Zinc contrarian play in the inflation bailout times. MTS.v

So now when we are back into negative real rates and inflation is coming on I believe Zinc is worth our attention. Last time demand has picked up in 2003 when zinc went ballistic until mid 2006. It is recovery play on inflation expectation. Bailout will bring liquidity, demand will be recovering in western world and will still be strong in emerging markets. The problem with the price was that it forecasted increasing of production and Zinc surplus in 2009-2010. With spot price as low as 0.75 US/lb Chinese companies start cut production. Huge deposits which were supposed to come online are not in the pipe any more. Ozernoe deposit in Russia with more then 150 million tones of Zinc ore were supposed to be build into mine for 600-800 mil dollars. Now Lundin Mining is going out of the project and price tag has risen to 1.5 billion. Lundin Mining is struggling with low prices and high operational cost in Euro. Huge deposits are situated in Iran, Afghanistan or in Africa. Will you be able to finance them now? With record low inventories we are getting into rising demand. Housing market in USA will recover one day and even if it will happen in 2010-2011 you will not put new mines online within this time. Rising price will bring attention back into this market, this time most interesting will be deposits in a stable political environment which could be financed into production with infrastructure in place. Consolidation in the industry will be also very important driver.

Stockmarkets meltdown, Gold is flying high. SSRI, RGLD, SLW, AUY, MTS.v, TNR.v, SST.v

Trust is broken, system is falling apart. Too many bailouts and liquidity pumping and just a few solid assets without anyone promise and IOU squared by derivatives.

FED did not cut, but Gold is flying without it! Cut will come and will add to the fire.

All financial economy is build on Trust, there are very few tangible assets left. In commodities market and PGM you have your assets in the ground, defined by drilling and not just "PlayStation kids Credit Default Assumptions", you still need credit to build a mine, but you have tangible assets in a "safe" and if there is Demand for them you can build on its economics.

Today is a crucial day: with rising systemic risk finally Gold behaved as it supposed to be in a free market without government manipulations - Safe haven of last resort. Raise more then 85 dollars in a one day trade will bring Gold to the front pagers of newspapers in the world.

HUI and XAU are supporting Gold rise and showing final break out from falling apart general markets.

Game here was simple in a hindsight now: with the first margin calls in July Funds sold where they had a profit: commodities, fueling the Bear Raid of PPT intervention in Gold market. Today when assets are liquidated in a fire sell to cover derivative obligations in a reality of a tight credit markets it is very important that HUI and XAU have "decoupled" finally from general market.

Economics of Supply and Demand are very simple here: Stock market of the world used to be 51 trillion dollars. All we need here is 5% of it. Investors today have seen that Gold has decoupled of falling financial markets. Even if the markets will turn on the Election Rate Cut and all these liquidity pumped into the system, investors are going to Buy Gold as Insurance without any counter party risk. Assume 3% will go into physical markets of Gold, Silver, PGM and other commodities. It is 1.5 trillion dollars! They will just fly. With 1% going into HUI it will be 500 billion: it means all HUI companies will have to rise in their valuation 5 times. Now even divide everything by 2 - it is still Buy of a lifetime by any means.

Once this will happen the most "crazy and greedy" investors will take positions in Juniors: lets say 1% of all these money for the HUI: it is 5 billion - Juniors will have to rise Ten fold just to accommodate these demand for the goods in the ground.

These investors will meet money from Majors in HUI when they will start to buy resources and buy time which is the most precious ( in case of AIG bailout time was measured in 85 billions and 80% of the company respectively). They will spend another 10% of their valuation 50 billion

on buying into Juniors with resources.

You can play financials recovery as usual or you can chose the staff in the ground which today has received very bold endorsement from the Mr Market. (Mr Warren Buffet must be nearby now, they do like each other).

We need just 1% of the money running out of stock markets these days.

Today's action is when picture is better then thousand words.

Silver is showing its monetary function as well and gain here will be even more dramatic once money will come back into the sector.

Who will bailout US Dollar? LEH, MER, BAC, AIG, RGLD, SLW, SSRI, AUY, TNR.v, MTS.v

FED will cut rates: otherwise it is a "suicide option" for their friends: now it is apparent that domino bailout is in effect on the Wall Street. We still have room to go sharply down on fear metricks VOX, VXN, VIX.

Lehman Brothers LEH has filed for bankruptcy - FED did not protect it, Merrill Lynch MER is bought by Bank of America BAC for 50 billion, American International Group AIG is looking for 40 billion FED life support. Only chosen few will be saved - others will fight for themselves, financial assets will be unwind in the falling market. Selling pressure will add to selling pressure: FED needs buyers to prevent collapse, chosen few will get money with negative rate of return to taxpayers.

Last stage of operation should come into play: FED cut rates, awash market with liquidity, PPT will buy in the open market financial equity. They will try to talk all other central banks into rate cuts.

ECB, BOE to Pump Extra Cash Into Strained Money Markets

Anyway if systemic risk will be addressed by operations like BAC buying MER, US Dollar will go down and Gold will fly, against falling dollar and all other FIAT currencies. Ten global banks has created 70 billion dollar loan facility: time is not to fight the USD collapse, but to fight for financial system existence.

Today's action in Gold, Silver and commodities will be very important. Will Goldies finally decouple from financial economy mess and become new backbone of the Recovery?

Freddie Mac FRE & Fannie Mae FNM bail out and its downside for US Dollar.

Positive thinking manifesto.

According to the recent reports USA government is close to bail out Freddie Mac FRE & Fannie Mae FNM under the government control:

"Paulson Plans to Bring Fannie, Freddie Under Government Control

By Alison Vekshin and Dawn Kopecki
Sept. 6 (Bloomberg) -- Treasury Secretary Henry Paulson is preparing to announce plans to bring Fannie Mae and Freddie Mac under government control, seeking to halt the crisis of confidence in the companies that make up almost half the U.S. mortgage market. "

Now we can understand that operation in the open market by the world central banks in order to pop up the ailing currency US Dollar was the careful preparation for this bail out. I guess that too much is at stake to allow the newcomer get in the Washington DC mess. Georgia came in handy as well. With geopolitical risk economic worries are going on the second plan, choice is predetermined and USD is rising voting for USA military machine.

Without that intervention such a bail out could easily crash the US Dollar into another waterfall and make its "managed" depreciation impossible. Market manipulation has send USD dollar into Bear market reaction rally, Gold and Silver were trashed into the dust with investors running to the Exit. Investors confidence in Gold and Silver mining companies and Junior mining were shaken with a lot of casualties and money lost. Perfect storm in commodities market amplified by Bubble Vision commentaries on the end of the Commodities Bubble prepared the operation "Election Jump Start the Economy".

It came handy that few biggest US banks went short Gold just before the intervention in unprecedented amount. More details are in this great article.

What will be the consequences of such a bail out and why so many resources were put into this historical manipulation? At stake is a financial system of the world as we know it and its main reserve currency of choice US Dollar. This was the reason why European and Japanese central banks supported the intervention. All financial system is brought down to a still with toxic assets based on not only subprime mortgages, but also "primary" assets issued by Freddie Mac FRE & Fannie Mae FNM. Credit flow has dried out as confidence in a counterparty disappeared. Effective government overtaking of all liabilities issued by these agents means monetisation of this debt and its substitution effectively by government "currency" - Treasuries. More goods to sell with falling demand means lower prices. In case of Treasuries it means higher yield, real rates will go up. What about short term rates managed by FED? If after recent unemployment report anybody things about FED raising rates they better check their water supply. I will not be surprised if FED Cuts Rate in case the markets will tank further into the bear market territory. Welcome to the Stagflation world: Negative Real Rates (difference between FED short term managed rate and Real rate defined by the market in treasuries) like in the 2002 when Gold market was ignited to the new highs.

Threaten by deflationary pressures in the form of falling prices in housing, permanent Sales on the high street for squeezed consumer and falling financial assets prices on the Wall street FED will be always intentionally late to Raise the rate to fight inflation. Inflation is an increasing money supply be definition and with this bail out Pandora Box is open.

What is the magnitude of the situation? Both GSEs are holding and guaranteeing more then 5 trillion dollars in debt, it will go into the government books on the liability side in plus to the current 9.6 trillion dollars government debt. It is an astonishing 54% increase! Why is it negative for the US Dollar "value"? US dollar is a FIAT currency and supported only by perceived value of US government ability to collect revenues in the form of taxes and keep its supply "limited" to the real economic growth in goods and services produced by the USA Corp. When more money is chasing the same amount or falling amount of goods and services we have an inflation.

Let us make a quick "back of envelope" analyses of this M&A deal. USA Corp. is taken liabilities with fixed rates to be paid in the form of interest on Freddie Mac FRE & Fannie Mae FNM bonds to its holders like China, Japan, Russia, Middle East etc. On its assets side it is unwillingly getting falling in value houses as collateral for issued bonds. Assets are shrinking in value with falling house prices, cash flow is falling: people are not able to service their debt, late on payments and are walking away from properties. Common stock of USA Corp is going down - it is our "chosen victim" US Dollar. Then even worse is happening: in order to finance budget deficit and these adding to shortfall difference between fixed payment out to service debt and receivables from housing assets USA Corp is forced to borrow more to cover the cash flow gap.

Situation is becoming more complicated with need to save economy and its subjects from the bankruptcy: maybe Jim Cramer is right after all and USA Corp. will decide to extend mortgages and reduce the payments, US Dollar will be even under more pressure.

How will it play out into our investment approach:

1. Worst case scenario: USA is brought to the corner, depression is looming, elections are falsified, Iran is nuked and war with Russia started for resources. I do not know what to do or even how to live in such situation.

2. Goldilocks scenario: new way of building wealth is found. Make money and take profits; losses will be taken by the crowd - tax payers and they are happy to do it and even asking for more. USD is rallying further, markets are rallying, housing overnight is 30% up. I will write a book "You can do it too", get famous and will make my fortune by selling it.

3. "Positive scenario". FIAT currencies are chosen victims. Bail out is taking out the strain from the financial markets, foreclosures are managed by reducing rates and extending maturity. European agents are using the same medicine - inflation is a world wide normal cause of things. Rates are cut world wide to jump start the economy, government debt is substituting the debt of "falling agents" real rates are negative and all currencies are depreciating against real assets. New credit will make its way into the economy, but not into absurdly priced assets like standard housing or modern paintings, money will chase real resources and go into infrastructure which will make possible to build a new wealth. Gold and Silver will become more and more carrying its monetary function of value preservation, they will appreciate against all FIAT currencies, then will be mania stage with its following collapse. Trust is shaken about "last reserve of confidence" of USA, globalisation as a form of securing global resources market in exchange for Coca-Cola and Bubble Gum is finished, world is becoming more connected and fragmented at the same time. West has accepted the End of Empire stage, its last Prime resource - Military Machine is taken out of political and very costly equation. USA has concentrated on internal problems, new powers are rising, multipolar world is established with "fair" price for diminishing resources, which are rising in their value with rising demand from growing population. Nothing will be perfect as usual: it will put more strains on Supply side. Quality assets in a stable politically situations will be in the big demand. USA Markets will be in a range bound mood between greed, new credit chasing new opportunities and returning reality of hangover with derivative losses making its way throughout the system. One of the complications: WEST will have to reduce its quality of life style under the burden of debt service at least for a while in return for stability. EAST will be catching up with WEST in a new found consumerism happiness.

Deflationary camouflage has made its task: buyers in the commodities and PGM are scared, speculators are ruined, hedge funds are shutting down with fire sell now.

Time is to buy real assets with the best value, best management and best positions to benefit from recent historical event.

Those which are on the radar screens and will benefit first like Silver Wheaton SLW, Silver Standard SSRI, Royal Gold RGLD, Yamana Gold AUY.

Risky plays where fortunes could be made are in Juniors.

Some of them for further study are TNR Gold TNR.v, Silverstone Resources SST.v, Mantle Resources MTS.v, Suramina Resources SAX.to

I am not along this time for sure: clever money are already all over the story and even Used to Be Smart (UBS) guys are making interesting observations.

"UBS urges clients to buy gold - we already are say investors

Back at UBS the Bank states that it has seen "unprecedented" gold demand from India, from European consumers and from other Asian clients, that demand is very strong in Turkey and the Middle East and that it should pick up in Italy as of early September as the holiday season draws to a close. UBS is not alone in seeing this interest, with some Indian jewellers having to turn away clients and, with the Wedding and Festival seasons imminent, demand is expected to remain robust for the next few weeks. Diwali (the Festival of Lights, which is a very important Hindu Festival, the largest gift-giving and shopping festival in India and most popular for gold purchases, falls this year on 28th October."

Lundin Mining LMC LUN.to will company overcome its spell?

Everything depends on results. Now in company's value everything is discounted close to zero. No value for Ozernoe, it was a real problem: Russia's modern state of capitalism is noway better then mess in Congo if you are not connected into the right network. Looks like Lundin pass on this one. No value for Tenke Fungurume stake and it is understandable, hot guys in Congo did everything impossible to destroy value of their own projects. But what about Lundin's own operations and its strategic investments? Profits are under pressure with rising euro and falling Zinc and Lead prices, not so bad on Copper front. We are far and farther away from Lukas dream of 10 billion market cap. Will he bring his magic again? I am not sure, but I will not discount Mr Lundin. His trick should include diversification from Europe into new stable environment, spiced with upside in countries perceived less stable, but still manageable. If company will be able to get Wall street attention back and will come with strong production numbers logical steps will be to increase value of its strategic investments and move them quickly into development stage. On the radar are Mantle Resources MTS.v, Sunridge Gold SGC.v, Sanu Resources SNU.v and Nevsun Resources NSU.v. Situation become more for trading then for investment for our taste now. We have closed Puts protection and increased our Calls. Another approach is to accumulate potential targets of M&A activity.

Lundin Mining LUN.to LMC Mantle Resources MTS.v positive ZINC sentiment

Lundin Mining has around 26% in its revenue from Zinc but its recent slide was almost the same as Zinc metal price collapse. This changing Supply landscape will add fuel to short covering rally in Lundin Mining and Mantle Resources.

Snow hits Chinese lead and zinc smelters hard, boosting prices -industry insiders

"We previously predicted that there would be a surplus in China's zinc market in 2008. However, we will need to revise that forecast after the bad weather subsides, as zinc stockpiling may accelerate among downstream users,"

http://www.chinamining.org/News/2008-02-01/1201846285d8987.html

Very good article on Zinc, Lundin Mining LUN.to LMC and Mantle Resources MTS.v

I am following this Blog and found it very interesting:

http://www.greatinvestments.blogspot.com/

You can find a lot of information on Roxmark Mines RMK.v and some info on Mantle Resources MTS.v.

Mantle Resources MTS.v is halted

Must be some serious news are coming...Lundin Mining LMC LUN.to owns 10% of the company.

Mantle drills 27.61 m of 12.2% Zn, 2.99% Pb at Akie

"Mantle Resources Inc.: Assay Results for Hole A-07-43Monday September 24, 2:15 pm ET
27.61 Meters Grading 12.20% Zinc, 2.99% Lead, 20.01 g/t Silver
Akie Property, B.C.
VANCOUVER, BRITISH COLUMBIA--(Marketwire - Sept. 24, 2007) - Mantle Resources Inc. (TSX VENTURE:MTS - News; FRANKFURT:A0F7E1 - News; the "Company"), is pleased to report the following assay results for hole A-07-43, the first hole completed during the 2007 exploration program currently underway at its 100% owned Akie zinc-lead property, located in northeastern British Columbia, approximately 260 kilometers north-northwest of the town of Mackenzie.
Hole: A-07-43. (Az: 055 degrees; Dip: -81 degrees; Grid: 3400S/0105W; Elev: 1429 meters; End of hole: 629.72 meters)"

It is one of the strategic investments by Lundin mining LUN.to LMC.