This has been a brutal market, not only for housing and financial stocks, but for mining stocks as well. In May, we thought the bottom may have been put in for the junior mining sector selloff. However, that bottom lasted only a couple of months, as the sector broke to new lows and headed much lower during the summer amid the financial sector collapse. The selling accelerated in recent weeks, resulting in panic liquidation of junior miners at prices that would have been unthinkable just a few months ago. Panic and fear among investors has forced many to capitulate and sell whatever they could to raise cash as stocks seemed to endlessly move lower and lower. Though a number of marginal mining juniors won't make it because of high costs, insufficient ore, low grades, onerous debt, or political risk, the selloff has been driven primarily by the lack of liquidity, not by fundamentals (other than for high-cost producers that are losing lots of money while depleting their reserves).

Last week, the selling of mining stocks hit a crescendo, as the XAU and HUI mining indices dropped nearly in half from their highs less than 2 months earlier. Junior miners have been hit even harder than the larger cap indices, with many losing as much as 90%+ of their value since last year. However, since last week's panic lows, the XAU and HUI mining indices have rebounded 20% and 24%, respectively, even as the overall stock market had selloffs of over 500 Dow points on Monday and around 450 points today. Our favorite mining junior, Metalline Mining, has rebounded 30% since last week's low, closing higher on both big market selloff days. However, even after these rebounds, the junior mining sector is still much, much lower than it was a few months ago.

With the fears of global recession and the subprime-induced credit crunch, junior mining stocks have been clobbered in recent months. Investors have been liquidating whatever they can to get through this rough period, with even large producers taking big hits. As this article points out, "The juniors are in the midst of a fear-driven sentiment storm that is fierce and unforgiving... But eventually... those speculators positioned in the elite juniors should win legendary gains." Many investors have thrown in the towel on the sector, dropping some top-notch juniors to incredibly undervalued levels.

We believe the big money will be made by those investors who take advantage of rough periods like this to accumulate the junior mining stocks with the best long-term outlooks. As this article points out, "A temporary slowdown [was] predictable: Each decade has some sort of pause. What will follow this one will be, we believe, an even greater boom - that will last for many, many years... For miners, the best is yet to come."

In August, we highlighted three quality junior mining stocks that we believed represented outstanding buying opportunities amid sector weakness - the proverbial babies being thrown out with the bathwater. That week, the sector selling hit a climactic bottom, and these three stocks have since rebounded very nicely, rewarding those investors who took advantage of the market weakness to buy them, rather than selling out with the panicking crowd. We believe these 3 "babies" still have a long way to go as they grow up.

Metalline Mining (MMG)

We disagree with other pundits who are cautioning that gold will pull back from these levels. While we may see a short bout of consolidation to form the handle of this classic cup and handle set up, we don’t anticipate any significant pullback and believe that the 360-370 level that has acted as resistance for so long, will now become support.

The property owned by Metalline Mining (MMG) is located in Coahuila, Mexico in the Sierra Mojada Mining District. The district has high voltage electric power and is accessible by rail lines, a well-maintained gravel airstrip, and 250 kilometers of paved road.

There have been articles predicting the doom of base metals because China’s strong economic expansion is sure to slow down to reduce demand. However, even if China’s economic growth drops in half from the 10%+ rate it’s had over the past 3 decades, their economy will still be significantly larger each year than the previous year and will still demand far more base metals. China has a very long way to go to get to anywhere near half the per capita GDP of western nations. This recent article does a good job addressing the bearish view on base metals.

“Strength in commodity markets will be something we should see generally over the next 10 to 20 years,'' said Russell Read, the chief investment officer, in an April 24 interview. “We see a relative shortage of commodities stemming from a boom in demand from emerging markets, particularly India and China.''

Other than a one-day spike in June 2005, LME Zinc inventories had dropped nearly 90% in a very consistent pattern since April 2004, from 785,000 tonnes to a low of 84,825 tonnes, but that pattern appeared to have changed late last year.

From December through late March, a shallow uptrend developed, and media skeptics came out of the woodwork suggesting that the trend change in zinc LME inventories indicated a permanent shift in the supply/demand situation, as China became a “net exporter” of zinc. The truth was that a couple of short-term factors, delayed shipments from the world’s biggest zinc mine and a change in Chinese export tax law, had helped to create a short-term surge in refined zinc supply, causing a temporary pause in the downtrend.

There were three main takeaways we got from this trip:

1) There’s an incredible amount of infrastructure in place at Sierra Mojada. It’s very rare that a world-class deposit will have a rail line, electric power, water, paved road, and 2 local mining towns with many low-cost workers with mining experience eager to work there.

It's even more impressive considering that the gold market underwent a major correction during the third quarter of 2006. With the threat of a recession looming in 2007, we think the Dow might have just posted its best results for the foreseeable future.