The Eureka Miner: POSCO (PKX) Up; Copper, Moly Down

Morning Miners!

It is 5:55 AM. Grab a cup of Monday earth tremors and let's get to work...

Oil & Metals Outlook

The north star is now in a different place in the sky and our days are shorter. No, I'm not saying you turned your clock back the wrong way Saturday night. These changes are not perceptible by human senses but folks that measure such things now tell us the earthquake in Japan caused the earth to tilt and spin a bit faster. That's a big'un pardner.

If the unrest in North Africa and the Middle East were not enough to challenge the outlook for the metals & miners - now we add the world's fifth largest recorded seismic event, a horrific tsunami and two nuclear plants undergoing partial meltdown. What's a miner to do?

Fortunately the broader markets are in bull mode even though the mining sector has been in a slump since early January. Bull markets love to climb walls of worry. If all this calamity had happened last March we would have a tougher story on our hands. As it is, gold prices are up about $10 from our last Monday's roundup presently trading at $1427.0/oz. Silver is hanging in there above $36/oz and copper has stumbled but not a whole lot. Last Monday the red metal was sitting at $4.4755/lb; this morning, $4.1785/lb. Shucks, last March we were pouring champagne at $3.50/lb.

There is some thought that the Japanese tragedy will cause a dip in base metal prices as their near term demand dips (Japan is one of the five biggest consumers of metals) but then recover as reconstruction begins. There will no doubt be a high demand for steel and investor's are shoveling the coke to South Korean steelmaker POSCO (PKX) this morning. On a down day overall, POSCO has popped over 5%. The fortunes of POSCO are important to Eureka because this steel giant is an investor in Genral Moly (GMO) and 20% owner of Mt. Hope.

In contrast, copper giant Freeport McMoRan (FCX) is falling with copper prices below its key 150-day average...again. Freeport is our bellwether miner, mining not only copper but gold and molybdenum too. Gold miners Barrick (ABX) and Newmont (NEM) are up today with gold prices but General Moly is struggling with the $5 level this morning.

The London Metal Exchange (LME) 3-month moly contract dropped to $16.49/lb Friday and the ole Colonel has been saying to expect moly spot prices to be under some pressure for the short term. Western and European moly are holding above $17/lb (see discussion below).

On a brighter note, NYMEX oil prices have dropped below $100/bbl as the battle between supply disruption (think Middle East) and demand destruction (think Japan, slower growth China) is tilting toward the latter. It will take awhile for the dust to settle on this one, stay tuned.

Here is a good Bloomberg article on the state of our red metal friend:

Metals Demand in Japan to Drop as Power Cuts Shut Factories After Tsunami (By Jae Hur, 3/14/2010, Bloomberg, 4:36 AM PT)

To keep some perspective on the ups and downs, here is our record book for the big three metals together with NYMEX and ICE Brent crude:

COMEX Gold $1445.7/oz 08:20 ET 03/07/2011, April contract most active
COMEX Silver $36.745/oz 07:50 ET 03/07/2011, May contract most active
COMEX Copper $4.6375/lb 06:15 ET 02/04/2011, March contract most active
NYMEX WTI Crude $106.95/bbl 08:05 ET, 03/07/2011, April contract most active
ICE Brent crude $119.79/bbl 02:45 ET 02/24/2011, April contract most active

Eureka Miner's Index (EMI)

The Eureka Miner's Index (EMI) gives us the market temperature for the factors 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, more readable chart can be found near the bottom of the blog page):

This morning the Eureka Miner's Index(EMI) is above-par at 325.65, up from from Friday's close at 345.72 and below the 1-month moving average of 477.16. The EMI continues to be down from the high set on January 4th, it set a a new 2011 low set March 10th.

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 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.

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 most active front-month contracts as of this morning:

NYMEX light sweet crude $99.68
ICE North Sea Brent crude $113.13
Spread (ICE- NYMEX) = $13.39 (Last Monday $11.39)

Here are the June contracts with a narrower spread:

NYMEX light sweet crude $101.54
ICE North Sea Brent crude $113.07
Spread (ICE- NYMEX) = $11.53 (Last Monday $9.08)

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

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 returning to the commodity space, diminishing correlations between key commodities are less alarming but trends should still be carefully monitored especially with spiking oil prices.

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

Oil/Au correlation +0.9547 (1-month) +0.7448 (3-month)
Cu/Au correlation -0.5077 (1-month) -0.1636 (3-month)
Cu/Oil correlation -0.5832 (1-month) -0.1235 (3-month)

Here are the numbers from the last roundup (3/07/2011):

Oil/Au correlation +0.8605 (1-month) +0.6433 (3-month)
Cu/Au correlation -0.5155 (1-month) -0.1000 (3-month)
Cu/Oil correlation -0.4976 (1-month) +0.1780 (3-month)

We now have more negative than positive correlations. Oil and gold continue to move in a strong positive direction; copper versus gold and copper versus oil are in a solid inversion (i.e. both one-month & three-month value correlations are negative). The metals & miners tend to do best when all correlations are positive.

According to my new March models (see bottom of blog page): oil is presently overvalued with respect to gold by +2.76-standard deviations and copper is undervalued by -0.15-standard deviations. Copper is presently under-valued with respect to oil by 1.40-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 more recent data (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 last fall and has was initially in the green quadrant longer. Correlation data in this region is typically considered bullish. After a brief venture into the "-,+" quadrant, the return of oil vs gold to the "+,+" side is bullish; the movement of copper vs gold into the "-,-" inversion region is a bearish development.

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 have diverged. The period of divergence is what prompted my January 14th 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 mining sector remains in correction except gold miners are getting some lift with rising gold prices.

Here is a plot of the variation for both ratios as well as the copper/oil ratio (a larger, more readable chart can be found near 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 the another in the ratio pair.

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

Gold:Oil ratio

mean 15.06 bbl/oz
variation > 3.0% limit at 4.31% (1-standard deviation/mean)

Oil:Copper ratio

mean 21.03 lbs/bbl
variation > 3.0% limit at 7.01% (1-standard deviation/mean)

Gold:Copper ratio

mean 316.0 lbs/oz
variation > 3.0% limit at 4.02% (1-standard deviation/mean)

Weekly Molybdenum Roundup

Spot prices for molybdenum oxide remain in $17/lb territory out West and in Europe. Euro moly spot is now in backwardation with both 3-month and 15-month London Metal Exchange (LME) seller contracts. Western Moly is in backwardation with the 3-month only (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 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 although the Middle East and Japan crisis must be watched closely. There is an excellent analysis of the supply/demand argument for $20+/lb moly provided by General Moly's Seth Foreman in the General Moly Update.

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) $17.60/lb (the price reported in the Metals Bulletin)

LME Futures Contracts

LME cash seller is at $35,805/metric ton $16.24/lb

3-Month (Buyer) $36,250/metric ton $16.44/lb
3-Month (Seller) $36,350/metric ton $16.49/lb

15-Month (Buyer) $37,025/metric ton $16.79/lb
15-Month (Seller) $38,025/metric ton $17.25/lb

Here is a 1-year chart of the LME 3-month contract (seller):

Daily Market Roundup

Enough talk, let's walk the walk:

Eureka Outlook Dashboard

4-WD is ON - The miners are still in a rough patch; The VIX or "fear index" is below 25; bellwether Freeport-McMoRan (FCX) is below 150-day moving averages but still 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 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, R&R Partners parts ways with Nevada Mining Association, Obama budget includes mining royalty , Mineral commission fights consolidation

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

Commodity Market Morning Update

NYMEX/COMEX: Oil is down $1.48 in early trading at $99.68 (April contract, most active); Gold is up $6.0 to $1427.0 (April contract, most active); spot Silver is $36.01 (COMEX pricing N/A this morning); Copper is down $0.0290 to $4.1785 (May contract, most active)

Western Molybdenum Oxide is $17.00; European Molybdenum Oxide is $17.60; LME moly 3-month seller's contract is $16.49, LME cash seller is $16.24

Stock Market Morning Update

The DOW is down 59.34 points to 11,985.06; the S&P 500 is down 7.48 at 1296.80

Miners are mixed:

Barrick (ABX) $51.09 up 0.55%
Newmont (NEM) $52.43 up 0.59%
US Gold (UXG) $7.61 up 2.01%
General Moly (Eureka Moly, LLC) (GMO) $5.05 down 1.56%
Thompson Creek (TC) $12.19 down 0.33%
Freeport-McMoRan (FCX) $49.23 down 0.51% (a bellwether mining stock spanning copper, gold & molybdenum)

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

ArcelorMittal (MT) $34.85 up 0.58% - global steel producer
POSCO (PKX) $108.08 up 5.20% - South Korean integrated steel producer

The Eureka Miner's Grubstake Portfolio is is up 0.75% at $1,776,715.02 (what's this?).

Cheers,

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