Optimal Baja Put Prices & Target Share PricesSilver Stock Reportby Jason Hommel, October 19, 2007
For me, I'm most excited about the principles involved, which indicate to me that it is most profitable to avoid unnecessary obligations that come from unnecessary hedging. We ought to make no promises about the future, and make no oaths (which is what a debt is, and what hedging is).
This is why hedging 5 years out is stupid and evil, not to mention, potentially very costly. And if hedging is a requirement of a loan agreement already entered into, then it's my responsibility as a shareholder to advocate the absolute minimum and least costly hedging choices that are available, such as puts. We all sin, and participate in evil. I use paper money, which
I've discovered violates each and every single one of the ten
commandments. I have a credit card, so I borrow money on occasion. And the cash in my brokerage accounts is automatically swept into money market funds, which makes me a usurer and extortioner, Biblically speaking -- more than most people, because I now have nearly $400,000 in my money market accounts. But I try to minimise that as much as I can, and so I typically keep less than 5% of my net worth in cash. To calculate the minimal, and optimum puts for Baja, it is "conservative," and realistic, to assume that Baja will at least earn only a part (perhaps 50%) of today's cobalt and zinc prices. (The manganese production, which is unknown at this point, is not included). Without the copper, what will Baja earn per year? Now, Baja needs to be able to earn on their copper: $131,300,000 minimum needed per year to pay off their loan in 5
years. Now, to earn a minimum of $136 million, on 122 million pounds of copper is very simple math. $136,180,390 / 122,873,000lbs. = $1.10 per pound. To take it to the extreme the other way, we can also assume that the prices for cobalt and zinc go to zero, and in that case, the optimal, minimum copper put price would be: $131,300,000 minimum needed per year to pay off their loan in 5
years. Now, to earn a minimum of $196 million, on 122 million pounds of copper is very simple math. $196,300,000 / 122,873,000lbs. = $1.59 per pound. But that's an unrealistically high price to pay for puts, since the company will receive at least SOMETHING for the cobalt, zinc, and manganese, and this assumes the maximum put price if they receive nothing. The point I'm making is that even puts to sell copper at $1.59 would be extremely cheap, compared to the potential disaster awaiting the company if they hedge and pre sell copper at fixed prices. Furthermore, $1.59/lb is the maximum acceptable price for any copper puts required as a condition of any lending agreement, and anything over that must be considered as excessive gambling, and not in the best interests of shareholders who are investing in a mining company, and not a derivatives holding company or hedge fund. The company's feasibility study was based on the modest prices
of: Now, it's very important that shareholders demand that the company either not hedge at all, or buy puts, instead of selling "part of the first five years' output from the $568 million El Boleo project at fixed prices" as was the prior plan of the company. The difference, between puts, and outright pre-sold prices, to shareholders, in case copper prices double in 5 years, can be summarized as follows: Baja Mining (BAJ.TO, BAJFF.PK) (Symbols work at Yahoo!
Finance) Assuming fixed sales of 1/2 the copper at $3.50:
The difference to shareholders could be the difference between a share price of $27/share vs. $39/share! The loss to the company if they hedge 1/2 their copper at $3.50 is over $215 million, per year! The benefit of puts is that they don't lock the company in to bad copper prices. Furthermore, as I showed a few days ago, at: --if the copper price rises another 5 fold in the next five years, to $18.25, and if the company hedges half of their annual production of copper at $3.50, then the hedging loss could be: $906,188,375. My main complaint is that: 1. I don't want the company to lose $900 million/yr, in the event
copper rises to $18.25/lb. In this case, the math clearly shows no need to hedge, unless there is
a real risk that the company receives nothing for the manganese, and only
half current prices for cobalt and zinc, and if copper prices go below
$1.10. jgreenslade@bajamining.com Disclaimer: I own 588,700 shares of Baja Mining, have not traded any shares in over 5 months, and the company has not paid me to promote their company. My wife recently sold 8000 shares of Baja Mining, against my advice, and has not yet repurchased any shares. Sincerely, Jason Hommel
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