molybdenum

Copper Kings

Copper King William A. Clark

I was fascinated by the obituary for Huguette Clark that appeared in the New York Times a few weeks ago.

Huguette Clark’s eccentricities in themselves make for good copy — empty mansions, elaborate doll collections, predatory lawyers and accountants vying for control of a vast fortune. More remarkable, however was the fact that, at age 104, she was likely the last living link to the United States’ Gilded Age. Clark’s father was one of the three “Copper Kings” of Butte Montana, who monopolized the fabulous turn-of-the century copper mines, setting the stage for the creation of the appropriately named Anaconda Copper Mining Company.

Coincidently, right at about the time that Huguette Clark died, I received a query from a friend who recently inherited a block of Copper-Mol-Gold giant FCX‘s shares (via an original family holding of Phelps-Dodge, later acquired by Freeport-McMoran). The question, of course, is, given the rather precipitous slide that the primary copper and molybdenum producers have taken over the past few months, should one hold on or sell out?

Molybdos staff analyst Dr. Nutzmann had a look at FCX’s balance sheet, and offered a personal opinion (noting, as always, that this doesn’t constitute a recommendation of any kind. Consult your own financial advisor, etc. etc.)

FCX is trading at 4X book value, so the balance sheet won’t save the stock should copper demand entirely fall off a cliff. Current earnings level makes FCX still reasonably attractive, but not a sure thing.

Some reasons to worry:

http://ftalphaville.ft.com/blog/2011/03/10/510676/chinas-copper-as-collateral-addiction/
(and the links in the article)

I think if China continues to grow smoothly, copper is a good bet. If you are worried about a real estate bubble in China causing weakness in their economy, then copper might have some rough times.

The easiest recommendation is that an investor should not have more than 5% of his or her portfolio in FCX, and should sell some if that is the case. Below that level, I think it is good to have something like FCX in your portfolio.

Cool-headed valuations for your 401(k) are one thing, but there’s a certain undeniable intangible satisfaction to owning a big block of FCX. The boss may be a jerk, unable to neutralize life’s cheap shots within himself and therefore takes it out on you, with unreasonable demands. Yet even as you boil in your cubicle, the giant FCX Tonka trucks keep hauling the gold, the mol and the copper out of the gigantic pit. Dividend checks! As you buckle down under the unfairness, there’s a certain vicarious satisfication in the fact that as a Freeport shareholder, you’re naturally entitled to emulate the “copper crowd” of the Gilded Age:

…Broadway howls when the copper crowd whirl down in their automobiles. Every one in the party enjoys himself carte blanche at the Mr Heinze’s expense on these tours, and the commotion the Western visitors created last May during the annual Heinze tour furnished the newspaper with columns of good stories.

An ODE for predicting mol prices

An ambitious young feller could make a good living trading molybdenum if he knew just where the price of mol was headed. The problem, of course, is that the price of molybdenum shows odd fluctuations and is not particularly easy to predict. Here’s the trajectory (as charted by the London Metal Exchange) for the first three months of 2011.

My working hypothesis is that molybdenum prices can potentially be predicted with some degree of accuracy in advance, and that construction of a successful model is less daunting than would be the case for larger, more complicated commodities such as oil, gold and wheat. Fred Adams visited the office last month, and we took a crack at an initial formulation at a governing ordinary differential equation:

In the above, P is the mol spot price, D is worldwide demand, and S is worldwide supply. The last term on the right hand side is a stochastic forcing term — no crystal ball is perfect!

More explanation is, of course, in order. Stay tuned.

The North Campus Mineral Zone

If the global economy continues to grow, then energy use will also continue to grow, and that’s good news for the primary molybdenum producers. The strong correlation of the molybdenum equity names with one another is quite interesting, given the relatively low short-term correlation of the stocks with the molybdenum spot price. There’s a medium-duration long-short strategy sitting there to be exploited, I’m quite sure, but the details have yet to be worked out.

Of more pressing urgency is the matter of university finances. The state budget situation does not look good, so I’ve looked a little further into developing UCSC’s potential mineral resources.

As readers know, the UCSC campus sits astride a block of Salinian granite that contains mineralized gold-bearing quartz veins. The presence of the glittering metal in the folds of the pristine redwood-forested hills came to my attention through some notes in an 1890′s era California geological survey:

The website mindat.org lists the location of the Stribling mine as latitude +37 deg, 1′, 11”, longitude 122 deg, 2′, 60” W. This location is on an odd hairpin bend in the San Lorenzo River, located in Henry Cowell Redwoods State Park, just adjacent to the property line of the UCSC North Campus:

On the geological map, the hairpin bend seems to be associated with the Ben Lomond fault, which is a high-angle fault that has produced over 600 feet of vertical slip since the Miocene era. The fault runs through the Pogonip open space, and defines the very steep eastern border of the Campus, before continuing north into Henry Cowell Park.

One can only do so much with Google Earth and an Internet connection. Next step is to get out into the field and do some prospecting.

LBO

Brother, can you spare a couple mil? It’s been rough days on both the mol desk and on the exoplanet radial velocity desk. So far this year, TC’s stock price is down 20%, hitting molybdenum bugs where it hurts:

If that chart weren’t bad enough, 1,235 Kepler candidates have flooded the market, driving new planet prices to historical lows. In recent trading on the Oklo electronic exchange, uninflated hot Jupiters orbiting V=13-14 stars were changing hands for USD 1,200. Further price deterioration is expected as new production from the Persian Gulf region starts to come on line:

Rather than sit around and grumble, Philip Nutzman and I have been working out the details of a strategy that can take advantage of the depressed TC stock price, while dramatically increasing free cash flow in our core exoplanet businesses. The scheme? A roaring 80′s Barbarians-At-The-Gate inspired leveraged buyout of TC!

The full details, of course, are proprietary, but I can tip our hand a little bit: We’ll be issuing junk bonds paying ~10% to underfunded university pension plans. Despite their junk rating, our bonds will be quite attractive, as they’ll be contingent on the success of the deal. We’ll use the 2.6 billion in capital thus raised to initiate a leveraged buyout of TC at a ~20% premium over the current basement-level stock price. Once we’ve gained control, we’ll sell off the Mt. Milligan copper-gold project to a large-cap copper major for ~1.2 billion. We’ll use the cash thus obtained to start paying down the bonds, and help ourselves (or rather, we’ll help the exoplanet desk) to TC’s 300 million in cash. Continued operations at the Endako and Thompson Creek mines will be used to retire the remaining bonds over the next 5-7 years.

Now before the TC executives come at us with a pitchfork, let me remind everyone that I’m being strictly tongue in cheek. In addition, see also the web log disclaimer!

Disclaimer

Nothing on this site should be construed as a recommendation to buy or sell any specific security nor as a solicitation of an order to buy or sell any specific security. Before making any trade for any reason you should consult your own financial advisor. The author may hold long or short positions in any of the securities discussed either before or after publication of an article mentioning such a security.