Economic malaise causes moly prices to collapse

Tue, Nov 11, 2008

Featured Articles, Moly Articles

Moly prices are dropping as the current demand outlook has devalued the metal.

By Leia Michele Toovey- Exclusive to Moly Investing News

After holding its ground much longer than other base metals, molybdenum’s price point has given way to the global economic pressure.

The metal was stable in the US$32 to US$35 a pound range for much of this year; holding its value, compared to the plummeting of prices of other base metals. Just over the past month, however, the credit crunch and spreading economic malaise has sent molybdenum down sharply to US$11 to US$13 a pound.

The downturn in global steel demand hit the metal hard, as molybdenum is used in structural steel and oil pipelines. However, analysts are optimistic about moly’s future.  Even as demand wanes, supply remains tight. It is the tight supply picture that ultimately could make the metal rebound. Once credit conditions thaw and economic conditions improve, molybdenum has “slingshot” potential.

Company news

The world’s largest molybdenum producer, Freeport McMoRan Copper and Gold, (NYSE: FCX) has announced plans to reduce production from its Henderson primary molybdenum mine, and to defer the restart of the Climax molybdenum mine. FCX conducts primary molybdenum mining operations at the Henderson underground and mines the alloying metal as a by-product at mines in North and South America. Like many other companies, the recent cuts are necessary to cope with declining economic conditions.  The revised mine plans for the Henderson primary molybdenum mine will result in a reduction in expected annual molybdenum production of approximately 10 million pounds, reflecting a 25 per cent reduction in Henderson’s approximate annual production. FCX is also assessing the potential to curtail molybdenum production at its by-product mines.

FCX also announced the suspension of construction activities associated with the restart of the Climax molybdenum mine. Construction activities will be suspended in a controlled and sequenced manner in order to maintain the integrity of the work completed to-date and to allow for a quick restart of the project pending improvement in market conditions. FCX sold 69 million pounds of molybdenum from mines in 2007.

Thompson Creek Metals released its third quarter results last Thursday. The quarter profit more than quadrupled from the year before on stronger molybdenum sales. The Toronto-based company, however, said it would postpone development of its Davidson project in northern British Columbia until economic conditions improve. Thompson Creek, the world’s No. 5 producer of moly, earned $100.6 million, or 74 cents a share, in the three-months ending September 30. That was up from $24 million, or 18 cents a share, a year earlier. Molybdenum sales jumped to $325.9 million from $195.9 million as the company mined higher grades. Realized molybdenum prices were $32.85 a pound during the quarter, but will be much lower in the fourth quarter, the company warned. Thompson Creek raised its production guidance for 2008. It now sees output of between 25 million and 26 million pounds, up from its previous estimates of 23 million to 24.5 million pounds. In 2009, production is expected at 31.5 million to 34 million pounds.

Thompson Creek’s shares, which are down more than 65 per cent this year, fell 88 Canadian cents, or 14.3 per cent, to C$5.28 on the Toronto Stock Exchange on Thursday, touching a two-year low. As molybdenum prices dropped by one-third in only a few weeks, Thompson Creek Metals President and CEO Kevin Loughrey recently told analysts, “We have some reason to believe that we are near the bottom right now.” Nevertheless, Loughrey noted, the financial crisis had caused, as he put it, “a diminution of molybdenum demand.” The demand reduction, in turn, has caused a dramatic reduction in prices unlike anything I think any of us have seen in the moly business in a long time.  Loughrey blamed the price drop primarily on the inability to get financing for projects that consume steel, rather than the speculative investing that has spelled doom for other metals.

Moly Mines, (TSX-V:MOL) Western Australia’s next big molybdenum producer has been forced to scale back its workforce because it’s struggling to raise the  $600 million required for construction on its Spinifex Ridge project. About 200 Worley Parsons contractors had been working on the $1.2 billion project; there are now 30. Managing Director Derek Fisher says the company has had to cut costs in several departments. “We have already put over 500,000 man hours of technical work into the project since we finished the feasibility study, and that’s largely through Worley Parsons,” he says.  A large contributor to Moly Mines lack of capital is the poor performance of the company’s portfolio investments. At quarter end, the corporation’s assets of $141.2 million consisted of the following: $92.4 million or 65.47 per cent in Portfolio Investments and $47.6 million or 33.71 per cent in cash and short term money market securities. Other assets included prepaid expenses and a future tax asset. Looking forward, an improvement in the stock market will help Moly Mines gain more capital.   Fisher claimed “We believe that our portfolio investments are trading at very low valuations.” Once conditions improve, the company will be ready to move forward.