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


The author/editor of the Eureka Miner owns common shares of local mining stocks, General Moly (GMO) 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.

Thursday, January 21, 2010

Miss Moly and the Platinum Looking Glass

Morning Miners!

It is 6:22 AM, grab a cup and let's see what's up for molybdenum in the next several months. As reported at the tail end of last year (The Colonel Wishes You a Happy New Year), minor metals moly and cobalt will make their debut in early February on the London Metal Exchange (LME):

Cobalt and Molybdenum 2010

This will expose these metals to a larger group of market participants (including speculators) by creating futures contracts similar to those of more well known commodities such as gold, copper and oil. In the current economic environment of low interest rates and continuing global recovery, the expanded market will most likely be supportive of molybdenum price in the near term.

The futures contracts are "physically delivered" which in the literal sense means if you bought it you got it although this rarely happens at the LME. Traders on the LME usually sell their contracts to someone else to avoid delivery of the physical metal. In the words of the Exchange:

"The LME is primarily a financial, rather than a physical market, where trading is used to manage risks rather than secure metal. Less than 1 percent of contracts traded on the LME result in physical delivery, so the chances of being stuck with metal you cannot use are very low. In the unlikely event that a contract goes to physical settlement, lots can be swapped or sold at a premium or discount to the LME price. The cobalt industry is already used to this way of doing business, as it already trades metal at a premium or discount to the Metal Bulletin cobalt price."

The LME will enable a moly miner in production like Thompson Creek Metals (TC) to hedge against volatility in prices. From the LME's view, "Hedging is the process of managing the risk of a price change by offsetting it in the futures market. The ability to hedge gives producers, consumers and merchants in the industry the choice of how much price risk they are prepared to accept. The process of hedging will also create for the first time a truly transparent and representative market price."

We have recently witnessed the downside to carrying a hedge book by the example of Barrick Gold (ABX). As they now perceive an increasing gold price trend, Barrick reduced their hedges to zero to take the fullest advantage of current market prices. The choice between low price volatility and greatest return is made by all producers; the LME adds a powerful tool for managing this risk/reward trade-off.

For a molybdenum miner in a pre-production phase like General Moly (GMO), the LME should help boost current moly prices given recent investor interest in metals as a "pseudo-asset" class. Higher future metal prices will improve GMO's estimated margins with respect to estimated production cost. This in turn strengthens their position in the eyes of investors and the ability to borrow capital.

This is the point at which Miss Moly passes into a somewhat surreal environment similar to Alice passing through the looking glass. Although only members of the LME will be allowed to participate in molybdenum futures contracts this will include speculators who see opportunity in putting easy money to work to bid up metal prices and reap handsome rewards. These folks are not evildoers, speculation adds liquidity to markets and in the end is always dampened by the laws of true supply and demand. Speculators with a natural sense (or luck) to know when to get in and out do well; those that bet poorly are crushed. That's the fun of markets, pardner.

I thought it might be interesting this morning to look at the platinum group metals to draw a comparison for what might be in store for molybdenum and cobalt. A U.S. subsidiary of London's Exchange Traded Fund Securities launched platinum and palladium exchange-traded funds (ETF) earlier this month, PPLT and PALL. Both of these metals are traded on the London Platinum and Palladium Market (not the LME) and now the ETFs expand participation to a massive base that includes retail investors like you and me. It is highly unlikely that there will be a moly or cobalt ETF launch any time soon; the point of this comparison is to illustrate how an expanded investor base can influence metal price in the near term.

Let's give this some perspective. Moly and cobalt are about to enter the financial high school of metals, platinum and palladium are seniors earning their own ETFs and gold and silver have graduated to become ETF mega-asset pools. Here's a comparison of ETF market capitalization (ETF share price x outstanding shares):

Platinum (PPLT) $0.0165B
Palladium (PALL) $0.0915B
Silver (SLV) $5.3B
Gold (GLD) $40.7B

The Gold ETF alone represents more than 1,100 metric tons of gold; the two new funds have accumulated a bit more than 100,000 ounces each of platinum and palladium to date. The platinum market is about 6 million ounces, and showed a small surplus last year. A 100,000-ounce swing is big enough to turn the market to a deficit. Platinum has just stepped through the looking glass - investors can easily trump supply and demand (at least for awhile) in a thinly traded market. And guess what happened? The price of platinum and palladium have shot up even even as gold has pulled back:

Platinum and palladium prices rocket (MineWeb, 1/19/2010)

So Colonel what's your point? Molybdenum will not have ETF exposure but its LME launch next month will broaden it's investor base through LME membership. As long as the "China/India will help recover the steel industry" story rings true, moly prices should be on an uptrend for 2010. With molybdenum listed on the LME, this uptrend may get an additional boost from speculative money seeking high return. Of course markets giveth and taketh away, so increased volatility in LME moly prices may result if the "China is tightening monetary policy and we're headed for trouble" story gains momentum. Not to worry, soon moly producers can hedge their bets with LME futures contracts. Aren't markets awesome?...oh, oh here comes the Mad Hatter!

If you just can't get enough of this metallic wonderland, here are some additional reasons why launching molybdenum and cobalt on the LME is a good idea:

London Metal Exchange cobalt and molybdenum FAQ

Here comes the Red Queen, let's walk the walk:

4-WD is OFF - the VIX or "fear index" remains below 25; smoother road market conditions expected to continue (what's this?)

Yellow light is ON for possible adverse regulation/legislation: Cortez Hills & mercury emissions

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

Oil is up $0.25 in early trading to $77.99 (March contract, most active); Gold is down $4.4 to $1108.2 (February contract, most active); Silver is down $0.030 to $17.850 (March contract); Copper is up $0.0070 to $3.3620 (March contract); Molybdenum is steady at $15.25

The DOW is down 201.03 points to 10402.12; the S&P 500 is down 19.14 points to 1118.90. The miners are still hunkered down:

Barrick (ABX) $37.25 down 1.63%
Newmont (NEM) $45.40 down 2.18%
US Gold UXG) $2.37 down 4.44%
General Moly (Eureka Moly, LLC) (GMO) $2.75 down 7.72%
Thompson Creek (TC) $13.46 down 4.27%
Freeport McMoran (FCX) $82.62 down 1.85% (a bellwether mining stock spanning gold, copper & molybdenum)

The Steels are still in the same foxhole, (a "tell" for General Moly & Thompson Creek):

ArcelorMittal (MT) $42.60 down 5.06% - global steel producer
POSCO (PKX) $130.70 down 3.58% - South Korean integrated steel producer

The Eureka Miner's Grubstake Portfolio is is down 3.78% to $1,290,289.06(what is this?).


Colonel Possum

Headline Photograph by Mariana Titus

No comments:

Post a Comment