"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.

Monday, December 27, 2010

$30 Moly for 2011? Metals & Miners Weekly Roundup


*** BREAKING NEWS *** General Moly (GMO) made a significant move up in afternoon trading. It hit a high of $6.01/share (2:50 p.m. ET) a 11.2% pop from its opening price of $5.40. GMO has since pulled back but is still above $5.80 at 3:30 p.m. ET. UPDATE: GMO closed on the day $5.90 up 9.26% from its prior close on 12/23/2010

Morning Miners!

It is 6:05 AM. Have a Monday cup of why-am-I-working-today coffee. There's a lot going on pardner, let's roll...

China's Christmas Surprise

China raised its key lending and deposit rates on Christmas Day to curb growing inflation concerns. This will no doubt throw the metals & miners for a loop as investor's worry again about China's rate of growth; the Shanghai exchange closed down 1.90% for the day.

The news didn't slow didn't slow COMEX copper which set $4.2985/lb as new record at the stroke of midnight just a nudge above $4.2960/lb set 12/22. It has since fallen back to $4.2595/lb in early morning trading. Gold is up a bit from Thursday at $1383/oz; and silver down a tad at $29.240/oz. NYMEX Oil remains ominously above the $90 level at $90.90/bbl.

It is hard to draw conclusions in a thinly traded holiday market. Our discussion below on oil, gold and copper correlations may give us some clues as to where we go next. First, let's check out one analyst's thoughts on moly prices for next year...

$30 Moly for 2011? Weekly Molybdenum Roundup



A faithful reader of the Report sent me a Canadian Business News Network (BNN) video of an interview with metals analyst John Redstone, Desjardins Securities. Mr. Redstone believes molybdenum, aluminum and zinc, and the companies that mine those metals, will be ones to watch. He thinks molybdenum could see a $30/lb price spike in the first-half of the year and chooses Thompson Creek (TC) as his "top pick" moly producer for 2011:

John Redstone Interview (BNN, 12/23/2010)

(Note: be patient with this video link, you may get a short BNN front end piece)

Spot prices of molybdenum oxide are now both in $16/lb territory in the West and Europe. Moly futures indicate a growing contango between spot prices and the London Metal Exchange (LME) 3-month and 15-month seller contracts both of which are now above $17/lb with the latter approaching $18/lb (contango occurs when the price of a commodity for future delivery is higher than the spot price, or a far future delivery price is higher than a nearer future delivery; backwardation is the opposite of contango).

The 3-month seller at $17.24/lb is comfortably above the Colonel's mid-range moly price target for 2010 of $15.71/lb. I will update my target for 2011 as we roll into the front end of January. Spot and futures data all look promising for a solid 2011. Is $30 moly in the cards? Stay tuned buckaroos.

Here is a detailed pricing summary for last week:

Western Moly Oxide $16.00/lb (the price tracked by Base Metals on the General Moly Website)

Moly Oxide, Europe (Mo Drummed Molydbic Oxide EU) $16.70/lb (the price reported in the Metals Bulletin)

LME Futures Contracts

LME cash seller is at $37500/metric ton $17.01/lb

3-Month (Buyer) $37,000/metric ton $16.78/lb
3-Month (Seller) $38,000/metric ton $17.24/lb

15-Month (Buyer) $38,150/metric ton $17.30/lb
15-Month (Seller) $39,150/metric ton $17.76/lb

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



Eureka Miner's Index (EMI)

The Eureka Miner's Index (EMI) gives us the market temperature for the sectors that have the greatest impact on mining in Eureka County. Below is a chart of the EMI at Friday's close. The magenta line is the EMI with a low interest cap of 3% on 10-year Treasurys (LIRC) and adjustments for gold and silver prices (i.e., Au:Ag ratio). A 1-month moving average is given by the blue line. A larger and more readable chart appears near the bottom of this blog page.


This morning the Eureka Miner's Index(EMI) is above-par at 596.47, down from Thursday's 677.46 on the China interest rate headline. The 1-month moving average is 596.06 periously close to this morning's EMI. If we break below this level in the coming days, the recent EMI uptrend may reverse.

The 2010 record high for the EMI is 739.13 set 12/7/2010; the low was set 6/7/2010 at 50.7. An EMI greater than 100 signals better times for the metals & miners relevant to Eureka County, the EMI re-established an upward trend on Friday, 12/3.

200-day averages are used in the EMI to normalize current mining company share price and are updated monthly. Upper and lower trend lines are updated weekly.

Oil & Copper Correlations with Gold

Oil & copper correlations with gold give us insight into what may happen next for the metals & miners.

Here are the latest correlations given this morning's NYMEX/COMEX trading:

Oil/Au correlation +0.4723 (1-month) +0.8103 (3-month)
Cu/Au correlation +0.3132 (1-month) +0.7126 (3-month)
Cu/Oil correlation +0.9117 (1-month) +0.9191 (3-month)

Here are the numbers from the last Monday's roundup (12/20/2010):

Oil/Au correlation +0.7717 (1-month) +0.8828 (3-month)
Cu/Au correlation +0.5897 (1-month) +0.8000 (3-month)
Cu/Oil correlation +0.9017 (1-month) +0.9113 (3-month)

All these correlations remain positive which is a typically a bullish condition for the metals & miners but some bearish trends are starting to emerge. The correlation of copper & gold continues to break down with copper showing a very over-valued state with respect to gold (nearly 7-standard deviations above the December model "fair vale" line). Though less severe, oil and gold are also showing some divergence. Oil is presently overvalued with respect to gold by nearly 4-standard deviations. The 1-month and 3-month correlations of copper & oil remain above 0.9 suggesting copper and oil prices continue to move in lockstep.

One way to visualize these correlations over time is to plot the "near-term" 3-month versus the "short-term" 1-month correlations (aka "rho") as shown below in a graph of oil versus gold and copper versus gold. The blue line indicates the correlation trajectory since October 1st; the magenta line is recent data since December 1st (ref: China to the Rescue?):




In the case of oil versus gold, we start out on 10/1/10 in the "+,-" or "yellow" quadrant and move upward until both are positively correlated (i.e. in the "+,+" or "green" quadrant). Copper correlated positively faster than oil and has been in the green quadrant for this entire period. Correlation data in this region is typically considered bullish. The trend toward the "-,+" quadrant for both oil & copper is worrying and potentially bearish (white arrow). We'll keep our eye on these two rascals as we enter the new year.

Gold/Oil & Oil/Copper Ratios

The Report has been tracking the recent rock solid stability (<3%) of the gold/oil and oil/copper ratios. This morning's gold/oil ratio is 15.2 suggesting $90/bbl oil should support $1370/oz gold; $100/bbl oil, $1520 gold. The oil/copper ratio is presently 21.3 suggesting $90/bbl oil should support $4.23/lb copper; $100/bbl oil, $4.69/lb copper.

For the past 3-months we have these statistics:

Au/Oil ratio

mean 16.15 bbl/oz
variation 2.57% (1-standard deviation/mean)

Oil/Copper ratio

mean 21.71 lbs/bbl
variation 1.88% (1-standard deviation/mean)

Daily Market Roundup

Enough talk, let's walk the walk:

Eureka Outlook Dashboard

4-WD is OFF - Markets are stable; The VIX or "fear index" is below 25; bellwether Freeport-McMoRan (FCX) in the low-$100s above its 200-day average of $79.39 (our new warning level, 12/06 update); 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 comfortably above $3.50/lb

The GREEN light is turned on for Stable Markets with the VIX below the 30 level (what's this?)

The YELLOW light is turned on for Inflation Watch as the Federal Reserve resumes buying Treasurys (aka QE2)

The GREEN light is turned back on for Investor Confidence as investment returns to the equity markets

The ORANGE light is turned on our Fuel Gauge with oil above $90

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?)

Commodity Market Morning Update

NYMEX/COMEX: Oil is down $0.61 in early trading at $90.90 (February contract, most active); Gold is up $2.9 to $1383.0 (February contract, most active); Silver is down $0.088 to $29.240 (March contract, most active); Copper is up $0.0010 to $4.2595 (March contract, most active)

Western Molybdenum Oxide is $16.00; European Molybdenum Oxide is $16.70; LME moly 3-month seller's contract is $17.24, LME cash seller is $17.01

Stock Market Morning Update

The DOW is down 53.43 points to 11,520.06; the S&P 500 is down 5.01 to 1251.76. Miners are down except for US Gold:

Barrick (ABX) $51.34 down 0.56%
Newmont (NEM) $59.98 down 0.17%
US Gold (UXG) $7.33 up 0.14%
General Moly (Eureka Moly, LLC) (GMO) $5.36 down 0.74%
Thompson Creek (TC) $13.25 down 0.97%
Freeport-McMoRan (FCX) $117.48 down 0.58% (a bellwether mining stock spanning copper, gold & molybdenum)

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

ArcelorMittal (MT) $37.01 down 0.59% - global steel producer
POSCO (PKX) $106.82 up 0.86%

The Eureka Miner's Grubstake Portfolio is is down 0.46% at $1,839,411.56 (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

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