Good Golly, the Price of Moly!

Prices hit a record of $42.20 per pound in June 2005, due to mine closures in China (a significant producer) related to environmental and safety concerns. Although the affected Chinese mines have returned to production, and by-product production at some copper mines has increased, supply growth has barely been able to pace demand. Hence, the market remains physically tight with prices holding above $30 per pound.

In response to market conditions, firms are injecting capital into projects. In particular, three mines in North America promise to significantly boost supplies. Freeport- McMoran is on the verge of re-opening its Climax molybdenum mining facility in Leadville, Colorado. The scheduled opening in 2010 should add as much as 30 million pounds annually to world supply—about 6% of 2007 production. General Moly's new greenfield mine in Mt. Hope, Nevada promises to add another 38 millions tons annually starting around 2010-–12. Finally, Thompson Creek Mining is ramping up the development of its high-grade Davidson deposit in British Columbia. Together, these projects ensure a well-supplied market.

While mining firms are meeting demand growth, pricing pressure will remain strong throughout 2008 and 2009. In addition to low inventory, the recent surge in diesel fuel and electricity prices, along with higher transportation rates, have placed significant cost pressure on the industry. In addition, the Chinese government recently restricted delivery of explosives to the mining industry as means to avoid any embarrassing incidents during the Olympics.

Given current market conditions, we expect moly to trade around $35/lb going into 2009, gradually sliding toward the $30 mark as the year ends. Beyond 2009, we expect a price correction as new mining production comes on-line. Current estimates indicate greenfield projects require moly prices to remain in the $10-12/lb range in order for financial profitability, a level the market will remain comfortably above.

As a side note, current market conditions are fueling interest in an exchange-traded molybdenum futures contract, with the LME now actively exploring the idea. Proponents believe such a vehicle would facilitate efficient price discovery; those opposed highlight the introduction of speculators and heightened price volatility they feel an LME contract would bring. Whether or not a contract is introduced, the debate over its desirability is one more indication of how much better the market is today—from a miner's perspective—than just a few years ago.