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What is Molybdenum?
The first important question when considering an investment in anything is what exactly is it that I am buying? In this case, molybdenum (or moly for short) is a metal that is added to steel to make it more corrosion resistant and able to withstand extreme temperatures (up to over 2600 degrees C.). There are many uses for moly (such as possible applications in nanotechnology circuitry, its use in dry lubricants, as a catalyst to help remove sulfur in coal burning furnaces, as well as many others) but to keep things simple its most common uses are in steel and stainless steel. For this reason you can think of moly as strongly tied to the steel industry. In general, if steel demand is going up it is highly likely that moly will follow. Now that we have a rough idea of what moly does, let’s dive into the industries it is used in. This is where things start to get exciting.
What Industries Require Molybdenum or Molybdenum Containing Steels?
There are many, but again the purpose of this article is to cover the broader view and to keep things simple. One of the primary industries that requires vast amounts of moly is energy production. Almost every means of energy production requires molybdenum. Let’s run through this by type:
Coal: Molybdenum is used in the blast furnaces of any new coal-burning power plants (because of the high temperatures reached in these furnaces). As was previously mentioned, it is also being used as a catalyst to remove sulphur that would be released from the plants, thus lowering greenhouse gases.
Oil and natural gas: If you’re drilling for oil or natural gas the drill bits you are using have moly in them. They need moly again because of the temperatures the drill bits reach, and to prevent cracking or deformation. It also helps increase the life of the drill bits. Keep in mind that these are a little different than the drill bits you used in wood working; they are often over a kilometer in length and have a much wider diameter. Even more important that the drill bits though, is moly’s use in pipelines. Every new pipeline built today will have a significant amount of molybdenum in the steel (sometimes up to 5%-8%). As the US is learning from their 1000’s of kilometers of corroding pipeline, increased corrosion resistance and longevity of lifespan of your infrastructure will help reduce your future costs. The size of the pipeline systems being proposed and currently under construction from Europe, across the Middle East, and into East Asia and China, are on scales the world has never seen. Every kilometer of pipeline will contain substantial amounts of molybdenum. This is also just one example of many.
Clean Energy: Molybdenum is found in some parts of solar photovoltaic cells, in the turbines of wind farms (especially those near coastlines or out in the ocean because of the need to prevent corrosion from the salt water), and in great abundance in nuclear power plants. This last sector is of great significance. After a few mishaps (Chernobyl being the catalyst) the nuclear power industry was essentially dormant for 20-30 years. But right now China is being the first to promote a nuclear renaissance with many countries following suit. Even the US is looking into constructing more reactors as a means to move to cleaner energy.</p>
Again, this is an overview. There are many other uses for moly in energy exploration, production, and transportation. Beyond energy though, another industry that has started to become a major consumer of molybdenum is the auto industry. Moly has been used minimally in the car industry for some time (I’m sure you can imagine how hot some parts of your car get and the need for steel in those areas that can withstand such temperatures). But, only recently has car operating efficiency (essentially gas mileage) become a huge selling feature that car companies are competing with each other to improve upon. One of the best ways to increase the gas mileage of your car is to lower the overall weight of the car, but this has to be done in a way that doesn’t lower the safety of the vehicle, in fact in many cases car manufacturers are trying to find ways to increase mileage and increase safety. How are they doing this? Well, by replacing the lower quality steel in the panels and frame of the car with smaller amounts of stronger steel. And, yes, you guessed it; this is done by adding moly to the steels. It’s a small addition percentage wise, (the new light-weight, stronger steels contain about 0.5% molybdenum) but when you consider the number of cars being produced to meet the growing demand of industrializing nations it is extremely significant. But I’m getting ahead of myself. We’re still talking about industries that require moly.
The next one is desalination plants. For anyone who lives somewhere that has a lot of free-flowing water (like myself in Vancouver, Canada) the concept of not having water running down rivers from the nearby mountains might seem foreign to you. But, I kid you not, there are many regions across the globe that due to increasing populations, unfavourable geographies, and lifestyles that consume vast amounts of water, simply do not have enough fresh water. In these cases, governments are often forced into investing huge sums of money to build desalination plants which take salt water, remove the salt, and produce clear, clean drinking water. Some regions heavily dependent on this technology are coastal regions in the Middle East, Australia, Cyprus, and even California. But of interest to you is that molybdenum is absolutely essential in the pipes, storage tanks, and pretty well entire desalination process of these plants. So now we know what moly is, and we understand some of the industries it is found in, but really why should someone invest their money in molybdenum?
Why Should I Risk my Money Investing in Molybdenum?
First, it really is essential to understand what a good investment is before you can even ask the question “Is ____ a good investment?” I’m sure most of you think you understand what a good investment is (and many of you are most likely even correct in what you believe to be a good investment) but for anyone who would like to be sure, to clarify their view, or just to understand what makes a good investment in my opinion you really should take a look at my post on What is a Good Investment?
If I’m about to consider molybdenum as an investment prospect I need to figure out one thing. Is the price of moly going to go up or down? At the most basic level this is the only question that matters. With commodities (in this case a metal) this question comes down to supply and demand. This is one of the reasons I invest almost exclusively in commodities, and even more specifically almost always in metals, because coming to understand the supply and demand of a commodity is really not that hard. Supply comes from miners in the case of metals, and demand comes from the world growth or contraction of the industries that consume the commodity. That’s it. Let’s talk about supply first.
There are several mines that supply molybdenum to the world market. Many of them are based in China, but a great deal of moly also comes as a byproduct of copper mining out of Chile, and some comes from the US, Canada, and other countries. The chart below gives a good idea of the molybdenum supply situation.
CPM Group has since put out a more recent chart showing that the actual supply of moly for 2009 and 2010 did fall in-line with what the chart above projected. Sadly, I couldn’t find it before posting this article. Anyway, what is important to take away from this chart is that there were a number of project expansions and new planned construction projects that would have brought new supply online in 2009 and 2010 which were paused or cancelled due to the US economic recession. It is also important to understand the general timelines of mining projects. It’s not a simple process building a mine; it doesn’t happen overnight. There are many stages, such as staking a claim to land, receiving drilling permits, performing drilling, assessing drill results and putting together a feasibility study, receiving construction permits and mining permits, getting financing, going into construction, and finally beginning to mine. This is important because this can sometimes take a decade to go through all of these steps. Even if the project is ready to go and the only thing paused for the recession was the construction, this stage alone can take 1-3 years depending on the size of the project. So, the lag that the recession had on molybdenum supply is a dramatic factor in whether or not molybdenum is a good investment. I believe it is safe to say that molybdenum supply is (as a worst case) a little above the 2007-2008 levels. The data suggests this is reasonable, and there are other factors such as diminishing grades at major mines that suggest this is a reasonable assumption as well. The next part of the equation is what is the demand picture for molybdenum?
We already went into some of the industries molybdenum is used in, so the obvious question here is do we expect these industries to be growing over the period of our investment or diminishing? Much of this ties into why I believe that molybdenum is a good investment now, because the world is in a state right now where the need for energy and infrastructure is paramount. But more so than the need, is the fact that it is actually happening. Perhaps the biggest example of this is the fact that China overtook the US as the largest energy consuming country in the world last year. This is huge. Combined with China’s immense GDP growth (according to some it has been around 10% for close to three decades, and expected to be 7-8% in 2011 which is still exceptional), the growing need for electricity, construction materials and equipment, safe drinking water, cars, rapid transit projects, etc. will require molybdenum. And it will be significantly more molybdenum than they have needed in the past. And this is just China. India is also growing at an astonishing rate with nothing in the foreseeable future slowing it down, and its needs for infrastructure and power are growing along with it. Even Africa is starting to see significant growth in some areas which will increase their need for molybdenum. In the US and other developed nations demand for molybdenum did significantly drop off during the recession, but Obama has on several occasions noted the need for the US to remain competitive on the world stage which means keeping their pipelines operational, keeping their cost of electricity down, lowering their dependence on imported energy (oil and otherwise), and creating jobs which means investment in infrastructure projects. Recently he stated that 50 Billion would be allocated to infrastructure projects. What this all amounts to, is that the world went through a major shift during the recession. Wealthier nations toppled over from a foundation of bad debt, and developing nations filled (and are still filling) in the gap. But what developing nations are doing with their new-found opportunity is of primary significance; they are doing exactly what the US did 80 years ago. They’re investing in themselves and their people. Building infrastructure, energy production, transportation routes, and entire cities on a scale that has never happened in the entire history of the world. All of this requires molybdenum.
If you’ve read my article on the Goals of AaronStraker.com you will know that I do not claim to be able to provide the absolute best investment advice out there, nor am I guaranteeing you some ridiculous % gain with a flashy banner ad. My goal is very simply to provide good advice, for free, to everyone and anyone who reads my articles. I say this because, will the supply and demand relationship with molybdenum over the next two to three years be the most out of sync of all the commodities and thus provide the best opportunity to investors? It is possible, but probably not. But is moly a good investment based on expected future supply and demand and thus presents an opportunity to investors with a fairly low risk profile and reasonable to high expected return? I believe that is exactly what moly provides and that is exactly why I am writing this article. I bring this up because it is the core of what I am trying to offer to my readers. This is why I don’t emphasize going into too much detail. Make some reasonable assumptions, do some good research, and you will be well ahead of most. But once again, I’m getting off track; back to moly.
The following chart shows moly demand over the past 50 years and gives a good idea of the long-term trend.
Given that moly is required in such a fundamental way to a growing world, and is finding new applications in clean energy, as well as possible future uses in nanotechnology circuitry, and others, there is no doubt in my mind that it will continue to be needed in the future.
The only other thing you have to consider when assessing a possible investment in a metal or other commodity is, can this material be replaced by something else? For example when copper becomes too expensive some wire makers turn to aluminum. This does take place to a small degree with molybdenum. In some cases there are cheaper alternatives for corrosion resistance. But for the most part the advantages that molybdenum adds are substantial, and the amounts of moly that need to be added to generate these benefits are small and cost relatively little. Also, generally replacements happen when a material is historically very highly priced. This is because manufacturers get used to certain prices and cost their end products appropriately with this in mind, but if one input material suddenly jumps in price they either have to pass on the cost to their less-than-impressed customers, or they have to find an alternative input material. The current price of moly is actually historically quite low, so if replacements were to occur it would be expected that they would not happen until moly was back in the $30-$40 rage at least.
As was just mentioned, molybdenum is currently priced in the $16-$18 range, which is historically quite low. The chart below only shows data up to June 30 2010, but it does give some idea of the price trend.
Price is primarily useful when thought of in the context of supply and demand. On its own price really means very little unless you are in a business where you are buying or selling the specific commodity. So, if one agrees that world supply for moly is at worst a little higher than in 2007-2008 and demand is at worst still currently low, but should return to pre-recession levels in the not too distant future, then given that price is still historically low, molybdenum is likely a good investment right now. The next question is how do you want to invest in moly?
Ok, I Like Moly. How Should I invest?
This is really up to you, but it’s up to me to present you with some of your options.
First of all you can invest in the actual commodity molybdenum. This can be done by buying futures in the commodity. This very basically means you own a certain amount of molybdenum at a date in the future that you are paying for today at a certain price. As that future point in time approaches, if the price of moly is increasing you can sell your contract back to the market at a profit or you can roll-over your contract to a date further in the future if you expect moly to continue to increase. This is an extremely basic explanation; anyone interested in this should do more research on futures contracts, some great resources can be found on my Investment Resources page. One advantage of investing in the actual raw material is you don’t have to consider many of the risks that go along with owning shares in a company, such as political risk, management risk, currency risk, etc.
The second option is to buy shares in a company that mines molybdenum. Here you have to learn at least the basics about company financials, as well as how to assess a management team, which nations are politically stable, and how to value a company. A good starting point to learn how to do this for yourself, is in my article on How to Determine a Company Valuation
Buying shares in a company is in some ways a simpler and more accessible option for the average investor, so many individuals do go this route. It does increase your required level of knowledge on the investment though, because now before you can make a good investment you must consider all of the risks that were previously mentioned and understand how they apply to the company you are considering. For example if I’m considering a copper producer in the Congo, I must understand the political situation in the Congo, how it relates to mining companies, how stable it is, when the government is likely to change, etc. Any investment in this company without thorough knowledge of this takes on unnecessary and substantial risk and moves towards gambling and away from investing.
If you’ve come this far and are hoping I will provide you with a way to invest in moly beyond you learning about buying futures contracts, there are a couple companies that I believe are low risk (to understand risk you should see my article on Understanding Risk in Investing) and will benefit from any increase in molybdenum price. Two companies that meet my criteria for being good investments in molybdenum are Mercator Minerals (Ticker ML on the TSX)and Moly Mines (Ticker MOL on the TSX and ASX). Mercator Minerals operates a mine in Nevada, it has a management team that has constructed, optimized, and made profitable their first mine through the recession, they have a world-class copper project coming online in 2-3 years that will be built from cash flow, and they trade at a very reasonable level currently. Moly mines is an Australia-based company with a world-class molybdenum deposit that is permitted and ready to go as soon as financing is received. They have over $100 million in lead equipment already received, and their majority shareholder (Hanlong of China) is actively seeking financing for them of $500 million (half of this is already guaranteed in a commitment letter). Their management team is experienced and has an excellent track-record. They also have an in-production iron ore mining operation that should generate close to $100 million this year, and will provide cash for their moly project.
Why Invest in Moly Right Now?
Timing an investment is a challenging endeavor. But there is only ever one reason to make any investment right now. That reason is that the expected trend line of the underlying investment is positive; you don’t expect to see a lower price in the near future. In the context of molybdenum this means that I believe that current and near-future supply and demand are going to pull prices up and very little if anything could pull prices down. When you come across a situation like this buying right now (or waiting a very short while in the anticipation of a slight price drop enabling you to get a better entry point) is really all you can do.
You absolutely should do more research before making any investment decision. I’m merely presenting what I believe to be a good starting point, and a reasonable assessment of the state of the world in regards to molybdenum. Please feel free to contact me with any question on molybdenum, or anything related to this article.
Disclaimer: At the time of publishing this article I owned shares in Moly Mines.
By: Aaron Straker