"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.

Tuesday, May 24, 2011

Bluer Skies? Watch Quadra FNX (TSE:QUX), Freeport-McMoRan (FCX)

Morning Miners!

It is 6:04 AM. Have a cup of Tuesday Lucky Numbers. Sweet Ruby T can jam gears with the best of them but she also has quite a head for numbers. Anytime Tuesday falls on the 24th of the month you can bet she's whistling "Blue Skies." Her birthday falls on that day and she points out that 24 is the only number in the month that is divisible by so many other numbers; 1,2,3,4,6,8 and 12. Ruby says no other date is so willing to divide and share - yesterday's 23rd is a good example of a "stingy" number splitting her fortunes with only herself and that loner "one." Monday the 23rd surely didn't share any good fortune with the markets, let's see if we have a more generous day today...

Watch Quadra FNX (TSE:QUX), Freeport-McMoRan (FCX)

Ruby is on a haul back run from the Quadra FNX Mining's Robinson copper mine in nearby White Pine County. The Ruth pit is up and running again and plans to chunk out a good share of copper, gold and molybdenum in 2011 - this report's favorite metals. Earlier this month, Quadra agreed to form a joint venture with Sumitomo Metal Mining Co. and Sumitomo Corp. to develop the Sierra Gorda copper-molybdenum project in Chile. Quadra will retain a 55% stake in the joint venture. I'd say this is a miner on the move.

But what about the latest carnage in the metals & mining sector? This report's Eureka Miner's Index(EMI) made a new low for 2011 yesterday (see below). All manner of pessimism has put a damper on global growth stories lately and this has taken a good whack on the base metals complex.

Lower expectations for global demand is always only half the story in markets. What about the supply side? There was a terrific Kitco Market Nugget this morning on Barclays Capital's latest assessment on copper production for 2011:

Market Nuggets: Global Copper Production Could Fall Sharply In 2011 – Barclays Capital (Kitco News, 5/24/2011)

(note: Kitco Market Nuggets are fleeting events, the above link should take you there but you may need to do a little digging to find this one)

The title at first looks a little scary suggesting that copper production is being paired back to match falling demand as in late 2008-2009. Actually the article is addressing the an expected drop in copper output for 2011 given the problems of declining ore grades, aging mines and rising costs. In fact by Barclays' new estimate, global copper mine production could fall as low as 15.7 million metric tons in 2011, down significantly from their April forecast for 16.1. This difference is primarily due to supply-side issues. Their conclusion, “...although expectations were broadly in agreement for stagnant mine supply growth in 2011, the outturn of available data so far points to an even worse picture evolving which should offer some upside support to copper prices.”

My thoughts are that a floor for copper prices is very welcome news and that miners that can control costs with new supply coming online should fare well in this environment. But what about demand if global growth is less than expected earlier this year? JP Morgan just cited "compelling evidence the global economy will bounce back from temporary setbacks" in a Wall Street Journal article this morning on higher oil prices. Maybe things aren't so bad after all, but oil back over $100/bbl will be a cost challenge for all miners. It won't be easy but the red metal is looking a little happier today with COMEX copper trading above $4/lb again at $4.0420/lb.

Watch Quadra FNX, pardner and of course our bellwether miner Freeport-McMoRan (FCX). If FCX can break above its 200-day moving average with some conviction there may be bluer skies ahead for the whole mining sector. Presently FCX is trading at $48.63 up 2.55% but still below yesterday's 200-day average of $50.14. To prove I'm a believer, the ole Colonel just threw a few shares of FCX in the buckboard this morning. Go copper, go gold, go 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 253.03, down from yesterday's 225.03 and below the 1-month moving average of 354.18. The EMI continues to be down from the high set on January 4th and set a new 2011 low of 225.03 on May 23rd. The 1-month average continues a troubling negative trend.

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 78.96, down from yesterday's 80.25 and above its 1-month average of 75.52. The gold-gaining-value trend is intact. Today's Value Adjusted Gold Price (VAGP) is $1,611.2/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

Latest Nevada Fuel Prices

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 (MENA). It is now above $100/bbl with a large 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 $99.45
ICE North Sea Brent crude $112.30
Spread (ICE- NYMEX) = $12.85 (Yesterday, $12.12)

Here are the September contracts* with a narrower spread:

NYMEX light sweet crude $99.88
ICE North Sea Brent crude $111.96
Spread (ICE- NYMEX) = $12.08 (Yesterday, $10.64)

* NYMEX futures contracts have rolled forward, we now show July & September for a 2-month look-ahead

Prices are off their crisis highs but we still have $100+ Brent and $90+ NYMEX in September favoring high oil prices throughout 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 on very rough roads; The VIX or "fear index" is below 25; bellwether Freeport-McMoRan (FCX) is still below its 200-day moving average of $50.14 (our new warning level, 05/23 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 The Federal Reserve will phase out buying Treasurys (aka QE2) but maintain low interest rates for now

The YELLOW light is turned back on for Investor Confidence as some investors avoid commodity-sensitive equities

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, Democrats seek to repeal mining tax from the constitution, Rhoads, Ellison oppose repeal of net proceeds tax, Proposal could change net proceeds tax, 'You get to deduct WHAT???' Nevada lawmakers ask gold miners

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

Commodity Market Morning Update

NYMEX/COMEX: Oil is up $1.75 in early trading at $99.45 (June contract, most active); Gold is up $7.2 to $1522.6 (June contract, most active); Silver is up $1.031 to $35.935 (July contract, most active); Copper is up $0.0505 at $4.0420 (July contract, most active)

Western Molybdenum Oxide is $16.65; European Molybdenum Oxide is $16.72; LME cash seller is $17.10, LME moly 3-month seller's contract is $17.24

Stock Market Morning Update

The DOW is up 25.39 points to 12,406.05; the S&P 500 is up 4.43 at 1,321.80
Miners are up:

Barrick (ABX) $46.03 up 1.10%
Newmont (NEM) $54.73 up 0.85%
US Gold (UXG) $6.71 up 3.23%
General Moly (Eureka Moly, LLC) (GMO) $4.14 up 1.72%
Thompson Creek (TC) $10.51 up 1.94%
Freeport-McMoRan (FCX) $48.63 up 2.55% (a bellwether mining stock spanning copper, gold & molybdenum)

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

ArcelorMittal (MT) $32.37 up 0.75% - global steel producer
POSCO (PKX) $102.12 up 0.62% - South Korean integrated steel producer

The Eureka Miner's Grubstake Portfolio is up 1.59% at $1,680,587.61 (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 (source: Wikipedia)

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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