Steel, POSCO and Eureka Moly LLC

Morning Miners!

It is 5:57 AM, grab a cup and remind me to stop by Raine's sometime today. We're plumb out of their delicious TGIF coffee and Friday is almost here. I thought we'd take a moment to scratch our heads a little more on the steel industry and General Moly. This is a big topic and we've been picking around the edges for the last week or so tracking the price performance of of molybdenum and nickel, key ingredients to making steel. They both took a turn down and that had the Colonel worried. It looks like they are stabilizing and it's high time to walk up-canyon a bit to take a broader view.


Why should we care? General Moly, or more correctly Eureka Moly LLC in these parts, is still a long way from producing molybdenum from our Mt. Hope. Why does the price of moly or the health of the steel industry matter today? The answer is simple, investment. It takes a lot of mullah to start up a new mine and that comes initially from institutional and individual investors who believe the Mt. Hope story. Like many of you, I believe and have a small grubstake in our friends on Main St.

Belief in something can't soley come from hope even if hope is the size of a mountain (in our case). Investors need to feel confident that the expected price and demand for molybdenum is adequately high in the 2010-11 time frame to justify the start up and production costs ahead. We've just dodged a global depression by a hair, so the argument is tougher than ever to attract new money to future projects. The news so far has been good; General Moly (GMO) share price is seeing 52-week highs and the same is true for the South Korean steel producer POSCO which owns a 20% share of Mt. Hope.

For GMO to succeed, POSCO and other steelmakers must continue to be strong. POSCO is a major provider to China and the world and that's why the Report looks at global events to devine our local economic future. China which produces nearly half the world's steel is doing great so far:

"China's monthly steel production hit a fresh high in August at 51.65 million tons, up 21% year on year to represent a record daily production of 1.67 million tons, according to a Morgan Stanley research note Monday." (MarketWatch, 9/14/09)"

Although experts don't expect steelmakers to revisit their peak levels from 2007 anytime soon, POSCO closed yesterday at a price nearly identical to its close following the collapse of Bear Stearns ($108.08 9/16/09 versus $108.41 3/17/08). Since POSCO hit lows in the $40 range last Fall, this is indeed impressive. The global steel industry is recovering buckaroos.

The Colonel has worried about recent declines in the price of molybdenum from $18.25 to $14.75 but that is still more than 80% higher than moly's April lows. Moly is an input cost for steelmakers and we may indeed just be seeing a dip from restocking raw materials this year. What about the price of their product?

I dug up some numbers for domestic steel. Here is the percent price gain in three categories from their lows earlier this year:

Flat steel: up 31% from 6/09
Long steel: up 9.5% from 5/09
Scrap steel: up 84% from 4/09

Hmm..lower input costs, increasing product price and rising global demand. That's looking pretty healthy to me. There are some concerns. Joseph Innace, managing editor, Platts Steel Markets Daily, remarked recently:

"In short, the steel sector -- globally and in most regions -- had a decent summer, but now things look iffy again..."

So what's the bottom line? My sense is that we're seeing an industry on the mend with a few bumps in the road ahead. The Report will stay on top of this story but so far the up-canyon view for our friends at Eureka Moly looks pretty durn good to the ole Colonel.

Enough talk, let's walk the walk:

4-WD is OFF (the VIX or "fear index" is low)

Yellow light is ON for declining molybdenum price although there are signs of stabilization (less than magic number: $16.50)

Yellow light is ON for possible adverse regulation/legislation (mercury emissions)

Otherwise, all lights are green on the Eureka Outlook Dashboard (upper right, what's this?)

Oil is up $0.20 in early trading to $72.71 (October contract); Gold is down $0.7 to $1019.5 (December contract, most active); Silver is up $0.005 to $17.525 (December contract); Copper is up $.0010 to $2.9375 (December contract); Molybdenum holds at $14.75.

The DOW is up 26.52 points to 9818.23; the S&P 500, up 2.31 points to 1071.07. The miners are mixed:

Barrick (ABX) $38.81 up 0.73%
Newmont (NEM) $46.86 down 0.56%
General Moly (Eureka Moly, LLC) (GMO) $3.37 down 1.75%
Freeport McMoran (FCX) $72.36 up 0.29% (a bellwether mining stock spanning gold, copper & molybdenum)

Steel stocks are mixed, (a "tell" for General Moly):

Nucor (NUE) $50.46 up 4.89% - domestic steel manufacturing
ArcelorMittal (MT) $41.24 down 1.81% - global steel producer
POSCO (PKX) $107.82 up 0.24% - South Korean integrated steel producer

The Eureka Miner's Grubstake Portfolio is up 0.18% to $1,256,783.31(what is this?).

Cheers,

Colonel Possum

Headline Photograph by Mariana Titus