"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.

Wednesday, June 15, 2011

Red Metal Moon; Moly Price Conundrum

“Promises are like the full moon, if they are not kept at once they diminish day by day” German proverb

Morning Miners!

It is 5:57 AM. Have a cup of Dallmayr Kaffe compliments of Old Miner Woden. He is feeling his Germanic roots this morning - it must be the full moon. Dancing around the shop he keeps repeating "Promises, promises...liars, liars!" Maybe Woden is telling us something about the markets...

Red Metal Moon

One promise we've heard lately is that the Chinese will come roaring in next month to buy copper, the descent of metal prices will reverse and the miners will rally. We reported last Thursday that some China observers believe the Chinese have run their red metal stockpiles down at an alarming pace and will soon be back in the world markets for much more. According to this theory, the London Metal Exchange (LME) copper inventories should begin a marked descent in July and prices will respond to the upside. That would be welcome news because copper has been our faithful canary in the global growth mineshaft; as copper goes, so go the metals & miners.

Yesterday we noted the LME copper build had a flat spot and today shows the first decline in warehouse stores for a long time:

Is this the beginning of a Sino-buying binge or just a blip in the lunar ether? This morning London Bloomberg News carries a similar story on depleting stockpiles and the coming red dash for the red metal:

Copper Users in China Plunder Stockpiles as Goldman Forecasts Record Rally (By Glenys Sim - Jun 15, 2011 4:03 AM PT)

This piece offers some interesting numbers to back up the prediction. China comprises about 40% of global demand for copper; by the end-of-March they had amassed about 600,000 metric tons of the stuff and some folks think that they may have reduced the pile already by 300,000 metric tons. At that rate, the stocks would be depleted before summer's end. Goldman Sachs anticipates copper trading to bounce to a lofty $11,000/metric ton ($5/lb)in 12 months as mining companies fail to keep pace with the demand. On the other side of this argument is Dennis Gartman, author of the respected Gartman Letter, who has voiced very bearish views on copper price going forward against a growing backdrop of growing negative domestic and global economic news (Eureka Miner, 6/10/2011).

I have thrown my hat into both sides of the ring as kindly reported by Mining Editor Adella Harding in last night's online Elko Daily Free Press:

Roadshow buyer tracks gold price ( ADELLA HARDING Mining Editor, Elko daily free Press, June 14, 2011 6:04 pm)

No, the ole Colonel isn't the roadshow guy - my comments about gold, copper and silver prices appear toward the end of the article.

As we've discussed in this blog recently, I've looked at an upbeat and downbeat scenario for the summer. My models suggest that COMEX copper could ascend to $4.50/lb territory on improving economic data or dive below $3.75/lb on some succession of dire headlines (Gartman has recently said $3.50/lb could be in the offing). Which scenario is correct? Stay tuned, I am a little suspect of white knights showing up in darkening markets, even under the light of a full moon.

Moly Price Conundrum

There is another little funny in the metals market - a slight change in moly pricing that may be a harbinger of things to come or just more moon light. Western moly oxide bumped back up to $17.00/lb yesterday while euro-moly dropped to $16.45/lb. No big deal really except the LME moly futures also dropped - the 3-month seller fell to $16.56/lb from $17.01/lb; the 15-month, to $17.11/lb from $17.58/lb.

This puts western spot pricing in so-called "backwardation" with the front-end LME contract. This hasn't occurred for many months and usually means near term demand is trumping future price expectations, at least out here in the West. A softening in the molybdenum outlook is not inconsistent with the slowing global economy story, let's just hope this is just a small dip down. Stay tuned, even more to come...

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 215.88, down from yesterday's 229.95 and below the 1-month moving average of 263.27. The EMI is down from the high of January 4th but above the 2011 low of 211.88 set 6/10/2011. The 1-month moving average continues a troubling downtrend.

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 78.90, down from yesterday's 79.45 and slightly above its 1-month average of 78.45. The gold-gaining-value trend is now moving sideways. Today's Value Adjusted Gold Price (VAGP) is $1,612.5/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 $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 $98.55
ICE North Sea Brent crude $118.21
Spread (ICE- NYMEX) = $19.66 (Yesterday, $22.68)

Here are the September contracts* with a narrower spread:

NYMEX light sweet crude $99.40
ICE North Sea Brent crude $116.80
Spread (ICE- NYMEX) = $17.40 (Yesterday, $20.44)

* 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 $110+ 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 rough roads; The VIX or "fear index" is below 25; bellwether Freeport-McMoRan (FCX) is still below its 200-day moving average of $51.15 (our new warning level, 06/13 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 in June (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 down $0.82 in early trading at $98.55 (July contract, most active); Gold is down $1.8 to $1522.6 (August contract, most active); Silver is down 0.111 to $35.300 (July contract, most active); Copper is down $0.0200 at $4.1350 (July contract, most active)

Western Molybdenum Oxide is $17.00; European Molybdenum Oxide is $16.45; LME cash seller is $16.56, LME moly 3-month seller's contract is $16.56

Stock Market Morning Update

The DOW is down 79.89 points to 11,996.22; the S&P 500 is down 7.56 at 1,280.31

Miners are mixed:

Barrick (ABX) $44.32 up 0.93%
Newmont (NEM) $53.02 up 1.36%
US Gold (UXG) $5.86 up 0.17%
General Moly (Eureka Moly, LLC) (GMO) $4.44 down 3.06%
Thompson Creek (TC) $9.73 down 1.12%
Freeport-McMoRan (FCX) $49.40 down 0.96% (a bellwether mining stock spanning copper, gold & molybdenum)
Quadra FNX (TSE:QUX) $13.70 down 0.60%

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

ArcelorMittal (MT) $32.01 down 1.96% - global steel producer
POSCO (PKX) $98.50 down 2.55% - South Korean integrated steel producer

The Eureka Miner's Grubstake Portfolio is down 0.81% at $1,623,783.30 (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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