risk has gone up dramatically

I am amazed that the facts are well understood and openly discussed here but somehow holders continue to see the glass as half full.

Events of the past 2 weeks have virtually guaranteed a world recession, or depression as Oly‘s mega-bear plays out, with metal demand/prices dropping until the higher cost producers shut-down as they have in every previous recession. CMR by it’s own admission is one of the highest cost producers around, even if everything goes right with the plant. Heaps of new large copper mines are starting up but haven’t hit the supply side yet, especially Cu-Co mines in Africa, just as demand begins it’s steady drop.

The Aussie dollar was heavily over-sold as the Japanese all rushed to close their carry trade positions at once and the world’s commodity players all exited the Aussie once it became clear the commodity play was over. The Aussie is probably the most liquid and widely used proxy for commodity related investment exposure. Today the Aussie has already risen over 5% against the USD and JPY as the panic selling abates. IMO the future “clearing price” for metals will become lower in AUD as the USD falls from it’s liquidity preference driven bounce but surplus supply keeps USD metal prices low.

Regardless of how bullish your view on metal prices, the risk that CMR goes sub 2c is enormous. The Oxide plant will lose more money last quarter and this quarter while production is ramped up. Without a remarkable turn-around in world growth and metal prices CMR will likely not reach profitable production in 2009 and get closed down to stop the bleeding. This news will crash the share price further from where there will be a massive debt greater than $75M to be repaid by share conversion. Retrenchments, contract cancellation and keeping the plant on care and maintenance will all cost money so CMR would have to raise millions more on-top of debt.

During this time it will become abundantly clear that the Sulphides will not go ahead under current HNC agreement even if it is profitable. The very large capex in a recession is just not on and HNC has enough trouble keeping it’s own head above water, with a market cap now considerably less than the Sulphides project would cost. Even Oly now says it won’t go ahead unless HNC buys CMR for a song and waits for the market to improve. Frankly the Sulphides is a project for the next boom in 5-10 years time.

What price will debt-for-share dilution occur at? Well IMO the value of a company with a mothballed plant that requires money each month for upkeep would be about cash backing or less in this market, except CMR has no cash. Knowing this dilution is coming buyers will stand back and sellers will rush to exit bringing share price down towards 1c. The con-note holders will encourage this because the cheaper the share price the large portion of company they end up with. At 10c con-notes pick up towards 0.75 billion shares, at 5c around 1.5 billion shares and so it gets worse going lower. The con-note holders are CMR’s bank and the banks always end up owning failed projects.

CMR with a mothballed Oxides plant and Sulphides that will not go ahead is worth about $10M in recession market IMO. HNC will not launch a takeover until (if at all) the con-notes are converted because the company is obviously worth less down the track than the debt owed now. HNC will talk-down the DFS and burley the waters of fear before walking away or renegotiating. The note-holders will be happy with a total take-over price of $75-$100M just to get their money back, not that other share holders will see much of it.

The risk is metal prices don’t improve and CMR shares slide into oblivion but what is the upside?? Is the Oxide plant going to do much better than break even in a recession let alone make enough cash to pay back debt…. I doubt it. Who is going to plough into CMR and buy your shares for higher price when so many low-risk bargains abound? Day traders are probably the only ones holding it up today trying for a few cents play tomorrow and will run quickly when the bounce doesn’t come.

I honestly don’t wish this outcome on CMR share holders and take no pleasure in seeing things go from bad to worse. This market has hurt us all, so I certainly don’t come here to brag. I do ask that despite the ridicule and abuse I’m about to cop from determined supporters that you think about this investment in the light of today’s glaring risk-reward circumstances. This is not advice, I could have missed something that makes it a screaming buy, time will tell.

goodluck