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Please
accept my sincere condolences on the continuing suppression of metal
prices. As a stock holder in your company, I share your concern that an
unrelenting environment of depressed metal prices will inevitably cause
damage to your mining company. I will not insult your intelligence by
dwelling on the long term solution that you are so very well aware of (i.e.,
reduce mining output at low prices, both as a way to pressure prices higher,
and as a way to conserve your precious in ground resource for times when
prices are more favorable). Instead, I hope to suggest short term
tactics that could help to restore higher prices.
A
physical solution to a paper problem
You
do not need me to tell you how intensely painful it is when a few traders
dump a huge amount of paper metal short sales into the futures market,
frequently at times when there is little volume, so the paper dump results in
maximum price reduction. When the objective of those traders is to
reduce the price, their dumping approach is certain to work. No doubt,
those traders expect to make profits by being allowed to buy back their short
positions at lower prices as longs panic and sell at a loss. That
dumping plan by traders who have essentially unlimited resources to sell huge
quantities of paper futures contracts would be an invincible way to make
immense profits, except for a small detail. The futures contracts they
sell in huge numbers require delivery of real physical metal if they are not
closed out prior to the delivery time. Mining executives can exploit
that weakness by refusing to sell discretionary physical metal during the
month or so before delivery notices are issued. For example, miners
could withhold from the markets all physical metal that they have timing
discretion over until after the delivery notices are issued. By
withholding discretionary sales during the month before delivery notices are
issued, and by telling potential buyers for the following month to take
delivery of futures contracts instead, mining companies could transform the
earlier losses (caused by dumping huge amounts of paper futures) into gains
as the traders who were betting they could sell short and then cover later
are forced to buy at increasing prices because they do not have the metal
required for delivery. Then the miners could sell into higher prices
(after delivery notices have been acted on) the physical product they
withheld from the market over the previous month. By focusing on
withholding physical sales during the month before delivery, mining
executives can press the short traders by constricting their supply of metal
to deliver while encouraging buyers to take delivery from the futures
exchange. Note that this approach only considers discretionary
sales. Sales required by contract should be completed as previously
agreed. When negotiating contracts or extensions for the future,
however, mining company executives may want to consider time windows in which
they retain flexibility about when they are required to deliver product.
Dividends
payable in physical
Another
approach that could be used by mining companies who pay dividends to
shareholders is to offer the stock holder an option to receive dividends in
the form of physical bars or coins made from the metal the mining company
produces. That would increase the price of the stock in two ways.
First, more shareholders would buy the stock specifically for the opportunity
to receive real metal as dividends, especially if the cost of that metal was
near the wholesale cost of the metal produced by the mining company.
Second, bears who sell the stock short would need to obtain the appropriate
physical metal needed to match the dividend those short sellers would be
obligated to pay.
Dividends
delayed
If
metal prices drop below the actual cost of production, then the mining
companies that pay a dividend could stop that payment, and divert the funds
into buying futures for delivery. By taking delivery of very low cost
metal from the futures exchange, mining companies would make it more risky
for traders to bet short on the metals, and would increase the value of the
company for shareholders.
Share
information with shareholders
Mining
company executives are encouraged to share information about their tactics
with their shareholders, either by email or prominent notices on the company
web page. There is no need for one company to try to influence the
actions of another company. Other mining companies will learn about the
tactics that executives tell to their shareholders, and then the other mining
companies can decide for themselves if they want to do something
comparable. Hopefully, it is not yet illegal for mining companies to
decide when to sell their product, and to communicate information with their
shareholders. However, if any portion of this open letter contains
anything that borders on anything illegal, then all readers are encouraged to
ignore that portion. Readers may want to forward the legal portions of
this message to their favorite metal mining company. With enough focus
on delivery of physical, we may be able to loosen the death grip a few very
large traders have on the metals markets.
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