Boys, Be Ambitious!

February 28, 2011 by 1 Comment

When I lived in Japan, I visited Hokkaido University in Sapporo to give an astronomy colloquium. While there, I immediately noticed that an odd motto, “Boys, Be Ambitious!” is attached (in English) with great frequency to the various affairs, both large and small, of the University. One of the astronomy graduate students had the phrase written on a post-it note attached to the screen of his computer. In another building, there was a large mural showing a stern, stiffly dressed 19th-century gentleman exhorting a group of reverent students with a longer version of the phrase:

“Boys, be ambitious! Be ambitious not for money or for selfish aggrandizement, not for that evanescent thing which men call fame. Be ambitious for that attainment of all that a man ought to be.”

Which upon reflection, seems to be excellent advice…

The gentleman in the mural, it turns out, is William Clark Smith, the founder and first president of the University of Amherst, Massachusetts. In the mid 1870s, he was enlisted by the Japanese Meiji Restoration government as an Oyatoi Gaikokujin, or “hired foreigner”, to establish an agricultural college in Sapporo (now Hokkaido University) and he made an impression that has lasted well over a century. The Wikipedia article is extensive and quite interesting. On the origination of the motto:

“On the day of Clark’s departure, April 16, 1877, students and faculty of SAC rode with him as far as the village of Shimamatsu, then 13 miles (21 km) outside of Sapporo. As recalled by one of the students, Masatake Oshima, after saying his farewells, Clark shouted, “Boys, be ambitious!”

Upon returning to the United States, and flush with the organizational successes and appreciation that he had garnered in Japan, Clark left his academic career, cultivated an interest in gold and silver mining, and embarked on an abrupt, ambitious, and ultimately disastrous foray into the business world. In 1880, he teamed up with a junior partner, John R. Bothwell, to found what might best be described as a 19th-century incarnation of a metals hedge fund. From offices on the corner of Nassau and Wall Streets in Manhattan, the firm of Clark & Bothwell acquired interests in a slew of silver and gold mines across North America, for which they assumed management and issued stock. Clark, as president, got his contacts and colleagues to invest in the venture, and for a period during 1881, the stocks issued by Clark and Bothwell ran up into multi-million dollar valuations. A classic example of a bubble.

Clark travelled around the country, promoting the company, acquiring new mines, and seeing to their management, while Bothwell appears to have been responsible for back-office operations. Clark, who had no experience in finance, and little real knowlege of mining geology seems to have spun his wheels, while Bothwell, who had a shady history, actively mismanaged the companies. The operation got into debt, with the outcome being all too typically familiar along the lines of When Genius Failed. By the Spring of 1882, they were facing insolvency, investor lawsuits, fraud allegations, and various other problems. Bothwell disappeared on a train trip to San Francisco, never to be seen again, leaving Clark holding the bag. The story played out to the delight of the Massachusetts and national press.

From the Springfield Republican, May 29, 1882:

… it appears form the beginning that he, as manager of the mines has allowed Bothwell, as treasurer, absolute control of the books and finances of the several companies. It doesn’t appear that he ever examined the books, nor had anybody do so for him, or inquired into the financial condition of each mine, or what was being done with their profits; neither has he required from Bothwell such bonds as the latter’s position should require for the safe handling of moneys entrusted to him..

The scandal made the New York Times, which wrote several articles about the affair, including this one, from May 29th, 1882, which I dug out of the archive:


The scandals eventually ruined Clark’s health, and he died four years later, in 1886, at age 60. A cautionary tale for academics everywhere with ambitions to leave the Ivory Tower in search of glittering lucre. Now granted, molybdenum is quite a bit more responsible element than silver, but it seems a good opportunity to re-emphasize my disclaimer,

Disclaimer

Nothing on this site should be construed as a recommendation to buy or sell any specific security nor as a solicitation of an order to buy or sell any specific security. Before making any trade for any reason you should consult your own financial advisor. The author may hold long or short positions in any of the securities discussed either before or after publication of an article mentioning such a security.

(That said, with the next post, we’ll throw caution aside, and charge back into the updated molybdenum price model.)

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TC Earnings Call

February 26, 2011 by Leave a Comment

In academia, one hears of ten-o’clock scholars. In the hurly-burly world of molybdenum speculation, it’s 10:40 AM-o’clock would-be metals analysts. I was not finished preparing Friday morning’s dynamics lecture, and so I wasn’t live on the line for Thompson Creek’s 5:30 AM earnings call. Conveniently, however, the call is online, and so I was able to listen in a day late.

TC’s 2010 full-year performance was pretty much in line with expectations. Full-year production was 32.6 million pounds of mol, costing an average of $6.07 a pound to dig out of the ground and process, and selling for an average of $15.67 per pound. Net income was $113.7 million using generally accepted accounting principles. TC has a slew of outstanding warrants priced in Canadian dollars, which are treated as derivative exposure using US accounting rules. They take a big bite out of the official bottom line. I have not had time to fully understand the underlying story, but I do intend to look in more detail at exactly what’s going on with those bad boys. Non-GAAP net profit for the year was $163.3 million, and $34.4 million for the fourth quarter.

The most interesting part of the call is the Q/A session following the canned presentation. There is a lot of talk about the effect of price inflation on capital expenditures. TC is building out at full bore on both an expansion of the Endako mine, and also on the Mt. Milligan copper-gold project. With metals prices up across the board, there is heavy competition for skilled workers, which drives up Cap-X. Oil’s going up, and ironically, so is the price of steel. TC had 316 mil in the bank at the start of the year. They expect to spend all that, plus all their profits for the year, and are talking about going out on the credit markets for even more dough. It’s clear why they don’t pay a dividend. “Look, dude, it takes money to make money.”

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Valuing Adanac

February 23, 2011 by Leave a Comment


Shares of Adanac Molybdenum Corporation (AUA.TO) were off 14.3% today, finishing at 0.06 USD in afternoon trading.

That headline definitely sounds more dramatic than reporting that “the stock dropped by one cent”, but sadly, the two statements are fully equivalent. Adanac spent close to 150 million in an effort to get their Ruby Creek deposit into production, but was then waylaid by the financial crisis and the attendant collapse in mol prices. The company has been reorganized, and the shareholders are scheduled to receive 3% of the equity, meaning that the 6.3 million market cap as of this afternoon’s close actually corresponds to a total company valuation of 210 million USD.

Is that reasonable?

If we the adopt the molybdenum price model developed in the last post, we’re in position to run Monte-Carlo simulations that yield a distribution of possible valuations for the company based on the projected forward trajectories of the molybdenum spot price. According to Adanac’s Oct. 21, 2008 fund-raising presentation pitched just prior to the company’s going bust, the mine will cost ~500 million USD to get up and running and consistently producing. With that capital expenditure, the mol can start flowing in two years time. The Ruby Creek deposit is capable of producing 13 million pounds of mol per year for the first five years, and then 9.5 million pounds per year for years six through nineteen. Costs in the first five years (with a higher grade of ore) are 8.10 USD/lb, increasing to 10.23 USD/lb thereafter. I assign a moderately conservative 12.5% rate, and sum the discounted cash flows for the life of the mine for each Monte-Carlo trajectory to build the distribution of valuations. I also assume that if the price falls below break-even, then they can just shut down the mine with no consequences until the situation improves.

The results are somewhat encouraging. Out of 10,000 trials, the average valuation is 471 million dollars. 38% of the cases come out above a half billion dollars, 21% lie above one billion, 5% are above two billion, and 0.7% lie above three billion. Here’s the histogram of outcomes:

The risks, of course, are legion. Most importantly, as pointed out in the last post, the price model does not adequately incorporate the surges in production by FCX et al. (and the ensuing collapse in prices) that will likely occur in the event of a sustained price spike. Next step is to get that effect into the model and re-run the code. Nevertheless, the current stock price might have some upside potential. I’m going to hold onto my 150 dollar “research grade” position…

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Toward a molybdenum price model

February 21, 2011 by 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 by 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 by 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 by Leave a 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 by 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 by 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…

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