Jason Hommel-2received another missive from Mr Hommel today.
usually when he pumps a stock it has some effect; so far this doesn't seem to be the case.
here's the latest; an no I haven't repurchased my shares...
"One such old project that should now be highly profitable, is Baja Mining.
It's a copper/cobalt/zinc project in Baja, Mexico. They should be completing a bankable feasibility study in about 2 weeks, by mid May, I hear.
Pre-feasibility showed that they can produce over 132 million pounds of copper per year, at negative cash costs, and I'm sure that was by using very low and conservative prices for copper, cobalt, and zinc. Since then, cobalt has risen from about $10 to $30/lb, and is one of the "hot" commodities in dangerously short supply.
The mine life is probably in excess of 100 years. The metallurgy of this particular project has apparently now been solved as evidenced by successful test mining, and metallurgy reports.
With a market cap of $255 million fully diluted, a depressed (but rising) stock price, and needing to raise about $500 million, the question of the day for Baja Mining is, "What is the best way to raise capital? Debt and hedging, or share dilution?"
I asked my paying subscribers, in our forum, "How would you rather your company raise money to build a mine?". The results were clear. Twenty voted for issuing stock, nobody voted for debt and hedging.
The danger for Baja is that Baja has already lined up about 19 investment banks who may soon be bidding against each other for the right to loan them money.
Fortunately, Baja has recently acknowledged that if their share price rises above $2.55/share, they would rather issue stock, than borrow money and hedge copper. This should give the market (and even investment banks) a good incentive to bid the stock up to $2.55! IE, why loan money at 10% if you can earn up to 41% in a few weeks by buying the stock at $1.80 today?
Baja's share price will rise, because money will continue to pour into the entire mining sector. And copper is especially hot right now, as I explained on May 1:
Look at the copper chart of the past 5 years. You see copper took off from $.75 to $4.00/lb. Then, it dropped back to $2 something. That happened when China stopped buying for about 8 months. Then, about 3 months ago, China started buying again, and inventories started dropping, and for the past 3 months, copper prices have been moving back up again, and stand at $3.76/lb! Seems to me that copper could rise to $6/lb or higher, very quickly, within months perhaps.
Baja's project economics will continue to look better and better in our world of inflation.
Baja Mining's annual production may be at about the following:
132 million pounds copper/year @ $3.75/lb. = $495,000,000/year
6.8 million pounds cobalt/year @ $30/lb. = $204,000,000/year
79 million pounds ZnSO4 slat (a zinc byproduct) /year @ $1.20 (about 75% percent of the zinc price of $1.60) = $95,000,000/year
Total operation costs are approximately $65,000,000/year
EBITA would be about $729,000,000/year (at today's prices)
Cash flow would be about $800 million / year.
With potential profits in excess of $729 million per year or more with higher metals prices, the forward P/E of Baja Mining right now is about (255/729) 0.3, or way less than 1.
I recently caught up with a multi millionaire friend of mine from college, who taught me a lot about investing 9 years ago. We hadn't spoken in over a year. I told him about Baja's forward P/E, and he was shocked! He asked, "How do you find such companies?" Well, as you know, I do this full time, and I review a lot of deals.
I calculate a forward P/E ratio is about 1.24 at $2.55/share. Let's assume that Baja raises $540 million at $2.55. Let's assume that the company issues 212 million shares (no warrants). Add in existing shares and warrants of 142 million to get 354 million. Times $2.55/share, that gives a market cap of $902 million. Earnings could be as high as $729 million, or higher, with higher copper prices. (902/729 = 1.24.)
(By the way, MGN, Mines Management, a company with a copper/silver project, just raised $30 million at $5.00/share while it closed yesterday at $4.50/share. So, MGN raised money at above their current stock price!)
With Baja Mining's bankable feasibility study due in about two weeks, that could mean bankable profits for stockholders, if the study confirms the pre-feasibility studies.
As for me, if I see that Baja Mining engages in any copper hedges in the next few months, and if copper rises beyond where they hedge, I can merely sell my stock, hopefully at at least a 50% to 100% profit from today's price level.
That may seem a bit overly harsh against the company, or overly cautious, but that's what makes a market.
And just as I can say "Sorry, I don't need you," to a company that hedges, any company should similarly be able to say, "Sorry, I don't need you," to any banks that demand hedges for loans.
That's what being a strong investor is all about. The mining companies ought to trust in the free market, trust in a rising stock price, and trust in their shareholders without selling them out, and in that way, any company can avoid the pitfalls of doing business in a world of inflation.
In my opinion, Baja does not need loans, they need investment; and they need their investors, and they need to invest in acquiring investors.
Finally, the free market requires marketing. You have to tell people about your edge over your competitors. Mining companies ought to buy ads to promote their story on the internet at precious metals web sites, or buy email blasts from industry sources. (My write-ups are not for sale!)
Fortunately, Baja mining did an excellent interview with BNN, on April 26th, which tells the company story very well."