A "New Normal" for Metals & Miners?

Morning Miners!

It is 6:00 AM sharp. Grab a cup of Monday-got-here-faster-than-the-World-Cup-ended java and let's get to work. The World Cup reminds us of how many players there are in the world, not only in the popular sport of soccer but in the commodities that influence our local economy. We'll look at two examples this morning then contemplate a little global philosophy for these markets.

Before we start, please note that we have a Eureka Miner's Index (EMI) update to your right. The EMI gives us the market temperature for the sectors that have the greatest impact on mining in Eureka County. You can read more about this index by clicking on the small chart icon. Last week the EMI ended above par at 111.3 (an EMI greater than 100 is good for the metals& miners). We could have some pullback today as investors await aluminum giant Alcoa's (AA) quarterly report at the close.


(a larger, more readable chart is near the bottom of this blog page)

Alcoa is the first company in the Dow Jones Industrial Average to report last quarter's earnings and expectations for the new quarter and beyond. It is important to this Report because it is also the first metal producer at bat and gives us an important data point on global growth. This Bloomberg article summarizes current expectations:

Alcoa Earnings Won’t Recover for Years, Analysts Say (Edmond Lococo, Bloomberg News, 7/12/2010)

Alcoa faces some unique challenges: aluminum prices have declined 40 percent since reaching a record on July 14, 2008 and they have idled 20 percent of their aluminum-smelting capacity because of excess global production and soaring inventories. More than one-half of their 2009 sales were in the U.S. so Alcoa is pulled by both domestic and global forces. The expectation is a report of sluggish growth for the former and improving prospects for the latter.

Another important piece of the global story was reported by Bloomberg last Friday:

Commodity Shipping Slumps for Longest in 9 Years on China Steel (Alaric Nightingale, Bloomberg News, 7/9/2010)

The decline in Chinese steel prices has diminished the nation’s iron ore demand which creates the single-biggest source of demand for dry-bulk shipping. Investors therefore monitor the Baltic Dry Index, a measure of commodity shipping costs, to gauge the robustness of steel and other commodity sensitive industries. It has fallen for the longest period in almost nine years.

The markets are now open and the Eureka Miner's Grubstake Portfolio is down but not by much (0.69%) and the Eureka Miner's Index is 110.6 just slightly below Friday's 111.3.

Two samples of scary headlines followed by only a measured reaction from the companies we follow. Predictably, our poorest performers this morning are related to the steel industry (POSCO, Arcelor-Mittal, Thompson Creek and General Moly) and falling copper prices (Freeport-McMoran). But the declines are not pronounced and could easily reverse on slightly less gloomy news from Alcoa this afternoon.

We are operating in a "new normal" as PIMCO CEO, Mohamed El-Erian, accurately coined the expression last year. The metals and miners are adjusting to slower domestic and global growth as the western world unwinds a massive debt load. Their stocks and products are being slowly "repriced" to reflect this new reality and seemingly bad news has less affect on both now that expectations are being lowered across the board. The headline of a major European bank failure or the collapse of some segment of the Chinese economy would no doubt bring a severe correction in these markets but lacking that the ole Colonel expects that we will witness bounded up-and-down adjustments for some long time to come. Price discovery is the work of stable markets and they are busily doing that now that the fear we experienced in May-June is slowly receding from the marketplace.

That's our philosophical thought for the morning as we enter earnings season. Stay tuned buckaroos and keep an eye on the EMI!

Weekly Molybdenum Update

Molybdenum prices continued to remain in a trading range with Western moly oxide price sitting above European moly and LME futures seller contracts. The Report adjusted a new mid-range price target for 2010 moly prices of $15.71/lb (see note 1); the old target was $16.50/lb.

Western Moly Oxide (FeMo65) remains at $16.00/lb (the price reported by Infomine and tracked by Base Metals on the General Moly Website)

Moly Oxide, Europe (Mo Drummed Molydbic Oxide EU) moves down to 14.00/lb (the price reported in the Metals Bulletin)

LME Futures Contracts

LME cash seller is at $31,500/metric ton $14.29/lb

3-Month (Buyer) $30,000/metric ton $13.61/lb
3-Month (Seller) $32,000/metric ton $14.52/lb

15-Month (Buyer) $30,000/metric ton $13.61/lb
15-Month (Seller)$32,000/metric ton $14.52/lb

Here is a chart of the LME 3-month contract (seller) from the February launch to the present:


Enough talk, let's walk the walk:

Our newly minted Eureka Miner's Index (EMI - what's this?) is above-par at 110.6, down slightly from Friday's 111.3 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 below 25; metals & miners remain on shaky timber with benchmark FCX trading in the the 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 Investor Confidence as further market corrections are probable 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

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

NYMEX/COMEX: (problems with the WSJ commodity link preclude reporting delta prices this morning; COMEX silver price is an estimate from COMEX gold multiplied by the LME Au:Ag ratio for this afternoon's trading):

Oil is $75.83 (August contract, most active); Gold is $1204.7 (August contract, most active); Silver is $17.990 (estimate); Copper is $3.0120 (September contract, most active)

Western Molybdenum Oxide is at $16.00; European Molybdenum Oxide is at $14.00; LME moly 3-month seller's contract is $14.52, LME cash seller is $14.29

The DOW is up 5.71 points to 10,203.74; the S&P 500 is up 0.36 to 1078.32. The miners are mixed:

Barrick (ABX) $44.09 up 1.19%
Newmont (NEM) $62.16 up 0.37%
US Gold (UXG) $4.88 down 0.41%
General Moly (Eureka Moly, LLC) (GMO) $3.19 down 1.85%
Thompson Creek (TC) $9.74 down 1.62%
Freeport-McMoRan (FCX) $64.01 down 2.99% (a bellwether mining stock spanning copper, gold & molybdenum)

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

ArcelorMittal (MT) $29.71 down 1.82% - global steel producer
POSCO (PKX) $103.84 down 2.04% - South Korean integrated steel producer

The Eureka Miner's Grubstake Portfolio is is down 0.69% to $1,375,644.92 (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

Note 1: The Colonel hasn't developed a molybdenum price model to date since this minor metal is thinly traded. As the futures market matures and more investors are involved it may make sense to do so later on. Presently molybdenum trades on fundamentals in a tight supply condition. It's relative price stability is good for producers like Thompson Creek (TC) and encouraging for General Moly (GMO) as they enter Mt. Hope mine construction next year.

For a trading range of $30,000-$40,000/metric ton is is instructive to look at both the arithmetic and geometric means (since we have no model):

Arithmetic mean (i.e standard average) = $35,000/metric ton or $15.88/lb
Geometric mean = $34,641/metric ton or $15.71

I tend to favor the geometric mean in understanding the "middle" of trading ranges so let's choose $15.71 as a measure of where we are in the moly pricing world. I'll give moly prices a "GREEN" light on the Eureka Outlook Dashboard if Western moly oxide is above this number; "YELLOW" if it falls below (our old trigger level was $16.50/lb).

Headline photograph by Mariana Titus