Zinc

[basserdan]

From SI's MMG board....

From: Mr. Aloha 7 Recommendations 5/11/2007 11:38:03 PM

"Don Coxe's call this week is particularly bullish for base metals junior miners, so I took nearly verbatim notes on the metals discussion. This should make MMG shareholders feel really good about holding one of the best, if not the best, base metals junior with huge metals deposits in a politically secure area."

http://events.startcast.com/events/199/B0002/code/eventframe.asp

What I realize is that although we have to talk because of compliance problems and the kinds of clients that we serve, we have to comment on the big cap stocks, that more money is made in any boom like this by buying small caps. Yes, the risk profile is higher, but if you listen carefully, we’ve said the theme always is buying unhedged reserves in the ground in politically secure areas in the world. Then what that means is you’re better off if you can find small cap mining companies who have got reserves in the ground than you are buying big caps – the leverage is terrific, and you can also assume that they’re gonna get taken out, if the stock market obstinately refused to bid them high enough.

Therefore, it is important for people who say, “Do I really care that BHP bids for Rio Tinto?” Well, yes, you should, because the fact that Alcoa, Alcan, BHP, and Rio Tinto looking at the world really believe that the best thing to do is just look at each other, confirms what we also heard from an account on the West Coast, is the frustration that some of the big cap companies have at how they’re valued in the market place. This has been the best performing group in earnings in this cycle (big companies if you use a figure of $10 billion), and yet they still at substantial discounts and PE’s to the rest of the market. The argument that’s used against this, and it’s been thrown in my face time after time, is – “oh, that’s just playing the cycle – the only way to play the mining stocks is to buy when they’re losing money and are selling at an infinite multiple and you sell them as soon as the PE ratios going down to single digits.” The problem with that is that you would have sold them out 3 years ago, and if you had any left you would have sold them out 2 years ago, and if you had just a little bit left you would have been totally out of it by now, and that’s long before this latest runup. Even with the latest runups, these stocks are cheap, and they are absolutely necessary to the global economy.

There’s a big, big difference between the mining industry and the oil and gas industry as to pricing power. The oil industry has to face the fact that between OPEC and state owned oil and gas companies that the opportunities for the oil companies to grow their reserves and expand their production are shrinking, and that they’re competing with subsidized buyers to buy assets as they come up, and they also have to do deals with governments, and the number of governments that they can trust to do a deal with is shrinking at an alarming rate. So therefore, you can’t use the analogy that “well, the big oil stocks haven’t done anything so why should big mining stocks do something?” Because if you’re BHP, yes, you have some production coming from politically insecure regions, but there are no significant state-owned companies that you’re dealing with. The only big exception to that is of course Codelco in Chile, but Chile still maintains a very good environment for private capital to move in there, in other words what you do not have is anything like the OPEC situation for the mining industry. About 30 years ago, there was an effort in the copper industry to do just that, to create a CPEC, which was just another bad idea in the 1970’s that dissolved when the triple waterfall began for the commodities companies.

So what you’ve got here is a situation of a commodity class of absolutely necessary commodities where they actually have the opportunities to do reasonable deals with the governments, and if the governments try to nationalize them, they can see that they’ll hurt themselves, and they do not have state owned vehicles who can operate these facilities. That doesn’t mean political risk isn’t important – it certainly is – but they have got enough areas of the world that they can expand in and that they can make money in, and meanwhile, because of the fact that they’ve been subject to litigation and these problems, what we haven’t had is a supply side response, so therefore metals prices keep going up. Now again, I was up against the argument that, “Well, as soon as the U.S. economy slows down then metals prices are going to go down.” Now this is about as absurdly an Amero-centered idea as you’re going to get – the idea that the price of copper is driven primarily by building houses in the U.S. financed by sub-prime loans is something that only somebody that doesn’t even have an American passport to travel abroad should have. What we know of course is that demand is driven by the third world driven by China and India, and there’s nothing out there that suggests that’s going to dwindle.

The central concept of our time is that it’s the new middle class in those countries in particular and other third world countries moving in dwellings with indoor plumbing, electricity, basic appliances, and buying cars that create sustained growth in demand for metals. Furthermore, whereas in the last big cycle that we had after World War II, the cycle came to an end when plastics intervened and stopped metals prices in their tracks, and gradually moved metal right out from all sorts of applications. Well, back then, oil was $3 a barrel, Natural gas was 20 cents an MCS. Oil price and natural gas prices have gone up more than metals prices, so plastics, gas can compete, but if you saw the deal announced this week between Dow Chemical and Saudi Arabia, what they have to do now is move into an area where they get subsidized hydrocarbons to expand production of plastics because within the U.S. they’re competing for every barrel of oil and every MCS of gas with real users.

So the arguments that I’ve been given for why this cycle was bound to collapse the way things did in the 60’s continue to be wrong. The advantage of having those big caps out there, which do have to attract some notice, is it’s saying that we’re a long way from the top. But that does mean that when you can find small companies that have unhedged reserves in the ground in politically secure areas, you can expect one way or the other you’re going to make more money on them then you would owning the big cap stocks. So that takes the kind of help that our research department can give you to find these names, but everything that I talk about is to reinforce your view that that’s where you should be searching – you should be prospecting within the mining group, and you shouldn’t be assuming that since I’ve made so much money up until now I should cash it out and move money into real stocks. These are real stocks.

Now, one group I haven’t mentioned in this is the gold stocks. Gold sold off sharply again after trying to go through 700 and it’s struggling to find a base. As you know from the current Basic Points we’re taking the view that now there is a reason for investing in gold on a basis of something other than looking for a financial collapse because we are going to get more inflation and therefore buying the purest play on that within the metals group is a good investment and the fact that there’s been a pullback creates a buying opportunity. Our thesis on inflation is that we’re going to have energy inflation, we’re going to have metals inflation, we are now having food price inflation.

Conclusion at about 26 minutes:

So all in all, you can understand that I've been subjected to a lot of strong arguments from very smart people that basically say, "Well, it was a great run while it lasted, but this isn't a time for committing any new capital to groups." I feel as strongly as ever that the best is yet to come, and you've just got to be prepared for criticism from people when you do something now, when you buy stocks that seem to have gone up so much, and say they're actually cheaper now then they were 3 years ago.

Q&A:

At about 31 minutes, in response to a question about whether oil might be better investment than metals because of China's smaller percentage of world consumption of oil and growing need for energy:

For new money, right now, I still think that, oil sand stocks apart, the general mining companies are a better value than oil companies. It's just a question of how much you're prepared to put in to a group. But longer run, I still remain a bull on oil stocks, and we never sold them, we've just said where should new money go and where should your weighting emphasis be.

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