"The history of Eureka lies in its future." - Lambert Molinelli, 1878

DISCLOSURE

The author/editor of the Eureka Miner owns common shares of local mining stocks, General Moly (GMO), McEwen Ming (MUX) and Newmont Mining (NEM); together with benchmark miner Freeport-McMoRan (FCX). Please do your own research, markets can turn on you faster than a feral cat.

Monday, October 26, 2009

Dog In Search of an Honest Metal


Morning Miners!

It is 5:51 AM, grab a cup and the ole Colonel will tell you about an unusual visitor in our break room this morning. I was letting Loquita out for her morning pee when I saw a faint and flickering light come my way. It was an old timer carrying a miner's lamp. He walked up to the shop door and asked to come in to rest a spell. I asked his name and he said, "Diogenes. It's a Greek name, miners call me Dog". After our second cup, I asked the old feller what he was doing up so early in Eureka. He smiled and said, "I'm looking for an honest metal and I think I've found it." Puzzled, I inquired what metal that might be and he laughed, "Molybdenum, my friend!"


I didn't learn too much more from "Dog" and he melted away in the early morning darkness as quickly as he appeared. Loquita followed and for a moment I wondered if I had lost my dog to another. With the first light of dawn, she came running back wagging her tail with a note tucked in her collar. I read the note and now I know what my miner friend was telling me.

The readers of the Report have watched a meteoric rise in gold since early September as our poor ole greenback continues to fall down the mineshaft relative to other currencies (Gold Breaks $1007, Attack of the Ninja Miners). Equity and oil markets have also rallied with the Dow Jones breaking 10,000 and oil jumping above $80.

Initially, the curious thing was the lack luster performance of the industrial metals. We noticed molybdenum and nickel, both key ingredients to steel production, kept trending downwards as the precious metals danced in the heavens. General Moly responded to the Report's concern with an excellent analysis of moly's price performance which we reprinted in Good Golly Miss Moly. I encourage you to read their entire response which concludes:

"So when we look at the [molybdenum] price declining from the mid $17/lb to the mid $15/lb over the past couple weeks, we suspect one or more of the following is at play. First, the Chinese could be done accumulating their stockpile of moly and thus demand has been reduced. Or, second, some incremental [molybdenum] production from either China or the western world could be coming back online, increasing relative supply."

My takeaway from this line of argument is that moly price is following the expected laws of supply and demand. Even though it took another jog down to $11.75 last week, I suspect moly continues to obey supply/demand fundamentals as miners (supply) and the global steel community (demand) seek equilibrium in the global recovery.

Perhaps not so for other metals and that brings us to Dog's note. He suggested I look at nickel, zinc and copper which have been fairly range bound during the precious metal rally. Lo and behold, it appears that these metals have now caught "gold fever" too. Here is a one-month chart of nickel, zinc and copper rising as molybdenum falls.


What's going on? The Wall Street Journal has an interesting view on copper which broke the elusive $3 level only last week:

"Although the weakening dollar and the generally more positive outlook for the metals sector is certainly providing support, brokers remain confused at the gains[in copper price].

Poor physical-market conditions are failing to provide the rationale for the move in copper, a metal used in industrial applications like housing and construction. But brokers say they won't take their money off the table and go short in case they miss yet another leg up for the base metals complex.

'A wall of money is playing into the hands of market bulls,' said Ole Hansen, manager for futures and fixed income at Saxo Bank.

The latest U.S. Commodity Futures Trading Commission Commitments of Traders report showed speculative long positions have reached the highest level since January 2006. 'This trend is confirming our view that the last price increase was predominantly driven by speculation and downside risk is building up," said Eugen Weinberg of Commerzbank. (WSJ, 10/26/2009)

Ah-ha! I see what Dog is telling me. Molybdenum, a less attractive metal for speculation, is continuing along a rational supply/demand path while its more glamourous cousins (copper, nickel and zinc) are being inflated by speculators with a lot of cheap money in their pockets. Have we seen this movie before?

The Wall Street Journal article concludes:

"Few [analysts] deny that several markets, such as copper, have started to see the kind of improvement in their underlying fundamentals that would justify the current prices, but only perhaps in 2010. Privately, many see the moves as too swift, too soon, and say the divergence between the underlying and futures prices has become extreme." (WSJ, 10/26,2009)

So is molybdenum the honest metal in a crowded ballroom filling with tiny bubbles? Maybe Dog will return in several months and we can chat more over a cup of joe in Monday's early morning hours.

Have a good week, buckaroos.

Enough talk, let's walk the walk:

4-WD is OFF - the VIX or "fear index" is below 25, smooth markets expected in the near term (what's this?)

Yellow light is ON for our fuel gauge (oil over $80/barrel)

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 $0.37 in early trading to $80.87 (December contract); Gold is down $0.6 to $1055.8 (December contract, most active); Silver is down $0.018 to $17.700 (December contract); Copper is up $.0275 to $3.0620 (December contract); Molybdenum is steady at $11.75.

The DOW is down 30.38 points to 9941.80; the S&P 500, down 2.73 points to 10076.87. The miners are mixed:

Barrick (ABX) $37.51 down 0.16%
Newmont (NEM) $45.52 down 0.87%
General Moly (Eureka Moly, LLC) (GMO) $2.70 up 0.37%
Freeport McMoran (FCX) $82.08 up 0.90% (a bellwether mining stock spanning gold, copper & molybdenum)

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

Nucor (NUE) $44.32 up 0.34% - domestic steel manufacturing
ArcelorMittal (MT) $38.66 up 1.26% - global steel producer
POSCO (PKX) $117.69 up 4.78% - South Korean integrated steel producer

The Eureka Miner's Grubstake Portfolio is is up% to $1,255,178.81 (what is this?).

Cheers,

Colonel Possum

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