Moly Prices Pause On China Conundrum

- December 22nd, 2009

China is set to cut export duties for unwrought molybdenum and molybdenum powder to 5% next year, from 15% and 10% respectively, this year. How will this affect moly prices?

By Kishori Krishnan Exclusive To Moly Investing News

Moly spot prices are well of their August peak, but with China looking to re-enter the market as a buyer, there are good times in store ahead in the new year.

Moly is a lynchpin of the energy complex. It’s a vital resource for oil pipelines, nuclear reactors and fuel refiners. Above all, moly is used to strengthen steel.

In October this year, China’s Sichuan Hanlong Group agreed to arrange up to US$500 million in debt funding and pay US$140-million for 54 per cent of Moly Mines Ltd (TSX: MOL.TO).

The latter, is developing an Australian molybdenum and copper project.

The funding will allow further development of the Spinifex project to begin in mid 2010.

Shareholders of the Perth-based explorer overwhelmingly supported the proposed investment package on December 16.

Once the agreement is complete, Hanlong will subscribe for 2.7 million shares in Moly Mines for US$140 million and provide a 10-year interest bearing loan of US$60 million.

As well, Hanlong will commit to procuring debt financing of US$500 million by the end of June 2010 for the Spinifex project and will receive 35.5 million unlisted three year options exercisable at C$1 per share.

Hanlong is a subsidiary of the China-based, privately-owned, Sichuan Hanlong Group Co. Moly Mines shareholder approval is another key step toward completing the US$200 million debt and equity subscription of Hanlong in Moly Mines.

The molybdenum project originally had a $1.2 billion capital cost but the figure has been more than halved along with the initial scope of the planned operation, which should start producing at a rate of 10 million tonnes per annum.

Duty cut

China has decided to press the pause button. The Asian major has said it will cut export duties for unwrought molybdenum and molybdenum powder to 5 per cent next year, from 15 per cent and 10 per cent respectively, this year.

China has been a major molybdenum supplier to the international market. It made an abrupt switch from major exporter to major importer.

The credit crunch has hit molybdenum hard, with demand diving and prices plunging on a scale not seen in years. As energy markets softened, there have been a lot of shutdowns in China.

There have been sweeping production cuts too. Given the fact that offtake remains below par and prices subdued, analysts maintain, that one can’t ignore China.

Largest producer

China is the world’s largest producer of steel, given that the nation produces nearly 40 per cent of the world’s steel. It makes twice as much steel as the European Union. And much of that steel will need moly.

Therefore, any rebound story in moly is bound up in the China growth story. In fact, over the past five years, Chinese demand for moly has grown 27 per cent annually, compared with only 4 per cent globally.

At the moment, “molybdenum is temporarily resting, like a basketball player taking a breather before he steps back on the court. All the elements that pushed moly to $30-plus per pound in the first place are still in place for yet another run. It is cheap right now,” analysts maintain.

Corporate scoreboard

MetalCorp Limited (TSX V:MTC) has announced the results of the first mineral resource estimate for its 100 per cent owned Platyer Moly-Rhenium project near Marathon, Ontario.

Highlights of the AMEC report include: inferred resource of 874,410 tonnes grading 0.25 per cent molybdenum, 1.67g/t rhenium and 3.38g/t silver.

The inferred resource has an effective date of November 23, 2009, and was estimated using a molybdenum price of US$11.50/lb, rhenium price of US$8,000/kg and silver price of US$11.50/oz, with sensitivities calculated at both lower and higher metals prices.

What is also happy news is that Haynes International has announced a price increase by 6 per cent to 8 per cent, effective with new orders placed on or after January 1, 2010.

Craig Nelsen, President and CEO of Vancouver-based Avanti Mining said said: “A person who buys [resource stocks] has to believe in the [global] economic recovery. They have to have a view on steel and the development on the Third World economies and that that’s where the recovery is going to come from.”

Avanti Mining (TSXV:AVT) is focused on the development of the Kitsault molybdenum mine located north of Prince Rupert in British Columbia. The firm has issued its final NI 43-101 pre-feasibility study report.

Concerning the outlook for a molybdenum recovery, Nelson said: “When these [economic stimulus initiatives] kick in, I think we’ll see a bit of a whiplash in the moly market because most moly is being consumed out of stocks. Curtailing of new projects and cutbacks of existing production – it takes a while to wind that stuff back up.”

First signs

And it is already happening. The first signs are in.

The London Metal Exchange (LME) has listed its first molybdenum brands for delivery against the LME’s new molybdenum contract.

The exchange has listed roasted molybdenum concentrates from Molymet’s Nos roaster in Chile, from its Molymex roaster in Mexico and from its Sadaci roaster in Belgium.

Clearly, “momentum continues to build in advance of the contracts’ launch date in February,” said LME new products manager Chris Evans.

The LME is currently evaluating other brand listings for molybdenum and in recent weeks has approved cobalt brands from the following producers: Vale Inco, Votorantim Metais Niquel, Sumitomo Metal Mining and Jinchuan Group.

The LME contracts for minor metals are due to launch on February 22nd 2010 and will provide transparent pricing and risk management tools for the molybdenum and cobalt industries.

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