"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, July 6, 2011

General Moly (GMO) on Moly Prices; Liberty Project Update; POSCO + Li3?

Morning Miners!

It is 5:24 AM. Have a cup of Elko's classic White King coffee. Old Miner Woden brewed a special pot this morning for the market bears in the break room - he may be drinking alone. The ole Colonel thinks the grass is starting to look a little greener in Ruby T's bull pasture...

To be a Bear or Not to Be?

There is certainly enough scary news floating around to keep folks skeptical of the markets. This morning the repercussions of Portugal's debt downgrade to junk status yesterday and an interest rate hike from China has put a damper on base metals. COMEX copper has come off its recent high and is trading presently at $4.3335/lb. Yesterday the red metal peaked at levels not seen since late April. Today's price is, however, only down 0.3% - hardly a "gap down" given these pretty lousy headlines.

I have worried lately that although copper and the base metals have rallied, molybdenum has headed down, down. Although it is unwise to infer too much from the price swings of a minor metal, the ole Colonel suspected moly is telling a different story than the big boys. Since there is negligible speculative money in moly, does the downtrend in prices since mid-June provide a more sober view of near-term direction than the red metal giant?

I asked General Moly's Seth Foreman for his view on the copper-moly conundrum yesterday and have included his thoughtful analysis below. According to Seth, molybdenum may be just showing some seasonal fluctuations. His moly price history chart from more normal times (i.e. pre-financial crisis and recession) does show mid-year dips.

Copper on the other hand may be exhibiting some counter-seasonal trends due to supply restrictions and expectations that the Chinese will continue re-stocking copper this summer together with some additional pickup in U.S. and Japan demand. The jury is still out on this one, but if anything, copper continues to be resilient. Dennis Gartman, who has been bearish on copper and the base metals, noted that "someone" is buying the stuff at the current $4+/lb price levels and that's "impressive."

My second concern has been the inverted relation of copper and gold prices. Both are currently in "deep inversion" by this Report's definition (i.e. 1-month and 3-month correlations are negative). This morning COMEX gold is up another $13.8/oz at $1,526.5/oz on the headlines but surprisingly the copper/gold correlation trajectory has turned in a bullish direction. If this continues we may be headed for better times, pardner.

The Chinese seem ready to back the euro aggressively by buying the debt of Europe's profligate peripheral countries if things get too bad. Chinese direct investment in Europe is up 60% from 2009 and together with their massive euro reserves, China has a lot at stake there. I've stopped worrying about Europe until September.

A bigger headwind could be our own debt debate coming to a head in early August. If congress doesn't raise the debt limit, this ole boy will leave Ruby's pasture and be be drinking a lot of White King with Old Miner Woden.

General Moly (GMO) on Moly Prices

These are Seth Foreman's thoughts on the recent declines in molybdenum prices:

I have two thoughts. First, summer is a traditionally slow period for the steel industry. Particularly in Europe, mills tend to slow production rates as people vacation, and return to full strength in the fall (September-ish). For Moly, this translates into few orders for product. Simultaneously, you have a number of producers and trading companies that don’t want to get stuck holding inventory of moly until September becoming increasingly more aggressive at liquidating product before the summer slow period. Those two factors are driving prices down currently.

I drew up the attached chart [included below] recently showing moly prices from 2000-2007 (eliminating 2008 and 2009 because of the financial crash). Of course the past is no predictor of the future, but moly prices have generally retreated from May/June to August/September in 5 of the 8 years on this chart. The exceptions are 2004 when the price was rocketing up, 2006 when prices held about steady over the summer, and 2007 where they rose slightly. So there does seem to be some seasonality to moly prices. If the global economy is still showing signs of strength and growth come August/September, we anticipate the moly price to respond positively.

Second, we have seen a number of weak economic indicators, both from the US and China. GDP growth here is tepid and a number of PMI indices in China have recently been showing very slow growth. Psychologically, this could lead both trading companies and steel mills to want to hold less inventory (de-stocking) just in case the economic rebound sputters. That could be compounding the seasonal issue described above, but this is difficult to quantify. If there de-stocking going on in the moly market currently, we can take relief in knowing that de-stocking is a temporary issue (eventually inventories will get de-stocked and can get de-stocked no further!).
(Seth Foreman, General Moly Director of Investor Relations)

Thanks Seth!

General Moly Liberty Project Update

There was some good General Moly news release yesterday about their Tonopah Liberty project:

General Moly Announces Liberty Project Drill Hole Results (Press Release, 7/5/2011)

In the words of Bruce D. Hansen, Chief Executive Officer:

"As part of our effort to re-start project development activities at the Liberty project this year, I am pleased to release these encouraging drill results from our second, world-class moly property. In addition to ongoing permitting achievements that we anticipate at the Mt. Hope project in the second half of the year, we are also advancing the Liberty project and anticipate releasing a revised resource estimate in the third quarter, as well as an updated pre-feasibility study early next year. Liberty is a solid project with robust economics for which we feel we receive minimal market valuation; however I am confident that we will continue to build value for our shareholders by driving both Mt. Hope and Liberty project development." (Press Release, 7/5/2011)

Adella Harding talked to General Moly spokesman Zach Spencer yesterday about the drill results and reported his thoughts in the Elko Daily Free Press last night:

Gold prices return to above $1,500 (Adella Harding, Mining Editor, Elko daily Free Press, 7/5/2011)

Don't let the title confuse you; there is a second article by the same name in Free Press online news. Just a little oopsy-doopsy at press time I assume.

POSCO + Li3 Energy?

Finally, here is an interesting tidbit about Li3 Energy, Inc. and South Korean steelmaker POSCO, who is an investor in General Moly (GMO) and owns 20% of our Mt. Hope:

Li3 Energy Provides Posco Update (Li3 Energy Press Release: Lima, Peru - 7/5/2011)

Besides securing molybdenum resources, POSCO has shown a keen interest in Lithium. Lithium is a key metal used in advanced battery chemistries for future electric and electric hybrid vehicles as well as many other applications. This report has covered how emerging battery technologies may become very important to our County and State. A list of links to these reports is included in this piece about Warren Buffet, POSCO and lithium:

Buffet Wants More POSCO, Both Want Lithium (Eureka Miner's Market Report, 1/19/2010)

We had a lithium followup several months later when Li3 Energy, Inc. announced acquisition of 170,000 acres of prospective lithium brine assets in the Big Smoky valley:

The Future Comes to Big Smoky - More Lithium in Northern Nevada (Eureka Miner's Market Report, 4/14/2010)

Now it seems POSCO and Li3 Energy may well be on a path of teaming together which could include both financial and technological exchanges. Although Li3 Energy's primary focus are its assets in South America, the connection to POSCO and our nearby Big Smoky is interesting. Stay tuned.

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 298.28, up from yesterday's 297.51 and above the 1-month moving average of 230.41 for the third day. 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 continues a troubling downtrend but the recent EMI move above the average is encouraging.

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 hot and cold markets 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 78.26, down from yesterday's 79.95 and below its 1-month average of 80.01. The new high for 2011 is 82.20 set June 23rd. Today's Value Adjusted Gold Price (VAGP) is $1,629.7/oz or $103.2/oz above the current COMEX 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; recently, gold has been gaining value reversing the trend. These three commodities were chosen for relative value comparison because 1) oil is a common cost element for all miners, 2) copper has proven to be 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 $96.68
ICE North Sea Brent crude $113.09
Spread (ICE- NYMEX) = $16.41 (Yesterday, $16.63)

Here are the October contracts* with a narrower spread:

NYMEX light sweet crude $97.68
ICE North Sea Brent crude $112.76
Spread (ICE- NYMEX) = $15.08 (Yesterday, $15.20)

* NYMEX futures contracts have rolled forward, we now show August & 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.

Eureka Outlook Dashboard

4-WD is ON - The miners are still on rough but possibly improving roads; The VIX or "fear index" is below 25; bellwether Freeport-McMoRan (FCX) remains above its 200-day moving 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 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 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 more 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 $0.21 in early trading at $96.68 (August contract, most active); Gold is up $13.8 to $1526.5 (August contract, most active); Silver is up $0.340 to $35.750 (September contract, most active); Copper is down $0.0140 at $4.3335 (September contract, most active)

Western Molybdenum Oxide is $14.52; European Molybdenum Oxide is $14.90; LME cash seller is $14.74, LME moly 3-month seller's contract is $14.74

Stock Market Morning Update

The DOW is up 3.70 points to 12,573.57; the S&P 500 is down 3.31 at 1,334.57

Miners are mixed:

Barrick (ABX) $46.48 up 1.09%
Newmont (NEM) $54.50 up 0.24%
US Gold (UXG) $6.20 up 3.85%
General Moly (Eureka Moly, LLC) (GMO) $4.44 up 3.02%
Thompson Creek (TC) $10.05 down 0.50%
Freeport-McMoRan (FCX) $53.72 up 0.19% (a bellwether mining stock spanning copper, gold & molybdenum)
Quadra FNX (TSE:QUX) $15.24 down 0.61%

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

ArcelorMittal (MT) $34.42 down 0.86% - global steel producer
POSCO (PKX) $107.63 down 0.57% - South Korean integrated steel producer

The Eureka Miner's Grubstake Portfolio is up 1.05% at $1,710,025.58 (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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