"The history of Eureka lies in its future." - Lambert Molinelli, 1878

DISCLOSURE

The author/editor of the Eureka Miner owns common shares of local mining stocks, General Moly (GMO), McEwen Ming (MUX) 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.

Monday, July 11, 2011

Dollar, Gold Bounce; General Moly (GMO) Update; Metals & Miners Weekly Roundup


Morning Miners!

It is 5:32 AM. Have a Monday cup of Seven-Eleven-Eleven - it sure sounds lucky, we'll see...

The Colonel's Metals & Miners Outlook


You can bet the market morning will be exciting when the dollar and gold bounce together and the 10-year Treasury drops below 3% (yet again). This week starts with renewed fear that Europe's debt crisis is spreading to larger nations like Italy and Spain putting a damper on the start of the second-quarter earnings season. Aluminum giant Alcoa (AA) reports after the bell which is an important input for the metals & miners.

Of course, the U.S. dollar is a big input too and this morning popped more than 1% on a falling euro. As I write this blog, the euro has dropped to 1.4075 and the U.S. Dollar Index is at 75.66 - a level not seen since late May. COMEX gold is also up nearly a percent at $1,554.2/oz; the 10-year U.S. Treasury has dipped to 2.972%.

Last week I told Mining Editor Adella Harding that the ole Colonel was sticking by his prediction that COMEX gold would break $1,600/oz before Labor Day. My thoughts appear near the end of her Friday afternoon article in the Elko Daily Free Press:

Gold prices rise on new jobs report (ADELLA HARDING Mining Editor, Elko Daily Free Press, Friday, July 8, 2011 5:06 pm)

Given Europe's woes and our own debt debate in Washington, there should be enough fear around to keep gold well supported for the remainder of the summer. I've also made a call that COMEX copper will stay above $4/lb over the same period. Although this seems counter-intuitive if a strong "risk-off" sentiment returns to the marketplace, I told Adella, "The copper price remains supported by supply restrictions in Chile and improving outlooks for the red metal for the second-half of the year."

We may see some healthy dips in red metal price in the meantime but it has been trading with remarkable resilience. This morning COMEX copper is down 0.9% to $4.3730/lb on the stronger dollar. Technically, however, the relation of copper and gold prices are improving. Both have been inverted (their price moves are typically in opposition) but the direction of change is tending to positive correlation (their prices move together). I consider the latter case bullish for copper going forward (see the Oil & Copper Correlations with Gold discussion below).

The markets are now open and it looks like a bruiser; the DOW has drooped 104 points to 12,553 and the S&P 500, 13.6 points to 1,330.5.

This report's Eureka Miner's Index (EMI) has fallen but holding its ground above the 1-month average (310.4 versus 241.2, the 2011 low was 180.0 on June 27th). Let's cross our fingers for a positive Alcoa report.

General Moly (GMO) Update

General Moly (GMO) released an important update on financing and schedule bright and early this morning:

General Moly Announces Amendment to Hanlong Agreement (Press release, 5:47 AM PT, 7/11/2011)

They announce amendments to their agreement with Hanlong (USA) Mining Investment Inc. to provide greater flexibility with respect to Mt. Hope permit receipt and Chinese bank approval timelines. CEO Bruce D. Hansen commented on this and the ongoing permitting process:

The BLM and its independent EIS contractor are continuing to make good progress on responding to the comments received on the second draft of the PDEIS. We anticipate them to finalize and release the DEIS for publication most likely in August. Once the DEIS is published, we expect the public comment period and finalization of the EIS to take six to nine months before project authorization will be issued via a Record of Decision (ROD). Progress also continues in regard to the Nevada State issued permits. (Air Quality, Water Pollution Control, Reclamation, and Dam Safety). All of these permits are expected prior to the issuance of the ROD. (Press Release, 7/11/2011)

Naturally, we all want to know when mine construction will begin. My last attempt to figure these dates was after the Eureka Town hall Meeting in June. From the GMO presentation, I came up with a "best case" start around mid-April of next year. Now, an August publication release plus a 6-month finalization period for the EIS and a 2-month period for financing gets you to about the same start time. Unfortunately, with the new agreement, Hanlong gives themselves a longer time to arrange financing - up to 9-months. For "worst case" analysis then, a 9-month EIS finalization and 9-month financing period would move the start date into the first quarter of 2013. Nuts.

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 310.35, down from Friday's close at 347.10 and above the 1-month moving average of 241.21. The EMI is down from the high of January 4th and set a new 2011 low on June 27th at 180.03. The 1-month moving average broke its troubling downtrend on May 2nd.

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 79.62 up from Friday's close of 78.38 and below the 1-month moving average of 79.95. Gold is moving sideways with respect to relative value. Today's Value Adjusted Gold Price (VAGP) is $1,631.0/oz; $76.8 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 trended down since 6/7/2010 when it had a value of 100; gold regained value recently but now appears to be moving sideways. 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 $95.05
ICE North Sea Brent crude $116.08
Spread (ICE- NYMEX) = $21.03 (Friday $20.98)

Here are the October contracts* with a narrower spread:

NYMEX light sweet crude $96.06
ICE North Sea Brent crude $115.33
Spread (ICE- NYMEX) = $19.27 (Friday $19.33)

* 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 +0.3393(1-month) -0.0991 (3-month)
Cu/Au correlation +0.0356 (1-month) -0.0434 (3-month)
Cu/Oil correlation +0.2104 (1-month) +0.4279 (3-month)

Here are the numbers from our last roundup (7/5/2011):

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)


There are less bearish indications in the latest numbers. We have gone from three to two negative correlations with movement of copper versus gold away from inversion (i.e. 1- and 3-month correlations negative). Oil versus gold has a positive 1-month and is showing more improvement in its negative 3-month. Copper versus oil maintains a positive correlation with 3-month data and has moved away from near-negative 1-month 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 -0.67-standard deviations and copper is overvalued by +2.48-standard deviations. Copper is presently overvalued with respect to oil by +3.39-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. The return of oil vs gold to the "+,-" quadrant was bearish but the upward trajectory is encouraging. The movement of copper vs gold from the "-,-" quadrant (white arrow) is less bearish, with a bullish upward trajectory.

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 (i.e. declining CRS, see below)

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

Gold:Oil ratio

mean 15.07 bbl/oz
variation > 3.0% limit at 6.58% (1-standard deviation/mean)

Oil:Copper ratio

mean 24.33 lbs/bbl
variation > 3.0% limit at 5.79% (1-standard deviation/mean)

Gold:Copper ratio

mean 365.46 lbs/oz
variation > 3.0% limit at 3.47% (1-standard deviation/mean)

The composite Commodity Ratio Stability (CRS) is 5.44% (i.e the root-mean-square of the three variations above); last roundup was 5.62%.

Weekly Molybdenum Roundup

Spot and futures prices for molybdenum oxide remain below $15/lb except for the 15-month sellers contract at $15.08/lb. We have $14.29/lb spot out West and $14.65/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 $14.52/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 $14.29/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) $14.65/lb (the price reported in the Metals Bulletin)

LME Futures Contracts

LME cash seller is at $32,000/metric ton $14.52/lb

3-Month (Buyer) $31,000/metric ton $14.06/lb
3-Month (Seller) $32,000/metric ton $14.52/lb

15-Month (Buyer) $32,240/metric ton $14.62/lb
15-Month (Seller) $33,240/metric ton $15.08/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 OFF - The miners are on smoother roads; The VIX or "fear index" is below 25; bellwether Freeport-McMoRan (FCX) remains above its 200-day moving average of $52.16 and 150-day moving average of $53.41 (our new key levels, 07/08 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 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 down $1.15 in early trading at $95.05 (August contract, most active); Gold is up $12.6 to $1554.2 (August contract, most active); Silver is up $0.177 to $36.720 (September contract, most active); Copper is down $0.0390 to $4.3730 (September contract, most active)

Western Molybdenum Oxide is $14.29; European Molybdenum Oxide is $14.65; LME moly 3-month seller's contract is $14.52, LME cash seller is $14.52

Stock Market Morning Update

The DOW is down 104.02 points to 12,553.18; the S&P 500 is down 13.55 at 1,330.25

Miners are mostly mixed:

Barrick (ABX) $46.51 up 0.58%
Newmont (NEM) $54.87 up 0.20%
US Gold (UXG) $6.11 unchanged
General Moly (Eureka Moly, LLC) (GMO) $4.45 down 1.33%
Thompson Creek (TC) $10.07 down 1.85%
Freeport-McMoRan (FCX) $53.62 down 2.72% (a bellwether mining stock spanning copper, gold & molybdenum)
Quadra FNX (TSE:QUX) $15.01 down 1.23%

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

ArcelorMittal (MT) $33.42 down 2.58% - global steel producer
POSCO (PKX) $108.28 down 1.54% - South Korean integrated steel producer

The Eureka Miner's Grubstake Portfolio is is down 0.79% at $1,710,633.83(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

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