The following is a continuation of a story posted on Oct. 30.
There's been quite a bit of molybdenum project news over the past year:
Climax & Henderson mines -- In November 2008, Freeport McMoRan Copper & Gold(FCX-N)announced it would delay construction at Climax and reduceproduction at its Henderson by 10 million lbs. per year, after havingearlier committed US$500 million to reopen Climax.
Mill testing had been scheduled for the fourth quarter of 2009, and2010 production from Climax had been pegged at 28 million lbs., or justshy of the full capacity is 30 million lbs. per year, or about 6% ofworld production.
Many industry observers believe Freeport will use Climax andHenderson to meter production to levels that maintain good moly pricesin the market. Together, Freeport's Climax and Henderson mines couldproduce about 70 million lbs. per year, or about 15% of worldproduction.
Freeport's choice is to either produce at high levels and getdepressed prices, or cut back production to preserve its assets and gethigher prices in the long term. Obviously, Freeport has made thedecision to reduce moly output in the short term.
Metering production at these mines is relatively easy as they areprimary moly producers. Freeport says that Climax production could bedoubled to 60 million lbs. moly per year if market conditions warrant,though many market observers believe the odds of this expansion goingforward are low. Their view is that Freeport is sabre-rattling todiscourage others from opening large primary moly mines.
Even though prices have rebounded in 2009, as of this writing, therehas been no announcement by Freeport that the Climax mine will bereopened in the near future. It should take about 18 months to reopenit once Freeport restarts construction.
Spinifex Ridge -- Moly Mines (MOL-T, MOL-A) of Australia announced recently that Hanlong Mining Investment ofChina had committed to US$700 million in debt and equity financing todevelop the Spinifex Ridge moly-copper project in Western Australia'sPilbara region.
Although the Spinifex Ridge resource might technically be called abyproduct producer, the copper grade is low at only 0.08% and thecopper represents only a small percentage of the ore's value. So theproject should be viewed as a primary moly producer with minor coppercredits.
Originally planned as a 20-million-tonne-per-year open-pit operationwith an estimated capital expenditure of US$1.1 billion, a revised plandeveloped in mid-2009 calls for a 10-million-tonne-per-year mine withan estimated US$553-million capex.
This announcement is significant on many levels:
1) It indicates Chinese moly consumers may be concerned about the ability of Chinese producers to meet expected Chinese demand.
2) The investment by Hanlong may also bea result of China's need to purchase hard assets with its largereserves of U.S. currency, which may see significant depreciation inthe years ahead.
3) In its August 2009 updated NationalInstrument 43-101 report on Spinifex, Moly Mines expressed the viewthat the high-cost, smaller moly mines in China that had closed in late2008 and early 2009, would *not* reopen even if moly prices increased.While no verification of this is available, it's notable that this wasexpressed in a document that was presumably written when the companywas in deep negotiations with a Chinese partner.
4) With a moly equivalent grade of0.063%, the Spinifex Ridge resource is only 60% of the average grade ofexisting surface moly producers. And of the 46 relatively advancedpotential new primary and byproduct moly mines, it has the sixth-lowestgrade. While ore grade is only one factor in determining whether aresource will be economic, it is certainly one of the most important.
5) In its revised planning, Moly Minesuses long-term moly and copper price forecasts of US$20 and US$2.60 perlb. respectively. Presumably Hanlong would not have invested US$700million with Moly Mines if Hanlong believed these price forecasts to betoo optimistic.
Mt. Hope -- General Moly (GMO-T,GMO-X) has been working to bring its Mt. Hope project in central Nevadainto production by late 2010 or early 2011. The company says theproject will produce 40 million lbs. moly per year for its first fiveyears, and capital costs are estimated at more than US$1 billion.
As is the case with Climax, this production may create an oversupplysituation. However, unlike Climax, where Freeport has the financialstrength and the market presence to meter production, it is likely Mt.Hope will be highly leveraged, thus making it difficult for GeneralMoly to reduce production in the face of market surpluses.
Because of the recent price volatility, General Moly has placed the project on hold.
Codelco -- In Chile, molybdenum production by the world's largest copper miner, state-owned Codelco, is forecast to be much reduced in 2008 and 2009 due to lower moly grades in their copper-moly operations.
Codelco produced 68 million lbs. of moly in 2006, 60 million lbs. in 2007, and only 46 million pounds in 2008.
Its huge Chuquicamata copper mine, at 29 million lbs. byproduct molyin 2008, is expected to maintain and grow its moly production slightlyover the next 10 years. Its Salvador copper mine, currently producing 3million lbs. moly per year, is expected to cease production after 2011,while its Andina copper mine is expected to increase moly productionfrom 5 million lbs. in 2008 to 12 million lbs. by 2015.
China -- The Chinese economy has grown at annual ratesnear 10% for the past two decades. USGS data indicate that 2007 molyproduction in China increased by 36% over 2006, up 35 million lbs. to132 million lbs. In 2008, China's moly production is estimated at 170million lbs., or a 29% increase.
With this year's price weakness, and the closure of many small andhigh-cost mines, production in 2009 is estimated at 140 million lbs. AsI've stated, all these Chinese numbers need to be viewed withskepticism.
More delays -- The global credit crisis has already impacted new moly projects. In addition to the Climax delay, Inca Pacific Resources(IPR-V, IPRFF-O) a year ago announced that it would cancel its ordersfor long-lead time equipment at its Magistral moly project in Peru, andfocus on obtaining its permits before deciding on mine construction.
In October 2009, Activos Mineros, the Peruvian government agencyresponsible for administering Inca Pacific's contract, announced itsintention to withdraw $3 million that the company had on deposit assecurity for its investment commitments at Magistral.
Activos contends Inca Pacific did not satisfy certain minimuminvestment and expenditure obligations in fiscal 2008 -- an assertionthe company disputes.
The Activos agreements involve the central core claims at Magistral.Inca Pacific controls the surrounding claims that would be needed forproject development.
Inca Pacific says it is also negotiating to secure an extension tothe deadline for bringing Magistral into production, currently set atDec. 31, 2011.
Most other planned new moly projects, with the notable exception ofSpinifex Ridge, have been placed on a delayed or suspended developmenttrack. Thompson Creek Metals (TCM-T, TC-N) suspended the development of its Davidson project in Smithers, B.C., and Quadra Mining (QUA-T) took a similar step at its 98.2%-owned Mamlbjerg open-pit moly project in Greenland.
However, with the price strength in mid-2009, Thompson Creekannounced it would be producing a bit more from its mines than earlierforecasts.
Longer term
As outlined above, oversupply conditions may dominate the market forthe next couple of years. But in the longer term, moly demand shouldoutpace world economic growth. There will be a need for new oilproduction and nuclear plants, both of which consume large quantitiesof moly. Governments around the world have initiated economic stimulusplans that include large infrastructure projects. And new uses for themetal continue to be found.
The case for a return to high long-term moly prices depends to someextent on continued high world economic growth. But the specifics ofmoly demand may support higher prices in the longer term, even if wesee slower overall growth around the world.
Beyond 2012, existing producers are not forecast to be able toincrease molybdenum production and any increase in world consumptionwill require the opening of new mines.
Conventional economic thought is that the price of a commodity in anexpanding market will be set at the marginal cost of bringing in newproduction. For moly, excluding Climax, the marginal cost of bringingthe new projects on stream is estimated at something north of US$15 perlb. Some of the big swing producers are a number of smaller mines inChina where the estimated cost of production is US$13 per lb. or more.
Another factor in the molybdenum price has been its very highstatistical correlation (over 90%) with the price of oil (seeaccompanying chart).
While correlation does not necessarily mean causation, molybdenumhas significant uses in oil-pipeline and drill steel, and it is used asa catalyst to remove sulfur from fuels. If this relationship continues,it implies that at US$67-per-barrel oil, the price of molybdenum oxideshould be US$22 per lb.
The recent price volatility has created a problem for primary molyproject developers. In order to obtain project financing, most of theseprojects require long-term moly prices of US$14 or more per lb. to beattractive.
Even though most long-term price forecasts for moly are at thatUS$14 level or higher, price risk is certainly higher and bankproject-financing terms are going to be tough. The uncertainty of theproduction and consumption numbers coming out of China adds anotherlevel of risk.
Copper projects with byproduct moly will have an easier road, but itwill be very tough for primary moly project developers to obtainfinancing on reasonable terms, especially when the cost of developmentis in the US$1-billion range.
If any new primary mines do get financed, as in the Spinifex Ridgefinancing described above, the prospects for financing subsequentprimary projects will become increasingly difficult. These risk factorswill very likely delay new primary moly mine production.
So, a long-term forecast for moly in the US$14 to US$17-per-lb.range seems reasonable. Obviously there are going to be short-termoversupply or undersupply conditions that take prices substantiallyabove or below this level for periods of a few quarters at a time.
-- The author is a registered professional mining engineer and president of Western Troy Capital Resources(WRY-V, WTCRF-O), a mineral exploration and development company withprojects in Quebec. More detailed information and backup data relatedto this article can be found at www.westerntroy.com .
