Great stock trades based on fundamentals and technical analysis.
As we mentioned in November, some readers had questions about a water source for Metalline Mining (MMG) after an October press release indicated that, as part of the feasibility study, they needed to find sufficient water to supply the mine and concentrator operation. This was the biggest issue for those investors who thought it may be the only obstacle that could prevent the project from being economically feasible.
Today, Metalline Mining announced test results
on the first hole they completed. This testing suggests they have hit a large source of water. They experienced little drawdown from the first pump after 24 hours of continuous pumping at the maximum rate possible, so they put in a bigger pump to pump water at a 55% higher rate and still had little drawdown and an almost instantaneous recovery of the water level to the static level when the pump was turned off. With the static water level around 350-500 feet below the surface and the wells going as much as 1200 feet deep, we believe there is ample water there for their operations. Previous testing on the water indicated that the "water is ideal for use in mining applications." The consulting hydrologist stated "this is behaving like an underground river." They also have several other borings nearby that have very good production potential if needed.
Despite the fears of many, it appears securing a water source will not be an issue for MMG's mining and concentrator operation, and continued water testing should confirm that conclusion.
With copper and oil breaking down from recent support levels, investors have been fleeing the commodities sector recently. A pause in the downtrend in LME zinc inventories has some investors fearing that zinc supply has permanently increased to meet demand, though we explained in a recent update why we believe two short-term supply surges have caused this pause
. The biggest zinc miner in the world, Teck Cominco (TCK) is down over 20% from its December 15 high, and many other zinc miners are also down significantly, including our favorite, Metalline Mining (MMG), down over 29% in the same 3-week period.
Canadian investment banking firm CIBC World Markets published a report yesterday titled "Base Metal Equities Correct -- Correction Setting up Buying Opportunity." CIBC views the current selloff in base metals mining stocks as a buying opportunity for the long term, particularly for zinc stocks. A table from this report shows why we’re so bullish on zinc miners longer term and why CIBC says, "our preferred equity exposure remains focused on zinc related names":
Exhibit 7. Base Case Supply/demand Summary
(000's tonnes) 2005 2006E 2007E 2008E 2009E 2010E
Aluminium 197 (76) 36 947 1,377 1,642
Copper (330) (4) 69 104 714 478
Nickel 17 (60) (3) (14) 24 86
Zinc (538) (355) (275) (96) 47 (380)
With LME Zinc inventories at just 90,000 tonnes at the start of 2007, we don't see how the zinc market can handle a supply deficit of over 700,000 tonnes over the next 4 years. We believe zinc prices will have to move up significantly in order to curb demand so above ground zinc doesn't run out completely. Since zinc is such a minor part of end products and thus is very price insensitive, zinc prices will likely have to go far higher than any analysts project to curb demand enough.
From the action in MMG yesterday it looks like institutions are buying what they can at around 3 and under. After being down about 9% on the day, MMG recovered those losses and closed up 4 cents at 3.07, an over 11% move up from the low and the second day in a row that buyers came in when the stock dipped under 3. Often a big reversal like that after weeks of sharp correction marks a bottom. 3 is a logical support area, as the 200-day moving average is around there and it’s the 50% retrace of the fall rally.
One gold site, http://www.goldstockbull.com/
, lists MMG as one of their top stock picks on their current lead story and says they’re buying any dips below $3. It looks like they’re not the only ones.
Another gold site calls zinc "The Most Undervalued Metal on the Market Today" in a detailed report: http://www.goldworld.com/reports/zinc_report_gw.pdf
We’re not sure whether the correction is over for MMG yet, but it remains our favorite stock for the long term and our top pick for 2007
Here are our top 5 stock picks for 2007. We believe all of these stocks should be great long-term investments and are worth accumulating at current levels or lower. Our top 5 picks for 2006 were up over 40% after one month
, after which we sold all except the commodity stock and shifted to a focus on long-term investments in undervalued commodity stocks, shifting from the greattrades blog
to the greatinvestments blog
. The one top pick for 2006
we held on to was up over 266% for the year.Metalline Mining (MMG, $3.59)
Our top pick from 2006 remains our top pick for 2007. We don’t know of any stock that has as high a likelihood of very high returns in coming years. We expect MMG to remain at the top of our list for years to come, unless someone buys them out in the next year or two, which we expect several companies to attempt
If you do a comparative valuation analysis of other late stage pre-production world-class zinc projects or mid-tier zinc producers (trading orders of magnitude higher) and discount back for the time and risks to get to production, you'll see how tremendously undervalued MMG is at about 1/4 of one year's projected operating cash flow. That’s an amazing value for what could be, in about a year, the biggest proven feasible preproduction zinc project in the world (and maybe the only one of world-class size). As the projected cash flow numbers get confirmed with the mine plan and the rest of the feasibility study in the coming year, we expect both the time and risk discounts to decrease significantly and the stock price to move up substantially as a result.
Since Metalline Mining only got Amex listing in November
and had virtually no institutional interest on the bulletin board before that, there's huge pent-up demand from institutions who will want a piece of the only zinc junior listed in the U.S., especially if zinc stays strong or breaks out to new highs this year. If they make it to production, which seems very likely given that the same team got the similar Skorpion mine into production at .35/lb. zinc (zinc is now over $1.90/lb.), MMG would have to move up enormously in coming years just to get a similar valuation to the zinc miners in production, which are arguably very undervalued. As they prove out their high-grade silver deposit, the market should start to recognize the precious metal value of the company as well.Roxmark Mines (RMKL in Canada, $0.21)
As we mentioned last month
, Roxmark Mines (RMKMF in the U.S. or RMKL on the CNQ exchange) should get listed on the Toronto Venture exchange very soon, which should bring in new investors who haven't been able to buy the stock on the little known CNQ exchange. By the end of the year Roxmark should be in full production with their molybdenum mine and move toward 2008 production with at least one of their 6 former producing gold mines. The current market cap is around the same value or less than the value of their modern mill, which can process both molybdenum and gold, so there’s little downside risk and very high upside from the coming molybdenum and gold production. This article from last spring has a great description of the Roxmark story: http://www.321gold.com/editorials/moriarty/moriarty042006.html
.JER Envirotech (JER in Canada, $0.82)
We highlighted JER Envirotech in April
. Some production delays due to a supplier mixup held up operations at their new Malaysian plant until last month
, but now that plant is in production. With both WPC compounds and WPC panel boards now in production, the founder is moving to a technical advisory role and handing over the reins to a new CEO with extensive background in sales and marketing in the polymer industry
, who will lead JER as it shifts focus to commercializing their products and expanding their manufacturing operations globally. JER is working toward getting a U.S. symbol to make it easier for U.S. investors to invest in the company.Acadian Gold (ADA in Canada, $0.98)
We highlighted Acadian Gold
(ADGLF in the U.S.) in November. While it broke out to a new all-time high as we expected and has already moved up over 40% since our writeup, we believe it still has lots of upside as they go to production with their zinc mine early this year and use the cash flow from that production to advance their gold projects toward production. There are very few near-term zinc producers, and Acadian Gold could be hitting production right around the time that LME zinc inventories hit crisis levels, though its small production (about 15-16,000 tonnes of zinc per year for the first 5 years) would have little effect on zinc inventories.Copper Fox (CUU in Canada, $0.60)
We highlighted Copper Fox
(CPFXF in the U.S.) in August. A more recent article
gives a good description of the Copper Fox story. If Copper Fox can produce strong results from its pre-feasibility study on its huge Schaft Creek project this year, it should move up significantly from its current very small market cap. With recent takeover bids for its neighbors (Barrick’s bid for NovaGold, Imperial’s takeover of bcMetals, Barrick’s takeover of Pioneer Metals), Copper Fox is in an area now more likely to get infrastructure built and is also a likely takeover target down the line (Schaft Creek partner Teck Cominco is the most likely bidder).
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Great Trades contains opinions, none of which constitute a recommendation that any particular security, transaction, or investment strategy is suitable
for any specific person. Great Trades does not provide personalized investment advice.