Unscramble These Letters: MOLYBDENUM

The mere whiff of an economic recovery has sent the prices of many industrial metals soaring. A genuine recovery and/or inflationary trend will cause prices to soar even more. Heck, we may not even need much of a rebound. Current extraction rates of certain metal minerals imply we’re going to see some big price moves soon.

Andre Diederen is a senior research scientist at TNO, in Holland, a sort of think tank aiming to apply scientific knowledge to industry and government. Diederen argues in a recent research paper that we face a “looming metal minerals crisis.”

“During the next few decades,” he says, “we will encounter serious problems mining many important metal minerals at the desired extraction rates. Amongst them are all precious metals (gold, silver and platinum-group metals), zinc, tin, indium, zirconium, cadmium, tungsten, copper, manganese, nickel and molybdenum.”

Diederen advances in this forecast because many of these metal minerals have relatively low reserves. As we’ve mined much of the high-grade ores, we now have to dig deeper and process more rock to get a given amount of metal. Lower grades require exponentially more energy, as Diederen shows. So he believes that the “decades-old paradigm of increasing reserves as demand rises” is no longer valid without cheap and abundant energy. The bump up in costs will be so great, in fact, that much of the known mineral resources will never become economically viable reserves.

By his estimate, the planet holds less than a 50-year supply of a number of essential metals and minerals.

More importantly, we reach peak production of many metals well before the 50-year period is up. For example, the remaining lifetime reserve of zirconium is 19 years, but peak production is well behind us already (1994). Referring to the chart below, Diederen writes: “Although exact data fail, the elements strontium [Sr] through niobium [Nb] will soon reach their peak production or have already passed their maximum extraction rates.”

Years of Remaining Metal Supply

All the elements here face stiff headwinds as far as increasing extraction rates. Some of the more interesting ones – from left to right – include silver (Ag), gold (Au), molybdenum (Mo) and niobium. The latter is worth highlighting because Capital & Crisis recommendation, IAMGOLD (IAG:nyse), owns a niobium mine that is something of a wild card to value, but throws off significant cash flow. It is also one of only three such mines in the world and produces 8% of world supply. It’s a nice little bonus you get for owning IAMGOLD.

Diederen also makes the case that many metal minerals have no acceptable substitutes for their major applications. And finally, even where we have plenty of proven reserves, we may still face supply constraints because so much of the resource is in one place that is not easy to access. An example Diederen uses is chromium, which is mainly located in Kazakhstan and southern Africa.

Common ideas people put forward that would avert the Diederen thesis include recycling and technological progress. As to the former, Diederen makes a good case that even with more intense recycling, we’ll need more primary production to meet growing needs. As to the latter, he cites the Jevons Paradox: that when we use something more efficiently because of technological progress, we wind up using more of the resource in absolute terms. Certainly, you can see that with oil over the long term.

Car engines and all kinds of applications are more energy-efficient than ever, yet our oil usage in absolute terms has gone up materially over the years.

The developing supply crunch in these metal minerals sets the backdrop for a major, long-term bull market.

Molybdenum is one of the most interesting metal minerals from an investment standpoint. That’s why I have recommended Thompson Creek (TC:nyse), a major miner of molybdenum, to the subscribers of my investment letter, Capital & Crisis. I’ve stuck with this story despite a gut-wrenching, hair-whitening ride. Over the last two years, the stock has traded as high as $25 per share and as low as two dollars. It currently sits at $11.70. The story here is all molybdenum, the price of which has drifted down to about $11 a pound from prices around $35 in the middle of last year. So if we don’t see a rise in moly prices, TC isn’t going anywhere.

But longer term, I see good reasons for moly to rise, mostly tied to the story of steel demand, against a rather tighter supply of moly. But for now, the company had $262 million in cash last quarter end. It also raised another $200 million after the quarter ended. So the market cap is now about $1.6 billion and the company has practically no debt and nearly $500 million in cash.

Thompson Creek could be acquired by a copper miner, such as Freeport-McMoRan, looking to boost its exposure to moly. More likely, I think, is that Thompson Creek uses its cash hoard to buy a more-cash-strapped competitor. We’ll see. But the stock seems ripe for M&A with all that cash.

Detour Gold (DGC:tsx; DRGDF:pink sheets) is another ripe takeover candidate. In a world where the gold majors are struggling to increase production, Detour has the largest deposit not already owned by one of the biggies.

As metal minerals prices slowly rebuild their momentum, I would expect to see a large number of takeover deals in the sector. Place your bets now.


Chris Mayer,
for The Daily Reckoning

The Daily Reckoning