Strategic Metals - Molybdenum

Hello again. From the discussion of strategic metals we began in column 10, let's continue with Molybdenum. First, what is Molybdenum and why is it important? I was surprised at the limited understanding, or even awareness of Molybdenum or "Moly". Not long ago I was reading some comments by some of our "Wall Street Mining Brain Trust", a title I am beginning to believe is an oxymoron. One of the comments was "A couple of years ago a promoter came to me with a proposal to mine Molybdenum. I didn't know what it was then and still don't, but it seems to be the hottest thing in the mining industry, so I guess we should look at it". Once again, my hat is off to the in-depth analysis and understanding of the esteemed Financial Community and their knack for forward thinking.

First what is it? Molybdenum is number 42 on the Periodic Table of the Elements, making it a "Transition Metal". It is located just below Chromium and just above Tungsten, which indicates it may share many of the properties of those metals. It is generally found in relatively low concentrations in nature as an oxide or sulfide, and will tie up, in mineral compounds, with a large number of other elements. It is found most frequently with Copper, usually in porphyry deposits, which I believe is because, that is where we look for it. (I also feel this is true for many other minerals and elements, which will be evident in future columns.) Molybdenum forms compounds with a many others elements including Iron, Lead, Bismuth, Antimony, Mercury and Uranium. Its isotopes vary in molecular weight from 86 to 110, with those at 92, 94,95,96,97 and 98 being considered "stable". It was discovered by Scheele in 1778 and extracted in metallic form in 1783 by P.J. Hjelm in Sweden, so it has been around for a while.

Why is it important? As I described in the "Strategic Metal" column, Molybdenum is key in producing alloy and stainless steel grades, especially those developed for long life and extreme use applications. Casting applications, tool steels and the Hastaloy series, mentioned in the original column, often contain high concentrations of Molybdenum. About 75% of the world's consumption is for metallurgical applications. Non-metallurgical uses include catalysts, lubricants (primarily as Molybdenum Sulfide), chemicals and pigments, with catalytic applications probably being the biggest area of consumption.

The next logical question is, how does Molybdenum go from ore to its usable form? This appears to be a pretty straightforward process. Ore is crushed and ground and then "floated", similar to Copper. In "floatation", the ground Molybdenum ore is mixed with water and conditioned with chemical reagents and some type of oil-based material, often diesel fuel. This oil-based product coats the Molybdenum, making them water repellant. This slurry is piped into big tanks that are aerated. The oily Molebdenum attaches itself to a rising air bubble and rises to the top or "floats".

The tanks are skimmed and the concentrated ore goes through the same grinding, treating and "floating" processes again - possibly a few times, depending on the operation. This gives you a 70% to 90% Molybdenite concentrate. If there is a lot of metal, often Copper or Lead, these can be removed by selective acid leach. The concentrate then goes to a "roaster" where the sulfide is converted to an oxide, called Molybdic Acid. This material then goes to a smelter for conversion to Ferromolybdenum or for further chemical processing for non-metallic applications. One new issue, that will have to be addressed by the processing industry, is the classification, in 2003, by the EU (European Union) that pure Molybdenum Oxide as a "category 3 carcinogen." This would make it subject to the new EU guidelines governing the registration of chemicals and metals. This will likely make it more expensive to distribute the oxide form, which is one of the primary industrial input forms of Molybdenum (along with Ferromolybdenum).

Where is Molybdenum found today? The biggest producers of Molybdenum in the world today are the U.S., Chile and China, which account for about 75% of world production. Peru is rapidly becoming important as a number of new Copper-Molybdenum projects are being brought to production. In the U.S. about 90% of the Molybdenum reserves are low-grade deposits that are mined primarily for their associated Copper. These are located in Arizona, Colorado, Idaho, Montana, Nevada and Utah. The big issue is that you don't get Molybdenum from the new SX processing that seems to be favored by the environmentalists. It is generally produced at the concentrate stage and handled in conjunction with Copper smelting, which is on the decline in the US - as is Molybdenum production; falling from 60,000 MT in 1997 to 33,600 MT in 2003.

Primary Molybdenum mines do exist in the U.S.; in the Henderson (Colorado), Thompson Creek (Idaho) and Questa (New Mexico) mines, but up until the recent price hikes these were only operating on a limited basis. A lot of things do change when a commodity price increases 1,000% to 1,500% in 2 years. Unfortunately one of the things that never seems to change is Murphy's Law, "if something can go wrong, it will". Just as Molybdenum prices were starting to climb in early 2004, Thompson Creek Minerals lost production volume at its Idaho mine (American Metal Market, April 7, 2004, page 1). When more supply was needed the most, and big profits could be made, they hit a portion of the ore body containing lower-grade ore and production fell. A ramp-up problem, maybe; but then when are miners ever going to get a brake? No wonder bankable feasibility studies are developed from a "worst possible case" standpoint.

Phelps-Dodge is the largest U.S. producer, as a result of their purchase of Cypress Copper, whose assets included the pure Molybdenum operations in Colorado (Henderson and Climax Mines) and the Baghdad and Serrita porphyry copper operations in Arizona. The newest large player is Montana Resources' Continental Pit, which was reopened in 2003 and started shipping Molybdenum concentrates in 2004. Other major U.S. producers are Kennecott Utah Copper, Thompson Creek Mines and now Montana Resources. One sidelight to the Montana Resources story was a comment made in Platts Metals Week, November 10, 2003: "Continental faces a problem common to western mines: a dwindling available skilled labor force. The problem is so dire that the University of Montana's Montana Tech campus in Butte has fired up a hard-rock mining school to supply miners to operators like Stillwater's PGM (Platinum Group Minerals) mine in nearby Columbus, and Sterling's Sunshine Mine in Kellogg, Idaho." Do you know anyone looking for a good career? These jobs tend to be relatively high-paid and courtesy of "modern technology", not nearly as bad and/or dangerous as history paints the industry.

As I said before, these reserves are where we expected to find Molybdenum. One of the more interesting new Molybdenum "finds" was done by Golden Phoenix Resources, at the Ashdown Mine in Humboldt County, in northwest Nevada. Here Molybdenum was found, in relatively high concentrations, in the tailings of an old Gold mine. It is thought that there are a few thousand Metric Tonnes of Molybdenum, above ground, nicely broken up, and just waiting to be harvested. A few thousand metric tones is not the type of deposit that usually turns the heads of the major miners, but with Molybdenum "north" of $80/kg., a ton is worth $80,000; a thousand MTs $80,000,000, and a "few thousand", well - this tends to get anyone's attention. What's more interesting is that this Gold-Molybdenum association doesn't appear to be all that unusual. Going back over some of the data we have there are literally dozens, possibly hundreds of such occurrences, although I don't know if any of them have ever been reviewed to see if they are commercial. Where we (theweekendminer.com) have data, we will identify Gold-Molybdenum mineralization as we publish data on the mines.

Old mine tailings may offer some real opportunities. One of the major new Molybdenum projects in Chile is the expansion of the production of Molybdenum concentrates from the El Teniente Copper Mine, owned by the Government of Chile. The recovery is being done by Canadian miner Amerigo Resources (per Platts Metals Week, August 10, 2004).

When you look at Molybdenum supply, you can't ignore recycling. It is estimated about 30% of the Molybdenum used today is in the form of contained Molybdenum alloy in steel that is recycled. Much of the other industrial use has limited recycling, and this may be a major "missed opportunity" today. For example I understand, the die-block makers in the tool steel industry used to slag off the alloy components to increase furnace throughput. Recently one of the major firms has changed their processes to capture the alloy components in the old die scrap coming in, as a result of the current high prices. Projects like these add to supply just like new mines.

I guess the last question is, why are prices so high? I used to work with a trader whose response to such a question was a blank stare and the statement "More buyers than sellers"; to which my response was an extreme urge to "choke him to the floor". The real question is, why are there more buyers than sellers; has supply increased as fast as demand, and if not why? Is the situation a condition or is it a Market aberration? Is it the result of fundamental Market conditions or is it contrived? The responses are often loaded with cynicism and suspicion.

A lot of fingers get pointed at China, and some of the things they do look a "bit unusual". For example, a June 16, 2005, article in the American Metal Market, page 7, headlines "Moly faces 14.1M-lb. deficit; China woes cited". It quotes George Song, of Shangxiang Minmetals as saying that production problems in China are largely responsible for the deficit. He estimates the falling Chinese production, to be 69 million pounds vs. 87 million pounds in 2004 and 92 million pounds in 2003. (Western World primary production was indicated to be 58 million pounds in 2005 vs. 51.1 million pounds in 2004.) He cites the Huludao region would produce only 10 million pounds in 2005 vs. 20 million in 2004 and 30 million in 2003. He advised the mines in Huludao were shut down by the government in February, 2005. It should be noted what Mr. Song was talking about is primary production, where Molybdenum is the main metal mined. Mr. Song failed to note that production of Molybdenum as a by-product increased from 227 million pounds to 262 million, much of this increase coming from the new smelting and refining capacity built in China in the last 10 or so years. Also, what would prompt the announced closing of the Huluado mines in February? In a March 3, 2005, Platts Metals Daily, LME Close Edition, page 2, an article titled "Huluado mines delay restart; FeMo prices climb" the reason for the shutdown of the mines was cited as a coal mine accident in Liaoning province that has aroused safety awareness and the mines were closed to improve their safety conditions. It may also be noted that the average price of Molybdenum had fallen in February to $33.87 per pound from $38.00 in January, it's only drop in the last two years. After the shortage scare Molybdenum resumed its upward climb.

The same day, in Platts Metals Daily, LME Close Edition, on page2, Luoyang Luanchuan Group announced expansion plans for their primary Molybdenum, to triple its capacity by 2006 to 25,000 MT/year of Molybdenum concentrate, and more than triple its Molybdenum Oxide production - to 16,000 MT/year from the current 5,000 MT/year. Isn't that more than the total 20 million pounds lost in the Huluado area; and isn't the Luoyang Luanchuan JDC Mine in the Huluado area? Don't you think that would be worth mentioning by Mr. Song to mitigate Market concerns? The group also cited that 80% to 90% of the added production would be exported.

Other "odd" coincidences have occurred. For example in the April 18, 2005, Platts Metals Week, page 11, the headline reads "Chinese FeMo prices dip on weak demand". In the April 21, 2005, Platts Metals Daily, LME Close Edition, page 2, an article reads "Chinese FeMo prices higher on tax issue concerns" followed by "Demand to pick up closer to Labor Day holidays". The first cited the forced closing of mines in the Jinzhou, Liaoning area, which account for about 1/3 of the total Huluado Region output, and the second an expected pick-up in demand after Labor Day, which is May 1 in China.

In the Fall of 2004 the Chinese Government announced, over a number of months, it would be canceling the 13% export tax rebate on Molybdenum, effective January 1, 2005. In January the Chinese Molybdenum Traders cited supplies were still available and prices probably had not gone up due to the elimination of rebates; they would be going up because of shortages.

In July, 2004, the Chinese announced the failure in a tailings dam at the JDC mine threatened to close the facility. August 9, 2004, Platts Metals Week, page 11, headline "Chinese FeMo prices surge" explained that Molybdenum concentrate prices surged due to the concerns at JDC. This was followed by "JDC still investigating tailings problem". Platts Metals Daily, LME Close Edition, also August 9, 2004, announced "Tailings dam problem at Mo miner JDC under control" with the text containing a quote from JDC's General Manager, Ma Baoping "Output deliveries from JDC have been under normal operation and our production has not been affected".

In the June 14, 2004, Platts Metals Week, pages 1 & 5, was an article citing Chinese concern over the surge in ferromolly prices. Upon reading however the concern was for the two-tier pricing system that caused the Chinese material to be priced at much less than Western materials. The article cited European Union anti-dumping duties in place that had the effect of reducing demand for Chinese material in the ten new, primarily Eastern European, countries that were brought into the EU recently.

And so on.. If you read the last six (6) paragraphs in reverse order you will see why fingers get pointed at China, even if unjustly. We are all feeling the pain of these higher prices. The USGS cites that 78% of the US Ferromolybdenum imports came from China in 2004.

We must all realize that this is what happens when a country allows its own industry to die and has to rely on imports for its needs. There really aren't substitutes for Molybdenum. The casting and tooling industries are looking to Tungsten, but that too is controlled by China. We can expect Tungsten prices to rise "in sympathy" with Molybdenum. We have no Molybdenum strategic stockpile, which is another concern. Our only choices are to produce our own, which is doubtful since it would require the construction of new or the re-opening of old smelters; and the environmental lobby would never allow that. The other option is to pay and continue to pay higher prices. Unless some of you small miners can find additional Molybdenum supplies, we will all continue to suffer higher prices and a loss of American Wealth.

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