Zinc Has Dropped, but Silver Is Metalline's Hidden Treasure

We've previously written about Metalline Mining's (MMG) world class, low cost zinc project at Sierra Mojada, and the fact that the similar Skorpion oxide zinc project was valued at more than Metalline's current market cap when it was bought out by Anglo American upon completion of their feasibility study in 1999. Now, even though the price of zinc has dropped in half over the last year, it's still about triple what it was when GTI (Green Team International) put Skorpion into production. We believe it is near a bottom and should be strong for years to come: Why Zinc Has Underperformed this Year.

When GTI completes the feasibility study for Metalline's zinc project next year, we believe the project should be valued much higher than Metalline's current market cap even if zinc drops much more, because it is one of the few projects that can make significant profits with lower zinc prices, and it could be the largest project of its kind in the world over the next few years. Given GTI's success with the similar Skorpion mine, there's relatively low execution risk.

Metalline's project has many advantages over the Skorpion project, which was the first of its kind, and was built in tough conditions with no infrastructure in the remote Namibian desert. By contrast, we've seen firsthand the incredible amount of infrastructure already in place at Sierra Mojada, as we reported in our site visit report in May: Metalline Mining is the Real Deal.

Unfortunately, since our visit, the price of zinc has dropped 44%. Junior zinc miners have been devastated, with many projects now unlikely to make it to production because of their small size and/or high costs. MMG has dropped 23% in that time, which is a significant drop, but much stronger performance than most zinc juniors. Because of their project progress (one of the few sizable zinc projects well into their feasibility study) and likely profitability at much lower zinc prices, MMG has been able to far outperform other zinc juniors as well as zinc itself, and we believe this relative strength bodes well for when zinc rebounds.

While Metalline has been known as a zinc junior, few investors realize that they were a silver junior before the positive Skorpion feasibility study made them shift their attention to their world class oxide zinc deposit. Considering their 45 once productive silver mines never even had a mill to concentrate the ore, and direct shipped only the very high grade silver, we believe Metalline has an enormous amount of silver at Sierra Mojada, probably more than enough to justify the current market cap without consideration of the zinc.

Last Wednesday, Metalline announced it intersected 95 meters of 166 grams/tonne silver in a new zone that hadn't previously been drilled (http://biz.yahoo.com/prnews/071121/law018.html?.v=101 ), and awaits assay results from a number of other drill holes. This silver exploration work is completely separate from the zinc project, and much exploration work was done in the late 1990's. They've built a huge database of silver results from that previous work, and plan to construct a resource model and put together silver block model estimates soon.

The previous drill results included some very impressive intercepts, including one hole which "intersected mineralization with grades averaging 11 kilograms over a thickness of 9 meters" (http://sec.edgar-online.com/2005/06/15/0001031093-05-000002/Section3.asp -- top of page 4). We've never seen any other silver miner hit anywhere near as rich an intercept over that thickness. We believe the database of previous drill results will indicate that Metalline has already found many millions of ounces of silver, and we eagerly await the initial grade and tonnage estimates from their exploration.

Perhaps the most impressive part of Wednesday's news was that Metalline will have its own crews of trained local staff working two shifts on four drills on their huge historic silver district, and on the rest of their enormous, highly prospective property. They also will have their own assay lab to provide quick assays for timely feedback to direct the placement of new holes. Since they use Mexican labor which is very inexpensive compared to the costs of other miners who hire expensive contractors in much more expensive labor markets, Metalline will be able to accomplish an immense amount of drilling very efficiently in coming years. This efficient exploration work should enable Metalline quickly to grow into a sizable silver miner.

As a silver explorer, Metalline provides a hedge for investors in extended economic unrest. Silver is not only an industrial metal useful for many applications, but it is also a precious metal used as money. In fact, in many languages (e.g., most Romance languages, Chinese) the word for money is the same as the word for silver. Like gold, people buy silver to save, particularly in case paper money collapses in value. That gives it extra value in case of global economic disaster. In the recent economic uncertainty, silver has been breaking out to new highs along with gold.

Because silver is considered a precious metal, silver miners receive a much higher valuation than base metal miners, even if they are nowhere near production. With their stock undervalued based on their premier zinc project alone, Metalline receives no recognition in the market for their silver yet. We believe that will change soon when Metalline constructs their resource model and releases large volumes of results from their aggressive silver exploration program.

With the current turmoil in the stock market and fears of recession, some people fear a weak U.S. economy will result in a global recession, while others are confident that the global economy will continue to go strong led by developing nations such as China and India along with oil-producing nations. In such an environment, savvy investors look for investments that will do well in either scenario, such as base metal miners that can still make profits at rock bottom metal prices but have enormous volumes of base metals for huge upside leverage in a strong economy, or precious metal miners that will profit if the global economy hits hard times, sending gold and silver higher, or if economic strength continues to send inflation and precious metals higher. In Metalline Mining, investors get the best of both worlds, with one of the world's largest zinc projects likely to be produced profitably at rock bottom zinc prices (as the Skorpion mine did a few years ago), and a large amount of silver that they are aggressively and efficiently proving up.