Great stock trades based on fundamentals and technical analysis.
In the spring, we highlighted a chart pattern on Metalline Mining called a Cup & Handle breakout. At the time, the stock was at $3.00 and we stated that the target for that breakout was over $5: http://greatinvestments.blogspot.com/2006/05/mmgg-cup-handle-breakout.html
That pattern played out perfectly, as the stock proceeded to trade over $5 both in May and in June.
Today, MMG is rallying on drill results indicating a potential new zinc deposit, and the stock is again displaying the same cup & handle chart pattern. In fact, if you look at the chart we showed you in the spring (weekly) next to the current chart (daily), you can see these charts are eerily similar, even down to the volume patterns:
In both cases, the stock was driven down on low volume by impatient sellers, and then exploded back higher on much higher volume when that selling pressure was gone and the fundamentals took over, recovering the previous losses. A handle formed each time as the stock consolidated the big recovery in a relatively tight trading range, as profit takers exited and new investors entered. A breakout from this handle consolidation is very bullish and points to higher prices to come.
With the depth of the current cup about $2.58, the Cup & Handle breakout target is over $6.50, about a dollar higher than the spring high. Interestingly, the P&F chart also points to a preliminary target of $6.50:
We’ve shown how the fundamentals point to a much higher stock price for MMG over the long term. Now, the technical analysis points to a much higher price, too. We don’t know if the current Cup & Handle pattern will play out as well as the last one, but we remain very confident in the long-term upside of the stock.
Acadian Gold Corporation (ADA in Canada, ADGLF in the U.S.) is a Canadian mining company based in Halifax, Nova Scotia. The company is focused on two main projects; the Scotia Zinc Project
and the Scotia Goldfields Project
About a year ago, with zinc trading at about .70/pound, Acadian worked out a deal with HudBay Minerals to purchase 100% of the previously producing ScoZinc from them for CAN$7.5 million, signing the letter of intent in December 2005 and closing the deal in July 2006. ScoZinc’s principal assets are a modern mill and zinc/lead deposits (the Scotia mine) 50km north of Halifax. With the price of zinc nearly tripling since they convinced HudBay to sell them ScoZinc, Acadian really hit it big with this purchase.
Acadian has already completed a positive feasibility study
for the Scotia Zinc mine. With much of the infrastructure already put in place by a prior operator, the project is basically a turn-key project with minimal start-up requirements, allowing the mine to be put into production in Q2 2007. The Scotia Zinc mine is expected to produce 39.8 million pounds of zinc annually at a $0.36 cash cost per pound. With zinc over $2, the pre-tax cash flow should be nearly the same as Acadian’s current market cap, which is approximately $60 million U.S. fully diluted. If zinc moves much higher in the next 6 months, which seems likely given the LME zinc inventories are on pace to be gone within 3 months
, the Scotia Zinc mine could produce more cash flow than Acadian’s entire market cap.
Acadian’s plan is to use the high cash flow from the Scotia Zinc mine to fund development of the Scotia Goldfields project
, which has 4 properties progressing to the pre-feasibility stage to determine their economic viability. This approach of using near-term cash flow from base metals to fund development of their gold properties is similar to that of Roxmark Mines, one of our long-term favorites that we highlighted in April
, and helps to balance the risk of base metals with the gold potential. Acadian also plans to issue a dividend to shareholders after zinc production starts, which is unheard of for a junior miner.
Acadian Gold has only a tiny fraction of the zinc of our favorite miner, Metalline Mining, but their near-term cash flow relative to its tiny market cap along with their gold properties make it a very attractive investment for those looking for a near-term zinc producer with good gold potential.
Technically, ADA tested its all-time high last week after recent MACD and money flow buy signals shown in the below weekly chart:
We believe investors who accumulate ADA under the .75 resistance area will be well rewarded in coming months when the stock breaks out from its base and heads much higher where it belongs. The market hasn’t yet recognized the zinc potential of this gold stock, but we believe this hidden zinc upside, which alone is arguably worth much more than the current stock price, won’t remain hidden for long.
Several readers have asked us what our target price for MMG is. We don’t use target prices, but we’ll try to give you a rough idea of how undervalued it is here by using a mining rule of thumb for valuation (additional to our previous valuation analysis which used 3 different methods to show a fair value of $13-21/share
when zinc was $1.57).
Here's an article on calculating the value of a mining stock: http://personalfinance.iii.co.uk/articles/articledisplay.jsp?article_id=2278403
Julian Baring, the well known City ‘gold bug’, used to value mining stocks
by taking, as a rough guide, 10% of the value as calculated in the previous
paragraph as being the correct value for the company in question.
Gold mining rule of thumb
Curiously enough, this rough and ready guide seems to hold good today.
Figures calculated by the Mining Business Digest in 2000, based on data for
corporate acquisitions in the gold sector, reckoned that those at the earliest
stages of exploration, with some inferred resources, would be valued at most at
around 3.5% of the underlying metal value in the ground. An average for those
with more tangible metal assets to develop would fetch around 11% of underlying
value while those in the early stages of production could see a value of
anything from 15% to 25% of the value of the underlying ounces of metal in the
ground. It is not a hard and fast rule, however, and those mining base metals
are valued at correspondingly lower rates.
There is some more data confirming this gold mining rule of thumb.
According to figures compiled by Galahad Gold and sourced from broker reports
and the publication Gold Stock Analyst, the average value placed on ‘ounces in
the ground’ in 2005 was $120 for second tier companies about to start
production, $50 an ounce for those with resources that had been measured and/or
indicated, and $32 an ounce for those with simply inferred resources. This
compares with an average gold price for 2005 of $444, making the respective
percentages 27%, 11.2%, and 7.2% – not too far from those quoted earlier.
If you take MMG's 5.8 billion pounds of proven zinc and don't count anything for their high-grade silver and separate zinc for which the resource hasn't been estimated yet (the SEC doesn’t allow U.S. companies to disclose inferred resources
), you can see how MMG is worth many times its current price:
Zinc today is at $1.9482/lb.
5.8 billion x $1.9482/lb. = $11,299,560,000 of proven zinc resources
$11,299,560,000 / 49.7 million shares fully diluted = $227.36 worth of zinc per share
10% of $227.36 is $22.74 per share value per Baring’s rough guide.
MMG’s zinc is a base metal, so some would say the value should be lower than for gold miners, but with its zinc project at a very late stage compared to most preproduction miners, and profit margins likely much higher than most gold miners (let’s say conservatively .35/lb. production costs, what Skorpion sold zinc for in 2003, for $1.9482/lb. refined zinc -- equivalent to $112.68 production costs for $627.20/oz gold, which would be very high margins for a gold miner), MMG should arguably get a higher value than gold miners.
To give you an idea of the upside once MMG gets to production, here are the numbers for HudBay:
3.11 billion lbs. x $1.9482/lb. = $6,058,902,000 of proven zinc resources
$6,058,902,000 / 124,796,513 basic shares outstanding = $48.55 worth of zinc per share
HBM closed at 19.28 CAD today, or about $17.16 USD per share
$17.16 / $48.55 = 35.35% of the value of their proven zinc
Baring used to say about valuing mining shares, “"Buy up to 10% of the in situ value of a deposit using current metal prices, hold up to 40% and sell above 40% taking no prisoners!!!!". Since HudBay is in production, and has other metal byproducts to help give them very high profit margins, we believe it is still undervalued, even as it approaches the 40% level for its proven zinc, as we expect zinc to move higher and HudBay’s profitability to go even higher.
When you add in the additional zinc and high-grade silver to the rule-of-thumb $22.74/share for the proven zinc resources, it seems clear to us that MMG is heading much higher than its current $3.63 now that its shares will be listed on a legitimate exchange and institutions around the world will be able to invest. If the price of zinc moves higher, as we expect given the supply/demand situation, the fair value for MMG will move higher as well. A year ago, HBM was at $3.75, so very high appreciation for zinc stocks as they advance their projects and zinc moves higher is nothing new.
Here’s the final weekly chart of MMGG before the rebirth as MMG (click on chart for larger view). You can see that in addition to the severe undervaluation pointing to higher prices, the chart is turning around and pointing higher as well.
Notably, all the big volume weeks have been up weeks, while the down weeks have been on lower volume. MACD is just hitting a buy signal. As in 2005, there was an extended period of several months in 2006 with negative money flow (the CMF chart at the bottom) and a sharp sell-off on lower volume. The 2005 sell-off ended with a sharp rally from under $1.00 to $5.67 with positive money flow all the way. With money flow just starting to turn positive and new investment from institutions expected on the new exchange, we’ll be interested to see how far this rally takes the stock in coming months/years.
While there may be some short-term pullbacks along the way, with zinc breaking out to new all-time highs and the company’s zinc feasibility study moving toward completion, it looks like the stock is poised to break out of its trading range and begin a new trend higher in coming months.
Metalline Mining to Begin Trading on The American Stock Exchange November 6
After months of no action and impatient investors bailing out on low volume, Metalline Mining announced this morning that their application for American Stock Exchange listing has been approved, and they will begin trading on the Amex on Monday
With zinc breaking out to a new all-time high, LME zinc inventories quickly getting devoured, and management on an international road show with institutional investors, the Amex listing is coming at a perfect time.
Many investors, particularly institutions, won’t buy a stock that’s on the OTC bulletin board, which has a reputation for being a “penny stock” haven with lots of scams. The Amex listing will give Metalline credibility and will put it on the list of many institutions around the world.
As arguably the best metal for investors today (http://greatinvestments.blogspot.com/2006/10/forget-all-other-metals-think-zinc.html
), zinc is attracting a lot of investment interest. The above chart of LME Zinc Warehouse stocks shows that the zinc crisis is headed for an explosive event within a few months as the zinc inventory is quickly headed for 0. Of course, the inventory can’t go below 0, so something is going to have to change to keep the inventory positive. Despite the near tripling of the price of zinc over the past year to near $2/lb., the demand for zinc has not slowed down the rapid pace of inventory depletion. The price of zinc would need to nearly triple again to make a new all-time high in real, inflation-adjusted terms. Basic supply and demand economics indicate zinc is headed for an explosive move higher. In the coming zinc crisis, the price of zinc will need to rise high enough to curtail demand significantly.
This article from earlier this year gives a great overview of the zinc market, with great charts as well as text:http://greatinvestmentarticles.blogspot.com/2006/07/case-for-zinc.html
Because GTI produced a positive feasibility study and got the similar Skorpion mine into production when zinc was at 35 cents, we believe that GTI will produce a very positive feasibility study for Metalline Mining now that zinc is over 5 times higher. With 5.8 billion proven pounds of zinc and a fully diluted market cap around $150 million, we continue to believe Metalline Mining is extremely undervalued for one of the world’s largest zinc projects at such a late stage of development, at about 1% of the value of their proven zinc.
For a quick valuation comparison, let’s compare Metalline to one of the few zinc producers, HudBay Minerals (HBM on the Toronto Stock Exchange).HudBay:
Zinc reserves = 21,400,000 tonnes of 5.3% zinc (1,134,200,000 tonnes contained zinc),
less about 85 million tons reserves mined in this year’s production so far,
leaving approx. 1,050,000 tonnes contained zinc reserves remaining
Resources = 4,900,000 tonnes of 7.4% zinc (362,600 tonnes)
Total = 1,412,600 tonnes contained zinc, or 3.11 billion lbs.
) on 1/1/06
124,796,513 shares outstanding (unclear what fully diluted is) x 19.07 CAD = $2,379,869,503 CAD x .89 = $2,118,083,858 USD basic market cap
$2,118,083,858 / 3.11 billion lbs. = $.681 per proven pound of zinc
(HudBay also mines some other metals as byproducts, which they apply as credits to decrease their cost of zinc mined)Metalline:
Iron Oxide Manto = 28,042,538 tonnes of 7.04% zinc (1,974,185 tonnes contained zinc)
(from page 29: http://www.metalin.com/Metalline,%20Sierra%20Mojada,%20Zinc%20060625.pdf
Smithsonite Manto = 5,431,050 tonnes of 12.08% zinc (656,070.84 tonnes)
(bottom of page 1: http://www.metalin.com/03-18-05.pdf
Total = 2,630,255.84 tonnes contained zinc, or 5.8 billion lbs.
49.7 million shares fully diluted x $3.10 = $154,070,000 fully diluted market cap
(there are only 34,126,661 basic shares outstanding perthe last 10Q filing
, but we’ll use fully diluted to be conservative)
$154,070,000 / 5.8 billion lbs. = $.0266 per proven pound of zinc
As a zinc producer, HudBay deserves a higher valuation than Metalline’s preproduction zinc project, but assuming Metalline can get to production, this comparison shows that the upside is enormous, even after the recent recovery of the stock from the artificially low prices caused by the one big seller we mentioned in August. Even though zinc is much higher now, the Amex listing has been approved, and its project has advanced significantly, Metalline’s stock remains well below its May high of $5.67. If they don’t get bought out, they’ll likely need to dilute the existing shares significantly during financing for the move to production, but even after discounting heavily for that dilution and the multi-year wait for production cash flows, Metalline has at least 10-fold upside, especially considering the zinc crisis and the high-grade silver they’re drilling.
Some investors have told us they’re worried that the cost of piping water in a long distance (an early October press release
indicated Metalline has located water 20 km away from the project site) may make the project unfeasible. However, Skorpion was proven feasible at 35 cent zinc even though they have to pipe water in from 45 km away (http://www.gti.co.za/Skorpion.htm
). Also, Metalline could locate the refinery elsewhere, near water, if the nearby water isn’t sufficient. Their earlier testing showed that they can easily produce a concentrate from the ore which they can ship anywhere in the world for refining, meaning they can locate the refinery wherever it makes the most sense from a tax incentive, power, labor, etc. standpoint. This flexibility gives them negotiating power with Mexico and other countries to get the best all-around deal for the refinery.
As we explained in August, we believe several companies will try to buy Metalline’s zinc project
after completion of the feasibility study. With the largest proven preproduction zinc project in the world that major mining companies will be able to buy, in a politically safe part of the world, Metalline Mining will be sitting in the driver’s seat when the cash-rich suitors with dwindling reserves come calling.
After suffering through the junior mining sector carnage and being held hostage by one big seller on low volume the past few months, we’re very pleased that Metalline Mining is finally graduating to the big leagues from the pee wee arena. Metalline Mining's typical shareholder profile will be changing drastically from bulletin board traders to high profile international institutions.
To us, the Amex listing under the new MMG symbol is Mmm, Mmm, Good.
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