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 The only pod of economics-related molybdenum data that I could coax out of the engine was a curiously out-of-date time series of molybdenum prices, running from 1912 to 1998: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:

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 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.

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.

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.

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…

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…

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.)

TC’s 2010 full-year performance was pretty much in line with expectations. Full-year production was 32.6 million pounds of mol, costing an average of $6.07 a pound to dig out of the ground and process, and selling for an average of $15.67 per pound. Net income was $113.7 million using generally accepted accounting principles. TC has a slew of outstanding warrants priced in Canadian dollars, which are treated as derivative exposure using US accounting rules. They take a big bite out of the official bottom line. I have not had time to fully understand the underlying story, but I do intend to look in more detail at exactly what’s going on with those bad boys. Non-GAAP net profit for the year was $163.3 million, and $34.4 million for the fourth quarter.

The most interesting part of the call is the Q/A session following the canned presentation. There is a lot of talk about the effect of price inflation on capital expenditures. TC is building out at full bore on both an expansion of the Endako mine, and also on the Mt. Milligan copper-gold project. With metals prices up across the board, there is heavy competition for skilled workers, which drives up Cap-X. Oil’s going up, and ironically, so is the price of steel. TC had 316 mil in the bank at the start of the year. They expect to spend all that, plus all their profits for the year, and are talking about going out on the credit markets for even more dough. It’s clear why they don’t pay a dividend. “Look, dude, it takes money to make money.”

That headline definitely sounds more dramatic than reporting that “the stock dropped by one cent”, but sadly, the two statements are fully equivalent. Adanac spent close to 150 million in an effort to get their Ruby Creek deposit into production, but was then waylaid by the financial crisis and the attendant collapse in mol prices. The company has been reorganized, and the shareholders are scheduled to receive 3% of the equity, meaning that the 6.3 million market cap as of this afternoon’s close actually corresponds to a total company valuation of 210 million USD.

Is that reasonable?

If we the adopt the molybdenum price model developed in the last post, we’re in position to run Monte-Carlo simulations that yield a distribution of possible valuations for the company based on the projected forward trajectories of the molybdenum spot price. According to Adanac’s Oct. 21, 2008 fund-raising presentation pitched just prior to the company’s going bust, the mine will cost ~500 million USD to get up and running and consistently producing. With that capital expenditure, the mol can start flowing in two years time. The Ruby Creek deposit is capable of producing 13 million pounds of mol per year for the first five years, and then 9.5 million pounds per year for years six through nineteen. Costs in the first five years (with a higher grade of ore) are 8.10 USD/lb, increasing to 10.23 USD/lb thereafter. I assign a moderately conservative 12.5% rate, and sum the discounted cash flows for the life of the mine for each Monte-Carlo trajectory to build the distribution of valuations. I also assume that if the price falls below break-even, then they can just shut down the mine with no consequences until the situation improves.

The results are somewhat encouraging. Out of 10,000 trials, the average valuation is 471 million dollars. 38% of the cases come out above a half billion dollars, 21% lie above one billion, 5% are above two billion, and 0.7% lie above three billion. Here’s the histogram of outcomes:

The risks, of course, are legion. Most importantly, as pointed out in the last post, the price model does not adequately incorporate the surges in production by FCX et al. (and the ensuing collapse in prices) that will likely occur in the event of a sustained price spike. Next step is to get that effect into the model and re-run the code. Nevertheless, the current stock price might have some upside potential. I’m going to hold onto my 150 dollar “research grade” position…