The BarkerLetter

November 27, 2007

Greetings investors!

Uh uh …

First there was this proposed BHP Billiton/Rio Tinto Ltd. merger to create the world’s largest integrated mining company. Now the world’s second largest zinc producer is warning of lower earnings.

Am I the only one who thinks we’ve been too long at the trough?

Zinifex Ltd. of Australia has warned investors that rising costs, the strong Australian dollar and lower zinc prices could hold back earnings this year.  Net profit is still ontrack to exceed last year’s record result, but I think this is a harbinger of leaner times ahead.

I don’t like to be the skeleton at the feast, but higher costs and inflated currency values have created an artificially expensive operating climate for mineral explorers and producers.  A downtick or (heaven forbid) prolonged dip in metals prices could be disasterous.

Look, it’s the reverse scenario of a few years ago. After a prolonged bear market for copper, nickel, and precious metals (closer to a nuclear winter in fact), producers had wrenched down operatings costs so far that any upward moving in pricing sent profits and share valuations sky high.

In this reverse scenario, we’ll see it all go the other way.

Personally, I think BHP and Rio are both looking to their future survival, rather than a way to expand profits over the short term. They’re already planning into the next bear market. 

The only way to stay in business when aluminum and steel return to ’90s prices is to be the world’s largest volume producer with the thinnest margin.

But it’s always profitable to buy the right penny explorers, if you can get them cheap. Nobody ever went broke finding minerals, merely from producing metals at costs that were too high to sustain profitability in a dwindling commodities market.

Be real careful out there.

Kb

November 20, 2007

Greetings investors!

Last week I commented on how miners turned in lower quarterly earnings during the recent reporting season. That is particularly true of Canadian juniors, those with exposure to the Canadian dollar. 

I believe this trend will continue through the current quarter, which has seen unprecedented gains in the loonie’s value relative to the US dollar.

However, the experts say the temporary squeeze is unlikely to put off investors, who have continued to pump money into Canadian miners in the hope of cashing in on the next big discovery or acquisition.

I beg to differ ….

A number of base metal companies have reported lower earnings because of the high loonie.  That rapid rise has made doing business more expensive for many Canadian miners, especially those who record revenues in U.S. dollars but pay expenses in Canadian currency.

One example is FNX Mining (FNX.TSX), one of my favorite Canadian nickel miners. It posted lower 3rd Qtr. earnings despite record production. Its net income fell almost by half to to $12.5 million Cdn, even though revenue was higher.

On top of the higher loonie, labour and materials costs have risen across the board for miners, making it even harder to break even.

It’s why I’m not buying emerging or existing metals producers. I prefer grass roots plays trading for pennies. There’s a bigger upside there.

Careful out there.

Greetings investors!

I’ve been analyzing the one year chart for Canada’s TSX Venture Exchange. The CDNX index is mineral weighted, comprised of all the junior penny stocks which trade on the Toronto Stock Exchange. So it’s a good barometer of where stock prices are headed in the short and medium term.

What I don’t like about the chart is the  slow stochastic indicator which is currently overbullish, having pushed well past the 80 point mark. In fact it seems to have peaked and tipped downward in recent sessions. Also, we’ve had positive divergence of the MACD for at least three weeks now, and that looks like it will head south shortly.

On the plus side, the RSI, or relative strength index indicator, is well short of 70 and still climbing, so we could see the index travel further. I think over the short term we could see a minor correction but the uptrend is well established so any dip is destined to be short and sharp. The medium term outlook is quite rosy.

Will the CDNX reach its historic highs of +3300? I think it will over the longer term. Despite galloping commodities prices over the past 60 days, particularly in gold and zinc and lead, we haven’t seen a commensurate rise in the share prices of exploration juniors. I believe that is still to come. I think there are a couple of reasons for it, or maybe just one: The market has yet to see any results from all the drilling to get excited over. Agreed, there are lots of great projects and smaller mines coming on stream, but we haven’t seen anything in the order of a Voisey’s Bay (nickel, copper, cobalt), or an Ekati (diamonds).

Moreover, I’ve noticed one important difference from past mineral bull markets: We haven’t seen the characteristic eye-popping share valuations for juniors with big discoveries, where the stock price travels from mere pennies to $50 or $75 or $125 per share. I think one reason for that is merely the different way entrepreneurs are organizing their share structures. Rather than let their prices travel endlessly upward, companies that have added substantial value to their portfolios in recent times are creating more paper. This results in a larger market capitalization without creating high stock prices.

I think that’s a good thing, since it discourages selling. Also, I’ve noticed a lot of share giveaways, splits whereby newly created stock given away as a dividend to the shareholder base. This is often done when a company spins off its non core assets into another vehicle and ‘gives away’ the shares to its existing investors. Again, a good thing, since it keeps shareholders in the deal and even gives them another equity to invest in.

Without a big discovery and/or upwardly mobile share prices, we’re not likely to see the sort of investor hysteria of past bull markets. This is probably a good thing, since it ensures a more orderly market without those traumatizing and gut wrenching ups and downs of portfolio values.

The message to investors in this market is very clear: Go the distance, and don’t be in a hurry to sell.

Makes sense to me!

Kb

I’m looking at this Lundin Mining (LUN.TSX) buy-out of Rio Narcea Gold Mines Ltd. (RNO.TSX).

Lundin wants to establish itself as the next major global mining house in the base metals sector. Actually I’ve been watching both Lundin and Denison Mines (DML.TSX) to see which gets to be a $20 stock first. They’re both similarly priced now at approx. $13 and $15 Canadian per share respectively, with similar market caps. Both have been aggressive acquisitors in this market, though Lundin has a precious metals and uranium focus.

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Xstrata plc announced last week it was buying LionOre Mining (LIM.TSX) C$4.6 billion in cash.

I believe this is the beginning of a very sudden wave of consolidation in nickel. Nobody expected the metal to rise to its current price on the LME, much less stay there.

The top four companies in the nickel market reportedly have 65% of supply and most of the big projects. I suspect that’s far from where they would like to be.

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First Nickel Inc (FNI.TSX) gained a few cents today on news of a significant discovery on the north range of the Sudbury Basin in Canada’s Ontario province.

I’ve always liked Sudbury, partly because of a very interesting theory about its formation. Scientists believe a meteorite hit the region countless eons ago, turning a portion of the earth’s mantle inside out and creating rivers of exposed magma which formed minerals. To date, some 30 economic polymetallic orebodies have been discovered there.

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It looks like consolidation time in Canada’s Subury nickel camp is drawing near. First, HudBay Minerals Inc. (HBM.TSX) came out and said it’s considering North American nickel producers as potential merger candidates. Then UBS Securities Canada jumped on the bandwagon, calling FNX Mining Co. (FNX.TSX) a likely partner in such a scenario.

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