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Thursday, January 6, 2011

Good Golly Miss Moly

Let’s talk about Molybdenum shall we? Many of you out there may never have even heard of this particular metal more widely known as “moly” or element number 42 in the periodic table. For me though, I have heard about molybdenum beginning in my childhood. You see dear reader, my father was a chemical engineer by trade and from the 1960s to the late 1970’s he worked for Amax Metals Inc (a result of the original Climax Molybdenum and American Metals merger in the 1960’s) which is now part of Freeport McMoran (NYSE: FCX) and rebadged as Climax. Later after leaving Amax he went on to from a couple companies which processed and sold molybdenum oxide and ferromolybdenum and later rhenium (element 75 in the periodic table) products. Needless to say I learned plenty about molybdenum and its uses while growing up to the point that I am sure that I can easily answer any Trivial Pursuit ™ question related to molybdenum.  As a kid I recall my dad traveling quite a bit to build plants he designed like the one at Fort Madison which Climax still uses.

Well enough of the trip down memory lane as I do not want to bore you further dear reader. Molybdenum is a useful transitional metal with many applications as depicted by the chart below:

Molybdenum is in demand from more than just a single industry and is used to strengthen steels, and provide corrosion resistance for environments that are particularly harsh like offshore drilling and marine vessels. Molybdenum is also used in jet engines and power plants that require strong, yet resilient steels. Molybdenum is used in architectural grade steels, coal conversion, chemicals, and nuclear medicines. The tool industry utilizes molybdenum in their high speed tools. Molybdenum has applications a catalyst and sulfur reducer in petroleum production. Molybdenum is used in pipes that are required for oil and gas as well as nuclear power for leak prevention. There are even applications for molybdenum in desalinization, fertilizer, flame retardants and vitamins. Moreover, molybdenum is often used as a high performance lubricant an example of which you may know from the auto world is “Gear Moly”. Lastly, molybdenum has various military applications including in ballistic missiles which can contain upwards of 15% Molybdenum content.

Steel demand is projected to rise to record highs in 2011 and there is corroborating evidence from the run up in metallurgical coal prices. If you have been following the markets you probably already know that coking or met coal is booming but thermal coal is lagging, this is because thermal coal is used for power generation and does not contain enough BTUs for processing metals. The rise in demand for steel along with the continued infrastructure demands also translate in to demand for molybdenum. As with the Rare Earths, China used to flood the world with molybdenum when the price rose but that trend appears to be on the decline. Molybdenum prices have retreated from their highs of 2008 when virtually all commodities crashed, but they have been working their way higher and are still about 50% below peak price.

I believe that molybdenum prices will rise along with other commodities by a combination of inflation and more demand. The average of demand growth historically in the molybdenum industry is about 4% year over year meaning that industry should require around 550 million pounds of molybdenum by 2014. I feel that demand will tend to run somewhat higher than average as a result of the continued infrastructure build outs in China and elsewhere in the developing world. While Europe and the US tend to be the largest consumers of molybdenum for the time being as with everything else price will be dictated by demand from the periphery. So this time around China will not be willing to cool the price of molybdenum by dumping, with their own demand growing  it appears to have become less of a factor at this time. Just like with Rare Earth Elements (REE’s), I could see China restricting the export of molybdenum due to its strategic nature, and this would be additionally supportive of the price. Every time I research the topic further it seems that there is a new application requiring molybdenum to make it work; between its historical uses and new ones coming on stream the picture that presents itself is one of growth in demand.

What got me started down this path is looking in to what I believe is the Rare Earth Bubble (stock) and one of the companies I came across was General Moly (NYSE : GMO). I began to look at GMO to see why it would be lumped in with the REE’s and could not find a great reason for that other than they are a miner and there could be REE’s on their property. GMO has two properties Mount Hope and Liberty, neither of which are producing any molybdenum. GMO does have a “bankable” feasibility study for the Mt. Hope property and they are partnered with South Korea’s POSCO (NYSE : PKX) to develop the mine. GMO has received final permits, ordered long lead time equipment and has begun preliminary construction. I will agree that they have potential, but they are sporting a 461 Million dollar market cap and a price to book of 5 times. If one learns anything about investing in the mining sector it is that “Murphy” was an optimist. In other words in mining anything that can go wrong will until the operation is working for a period of time and even then there are always “acts of God” to contend with; take a look at Mine Finders (AMEX :MFN) who is a gold and silver producer at this point, with competent management and you will get the idea. Until MFN got up and running it was one thing after another and periodically the share price would take a severe hair cut and even today the stock is struggling to participate in the current gold bull. The point is that I believe that GMO is overvalued and appears to be mistakenly riding the REE bandwagon. If you want to play in the Molybdenum space there are better vehicles in my opinion.

If one is conservative and wants exposure to molybdenum but added diversification of a larger company with more mine segments like copper and gold you should look at something like Freeport McMoran (NYSE :FCX). Freeport is large miner with $55 Billion in market capitalization, proven earnings, a PE of 15 and even a dividend currently yielding 1.7%. One gets the molybdenum exposure with FCX through their Climax subsidiary I mentioned earlier. Freeport has diversification and very good management but more importantly unlike GMO they have real earnings. I believe that in the next couple months FCX could trade up to $129 from $117 today. From a technical perspective the chart sports a golden cross and the shares are trading above both the 50 day and 200 day moving averages. If FCX pulls back toward the 50 day moving average at $106.67 on declining volume then it would be a good spot to acquire shares or add to an existing position.

If you are further out on the risk curve and want to more growth potential there is a strong company that I believe has excellent potential. The company of which I speak is Thompson Creek Metals (NYSE : TC). Thus far FCX has outperformed Thompson Creek by 20% but the time maybe approaching for some catch up. Thompson at $2.4 billion in market cap is about 1/22 the size of FCX. Thompson sports a PE of 11.5 at current prices and I am projecting that next year’s earnings (Year over Year) on the order of 30% due to what I believe will be a stronger than expected molybdenum demand. I believe that Thompson can post a $1.40 per share which also happens to be the midpoint between the highest and lowest analyst estimates I have seen for TC. Unlike General Moly, Thompson is in production and has multiple properties as well as a couple of “roasters” that keep value added products in their control.

Thompson’s mines include the Thompson Creek Mine in Idaho which has produced Molybdenum since 1982 and processes 30K tons of rock a day producing molybdenum sulfide for roasting at their Langenloth roasting facility in Pennsylvania.   Thompson Creek has 277 million pounds of proven and probable reserves of molybdenum and another 444 million pounds of measured and indicated.

The Endako Mine in North British Columbia is an open pit mine that Thompson has 75% control of. Endako is currently being expanded to 55K tons of production per day from 31K. The molybdenum sulfide produced at the mill is then roasted on site to produce molybdenum oxide. Endako has proven and probable reserves of 306 Million pounds of Molybdenum and another 463 million pounds measured and indicated.

Mount Milligan is currently under construction and should become operational as an open pit copper and gold mine in 2013. Additionally, there will be a copper processing plant onsite that can handle 60K tons per day and Thompson expects to produce 81 million pounds of copper and about 195,000 ounces of gold over the expected 22 year life of the mine. Mt. Milligan has 2,124 pounds of copper and 6 million ounces of gold in the proven and probable category and another 2,840 pounds of copper and 7.5 million ounces of gold as measured and indicated resources.

Mount Edmonds mine located in Colorado is an undeveloped very large high grade molybdenum deposit that based upon prior drill results indicates a deposit potentially as large as 750 million pounds of molybdenum. Thompson is the project operator and has the option to acquire 75% of the project. Currently the project is in exploration stage.

Thompson is also in the process of evaluating two other properties the Berg project in British Columbia, Canada and the Davidson project also in British Columbia. The Berg project is an early stage copper\molybdenum\silver deposit. The Davidson project is currently under evaluation and it is thought to be the largest undeveloped molybdenum deposit in Canada.

As you can see Thompson Creek Metals has existing projects and is growing their reserves as along with production which is more than can be said for General Moly at least at this point in time. Additionally, Thompson is more than a straight molybdenum play as there are gold, copper and potentially silver ores to accrete more value to the bottom line (I am aware that the GMO properties also have more than molybdenum as well but they are not producing anything yet). It also would appear that the three main mines also have “blue sky” opportunity. I believe the market is not fully valuing the potential that Thompson brings to the table and therefore the stock provides you with an opportunity to acquire excellent resources at a reasonable value.  With the current correction in metals, a pull back in Thompson toward $13 level would be a nice point at which to begin accumulating some shares. From a technical perspective Thompson is working off an overbought condition, but the chart itself looks good. Thompson is trading over its 50 and 200 day moving averages. The two averages also sport a golden cross, which is bullish especially for a stock that appears to be in a nice solid uptrend. I believe that as long as Thompson Creek continues to execute and the economy especially in the developing world chugs along the shares could trade up to $25 over the next few months.

Disclosure: I have a small position in Thompson Creek and am looking to add more on a dip toward $13(if it occurs).

Note :This was published on Benzinga.com by me.

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