Moly Market Losing Steam - Caveat Emptor Moly Market Losing Steam - Caveat Emptor on Promotions
By Michael J. DesLauriers
06 Jan 2006 at 11:50 PM EST
TORONTO (ResourceInvestor.com) -- The molybdenum market is one of the most opaque in the world, making good pricing, and supply/demand information very hard to come by.
Massive profits have been realized by some primary and secondary producers over the last few years, and it is obvious that if moly prices fall, it will be injurious to the income statements at miners such as Phelps Dodge [NYSE:PD], Southern Peru Copper [NYSE:PCU] and Teck Cominco [TSX:TEK.SVB], all of which have had a very nice lift in cash flow from this by-product. But to these large producers it will only be wounding, not life-threatening.
For that reason, this piece will focus on the juniors - pure plays that have tied their fate to the vicissitudes of the moly market, and to the inscrutable whims of the Chinese alone.
A number of promoters have managed to capture the imagination of retail investors and resuscitate the share prices of several vehicles that have had more lives than you can count. The promise of these juniors is that they will bring their moly projects to production in the next few years, and investors will be justly rewarded for their belief in the metal, with huge cash flows and rising share prices.
The question is, will these moly plays still be feasible in 2008, and even if so, in a forward looking market, will production still be sufficiently profitable in say, 2011? With prices having recently retraced from the low thirties to the 22$/lb level, the question is a vital one for these companies and their adventurous shareholders.
In early July 2005, shortly after moly prices peaked around $40, RI wrote an article entitled “The Manic Moly Market and the Roasting Bottleneck,” in which the issue of the day appeared to be a lack of roasting capacity in the Western world, despite plenty of it in China, which had experienced a triple-digit surge in its moly demand.
In 2003, the Chinese shut down about 200 mines or roughly a third of their production citing safety concerns - the country accounts for about a quarter of world production. A cynic would point out that the words safety and concern rarely appear in the same sentence, in the central planning offices of the PRC. Of course, getting accurate information on what’s really going on in China is next to impossible, and whether or not most or all of that production is back on stream is unknown.
What is known is that the price of moly has taken a big hit recently and in an interview with RI, an industry insider noted that new roasting capacity has been added in South America and capacity has also been increased in the U.S. Additionally, a number of copper producers are currently in the process of, or planning to begin production of moly as a by-product – a proposition which has quite a favourable IRR on a standalone basis, as adding a moly circuit to an existing facility isn’t too expensive a proposition.
Further, as RI pointed out in July, “there is an awful lot of molybdenum in the world. According to the IMOA, world reserves are 12 million tonnes. The USGS attributes substantially more to China, and puts the number at some 19 million tonnes. Either way, there is probably more than one hundred years of current demand already identified.”
The bottom line for investors is that with so little visibility in the moly market and apparent resurgent supply, it may be well advised to reevaluate one’s position, especially given the fact that production from some of these juniors is still several years off. Companies like Adanac Moly [TSXv:AUA] are making projections in their pre-feasibility, which show a gradual decrease in moly prices from $20 in 2008 to $15 in 2012.
While this may be useful for them in terms of displaying favourable IRR numbers, one wonders how realistic it really is? Many of these juniors have done an admirable job at securing moly properties with historical resources and getting their stocks up by drilling, creating 43-101 compliant numbers, and issuing scoping studies that use lofty moly price assumptions.
That said, if the metal goes back to $5, they might as well be shells because their deposits will be categorized once again in geological tables as mere anomalies and not potential mines.
Caveat Emptor.