"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.

Tuesday, June 1, 2010

The Molybdenum Conundrum - Europe Snubs Miss Moly


Morning Miners!

It is 5:30 AM. If you can say "molybdenum conundrum" three times without tying your tongue in a half-hitch, the Colonel will buy you coffee for the rest of this short week. I got a postcard from Miss Moly this weekend and she is lonely as heck for the rodeo and the smell of sweet Great Basin sage. As you may remember we trundled her off to London last February so she could join the London Metal Exchange's (LME) futures market for minor metals (Miss Moly Flies to London).

Molybdenum, a key alloying metal in steel production, trades almost entirely on supply/demand fundamentals and is expected to remain in deficit for the near-term (unless the wheels fall off the global growth story, more on that in a minute). A speculative dimension was added to moly trading with the introduction of the LME futures market. With investors now able to bet on the future price of moly, many expected an increase in price volatility even as the LME brought more liquidity to the marketplace.

Moly futures did jump some after the first contracts were introduced February 22nd then stabilized quite nicely. There rises the conundrum: why have molybdenum prices been remained so stable while other metals such as copper have experienced high volatility and downward pressure over slowing Chinese demand and concerns over the health of Europe's banks?

Miss Moly's luck may have finally run out last week as spot molybdenum prices fell from a comfortable $17/lb-$18/lb ($37,500/tonne-$40,000/tonne) range to $16/lb for western moly oxide and $15.75/lb in Europe. In response, the LME 3-month and 15-month contratcs both dipped to $17.01/lb with the cash seller closing at $16.92/lb. Here is a chart of the 3-month seller contract since the LME introduction of minor metal futures:


Some clues to the rock-steady price performance of molybdenum for the past several months are beginning to emerge. The Wall Street Journal reports that China appears to be digging into some of its commodities reserves, a potentially worrying near-term trend for commodities producers and investors. Specifically, imports from China in refined copper, iron ore and lead have declined in the last few months, a possible factor behind the recent price drop for those commodities. Although China became a net importer of molybdenum last year, presumably moly hasn't made this list...yet.

The other issue is the viability of the LME moly futures market itself. As a start up, moly futures are still thinly traded and may not accurately anticipate price movement in the physical molybdenum marketplace. A Steel Business Briefing (SBB) reports that European stainless mills are showing caution towards LME moly pricing:

"Major European stainless steel producers have not so far adopted the London Metal Exchange’s new molybdenum contract as the reference price for calculating their alloy surcharges. In response to survey by Steel Business Briefing, some said they are watching the development of LME moly trading, but none is yet using the price as a surcharge reference." (SBB, 5/30/2010)

In the meantime Miss Moly's big cousins continue to be hammered by the dimming prospects for the global growth story:

METALS-Copper at 1-week low on China, euro zone growth woes (Reuters, Humeyra Pamuk, 6/1/2010)

The ole Colonel wouldn't be surprised to see increasing downward pressure in the moly world for the next coming months. Here is a one-month chart of molybdenum and nickel, another key alloying metal to steel production:



The Wall Street article on China's bite into domestic stockpiles forecasts this for copper and nickel:

"Short term, a move to tap reserves is a potentially bearish signal for investors in these commodities, as China's reserves are deep. Analysts at Deutsche Bank said the third quarter may see 'considerable pressure' for prices on commodities such as copper and nickel." (WSJ, 6/1/2010)

Is molybdenum on this bus? Stay tuned buckaroos. I bet Miss Moly would have enjoyed a break at this weekend's Eureka High School Rodeo, we sure missed her.


Enough global talk, let's walk the walk:

4-WD is ON - rough roads in the marketplace; The VIX or "fear index" remains in the low 30s, still above our 25 level threshold; metals & miners remain on shaky timber with benchmark FCX trading in the high $60s 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

The GREEN light remains on for Commodity Reflation with copper trading just above $3/lb

The YELLOW light remains on for Stable Markets with the VIX above the 30 level (what's this?)

The YELLOW light remains on for Investor Confidence with the possibility of a greater than 10% correction in the broader markets

The GREEN light remains turned on our Fuel Gauge with oil below $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 up $1.08 in early trading to $75.05 (July contract, most active); Gold is up $10.5 to $1225.5 (August contract, most active); Silver is up $0.238 to $18.660 (July contract); Copper is down $0.0115 to $3.0930 (July contract)

Western Molybdenum Oxide is at $16.00; LME moly 3-month seller's contract is $17.01, LME cash seller is $16.92

The DOW is up 52.68 points to 10,189.31; the S&P 500 is up 3.01 to 1092.42. The gold miners are up, others down:

Barrick (ABX) $43.08 up 2.38%
Newmont (NEM) $55.36 up $2.86%
US Gold (UXG) $4.02 up 1.77%
General Moly (Eureka Moly, LLC) (GMO) $3.71 down 1.33%
Thompson Creek (TC) $9.79 down 0.61%
Freeport-McMoRan (FCX) $69.00 down 1.50% (a bellwether mining stock spanning copper, gols & molybdenum)

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

ArcelorMittal (MT) $30.80 down 0.79% - global steel producer
POSCO (PKX) $95.12 down 1.30% - South Korean integrated steel producer

The Eureka Miner's Grubstake Portfolio is is up 0.31% to $1,349,800.39 (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 and series photographs by Mariana Titus

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