As expected, molybdenum prices fell sharply over the last two weeks. The metal has finally fallen in line with the rest of the commodities. For us, this is a benefit.

Molybdenum is not traded like copper, zinc, or nickel. It’s such a rare element; it is actually bought by steel and fertilizer companies straight from miners. There’s simply not enough of it to be traded on a commodities exchange like other base metals.

Because many projects have been cut and expenses are tight worldwide, demand for many metals has temporarily slipped in recent months. That’s why copper, zinc, and nickel are down 50% to 55% since July.

Since molybdenum goes months without new bids, its price hasn’t budged from its $34 rate. That’s why, when the most recent contracts came in, the negotiated price was slashed.

While that doesn’t sound like a positive for molybdenum miners, it may prove to be the best possible development for many juniors. You see, most juniors aren’t actually selling any molybdenum yet. So, they don’t have to take this price. Others, however, are taking a beating.

Freeport-McMoran Copper & Gold Inc., for instance, has a few molybdenum mines in Colorado, where they are cutting production and closing up shop. This drop in prices makes these mines uneconomical to run. The company said they plan on reopening the mines when prices climb back up. But, it’ll take 12-18 months for Freeport to get them back to full capacity.

Shut downs like these should bring the price of molybdenum back up to where it was trading before and eliminate some competition. But there is a second development here…

Governments all over the world are tackling the current economic crisis in different ways. One approach is starting to emerge in many countries. President-elect Barack Obama has repeatedly stated that the best way to fight through a crisis like this is by implementing more building projects. Referring to the Tennessee Valley project under FDR during the Great Depression, Obama claims that infrastructure projects offer the best for both the country and its citizens.

Other world leaders are jumping on to this approach. China just unveiled a $586 billion economic stimulus plan that will invest heavily in the country’s growing infrastructure needs. When there’s infrastructure in the works, demand for molybdenum goes through the roof. Steelmakers require molybdenum for building everything from pipelines to construction equipment.

Developments like these will surely boost the price of the metal by the time juniors’ mines come online.

Unfortunately, there aren’t too many players in this field. Here’s a short list of a few that should benefit:

• Quadra Mining Ltd (QUA: TSE) has a 211-million pound molybdenum mine with planned development program through mid-2009.
• Roca Mines Inc (ROK: CVE) operates a 191-million pound molybdenum mine already in production with planned increases during the next several quarters.
• Augusta Resource Corp (AZC: AMEX) has a 190-million pound molybdenum mine scheduled for initial production in 2011.

None of these are recommended for the faint of heart. We aren’t suggesting you purchase shares of any of these three. But as the Chinese proverb goes. “A crisis is an opportunity riding the dangerous wind.” The crisis wind may be blowing…

Sincerely,
Jim Nelson

November 11, 2008

P.S.: If you think 200 million pounds of molybdenum is enticing, you need to check out our latest find, which is sitting on 1.3 billion pounds of molybdenum and is set to begin production in 2010. That’s the largest pure play in the business, and one of the cheapest price tags.

Jim Nelson

Jim Nelson is the managing editor of Penny Sleuth. He has been playing the stock market since he was 14, always with a preference toward smaller companies. He has honed his stock picking skills at Agora Financial since 2004, effectively combining a growth and value approach. Like Greg Guenthner, Jim also contributes to Penny Stock Fortunes on top of bringing you the Penny Sleuth every weekday.

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More on this topic (What's this?)

Freeport-McMoRan To Cut Molybdenum Production as Price Plummets (Epiphany Investing, 11/10/08)

1,000% Surge in Molybdenum Prices Is Just the Beginning (Contrarian Profits, 9/19/08)

“‘Hard Luck’ Scheele’s Discovery Could Quadruple Your Money” (Stock Gumshoe, 8/31/09)

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