"We Are Prepared for Success"- Why Copper is Important to Eureka

Morning Miners!

It is 5:32 AM. Have a hot cup of that classic Raine's TGIF Red Label. You've earned every bit of it this week!
Have a great weekend from the Colonel.

"We Are Prepared for Success" - Why Copper is Important to Eureka

There is no doubt the present debt concerns in Europe and the United States have cast a long shadow of uncertainty on the markets. This morning, things look a little brighter in Europe but Congress seems only further away from resolving our own debt ceiling debate as the August 2nd deadline draws near. Tomorrow these headlines could reverse; gold up, gold down. Armageddon or smooth sailing?

If we can see through the noise of all these headlines there are actually some increasingly positive signs coming from the price movements of gold and copper. It makes sense for Eurekans to feel good about rising gold prices; gold mining royalties are a major part of our county revenue. Why should we care about copper? Although the Robinson copper mine is just down the road a piece outside of Ely, it is in another county. Not much copper in Eureka, gold and molybdenum abound.

Followers of this Report know that copper has been a very reliable proxy for global recovery since the dark days of March 2009 when the Eureka Miner first went on the air. As copper prices reflated on improving demand, the overall metals & mining sector improved. We were excited when copper broke $2.50/lb then; nowadays we are in the lofty $4+/lb range and the red metal remains our brave canary in the mineshaft.

China makes up nearly 40% of global copper demand and is clearly slowing down. The preliminary HSBC China PMI update hit a 28-month low at 48.9 this week showing that Chinese manufacturing is now in contraction. The curious thing is that copper price remains resilient against this backdrop.

You might guess that this is just frothy market speculation but Freeport-McMoran CEO Richard Adkerson said on CNBC Business News yesterday that investment flows were down and fundamentals were driving price. As we have reported, even with slowing demand there are anticipated supply restrictions and copper miners are doing their best to ramp up production. Mr. Adkerson's memorable quote from the CNBC interview was, "We are prepared for success."

He added, "China is the risk to the copper price today...If something were to happen with China I believe it would be temporary. The forces that have been unleashed for the global growth are not things we’re going to have to go back on." (CNBC Business News, 7/22/2011)

That's music to this ole Colonel's ears. This is not a mining CEO that says things to boost share price; he was one of the first mining bosses to slash costs and reduce production during the 2008-2009 financial crisis. As we have said before, unless the wheels come off either the U.S. or Europe debt buckboards, we should see improving times for the miners in the second half of this year. As copper goes, so go the metals & miners, so go the broader markets in my view.

This morning Caterpillar (CAT) reported disappointing earnings on dropping demand from Japan and China. On the other hand, General Electric with an large international footprint too, reported good results with optimism about the path forward. What did copper think? COMEX copper is trading up $0.0260 at a respectable $4.4095/lb - not bad.

But what about gold? If there is some breakthrough on the debt fronts gold could drop more than a tad. We saw that the other day when there was hope for the so-called gang-of-six plan, gold fell nearly $30/lb after just setting an all time nominal high of $1,610.70/oz. That deal went soft and COMEX gold is now trading back up at $1,602.8/oz.

I think Commodity King Dennis Gartman has gold about right. Allen Sykora of Kitco News reported Gartman's thoughts in a "Kitco Market Nugget" this morning, “The inevitable and long overdue correction has begun, and although we have retained a core position in gold, we’ve time on our side, allowing us to sit and wait for the correction to run its course and into which we hope to replenish that which we sold and perhaps a bit more also.”

Next week, the Report plans to expand on the technical reasons for why gold and copper should do well together in the second half of the year even though there may be some scary ups and downs. That's good for Eureka, pardner - let's be prepared for success!


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 337.60, down from yesterday's 341.38 and above the 1-month moving average of 277.84. 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 79.17, up from yesterday's 79.04 and below its 1-month average of 79.60. The new high for 2011 is 82.20 set June 23rd. Today's Value Adjusted Gold Price (VAGP) is $1,691.3/oz or $88.9/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 $98.70
ICE North Sea Brent crude $117.76
Spread (ICE- NYMEX) = $19.06 (Yesterday, $19.31)

Here are the November contracts* with a narrower spread:

NYMEX light sweet crude $99.30
ICE North Sea Brent crude $117.76
Spread (ICE- NYMEX) = $18.46 (Yesterday, $18.48)

* 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 $95+ 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 down $0.43 in early trading at $98.70 (August contract, most active); Gold is up $15.4 to $1602.4 (August contract, most active); Silver is up $0.923 to $39.870 (September contract, most active); Copper is up $0.0260 at $4.4095 (September contract, most active)

Western Molybdenum Oxide is $15.06; European Molybdenum Oxide is $14.65; LME cash seller is $15.06, LME moly 3-month seller's contract is $15.06

Stock Market Morning Update

The DOW is down 52.86 points to 12,671.55; the S&P 500 is down 2.45 points at 1,341.35

Miners are mixed:

Barrick (ABX) $50.19 up 1.23%
Newmont (NEM) $58.85 up 0.58%
US Gold (UXG) $6.98 up 1.31%
General Moly (Eureka Moly, LLC) (GMO) $4.70 down 1.67%
Thompson Creek (TC) $9.65 down 3.60%
Freeport-McMoRan (FCX) $55.39 up 0.09% (a bellwether mining stock spanning copper, gold & molybdenum)
Quadra FNX (TSE:QUX) $15.96 up 0.13%
Timberline Resources (TLR) $0.82 up 5.13%

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

ArcelorMittal (MT) $32.84 down 1.02% - global steel producer
POSCO (PKX) $110.56 down 0.32% - South Korean integrated steel producer

The Eureka Miner's Grubstake Portfolio is down 0.45% at $1,790,634.02(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