Great Trades

Victory Nickel is a nickel junior with a huge amount of nickel in 3 different projects with excellent infrastructure -- a relatively small one with very high grades requiring minimal capex to go to production, a very large one with lower grades but a huge amount of tonnage, and a third project in between the two with respect to size and grade. In addition, they have what's becoming an intriguingly attractive oil and gas related project in their frac sand overburden overlying the proposed open pit for their largest project (Frac sand is used to enhance recoveries in the oil and gas industry).

We first wrote about Victory Nickel back in August:

Victory Nickel

Another baby being thrown out in this market selloff is Victory Nickel (NI in Canada, or VNCKF in the U.S.). Victory Nickel is a fairly new nickel junior, having been spun off from Nuinsco Resources earlier this year. With a market cap of under $100 million , they have 3 promising projects, the main one being the Minago project in Manitoba, which, based on a recent scoping study, has an NPV@8% (Net Present Value using an 8% discount rate), assuming $7.43 nickel, of $334 million. They also have frac sand overburden at Minago with an NPV@8% of that resource of $32 million. Minago has excellent infrastructure, with a nearby paved highway, port, rail, and low power rates.

Victory also has the Mel project, with 83 million lbs of Measured and Indicated contained nickel, and the Lac Rocher project in Quebec with 25 million lbs of Measured and Indicated contained nickel (including a phase one section with 50,000 tonnes of 4.06% nickel, which can go to production with minimal capex).

Victory plans to get all 3 projects in production by 2009 or early 2010, using the early cash flow from the Minago frac sand and Lac Rocher's phase one to minimize the dilutive financing required to get the huge Minago project (one of the largest nickel projects in Canada) into production.

While we don’t like the outlook for nickel nearly as much as we do zinc and silver, if Victory can get to production with these projects as planned and nickel doesn't completely collapse below $6/lb (currently around $12/lb), the stock should move much higher in the next couple of years. With the recent weakness in the sector, market, and nickel price, the stock has dropped back to all-time lows (currently $0.53, less than half the high of 2 months ago, which was less than the stock's first day close of $1.21 in February), which we believe is a great buying opportunity for risk-tolerant long term investors looking for near-term production of sulphide nickel.

You can see more details on Victory nickel in this recent presentation.

(Here's the more recent presentation, from December)


Last month, Victory announced a dramatic increase in the potential for its frac sand project, with over 5 times the projected annual net revenue. More of the frac sand has been identified as potentially saleable, and with the increasing demand for oil and gas, the demand for frac sand at oil and gas projects in Canada and the U.S. has risen dramatically. Just yesterday, Victory announced the commissioning of Outotec to design the frac sand production plant, showing they're serious about moving this project to production quickly. Since the original scoping study on the frac sand project showed an NPV@8% of $32 million, and the projected annual net revenue is now over 5 times higher, Victory, with a market cap of around $100 million, is arguably undervalued based solely on the frac sand overburden project, which requires very low capex investment.

On the nickel front, Victory announced impressive drill results from Lac Rocher in October, as well as excellent metallurgical results for Lac Rocher in December, and then last month the receipt of a key approval for Lac Rocher's very high-grade Phase 1 extraction, all of which moves them closer to the goal of beginning Phase 1 extraction by the end of 2008. On Wednesday, Victory also continued to report impressive drill results for the huge Minago project, for which they plan to complete a feasibility study later this year. With one of Canada's largest nickel resources moving toward production, we believe Victory is undervalued for their nickel projects, and is a strong takeover candidate within the next year.

Just as with Metalline Mining (MMG), which, as we outlined earlier this month, we believe is undervalued based solely on their zinc project and also based solely on their north side silver project, we believe Victory Nickel is another company that has projects with excellent infrastructure in a politically safe location where you get outstanding value from 2 different types of projects. We really like the 2-for-1 concept where you get a huge base metal project combined with a precious metals/oil and gas project which can help the base metal project get to production without excessive dilution and/or hedging. The precious metals/oil & gas projects provide diversification in case the base metals don't do well, and also provide tremendous upside. Both of these companies' valuations should move up significantly as they move toward production, with stong potential for takeover bids within the next year.

It's been a tough period for mining juniors. Many investors have "thrown in the towel" on juniors as they've moved lower month after month, trying the patience of even the most patient long-term investors.

Gold, silver, and the XAU/HUI mining stock indices all hit a bottom on May 1. Many juniors have moved off their lows since then, coming off deeply oversold levels. Is the worst over for mining juniors? We think there's pretty good evidence that it is, or at least that the bottom is very close...

In recent years, May has marked an important turning point for the sector, with tops in May 2001 and 2002, bottoms in May 2004 and 2005, and the last major top in May 2006. If this month marks the bottom of this painful correction within this long-term mining bull market, we expect a powerful reversal higher to commence soon.


In this May 1 article, based on technical analysis, Alf Field said that "there is a strong probability that the correction in the gold market from the $1033 peak of 17 March 2008 is complete." So far, the May 1st low has held, making this call look pretty good.


This May 8 article by Troy Schwensen of The Global Speculator (posted publicly May 13) has some interesting technical analysis of gold, silver, and the XAU index. The closing comments provide a good description of what's been happening in the junior mining sector over the past couple of years:

As the gold sector presently looks to find a low and begin yet another climb up to new highs, many have been left wondering what on earth happened to the junior sector over the last 12-18 months. The lack luster performance of the juniors was reminiscent of the 2001/02 rally in the gold sector, where only the majors had any meaningful movement. Interestingly enough, 2001/02 was also a period of significant market uncertainty as the Dow Jones lost over 30% in the wake of the Technology bubble bursting. What followed in 2003/04 was a powerful display in the junior sector which made some impressive gains as the general market found some stability and investor confidence returned. Whilst 2007/08 has certainly been very different in many respects to 2001/02, the mood of the markets has been very similar and investor sentiment has consequently been poor. It is my belief that we may see a repeat of 2003/04 in 2008/09 as many of the loose sellers in these mining juniors have been cleared out, leaving the shares in primarily tighter hands. This clean out has been necessary when you consider the vast number of placements that occurred in the period of 2004-2007 leading up to the shake out. Valuations are attractive yet again and the stage is set for an explosive move. Where 2003 - 2006 saw most junior gold mining companies participate in the upward move, I get the feeling it will be primarily the quality companies that will be the beneficiaries this time around. That is, the entities which have substance and therefore a demonstrable exposure to higher metal prices going forward. Having been burned by many mining juniors over the last 18 months, I just can't see investors blindly investing with the same bravado they did previously. This makes prudent due diligence essential if you want to isolate the most appropriate candidates to buy.

Is the bottom in for mining juniors? We believe it is, at least for some of the best quality juniors, and we think long-term investors in these juniors will be very well rewarded for their patience in coming months/years.

Zinc on the London Metal Exchange (LME) is up over 6% this morning as news gets disseminated about the zinc mines being shut down by yesterday's earthquake in China's Sichuan province. This could be a big supply disruption that could last quite a while, as this was a serious quake with a number of zinc mines near the epicenter.

This article predicted this reaction yesterday:

Another London broker said the Chinese earthquake will have a bigger impact on the LME base metals than anyone anticipates. He said the majority of operations in the area of the epicenter are lead and zinc underground mines.

"By (Tuesday) you might find all base metals prices are higher and everyone will be saying it's because of this," a trader said.


Metals Insider reported yesterday that with zinc testing key technical support, the November lows, "black box" technical funds were short zinc to around 75% capacity, a net change of around 880,000 tonnes in the last 2 months:

It was also within touching distance of $2,150, which marks the last line of technical defence, representing the market lows dating back to November 2007.

Our fund-watching sources estimate that the CTA “black box” community is collectively positioned short of zinc to around 75% of historic capacity. As recently as March it was still in net long territory but has sold aggressively into the most recent down leg. The change of positioning over that period is equivalent to around 880,000t (compared to LME inventory of 125,475 tonnes).

These players are purely technically driven, responding to the deteriorating chart dynamics captured above.


Such a huge short position in a relatively small and thinly traded market, combined with key support holding and the big supply disruption from the Chinese earthquake, makes for an explosive move. The bottom put in back in November has held, as we suggested it might at the time, and this successful retest should solidify the bottom. LME zinc inventories have already indicated that the expected huge surge in zinc supply this year is disappointing the bears, as those inventories have been declining in recent weeks rather than climbing, and remain well over 80% down from just a few years ago.

The technicals and the fundamentals may have finally set the stage for a sustained rally in zinc. If so, stocks that have priced in much lower zinc, such as Metalline Mining, which we highlighted last week should do very well from the current depressed levels.

With the fears of global recession and the subprime-induced credit crunch, junior mining stocks have been clobbered in recent months. Investors have been liquidating whatever they can to get through this rough period, with even large producers taking big hits. As this article points out, "The juniors are in the midst of a fear-driven sentiment storm that is fierce and unforgiving... But eventually... those speculators positioned in the elite juniors should win legendary gains." Many investors have thrown in the towel on the sector, dropping some top-notch juniors to incredibly undervalued levels.

We believe the big money will be made by those investors who take advantage of rough periods like this to accumulate the junior mining stocks with the best long-term outlooks. As this article points out, "A temporary slowdown [was] predictable: Each decade has some sort of pause. What will follow this one will be, we believe, an even greater boom - that will last for many, many years... For miners, the best is yet to come."


Metalline Mining's Oxide Zinc Project Progress

In our last update, we mentioned Metalline Mining's (MMG) "best of both worlds" status with a world-class low-cost zinc project as well as an aggressive silver exploration program. Since then, Metalline has updated their oxide zinc feasibility study progress, including the announcement of plans to drive the production decline to the center of the resource and test mining to back up the information in the paper feasibility study. In the current environment where many projects that hadn't done test mining (and a good number that hadn't even done a feasibility study) have encountered unexpected difficulties going to production, we believe this test mining will significantly reduce the risk of the project and make it much more attractive for financing and/or potential acquisition. Driving the production decline before the completion of the feasibility study will give the project a head start on the move to production, saving significant mine construction time later. It also will provide much better information on both the oxide zinc and the north side silver/copper/zinc/lead mineralization.

The zinc feasibility study progress update also introduced an economic model involving selling their concentrate to existing refineries rather than building their own, which would eliminate the vast majority of the project's capex costs and accelerate the move to production. If the evaluation of this option proves fruitful, the economics would be extremely attractive in an environment of tighter credit. The operating costs would be higher with this approach, but still likely much lower than other zinc miners.

On Monday, Metalline announced the hiring of a large international engineering team (which had worked on the Skorpion zinc project) to complete work on the concentrator plant studies by September in order to accelerate completion of the feasibility study, expected to be completed by the end of the year. In an environment where many mining projects endure repeated delays because of a shortage of qualified personnel, this news shows that management is aggressively moving toward timely completion of the oxide zinc feasibility study.


Zinc bottom

In November, in an update explaining Why Zinc has Underperformed This Year, we mentioned that "We believe zinc is near a bottom and won't go much lower." Zinc was testing the $1/pound level then, and it's still testing that level now, nearly 6 months later. The fact that LME zinc inventories have increased over 50% in those 6 months (still historically very low and down well over 80% from the 2003 peak), yet the price of zinc hasn't dropped lower, indicates the worst may already be priced in. As we explained, "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."

As this article points out, there will be an "extremely large" shortage of zinc in coming years because of slow mine supply growth, leading to much higher zinc prices. In addition to lower mine supply growth, a number of the largest zinc mines in the world will start shutting down because of depleted reserves soon, including Teck Cominco's Lennard Shelf mine, scheduled for closure next year, and Xstrata's Brunswick mine, the world's fourth largest, scheduled for closure in 2010. We don't believe there will be enough new supply to overcome the loss of production as well as meet the increasing demand from emerging economies and infrastructure rebuilding in developed countries, resulting in the predicted "extremely large" zinc shortage.

We saw last year during zinc's big drop while LME inventories decreased significantly that the market was already looking forward to a recession and the bounce back in inventories caused by a short-term surge in supply during the last 6 months. We believe it's only a matter of time before the forward-looking market starts to recognize the coming shortages and starts to move zinc much higher.


The Silver Lining in the Oxide Zinc Project

On the silver front, the aforementioned oxide zinc feasibility study progress update also indicated that metallurgical studies on the oxide zinc materials showed "better than 80% recovery of the contained silver." Previously, we had not been expecting any silver by-product in the oxide zinc project. If further work confirms the feasible recovery of this by-product silver, that could have big ramifications for the financing of the move to production.

Last week, a deal was announced between Silver Wheaton and Augusta Resources where Augusta will sell to Silver Wheaton 45% of the payable silver from its mine, or about 1.2 million ounces per year for 18 years, starting in 2011, for a total upfront cash payment of $165 million. As explained on their web sites, companies like Silver Wheaton and Silverstone Resources have a business model of growth by pursuing such silver by-product stream deals. With good silver projects becoming more and more scarce, these companies are actively in the hunt for silver by-product streams

If MMG could do a deal like this with one of these companies for the oxide zinc project's by-product silver, they might be able to finance the move to production without any dilution, especially if they choose the option of outsourcing the zinc refining (at least initially). Perhaps the biggest worry investors have about late stage mine developers like MMG is about financing the move to production during a credit crunch. If MMG can do a deal that allows them to finance the move to production without dilution, while still keeping significant silver upside for shareholders from the north side, it would be an ideal scenario for current shareholders, and the stock would be worth a heck of a lot more.

The beauty of MMG's zinc project is that they may be able to finance the move to production with little or no equity dilution either with the very low capex option of outsourcing the refining, which most zinc miners do (MMG has a big cost advantage because of their huge amount of existing infrastructure and the cheap processing of oxide zinc), or with a silver stream deal on the project's silver by-product, or both. That would be a very unusual situation for a world-class zinc project, and would give current shareholders tremendous upside.


The Big Silver Upside

Since our last update, in addition to some promising drill results, the announcement of ramping up to 4 drills working 2 shifts, and the implementation of an on-site assay lab to guide operations, MMG also completed a 3D evaluation of the silver and copper content of an initial block of mineralization on the north side based on the drilling compiled to date. This evaluation indicated that there are approximately 30 million ounces of silver and 30 million pounds of copper in this block for a rough total of over $600 million of gross value using current prices. There also is significant zinc and lead in this block, but the evaluation of that content is still in progress. The 3D evaluation also showed in Powerpoint images that the block is a nearly flat-lying, wide and thick body, which would be amenable to low-cost bulk tonnage mining.

This initial block is just a small portion of their prospective property. It covers only 600 meters east-west within the 1,100 meters east-west they've been drilling, within the 3,100 meters east-west they've been sampling, within the over 5,000 meters east-west of the historic mining district. In addition, they have 14,000 more meters west of the district that has similar geology, as well as other prospective areas. So this 600 meters east-west is less than 1/8th of the east-west length of the historic mining district, and less than 1/30th of the east-west length of highly prospective geology. It's really the proverbial "tip of the iceberg," with 2 shifts working "4 diamond drills, 3 percussion drills, channel sampling and geologic mapping," all guided by an on-site assay lab to efficiently prove up the rest of the iceberg.

Given MMG's market cap under $80 million, this initial $600 million+ of gross metal value, which will be added to when the zinc/lead evaluation of the block is completed, is a great start to the evaluation of the north side mineralization, especially when combined with the several billion dollars of zinc in the oxide zinc project.

With MMG considered to be just a zinc junior, with a world-class zinc project on the south side of the property, this huge amount of silver on the north side just in this initial block indicates that MMG is well on their way to establishing themselves as a huge silver miner, too. Since silver juniors get valued much higher than zinc juniors, MMG should be getting a very nice revaluation as the market recognizes the transformation of the company. Watch for far more drill results and more evaluations in coming months as this aggressive transformation progresses.


Unique Value

With a world class zinc project being run by the same team that put the similar world class Skorpion zinc project into production a few years ago at historic low zinc prices (about 1/3 current prices), MMG clearly has enormous upside. Skorpion was valued much higher than MMG's current market cap when it got bought out by Anglo American upon completion of the feasibility study 8 years ago, at the trough of the metals bear market -- and they didn't have any silver. The oxide zinc project's silver by-product has the potential to allow MMG to finance the move to production without significant equity dilution, which would be a huge positive for current shareholders, especially during a credit crunch.

Separately, MMG's big silver upside from their north side mineralization that they're very aggressively working to prove up could end up being worth many times MMG's current market cap. The aggressive work being done to prove the silver value has already shown significant value, and will likely prove up much more value in coming months.

There's still much work remaining to be done on both projects, but it's clear that the work being done in coming months should add enormous value for MMG's shareholders. With the junior mining sector potentially recovering strongly from its doldrums in coming months, with zinc likely to start rebounding soon as the market begins to recognize the looming shortages, and with silver likely rebounding from its correction soon, the timing for MMG completing all this work to transform themselves into a near-term zinc producer and significant silver miner could be excellent.


Best Time to Invest

Some of the best returns in the stock market are made by investing in out-of-favor stocks during slumps in long-term bull markets, especially those that are improving their fundamentals by transforming themselves to increase shareholder value. The recent sector weakness has been a difficult period for junior mining investors, but we continue to believe that long-term investors in quality junior miners will be very well rewarded for their patience.