"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.

Monday, January 24, 2011

Resting Easy for the Moment - Metals & Miners Weekly Roundup

Morning Miners!

It is 5:50 AM. Grab a cup of Monday Joe. The metals & miners have been in a slump lately but gold and copper are up a bit today and western moly bounced a buck. I'd say that's not a bad way to start the week...

Resting Easy for the Moment

Ever since the close of this year's first market day, our poor metals & miners have been spending a lot of time in the lower levels of the mineshaft. This report has confirmed we are in a corrective phase but maintains the duration should be fairly short. Let's look at the numbers.

The Eureka Miner's Index (EMI) set an all time high on January 4th of 816.8 followed by Friday's considerably lower close of 477.6. This morning the EMI is up a bit to 483.5 (see below).

The EMI uses three benchmark miners for gold, copper and molybdenum together with interest rates, market volatility and metal prices to gauge how well the Eureka County mining interests should be doing. Here is a comparison of the benchmarks with Friday's close:

Barrick Gold (ABX) $49.95 (1/21 close) $51.67 (1/4 close) down 9.1%
Freeport-McMoran (FCX) $118.75 (1/21 close) $108.40 (1/4 close) down 8.7%
Thompson Creek (TC) $13.78 (1/21 close) $14.91 (1/4 close) down 7.6%

OK, that's not too bad - nobody is down 10% yet. What about the other miners in the Eureka Miner's Grubstake Portfolio?

Newmont Mining (NEM) $55.84 (1/21 close) $62.52 (1/4 close) down 10.7%
US Gold (UXG) $6.24 (1/21 close) $7.94 (1/4 close) down 21.4%
General Moly (GMO) $5.63 (1/21 close) $6.68 (1/4 close) down 15.7%

That's a little worse but junior miners (UXG & GMO) always get beat up more than the majors during corrections. Newmont is a big boy but is the only stock of the six that is below its 200-day moving average. Newmont being down a bit more than Barrick is therefore not unreasonable (10.7% versus 9.1%). The Grubstake Portfolio is down 10.1% over the same period.

Will things get worse? Maybe. I take a bullish view that although there may be more bad days ahead, we should regain momentum going into the spring. In her morning article, Reuter's Rebekah Curtis quoted Robin Bhar, an analyst at Credit Agricole, as saying, "The market's resting easy for the moment." He was referring to the base metal complex now that some China fears are easing a bit. The ole Colonel thinks this may be the proper sentiment for the entire metals & mining sector. Here is a link to Ms. Curtis complete article:

METALS-Copper up and tin at record on supply concerns
(Rebekah Curtis, Reuters, 01/24/2011)

Refreshingly, supply & demand forces are beginning to dominate again replacing the more monolithic "risk-on, risk-off trade" investor mentality of 2010. Supply is tightening in many areas so this should help rise the prospects for our miners. Copper is in short supply, molybdenum pricing is suggesting both near term and longer term rising demand (see below) and this report continues to claim that gold will break $1570/oz before July Fourth. Stay tuned.

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 483.45, up slightly from Friday 477.61. We are below the 1-month moving average of 673.11 and the the EMI is now trending down from the high set on January 4th.

The 2011 record high for the EMI is now 816.78 set 01/04/2011; the 52-week low was set 6/7/2010 at 50.7. An EMI of 100 is the boundary between good lands and bad lands for the metals & miners relevant to Eureka County.

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. With supply and demand fundamentals driving the commodity space, diminishing correlations between key commodities are less alarming but trends should still be carefully monitored.

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

Oil/Au correlation +0.4768 (1-month) +0.5857 (3-month)
Cu/Au correlation +0.3597 (1-month) +0.4024 (3-month)
Cu/Oil correlation +0.3542 (1-month) +0.9193 (3-month)

Here are the numbers from the last roundup (01/18/2011):

Oil/Au correlation +0.4767 (1-month) +0.7377 (3-month)
Cu/Au correlation +0.3588 (1-month) +0.5664 (3-month)
Cu/Oil correlation +0.5206 (1-month) +0.9195 (3-month)

All these correlations remain positive which is a typically a bullish condition for the metals & miners but some bearish trends continue. The 3-month correlation of copper & gold continues to weaken and exhibits an over-valued state with respect to gold (3.9-standard deviations above the new January model "fair vale" line).

Though less severe, oil and gold are showing divergence also. Oil is presently overvalued with respect to gold by 3.0-standard deviations. The 3-month correlations of copper & oil remains above 0.9 suggesting copper and oil prices continue to move together although the 1-month correlation has dropped below 0.4. Copper is presently overvalued with respect to oil by 2.9-standard deviations.

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 recent trend toward the "-,+" quadrant for both oil & copper has reversed which is bullish (white arrow), but the decline in 3-month correlations is bearish (i.e. arrow points down).

Gold/Oil, Oil/Copper & Gold/Copper Ratios

The Report has been tracking the stability of the gold/oil, oil/copper & gold/copper ratios. Although they ended last year rock solid (<3% variation, 1-standard deviation/mean) the ratios are starting to diverge. This is what prompted my recent comment to Adella Harding, Elko Daily Free Press, "The recent divergence of our lustrous friend [gold] from copper and oil...may signal a near-term correction for the overall metals and mining sector." The re-emergence of supply/demand fundamentals should make this correction one of short duration.

Here is a plot of the variation for both ratios as well as the copper/oil ratio (a larger and more readable chart is given at the bottom of the blog page):

Once the ratios exceed 3% error, they become less useful in predicting the price moves of one commodity with respect to another in the ratio pair.

For the past 3-months we have these statistics given this mornings' numbers:

Au/Oil ratio

mean 15.79 bbl/oz
variation > 3.0% limit at 3.23% (1-standard deviation/mean)

Oil/Copper ratio

mean 21.40 lbs/bbl
variation 2.69% (1-standard deviation/mean)

Au/Copper ratio

mean 338.2 lbs/oz
variation > 3% limit at 5.42% (1-standard deviation/mean)

Weekly Molybdenum Roundup

Western molybdenum jumped one dollar last week to close with an earlier move in Euro moly. Spot prices for molybdenum oxide are now in $17/lb territory out West and in Europe. Moly futures indicate a backwardation between European spot prices and the London Metal Exchange (LME) 3-month contract continuing to signal a pickup in near term demand overseas. Western and European spot prices continue a mild contango with the 15-month seller contracts (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 $17.10/lb is comfortably above the Colonel's mid-range moly price target for 2010 of $15.71/lb but below my target of $20.21/lb for 2011. The Report will give moly prices a "yellow-green" light on the Eureka Outlook Dashboard for now because I do believe we could see much higher prices this year.

Here is a detailed pricing summary for last week:

Western Moly Oxide $17.00/lb (the price tracked by Base Metals on the General Moly Website)

Moly Oxide, Europe (Mo Drummed Molydbic Oxide EU) $17.50/lb (the price reported in the Metals Bulletin)

LME Futures Contracts

LME cash seller is at $37300/metric ton $16.92/lb

3-Month (Buyer) $37,000/metric ton $16.78/lb
3-Month (Seller) $37,700/metric ton $17.10/lb

15-Month (Buyer) $38,050/metric ton $17.26/lb
15-Month (Seller) $39,050/metric ton $17.71/lb

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

Daily Market Roundup

Enough talk, let's walk the walk:

Eureka Outlook Dashboard

4-WD is OFF - Markets are stable but caution is in the air; The VIX or "fear index" is below 25; bellwether Freeport-McMoRan (FCX) is below its 50-day moving average of 111.35 (1/24/11) but still well above its 200-day average of $83.07 (our new warning level, 01/05 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 YELLOW light is turned 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, 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 $0.77 in early trading at $88.34 (February contract, most active); Gold is up $3.7 to $1344.7 (February contract, most active); Silver is up $0.187 to $27.240 (March contract, most active); Copper is up $0.0195 to $4.3285 (March contract, most active)

Western Molybdenum Oxide is $17.00; European Molybdenum Oxide is $17.50; LME moly 3-month seller's contract is $17.10, LME cash seller is $16.92

Stock Market Morning Update

The DOW is up 28.38 points to 11,900.22; the S&P 500 is up 0.72 to 1284.07. Miners are mixed:

Barrick (ABX) $47.16 up 0.45%
Newmont (NEM) $55.58 down 0.47%
US Gold (UXG) $6.30 up 0.90%
General Moly (Eureka Moly, LLC) (GMO) $5.59 down 0.71%
Thompson Creek (TC) $13.75 down 0.22%
Freeport-McMoRan (FCX) $109.00 up 0.55% (a bellwether mining stock spanning copper, gold & molybdenum)

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

ArcelorMittal (MT) $36.80 down 0.11% - global steel producer
POSCO (PKX) $105.63 up 2.45% - South Korean integrated steel producer

The Eureka Miner's Grubstake Portfolio is is up 0.09% at $1,778,826.80 (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

Headline photograph by Mariana Titus

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