"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.

Tuesday, May 4, 2010

General Moly Rips, Copper Dives - Metal & Oil Roundup for May

*** BREAKING NEWS *** Fear has returned to the marketplace with the VIX breaking the key 25 level at 11:02 AM (EDT). The DOW has lost more than 200 points; the S&P 500, more than 25. The U.S. Dollar Index is surging as the euro slumps to new 12-month lows.

Morning Miners!

It is 5:59 AM. Have a cup of java and fasten your seat belt, we've got another wild ride in the markets. The U.S. dollar and gold have eloped leaving silver and copper in the dust and oil sinking in the Gulf.

Spot gold charged at $1192/oz in early trading before falling back while the euro fell to a 12-month low against the dollar on continuing doubts about Greece. Silver dropped to $18.32 in the spot market before recovering while copper fell another 3% to $3.24/lb territory. Emerging fears of China tightening have taken a whack at the red metal together with the strong dollar. We'll do our monthly prognostication on these wild desperadoes of the metal & oil frontier but first let's checkout some good news.

General Moly (GMO) has enjoyed a terrific run-up since late last week jumping nearly 15% yesterday to a new 19-month intraday high of $4.36. The GMO closing price was $4.30 on a day when bellwether miner Freeport-McMoRan (FCX) dropped below its 200-day average to close at $73.74. Benchmark moly producer, Thompson Creek (TC), fell 6.2% to close at $12.02. What's up? The catalyst for the GMO rally is most likely insider trading. When the key leadership of a publicly traded company buys or sells stock they are obligated to file an SEC "Form 4 - STATEMENT OF CHANGES IN BENEFICIAL OWNERSHIP". There have been four filings since 4/26; here's a summary of the filing dates and when the purchases hit the news-wires (EDT):

4/26 bought 25,000 shares @ $3.6764 Richard Nanna, Director: news 11:55 AM 4/27
4/28 bought 100,000 shares @ $3.561 Bruce Hansen, CEO: news 12:44 PM 4/29
4/30 bought 5,000 shares @ $3.89 Davis Chaput, CFO: news 11:51 AM 5/3
4/30 bought 50,000 shares @ $3.89 JP Ergas, Director: news 11:52 AM 5/3

At each news-time the GMO share price has jumped. There is no greater show of confidence in a company's future than the purchase of stock by the folks at the top, pardner!

This is the toughest month so far this year to predict what lies ahead for our favorite metals and oil. I chose a gold price nominal of $1120/oz for February and March then moved up to $1150/oz for April. Although gold is trading higher today, the ole Colonel will go for $1180/oz for May. There is enough fear returning to the marketplace to send gold above $1200/oz but the strengthening dollar should provide some headwinds. A May nominal of $1180/oz puts us right back on the 1-yr tend line.

Here are my updated commodity models for the month of May for silver, copper and oil assuming a nominal price for gold of $1180/oz:

The fair value of silver is $19.047 in a range of $18.129 to $19.964

The fair value of copper is $3.6912 in a range of $3.4311 to $3.9512

The fair value of oil is $87.91 in a range of $83.55 to $92.26

COMEX gold this morning is trading at $1184.2

COMEX silver is at $18.410, a level undervalued with respect to a $1180/oz gold nominal. Silver presently has a "beta" of 2.1 so an uptrend in gold should result in a larger bounce for silver. We notice some decoupling of gold and silver this morning, however, which could mute this dynamic (see note 1). The nominal gold/silver ratio for May is 61.95; presently, 64.32.

COMEX Copper dropped below the key $3.50 level last month trading at $3.22 this morning well below my model's lower limit of $3.43. This is a warning sign for the metals & miners. Remember, the statistics of markets follow the bell curve until they don't. When a benchmark base metal like copper breaks from expected ranges, take notice buckaroos! Our rugged canary in the global recovery mineshaft may be telling us something. The beta for copper has dropped from the 2s to 1.76.

NYMEX Oil was barreling towards $90 yesterday. Today, the first contract above $90 has moved out from August to November. Oil will remain volatile until there is more clarity on the Gulf spill impact and a strong dollar presents resistance. At $84.06 this morning, oil is below "fair value" for $1180/oz gold and just above its lower range. The present oil beta is 1.60 falling back from a peak beta of 1.98 in April. $90 oil may or may not be in the cards for May but is now within the upper bound of $92.26.

Molybdenum prices have stabilized in a tight range $17-18 on the spot and the London Metal Exchange futures market. With the dramatic drop in copper, I wouldn't be surprised to see a decline in moly future prices in the near term. The report will launch a molybdenum pricing model next month.

Enough talk, let's walk the walk:

4-WD is ON - rough roads in the marketplace; the VIX or "fear index" broke the key 25 level today; metals & miners remain on shaky timber with benchmark FCX trading 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 YELLOW light is switched back on our fuel gauge with oil above $80

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 $2.13 in early trading to $84.06 (June contract, most active); Gold is up $0.9 to $1184.2 (June contract, most active); Silver is down $0.450 to $18.410 (July contract); Copper is down $0.0690 to $3.2245 (July contract); Western Molybdenum Oxide sits at $17.75, LME moly 3-month seller's contract remains at $18.14

The DOW is down 234.51 points to 10917.32; the S&P 500 is down 28.30 to 1173.96. The miners are getting clobbered:

Barrick (ABX) $42.36 down 1.07%
Newmont (NEM) $53.65 down 2.33%
US Gold (UXG) $3.39 down 6.61%
General Moly (Eureka Moly, LLC) (GMO) $4.07 down 5.35%
Thompson Creek (TC) $11.60 down 3.49%
Freeport-McMoRan (FCX) $70.25 down 4.74% (a bellwether mining stock spanning copper, gols & molybdenum)

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

ArcelorMittal (MT) $36.68 down 5.95% - global steel producer
POSCO (PKX) $105.12 down 4.74% - South Korean integrated steel producer

The Eureka Miner's Grubstake Portfolio is is down a thundering 4.15% to $1,390,023.36 (what's this?).


Colonel Possum

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

Note 1: Here's a simple way to think of a metal's "beta" with respect to a reference metal such as gold. If beta = 1.0, a 1% move in gold should produce (on average) a 1% move in silver. For beta = 2.0, a 1% move in gold results in a 2% change in silver. Got it, pardner? If beta is greater than 1.0, we say silver is "high beta" and ready trot; if less than 1.0, silver is "low-beta" and headed back to the barn.

Headline photograph by Mariana Titus

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