Mad Money IGMI & MMGG

Silver Stock Report

by Jason Hommel, Jan 24, 2006


Last night, I saw Jim Cramer on "Mad Money" on CNBC and he said that we have to use creative thinking when making investment decisions.  He was saying that oil pipeline demand will increase, and thus increase steel demand; and in fact, Jim recommended a steel company, Oregon Steel--see how creative that is?    It's almost as good as recognizing that inflation will be good for gold and silver, and thus, silver and gold companies!  But it's also amazing how more pipelines will be bullish for molybdenum prices, since 75% of moly is used in steel, and pipelines use a special kind of steel that is extra high in molybdenum!  Well, I decided Jim might be open to hear the moly story, so I emailed him (madmoney@cnbc.com) the following:

If pipelines will drive demand for steel, then won't molybdenum prices remain high, because pipelines need steel with molybdenum--the moly prevents corrosion.

Moly prices are up about ten times, from below $2/pound, to up to $40/pound, and this means big profits for old, pre-drilled moly projects.

The world's top molybdenum mining project is IGMI, Idaho General Mines.

Idaho General Mines (IGMI.OB)
http://www.idahogeneralmines.com/
36.8 million shares fully diluted (Jan 17th, 2006)-- after recent $3.8 million financing at $1.10/unit
@ $2.62/share
$96 million Market Cap
--needs to raise $415 million capital to build the mine
Grade: .11%-.09% moly/tonne, starting with .118% for first 5 years.
--Production Cost per pound = $3.15/lb. for first 5 years.
Ore Reserves: 1.3 billion pounds moly.
Expected Annual production: 35 million pounds moly, for first 5 years.

raising $400 million should not be difficult if the company can earn over $400 million per year as follows:

35 million pounds x $11.85/pound profit (at $15/pound moly) = $415 million dollars annual profit.
35 million pounds x $16.85/pound profit (at $20/pound moly) = $590 million dollars annual profit.
35 million pounds x $26.85/pound profit (at $30/pound moly) = $940 million dollars annual profit.
35 million pounds x $31.85/pound profit (at $35/pound moly) = $1115 million dollars annual profit.

If the moly price is high, at $35/lb., profits could be $1115 million dollars.
At a P/E ratio of 10, the company would have a $11 billion market cap.
With 90 million shares (after raising capital to build the mine at $10/share), each share would be worth $124/share.

IGMI is $2.62/share, today.

Sincerely,

Jason Hommel

Correction:  Production costs are estimated at $3.15/lb. over the first 5 years, not $3.50/lb., as I had been reporting. 

The News link here verifies that:  Idaho General Announces Exercising Mount Hope Molybdenum Property Option to Lease
http://biz.yahoo.com/bw/051026/265292.html?.v=1

To my surprise, today I noticed that Jim wrote the following only yesterday, which goes to show that those in the mainstream, (Jim Cramer) are catching up to what we've known for years, that this is the beginning of a major metals bull market--one that could last a generation

Mine the Surprising Mineral Shortage
By Jim Cramer
RealMoney.com Columnist
1/24/2006 9:59 AM EST

This column was originally published on RealMoney on Jan. 23 at 10:54 a.m. EST. It's being republished as a bonus for TheStreet.com readers.

Mineral shortage?

I sit here and peruse the downgrades and worries and handwringing about Newmont (NEM:NYSE) and Freeport-McMoRan (FCX:NYSE) and Phelps Dodge (PD:NYSE), and it gets pretty darned obvious to me that we don't have enough minerals to go around.

This is a new problem, everybody. I always figured that when copper kicked in, we would simply flood the market worldwide with production. I also believed that Newmont had unlimited supplies. Now I wonder if all the consolidation activity in minerals is because companies are tapped out.

This is amazing.

Despite the runs in Companhia Vale do Rio Doce (RIO:NYSE ADR), BHP Billiton (BHP:NYSE) and Anglo American (AAUK:Nasdaq ADR), I would continue to buy these if only because we know they all have more. They can meet demand.

But these other companies are running short.

If it weren't for the pro-Che man next door, I also would buy Southern Copper (PCU:NYSE) right here, right now. Only Anaconda fears -- anyone old enough besides me to remember that mining concern? -- and nationalization, ahem, keeps me from bulling that one right here right now.

Mineral shortage. Who woulda thunk it?

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Jim's former attitude is exactly what many thought.  They thought that higher prices for copper would stimulate plenty of copper production to cool off copper prices. But copper is up from $.75/lb. a few years ago to over $2.16/lb., with no signs of stopping.  So, people are waking up to the "mineral shortage", and copper inventories remain at about 2 day's worth of world demand, due to several factors.  First, "just in time" inventory practices.  Second, copper investors have been vilified as "speculators" and "manipulators" and driven from the paper futures markets.  This means that paper shorts dominate, but in the end, they ended up shorting copper they didn't have.  That means they promised to deliver copper they don't have!  The same thing has happened in silver and gold--too many paper promises, and not enough investment in the real things.

There were similar thoughts about moly--that higher prices would simply encourage enough production as it was thought to be very simple to add a "moly circuit" to many copper mines.  But, apparently, not even the copper/moly mines can keep up with copper--perhaps due to being diverted into focusing on producing more moly! 

Important news article, confirming we are in the right sector:

Earth's Limited Supply of Metals Raises Concern --Jan 20th

http://news.yahoo.com/s/space/20060120/sc_space/earthslimitedsupplyofmetalsraisesconcern

Getting back to news regarding IGMI, which is the "lowest cost moly project" that I think exists:

From: http://www.rocamines.com/i/pdf/nminer-jun242005.pdf
"As a steel additive, moly is used mostly in pipelines.  For a standard pipeline 30 inches wide by 1 inch thick, about half a tonne of molybdenum is required for every [kilometer]."

Annual moly demand is about 370 million pounds, or about 168,000 tonnes.

A few days ago, I found this article "PetroChina to build two oil pipelines" (bullish on moly, as moly is used in pipelines).  Remember, IGMI's moly project was drilled by EXXON!  The article actually discusses 4 pipelines to be built in China, two more at the end of the article.

http://www.chinadaily.com.cn/english/doc/2006-01/19/content_513590.htm

PetroChina to build two oil pipelines
By Wang Ying (China Daily)
Updated: 2006-01-19 06:45

The nation's biggest oil producer, PetroChina, yesterday said it has obtained the government's final approval to build two cross-China pipelines.

These will pump refined oil, such as gasoline and diesel, from northeastern and northwestern areas to Central China.

The two pipelines will start from Lanzhou, in Northwest China's Gansu Province, and Jinzhou, in Northeast China's Liaoning Province, and converge in Zhengzhou, in the central province of Henan.

A further extension will reach Changsha, the capital city of Hunan Province, south of Henan, PetroChina sources yesterday said.

"We received final approval from the State Council a couple of weeks ago to start building the two pipelines," said a senior PetroChina official, who did not want to be identified.

Industry sources said Central China is expected to suffer from severe oil shortages, which could see it short of about 10 million tons of refined oil products in 2010.

Beijing-based PetroChina will be the only builder and will invest about 12 billion yuan (US$1.5 billion) in the construction, Zhu Shihou, an official overseeing energy projects at the Henan Development and Reform Commission, said.

The PetroChina official said it would take one or two years to build the pipelines. "So we expect, as originally planned, to put the two lines into operation by next year or in 2008," he said.

The pipeline from Lanzhou is expected to carry 8 million tons of refined oil a year; the Jinzhou route is designed to have an annual capacity of up to 4 million tons, local media reports said.

The pipelines will pump oil from refineries in north-eastern and north-western regions, which will process crude oil imported from Russia and Kazakhstan. This will arrive in China through cross-border oil pipelines, the PetroChina official said.

China and Kazakhstan in December jointly announced the formal opening of their first cross-border crude oil pipeline, which pumps crude oil from the Central Asian country to Alashankou, in Northwest China's Xinjiang Uygur Autonomous Region.

The Chinese-Kazakh pipeline will initially carry 10 million tons of crude oil a year.

Another pipeline project is also under discussion between China and Russia, which could transport about 30 million tons of crude oil a year.

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And even zinc prices are screaming upwards, nearly doubling in the last 6 months from about $.50 to a new high of $1.01/pound!

This is highly inflationary!  It's not just copper, or moly, or zinc, or lead, or steel, it's all of them.  One of my friends who was a "best man" at my wedding called me this week.  He works with metal, and is required to memorize all the different prices of the different kinds of steel used in installing air conditioners.  With prices rising so fast in the metals, he certainly recognizes inflation, even if our government is in denial.  He just wishes he could convince his parents, but feels rather helpless, since he does not have a strong investment background.  That's how I felt, about 6 years ago, in 1999 when I began to convince my father.  After all my Bible studies, I realized it was more important to help my family, than to try and trust the government.

(Tip: my favorite silver/zinc stock right now is Metalline Mining, MMGG (OTC) , with a market cap of about $30 million, and has 4.9 billion pounds of zinc resources, with potentially the lowest cost of production in the zinc industry, and needs to raise about $300 million to build the mine, but plans to produce just under 400 million pounds of zinc annually.)

Articles:
Zinc 101: The Future of Metalline Mining Company -- by David Zurbuchen, Jan 2006
Metalline Mining (MMGG) for the long term Jan, 2006
Silver, Zinc, & Metalline Mining -- Hommel & Duncan Hsia, March 19th, 2005
--one correction for the article.  The word "reserves" should be "resources".

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Sincerely,

Jason Hommel
silverstockreport.com
bibleprophesy.org

Excerpt from my article: Bible Verses on how to Manage Money
http://www.bibleprophesy.org/goldismoney/biblemoney.html

Avoid the lures of communism, which is the result of coveting and stealing.  Avoid insurance, and social security, which are plans of communism.  Trust in God's ways.  God's ways are that the family should take care of the family, and that the Church should take care of widows.  The way of criminals is the way of communism, "let us all have one purse", which means that the family does not need to take care of the family, because the state has taken over the family duty.

Exodus 20:12  Respect your father and your mother, and you will live a long time in the land I am giving you.

1 Timothy 5:8  People who don't take care of their relatives, and especially their own families, have given up their faith. They are worse than someone who doesn't have faith in the Lord.

Proverbs 1:11   when they say, "Come on! Let's gang up and kill somebody, just for the fun of it
12   let us swallow them up alive as the grave, and whole, as those that go down to the pit;
13   we shall find much precious substance, we shall fill our houses with spoil;
14   cast in thy lot among us, let us all have one purse""
15   my son, walk not thou in the way with them; restrain thy foot from their path;
16   for their feet run to evil and make haste to shed blood.
17   Surely in vain the net is spread in the sight of any bird!
18   And they lie in wait for their own blood; they lurk privily for their own lives.
19   So are the ways of every one that is greedy for gain, which taketh away the life of the owners thereof.