Good golly, Ms Moly

Molybdenum is up 1000% in the past five years, and suddenly a $12bn a year market, with a new ETF.

JOHANNESBURG - 

Like nickel and uranium, among others, molybdenum is up 1000% or so in the past five years. The metal, known in the trade and among specialist investors as "moly", and mostly used in steel alloying for hardening and corrosion resistance, is now in a $12bn a year market, but is it still worth a punt?

This week sees the launch of a molybdenum Exchange Traded Fund (ETF) (Bloomberg: MBMOEUOX ), "Sprott Moly", run by well-regarded Canadian fund manager Eric Sprott and his team. The objective is to invest up to C$150m in molybdenum equities (75% of the fund) and 25% in the metal itself. Sprott has arranged to buy "moly" from the largest pure play producer, Blue Pearl (BLE, C$12.06, with a C$1.25bn market capitalization).

The molybdenum market is currently running at around 400m pounds a year, and is said to be growing at a minimum of 4% annually. The metal's subscribers describe it as the "energy" metal, given how much it's used in the crude oil and gas business.

Sprott himself subscribes to the "peak oil" school of thought, which holds that global crude oil production is peaking, meaning more drilling for every new unit discovered. Sprott tells investors that a 5,000 foot oil well requires 50 tons of molybdenum-hardened steel to drill; a 15,000 foot well requires a magnificent 1,100 tons. Nearly 80% of all wells drilled today are deeper than 8,000 feet.

As for supply, China (currently 20% of world molybdenum production) is consistently digging out less as small operators increasingly fall foul of new environmental, tariff and quota constraints. Like a number of other metals, molybdenum has historically been dug out as a by-product. About 60% of current global molybdenum production ranks as by-product.

Phelps Dodge, Codelco, Rio Tinto, Grupo Mexico, Antofagasta, BHP Billiton, Xstrata and Anglo American produce molybdenum on the outskirts of copper porphyry operations. Insiders reckon that most of these producers high-graded molybdenum output during the 2005 spike to $40/pound, such that 2007-8 molybdenum production profiles are largely flat.

Big changes are on the way. A secular shift in copper output will see growth move to Africa's copper-cobalt deposits, such that new primary molybdenum production will shift production profiles in the next five or so years to 60% primary and 40% by-product.

Apart from Blue Pearl, Sprott Moly may own Idaho General Mines (GMO US$3.90, US$160m), Moly Mines (A$3.25, A$170m), Mercator Minerals (ML C$4.08, C$291m), Roca Mines (ROK C$2.65, C$174m), among others.

Anticipated short- to medium-term contraction in molybdenum production, allied with a Chinese stainless steel growth forecast of over 30% this year could see molybdenum test 2005 highs of $40/pound, roughly $10 higher than prevailing prices. 

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