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Friday, November 23, 2007


The Perfect Investment for an Uncertain Economy?

We've previously written about Metalline Mining's (MMG) world class, low cost zinc project at Sierra Mojada and the fact that the similar Skorpion oxide zinc project was valued at more than Metalline's current market cap when it was bought out by Anglo American upon completion of their feasibility study in 1999. Now, even though the price of zinc has dropped in half over the last year, it's still about triple what it was when GTI (Green Team International) put Skorpion into production, and we believe it is near a bottom and should be strong for years to come: .

When GTI completes the feasibility study for Metalline's zinc project next year, we believe the project should be valued much higher than Metalline's current market cap, even if zinc drops much more from here, as it's one of the few projects that can make significant profits at far lower zinc prices, and it could be the largest one in the world going to production in the next few years. Given GTI's success with the similar Skorpion mine, there's relatively very little execution risk.

Metalline's project has many advantages over the Skorpion project, which was the first of its kind, built in tough conditions with no infrastructure in the remote Namibian desert. By contrast, we've seen first hand the incredible amount of infrastructure already in place at Sierra Mojada, as we reported in our site visit report in May: .

Unfortunately, since our visit, the price of zinc has dropped 44%. Junior zinc miners have been devastated, with many projects now unlikely to make it to production because of their small size and/or high costs. MMG has dropped 23% in that time, which is a significant drop, but much stronger performance than most zinc juniors. Because of their project progress (one of the few sizable zinc projects well into their feasibility study) and likely profitability at much lower zinc prices, MMG has been able to far outperform other zinc juniors as well as zinc itself, and we believe this relative strength bodes well for when zinc rebounds.

While Metalline has been known as a zinc junior, few investors realize that they were a silver junior before the positive Skorpion feasibility study made them shift their attention to their world class oxide zinc deposit. Considering their 45 former producing silver mines never even had a mill to concentrate the ore, and only direct shipped the very high grade silver, we believe Metalline has an enormous amount of silver at Sierra Mojada, probably more than enough to justify the current market cap without consideration of the zinc.

On Wednesday, Metalline announced that they intersected 95 meters of 166 grams/tonne silver in a new zone that hadn't previously been drilled ( ), and await assay results from a number of other drill holes. This silver exploration work is completely separate from the zinc project, and much exploration work was done in the late 1990's. They've built a huge database of silver results from that previous work, and plan to construct a resource model and put together silver block model estimates soon.

The previous drill results included some very impressive intercepts, including one hole which "intersected mineralization with grades averaging 11 kilograms over a thickness of 9 meters" ( -- top of page 4). We've never seen any other silver miner hit anywhere near as rich an intercept over that thickness. We believe the database of previous drill results will indicate that Metalline's already found many millions of ounces of silver, and we eagerly await the initial grade and tonnage estimates from their exploration.

Perhaps the most impressive part of Wednesday's news was that Metalline will have their own crews of trained local staff working 2 shifts on 4 drills on their huge historic silver district plus the rest of their enormous, highly prospective property. They also will have their own assay lab to provide quick assays for timely feedback to direct the placement of new holes. With their extremely inexpensive Mexican labor costs compared to other miners who hire expensive contractors in much more expensive labor markets, Metalline will be able to very efficiently accomplish an immense amount of drilling in coming years. This efficient exploration work should enable Metalline to quickly grow into a sizable silver miner.

Being a silver explorer, Metalline provides a hedge for investors in case of extended economic unrest. In addition to being an industrial metal useful for many applications, silver is also a precious metal that is considered money. In fact, in many languages (e.g., most Romance languages, Chinese) the word for money is the same as the word for silver. Like gold, people buy silver to save, particularly in case paper money collapses in value. That gives it extra value in case of global economic disaster. In the recent economic uncertainty, silver has been breaking out to new highs along with gold. Because silver's considered a precious metal, silver miners receive a much higher valuation than base metal miners, even if they are nowhere near production. With their stock undervalued based on their premier zinc project alone, Metalline receives no recognition in the market for their silver as of yet. We believe that will change soon when Metalline constructs their resource model and releases large volumes of results from their aggressive silver exploration program.

With the current turmoil in the stock market amid fears of recession, some people fear a weak U.S. economy will result in a global recession, while others are confident that the global economy will continue to go strong led by developing nations such as China and India along with oil-producing nations. In such an environment, savvy investors look for investments that will do well in either scenario, such as base metal miners that can still make profits at rock bottom metal prices but have enormous volumes of base metals for huge upside leverage in a strong economy, or precious metal miners that will profit if the global economy hits hard times, sending gold and silver higher, or if economic strength continues to send inflation and precious metals higher. In Metalline Mining, investors get the best of both worlds, with one of the world's largest zinc projects, likely to be make it to profitable production at rock bottom zinc prices (as the Skorpion mine did a few years ago), as well as a huge amount of silver that they are aggressively and efficiently proving up.

Tuesday, November 20, 2007


Why Zinc has Underperformed This Year

Zinc's Underperformance vs. Other LME Metals

Despite the ongoing commodities bull market, zinc has been clobbered over the past year, with the price dropping nearly 50%. Zinc's underperformance relative to other base metals over the past year is puzzling when one looks at the LME inventories. LME zinc inventories have dropped more percentage-wise than any other LME metal over the past year, yet the price of zinc is down far more than any other LME metal. Here's a summary of each of the other LME metals and their inventories:

o LME lead inventories are actually up on the year, yet the price of lead has doubled this year.

o LME copper inventories are up over the past year, now at nearly double July levels, yet copper is also still up significantly this year.

o LME nickel inventories are about 6 times higher than a year ago, with a significant new source of nickel coming on line recently (pig nickel), yet nickel is still at around the same price as a year ago. LME nickel inventories are actually at the highest level since 2000, yet the price of nickel is up from about $3 to near $14 over the last 5 years.

o LME aluminum inventories are up about 35% over the past year, yet aluminum is only down about 3% in that time.

Despite the weakness over the past year, zinc remains in a longer term bull market. In the past 4-5 years, it has tripled, about the same or more than gold and oil, but it has been a much more volatile path.

Reasons for Zinc's Weakness

There are a number of reasons why the price of zinc has been weak the last year. Here are some of them:

1) Too far, too fast -- From late 2005 to late 2006, the price of zinc tripled. It moved up too far too fast, so it was bound to correct from that parabolic rally. It went from the best performing metal in 2006 to the worst performing one in 2007.

2) A surge in new supply from mine restarts and San Cristobal -- As a result of the huge rally in 2005-2006, a number of old mines that were shut down when zinc prices were much lower because they were uneconomic then have been reopening, as much higher zinc prices made them economically viable again. Another significant new source of zinc is the San Cristobal mine in Bolivia, which just recently started production after many years of development. The market is forward looking, so this surge in new supply has been factored into the price of zinc, even though it hasn't yet resulted in an oversupply situation, at least as measured by LME inventories.

The surge in new supply is only temporary, and doesn't provide the consistent growth in supply needed to meet the growing world zinc demand and offset depleting reserves at existing mines. There are only so many old mines that were uneconomic at lower metal prices and had enough reserves left to be mined economically today. After San Cristobal, the pipeline of sizable zinc projects for the next few years is pretty empty -- Metalline Mining's Sierra Mojada project is probably the only world-class sized zinc project that will be proven feasible in the next year or so. Despite the recent additions to supply, LME inventories indicate that the zinc market is still tighter than other metals, as it had a huge supply deficit to overcome from the last few years -- LME inventories have dropped nearly 90% over the last 3 1/2 years.

We'll soon see if the oversupply situation everybody and their brother have been saying is coming in the zinc market actually materializes, and how long it lasts. Per Scotia Capital's China Commodities Weekly, "China has been sucking up the world’s growing supply of zinc mine output, turning it to refined metals, and then using it for domestic consumption."

3) The perception that China produces more zinc than they can consume -- With the weakness in the zinc price, there has been a plethora of bearish articles on zinc focusing on China increasing their supply of refined zinc without mentioning that they've had to import far more zinc concentrate in order to increase their refined zinc output. China has significantly ramped up their smelting capacity, but their mine supply hasn't been able to keep up -- it's much easier to build a smelter than it is to find and develop a sizable zinc deposit. As a result of the ramped up smelting capacity, China has significantly increased their refined zinc output, but they've had to import a lot more zinc concentrate from foreign mines in order to do so.

The headlines discuss China's increased refined zinc output as if they had a glut of zinc when in actuality their imports of zinc concentrate have increased 178% YOY in the first 9 months this year -- that's an enormous increase in imports, dwarfing any refined zinc exports (China actually became a net refined zinc importer in September despite all these concentrate imports). Once the growth in global zinc mine output slows after the recent supply surge, China may not be able to continue to increase their concentrate imports, and we may have a zinc crisis on our hands rather than the expected zinc glut.

4) Fear of global recession -- With the subprime crisis and weakness in the U.S. housing sector, many fear that the world is headed for recession. Many argue that a U.S. recession means we'll get a global recession, which would mean less demand for base metals. However, even if the U.S. goes into a housing-led recession, that doesn't mean the world will go into a recession, though global growth may slow. Even if China's growth slows dramatically from 10%+ to even 5%, that would still likely mean increased demand for base metals, as the growth in base metals demand has been coming from developing countries, not the U.S. The U.S. doesn't drive the global resource markets any more -- with their huge savings rate and increasing consumption, China is becoming less and less reliant on the U.S. for their own growth. China and other developing countries have a heck of a long way to go to come anywhere near the standard of living of the U.S.

5) Technical shorting of zinc futures -- For most of this year, technical hedge funds have been shorting zinc futures based on a head and shoulders top pattern with a target in the $.90-1.00 area. In the fairly small futures market, these funds dominate, and yesterday's Metals Insider says, "The CTA systematic fund community is running short of this market to over 90% of historic capacity and they are not alone, we suspect." With everybody short zinc, it has been pressured down, but should rebound strongly when the shorts cover. Since zinc hit as low as $1.0185 overnight, it looks like the technical bottom is close.

6) A short-term surge in Chinese zinc exports ahead of an expected tax law change -- The recent uptick in LME zinc inventories may not be an indication of increased supply, but may instead be a reflection of a scramble to beat the impending tax law change in China where refined zinc will no longer receive a 5% export rebate but will instead be assessed a 5% export tax. As Metals Insider explained yesterday, "In China particularly, traders were looking for production and exports to rise ahead of a probable removal of export tax rebates and the possible introduction of new export levies."

Once this short-term surge is over and the tax law change is implemented, look for zinc to rebound, especially with the world's largest producer of zinc likely to export much less refined zinc, if any. Despite the short-term selling it's causing, this tax law change will be bullish for the price of zinc longer term: "The policy will result in a significant drop in China's zinc exports and tight global supply, which will in turn dramatically increase both global zinc prices and zinc concentrate prices. Domestic zinc smelters will have no choice but to accept soaring imported concentrate prices, and will probably be forced to reduce production, Wang explained." (

The Future Looks Bright

We believe zinc is near a bottom and won't go much lower. Mining costs have risen significantly in recent years, especially as measured in U.S. dollars, so fewer mines are economic at lower prices. If zinc prices move even lower, some marginal mines will need to shut down, as they have in the past when prices have dropped. Combine those shutdowns with the approaching shutdowns of mines whose reserves are being depleted, along with the dearth of sizable zinc projects in the pipeline, and the supply picture looks dire even if demand doesn't continue to grow. New, smaller projects or restarts that can only succeed at higher metal prices wouldn't make it at much lower prices. Even if prices rebound strongly, if there are any supply disruptions like there have been with nearly every other metal, the supply increase that everybody has been expecting may not come as planned.

Even most bearish analysts admit that the expected oversupply of zinc won't last very long -- most expect it to only go through 2008, with a deficit returning in 2009 because of the lack of new supply. In our opinion, zinc is pricing in a huge supply glut over the next year, and even if it comes as expected, with the forward-looking market likely realizing that a deficit will be returning soon, longer term the price is more likely to strengthen from here than weaken.

Although shorter term, zinc prices will fluctuate based on such factors as those mentioned above, longer term the prices will be driven by supply and demand. We're confident that growing demand for zinc combined with a dearth of new supply beyond the short term will lead to strong zinc prices for many years.


Roxmark Mines Plans Drilling Programs, Production Next Year

Roxmark Mines today announced upcoming plans on some of their gold properties.

As we mentioned in our update last month , "With the only operational and permitted mill in the area, and with a huge amount of existing infrastructure, Roxmark is much closer to production than any other juniors in the area." Indeed, Roxmark plans to re-open the Northern Empire Mine in late 2008. The Northern Empire Mine was operated successfully by Newmont Mines from 1934 to 1941, when gold was fixed at $35/oz. Now, with their recent drilling showing grades higher than when Newmont operated the mine, with gold over $800/oz, and with their onsite mill and existing underground workings, Roxmark should be able to quickly put the Northern Empire Mine back into production at minimal cost.

While they prepare the Northern Empire Mine for reopening, Roxmark is also planning a winter drilling program on the still undrilled 1,200 meter known strike length on the west extension of the Contact Zone at the Northern Empire property. Work is also planned for 2008 on the Leitch Gold Mine (once Canada's richest gold mine) and the Nortoba-Tyson property (a new source of gold and molybdenum), including "drilling of promising gold showings at the Nortoba-Tyson property."

Meanwhile, with Roxmark focused on the aforementioned properties, their joint venture partner Premier Gold is actively drilling on Roxmark's former-producing gold mines in the Geraldton Camp. Premier would like to quickly prove up the gold deposits there to quickly move those mines back to production in order to earn their joint venture interest. The local news had a story earlier this month on Premier's efforts:

To get the word out to investors, Roxmark has scheduled a road show in Montreal, Mississauga, and Toronto next week. Here are the details on this road show: .

As we explained last month , the Geraldton-Beardmore area has received a lot of interest recently, with Kodiak Exploration (KXL in Canada), Sage Gold (SGX in Canada), Ontex Resources (ONT in Canada), Mantis Minerals (MINE on the CNQ in Canada, MNTCF in the U.S.), and others all attracting a lot of investor attention with their promising gold exploration. With all of their programs in the works over the next year, Roxmark is well positioned to be the first in the area to realize profits from all this excitement.

Sunday, November 04, 2007


The Transformation of Pediment Exploration

When we first invested in Pediment Exploration (PEZ in Canada, PEZFF in the U.S.) in the spring, it was an early stage explorer with 10 promising properties. With the developments announced over the last 2 weeks, Pediment has now transformed into a potential powerhouse future gold producer. Now Pediment seems to have a large resource, a past producing mine, a top-notch advisory board, and growing institutional support. Meanwhile, gold has broken out over $800/oz, and the HUI gold stock index has broken out to a new all-time high.

Normally, when a stock moves up so much in such a short period of time, it's a good idea to take some profits off the table. However, we believe that Pediment Exploration is now a completely different company than just a couple of weeks ago, and the current environment is very favorable for such a promising gold miner.

We continue to view pullbacks as buying opportunities for aggressive investors and believe Pediment shares have a good chance to move much higher during this gold bull market.

NOTE: In our last update, we mentioned that Mantis Minerals (MINE on the CNQ exchange in Canada) didn't have a U.S. symbol. Since then, the stock has begun trading under the symbol MNTCF in the U.S., though on the pink sheets with no bid/ask. Investors need to choose the price for their order based on converting the price in Canada, which can be viewed at the CNQ exchange web site: (the Canadian dollar is worth about U.S. $1.07 now).


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