Toward a molybdenum price model

February 21, 2011 5 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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Price hikes = profit hikes

February 14, 2011 Leave a comment

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.

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The quartz diorite intrusion will make everything OK

February 12, 2011 1 Comment

The University of California budget is a matter of no small concern to everyone associated with UCSC. As the Golden State’s finances slip ever further into disrepair, the university is forced into a yearly ritual of ever-deeper across-the-board cuts. There is a heroic ongoing scramble to fill the funding gap with development (read donations), and with increased federal funding. Federal funding comes in two primary forms: research grants and their associated overhead, which accounts for roughly 1/3 of UCSC’s budget, and federal student loans, which the students use to pay the rapidly increasing fees that account for roughly another 1/3 of the pie. From my naive vantage, the student loan situation looks somewhat like the housing loan situation did in, say, ’05 or ’06. Federal grant funding might be in for a hit, too. I’m worried that fundamental research work in astronomy  and astrophysics and the Tea Party may not see eye to eye. It’s prudent to think about hedging strategies — hence a molybdenum  research weblog.

UCSC does, however, have a lot going for it, not the least of which is the physical location. Where the redwoods give way to the meadow, at the bottom of the inversion layer, the porcelain shrieks from the roller coasters can sometimes be heard echoing up through the tawny hillocks of summer grasses.

Another amazing aspect is the geology. The campus core is underlain by paleozoic limestone beds that have metamorphosed into pure marble. The marble has been eaten away by eons of pacific winter rains, and a network of solution cavities, caves, and sinkholes lies like a spongiform monster just beneath the surface.

One of my running routes takes me up into the fire trails up above the main campus. Here, if one keeps a sharp eye out, there is a sudden and radical change in the geology. The marble gives way to quartzite and then suddenly to quartz diorite. More than a hundred million years ago, a pluton of granitic rock pushed into the overlying strata, cooking the limestone, and leaving a slow-cooled igneous intrusion.

The geological map of Santa Cruz county shows mind-boggling diversity:

Zooming in on UCSC, the boundary between the marble (light blue) and the quartz diorite (light orange) is easily seen:

As a part of becoming a self-styled molybdenum expert, I’ve been studying up the geology of ore-forming bodies. While I’m certainly no prospector as of yet, it seems clear that as the the rock of the quartz diorite “Banana Slug Batholith” cooled, hot volcanic water was forced out of solution, and along with groundwater from above, it must have circulated through the web of cracks and faults, possibly leaving behind (as it occurred to me last week) traces of molybdenum, copper, and gold.

On a hunch, I typed “gold mine santa cruz california” into Google’s search box, and low and behold:

Now three miles NW of Santa Cruz seems to be on or very close to the UCSC campus, and it seems that gold mineralization (and perhaps copper and mol as well?) occurred to an extent that was marginally commercially viable using 1890′s era extraction techniques. The University of Texas is famous for supplementing its income stream with West Texas Intermediate Crude, why not a gold mine, with gold at $1300 an ounce, chipping in for ‘ol UCSC?

But then, wait! If FCX moves in to develop an open pit gold mine on Upper Campus, where am I supposed to go running?

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Trendlines

February 6, 2011 Leave a comment

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…

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More on the mol-neutral strategy

February 6, 2011 Leave a comment

Molybdenum prices, along with those of all the rest of the commodities, are holding up quite well. The Metals Week average price is 17.40 USD/lb (as of Jan 31, 2011), and the Ryan’s Notes average (as of Feb 1) is 17.50 USD/lb. At those prices, a molybdenum mine is the same thing as a mint.

Last week’s post encapsulated the speculation that deep pockets, deep reserves, and current production are keys to success in the molybdenum business. More than any other player, Freeport McMoran (FCX) seems to be firing on all three cylinders (with TC doing just fine as well, thankyouverymuch).

A look at the mol price graph in 2008 shows that where molybdenum is concerned, past performance is not necessarily a solid indication of future performance. Indeed, when one looks at forward looking estimates by the producers themselves, it seems that those in the know tend to focus on how operations hold up at 10 USD/lb. Rather than being a long-at-all-costs molybdenum “bug”, a better investment strategy might be to design a long-short “molybdenum-neutral” portfolio that focuses on finding out-performance, that is, mol sector alpha.

From the molybdenum investor’s standpoint, the difficulty with FCX is that its mol business is buried within a much larger metals set-up. As of the recent 2010 annual statement, FCX’s revenues were 3.9e+9 lbs x 3.59 USD/lb = 1.4e+10 USD from Cu, 1.4e+6 oz x 1271 USD/oz = 1.7e+9 USD from AU, and 6.7e+7 lbs x 16.47 USD/lb = 1.1e+9 USD from Mo. On a revenue basis, then, FCX is 83% Cu, 10% Au, and 7% Mo (which sounds like the perfect alloy for a gleaming 10 lb paperweight on the trading desk of a heavy-hitting molybdenum speculator).

Last week’s model portfolio sought to isolate the relative outperformance of FCX’s mol business by (1) going long 100K FCX, and going (2) short 83K worth of COPX (copper producer index ETF), and (3) short 10K worth of GDX (gold producer index ETF). The net 7K of FCX is, in theory, “all mol”, and this 7K of exposure is in turn balanced against a short 7K position in General Moly (GMO), who are currently working to get Nevada’s Mt. Hope deposit into production. An even better strategy would be to short 7K worth of Adanac and Roca Mines, but I’m guessing that it’d be difficult to get the locates on the shares.

The plan last week was to implement the mol-neutral strategy on the onging VSE UCSC Capitalism Club stock contest. Sadly, due to some technical difficulties on VSE’s side, the COPX and GDX trades failed to clear, and I was left 93% long FCX. On Friday, I issued a “stop gain” order to cut my advance to  up a mere 4% on the week. We’ll try again next week by issuing an order to go (1) long 1,763 shares FCX, (2) short 4,067 shares  COPX, (3) short 178 shares GDX, and (4) short 1,277 shares GMO.

As pointed out last week, this portfolio would be a total failure as a real-world product. It chews up a huge amount of margin. For a mere 7K of FCX-GMO molybdenum alpha, one ties up ~200,000 USD of capital (or similar depending on specific brokerage rules). Also, in constructing the product, I assume that FCX’s copper and gold businesses have a beta of one to the respective producer indices — almost certainly not the case. The error in this assumption is exacerbated by the huge fraction of FCX that’s tied up in the copper business.

Looks like I need to work with an investment bank to structure a special product…

Filed under molybdenum trading

A mol-neutral strategy

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!

Filed under molybdenum trading

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.

Filed under molybdenum economics

There’s mol in them thar hills

January 26, 2011 Leave a comment

There’s a mineral collection in the common area of the Earth and Marine Sciences Building. I was looking at the various specimens yesterday, while waiting for my coffee, and I noticed that they have a piece of Wulfenite (PbMoO4), orange crystal structure sparkling in the iPhone photo above. It made me think of Adanac’s Ruby Creek mine, sitting up there in northern British Columbia, frigid and abandoned, wind and snow howling through the gyratory crusher.

The Adanac stock price has been holding up for the past several days at a total market capitalization of ~9.75M. Upon perusing their filings, one quickly learns that the secured and unsecured creditors control 97% of the equity, as a result of the crash of ’08, which visited financial waste on all the best laid plans for bringing new open pit molybdenum operations on line.

According to an interesting Adanac company presentation (from October 2008, right when things were freezing up completely, as ruefully indicated by the above chart) the cost of bringing Ruby Creek into full production totals 724 million dollars. That’s an awful lot of money, more than twice the current valuation of the company as viewed by the market consensus. Nevertheless, for that 724 million, one can extract 200 million pounds of molybdenum, which at the current spot price, is worth a staggering 3.4 billion dollars. I think that’s what’s caused the long-depressed stock price to start showing a bit of life.

Filed under molybdenum mines

More on Adanac

January 24, 2011 1 Comment

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.

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