"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, July 5, 2011

Copper-Moly Price Conundrum; Metals & Miners Weekly Roundup

Morning Miners!

It is 5:33 AM. Have a cup of Piccolo Pete java compliments of Sweet Ruby T. She brought back more than fireworks after her holiday break in Battle Mountain. She's looking for a punch-up with the market bears; anyone in the break room who isn't bullish on metals will get a bruiser, pardner...

The Colonel's Metals & Miners Outlook

There seem to be some real fireworks between two of our favorite metals - copper and molybdenum; major metal versus minor metal. Both appear to be telling very different stories about the near-term outlook for the metals & miners. Copper, a reliable proxy for global growth, has been on a roll. Copper giant and bellwether miner Freeport-McMoRan (FCX) closed last Friday after a 5-day rally putting some needed daylight between its share price and 200-day moving average. This Report's Eureka Miner's Index (EMI) has also been feeling the spirits lately after setting a new 2011 low June 27th; Friday marked its second day above its 1-month moving average. This is a bullish sign and important because the EMI gives us the market temperature for the factors that have the greatest impact on mining in Eureka County (see EMI discussion below).

Last week COMEX copper (orange) popped 6% to COMEX gold's (blue) 1% decline as shown in this 5-day chart:

Amid all this red metal bluster, Miss Moly has been feeling blue about the future. LME futures contracts and spot prices have been trending down since mid-June. The London Metal Exchange 3-month sellers contract is headed dangerously close its 52-week low ($14.74/lb versus $14.06/lb) and Western moly oxide closed last week at $14.40/lb. I posed the "moly price conundrum" on June 15th:

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. (Eureka Miner's Market Report, 6/15/2011)

We're a long way down from $17/lb pasture, pardner. Oddly, moly benchmark miner Thompson Creek (TC) doesn't seem to be phased by the slip in moly price closing above $10 after a 4-day rally to $10.13, a level not seen since early June. General Moly (GMO) has traded in a range of $4 to $4.50 over that same time period closing at $4.37 Friday; not great but certainly not headed for the cellar with Miss Moly. Finally POSCO (PKX), south Korean steelmaker and 10% owner of Mt. Hope, has been up and away bouncing more than 13% from its June lows to close at $108.74. This is relevant because steelmakers like POSCO use molybdenum in the production of high-grade steels. A rise in POSCO share price should be positive for future moly price expectations.

So Miss Moly appears to be a lonely voice in the metallic wilderness. Maybe not too lonely. Although he is probably less concerned with the minor metals, "Commodity King" Dennis Gartman has warned for some time that copper and the base metals are in for a surprise to the downside. Although he has backed off some from his clarion cry of "buy gold, sell copper," Kitco News reported last week:

Newsletter writer Dennis Gartman says he is heading to the sidelines in copper after previously anticipating weakness. “The chart appeared uncommonly ‘toppy’ and the economic news was, until last week’s ISM reports from around the world, of weakness rather than strength,” he says in The Gartman Letter. Other base metals had also appeared toppy, he says. But, he concludes: “The inventories of copper in Shanghai had been run down to discomfiting levels, and those inventories are being replenished, putting a strong bid into that market and forcing us to the sidelines.”

So there we have it, Miss Moly standing in the shadow of the Commodity King, but both seeing something in the ether. I hope they are wrong but this morning's price action maintains copper in a state of inversion with gold (i.e. by this report's definition, negative 1-month and 3-month correlations) almost never a bullish sign for the metals & miners (see Oil & Copper Correlations with Gold below). My July models, which we'll discuss later this week, also indicate that copper is in an overvalued state with respect to both gold and oil (see below). Stay tuned.

Poor Miss Moly (Euro-variety)...

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 297.51, up from Friday's close at 289.43 and above the 1-month moving average of 228.72. The EMI continues to be down from the high set on January 4th, the 1-month moving average continues a troubling downtrend but the recent breakout above the average is encouraging.

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 77.95 up from Friday's close of 77.82 and below the 1-month moving average of 80.04. Gold is losing relative value. Today's Value Adjusted Gold Price (VAGP) is $1,617.0/oz; $108.5 above the present gold price.

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 wide 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 $96.31
ICE North Sea Brent crude $112.94
Spread (ICE- NYMEX) = $16.63 (Friday $16.46)

Here are the October contracts* with a narrower spread:

NYMEX light sweet crude $97.37
ICE North Sea Brent crude $112.57
Spread (ICE- NYMEX) = $15.20 (Friday $16.29)

* 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 $95+ 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.

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

Oil/Au correlation +0.4820(1-month) -0.1999 (3-month)
Cu/Au correlation -0.4404 (1-month) -0.3830 (3-month)
Cu/Oil correlation +0.0025 (1-month) +0.6386 (3-month)

Here are the numbers from our last roundup (6/27/2011):

Oil/Au correlation +0.3688(1-month) -0.3083 (3-month)
Cu/Au correlation +0.1687 (1-month) -0.4489 (3-month)
Cu/Oil correlation +0.4400 (1-month) +0.7458 (3-month)

We now have three negative correlations with movement of copper versus gold into deep inversion (i.e. 1- and 3-month correlations negative). Oil versus gold has a positive 1-month and is showing some improvement in its negative 3-month. Copper versus oil maintains a good positive correlation with 3-month data >0.6 but the 1-month is close to negative territory. The metals & miners tend to do best when all correlations are positive.

According to my new July models, oil is presently undervalued with respect to gold by -0.92-standard deviations and copper is overvalued by +1.33-standard deviations. Copper is presently overvalued with respect to oil by +2.56-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 1, 2010; 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 (white arrow) is decidedly 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 another in the ratio pair. The errors have been falling which suggests a return to greater stability.

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

Gold:Oil ratio

mean 14.90 bbl/oz
variation > 3.0% limit at 7.09% (1-standard deviation/mean)

Oil:Copper ratio

mean 24.51 lbs/bbl
variation > 3.0% limit at 5.20% (1-standard deviation/mean)

Gold:Copper ratio

mean 364.08 lbs/oz
variation > 3.0% limit at 4.15% (1-standard deviation/mean)

The composite Commodity Ratio Stability (CRS) is 5.62% (i.e the root-mean-square of the three variations above).

Weekly Molybdenum Roundup

Spot and futures prices for molybdenum oxide are now all below $15/lb except for the 15-month sellers contract at $15.20/lb. We have $14.40/lb spot out West and $14.90/lb in Europe. Western moly spot prices are in a mild contango with 3-month and 15-month London Metal Exchange (LME) seller contracts. European moly is in slight backwardation with the 3-month seller (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 $14.74/lb is below the Colonel's mid-range moly price target for 2010 of $15.71/lb and way below my target of $20.21/lb for 2011. The Report will give moly prices a "orange" light on the Eureka Outlook Dashboard for this bearish development. I did believe we could see much higher prices this year although May-June commodity reversals have put a large damper on that expectation.

Here is a detailed pricing summary for last week:

Western Moly Oxide $14.40/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) $14.90/lb (the price reported in the Metals Bulletin)

LME Futures Contracts

LME cash seller is at $32,500/metric ton $14.74/lb

3-Month (Buyer) $31,500/metric ton $14.29/lb
3-Month (Seller) $32,500/metric ton $14.74/lb

15-Month (Buyer) $32,500/metric ton $14.74/lb
15-Month (Seller) $33,500/metric ton $15.20/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 on improving but road conditions remain rough; The VIX or "fear index" is below 25; bellwether Freeport-McMoRan (FCX) is above its 200-day average of $51.91(our new warning level, 07/01 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. The Federal Reserve phased out buying Treasurys June 30th (aka QE2) but will maintain low interest rates for now

The YELLOW light is turned back on for Investor Confidence as some 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 up $1.37 in early trading at $96.31 (August contract, most active); Gold is up $25.9 to $1508.5 (August contract, most active); Silver is up $1.310 to $35.015 (July contract, most active); Copper is up 0.0100 to $4.3125 (July contract, most active)

Western Molybdenum Oxide is $14.40; European Molybdenum Oxide is $14.90; LME moly 3-month seller's contract is $14.74, LME cash seller is $14.74

Stock Market Morning Update

The DOW is down 6.93 points to 12,575.84; the S&P 500 is down 2.48 at 1,337.19

Miners are mostly up:

Barrick (ABX) $45.56 up 1.74%
Newmont (NEM) $54.58 up 1.56%
US Gold (UXG) $6.08 up 5.19%
General Moly (Eureka Moly, LLC) (GMO) $4.39 up 0.46%
Thompson Creek (TC) $10.09 down 0.39%
Freeport-McMoRan (FCX) $53.68 up 0.34% (a bellwether mining stock spanning copper, gold & molybdenum)
Quadra FNX (TSE:QUX) $15.26 up 0.76%

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

ArcelorMittal (MT) $34.92 down 0.88% - global steel producer
POSCO (PKX) $108.99 up 0.23% - South Korean integrated steel producer

The Eureka Miner's Grubstake Portfolio is is up 1.36% at $1,695,335.17(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 (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

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