Silver Stock Report
by Jason Hommel, June 2, 2006
This page can be read online at:
The free market is expanding to more parts of the world, and increased trade is leading to greater prosperity for more people around the world than ever before. http://www.silverstockreport.com/email/Clydes_speech.html
The free market (which I believe is best described as Biblical capitalism) is certainly being hindered by forces too numerous to mention, but including: paper money, usury, futures contracts, excessive government, corruption and ignorance among those in government, heavy taxes, trade restrictions, immigration quotas, welfare, minimum wages and other forms of price fixing, and government granted monopolies of patents. Due to all of this, I’m not under any delusion that the world will be dancing off into the sunset of economic prosperity of a true free market anytime soon. In fact, I think that the world will continue to reject some parts of the “unknown ideal” of the free market even after Jesus returns as King, because the Bible clearly mentions that there will be the occasional rebellion, even then, see Isaiah 65 and Zechariah 14.
But one of the essential features of the free market is that prices are allowed to change; and it is the free market price that regulates supply and demand, and not government. Higher prices are supposed to both stimulate supply and reduce demand; while lower prices are supposed to reduce supply and stimulate demand. A freely changing price best suits all market participants; because we live in a changing world, and it’s impossible for one person to oversee and manage everything for everyone.
Now, I list futures contracts as a mechanism that is upsetting the free market, because futures turn things upside down. Higher prices can lead to increased investor demand; but higher prices are supposed to lower demand. This is often described as “fund buying”. Higher prices can also reduce supply, if producers have hedged through futures, and locked in prices that end up being below the market price, due to inflation. Hedging can cause producers to lose money and go bankrupt in a rising price environment. (This nearly happened to gold miners Ashanti and Cambior in 1999 when the gold price quickly rose $70/oz.!) Foolish producer hedging also greatly upsets the workers, who rightly feel that they should be able to benefit from a rising market price. Worker strikes were recently affecting Industrial Penoles, who hedged zinc at about $1000/tonne, while zinc has traded as high as $3500/tonne.
Futures contracts are “rationalized” and “justified” because they are supposed to reduce price volatility, but instead, they increase it! Futures contracts are also “rationalized” because a business in debt needs to be able to lock in prices for something that they may need to either buy or sell in the future. But, again, debt itself is contrary to how Biblical capitalism is supposed to work; as people should not be in debt. Futures markets also drain away money that could otherwise have been allocated towards investing in production, instead.
Very wealthy traders can also use futures markets to reduce price volatility, and manipulate prices, by selling or buying far more of the commodity that may exist, and they can get away with this manipulation for years. Paper money is also a manipulation, because it allows “very wealthy traders” to exist in the first place. And when paper money is created at a governmental level (such as with the Federal Reserve), and when this is used to manipulate prices (such as with the exchange stabilization fund, or Plunge Protection Team), this is really not much different than communism itself.
But as bad as things are; things are getting better for more people around the world, especially as communism has collapsed in Russia and China, and as trade increases. And prices are certainly changing rapidly, especially in commodities and precious metals–which is better than stagnation, manipulation, and shortages — which are the end result of communism.
But under communism, nobody benefits from shortages. People just have to wait in long lines, or do without. Under the current slightly more free so-called “free market” system, we can benefit from shortages, through investing, and this is our opportunity.
A world-wide zinc shortage is looming, if not already here!
And you must act quickly, before other investors, to benefit the most from the looming zinc shortage.
The LME (London Metals Exchange) has 8.2 days of zinc inventory, and at current rates that these stocks are being drawn down, the LME will be out of zinc by November, 2006 — unless zinc prices rise substantially to cut back demand, of course.
Clearly, zinc prices must rise until industrial demand decreases, or zinc supply increases. But prices may rise a lot because zinc is primarily used in galvanized steel, and zinc is a very low cost component of galvanized steel. Zinc prices may also rise a lot because zinc supply cannot increase significantly in the next two years, as that is how long it takes to bring major new zinc mines into production. Zinc prices may also rise a lot due to the turbulent futures markets that can create both the prior downside price manipulation, in addition to a massive over-correction to the upside, along with massive price movements; both up and down, within the next two years.
Recently, copper prices moved up 12% in one day; while bonds pay less than 6% in an entire year!
On May 11th, precious and base metals paused from their roaring uptrend, and began to dip.
Zinc hit a high of $1.72/lb., and quickly dipped to $1.45/lb. But zinc has already shown the greatest strength, as it climbed back up to $1.70 again earlier this week. Even today, zinc has shown the greatest gains among the base metals, and is up 4.5% to $1.60/lb.
The annual world consumption of zinc is 10.7 million tonnes.
The stockpiles of zinc at the LME are rapidly declining; and stand at 240,000 tonnes.
10.7 M tonnes / 365 = 29,300 tonnes/day of world zinc consumption.
240 KT / 29.3 KT = 8.2 days worth of zinc, stockpiled at the LME.
At current draw down rates (240,000 tonnes in the past 6 months) LME stocks will be exhausted by November, 2006.
The next three article excerpts are from:
Zinc prices will stay above $3,000 till 2008, says Volcan
Posted online: Friday, May 26, 2006 at 0000 hours IST
MAY 25: Volcan Cia Minera SA, South America’s biggest zinc producer, said prices for the metal won’t fall below $3,000 a metric ton until 2008 because of a production shortfall.
Zinc will remain almost three times the average price for the past five years because of a scarcity of the metal, Volcan chairman Roberto Letts said in Madrid on Thursday. Letts said he wasn’t ‘‘convinced’’ there is a ‘‘bubble’’ in zinc prices.
‘‘There is good demand, and no new production, prices will stay above $3,000,’’ Mr Letts said. Zinc futures have risen 86%, and traded at a record $4,000 on May 11. Demand is forecast to exceed production, and investment funds are buying the metal as they diversify into commodities.
“At some time in the beginning of 2007, zinc supply is going to be so tight and the price will be astronomical and some people will not get their zinc,” Douglas Brooks, a manager at Nucor Corp (NUE.N: Quote, Profile, Research), told Reuters at Metal Bulletin’s zinc seminar in London.
Worldwide Zinc Crisis: How to Play it
by Tom Dyson (May 19th, 2006)
The world is out of zinc…
I’m not joking. All industrial metals are scarce right now, but none are as scarce as zinc. There simply isn’t any available.
I learned this yesterday on the golf course. Chris Hancock specializes in Asia. He is the author of a publication called the Asia Strategy Report. We were paired together in a corporate golf outing. While contemplating my approach shot to the sixteenth green, Chris started talking about zinc…
Kohler Inc. is a huge manufacturing conglomerate, best known for making bathroom fittings like sinks, latrines and faucets. They coat their products with zinc to stop corrosion.
“I was just in Hong Kong,” Chris told me, “and while I was there, I met up with a friend of mine who’s the manager of several Kohler plants in China. He told me they’re having trouble with zinc… they can’t find it anywhere.”
Chris continued: “At first I didn’t pay much attention. But then at dinner that night, I sat next to a guy from my MBA class. He’s an investment banker with UBS Warburg. He says all the traders at Warburg are buying zinc like crazy and that the zinc price is about to run. But get this…
On the plane back from Shanghai, we start chatting to the lady in the seat next to us. It turns out she manages a plant in Chicago for one of the large office supply retailers. She said she’d been in China visiting factories. We told her we had been doing the same thing. We asked her how her trip went – if she’d had any problems sourcing materials for her plant – and she told us she did. She couldn’t get hold of any zinc!”
I hate to say, “I told you so”… no, actually I love it…but that’s not the point. The point is, on July 20, 2005, when copper was $1.60/lb., I wrote that copper could reach $4.20, a rise of 162%! That was a bold prediction, and not a bad prediction, since copper hit $4.00/lb., within a year!
Excerpt: And what about copper? At current prices of $1.60/lb., $5000 is 3125 pounds. Again, it’s not nearly as convenient as 55 pounds of silver! Furthermore, most copper is produced in a form that is inconvenient to store, such as pipes or wire! Copper’s recent low price was $.70/lb.
I’m interested in copper because I have invested in several silver exploration companies that also happen to have copper with their silver, such as O.T. Mining (OTMN.PK), Mines Management (MGN), and Capstone Gold (CSG.TO). Just in the course of keeping track of my stock picks, I’ve watched copper prices rise over 100% in the last few years.
The copper market may be getting ready to see prices explode upwards. Now, if copper moved up 6 times like oil has, copper would be $4.20/lb.! I don’t think that’s unrealistic, since the oil market is probably more than ten times bigger than the copper market, and it’s much easier for smaller markets to see greater volatility.————–
So, why am I talking about copper when I was talking about zinc? (Besides to help establish my own credibility?) Well, the copper market is related to the zinc market. Both are base metals. Both industries have seen lagging investment for years. Both industries were plagued by very low prices making many mining companies suffer during 1999 to 2001. Both are booming due to demand from China.
But now let’s focus on a few differences. In copper, inventories at the LME have climbed four fold from 30,000 tonnes to 120,000 tonnes at the LME in about 7 months, from August, 2005 to March, 2006. see http://www.kitcometals.com/charts/copper_historical.html
But the LME still only has about 2.5 days worth of world copper demand (while growing).
And the LME is down to 8.5 days worth of zinc! (and still rapidly shrinking!)
With copper, there are substitutes. In some cases you can use PVC pipes instead of copper. Or you can use aluminum wiring instead of copper, as has been recently reported in China. The interesting point with aluminum is that aluminum has historically been priced higher than zinc, until only recently, when zinc prices rose higher than aluminum.
Can they substitute zinc’s primary use in galvanized steel? (About 75% of zinc’s demand?) I don’t know. In some applications, I’m sure they can do without, since the difference is a matter of longevity. But that’s a matter for the free market, and individual users to decide.
As long as zinc inventories continue to decline, and as long as we know that it takes at least two years to bring major new zinc mines to production, I think it’s safe to say that investing in zinc is a good idea.
So, how high will zinc go? Due to the shortage, the price-insensitive demand, growing world trade, booming China and India, and long time to new production, and exaggerated price movements due to futures markets, I think zinc could hit $4/lb within the next 2 years; but probably sooner. (And that implies that copper, which is typically about twice as high as zinc, could hit $8/lb., or maybe slightly less.) And when zinc begins to shortly hit new highs again, above $1.75/lb., I suspect that this “dip” in the metals will be over.
But I would not invest in the futures market, nor buy zinc options. That’s gambling; where your gain comes at another’s loss.
Instead, we can work to help solve the zinc crisis and shortage by investing in zinc exploration and mining, where our gain creates gains for others as they benefit from having available zinc!
Metalline Mining (MMGG.OB–symbol works at Yahoo! Finance) is my company of choice, as they are working on a feasibility study to show that they can produce nearly 400 million pounds of zinc per year for nearly 10 years, at a low cost of about $.25/lb. With higher zinc prices, MMGG could earn between $400 million and over $1 billion per year.
With about 50 million shares fully diluted, and a price of about $4.25/share, MMGG has a market cap of about $212 million. (I own just over 1% of the company).
MMGG also recently announced very, very good silver results, from 5 to 50 oz. silver per tonne. (May 11th).
There is not yet a resource calculation for those drill results.
You don’t want to miss out on MMGG. The timing right now is about perfect. The stock is on a dip from a recent high of $5.67 earlier this month. The overall resource market is on a dip since May 11th, since gold is off from $720/oz., and silver is off from the high of about $15. Zinc prices have remained fairly close to recent highs of $1.70/lb., and due to declining inventories, zinc prices are ready to continue upwards towards $4/lb. By Monday, zinc prices could hit new highs of $1.75/lb., and MMGG could open at or near $5.00/share.
Some of my past reports on MMGG and Zinc are:
60% in 60 days: that’s what zinc just did! May 9, 2006 MMGG was $3.85/share; zinc about $1.60/lb.
A comparison of two Zinc/Silver companies: WTZ & MMGG Feb 24, 2006 MMGG was $2.19/share; zinc about $1.10/lb.
MMGG: Here’s why you will make a fortune on zinc! Jan 28, 2006 MMGG was $1.77/share; zinc about $1.04/lb.
Silver Stock Picks for 2006 Jan 5, 2006 MMGG was $1/share; zinc about $.89/lb.
If MMGG rises to become a company worth $10 billion, earning $1 billion/year, (assuming MMGG raises $300 million to finance mine construction at $10/share) then that implies a fully diluted share count of about 100 million shares, and implies a share price of about $100/share.
I own MMGG, and MMGG has not paid me to send out this email.