Low moly prices could thwart Phelps’ plans for Climax

Phelps Dodge (PD-N) has announced plans to restart its Climax molybdenum mine, in Leadville, Colo., but with the metal’s price down from last year, not everyone is convinced the plans will come to fruition.

“They might be trying to stop others from doing things,” says Soleil-Bradford Research analyst Charles Bradford. “If others realize there is a big new supply coming on, they won’t be able to count on a twenty-two-dollar-a-pound (U.S.) price. It could just be a deterrent.”

Bradford anticipates molybdenum prices will continue on their downward trend, as last year’s price spike encouraged more supply to come on-stream.

“Miners all over the world are building or rebuilding molybdenum facilities,” he says. “Supply was up over ten per cent in 2005, despite China being down.”

According to the Canadian Minerals Yearbook, China was the third-largest producer of molybdenum in 2004, accounting for 21% of global supply.

Bradford says a major accident at one of the country’s largest production facilities in February 2005 drove the metal’s price up.

The average price of molybdenum for 2005 was US$32.75. For the four previous years, its average price was just US$6.36. Since January of this year, molybdenum has traded between US$22 and US$25 per lb.

With China sorting out its production problems and big producers like Falconbridge (FAL.LV-T, FAL-N) bringing more molybdenum into the supply stream, Bradford sees the potential for over-saturation of the market in the future.

“We could see the price go below US$10 by the end of this year,” he says. “It’s heading in that direction.”

Still Bradford says it costs Phelps Dodge very little to simply announce that it is planning to bring a mine into production.

Bradford doesn’t hold shares in Phelps Dodge and Soleil-Bradford Research hasn’t had an investment banking relationship with the company in the last 12 months.

For its part, Phelps Dodge has recently completed a prefeasibility study at the Climax mine. That study indicated the open-pit mine could produce annually 20 to 30 million lbs. molybdenum contained in high-quality concentrates at highly competitive per-lb. production costs.

The company says capital costs would be roughly US$200 to US$250 million for a new concentrator and associated facilities. The mine last operated in 1995.

If Phelps Dodge does decide to put the mine into production, it says it can do so by the end of 2009.

In a recent release, Phelps Dodge chairman and chief executive J. Steven Whisler took the opposite view of Bradford’s.

“Molybdenum market fundamentals remain strong. Phelps Dodge is committed to meeting the requirements of its customers,” he said. “We believe the Climax mine is the best non-operating molybdenum resource in the world.”

Phelps Dodge is one of the world’s leading producers of copper and molybdenum and is the largest producer of molybdenum-based chemicals and continuous-cast copper rod.