The Mo in Freeport-McMoran

Adanac, Roca, Thompson Creek, and General Moly may be the pure mol plays, but numbers-wise, the heavy hitter is Freeport-McMoran. The 2010 results from the Phoenix-based mining giant came out on January 21, and the numbers are staggering.

Bottom line, FCX sold 6.7e+7 lbs of mol in 2010, at an average price of USD 16.47 per pound. The average cost per pound was USD 5.90. All that mol earned them USD 708 million.

The earnings report bears careful reading. They report that construction activities geared toward the reopening of the Climax mine (see last week’s post) are underway. The timing of start-up seems to be at least a year away, and will depend on “market conditions”. Estimated remaining costs to get Climax back into action are USD 450 million, a significant increase from the ~350 million estimate that was being quoted in mid-2009. The Climax Mine, on restart, is capable of pumping 30 million pounds per year — if mol prices hold up at the current USD 17.50 level, FCX’ll recoup their start-up costs in a year.

Furthermore, there’s no indication that the mol’s gonna run out any time soon. New reserves outpaced production in 2010 by 1200%. FCX is now sitting on 3.39 billion pounds of mol — a cool 60 billion at current prices. Not bad for a company with 100 billion market capitalization that’s primarily a copper play.

I’m not yet expert enough to issue stock picks, but one thing is for sure. This stock was a “buy” in Dec. 2008.

Not rare, but it’s in the Earth

As far as molybdenum is concerned, the “good old days” were back in `04 and `05, when the mol spot price spiked up to over USD 100,000 per metric ton.

This price spike appears to be associated both with an increase in demand (primarily from China) and a simultaneous squeeze on capacity. Historically, during most of the 1980s, and through the late 1990s, the majority of molybdenum production came from major copper producers, who added secondary molybdenum circuits to their operations. The resulting mol production from the copper mines was sufficient to meet demand. This kept prices low, and prevented primary molybdenum producers from getting any traction. This balance began to erode after the turn of the millennium when copper prices started to rise. If my current understanding is correct, this led the copper producers to focus on the higher-profit copper extraction at the expense of their molybdenum circuits. Even though mol prices were also increasing, a copper mine could make more money by focusing on copper. (If your high-frequency options desk is printing money, then you’re gonna focus on that, and you’re not going to waste time on a fundamental analysis of the mysteriously surging stock price of Adanac Molybdenum Corporation.)

The molybdenum price spike of 2003-2005 allowed primary molybdenum producers (first and foremost TC’s predecessor Blue Pearl) to get a foothold. The crash of ’08 has allowed TC to further strengthen its position by thwarting or slowing efforts by the likes of Adanac, Roca Mines, and General Moly to get production going on their deposits.

Molybdenum is not a rare earth metal, but there is a similarity in that it’s not rare, but it’s in the Earth, with a formidable financial barrier to scale prior to entering production. Furthermore, molybdenum spot prices are not the driver of steel prices in the same way that rare earth prices are not the primary price driver for the electronic products that incorporate them. The big current run-up in rare Earth spot prices therefore seems somewhat analogous to the great mol spike of 2003-2005. TC’s ensuing experience suggests that the first rare earth primary producer to get their production really ramped up will be in the best position once the rare earth supply and demand are brought into better balance.