Molybdenum price predictions for 1, 5 and 10 years out

August 19, 2012 2 Comments

Writing a blog about molybdenum might arguably be seen as a rather obscure use of one’s time, so why do it?

Molybdenum, in the broader sense, constitutes a topic that is large enough to be interesting, while being narrow enough that one has a shot at getting a genuine understanding — a chance to develop expertise. And molybdenum isn’t trendy. I parachuted into the field because I liked the sound of the word. So there’s a chance to come in ahead of the curve.

Molybdenum, furthermore, is an eight, uhh make that a five, billion dollar industry, yet it’s not out of the question that its price can be predicted with a non-negligible degree of confidence. Molybdenum has fewer moving parts than corn, gold or oil. If the underlying variance stemming from forecasting the general direction of the economy can be hedged away, then molybdenum’s performance is even more amenable to prediction.

My current predictive model is pretty simple. I take an 18-year time series of molybdenum spot prices, and sample at 2-month intervals. Convert these samples to percentage moves. Using bootstrap resampling, draw (with replacement) from the aggregate of percentage moves to generate a forward time series. Repeat 10,000 times.

The results of this model are shown in the plot below. The distribution of outcomes sampled a year from now is shown in red, the distribution five years out is shown in blue, and the distribution a decade from now is shown in black. Both the blue and the black curves have substantial tails at high price, extending well off the 50 USD/lb x-axis limit. A year from now, the 10,000 trials average to 12.45 USD/lb, with a standard deviation of 4.75 USD/lb. Roughly speaking, the model suggests that there’s a 15% chance that a year from now, the price of mol will be above 17 dollars per pound, and a 15% chance that it’ll be under 8 USD/lb, an outcome that wouldn’t be too rosy for shares of GMO.

Remember, though, it’s just a model, and an excruciatingly simple one at that. Next up, some analysis of the model with an eye toward improving it.

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TC Trading at Liquidation

August 16, 2012 Leave a comment

It’s been a tough year for the molybdenum industry in general and Thompson Creek Metals in particular. The Denver-based miner has seen huge cost overruns on its Mt. Milligan copper-gold mine, a drop in mol production at its flagship pit in Idaho, and a rough start for the new Endako mill. The stock has lost most of its value and is trading near liquidation. It’s fair to say that its been a disastrous 18 months for the shareholders.

One factor that has contributed to Thompson Creek’s woes is the rapid drop in the price of molybdenum, which is currently trading at 11 dollars per pound. This is only a few dollars above production costs for a miner like TC, and has obliterated their cash flow right when they need it most.

In February 2011, when the price of mol was riding high at USD 17.80 per pound, I developed my forward price model for molybdenum, and ran it forward 10,000 times to create a Monte-Carlo simulation. Here’s a screenshot (from my February 2011 post) showing a few sample trajectories. Mol’s got vol, Man.

With the model in hand, we can better appreciate the risks that Thompson Creek was taking as a consequence of their exposure to molybdenum price fluctuations. If you listen to their conference calls over the past year, they are uniformly careful to couch their language with safe regulatory-approved palliatives and disclaimers, “forward looking statements, etc. etc.”. I cannot find any specific indications that they are evaluating their molybdenum price risk with a serious quantitative model. Even a simple bootstrap-based approach of the type that I’ve implemented should have been enough to give them some serious pause.

The following histogram is the result of running the February 2011 model 18 months forward to the present day (August 2012). I show the distribution of molybdenum prices predicted by the model, along with the current spot price as a guilty red bar.

Over 10,000 trials, the average Aug 2012 predicted molybdenum price was 18.1 dollars per pound. TC would not be trading with a two handle had that been the outcome. More importantly, however, the current 11 dollar per pound cost is only one standard deviation beneath the mean. With my model, which is propagated from the heady days of 17.8 dollar per pound mol, there was a 15% chance that the price would be at or below 11 dollars per pound. That, combined with a little forward thinking concering price inflation on big mining projects when the price of gold is sky high, could have kept TC from destroying more than a billion bucks of shareholder value.

Next up, what does the distribution of mol prices look like 18 months forward?

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Wolfram Molybdenum

July 4, 2011 1 Comment


I guess everyone’s heard about Wolfram Alpha, the web service that responds to quantitatively oriented natural language queries by computing the answers from structured data.

Molybdenum’s odd appeal derives in large measure from its obscurity. I was therefore a bit worried that Wolfram Alpha, with its 5 million lines of Mathematica code, its 10,000 servers, and its 10+ trillion pieces of curated data (“from primary sources with continuous updating”), would render molybdos.com utterly irrelevant. Especially given the steadily declining mol spot price and abysmal rate at which I have been producing new posts.

Furthermore, it turns out that Mathematica co-founder Theo Gray, who was several years ahead of me at University High School in Urbana, has a rather singular fascination with the chemical elements. Indeed, here is a picture from his website where he is showing author Oliver Sacks his wooden periodic table:

Molybdenum is element 42. I think it’s a fair guess that everyone who reads this site knows that:

The Answer to the Ultimate Question of Life, the Universe, and Everything is calculated by an enormous supercomputer over a period of 7.5 million years to be 42. Unfortunately no one knows what the question is.

So I was half-expecting Easter eggs galore:

But the results are thoroughly workmanlike, with an emphasis on molybdenum’s physical properties. Pretty much the same dry facts that you’ll find on the right-hand side of the Wikipedia page. Interestingly, though, Wolfram Alpha does mention that the sound speed in pure Mo is 6190 m/s, the fourth-fasted of any element. That’s Mach 18, fully 55% of the escape velocity from Earth’s surface.

There doesn’t seem to be much else, so the reading public will need to continue frequenting molybdos.com. The only pod of economics-related molybdenum data that I could coax out of the engine was a curiously out-of-date time series of molybdenum prices, running from 1912 to 1998:

Quite an interesting plot, actually. The price spike in 1980 was quite dramatic. In 2008 dollars, the 1980 spot price of mol reached 25.60 USD/lb, which was close (but not quite as high) as the great molybdenum bubble of 2005, where the spot price topped out at a staggering all-time high of 46.00 USD/lb.

Was Molybdenum a good inflation hedge? Here’s the result of typing united states inflation rate time series into Wolfram Alpha:

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Predicting Molybdenum Production

March 5, 2011 2 Comments

Going forward, the all-important price of mol will depend sensitively on the competition between supply and demand. For a price inelastic commodity like molybdenum, a relatively small demand-supply imbalance can cause huge price swings. Molybdenum is only a small component of overall steel costs, so manufacturers will pay what it takes to get their mol fix. Likewise, nobody’s hoping for a molybdenum engagement ring. If there’s more than enough mol to go around (as was the case in 1980, when steel-rolling improvements caused the usage of molybdenum in pipelines to crater) then the price collapses. I’m trying to build a quantitative model of this phenomenon.

There’s a very useful investor’s presentation on the Thompson Creek Metals website that contains the following .ppt slide:

The slide shows how world mol demand has increased over the past fifty years, and projects demand to 5 years and 10 years forward, assuming the average year-to-year production increase of 4%. The resulting expectation is that there’ll be 600 million pounds of production in 2015, and 740 million pounds in 2021. Given the difficulty in bringing new projects on line, those numbers seem like likely to support a robust mol price. But can we get confidence limits on these predictions?

I sampled the fifty one production numbers from the above graph with a one-sigma measurement accuracy of ~ ±5 million pounds per year, the resulting series, is:

(86,80,92,95,111,130,132,141,160,180,
170,173,175,181,160,180,200,220,225,
230,240,200,130,210,220,210,200,215,
250,245,220,215,210,200,245,250,300,
305,300,320,300,305,330,350,360,400,
410,470,470,400,480)

I differenced the above sequence to get set of yearly percentage changes in demand. Assuming that these moves are serially uncorrelated on a year-to-year basis (and remembering, of course, that when you assume, you make an ass out of u and me) one can build foward trajectories for demand over the next ten years. Ten random example trajectories look like this:

After ten thousand ten-year trials, the average 2021 molybdenum production is 683±272 million pounds. The resulting distribution looks quite nicely log-normal. Central limit theorem in action:

So 740 million pounds in 2021 looks a little optimistic, but it’s within 1-sigma of expectations. Seems reasonable that you put your best foot forward if you’re doing an investor presentation…

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Toward a molybdenum price model

February 21, 2011 6 Comments


If you’re a pure-play molybdenum name, a lot rides on the price of mol. To a first approximation, the quality of your ore deposit sets production costs, with an important secondary variable being the price of energy. In order to assess the feasibility of a given project, one has to model selling prices per pound going forward. For example, in General Moly‘s bankable feasibility study for the Mt. Hope deposit, the forward price assumptions are as follows:

The above chart was drawn up in April 2008, prior to the financial crisis. The ’08-’09 price collapse basically dispatched the early-year predictions into the realm of wishful thinking, but hope springs eternal.

The molybdenum price chart for the past fifteen years makes it clear that molybdenum (like many commodities) is prone to extraordinary price volatility:

It’s thus interesting to try to evaluate what the price of molybdenum might look like going forward. As a first attempt, I took the above time-series and sampled it at 91 equally spaced intervals (corresponding to a two-month sampling cadence). I then differenced the resulting samples to get a set of 2-month price moves. Sampling from this distribution of 2-month returns, and enforcing a hard floor of 3 dollars per pound, yields a set of 15-year forward trajectories. Here’s a plot of ten representative samples:

For the most part, these trajectories look awfully good. Based on 1,000 trials, the average finishing price of mol fifteen years from now is 41.04 ± 25.26 USD/lb. The reason for the high average price, of course, is that while mol has come way down from the glory days of 2004-2008, it is still up by more than a factor of three from its abysmal mid-1990s lows. Sampling the price trajectory differentials over the last 15 years thus bakes in a big average gain.

For an improvement in realism, we can multiply the sampled differences randomly by -1 or 1. This removes some of the upside bias, but because we retain the assumed 3 USD/lb price floor, we experience the opposite of gamblers ruin in a fraction of the trials, which leads to a average net gain after 15 years. The average finishing price (again after 1,000 trials) is 30.62 ± 23.37 USD/lb. A random sampling of ten representative trajectories looks like:

These trajectories look somewhat more believable, and in particular, they are better able to capture the occurrence of long periods when the price is down in the dumps with seemingly little hope of recovery. What they don’t show, however, is a tendency to return back to “baseline” after a sharp upward spike. I think a realistic model needs to include this tendency, which comes about either from the bursting of asset bubbles, or from a situation in which high prices lead to a surge in output, leading to a crash in prices. More on this in an upcoming post…

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Pipelines

February 19, 2011 Leave a comment

Looks like the Middle East oil supply might be in for some volatility, which in turn means that those oil sands up in Alberta could well be contributing an increasing share of the gas in your tank. Depending on whether one prefers a fly ride or a fly environment, the 178 billion barrels of Canadian oil sand reserves are either comforting or alarming. At molybdos, however, the question is always simply: what’s the mol angle?

Back in the 1970s, pipelines were generally made of high strength low alloy steel, which runs 0.1%-0.2% Mo by mass. By 1980, however, as steel rolling techniques improved, new pipelines were able to switch to lower-grade steel alloys which don’t include molybdenum — one of the causes of molybdenum’s “lost decade” centered on the early 1990s.

In cold weather regions, however, it’s still necessary to use high strength low alloy steel, which made me wonder whether the development of the oil sands in the relatively chilly climes of northern Alberta might put future demand-side pressure on molybdenum prices. As far as I can tell, any effect will be relatively modest.

Here’s the reasoning. Lets say that the oil sands are developed so as to produce 178 billion barrels of oil over a 50 year period. That corresponds to 9.7 million barrels of oil per day, which is a tenth of the current global usage of oil, and a half of the US consumption. That doesn’t sound far-fetched.

The Alaska pipeline is 800 miles long, and can transport up to 2.14 million barrels of oil per day. For sake of argument, let’s say that the cold-weather segment of a prospective “Alberta pipeline” is 500 miles long, and consists of four Alaska-style high strength low alloy steel pipes that are 48 inches in diameter and 1.25 cm thick. At 0.2% Mo, these pipes would contain ~13 million pounds of Mo, which is a significant amount (225 million dollars worth), but only 2.6% of current annual worldwide Mo production. Not even enough to soak up the extra capacity that GMO will be pushing onto the market once the Mt. Hope open pit is open for business.

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The Mo in Freeport-McMoran

January 30, 2011 1 Comment

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.

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The Climax Mine

January 21, 2011 Leave a comment

Unlike the extrasolar planets, the underground mines often have evocative names.

My first experience with mines came during high school in the early 1980s, when I got the opportunity to attach myself to a University of Illinois geology research trip to the Creede silver district in Colorado. Man, that was great.  I was impressed by the sharp high-altitude light, the narrow rocky canyons, and the decaying 1890s-era mines — the Last Chance, the Commodore, the Revenue Tunnel, and above all, the fabulous Amethyst mine, where the central vein graded to a staggering 2000 troy ounces of silver per ton of ore.

In the summer of 1983, memories of the Hunt Brothers’ attempt to corner the silver market were still fresh, and Chevron was looking into the possibility of re-opening the Amethyst mine. In what must have been a gross violation of OHSA rules, the Chevron geologists took us into the main tunnel. I remember the amethyst crystals sparkling in the headlamps, and the faint trickle of water filtering through the miocene-era veins of the mountain. Far inside the mine, we turned off the lamps and there was absolute inky blackness.

The fabled Climax Molybdenum Mine is located further north in Colorado near Leadville. The original Climax claim dates to the late 1870s, and production started in 1914. During parts of the 20th-century, the Climax was responsible for three-quarters of world molybdenum production. It was shuttered in 1995, when mol prices were mired near their historic lows.

Down but not out. The Climax Mine is owned by Freeport McMoran (FCX), the S&P100 copper ‘n gold colossus, with a 50 billion market cap, 18 billion in yearly revenus, and 7 billion yearly profit.

According to FCX, the Climax ore body still contains 500 million pounds of molybdenum, and in 2007, with mol prices spiking, plans were announced to reopen the mine, with production projected at 30 million pounds per year starting in 2010. A Climax restart amounts to the equivalent of a whole new TC coming on line — a 6% increase in world production. That’s an elephant in the room.

Not surprisingly, the financial crisis put the Climax plans on ice. FCX estimated their restart cost for Climax at 500 million, of which 200 million was spent prior to the ’08 crash.

The status of Climax is a factor of very considerable interest to investors (read speculators) in AUA.TO, ROK.V, GMO and TC. Adanac’s shaky prospects look even shakier if Freeport McMoran starts shipping 100s of millions of dollars worth of additional high-grade mol. Here’s a link to a July 2009 article in the Summit Daily News that reports on a presentation by FCX executive Fred Mezner to the Summit County Rotatry Club in Frisco Colorado. Mezner said that planets were still on hold at that time prending economic recover. Significantly, the article also points to permitting hurdles that sound like they more problematic than FCX had previously let on.

The economy, stock prices, and especially mol prices have all improved significantly since July of ’09. I haven’t found any news on FCX’s most recent plans for Climax, but it seems likely that they might be back at work (or eying up getting back to work) on the restart. One thing’s for sure: Right now, a producing, environmentally compliant mol mine is a license to print money. The 5 billion dollar question is exactly when that license expires…

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Not rare, but it’s in the Earth

January 19, 2011 Leave a comment

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.

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