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.

Mol stox on the skids

When it comes to the pure-play molybdenum names, the past several weeks haven’t exactly presented an excuse for bottle poppin’. Here’s a chart of the stock prices for GMO (pure mol), TC (nearly pure mol), TCK and FCX (copper/gold/mol), and the SP500. In general, the more exposure you have to molybdenum, the worse you’ve been doing. The yearly WGMP, or world gross molybdenum product is ~8 billion dollars, meaning that mol constitutes ~0.0133% of the global economy — put another way, TC is exposed to the S&P, but the S&P isn’t really exposed to TC.

Extending the time horizon back a full year tells quite a different story. With the exception of TC, the molybdenum and metal names are all handily beating the stodgy ol’ S&P500. Calling all retail investors!

From what I can tell, TC’s trailing-year under-performance is due in part to the acquisition of Terrane metals, and the huge ongoing build-outs on the Endako expansion and the Mt. Milligan project. As a result of booming molybdenum sales, TC was sitting on 300 million in cash at the beginning of the year, but will spend nearly 600 million this year alone in funding ongoing operations and getting the new projects on-line for 2013. Meanwhile, production is starting to fall off at the flagship Thompson Creek mine in Idaho. TC’s guidance is that they will produce 30 – 33e+6 pounds of mol this year, falling to 26 – 28e+6 pounds in 2012. I think it’s likely that they’ll be starting 2013 with zero cash.

Now of course, if Mo, Cu and Au prices are holding firm at that time, then they’ll be completely set…

Boys, Be Ambitious!

When I lived in Japan, I visited Hokkaido University in Sapporo to give an astronomy colloquium. While there, I immediately noticed that an odd motto, “Boys, Be Ambitious!” is attached (in English) with great frequency to the various affairs, both large and small, of the University. One of the astronomy graduate students had the phrase written on a post-it note attached to the screen of his computer. In another building, there was a large mural showing a stern, stiffly dressed 19th-century gentleman exhorting a group of reverent students with a longer version of the phrase:

“Boys, be ambitious! Be ambitious not for money or for selfish aggrandizement, not for that evanescent thing which men call fame. Be ambitious for that attainment of all that a man ought to be.”

Which upon reflection, seems to be excellent advice…

The gentleman in the mural, it turns out, is William Clark Smith, the founder and first president of the University of Amherst, Massachusetts. In the mid 1870s, he was enlisted by the Japanese Meiji Restoration government as an Oyatoi Gaikokujin, or “hired foreigner”, to establish an agricultural college in Sapporo (now Hokkaido University) and he made an impression that has lasted well over a century. The Wikipedia article is extensive and quite interesting. On the origination of the motto:

“On the day of Clark’s departure, April 16, 1877, students and faculty of SAC rode with him as far as the village of Shimamatsu, then 13 miles (21 km) outside of Sapporo. As recalled by one of the students, Masatake Oshima, after saying his farewells, Clark shouted, “Boys, be ambitious!”

Upon returning to the United States, and flush with the organizational successes and appreciation that he had garnered in Japan, Clark left his academic career, cultivated an interest in gold and silver mining, and embarked on an abrupt, ambitious, and ultimately disastrous foray into the business world. In 1880, he teamed up with a junior partner, John R. Bothwell, to found what might best be described as a 19th-century incarnation of a metals hedge fund. From offices on the corner of Nassau and Wall Streets in Manhattan, the firm of Clark & Bothwell acquired interests in a slew of silver and gold mines across North America, for which they assumed management and issued stock. Clark, as president, got his contacts and colleagues to invest in the venture, and for a period during 1881, the stocks issued by Clark and Bothwell ran up into multi-million dollar valuations. A classic example of a bubble.

Clark travelled around the country, promoting the company, acquiring new mines, and seeing to their management, while Bothwell appears to have been responsible for back-office operations. Clark, who had no experience in finance, and little real knowlege of mining geology seems to have spun his wheels, while Bothwell, who had a shady history, actively mismanaged the companies. The operation got into debt, with the outcome being all too typically familiar along the lines of When Genius Failed. By the Spring of 1882, they were facing insolvency, investor lawsuits, fraud allegations, and various other problems. Bothwell disappeared on a train trip to San Francisco, never to be seen again, leaving Clark holding the bag. The story played out to the delight of the Massachusetts and national press.

From the Springfield Republican, May 29, 1882:

… it appears form the beginning that he, as manager of the mines has allowed Bothwell, as treasurer, absolute control of the books and finances of the several companies. It doesn’t appear that he ever examined the books, nor had anybody do so for him, or inquired into the financial condition of each mine, or what was being done with their profits; neither has he required from Bothwell such bonds as the latter’s position should require for the safe handling of moneys entrusted to him..

The scandal made the New York Times, which wrote several articles about the affair, including this one, from May 29th, 1882, which I dug out of the archive:

The scandals eventually ruined Clark’s health, and he died four years later, in 1886, at age 60. A cautionary tale for academics everywhere with ambitions to leave the Ivory Tower in search of glittering lucre. Now granted, molybdenum is quite a bit more responsible element than silver, but it seems a good opportunity to re-emphasize my 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.

(That said, with the next post, we’ll throw caution aside, and charge back into the updated molybdenum price model.)

Price hikes = profit hikes

Molybdenum is on something of a roll. During the first two weeks of February, the average price per pound has jumped from $17.45 to $17.83. For a producer like Thompson Creek, who can dig 32 million pounds of the stuff out of the ground per year, that corresponds to an extra twelve million bucks. “Keep the change, Son.”

Speaking of Thompson Creek, the next earnings call is Feb. 25th, 5:30 AM PST. Assuming that I wake up in time, I’ll be on the line.

Trendlines

It’s interesting to see how Molybdenum fares in Google’s new N-gram viewer, which charts mentions of a specific word or phrase across millions of books published between 1800 and 2000. Context is provided by the transition metals to the left, right, above, and below of Mo on the periodic table:

Molybdenum’s industrial use (other than as a hardener for steel) ramped up significantly during the 1920s. During this period, molybdenum regains some ground lost to tungsten starting shortly after 1900. In recent decades, molybdenum has lagged modestly behind tungsten, perhaps as a result of those “tungsten filaments”  in light bulbs.

The N-gram viewer closes up shop in 2000, foreshadowing the decline of the publishing industry. Recent history is charted by Google Trends, where tungsten’s dominance over chromium has steadily eroded as the Internet has become ever more widely used. Chromium is associated with health and environmental problems.

Finally, returning to molybdenum, it’s interesting to plot the producers against the product. What jumps immediately to notice, is Adanac’s persistent search volume, even as its share price and prospects have remained more or less mired in the ditch. Freeport-McMoran, of course is only 7% mol, whereas Thompson Creek is surely getting some crosstalk noise from the confusingly named door and window company. If the great Molycorp-rare Earth confusion is any indication, next thing we know, we’ll have investors snapping up TC in an attempt to get rich off the big door and window bubble…

More on Adanac

Something‘s up with Adanac Molybdenum Corporation (TSE:AUA). The stock spiked by ~50% last week (which definitely sounds more impressive than saying that the shares were up three cents). Volume was also (relatively speaking) heavy, with millions of shares trading hands.

Here’s the performance over the past year:

And here’s the recent action:

As most stock market investors must certainly know, Adanac has been under Canadian bankruptcy protection since being clobbered by the financial crisis. On November 9th of last year, Adanac’s creditors approved a restructuring plan in which the shares are to undergo a 150:1 reverse split. The fresh shares will then be distributed such that 92% of the equity goes to secured creditors, 5% goes to unsecured creditors, and a slim 3% goes to the shareholders of record. Fairly draconian, but better than GM or Enron.

With the stock price at 8.5 cents, and ~115 million shares in existence, the market capitalization stands at 9.74 million dollars. Quite a chunk of change. If this represents 3% of the total worth of the company, then the speculative valuation of the whole enterprise is 324 million dollars. That’s a lot. Back-of-the-envelope, if one assumes molybdenum prices of 15 dollars a pound and production prices of 10 dollars a pound, 324 million dollars implies 64.8 million pounds of molybdenum. That’s about 2 years annual production for Thompson Creek.