"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.

Monday, October 3, 2011

Copper Drops Below $3/lb; Gold & Silver Bounce; GMO's Liberty Rocks

Good-bye old friend...

My latest Kitco Commentary: Why is Gold More Volatile than Copper, Oil or Silver? (09-19-2011)

This morning's...
COMEX Gold price = $1,658.6/oz (December contract most active)
Eureka Miner’s Gold Value Index© (GVI) = 109.50 (new record high)
Value Adjusted Gold Price© (VAGP) = $1,265.7/oz
COMEX - VAGP = $392.9/oz; gold is trading at a premium; gold:copper & gold:oil ratio are at recessionary levels

Morning Miners!

It is 6:04 AM. Have a Monday cup of Fighting Back. The ole Colonel is plumb tired of negative sentiment on just about any topic lately. I'll stick my neck out - things will be better for miners by the end of this year then the end of last month (which wasn't pretty). Let's take on the first chunk of scary news this morning and turn it around to our favor...

Copper Drops Below $3/lb; Gold & Silver Bounce

It's a scary quarter's end when one of the biggest and best managed mining companies in the world loses 37% of its share price in one month. That was the fate of bellwether copper giant Freeport-McMoRan (FCX) as copper prices crashed in late December. This morning COMEX copper touched $2.9940/lb in the wee hours, a 14-month low. Fortunately, the red metal crawled back above $3/lb and is now trading at $3.0810/lb.

COMEX silver headed in a different direction for a change jumping to $31.430/oz at 8:20 AM EDT followed by COMEX gold that touched $1,667.0 15 minutes later. COMEX silver and gold fell back a bit but are presently trading at a healthy $30.610/oz and $1,658.6/oz respectively as bargin-hunting, safe-haven buying and strong physical demand from Asia replace precious metal liquidations.

Are we facing the end of the world or have things just become too negative? Europe is at the center of everyone's worries and the situation grew worse over the weekend as Greece appears on track to miss their deficit reduction targets. Since Europe is China's largest customer for exports, conventional wisdom says that a decline in Europe will put significant pressure on the flagging dragon who already has inflation pressures and internal issues challenging growth expectations. Copper futures became the casualty in September because copper is used so extensively in new construction and power generation/distribution networks - China accounts for 40% of the world's copper demand; the U.S. is about 10%. Down the price of copper futures went, a 25% decline in September and a full 29% to the early Monday low.

Over the weekend, I began to wonder why Freeport's CEO Richard Adkerson wasn't shutting down copper mines and laying off miners if conditions were so grim. That's what he did the last time the gold:copper ratio jumped into the 400-500 lbs/oz level in December 2008. Today the ratio hit a new high of 538 lbs/oz. Reuters answered my question this morning:

LONDON, Oct 3 (Reuters) - Freeport McMoRan Copper & Gold Inc (FCX:$30.87,00$0.4200,1.38%) said the sharp fall in copper prices does not reflect the market's fundamentals, as it continues to see good demand for the metal.

"The drop in the copper price doesn't reflect the fundamental situation... We still maintain a positive view of copper markets," the company's Chief Executive Richard Adkerson told Reuters in an interview on Monday.

Deutsche bank just upgraded Freeport to a "buy" from a "hold."

The HSBC China PMI moved up to to 53.0 in September from an all-time low of 50.6 in August. That might be less improvement then some would like but it doesn't sound sound like Armageddon to me. A second Reuters article reported:

Some, however, thought concerns about an economic slowdown in China were overdone. "We believe the markets have panicked unjustifiably about China," said Standard Chartered in a note, "Economic data remains constructive overall, and while exporters will suffer in 2012, domestic growth and the room for policy loosening is being underestimated." (Reuters, 10/3/2011)

Here's the entire report,

METALS-Copper hits 14-month low on Greece worry, China data (Reuters, 10/3/2011)

The ole Colonel will hang in there with Adkerson for the time being, let's get the miners on their feet and copper back above the mid-$3.50/lb level. Nuts to all this euro-negativity.

General Moly's Liberty Project Rocks

Here's another bit of positive news - General Moly published a press release this morning about their Liberty project in Tonopah:

General Moly Announces an 18% Increase in Molybdenum and a 47% Increase in Copper Contained at the Liberty Project (Press Release, 10/3/2011, 5:36 AM PDT)

According to General Moly CEO Bruce Hansen,

"The Liberty project is an extremely robust moly and copper project that gives General Moly a growth profile once we commence production at Mt. Hope. Using moly and copper prices more closely aligned with our peer companies and incorporating data from our most recent drilling campaign helps to illustrate the value of this world-class project. The updated pre-feasibility study will present two mining scenarios: one where mining operations stay completely on private land for the first five years, helping to expedite the permitting process and get Liberty started more quickly; and another, more optimized unconstrained mine plan scenario, which will produce more moly earlier in the mine life, but is anticipated to require a longer permitting period.

"Additionally, we are continuing to engage with parties interested in assisting General Moly in developing the Liberty project, including leveraging existing relationships with current customers and strategic partners, using this updated resource and forthcoming pre-feasibility study as a basis for negotiations."

Throw a little red metal in the General Moly mix; metal diversity is good - ask Barrick Gold, they like copper too!

Daily Market Roundup

Enough talk, let's walk the walk:

Eureka Miner's Index(EMI)

This morning the Eureka Miner's Index© (EMI) is below-par at 29.83, up from Friday's 28.66 and below the 1-month moving average of 77.38. The 1-month average is currently below the 100-level putting us solidly in bear country.

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 new low set on 9/30/2011 is 28.66. An EMI of 100 is the boundary between hot and cold markets for the metals & miners.

200-day averages are used to update mining equity norms in the EMI on a monthly basis.

Gold Value Index (GVI

The Eureka Miner’s Gold Value Index© (GVI) is above-par at 109.50, up from Friday's 105.47 and above its 1-month average of 100.85. The Value Adjusted Gold Price© (VAGP) is $1,265.7/oz which is $392.9/oz below the current COMEX gold price.

The GVI initially trended down from 6/7/2010 when it had a value of 100; gold regained value reversing the trend, moved sideways for a time and and headed back up with vigor. A sustained presence around the 100-level may prove to be a recession warning for a second dip down in the economy.

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 derivatives are 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 and industrial 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 Debt Crisis Watch

July 26th we introduced the Debt Crisis Index (DCI). The DCI is computed in the mornings and at the market close Friday in much the same way we do the EMI and GVI indices. Today, the DCI has a value of 248.6 down from Friday's 251.7. Our benchmark is 100, a value of the DCI at a level above 200 is time for serious concern. We are now above that level.

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 $100/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 $77.44
ICE North Sea Brent crude $101.37
Spread (ICE- NYMEX) = $23.93 (last report, $21.89)

Here are the January contracts* with a narrower spread:

NYMEX light sweet crude $77.78
ICE North Sea Brent crude $98.67
Spread (ICE- NYMEX) = $20.89 (yesterday, $19.54)

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

Prices are off their crisis highs and we have $95+ Brent and $75+ NYMEX in January favoring stabilizing oil prices throughout the late fall and early winter although we may see pressure return to the upside. My last 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 on very rough roads; The VIX or "fear index" is above 25; in early morning trading, bellwether Freeport-McMoRan (FCX) is seriously below its 200-day moving average of $51.92 (our new key level, 09/21 update); 10-year Treasurys are safely below 4% preserving a low-interest rate environment.

The ORANGE light is turned on for Commodity Reflation with copper trading below $3.50/lb

The YELLOW light is turned on for Stable Markets with the VIX above 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 until mid-2013

The RED light is turned back on for Investor Confidence with investors very adverse to commodity-sensitive equities

The GREEN light is turned on our Fuel Gauge with oil above $80

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 $1.76 in early trading at $77.44 (November contract, most active); Gold is up $36.3 to $1658.6 (December contract, most active); Silver is up $0.527 to $30.610 (December contract, most active); Copper is down $0.0710 at $3.0810 (December contract, most active)

Western Molybdenum Oxide (General Moly website) is $14.00; European Molybdenum Oxide (Bloomberg) is $13.95; LME cash seller is $14.06, LME moly 3-month seller's contract is $14.06

Stock Market Morning Update

The DOW is up 24.03 points to 10,937.41; the S&P 500 is up 3.60 points at 1135.02

Miners are mixed:

Barrick (ABX) $47.17 up 1.11%
Newmont (NEM) $64.68 up 2.75%
US Gold (UXG) $3.94 down 1.75%
General Moly (Eureka Moly, LLC) (GMO) $2.82 down 2.76%
Thompson Creek (TC) $6.07 up 0.17%
Freeport-McMoRan (FCX) $30.75 up 0.99% (a bellwether mining stock spanning copper, gold & molybdenum)
Quadra FNX (TSE:QUX) $8.25 down 5.27%
Timberline Resources (TLR) $0.57 unchanged

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

ArcelorMittal (MT) $15.75 down 1.01% - global steel producer
POSCO (PKX) $74.77 down 1.63% - South Korean integrated steel producer

The Eureka Miner's Grubstake Portfolio is down 0.14% at $1,273,689.01 (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 impact of the U.S. debt ceiling debate affected investment decisions for weeks before its resolution August 2nd and was followed by an S&P credit downgrade. 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 photo 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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