NMC Resource’s take on molybdenum

VANCOUVER — Molybdenum gets little glory in the metals world. On the production side more than half of it is produced as a by-product of more prominent metals like copper, while on the consumption side it is mostly used as a secondary additive to help make all sorts of steel alloys.

As to the major producers, moly again plays a side role, with most producing the metal as a by-product to their more rewarding copper and gold production. Freeport-McMoran Copper & Gold (FCX-N) is the world’s largest moly producer, extracting roughly 83 million lbs. last year, but it pales in comparison to its copper production. The same is true for Codelco and Grupo Mexico, the second and third largest producers at 50 million lbs. and 42 million lbs. respectively.  Of the top 10 producers, Thompson Creek Metals (TCM-T, TC-N) is the only publicly traded primary moly producer, extracting 28 million lbs. last year, though when the company’s Mt. Milligan mine goes online next year it will diversify into copper and gold like most of the other majors.

But with an estimated $7 billion market, moly can’t be entirely sidelined. Demand is projected to grow between 4% and 6% over the next few years, possibly bringing global moly demand from the 534 million lbs. estimated for 2012 to 760 million lbs. by 2020.

China is of course the dominant factor in that growth, with the country dominating the market. The country has two of the top 10 moly producers, both primary, with China Molybdenum producing 34 million lbs. and Jinduicheng Molybdenum producing 29 million lbs. last year. But overall China produced 180 million lbs. last year thanks to around 170 mining companies producing moly, while the country exported about 15 million lbs. The country’s ravenous steel industry takes up the bulk, and plays a big part in dictating the global price.

Next door in Korea, NMC Resource (NRC-V) president and CEO Do Hyung Kim has been watching the market closely as he manages Korea’s only moly mine. Overall, he likes what he sees.

“I think the moly market is going to be good, for two reasons,” Kim said by phone. “On the supply side, there’s declining ore grades. If you look at the first quarter, we see 11% reduction in production outside China, and it’s mainly from declining ore grades. And declining ore grades, you cannot do anything about it.”

“And at the same time people talk about those primary moly mines that will come on stream, but except for [Freeport-McMoran’s] Climax, which started production in May, we don’t really see any,” Kim said.

Kim pointed to the high capital costs required of low-grade moly deposits and the general cost overruns in the industry being significant barriers to new moly mines coming on-stream. Thompson Creek, in it’s outlook, also sees no significant increase in production in the next few years. Several operations with moly by-product have been delayed until 2014, while Polish miner KGHM’s Sierra Gorda copper-moly mine in Chile is not expected online until 2015. Meanwhile China is having trouble opening new mines of its own as locals become more concerned with industrial activity in their backyards.

On the demand side, Kim also sees some positive signs thanks to the inevitable growth of China.

“China’s urbanisation cannot be stopped” Kim said. “With a country and a per-capita income of only about $4,700, I don’t think there can be an over-capacity issue.”

He noted that China had net exports of 3 million lbs. in the last quarter, a drop of 47% from the same quarter the year before, as internal demand rises.

Kim also pointed out the shifting nature of China’s steel industry that will continue to drive demand.

“China’s government and major Chinese steel mills are shifting their gear to specialty steels, which means they need more alloys.”

Areas of growth include aerospace, the military, pipelines, and the nuclear industry, as well as more use in oil refineries as a catalyst.

“There is less correlation between stainless steel production and molybdenum use, because molybdenum use has been diversified in many different ways,” Kim said.

As to hard predictions, an RBC Capital Markets report predicts deficiencies of 2 million lbs. for 2012, 34 million lbs. in 2013, and 15 million lbs. in 2014. The report stated the shortfall should translate into prices of US$25 per lb. in 2013, US$20 per lb. 2014, and then back down to US$15 per lb. in 2015 as more moly supply comes online. More recently, Canaccord Genuity put out a much more modest price outlook on moly, estimating US$14 per lb. moly in 2013 and before hitting its long-term price estimate of US$15 per lb. by 2014.

For now, however, molybdenum is sitting at a little under US$13 per lb., having declined from almost $15 per lb. in February.

At NMC Resource, the company produced 172 tonnes of molybdenum concentrates at a 0.31% moly mill head grade in the quarter ending March 31. The company sold roughly 209,000 lbs. moly at a cash cost of US$9.22 per lb., which translated to $2.6 million in sales and a net loss of roughly $604,000, thanks largely to the declining moly price.

Kim, however, points out that the company successfully increased mill throughput by 28% through optimization, thereby increasing production without capital expenditures. Kim also said that the company is currently focused on other earnings indicators.

“What is our free cash flow? That is our focus. And what is our EBITA? That’s the real money that we are making,” Kim said.

NMC’s adjusted EBITA was $488,900 in the quarter. The company’s share price has hovered between 45¢ and 50¢ in recent months with little trading. The company has 27.6 million shares outstanding.