Sons And Daughters Of BBCMF Metals/Silver,Gold,Precious Metals companies/Research.

[mick]

JULY 10 2007 4:00PM - Wow, a lot of commentary and market action today! As I write this, the dollar continues to wallow on the razor's edge and its next move could turn out to be perhaps the most important development for the PM markets in over a year. Unfortunately, the general stock market is teetering today and this has resulted in no carryover effect to the PM stocks on what might otherwise have been a pivotal day.



First up today, I would like to point out that the various pundits are starting to take notice of a recent paper written by Frank Veneroso, GATA consultant and "nuclear winter in base metals" proponent, based on his speech in April 2007 to the World Bank Executive Forum. In this paper, Mr. Veneroso argues that base metals have been subjected to an extreme level of derivative and hedge fund speculation which have resulted in historically high, unsupportable prices. In his view, this will shortly end in fiasco as copper, zinc, nickel, lead, aluminum and the rest sink in price below the marginal cost of production (falling 80% or more). Let me just say that Mr. Veneroso brings a tremendous amount of research and logic together to make these conclusions and that in the long term, he is absolutely right. Steve Saville points out, however, in the first major piece to criticize this work, that Mr. Veneroso has failed to account for inflation in his analysis. That is, a portion of the recent increase in base metal prices has been the result, in Mr. Saville's opinion, of the tremendous rate of increase in money supply, especially M3 and other high-order monetary aggregates.



While I think Mr. Saville makes a valid point, I actually have a slight twist on his observation: it isn't incipient inflation, per se, that Mr. Veneroso has failed to account for but rather the declining purchasing power of the dollar in terms of other currencies. That is, in almost every other form of money the rise in base metal prices has not been nearly as big. For example, copper is up by a less impressive 200% in terms of euros compared to the 400%+ gains in terms of dollars. Still, failure to account for this currency effect does not make Mr. Veneroso's work any less relevant, it only means that the timing of when he will be proved correct may be somewhat delayed. This is because the situation can possibly go to much greater extremes, and it may take some time to get there. When we consider that only a small portion of the liquidity created during the most recent credit boom has been deployed into commodities, there might in fact be a lot of room left to the upside. At the end of the day, however, Mr. Veneroso will turn out to be absolutely right and for this reason every PM and resource investor owes it to himself or herself to read and understand this important, seminal research paper from cover to cover (I would note that the paper is still a draft -- work in progress -- so it might make sense to wait if you don't wish to read it again when a complete version becomes available.). I will even offer to help you figure out some of the more esoteric concepts if you are willing to invest the time to study this critical piece of work.



As far as what this all means in my worldview of the resource sector, I still believe that base metals will experience a severe decline toward the end of this year which is likely to punish most base metal mining and exploration stocks. What comes after that is anybody's guess, but at this point I am thinking that a strong level of support will form at some intermediate price such as $1.50 copper and this will serve as a launching pad for another major rally somewhere down the road. What I'm saying is that the coming washout in base metals in unlikely to bring the current resource boom to an end. In the meantime, I will continue to seek refuge in silver and gold dominant resource stocks.



Next, I would like to discuss the drilling results announced by Serengeti today. On July 5th, I noted that the drill plan made little sense to me but what I didn't mention is that I expected the results to provide very little new information, and therefore to disappoint. I based this thinking on my personal opinion that the hole locations were not very aggressive. Combined with a runup in share price, this was a classic setup that we have just witnessed with Southern Arc a couple of weeks ago. Unfortunately, my suspicions turned out to be correct and Serengeti was whacked for a brutal 35% loss today after reporting drill results which were pretty much identical to the type of results that previously drove the shares more than 2000% higher in less than 6 months. Interestingly, nothing has really changed with the prospects of the Kwanika project because the high grade core of the copper porphyry seems to be located southwest of the current holes, where Serengeti has not yet drilled any holes. Simply put, what we have here is a failure to manage and execute based on market expectations: the company should have put at least one new stepout hole into the high grade zone that they already know exists! Oh well, at least now there may be an opportunity to acquire the shares at a more reasonable price, which I may do after letting things cool off and studying the results more closely. And why again am I discussing Serengeti and Southern Arc, two gold companies hunting for gold-copper porphyry's? Oh yes, I said that one or more of these companies, along with Exeter, might help stoke the collective imagination of resource investors who are seemingly bored with this bull market. Well, so far I seem to be spectacularly wrong, but I'm hoping we are in the early innings.



In closing, I am going to quickly discuss a couple of silver stocks. First, Mines Management continued on a roll today and appears poised for a major move. I have not added to my position as yet but I am still looking for a quick 50% move higher (to $6 or so) on a technical breakout. Second, Sterling Mining continues to rise toward my $5.00 - $5.25 target without the benefit of any publicity surrounding its reported resources or any acknowledgment of its pending Toronto listing. Unless something bad happens in the next few days, I expect SRLM to very soon reach my 50% profit target at which point I will exit this speculative play.



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