie recipe. It may cost $10 to make a batch of cookies. But one vital ingredient may cost $.20, such as the salt, or baking soda, which is like the zinc. Who cares if the price of that tiny, but vital, ingredient rises 10 fold, to $2--you are still going to use it to make the batch of cookies. But cookies are not as necessary as steel!

Likewise, regardless of the price of zinc, it will be used to make stainless steel that does not rust that is needed for things like cars, kitchen knives, and who knows what else.

Think about this: the world could sustain oil prices going from $10/barrel to $70/barrel. Hey, the inflation adjusted high of $43/barrel from 1980 is a whopping $240/barrel! And oil is the largest commodity there is in terms of its cost. For every $100 spent on commodities, probably $35 is spent on oil. Surely, the wheels of the world economy will not fall apart if tiny little zinc rises ten fold from the low of $.35 to $3.50/pound.

And if oil can rise nearly 20 fold, zinc can rise 40 fold, but let’s not go there.

Here’s another key point: Several other minerals needed in steel have risen about ten fold already, such as molybdenum and cobalt. I know of only two other commodities that have risen as much, selenium and iridium. So, 2 out of those 4 are used in steel. Pause, and let that sink in.

Zinc is clearly headed up next, due to China’s increasing demand for steel—and this all helps to explain the parabolic price curve in zinc that we are now witnessing.

And what if investors add to the demand, and continue to buy zinc futures contracts in this thin market with greater and greater force?

http://www.kitcometals.com/ is an invaluable source of news on the metals markets, as they provide links to news sources all over the world.  From my reading there, I've discovered that we are not in a "fund-driven bubble" in commodities, as so many of the poorer quality news sources seem to be saying. 

Further, a true "inflation adjusted" high price for zinc might be about $2.15/lb. as Bill Murray observed in his recent article on Commodities:  See:
http://www.silverminers.com/publications/showpub.aspx?id=3024

From my research, zinc prices are set to rise for the next 2-3 years, (two to three years!), because supply is not expanding fast enough to meet demand from China, and it will take that long to bring on enough new zinc mines to offset the zinc mines that will be closing during this time period!  The details of major zinc mines are outlined in the President's Letter to Metalline Mining Company Shareholders, Monday May 1
http://biz.yahoo.com/bw/060501/20060501005550.html?.v=1

Inco, Falconbridge, and Teck Cominco, all major zinc miners, are all involved in a multi billion dollar acquisition dance, probably because somebody wants to try to get major control of the zinc market before things get even better for zinc--over the next two to three years!

Now, I've studied the silver zinc explorers for a few years, due to my interest in silver.  MMGG is the biggest, highest grade, most feasible zinc play there is, even at today's higher stock prices.  Most others are smaller, or in higher risk countries, or don't have costs as low.  MMGG is the lowest cost, with the highest grade, set to produce more zinc than all others of which I know. 

Here's an apt comparison.  EuroZinc Mining Corp. (EZM) is aiming to produce 200 million pounds of zinc per year.  MMGG is aiming to produce just under 400 million pounds of zinc per year. 

EuroZinc has a market cap of $1.6 Billion dollars, or $1600 million.

MMGG has a market cap of $192 million.  (50 million shares at $3.85)

EuroZinc already rose in price much more than ten times since mid 2003.

Chart

MMGG will likely catch up to, and exceed the market cap of EuroZinc! 

Chart

If MMGG merely matches the market cap, including a $300 million dilution at $10/share (to finance the mine construction) that will be an additional 45 million more shares (to allow for a half warrant), and MMGG will rise to $16.84/share.  (That's $1600 million / 95 million shares = $16.84.) But MMGG may well exceed that, because if zinc prices are slightly above a modest $2/lb., MMGG could be earning about $800 million per year, which, at a P/E of 10, could point to a market cap of $8 billion!  If that market cap is reached, at 95 million shares, that's $84/share for MMGG!

A few people have asked me about MMGG's recent financing at $.80/share, that was announced in the President's letter.  It certainly seems too low.  But the financing was open for 9 months, and during that time, nobody wanted to invest in MMGG.  Part of the problem was that MMGG had run out of money from spending $8 million on drilling, and proving up their zinc resources.  The other problem was that investors who had participated in the prior financing were selling, to get in on the new financing, which drove the stock down.  Finally, in January, as zinc prices had advanced from $.50 to $1/lb., the recent financing quickly closed as I, and a few others, began to give MMGG some publicity.  I bought the stock then, primarily because the stock was "cheap" and a bit of a laggard compared to its peers.  At the time, we did not have such price action in zinc, such as the 60% gain in the last 60 days!  In January, zinc prices were below $1/pound, and so today, MMGG is a much better opportunity, because it is now clear that the long wait is about over.

Now, there are a few other zinc stocks, if you don't want to jump on the MMGG train. 

Try looking up and researching the following:
SIL (Apex Silver) --high market cap, hedged with about a $700 million hedging loss, & in risky Bolivia.
EZM (Euro Zinc) --high market cap
YZC.V  (Yukon Zinc) --developing story, but recently hedged.
CZN.TO CZICF.PK (CANADIAN ZINC) --nearly full infrastructure, underground mine, to produce about 1/4 the zinc of MMGG/year.
ABI.V ABMBF.PK  (Abcourt Mines) (I own shares of Abcourt)
FAN.TO FRLLF.PK (FARALLON RESOURCES) --low grade, multi-mineral sulfides.
HDA.V (HUSIF.PK) (HULDRA SILVER) --very tiny market cap
SBB.V SBBFF.PK (SABINA SILVER CORP) --relatively low grade
RDV.TO RDFVF.PK (REDCORP VENTURE) --small market cap, lower grade

I suppose I ought to remind you about the very high grade silver that MMGG has.

Sierra Mojada is a Silver District!
"The Sierra Mojada Property has produced in excess of 10 million tons of high-grade ore that graded in excess of 30% lead, 20% zinc, 1% copper and 1 kg (31 ounces) silver per ton that was shipped directly to the smelter. The district has never had a mill to concentrate ore. All of the mining was done selectively for ore of sufficient grade to direct ship; mill grade ore was left unmined."
(That's 310 million ounces of silver.  Who knows how much silver is left?)  That's the question with an explorer.

MMGG is set to spend some of the money in the recent financing proving up their silver and copper areas.  Also, they will be advancing a feasibility study for their zinc.  In the meantime, Merling Bingham, president of MMGG has said he has no need to raise any money until feasibility is completed.  Resources move to "reserves" upon completion of a feasibility study. 

I regret to say that I've fallen seriously behind in responding to all my email, as I receive over 100 questions per day, on average.  Please keep the email coming.  I read it all, and I find it invaluable in determinging the concerns of my readers.

I own shares of MMGG, and Abcourt, and neither company has paid me to write this article.

Sincerely,

Jason Hommel
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