January 30, 2011 1 Comment
Source: Climax Molybdenum.
The 2010 earnings call makes it pretty clear that when it comes to mol, Freeport-McMoran is calling at least some of the shots.
Now let’s be realistic and get a full disclosure out in front: having written a molybdenum research web log on an erratically part-time basis for one month in no way qualifies me as a molybdenum expert. In particular, I don’t yet have any understanding for the demand side of the molybdenum market, which appears to be high-beta to the economy in general and to China in particular. So as of yet, I have no mechanism for predicting the spot price of mol a year out, two years out, five years out.
One thing that does seem plausible, however, is that the FCX molybdenum business has structural advantages over junior molybdenum miners such as General Moly, Roca Mines, Adanac et al. who are individually scrambling to either bring a new project on line, or ramp up production, or reorganize following bankruptcy. The junior miners face vagaries of financing, regulatory hurdles, single-point failure modes, etc. FCX, on the other hand is printing billions of dollars, has 60 billion dollars worth of mol reserves sitting in the ground and essentially no debt, and can bring the Climax mine into production more or less at will.
As an exercise, it’s interesting to construct a portfolio that attempts to (1) isolate the molybdenum business from the much larger Cu-Au section of FCX, and (2) is (to zeroth-order) “mol neutral” in that it is long FCX molybdenum, and short the junior mol miners.
Specifically, to achieve USD 10,000 exposure to pure FCX mol, we go (i) long 938 shares FCX, (ii) short 4398 shares COPX, (iii) short 185 shares GDX, and (iv) short 2000 shares GMO. As of the market close on 1/28/2011, this portfolio is long-short balanced.
UCSC Grad Student Neil Miller has been running a stock-market contest on the Virtual Stock Exchange (Game id: UCSC_Club). I’m currently in 4th place out of 48 players, as a result of a strategy that during December of ’10 went long TC and short CRM. I guess I’m ol’ fashioned, but I like companies that make a lot of money relative to their share price. I took the strategy off at the beginning of ’11, just after TC jumped upward on the (partial) basis of the rare-Earth confusion. As of 1/28/2011, I’m sitting on a 16.43% return, and my book’s off:
Time for another full disclosure: At the start of the contest, on Nov. 1, 2010, I threw caution to the wind, and put my whole book into a leveraged short position on LIZ.
Now, while this position would now be up enough to have me in first place in the contest, I got hit with a succession of margin calls during LIZ’s inexplicable late-November run-up, and Neil deleted my account:
After successfully losing 40 percent of his account within the first month of trading, user greglaughlin has been found to have insufficient margin for 5 consecutive market closes on November 30th and account was promptly deleted as promised.
(So, as is often the case when genius fails, I was fully recapitalized without suffering any particular personal penalty or loss.)
I’ve submitted orders to put on the above mol-neutral “Climax” strategy at the market open tomorrow (Jan 31, 2011). It’s certainly not optimally engineered: no accounting of the various betas has been incorporated, and it chews up a hell of a lot of margin for a mere 10K of FCX-Climax-outperformance exposure. Nevertheless, I bet it will outperform its inverse position, so I’m putting no money where my mouth is!