Baja Hedging ScenariosSilver Stock Reportby Jason Hommel, October 17, 2007
Here are some possible hedging scenarios for Baja, since I'm bullish on copper. Baja Mining (BAJ.TO, BAJFF.PK) (Symbols work at Yahoo!
Finance) Projected Annual Production: (At current prices.) What if Baja hedges 1/2 of their annual copper production at $3.50/lb. for 5 years? What happens if copper doubles in 5 years? Assuming costs would
double, too. What happens if copper goes up 5 fold in 5 years? Assuming costs
would go up 5 fold, too. Instead, let's assume that Baja tells the lenders requiring hedging to take a hike, and spends $1 million on marketing their story over the next year, to get the stock price up to $3.00/share, and that they issue enough stock to raise $515,000,000 at $3/share: + 171.7 million shares + 1/2 warrants = 257.5 million shares. What happens if copper doubles in 5 years? Assuming costs would
double, too. What happens if copper goes up 5 fold in 5 years? Assuming costs
would go up 5 fold, too. Shockingly, the company can make more money through debt and hedging, than through issuing shares, even if issuing shares at $3/share, and even if the copper price rises up to $18.25/lb. But this is only if the company hedges no more than 1/2 of their annual copper production. If they hedge more, things could be worse, and the losses could be much more than the single year loss of $900 million in year 5 if the copper price rises five fold to $18.25/lb. And nevertheless, it might be criminal to lose $900 million after borrowing $500 million. After all, not even credit card companies charge so much. Therefore, I think the company would be better off if they pressed for the following rights: 1. In the event that they pay off their debt of $515 million, then all hedges ought to be returned to the lender, so that the hedges will be the asset or liability of the lender, not the company. After all, once debt is repaid, there is no reason for any hedges that were put on because of any debt! 2. Cover all futures positions (short positions) with call options. This removes potential losses if copper prices rise. 3. Or, buy puts instead of hedges, which are the right to sell copper, but not the obligation, which protects Baja in case of a declining or rising copper price. And furthermore, regardless, the company should spend a little money telling their company story, And furthermore, the company should issue a press release about the terms of their hedging negotiations. Will the company lose money, or risk bankruptcy if they hedge all their copper production every year for 5 years, and if copper rises 5 times, and all costs rise 5 times? Not likely, but it starts getting close. So, what if they company hedges 100% of their copper production, instead of 1/2? What happens if copper goes up 5 fold in 5 years? Assuming costs
would go up 5 fold, too. Therefore, I must apologize to John Greenslade, and to Baja Mining. I let my religious zeal for "no debt" cause me to focus more on the likely losses, and the size of the losses, in a rising copper market, rather than the profits per share. The profits per share are likely to be higher with debt and hedging, and will likely range from $3-6/share, even all the way up to $18.25/lb. for copper (as long as Baja hedges no more than 1/2 of annual copper production, and we don't even know how much they will hedge), which, under that possible scenario, implies a share price from $30-$50/share. John, I'm sorry. I foolish and hasty. Baja Mining presents a great opportunity for investors. (I have not sold a single share.) But my original question still stands unanswered. Why hedge for 5 years if you can pay back capital in 1? I just can't understand that, and neither can many other investors. Please try to avoid all hedging after the loan is paid back. We still have not yet figured out how to properly account for debt and hedging at miningpedia.com. Perhaps this is part of my frustration, in that I'd like things to be more simple, and I hate the complexity and uncertainty of this issue. Sincerely, Jason Hommel |