The emergence of China and India as industrial powerhouses has brought the world’s dwindling mineral reserves into sharp focus. We know all about how oil, gas and metal deposits have been run down over the last decade. But recently, we at MoneyWeek have been picking up on more obscure elements that are crucial to Asian development.
Two weeks ago, it was sulphur – a chemical that energy and farm groups can’t get enough of these days as its used to leach the steel for Chinese skyscrapers and to fertilise Indian farmland. This week, it’s a metal – molybdenum. Having been all but ignored for many years, molybdenum (or moly) is now being mined at a ferocious pace as oil, gas and nuclear groups have discovered how many ways they can make use of the silvery metal.
It’s molybdenum’s toughness that makes it so useful. It has one of the highest melting points of any element and is highly resistant to corrosion. It doesn’t expand, contract, harden or soften under extreme temperatures. In the harsh conditions of a nuclear or oil refining plant, that makes it invaluable. So you’ll find molybdenum in every new turbine that’s installed at a modern nuclear power plant and in every tube used to cool the reactor: the old copper and nickel pipes would corrode in a third of the time taken if they are strengthened with moly. “Without molybdenum, nuclear energy would be set back 20 years,” says Nick Jones in the Penny Sleuth newsletter.
Oil and natural gas pipelines have also proved a lot more reliable since being built with molybdenum. The Alaskan Pipeline consists of a moly alloy that can handle temperatures of –70 degrees fahrenheit. Without moly, the 48-inch thick pipeline, which delivers 775,000 barrels of oil a day to America, couldn’t hope to maintain the 99% integrity it keeps along 800 miles of tundra. Oil refiners have also come to rely on the metal, using it as a catalyst to turn the soupy tar-oil found in Canada and Venezuela into the light, sweet crude oil the market demands. About 95% of all oil refineries use moly in this way.
These qualities have helped molybdenum jump ten times in price over the last few years, earning it a new nickname: “Energy Metal”. But its run isn’t over yet, says Chris Mayer for Whiskey and Gunpowder. It takes about 1.6 million pounds of molybdenum to strengthen every 1,000 kilometres of pipeline. But with the energy industry seeking out ever-more remote deposits of oil and gas, there are close to 100,000 kilometres of pipeline waiting to be built across the Baltics, Russia, China and Canada. The drills for ploughing deep-water deposits, the sheers in the coal fields, the generators in hydroelectric plants – all contain moly to toughen their parts.
Luckily for molybdenum producers and investors, there are few substitutes for the metal. Because oil, gas and nuclear groups require relatively small amounts to achieve their aims (7% of turbines and pipelines will do) demand isn’t slackening as the price escalates.
The chief problem affecting production is that it is pretty horrible for the environment. In America, production has been stalled by the environmental lobby, while China’s share of global moly output has fallen from 29% to 17% after a crackdown on pollution. Yet molybdenum is a crucial factor in the proliferation of nuclear power – a cleaner source of energy than the fossil fuels we now use. With 48 nuclear reactors planned between now and 2013, demand for moly is expected to grow at 10% a year in countries such as China and Russia. We have a look at one firm set to benefit below below.
The most promising miner in the molybdenum sector
Thompson Creek Metals (NYSE:TC), with 4% of the global output, is one of the world’s largest publicly traded producers of molybdenum. The C$2.7bn group has four properties (two in British Columbia, one in Idaho and one in Pennsylvania) with one billion pounds of the metal. Combined production of the firm’s Thompson Creek and Endako mines will be 23 million to 24.5 million pounds this year, rising to more than 34 million pounds in 2009.
Fuel costs and the rising cost of developing and financing mines have been eating into profit margins – reported costs in the first quarter were $10.54 per pound (/lb), up from $8.59/lb a year earlier. News that production targets for 2007 were revised downwards from 20.5 million to 17.5 million pounds saw the stock drop 10% in one day. But with the price of molybdenum holding steady around $32/lb, Thompson still turned in $46.8m in profit for the quarter.
And with molybdenum expected to average at least $36/lb this year, analysts at Versant Partners recently upgraded their target price from C$25 to C$31 – the stock currently trades at C$23.49, and is valued on a forward p/e of 10.5.