Moly Plays Spike on Supply Crunch
By Ben Abelson
30 Mar 2007 at 05:44 PM GMT-04:00
resourceinvestor.com
CHICAGO (ResourceInvestor.com) -- Since storming back into investors’ hearts a few years ago, molybdenum’s been a fairly volatile market - with prices spanning from the low single digits to highs above $40/lb.
But with threats of Chinese export controls and the launch of new ETF in Canada, an already tight supply situation has recently gotten much worse in the moly market, sending spot prices above $30/lb. in recent days. With that move, shares of primary molybdenum producers have taken off – with new 52-week highs almost a daily occurrence.
Reasons for a Rise
Among the biggest reasons moving the market is the launch of a moly-based ETF in Canada. Run by Sprott Asset Management, the Sprott Moly Fund is expected to invest up to C$150 million in moly related equities and the actual metal. Just as was seen with the launch of last year’s silver ETF (and given the relatively minuscule and illiquid nature of the moly market and equities), the expected spike in demand is already moving both the metals and the equities to new highs.
Another major factor affecting prices in Chinese supply, after that country’s government announced earlier this month that it plans to introduce a quota system for molybdenum exports in the near future. The quota system will only grant export permission to those firms with export volumes of over 3,000 tonnes and with registered capital of at least RMB 100 million (approximately US$13 million).
While it’s uncertain how much this will impact Chinese moly exports, the country export product has already decreased by 10% over the past year (following the adoption of an export tariff last fall). For a country that supplies 20% of a metal in a tight supply-demand market, that’s nothing to sneeze at. The export restrictions came into play because of the jump in Chinese demand for the metal (coincident with the growth of the steel industry, as molybdenum is primarily used to strengthen various steel products), and the Chinese government’s growing desire to retain more of its metal production for domestic use.
Beyond being used in steel for the construction industry, molybdenum is also critically important to the energy complex. According to Sprott Asset Management, a 5,000-foot oil well requires 50 tons of molybdenum-hardened steel to drill; a 15,000-foot well requires a whopping 1,100 tonnes.
The Moly Pure Play
Shares of Blue Pearl Mining [TSX:BLE] were among the biggest movers on the back of the soaring moly price, climbing as high C$12.30 after trading at C$7 as recently as mid-February.
Blue Pearl, previously covered by Resource Investor was created in early 2005, but didn’t really hit the scene in last fall, when it the junior bought out privately-held Thompson Creek Metals, the largest primary molybdenum producer (most other moly producers, such as Rio Tinto and BHP, produce the metal as a by-product) in North America. As such, Blue Pearl has become the defacto pure-play for investors seeking operational moly exposure.
While Blue Pearl recently reported a net loss of US$21 million for 2006, this was largely due to inventory purchase costs associated with the Thompson Creek acquisition. UBS analysts recently estimated 2007 earnings of US$1.06/share (when Blue Pearl expects it will produce 27 million pounds of moly), giving the company a forward P/E of just over 9 times.
While shares have had quite a run-up, a pending re-evaluation of mineral reserves using a long-term assumption of $10/lb moly (versus $3.50-$5 previously) could have an effect of a valuation re-rating for the up-and-coming producer. Blue Pearl also plans on formally changing its name to Thomspon Creek Metals and seeking a NYSE listing in the near future.
Moly explorers have also been making new highs, including shares of Idaho General Mines [AMEX:GMO], Moly Mines [ASX:MOL], Mercator Minerals [TSXv:ML] and Roca Mines [TSXv:ROK]. |
