This is off JKs web site a few months ago,I guess we now can add a moly story to this already good high grade ore body:
Bottom-Fish Action Report for Month of March 2008
A Wretched Month Pushing Speculators toward Capitulation
March 2008 proved to be a grim month for the junior resource sector as hedge fund managers continued to clean house and new money stayed on the sidelines as it surveyed the American foreclosure juggernaut. March is the peak month for the reset of adjustable rate mortgages; by July 2008 most subprime mortgages with initial low teaser rates will have reset to commercial rates under whose burden most subprime borrowers are likely to default. One might worry that the first quarter of 2008 was just a foretaste of the misery that will play out during the second quarter as the last batch of ARMs resets, but that would require one to assume that the market has yet to grasp the gravity of the situation.
Even if these NINJA (No Income-No Job-No Assets) borrowers could service the higher interest payment on their adjustable rate mortgages, it would be wiser for them to walk away and default on the loan. And while nine months ago the market may still have been mired in a pit of ignorance about the precarious nature of this situation, today nobody has the luxury of ignorance. I suspect that the market is discounting quite a bit of bad news short of an all out financial collapse. In late February Moody's estimated that 10.3% of American homeowners (8.8 million) had negative net equity in the homes, meaning that their mortgage is more than the current market value of their home. And this situation can only get worse. From 1998 until 2005 the average home value increased about 80%, from which peak prices are down a mere 15%. Given that the banks are reluctant to lend to any but the best borrowers, who by qualifying as "best" are unlikely to be in a hurry to try and catch a falling anvil, and that a glut of foreclosed homes is cascading onto the market, it is reasonable to assume a further 20-30% retrenchment of real estate prices over the next couple of years. Furthermore, with the passing of the Mortgage Forgiveness Debt Relief Act in December, which creates a 3 year window during which a borrower does not have to report as income any debt forgiven by the lender as part of a refinancing, or the loss suffered by a lender who forecloses on a home and liquidates it, submerged homeowners have additional incentive to walk away. In the state of California where I live we are already feeling the ripple effects as school budgets get cut. Municipalities that depend on property taxes are reeling from lower property values, though nobody is yet talking about the enormous tax loss-carry-forward bubble that will steamroll future tax revenue assumptions at the federal level. That will be something for the next president to contemplate.
The month of March also witnessed the ritual slaying of brokerage firm Bear Stearns, which had kicked off 2007 with a $170 stock price that gave this securitized mortgage production machine a market capitalization of nearly $25 billion. A liquidity crisis during the second week of March turned into an old-fashioned bank run that forced the Federal Reserve to stick its thumb into a hole that was threatening to tear apart the dike and allow a flood to drown the financial system. Bear Stearns shareholders woke up on St Patricks Day to learn that their shares which had closed Friday at $30 were now worth $2 each. The entire company was now valued at $292 million, though the price has since been quintupled to appease very pissed off shareholders, including employees who owned 35% of Bear Stearns. What amazed me is the story of Joe Lewis, a billionaire currency speculator who spent $860 million last September to accumulate a 7% stake in Bear Stearns at an average price of $107 per share, which he boosted to 8% in December, bringing his total investment to $1 billion. By St Patrick's Day this investment had shriveled to $22 million, a stunning 98% loss for somebody whose net worth Forbes Magazine had pegged at $2.5 billion. This caused me considerable consternation, because I assumed that somebody like that would have deployed the best talent available to kick the tires, and would not have been oblivious to the concerns shared by most of us lowly newsletter writers about the pyramid of marked to model financial paper, also known as rat turd riddled fruitcakes. Maybe he did, though as one friend suggested, maybe arrogance substituted for prudence. Nevertheless, watching Joe Lewis take a billion dollar bath on a pillar of the financial community cannot but have created unease among us speculators in high risk juniors with zero intrinsic value. We know our juniors COULD plunge to zero, but we assume they WON'T, an assumption that becomes quivery when we see a $25 billion hundred year old company go to nothing.
A financial catastrophe of the Bear Stearns sort should have caused the price of gold to build a firm base above the $1,000 watershed mark it had achieved in March, but, needless to say, down went the price of gold, and down went the resource juniors who only a couple weeks earlier during PDAC had shown signs of itching to emerge from a bottom created in the aftermath of the Martin Luther King Day blowout by Societe Generale. Almost immediately the financial media headlines were suspiciously blaring the end of the commodity "bubble". As the juniors headed lower investors who had bravely been riding out the storm began to question the wisdom of hanging on. For the first time since the August meltdown that signaled the end of the securitized mortgage paper party I started to get inquiries from KBFO members wondering if it is time to capitulate. The KBFO recommendation that triggered the most questions was Lithic Resources Ltd (LTH-V: $0.25), though not far behind was Avalon Ventures Ltd (AVL-T: $0.94). The basis for my recommendations remains intact for both companies, with Lithic being a no-brainer buy at current levels. Avalon is also a no-brainer buy with the long view in mind, but right now the "falling off a cliff" chart pattern for Avalon is being pulled by a sack of anvils in the form of a $17 million financing completed in December in the $1.55-$1.85 range that just came free trading. If you are a little bottom-fisher you should wait for the anvil to hit the ground and bounce a couple times before you scurry in and grab what you want. But if you have a steely head and a large sturdy sack of your own that can handle a bit of stretching, start looking to buy Avalon right now, because this stock has the fundamentals to create a V-shaped bottom.
Lithic Resources Ltd (LTH-V: $0.25) has been recommended a top priority bottom-fish buy in the $0.20-$0.29 range since 2003 and a good absolute spec value buy at $0.67 since July 2007. Although Lithic has solved the slow drilling problems that plagued it last year, is encountering the high grade zinc mineralization through infill drilling that management needs to support its goal of doubling the sulphide resource at Crypto, has discovered that Crypto has a high value indium content that bestows a strategic development premium on this deposit, and within a few weeks will be drilling wildcat holes that could deliver new and separate molybdenum, silver-lead, or zinc discoveries at Crypto, the stock has sagged back into the original bottom-fish buy range. Lithic's plight is emblematic of what has been afflicting the entire resource junior sector since November, and if you are willing to accept my hypothesis that the resource sector is on the threshold of the biggest boom ever witnessed, then I suggest you take advantage of the paper being dumped into the market by distressed shareholders. The company will soon report assays for holes #4 and #5, as well as catchup indium assays for #3. Now that Lithic has figured out the proper protocol for assaying the unusually high indium grades at Crypto it will be able to publish indium assays for all future holes in conjunction with the zinc and copper grades. Indium, which a year ago cost $1,000 per kg, now has a price of $450 per kg. Demand initially soared due to the emergence of flat panel displays, and may be gearing up for another major boost as a new type of flexible solar cell that utilizes indium gets commercialized. As with the rare earths that make Avalon's Thor Lake project so intriguing, most of the world's known indium reserves are in China, which has shown eagerness to restrict the export of strategic metals in order to support fabrication of end-user applications at home for export to the rest of the world. In late February Lithic reported indium grades for sections of holes #1 and #2 that ranged 102 ppm to 1,055 ppm, with the most impressive interval running 4.22% zinc and 184.9 ppm indium over 23.88 metres. Lithic's largest single shareholder, the Resource Capital Fund out of Denver, purged from the news release most of Chris Staargaard's efforts to make it easy for readers to monetarily quantify the rock value of the indium grades. Here is the trick: 1 ppm equals 1 g/t, indium is now worth $0.45 per g. The 184.9 ppm grade thus translates into a rock value of $83 per tonne on top of the $98 per tonne represented by the 4.22% zinc grade at $1.05 per lb. The high grade of 1,055 ppm over 1.2 m translates into $475 per tonne just for the indium. Unknown at this stage is what the correlation is between the zinc and indium grade in the Crypto deposit; while the zinc grade for the infill holes through #12 is not interesting to the market, except in a negative sense when it is low or absent, the indium grade will be well worth paying attention to. If indium is systematically present throughout the Crypto deposit, it could significantly enhance the economics of Crypto, especially because the green economy linked demand dynamics of indium will not likely correlate with the industrial demand dynamics of zinc. In addition there is the strategic aspect of a US source of indium to be considered. Lithic remains a top priority bottom-fish buy in the $0.20-$0.29 range, and represents excellent speculative value at these prices with regard to the Crypto project based on an implied project value of only $12 million.
The fact that Lithic is being dumped at $0.25 or less despite its fundamentals suggests that the downward pressure on the juniors is a peripheral phenomenon that is creating a profound buying opportunity for bottom-fishers who are not blind to corporate fundamentals and who do not share the pessimistic macro outlook that a financial apocalypse followed by a thirties style depression lies in store for the world. There is a serious disconnect between metal prices and the behavior of the resource juniors. One would think that with precious metals such as gold and platinum making record highs, and base metals such as copper inching toward recent record prices that are six times the level that prevailed five years ago, capital would be pouring into resource juniors working on advanced projects whose economics are very robust at present metal prices, or which are exploring promising prospect. |
