The Good, the Bad & the Ugly - Metals & Miners Weekly Roundup

Morning Miners!

It is 5:55 AM. Have a cup of Monday Go-Java. Let's start the week with a movie - the way the markets have been acting lately, you may think you've seen this one before...

The Colonel's Metals & Miners Outlook

The months of May and June have been rough on the metals & miners. For this morning's roundup let's look at the good, the bad and the ugly to see where we may be headed next...

The Good


It is always good to receive a new Mining Quarterly! The Summer 2011 Edition is now out and the online edition can be accessed with the link to your right. Mining Editor Adella Harding of the Elko Daily Free Press brings us another terrific overview of mining in our state with updates on Newmont, Barrick's Cortez Mine, The Hollister Project and much more. In her words, "High gold and silver prices and good demand for copper are sparking more mining projects and more exploration, and that's providing jobs and boosting the economy."

That's a lot of good, pardner.

Another good thing in addition to gold maintaining dollar price, is that glitter is now gaining value against key commodities after an 11-month decline. This report's Gold Value Index (GVI) is at another high for the year this morning, five new highs since early May. The GVI gauges the value of gold in relation to oil, copper and silver independent of currency. In simple terms an ounce of gold now buys more barrels of oil, pounds of copper and ounces of silver than it did just several months ago. Here are the increases in value from commodity highs (in gold terms) this year:

An ounce of gold at Friday's closing price buys...

26.4% more barrels of oil than on April 8th (2011 GVI oil high)
28.1% more pounds of copper than on February 7th (2011 GVI copper high)
37.3% more ounces of silver than on April 25th (2011 GVI silver high)

High dollar price, high relative value - that's good for gold, buckaroos. A full discussion and update of the GVI is given below.

Finally, falling oil prices are slowly registering at the pump for the consumer. You can monitor the latest Nevada fuel prices in the Daily Oil Watch below. This morning the average price of gas for Nevadans at the pump is $3.591/gal; the national average is higher at $3.651/gal. Here are the latest reported highs and lows in the state for regular gasoline:

$3.17/gal
ARCO , Las Vegas NE
1590 N Lamb Blvd & E Owens Ave

$4.19/gal
Texaco, Tonopah
1500 S Erie St near High School Rd

Since fuel prices are an important cost element for mining, lower costs are good for miners too. However...

The Bad


Falling expectations for domestic and global growth, the re-emergence of the European sovereign debt crisis and our own fiscal problems and debt ceiling debate have seriously impacted the equity markets. Last week the S&P 500 fell to within a few points of where we were when Lehman Brothers filed for bankruptcy on September 15th, 2008. That day marked the beginning of the bear market of 2008-2009, is there another bear waiting in the woods?

Oil and copper prices have proved reliable proxies for global growth for the past several years. Although no one enjoys higher fuel prices, NYMEX oil's rapid decline from $110+/bbl levels to this morning's $93.12/bbl is a red flag to many market watchers. COMEX copper prices have been fairly resilient in this downbeat environment since there is still a reasonable expectation for a red metal deficit in 2011. This morning COMEX copper is down but bravely holding above the key $4/lb level at $4.0380/lb. Dennis Gartman, respected author of the Gartman Letter, has warned that copper could see $3.50/lb if economic conditions worsen in the next several months. This report has indicated the possibility of $3.75/lb copper in down-side analysis based on the last 3-months of COMEX futures data.

As copper goes, so go the metals & miners. Copper giant and bellwether miner Freeport McMoRan (FCX) is stubbornly stuck between its 200-day and 400-day moving averages, never a healthy sign for the mining sector. General Moly (GMO) is similarly positioned with its averages but is showing some zip this morning trading up 1.2% to $4.19; FCX is holding steady from Friday's close down just slightly at $47.89.

Arguably, gold benchmark miner Barrick Gold (ABX) is faring worse than FCX or GMO, at least in terms of averages. This morning with COMEX gold at a respectable $1,539.2/oz, ABX is sandwiched between its 400-day and 600-day moving averages at $43.67.

That's just plumb bad.

The Ugly


As the GVI hits new highs this report's Eureka Miner's Index (EMI) keeps making new lows, a whopping seven since early May. This morning is no exception posting a lower low than Friday's close (see below). Whereas the EMI gauges market temperature, the Eureka Miner's Grubstake Portfolio is a measure of cumulative performance. It comprises 12 stocks that directly or indirectly impact mining in Eureka County and started with one million dollars in May of 2009. Although it hit two million dollars this year, the downturn in market sentiment has been devastating. Here are the latest year-to-date numbers as of Friday's close:

Grubstake portfolio $1,959,057.99 (12/31/2010)
Grubstake portfolio $1,579,050.10 (Friday's close 6/17/2011) down 19.4%

Over the same time period, the S&P 500 is up 1.1% - for mining equities that's plain ugly.

To complete ugly, the correlation and commodity ratio stability data given below does not suggest that we'll be out of the shaft very soon. Nuts, cheer up and read your brand new Mining Quarterly. It picked up this ole Colonel's spirits!

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 shows the EMI; a composite of three benchmark miners, key oil and metal prices, the 10-year Treasury rate and market volatility (.VIX). 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 183.47 setting a new low for 2011, down from Friday's close at 185.278 and below the 1-month moving average of 253.91. The EMI continues to be down from the high set on January 4th and the 1-month moving average has continues a troubling downtrend.

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.

Gold Value Index (GVI)

Our newly minted Gold Value Index (GVI) is below-par at 82.20 setting a new high for 2011 up from Friday's close of 81.838 and above the 1-month moving average is 78.86. Gold is gaining value. Today's Value Adjusted Gold Price (VAGP) is $1,564.6/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 0f 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.

Below is a chart of the GVI at Friday's close. The magenta line shows the GVI, a 1-month moving average is given by the blue line and the dotted line represents a "fair value" for a commodity-based valuation based on historical data (a larger, more readable chart can be found near the bottom of the blog page):



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 $110/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 $93.12
ICE North Sea Brent crude $112.25
Spread (ICE- NYMEX) = $19.13 (Friday $19.53)

Here are the October contracts* with a narrower spread:

NYMEX light sweet crude $94.24
ICE North Sea Brent crude $111.64
Spread (ICE- NYMEX) = $17.40 (Friday $18.36)

* NYMEX futures contracts have rolled forward, we now show August and October for a 2-month look-ahead

Prices are off their crisis highs but we still have $110 Brent and $90+ NYMEX in October favoring high oil prices throughout the summer and into fall. 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 the latest downbeat economic news.

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

Oil/Au correlation +0.1252(1-month) -0.2443 (3-month)
Cu/Au correlation +0.2624 (1-month) -0.5401 (3-month)
Cu/Oil correlation +0.4005 (1-month) +0.7313 (3-month)

Here are the numbers from our last roundup (6/13/2011):

Oil/Au correlation +0.5572(1-month) -0.0338 (3-month)
Cu/Au correlation +0.6125 (1-month) -0.5505 (3-month)
Cu/Oil correlation +0.6831 (1-month) +0.6560 (3-month)

We continue to have two negative correlations with further deterioration in copper versus gold and oil versus gold with both headed for inversions (1- and 3-month correlations negative). Copper versus oil (3-month) maintains a fairly tight positive correlation with 3-month data >0.7 as both have been trending down together. These are all decidedly bearish developments. The metals & miners tend to do best when all correlations are positive.

According to my new June models (see bottom of blog page): oil is presently undervalued with respect to gold by -2.78 standard deviations and copper is undervalued by -0.59-standard deviations. Copper is presently near fair value with respect to oil by +0.04-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 was bullish but now with a drop into "+,-" quadrant the trajectory has turned bearish; the movement of copper vs gold in the "+,-" quadrant is down and bearish.

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 on shaky ground.

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. The errors have been falling which suggested a return to greater stability but lately there are signs of divergence in Gold:Oil and Oil:Copper.

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

Gold:Oil ratio

mean 14.455 bbl/oz
variation > 3.0% limit at 6.63% (1-standard deviation/mean)

Oil:Copper ratio

mean 24.83 lbs/bbl
variation > 3.0% limit at 3.81% (1-standard deviation/mean)

Gold:Copper ratio

mean 358.44 lbs/oz
variation > 3.0% limit at 5.38% (1-standard deviation/mean)

Weekly Molybdenum Roundup

Spot prices for molybdenum oxide are below $17/lb territory with $16.33/lb out West and $16.25/lb in Europe. Western and Euro moly spot prices remain in a mild contango with 15-month London Metal Exchange (LME) 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). Western moly is flat with the 3-month seller contract.

The 3-month seller at $16.33/lb is 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. I did believe we could see much higher prices this year although recent commodity reversals have put a large damper on that expectation. 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.

A year-to-date chart of Western Moly oxide prices showing a mild downtrend:



Here is a detailed pricing summary for last week:

Western Moly Oxide $16.33/lb (FeMo65, the price tracked by Infomine - see the side bar graph in the lower right column)

Moly Oxide, Europe (Mo Drummed Molydbic Oxide EU) $16.25/lb (the price reported in the Metals Bulletin)

LME Futures Contracts

LME cash seller is at $36,000/metric ton $16.33/lb

3-Month (Buyer) $35,000/metric ton $15.88/lb
3-Month (Seller) $36,000/metric ton $16.33/lb

15-Month (Buyer) $36,200/metric ton $16.42/lb
15-Month (Seller) $37,200/metric ton $16.87/lb

Here is a 1-year chart of the LME 3-month contract (seller), please ignore the data glitch at the far right hand portion of the LME chart:




Daily Market Roundup

Enough talk, let's walk the walk:

Eureka Outlook Dashboard

4-WD is ON - The miners are in a rough shape; The VIX or "fear index" is below 25; bellwether Freeport-McMoRan (FCX) is below its 200-day average of $51.08(our new warning level, 06/10 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 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 YELLOW light is turned back on for Investor Confidence as investors turn adverse to commodity-sensitive equities

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

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 $0.28 in early trading at $93.12 (July contract, most active); Gold is up $0.2 to $1539.2 (August contract, most active); Silver is up $0.092 to $35.840 (July contract, most active); Copper is down 0.0640 to $4.0380 (July contract, most active)

Western Molybdenum Oxide is $16.33; European Molybdenum Oxide is $16.25; LME moly 3-month seller's contract is $16.33, LME cash seller is $16.33

Stock Market Morning Update

The DOW is up 18.92 points to 12,023.28; the S&P 500 is up 0.40 at 1,271.90

Miners are mixed:

Barrick (ABX) $43.67 up 1.13%
Newmont (NEM) $51.90 up 0.60%
US Gold (UXG) $5.41 down 0.37%
General Moly (Eureka Moly, LLC) (GMO) $4.19 up 1.21%
Thompson Creek (TC) $9.29 down 0.85%
Freeport-McMoRan (FCX) $47.89 down 0.08% (a bellwether mining stock spanning copper, gold & molybdenum)
Quadra FNX (TSE:QUX) $13.24 up 0.54%

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

ArcelorMittal (MT) $31.38 down 0.48% - global steel producer
POSCO (PKX) $96.61 up 0.35% - South Korean integrated steel producer

The Eureka Miner's Grubstake Portfolio is is up 0.36% at $1,584,714.22(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