"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.

Thursday, March 31, 2011

Buffet, POSCO (PKX) and Molybdenum

Morning Miners!

It is 5:44 AM. Have a cup of Viking Vengeance, our favorite Norseman just heated up the pot with his number 3 thunderbolt. We'll need another talk, the ole Colonel doesn't like anything stronger than number 2s going off in the shop. I've got to think of the neighbors!

Warren Buffet Bullish on South Korea

This week's news on billionaire investor Warren Buffet has not been good. His number one guy David Sokol resigned amid controversial revelations about his personal stock trading. Mr. Sokol was seen by many to be grandpa's successor and now Berkshire Hathaway will no doubt be in a spin to find a new contender.

This is all great headline fodder but I found Buffet's recent trip to South Korea to be a lot more interesting, at least in how it may affect the fortunes of Eureka County someday. Here's an article about Mr. Buffet's trip in the Wall Street Journal posted before the Sokol dust up:

Warren Buffett in South Korea: We’re Hunting For Deals! (Dave Kansas, WSJ, 3/21/2011)

The article reminds us that besides seeking new opportunities, Warren Buffet is still keen on South Korean steelmaker POSCO owning about 4% of the company. POSCO owns 20% of General Moly's Mt. Hope molybdenum project, so by my way of thinking the Sage of Omaha owns about 1% of that lonely mountain top some 21 miles north of Raine's Market.

"[Warren Buffet] also had soothing things to say about Japan, arguing that the earthquake/tsunami disaster will not shake Japan’s overall economic direction," the article goes on to say. He and other savvy investors no doubt see steel demand rising in that part of the world as Japan begins to pick up the pieces and rebuilds. Molybdenum is a key alloy in making high grade steels, so what's good for steel is good for moly miners.

POSCO (PKX) on the rise

So how is POSCO doing? Pretty durn good, pardner. Amidst all the recent global turmoil, POSCO has been on a tear. Compared to steel giant ArcelorMittal (MT), POSCO is up 9% for the year while MT is down 4%. Here's a comparative 3-month chart (PKX blue, MT green):

POSCO stock price is nicely above its 200-day average heading for $120 territory. POSCO closed yesterday at $117.57, the 52-week high is $125.97. Here is a 1-year chart of stock price (blue) plotted versus the 200-day moving average (green):

Last December, I mentioned that POSCO may be a good stock to look at for 2011 (Buy POSCO?) when it was trading at $102.98. Now, don't you wish you'd listened to your ole Colonel? Please do your own checking on steel producers before you jump into the melting pot.

What happened to $20/lb Molybdenum?

OK, I did expect molybdenum prices to be higher than they are right now - that was before Chinese monetary tightening, tsunamis, nuclear melt-downs and revolts in the Arab world. Now global growth is in question again and all the metals are experiencing a wait-and-see. The Colonel has a bet that Western moly oxide will break $20 before the Fourth of July and I'll admit that sounds a little scary now. European moly oxide has been heading in the opposite direction recently breaking its lower trend line to sit at $16.72/lb. Western moly oxide has been hanging tough at $17.00/lb but neither Western or European has shown any inclinations to head higher.

The LME futures contracts may be telling us a different story as they move back toward $18/lb pasture. Here's the line up:

LME cash seller: $38,050/tonne ($17.26/lb)
LME 3-month contract: $38,500/tonne ($17.46/lb)
LME 15-month contract: $39,150/lb ($17.76/lb)

Let's put the futures to a test. I'll bet a beer that European moly oxide spot prices will reverse and break $17.20/lb before May Day (you can checkout the Colonel's other beer bets for 2011 in the right column near the end of the blog page). How's that for a positive outlook? Go Buffet, go POSCO, go Miss Moly!

Daily Market Roundup

Enough talk, let's walk the walk:

Eureka Miner's Index(EMI)

This morning the Eureka Miner's Index(EMI) is above-par at 457.04, up from yesterday's 451.92 and above the 1-month moving average of 376.08. The EMI continues to be down from the high set on January 4th and up from the March 15th low of 262.02 - a trend reversal may again be in the works.

The EMI gives us the market temperature for the factors that have the greatest impact on mining in Eureka County. The record high for the EMI is 816.78 set 01/04/2011; the 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.

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.

Gold Value Index (GVI)

Our newly minted Gold Value Index (GVI) is below-par at 70.12, down from yesterday's 70.15. The 1-month moving average is 71.05. Today's Value Adjusted Gold Price (VAGP) is $1,712.8/oz.

The GVI gauges the value of gold in relation to oil, copper and silver independent of currency. Although gold prices have been on the rise, the GVI has been trending down since 6/7/2010 when it had a value of 100. These three commodities were chosen for relative value comparison because 1) oil is a common cost element for all miners, 2) copper has been a reliable proxy for global growth and 3) silver is a precious metal that now competes with gold for investment and as a hedge against fiat currencies.

The Value Adjusted Gold Price (VAGP) is a level that supports current oil, copper & oil prices based on historical commodity norms. If the daily COMEX gold price is below the VAGP, then gold is undervalued; if above, overvalued.

Daily Oil Watch

On February 1st we identified North Sea Brent crude oil as a good barometer for the developing crisis in the Middle East and North Africa. It is still above $100/bbl with a large but narrowing spread from the North American benchmark, Western Texas Intermediate or "Texas light sweet crude", traded on the NYMEX (see note 1). The Report normally follows the latter but will track both until things settle out in the region.

Here are the key front-month contracts as of this morning:

NYMEX light sweet crude $106.47
ICE North Sea Brent crude $117.28
Spread (ICE- NYMEX) = $10.81 (Yesterday $10.70)

Here are the July contracts* with a narrower spread:

NYMEX light sweet crude $107.44
ICE North Sea Brent crude $116.93
Spread (ICE- NYMEX) = $9.49 (Yesterday $9.45)

*(the most active front-month contracts are now May so we moved from June to July contracts for a 2-month look-ahead).

Although prices are off their crisis highs, we have $100+ Brent and NYMEX in July favoring higher oil prices through the summer. My December prediction that we would see NYMEX $100/bbl oil before the Fourth of July came true on February 23rd.

Eureka Outlook Dashboard

4-WD is ON - The miners are still in a real rough patch but Freeport may pull us out of the mud hole yet; The VIX or "fear index" is below 25; bellwether Freeport-McMoRan (FCX) is above its 50-day and 100-day moving average today and is comfortably above its 200-day average of $44.85 (our new warning level, 03/04 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 RED light is turned on our Fuel Gauge with oil above $100

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, R&R Partners parts ways with Nevada Mining Association, Obama budget includes mining royalty , Mineral commission fights consolidation, Democrats seek to repeal mining tax from the constitution, Rhoads, Ellison oppose repeal of net proceeds tax

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

Commodity Market Morning Update

NYMEX/COMEX: Oil is up $2.20 in early trading at $106.47 (May contract, most active); Gold is up $12.4 to $1437.3 (June contract, most active); Silver is up $0.274 to $37.785 (May contract, most active); Copper is up $0.0155 to $4.2895 (May contract, most active)

Western Molybdenum Oxide is $17.00; European Molybdenum Oxide is $16.72; LME cash seller is $17.26, LME moly 3-month seller's contract is $17.46

Stock Market Morning Update

The DOW is up 3.30 points to 12,354.55; the S&P 500 is down 1.34 at 1326.92

Miners are up:

Barrick (ABX) $52.03 up 0.93%
Newmont (NEM) $54.62 up 0.92%
US Gold (UXG) $8.84 up 1.38%
General Moly (Eureka Moly, LLC) (GMO) $5.32 up 0.76%
Thompson Creek (TC) $12.43 up 0.32%
Freeport-McMoRan (FCX) $55.75 up 0.92% (a bellwether mining stock spanning copper, gold & molybdenum)

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

ArcelorMittal (MT) $36.53 down 0.57% - global steel producer
POSCO (PKX) $115.9 down 1.85% - South Korean integrated steel producer

The Eureka Miner's Grubstake Portfolio is is up 0.54% at $1,910,290.90 (what's this?).


Colonel Possum

Note 1 - West Texas intermediate (WTI), also known as Texas light sweet, is a type of crude oil used as a benchmark in oil pricing and is the underlying commodity of New York Mercantile Exchange's (NYMEX) oil futures contracts. The price of WTI is often referenced in North American news reports on oil prices, alongside the price of North Sea Brent crude (Wiki).

Headline photograph by Mariana Titus

Write Colonel Possum at colonelpossum@gmail.com for answers to your questions or to request e-mail updates on the market

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