Baja Mining Hedging Danger & Warning

Silver Stock Report

by Jason Hommel, October 16, 2007


Baja Mining (BAJ.TO, BAJFF.PK) (Symbols work at Yahoo! Finance)
Market Cap Fully Diluted: $423,148,040
http://miningpedia.com/?s=baja+mining

Baja Mining recently announced the financing for the construction of their copper/zinc/cobalt/manganese mine in Baja, Mexico.

Baja Mining Secures Underwritten Commitment for El Boleo US$515 Million Debt Financing - September 12, 2007

This sounds fantastic, as I have previously projected that this company could make from $500 to $800 million per year, after they are financed.  See:
http://silverstockreport.com/2007/Baja_Mining.html

Thus, the company has a forward P/E ratio of less than one, and shareholders stand to make a lot of money, as the share price could rise to about $20/share. 

But the devil is in the details.  How much will they make?  At what cost?  Who knows.  The biggest uncertainty now is the terms of the loan, not the mining project!

The financing sounds fantastic, but what is the cost?  We don't yet know the interest rate or the terms.

It has come to my attention yesterday, that this loan will require 5 years of hedging, that is still to be negotiated.  Isn't that interesting.  They already got the loan, but the required hedges are in negotiation?

So, given that I warned the president of Baja about hedging, I now take it public, since your feedback to Baja Mining might help them come to better terms with their masters who will require them to hedge.  Here is the letter I sent to Baja Mining this morning:

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John Greenslade,

Why did you hedge copper for 5 years, if you can pay back capital in less than 1, or 2?

Were you financed by banks who need to cover their copper short positions, because the hedge time period does not make any sense for your copper mining company!

Don't you realize that you can't even trade the futures more than 2 years out?  Therefore, how can you know the true cost of hedging copper 5 years out?  There's no market to help you determine the price of what you just gave away!

Why have you contracted to accept paper dollars, which could become worthless in less than 5 years?

Did you hedge all of your costs in dollars, too, even labor?  Can you lock in labor to work at set wages, regardless of inflation, and expect workers to produce for declining real wages even as the copper price runs higher?  That's why copper miners are striking now!

If current copper price trends continue, or accelerate due to hyperinflation of the dollar, what happens if copper prices go up to $15.00/lb.? !?!

If you hedge a year's worth of copper production for 5 years, at $3.50, and if copper runs to $6.50, flat, for five years, and if you lose $3/lb., your hedges could cost the company $1.8 billion!

Did you borrow $500 million to lose $2 billion?

Of course, since you have not yet made the details of your hedges public, I really don't know how bad your decisions are.

Perhaps the only thing that could salvage this deal is if you receive from your bankers, "options" on copper at prices right above your hedges, so that you can't be hurt by a rising copper price!

If the theory of hedging is that your bankers should not be hurt by declining copper prices, at least you should not be hurt by rising ones, after all, you are the miners!
You didn't even spend $100,000 on marketing your stock to get it over $2.50/share?

What could possibly explain your incompetence?

Are you just ignorant of all things financial?

I can't believe you were this stupid, after our discussions, where I warned you of the dangers of hedging.

Did you learn nothing from the bad example of Apex Silver, that borrowed $200 million, to suffer a $1 billion hedging loss after hedging zinc at $.70 for 5 years?!
I'm extremely disappointed, frustrated, saddened, and angry.

Sept. 12 (Bloomberg) -- Baja Mining Corp., the developer of Mexico's first copper and cobalt deposit, said lenders will require it to sell part of the first five years' output from the $568 million El Boleo project at fixed prices.

I ask that you address my concerns, in public, with a public news release, as soon as possible.

How can I endorse your company, with my money and reputation, given such financial and fiduciary negligence on your part?

Sincerely,

Jason Hommel
Owner of 588,700 shares, worth $1.3 million.



cc
jgreenslade@bajamining.com
klow@bajamining.com
info@bajamining.com
enorton@bajamining.com
mlaflamme@bajamining.com

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I followed up that letter with a phone call, and with an email comment from my wife:

So, I read my letter to my wife, who replies, "I'm selling".

I said to her, "But we still don't yet know the terms of the hedges."

She replies, "I don't want to chance it!"  --  "I have most of my money in that one, so I'm selling."

She is selling 8000 shares now.


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This evening, John responded:

Jason,  I find the  comments below insulting and unwarranted.  Yes we will be required to hedge.  The Banks,  management and our advisors fully understand the issues relating to hedging.  We have not finalised any details with the bank yet I this area.  It will be the subject of discussion over the next several months.  For the record we do not make decisions based on the opinion of Jason Hommel.

What could possibly explain your incompetence?
>
> Are you just ignorant of all things financial?
>
> I can't believe you were this stupid, after our discussions, where I
> warned you of the dangers of hedging.
>

--------------------------------------------------

And so, I responded again:

 John Greenslade wrote:
>
> Jason,  I find the  comments below insulting and unwarranted.  Yes we will be required to hedge.  The Banks,  management and our advisors fully understand the issues relating to hedging.

If you fully understand the issues, then why hedge for 5 years when you can pay back capital in less than 1?

If you fully understand the issues, why hang a millstone around your neck, and the necks of your shareholders?

If you fully understand the issues, why can't you answer a simple question?

If you fully understand the issues, why are you so insulted with my comment that questions whether you, in fact, do understand the issues?

If you fully understand the issues, why can't you show why it is "not stupid", or a "bad idea" to hedge in certain ways?  Why take such offense to such simple language?

If you fully understand the issues, why would you not realize that I did not send you "the opinions of Jason Hommel", I sent you math, facts and "what if" scenarios, combined with language that you can show the bankers to show the kind of "market pressure" you are under.

Hopefully, you will have enough brains to understand that my letter is exactly the kind of ammunition that you need to deal with and duel with the sharks, the bankers, and hopefully, you will realize that the letters you will receive from shareholders that you will receive soon in response to my making this public can also help you in your upcoming negotiations.

"Rebuke a wise man, and he will love you."
"Rebuke a fool, and he will hate you."

The last company that told me that they "do not make decisions based on the opinion of Jason Hommel" was Apex Silver, about a year before they borrowed $200 million to hedge zinc at $.70, and they ended up losing over $1 billion in hedging losses.

Be professional.  Or at the very least, act like an adult.

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Baja needs our help!

And with that, I turn this over to you, the investing public.  To make your own feelings known about hedging, to help John in his negotiations with the bankers who are trying to rape him and enslave him, and steal from the shareholders of Baja Mining, email:

jgreenslade@bajamining.com
klow@bajamining.com
info@bajamining.com
enorton@bajamining.com
mlaflamme@bajamining.com

It is my hope that this loan deal will fall through, or that every "hedge" comes with an "option" so that it will be impossible for Baja Mining to lose money in an environment of rising copper prices.

It is my hope that the stock price rises enough to give John the incentive to raise all the money he needs by issuing stock, at well above $2.50/share.

It is my hope that my fellow shareholders will shame John into actually spending just a tiny bit of money to advertise their company, so they don't have to rely on the bankers that can steal value from the company through hedging.

Thank you.



Jason Hommel
www.silverstockreport.com
www.miningpedia.com


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