Wednesday, October 7, 2009
Oyu Tolgoi, Solar Panels & $1050 Gold
It is 6:05 AM and we've got a second pot a'brewin'. A little late for sign-on this morning because the ole Colonel has been crunching numbers. Things are happening so quickly lately it is hard to catch up. There will probably be a pause in the action today because third quarter earnings season kicks off after the markets close. The first at bat is always Alcoa which gets the Report's attention because aluminum is a key industrial metal and Alcoa is a world class producer of the light stuff. Alcoa has lagged its peers (e.g., steel producers) because there has been a glut of aluminum. A positive report from them would be a good sign indeed for the commodity world and global recovery in general. Stay tuned.
Since we have a little time I thought we'd look at several events that could become game changers in the "new normal" which is becoming the popular name for our present economic situation. Rio Tinto announced yesterday that they had finally signed a deal between the Mongolian government, Rio Tinto and Ivanhoe to develop the Oyu Tolgoi copper-gold project. The report covered this massive project in August (Dondog's Find in Oyo Tolgoi). Here's a link to the latest update on MineWeb:
Rio Tinto says it has signed Oyu Tolgoi agreement
I call this a potential game changer because it marks the first time Western mining companies have been brought into the Chinese interior for a project of this scale. Another recent example is a 2,000-megawatt photovoltaic farm to be built in the Mongolian desert. At the center of this project is an American solar developer, First Solar:
U.S. Solar Firm Cracks Chinese Market
Both the mining and solar projects are located in the forbidding Gobi Desert. The copper-gold project is expected to commence in 2013 with a five year ramp up to full expected production of 450,000 tons of copper per year and 330,000 ounces of gold. The solar poject is slated to be complete by in 2019. The Chinese are on the move buckaroos.
I'll close with a few more thoughts on gold's latest rise to the heavens. Just Monday I noted the one-month average price was just a tad over $1000 at the end of September (A Nevada Silver Mystery). Based on my models I predicted that if gold stayed at this level, copper had a shot at breaking $3 but oil was probably not likely to see $80 anytime soon. What a difference a few days make, this morning gold hit a record high of $1,048.25 before pulling back. It hasn't happened yet but I thought I'd run $1050 gold through the models (see note 1) to see what happens to silver, copper and oil. Here's a comparison with Monday's numbers:
silver (fair value) $16.47; range $15.90 to $17.05
copper (fair value) $2.867; range $2.547 to $3.189
oil (fair value) $70.47; range $63.89 to to $77.05
silver (fair value) $18.73; range $18.15 to $19.03
copper (fair value) $3.113; range $2.7916 to $3.4349
oil (fair value) $73.692; range $67.11 to to $80.27
That's a another game changer, pardner. At $1050 gold, the fair value of copper (with respect to gold) is over $3 and oil could see $80 before, let's say, Christmas. Ouch! That wily billionaire T. Boone Pickens said on CNBC business news yesterday that $80-85 oil or higher was in the cards for 2010. We'll see. By the by, I'm not complaining about the expected range for silver.
Enough crystal ball gazing, let's walk the walk:
CAUTION: 4-WD is ON - the VIX or "fear index" remains above 25. Expect to experience more off-road conditions in the markets (what's this?)
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 down $0.33 in early trading to $70.55 (November contract); Gold is up $0.8 to $1040.5(December contract, most active); Silver is up 0.095 to $17.390(December contract); Copper is down $0.0002 to $2.7825 (December contract); Molybdenum is steady at $13.6.
The DOW is up 5.74 points to 9736.99; the S&P 500, up 3.15 points to 1057.87. The miners are mixed:
Barrick (ABX) $39.07 up 0.59%
Newmont (NEM) $46.28 up 0.15%
General Moly (Eureka Moly, LLC) (GMO) $3.09 down 1.28%
Freeport McMoran (FCX) $71.17 up 2.24% (a bellwether mining stock spanning gold, copper & molybdenum)
Steel stocks are up, (a "tell" for General Moly):
Nucor (NUE) $45.35 up 0.18% - domestic steel manufacturing
ArcelorMittal (MT) $36.31 up 0.86% - global steel producer
POSCO (PKX) $103.11 up 0.54% - South Korean integrated steel producer
The Eureka Miner's Grubstake Portfolio is is up 0.07% to $1,213,163.60 (what is this?).
Headline Photograph by Mariana Titus
Oyu Tolgoi Photograph: Financial Post
Note 1: The Colonel's proprietary predictive models compare the prices of one commodity versus another. This has the advantage of diminishing the influence of currency fluctuations and can reveal the "fair value" a commodity with respect to a reference commodity (e.g., gold). The range is +/- two standard deviations from the fair value. Presumably the lower range is an "undervalued" condition; the upper range, "overvalued. If there is a good positive correlation between a commodity and its reference then the range provides an indication of where prices may be headed. Here are the 3-month correlations (1.0 = highest correlation; 0.0 = no correlation) for the values shown above: