Black Hats & White Hats - The Colonel's Miners Roundup for May

Morning Miners!

It is 5:55 AM. This is the first time the ole Colonel has ever brewed Raine's Red Label on a hump day. Grab a cup of the strong stuff, pardner, you may need it. Let's start our day on the floor of the London Metal Exchange (LME). As reported by FastMarkets, "Base metals plunged to fresh intra-day lows and their lowest for several weeks in most cases during the open-outcry sessions..." Why? You guessed it, more bad news from Europe. Portugal expects another credit rating downgrade and many are wondering if Greece can survive a debt-to-GDP ratio of 150% even though the most recent rescue package saves them form near term default. This morning 74% of the Wall Street Journal readers polled believe that the sovereign debt crisis will envelope all of Europe. Dennis Gartman, the "Commodity King", warned on CNBC the other day that we may be witnessing the unwind of the European Union. Nuts.

To add to the pressure on metals & miners, there are recent doubts about Chinese real demand for key metals. The mighty dragon consumes about one-third of the world's refined copper which has propelled the red metal to triple its price since collapsing during 2008's credit crunch. As reported in the Wall Street Journal:

"On Friday, the International Copper Study Group (ICSG) issued its latest forecast, saying Chinese demand for copper could drop as much as 13% in 2010, a sharp reversal from a 38% increase in 2009." (WSJ, 5/4/2010)

The ICSG noted that much of the copper China bought last year went into stockpiling, instead of actual use, which is likely to cap this year's demand. This morning COMEX copper continues in free-fall threatening the $3/lb level.

Have another cup of Red Label my friend. If the price of oil is your only concern, all this bad news is good. COMEX oil fell below $80 in early trading and I'm switching our fuel gauge warning light from YELLOW to GREEN although it may only stay there for a brief while with the outcome of the Gulf spill far from certain.

Time to panic? Nah, but it might be a good time to check who's wearing the white hats in this T.V. Western. At the beginning of the month, this Report gives you an outlook on metals (General Moly Rips, Copper Dives - Metal & Oil Roundup for May) followed by a check on our favorite miners the following day. Last month at this time we were worried about the 10-year Treasury in 4% territory. Maintaining a low interest rate environment at this point of the recovery is important for the metals & miners. At least this fear has abated as the world seeks safe haven in our Treasurys. Here's a 3-month chart to illustrate the improvement in April:


Almost overnight, the world has turned to worrying about deflation on the back of Europe's woes. Since gold is the classic hedge for inflation, the lustrous metal has taken a whack in the markets in reaction to the new worry-du-jour. This morning gold is trading at $1160 after a good run at $1200 just yesterday ($1193 intraday high for the June COMEX contract).

So who's wearing the white hats for the six miners that we track in the Eureka Miner's Grubstake Portfolio (what's this?)? The good news is there are more white than black. The bad news is that the two black hats are sitting squarely on our bellwether miner, Freeport-McMoRan (FCX), and moly benchmark miner, Thompson Creek (TC). This report gives you a black bad guy hat if you fall below your 200-day moving average (solid green line). Here are Freeport and Thompson Creek:



Our junior miners, General Moly (GMO) and US Gold (UXG), continue to be the stars of this Western riding on the high trail above their averages. The investor logic may be that since neither are in production (yet) they will avoid the crush of falling commodity prices and still hold promise for a brighter future down the road:



Our large gold miners are holding up pretty well also but will be under pressure if gold and/or the broader markets continue their correction:



Are we really headed for a shootout at the global O.K. corral? I don't really know but it is encouraging to remember that all of our favorite miner's were in a bearish correction as recently as the tail end of January (Freeport "Broken", Miners in Correction, 1/29/2010). Even if copper falls to $2.90/lb, Freeport can turn a profit. As long as gold remains above $1000/oz, Barrick and Newmont will be printing money. Although copper is falling down the mineshaft, molybdenum price has been very resilient even though the LME futures prices fell a tad yesterday (3-month seller at $17.92 from $18.14). Thompson Creek is fine at these levels. If stock markets are really about earnings, the miners should continue to prosper as long as interest rates remain low (i.e. investment money seeking return) and if fear recedes from the marketplace (i.e. the VIX drops safely below 25 again). Take heart buckaroos!

Enough hand wringing, let's walk the walk:

4-WD is ON - rough roads in the marketplace; the VIX or "fear index" remains in 25 territory; metals & miners remain on shaky timber with benchmark FCX trading well below its 200-day average of $75 (our new warning level), 10-year Treasurys are safely below 4% preserving a low-interest rate environment (what's this?)

The GREEN light is switched back on our fuel gauge with oil below $80 (although this may only be a brief respite)

A ORANGE light is ON for possible adverse regulation/legislation: Mine Safety Violations, Miner's claim fee, Miner taxation, Cortez Hills, mercury emissions &
General Moly Mt. Hope Water Rights

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

NYMEX/COMEX: Oil is down $3.43 in early trading to $79.31 (June contract, most active); Gold is down $9.1 to $1160.1 (June contract, most active); Silver is down $0.577 to $17.265 (July contract); Copper is down $0.1325 to $3.0460 (July contract); Western Molybdenum Oxide sits at $17.75, LME moly 3-month seller's contract drops to $17.92

The DOW is down 37.64 points to 10889.13; the S&P 500 is down 5.78 to 1167.82. The miners are mixed:

Barrick (ABX) $42.56 down 0.83%
Newmont (NEM) $53.77 down 0.94%
US Gold (UXG) $3.55 up 2.19%%
General Moly (Eureka Moly, LLC) (GMO) $4.20 up 2.19%
Thompson Creek (TC) $11.47 down 0.86%
Freeport-McMoRan (FCX) $71.01 up 0.74% (a bellwether mining stock spanning copper, gols & molybdenum)

The Steels are mixed, (a "tell" for General Moly & Thompson Creek):

ArcelorMittal (MT) $36.40 down 0.82% - global steel producer
POSCO (PKX) $106.42 up 0.53% - South Korean integrated steel producer

The Eureka Miner's Grubstake Portfolio is is down 0.16% to $1,397,011.85 (what's this?).

Cheers,

Colonel Possum

Write Colonel Possum at colonelpossum@gmail.com for answers to your questions or to request e-mail updates on the market

Headline photograph by Mariana Titus