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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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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