A mol-neutral strategy

January 30, 2011 by 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 by 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 by 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.

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More on Adanac

January 24, 2011 by 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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Report card

January 22, 2011 by 1 Comment

Here’s the comparative performance over the past year for four effectively pure play mol names: Adanac (AUAYF, market cap 10M), Roca Mines (ROK, market cap 42M), Thompson Creek (TC, 2.3B), and General Moly (GMO, market cap 408M), along with XLB (basic materials SPDR ETF):

GMO won 2010, hands down. The stock price of this name is doing well because they’ve got clear (Chinese-sourced) bridge financing in place and a good shot at bringing the Mt. Hope mine in Nevada on line. With its projected 40 million pounds per year of mol production, Mt Hope wouldn’t exactly be the best news for TC. Still not sure what’s up with Adanac’s recent flurry of stock trading activity. If Roca Mines 2010 3rd-quarter report is any indication, ROK hasn’t exactly been taking their MAX mine to the max as of late.

Roca and Adanac don’t have associated exchange-traded options, but TC and GMO do. Here, courtesy of ivolatility.com, are one-year time-series plots of realized and implied vol for TC and GMO:


GMO is trading at 80% implied vol, while TC is trading at 50%. I think it might be interesting to investigate trades that short GMO vol and hedge with TC vol. The vol’s all mol after all…

Filed under molybdenum trading Tagged with , , , ,

The Climax Mine

January 21, 2011 by 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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Supply

January 21, 2011 by Leave a Comment

How big is the molybdenum business? I have to admit that I would have had a difficult time getting the answer right to better than a factor of ten via ball-park estimation. With the Internet at hand, however, the answers to such questions are easy.

Very roughly, if one aggregates primary and secondary production sources, the current world output is about 500 million pounds of molybdenum per year. A metric ton is 2204 pounds, which means that the mol trade comprises a yearly volume of ~227,000 tons, or ~38,000 futures contracts worth. Given that there are currently live warrants on the LME for 228 molybdenum contracts, it’s clear that the vast majority of molybdenum production is bypassing the LME — dark pools, if you will.

Molybdenum, at 10.28 grams per cubic centimeter is pretty dense. The world yearly output could be fashioned into a cube roughly 80 feet on a side:

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Not rare, but it’s in the Earth

January 19, 2011 by Leave a Comment

As far as molybdenum is concerned, the “good old days” were back in `04 and `05, when the mol spot price spiked up to over USD 100,000 per metric ton.

This price spike appears to be associated both with an increase in demand (primarily from China) and a simultaneous squeeze on capacity. Historically, during most of the 1980s, and through the late 1990s, the majority of molybdenum production came from major copper producers, who added secondary molybdenum circuits to their operations. The resulting mol production from the copper mines was sufficient to meet demand. This kept prices low, and prevented primary molybdenum producers from getting any traction. This balance began to erode after the turn of the millennium when copper prices started to rise. If my current understanding is correct, this led the copper producers to focus on the higher-profit copper extraction at the expense of their molybdenum circuits. Even though mol prices were also increasing, a copper mine could make more money by focusing on copper. (If your high-frequency options desk is printing money, then you’re gonna focus on that, and you’re not going to waste time on a fundamental analysis of the mysteriously surging stock price of Adanac Molybdenum Corporation.)

The molybdenum price spike of 2003-2005 allowed primary molybdenum producers (first and foremost TC’s predecessor Blue Pearl) to get a foothold. The crash of ’08 has allowed TC to further strengthen its position by thwarting or slowing efforts by the likes of Adanac, Roca Mines, and General Moly to get production going on their deposits.

Molybdenum is not a rare earth metal, but there is a similarity in that it’s not rare, but it’s in the Earth, with a formidable financial barrier to scale prior to entering production. Furthermore, molybdenum spot prices are not the driver of steel prices in the same way that rare earth prices are not the primary price driver for the electronic products that incorporate them. The big current run-up in rare Earth spot prices therefore seems somewhat analogous to the great mol spike of 2003-2005. TC’s ensuing experience suggests that the first rare earth primary producer to get their production really ramped up will be in the best position once the rare earth supply and demand are brought into better balance.

Filed under molybdenum economics

Adanac (read “at the track”)

January 18, 2011 by Leave a Comment

Race track betting is a constant theme in the vérité fiction of Charles Bukowski. From the IMdB:

The race track as metaphor suited Bukowski as it represented something more than luck or chance. A horse player had to work at it to be any good and beat the odds, and the odds were definitely stacked against the crowd as the track took its vig right off the top, when it wasn’t outright and forthrightly fixing the race.

Small-time investors in bankrupt pink-sheet molybdenum names are (in all likelihood) in the same category as characters trying to beat the odds at the track. A case in point is provided by Adanac Molybdenum Corporation:

Clearly, things have not gone so well for investors who’ve held onto this stock since 2007. Note the logarithmic y-axis on the price chart:

The financial crisis caused financing to dry up, and the company is in reorganization.

After doing some digging, and as a relatively low-cost research experiment, I issued an order to buy 2000 shares of Adanac at the open this morning, largely on the basis of unusual volume patterns that started up on Monday. This is a USD 140 investment. Remarkably, the stock jumped 30% today on way-above average volume:

Time for a disclaimer: I am in no way recommending that anyone take a position in this stock, other than for strictly “research” purposes. Whether there is any alpha here is at very best highly debatable. We have an analyst, however, poring over Adanac’s public documents, his findings may lead to a state of enhanced informational efficiency. Stay tuned!

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Charts

January 17, 2011 by Leave a Comment

There’s a charting tool at the infomine website which has access to historical molybdenum prices running back 15 years.

All things considered, if the data that’s being presented is representative, then the price of molybdenum has remained relatively stable for the past year, with somewhat less volatility than the LME’s futures data would suggest. (I have a feeling, however, that indications of the charts notwithstanding, one shouldn’t consider quitting one’s day job in order to take up molybdenum arbitrage.)

One can track the price of molybdenum against a sheaf of other commodities. For example, here are charts over a variety of horizons for mol, copper, gold and oil. All the good stuff…

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