NMC’s take on moly’s future

Molybdenum gets little glory in the metals world. On the production side more than half of it is produced as a by-product of more prominent metals like copper, while on the consumption side it is mostly used as a secondary additive to help make all sorts of steel alloys.

As to the major producers, moly again plays a side role, with most producing the metal as a by-product to their more rewarding copper and gold production. Freeport-McMoRan Copper & Gold (FCX-N) is the world’s largest moly producer, extracting roughly 83 million lb. last year, but this figure pales in comparison to its copper production. The same is true for Codelco and Grupo Mexico, the second- and third-largest producers at 50 million lb. and 42 million lb., respectively. Of the top-10 producers, Thompson Creek Metals (TCM-T, TC-N) is the only publicly traded primary moly producer, extracting 28 million lb. last year, though when the company’s Mount Milligan mine goes online next year it will diversify into copper and gold like most of the other majors.

But with an estimated $7-billion market, moly can’t be entirely sidelined. Demand is projected to grow between 4% and 6% over the next few years, possibly bringing global moly demand from the 534 million lb. estimated for 2012 to 760 million lb. by 2020.

China is the driving factor in that growth, with the country dominating the market. The country has two of the top-10 moly producers, both primary, with China Molybdenum producing 34 million lb. and Jinduicheng Molybdenum producing 29 million lb. last year. Overall China produced 180 million lb. last year thanks to 170 mining companies producing moly, while the country exported 15 million lb. The country’s ravenous steel industry takes up the bulk, and plays a big part in dictating the global price.

Next door, NMC ­Resource (NRC-V) president and CEO Do Hyung Kim has been watching the market closely as he manages South Korea’s sole moly mine. Overall, he likes what he sees.

“I think the moly market is going to be good, for two reasons,” Kim says by phone. “On the supply side, there are declining ore grades. If you look at the first quarter, we see 11% reduction in production outside China, and it’s mainly from declining ore grades. And declining ore grades — you cannot do anything about them.”

Kim adds that “at the same time, people talk about those primary moly mines that will come on stream, but except for [Freeport-McMoRan’s] Climax, which started production in May, we don’t really see any.”

Kim points to the high capital costs required of low-grade moly deposits and the general cost overruns in the industry being significant barriers to new moly mines coming on stream. Thompson Creek, in its outlook, also sees no significant increase in production in the next few years. Several operations with moly by-product have been delayed until 2014, while ­Polish miner KGHM’s Sierra Gorda copper-moly mine in Chile is not expected online until 2015. Meanwhile China is having trouble opening new mines of its own as locals become more concerned with industrial activity in their backyards.

On the demand side, Kim also sees some positive signs, thanks to China’s inevitable growth.

“China’s urbanization cannot be stopped,” Kim says. “With a country and a per-capita income of $4,700, I don’t think there can be an overcapacity issue.”

He notes that China had net exports of 3 million lb. in the last quarter, a 47% drop from the same quarter the year before, as internal demand rises.

Kim also pointed out the shifting nature of China’s steel industry that will continue to drive demand.

“China’s government and major Chinese steel mills are shifting their gear to specialty steels, which means they need more alloys.”

Areas of growth include aerospace, the military, pipelines and the nuclear industry, as well as more use in oil refineries as a catalyst.

“There is less correlation between stainless steel production and molybdenum use, because molybdenum use has been diversified in many different ways,” Kim says.

As to hard predictions, an RBC Capital Markets report predicts deficiencies of 2 million lb. for 2012, 34 million lb. in 2013 and 15 million lb. in 2014. The report states the shortfall should translate into prices of US$25 per lb. in 2013, US$20 per lb. 2014 and back down to US$15 per lb. in 2015, as more moly supply comes online. More recently, Canaccord Genuity put out a much more modest price outlook on moly, estimating US$14 per lb. moly in 2013 before hitting its long-term price estimate of US$15 per lb. by 2014.

For now molybdenum is sitting at a little under US$13 per lb., having declined from almost $15 per lb. in February.

At NMC Resource, the company produced 172 tonnes of molybdenum concentrates at a 0.31% moly head grade in the quarter ending March 31. The company sold 209,000 lb. moly at a cash cost of US$9.22 per lb., which translated to $2.6 million in sales and a net loss of $604,000, owing largely to the declining moly price.

Kim, however, points out that the company increased mill throughput by 28% through optimization, thereby increasing production without capital expenditures. Kim also says that the company is focusing on other earning indicators.

“What is our free cash flow? That is our focus. And what are our earnings before deducting interest, tax and amortization expenses (EBITA)? That’s the real money that we are making,” Kim says.

NMC’s adjusted EBITA was $488,900 in the quarter. The company’s share price has hovered between 45¢ and 50¢ in recent months, with little trading. The company has 27.6 million shares outstanding.