Moly Getting Back On Her Feet

One encouraging development during the 18th trading week of the year was the hint that the molybdenum market is recovering after the devastating demand collapse we witnessed late last year.

• Much as last year’s molybdenum price crash lagged the declines in copper and zinc prices, so has May’s recovery in molybdenum oxide prices above US$9 per lb. trailed the April resurgence in the wider base metals markets.

A good glimpse of the renewed optimism in the often opaque moly world was provided by the world’s largest publicly traded moly producer, Thompson Creek Metals, in its quarterlies. These were highlighted by a 28% drop in cash costs to US$5.93 per lb. moly oxide.

Thompson Creek chairman and CEO Kevin Loughrey commented that his company is encouraged by the upturn in price in the past two weeks and his team continues to expect a “sustained recovery in molybdenum demand and prices in the medium-term future as the world economy recovers from recession.” (And unlike many in the bombed-out moly subsector, Loughrey is in a good spot to take the long view: Thompson Creek is sitting on US$261 million in cash and equivalents, and only has US$17 million in total debt.)

After five months of nail-biting anxiety, quite a few moly market participants are now forecasting that moly oxide prices will rise to the mid-teens for the rest of 2009 and 2010, after breaking above US$9 per lb. in early May.

What’s the root cause? It appears to be a rebound in Chinese moly demand, where steelmaking activity has picked up a couple of percentage points in contrast to steep declines just about everywhere else — at last a little bit of the vaunted “decoupling” that was supposed to allow the U. S. economy to go into recession last year without dragging the rest of the world with it.

With the prolonged slump, many Chinese moly producers have been priced out the market, necessitating a renewed focus on imported moly for Chinese steelmakers, with Japanese and Korean traders also getting in on the action.

• Barrick Gold announced it will be going ahead with its US$3- billion Pascua-Lama gold project, which straddles the Chilean- Argentine border, after the company resolved long-standing permitting and tax issues with the governments of both countries.

During the first five years of production, beginning in 2013, the mine is expected to yield an average 750,000-800,000 oz. gold and 35 million oz. silver per year. Barrick anticipates total cash costs to come in below US$50 per oz. gold, net of silver credits, and assuming a gold price of US$800 per oz. and a silver price of US$12 per oz.

With Barrick’s record as an experienced and successful gold mine builder in the Andes, there’s every reason to expect the company to hit these targets.

• One junior delighted with the Pascua Lama news is International Royalty Corp., which owns the largest private royalty on the Chilean portion of the project, purchased for US$56.5 million in a string of transactions in the first seven months of 2007.

This sliding-scale royalty varies with the gold price. At a spot gold price of around US$900 per oz., it amounts to a 3.15% net smelter return royalty and would generate on average US$20 million annually to IRC’s account at full production rates.

• PricewaterhouseCoopers tallied some eye-popping numbers for B. C.’s mining industry for 2008: Aggregate, pretax net earnings for the industry were up by 88% to $3.2 billion, the highest amount in the 41-year history of PwC’s annual survey. Meanwhile, the returns on shareholders’ investments in B. C.’s operating mines, based on pretax earnings, reached an unprecedented 98% in 2008, up from 46% the prior year.

Coal was the commodity that powered these impressive results, PwC notes, with coal prices in 2008 soaring 225% to US$261 per tonne over the previous year, and coal representing 86% of total product shipments. Of course, by April 2009, one-year coal prices had slid to the US$125-per-tonne range, but PwC comments that it’s “still high compared to historical averages.”

• Lastly, in one of those odd milestones, the London Interbank Offer Rate fell below 1% for the first time, beating the previous all-time low of 1% reached in June 2003. Naturally, there’s plenty of discussion whether this is a sign of improving credit markets or just the consequence of massive government intervention, and therefore a false signal of credit-market quality.