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:
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,
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:
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
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
The financing sounds fantastic, but what is the
cost? We don't yet know the interest rate or the terms.
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
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
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!
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!
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!
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
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?
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.
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
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?
Owner of 588,700 shares, worth $1.3 million.
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.
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
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
"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.
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:
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
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