"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 26, 2011

Quadra FNX (QUX:TSE) Rocks; Day-2 Debt Watch & The DCI

Ruby T's Copper Angel

Morning Miners!

It is 5:40 AM. Let me pour you some Tuesday Sunshine in a copper cup. Nothing like Sweet Ruby T to chase those debt ceiling blues away. She pointed out to me that spot copper prices just enjoyed a nice 1.3% pop this morning. A strike in the world's largest copper mine and a sagging dollar are putting some shine on the red metal. Speaking of copper miners, guess who is happy in Ely...

Quadra FNX (QUX:TSE) Rocks

Quadra FNX Mining Ltd. (QUX:TSE) saw a nice bounce yesterday in share price on the heels of a very positive production report. Quadra operates the Robinson copper mine outside Ely, Nevada, which includes the re-opened Ruth Pit. Mining editor Adella Harding wrote a nice piece on Quadra and their results last night in the Elko Daily Free Press online edition:

Quadra FNX reports production totals (Adella Harding, Elko Daily Free Press, 7/25/2011)

Adella reports, "The production profile at Robinson will benefit from access to higher grade material at the bottom of the [Ruth] pit and the removal of the existing north ramp, as well as additional haulage capacity, according to Quadra, which Ore grades are expected to further improve at Robinson in the fourth quarter, the company reported."

The Ruth Pit has a long history and its re-opening has been hampered by some of the old timer diggings and a large quantity of mud at the bottom of the pit. Investors have rewarded their good efforts lately. Below is a 3-month chart of share price (blue line). Quadra has broken above its 200-day average (green line) and is presently trading at $16.94 ($16.00 CAD).

Day-2 Debt Watch, Introducing the DCI

Yesterday, the Report began a "debt watch" to track how the ongoing debt ceiling debate in Washington might effect the markets (see note 2). So far so good, nothing calamitous yet.

Last night, The ole Colonel thought a Debt Crisis index (DCI) would be helpful in quantifying progress or panic. It will be similar in concept to our Eureka Miner's Index(EMI) and Gold Value Index (GVI). A value of par (i.e. 100) is the state of the markets at last Friday's close, 7/22/2011 (Day-0). We will interpret any number above 100 as indicating a worsening state of affairs; below par, improving conditions.

The DCI will be computed at the market close and reported the next morning until things quiet down. Yesterday, the DCI had a closing value of 113.5 - a little worse than our benchmark on Friday but no one is screaming out of the market theaters yet.

So what's in the index? I chose two groups of three things each. The first group of factors would presumably rise in value or price if the debt crisis in the U.S. worsens. Here are my choices:

First group:

Market volatility as measured by the S&P 500 volatility index (.VIX)
10-year Treasury yields to represent bond market reaction
COMEX gold price* as a safe haven refuge

The second group are things that would be expected to go down:

The S&P 500 index (.SPX) to represent stock market reaction
Dollar Index (.DXY) to represent currency market reaction, measured by the PowerShares ETF (UUP)
COMEX copper price* as a proxy for global growth expectations

(* most active front month contract)

We multiply the factors of the first group together and divide them by the product of the second group. The results are then normalized (NORM) by the 7/22/2011 baseline, therefore:

DCI = NORM * (VIX*(10-Year Yield)*(COMEX gold))/(SPX*UUP*(COMEX copper))

Here are the values/price at the Friday close:

.VIX = 19.35
.SPX = 1,337.43
10-year yield 3.0040%
COMEX gold $1,611.8/oz (16:00 EDT)
COMEX copper $4.4065/lb (16:00 EDT)
UUP 21.11

Now we're off and running...

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 288.94, down from yesterday's 313.93 and just above the 1-month moving average of 284.74. 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 July 5th and is now trending up.

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 78.85, down from yesterday's 79.78 and above its 1-month average of 79.32. The new high for 2011 is 82.20 set June 23rd. Today's Value Adjusted Gold Price (VAGP) is $1,708.1/oz or $96.2/oz above the current COMEX gold price.

The GVI gauges the value of gold in relation to oil, copper and silver independent of currency. 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.

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 reversing the trend but now appears to be moving sideways.

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 $99.30
ICE North Sea Brent crude $117.86
Spread (ICE- NYMEX) = $18.56 (Friday, $18.40)

Here are the November contracts* with a narrower spread:

NYMEX light sweet crude $100.18
ICE North Sea Brent crude $117.90
Spread (ICE- NYMEX) = $17.72 (Friday, $17.62)

* NYMEX futures contracts have rolled forward, we now show September and November for a 2-month look-ahead

Prices are off their crisis highs but we have $115+ Brent and $100+ NYMEX in November favoring high oil prices throughout the summer and into late 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 OFF - The miners are on smoother roads but caution is in the air; The VIX or "fear index" is below 25; bellwether Freeport-McMoRan (FCX) remains above its 200-day moving average of $52.22 and 150-day moving average of $53.40 (our new key levels, 07/11 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 with some investors adverse to 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 up $0.10 in early trading at $99.30 (September contract, most active); Gold is up $0.3 to $1612.5 (August contract, most active); Silver is up $0.499 to $40.460 (September contract, most active); Copper is up $0.0635 at $4.4700 (September contract, most active)

Western Molybdenum Oxide is $14.83; European Molybdenum Oxide is $14.68; LME cash seller is $15.15, LME moly 3-month seller's contract is $15.15

Stock Market Morning Update

The DOW is down 74.21 points to 12,518.59; the S&P 500 is down 4.84 points at 1,332.59

Miners are hanging in there:

Barrick (ABX) $49.90 up 0.28%
Newmont (NEM) $58.74 up 0.56%
US Gold (UXG) $6.94 up 0.14%
General Moly (Eureka Moly, LLC) (GMO) $4.80 up 0.84%
Thompson Creek (TC) $9.55 down 1.14%
Freeport-McMoRan (FCX) $55.69 up 0.41% (a bellwether mining stock spanning copper, gold & molybdenum)
Quadra FNX (TSE:QUX) $16.94 up 0.69%
Timberline Resources (TLR) $0.77 down 1.28%

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

ArcelorMittal (MT) $32.19 down 1.53% - global steel producer
POSCO (PKX) $111.61 down 0.71% - South Korean integrated steel producer

The Eureka Miner's Grubstake Portfolio is unchanged (to two decimal places in %) at $1,802,105.18(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)

Note 2 - The Report will track the progress of the U.S. debt ceiling debate and its effect on markets though the so-called "deadline" on August 2nd. In the meantime we've suspended some of our usual weekly format. The next Metals & Miners Weekly Roundup will be Wednesday, August 3rd. In truth, the impact of the U.S. debt ceiling debate has been affecting investment decisions for weeks. Global sovereign debt issues have been an overhang on markets for many, many months starting with the Dubai crisis in late November, 2009 and spreading to the euro-zone in 2010-2011.

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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