Thursday, July 15, 2010
Moly Futures Bounce - Thompson Creek (TC) Expands
It is 5:59 AM. Our favorite Norseman, Thor, brought over some ground-pounder coffee last night to celebrate his day - light the fuse and stand back while it brews. Happy Thor's day! I believe he's sailing off to England this weekend for holiday. Cheers.
Yesterday the Report looked for news to counter the prevailing mood of gloom and doom (Maybe Things Are Not So Bad After All). We found some pretty encouraging signs in early corporate earnings and forecasts as well as declining inventories of base metals at the London Metal Exchange (LME). Commodity King, Dennis Gartman, often reminds us that collectively base metals have a PhD in economics. Let's look at three curves to remind us of some of the challenges facing our metallic geniuses. Here is a 3-month price performance chart for COMEX copper:
From the lofty days of April when prices were north of $3.5/lb, copper fell all the way to $2.7/lb territory and has recently risen above the key $3.0/lb level. Today COMEX copper creeps a tad higher to $3.025/lb. Over this same time period gold (orange) has risen (on average) as copper (blue) has fallen. This is called an "inversion" and is almost always a bearish sign for metals:
The same has been true for oil (orange) which has recently demonstrated a very tight correlation with copper (1-month correlation = 0.954; 3-month = 0.747):
OK, Colonel so what? Well, pardner, these inverse relations have peaked, continue to weaken and that's a bullish sign going forward. Let's checkout the morning LME headlines:
LME ALUMINIUM JUMPS TO ONE-MONTH HIGHS AS EURO GAINS FURTHER
LME LATEST - Metals regain ground on robust euro, JPMorgan earnings underpin sentiment
Hmmm...stronger euro ($1.2866, a 2-month high), weaker dollar, stronger gold (COMEX up $5.6 to $1212.6/oz) and base metals rally - say we've been to this rodeo before and it's not a bad one!
Confidence in Europe is returning with a successful bond auction in Spain, U.S. banks are stronger than expected (a surprisingly good J.P. Morgan quarterly report) and Chinese growth is slowing but not by much. The last point comes from the release of a second-quarter 10.3% GDP growth number for China; analysts expected 10.5%. The slightly smaller number dipped Asian markets but the metals don't seem to care. With our domestic GDP numbers expected to be in the 1.5 to 2% range for some time to come, the ole Colonel will take a China growing north of 10% any day. Maybe things are getting better.
Yesterday POSCO had good profit numbers and a positive forecast for Asia. Checkout today's top article summary for Steel Business Briefing:
Steel prices stable, may strengthen in Q4: Mechel
Russian miner and steelmaker Mechel sees prices for steel in both Russian domestic and export markets being stable for the next two months, with possible strengthening beginning at the end of September.
"We see the possibility of a new ascending trend starting after the Islamic holidays are over," the company’s chairman Igor Zyuzin said during a conference call monitored by Steel Business Briefing. He described Mechel’s sales in the first half of the second quarter to the Middle East and South-East Asia as "very strong" with "continued price rises," as customers were stocking up before Ramadan and the rainy season. (SBB, 7/15/2010)
Another happy steelmaker and guess what's happening to molybdenum, a key alloying metal in steel production? Even though western moly oxide has dropped to the $14/lb level consistent with euro moly oxide pricing, the molybdenum LME futures have bounced more than 6% to $15.42/lb ($34,000/ metric ton). Here is a one-month chart of the molybenum 3-month seller contract:
Are we witnessing a trend reversal for moly prices going forward?
Benchmark moly producer Thompson Creek (TC) isn't too glum about the future and moves to diversify their commodity exposure with a new acquisition announced this morning:
Thompson Creek Metals Company Inc. Enters Into Agreement to Acquire Terrane Metals Corp. (Press Release, 7/15/2010)
Kevin Loughrey, Chairman and Chief Executive Officer of Thompson Creek, states:
"The acquisition of Terrane fits well in our strategic growth plan, providing us with clear production and revenue growth while diversifying our commodity exposure, all in a project with mining and milling processes, and a regulatory environment, with which we have considerable experience. We are utilizing a portion of cash on our balance sheet and our current cash generating capacity from existing operations while capitalizing on financing opportunities available through the Gold Stream Transaction. The upside from our existing asset base has been retained for our shareholders while structuring a transaction that we believe will be highly accretive on a cash flow basis once Mt. Milligan is in production. We believe with our Endako expansion, and now the Mt. Milligan project, we have substantially improved Thompson Creek's growth profile." (Press release, 7/15/2010)
From the Terrane Website:
"Terrane is focused on the future commercial development of the large-scale copper and gold reserve at Mt. Milligan, British Columbia. Mt. Milligan has an open pit reserve of 2.1 billion lb contained copper and 6.0 million oz contained gold. Upon development the project will have an average annual production of 262,100 oz gold and 89 million lb copper for the first six years of a 22.1 year mine life."
So there we go buckaroos. Early U.S. earnings reports, base metals, a Russian steelmaker, Miss Moly and Thompson Creek seem to all be in the same bleacher rooting for brighter days. Just more bits of news that may be saying things may not be so bad after all. Stay tuned.
Enough talk, let's walk the walk:
Our newly minted Eureka Miner's Index (EMI - what's this?) remains just above-par at 100.44, ever so slightly down from yesterday's 100.88 and a big improvement from the 6/7/10 low of 50.7. Remember an EMI greater than 100 is good times for metals & miners.
4-WD is ON - rough but improving roads in the marketplace; The VIX or "fear index" is slightly above 25; metals & miners remain on shaky timber with benchmark FCX trading in the low to mid-$60s well below its 200-day average of $76 (our new warning level), 10-year Treasurys are safely below 4% preserving a low-interest rate environment
The GREEN light is turned back on for Commodity Reflation with copper trading above $3/lb
The GREEN light is turned on for Stable Markets the VIX below the 30 level (what's this?)
The YELLOW light is on for Investor Confidence as further market corrections are possible but less likely
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, U.S. House committee debates miner workplace safety bill
Otherwise, all lights are green on the Eureka Outlook Dashboard (upper right, what's this?)
NYMEX/COMEX: Oil is down $0.05 in early trading to $76.99 (August contract, most active); Gold is up $5.6 to $1212.6 (August contract, most active); Silver is up $0.120 to $18.410 (July contract, most active); Copper is up $0.0165 to $3.0250 (September contract, most active)
Western Molybdenum Oxide is at $14.00; European Molybdenum Oxide is at $14.00; LME moly 3-month seller's contract is $15.42, LME cash seller is $14.21
The DOW is down 31.25 points to 10,335.47; the S&P 500 is down 2.44 to 1092.73. The miners are down except for TC:
Barrick (ABX) $42.81 down 0.41%
Newmont (NEM) $60.77 down 1.54%
US Gold (UXG) $4.71 down 0.63%
General Moly (Eureka Moly, LLC) (GMO) $3.14 down 0.95%
Thompson Creek (TC) $9.56 unchanged
Freeport-McMoRan (FCX) $63.19 down 0.74% (a bellwether mining stock spanning copper, gold & molybdenum)
The Steels are down, (a "tell" for General Moly & Thompson Creek):
ArcelorMittal (MT) $30.09 down 0.17% - global steel producer
POSCO (PKX) $101.18 down 1.29% - South Korean integrated steel producer
The Eureka Miner's Grubstake Portfolio is is down 0.63% to $1,362,167.62 (what's this?).
Write Colonel Possum at firstname.lastname@example.org for answers to your questions or to request e-mail updates on the market
Headline photograph by Mariana Titus