Time to Feel Good about Something ; Another Question for General Moly (GMO)

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Morning Miners!

It is 6:12 AM. Have a cup, our favorite Norseman has just brewed a second pot. "Happy Thor's Day" - it's time to feel good about something...

Time to Feel Good about Something

It is pretty easy to feel glum these days; a lousy jobs report last Friday, the broader markets have been on a six-day losing streak and we may be headed for a sixth consecutive week of declines. While I was on the road this report's Eureka Miner's Index(EMI) plumbed a new low for 2011. The EMI gives us the market temperature for the factors that have the greatest impact on mining in Eureka County so the coldest reading for the year is not particularly encouraging when summer is just 13 days away!

But maybe that's the good news - it's June 9th. Last year, June 7th was arguably the worst day for the metals & miners in 2010. The EMI was sub-par at a lowly 50.67 (par or 100 is the dividing line between cold and hot markets). By the close of 2010, the EMI had reached a white hot 795.98. OK, yesterday's low for the year (so far) was 223.2; cold but not frigid. Some of the same concerns are still with us as last year. For example, here is an excerpt from our June 30th report (Metals & Miners on Shaky Timber):

What's got everybody spooked? Nearly everything would not be a bad answer, checkout this Wall Street Journal summary this morning:

"Treasurys have garnered strong demand [i.e. driving prices higher and yields lower] in recent sessions as concerns rose that an economic recovery could falter in the second half of the year as government stimulus fades away.

Recent data in the U.S. have showed a struggling housing market, and the Federal Reserve last week turned more cautious in its assessment on the economy. Investors increasingly are coming around to the view that the Fed's ultra-low interest-rate policy will remain in place for the rest of the year and even into 2011.
The anxiety was further heightened as a gauge of the economic outlook for China, one of the world's leading growth engines, was revised sharply lower than previously thought. The fear pushed down riskier assets from stocks to commodities." (WSJ, 6/29/2010)

At that time, the 10-year Treasury had headed to sub-3% pasture; today it is 2.942%. I think the WSJ could reprint this same observation by only changing "2011" to "2012" and be spot on. Now for some good news, here is a pair of recent articles to read during your break:

Commodity prices should snap higher in H2, dollar unlikely to recover until 2012 - Morgan Stanley (Rhona O'Connell, MineWeb, Thursday , 09 Jun 2011)

Copper to Surge to Record by Year’s End on Chinese Demand, Barclays Says (Yi Tian, Bloomberg - Jun 8, 2011 9:46 AM PT Wed Jun 08)

The first piece reports that Morgan Stanley does not expect the Federal Reserve to raise rates for at least another year and Chinese economic growth should be sustained. The second quotes Nicholas Snowdon, an analyst at Barclays Capital in London as saying:

“The Chinese market is awakening from the destocking cycle that lasted nine months ...Their backyard inventories have been completely depleted. By July, we will begin to see a steady increase in imports.”

The article goes on to predict that the London Metal Exchange inventories will peak and then decline to satisfy the Chinese demand for the red metal. Here is where the LME inventories stand today:



Still rising but it's not July yet, pardner. Last year copper inventories peaked around 550,000 tonnes before descending on increasing demand and higher prices. Today the LME is at 476,750 tonnes, I'd say we have something here to watch closely in the coming months.

My other question to General Moly (GMO) CEO Bruce Hansen

Last week the ole Colonel had the privilege to ask General Moly CEO Bruce Hansen some questions about his company in particular and the mining sector in general (full report on the meeting and Q&A: Eureka Moly Takes the Cake). With respect to the big picture going forward, Mr. Hansen cited continued strong "Asia-centric" demand for steel and China's shift from being a net exporter to net importer of molybdenum as bullish signs for both GMO and the important alloy of high-quality steel. He did, however, caution that headwinds such as persistent debt problems of the "PIIG" countries (Portugal, Ireland, Italy and Greece) could weigh on the prospects for the sector.


Our discussion shifted to the price of copper and Non-Executive Chairman Patrick James (above right) pointed to the demand for the red metal in rapidly expanding offshore automobile production. With a lot of former copper miners in the audience, there was some levity about $4/lb copper with respect to the sub-$1/lb levels in the good ole days. Copper prices are important to monitor because they have proved to be a reliable barometer for global growth. I believe there was common agreement in the room that supply restriction may very well keep most metal prices up even though the demand picture is much tamer than envisioned early in 2011. All in all, a positive outlook with some prudent caution from the staff of General Moly.

The broader markets are now open and it looks like we may be on our way to breaking a losing streak. I just threw a few shares of South Korean steelmaker (and 20% owner of Mt. Hope) POSCO (PKX) and copper giant Freeport-McMoRan (FCX) in the buckboard. History often does not repeat in markets - we probably won't have the mad dash post-June metals & miners rally of 2010 but I'll bet you we'll close the year in a lot better shape than yesterday's EMI low. Oh, what about General Moly (GMO) stock? Shucks, I already picked up some more of that in gloomy May.

Always do your own research folks, the ole Colonel could be dead wrong.


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 239.47, up from yesterday's 2011 low of 223.2 and below the 1-month moving average of 276.48. The EMI is down from the high of January 4th and 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 78.49, up from yesterday's 78.58 and above its 1-month average of 78.24. The gold-gaining-value trend has stalled. Today's Value Adjusted Gold Price (VAGP) is $1,640.0/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 $101.44
ICE North Sea Brent crude $118.02
Spread (ICE- NYMEX) = $16.58 (Yesterday, $16.96)

Here are the September contracts* with a narrower spread:

NYMEX light sweet crude $102.41
ICE North Sea Brent crude $117.59
Spread (ICE- NYMEX) = $15.18 (Yesterday, $15.06)

* 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 $100+ 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 $50.92 (our new warning level, 06/08 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 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, 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 $0.70 in early trading at $101.41 (July contract, most active); Gold is up $1.8 to $1540.5 (August contract, most active); Silver is up $0.635 to $37.255 (July contract, most active); Copper is down $0.0435 at $4.0650 (July contract, most active)

Western Molybdenum Oxide is $16.42; European Molybdenum Oxide is $16.60; LME cash seller is $16.87, LME moly 3-month seller's contract is $17.01

Stock Market Morning Update

The DOW is up 56.99 points to 12,105.93; the S&P 500 is up 6.77 at 1,286.33

Miners are mixed:

Barrick (ABX) $44.09 down 0.52%
Newmont (NEM) $52.43 up 0.17%
US Gold (UXG) $5.79 up 0.35%
General Moly (Eureka Moly, LLC) (GMO) $4.26 up 1.91%
Thompson Creek (TC) $9.90 up 1.02%
Freeport-McMoRan (FCX) $49.17 up 0.72% (a bellwether mining stock spanning copper, gold & molybdenum)
Quadra FNX (TSE:QUX) $13.92 up 0.52%

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

ArcelorMittal (MT) $32.44 up 0.59% - global steel producer
POSCO (PKX) $100.57 up 1.17% - South Korean integrated steel producer

The Eureka Miner's Grubstake Portfolio is up 0.65% at $1,633,150.69 (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 (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