The ‘super metal’ I’m talking about is molybdenum. Most people just call it Molly B. Or Molly for short. Still, it’s not famous, as metals go. That is not a bad thing. Due to its relative obscurity (and the unique, growing market for it) no single firm dominates the industry for molly.
It’s not like iron ore. There’s no Rio Tinto, Vale or BHP. Three companies can’t control 80% of supply. Rather, the two biggest producers in the world contribute about 16% of global production each. After them, no other single company makes a double-digit contribution.
That’s why this month’s share tip—if it’s able produce at its world class asset in the Pilbara— should be a top-ten world-wide producer of its resource.
Going its latest production levels, it could soon be the 7th biggest producer on the planet. But even better…in a couple of years, there may only be three pure players in the world ahead of it.
That means, in the bull market we foresee, this company will get the kind of attention reserved for market leaders. Today, it’s still a small-cap explorer. It’s still valued like a small cap explorer. But if it were valued as a world-class major producer of an essential commodity for the energy industry, you can be sure its valuation would be much different (higher). How different?
It might not make you quite as rich as Andrew Forrest. But we think it’s realistic for this stock to at least triple. To find out why the valuation could change this year, let’s take a look at what’s driving the price for the metal.
Sweet is Cheap, Sour is Dear
The first barrel of commercial oil bubbled up to the surface in Pennsylvania, 1859. Back then, oil wasn’t
hard to find. If you knew where to look, it was just metres underfoot. The oil of the mid-19th century was everywhere…but more importantly, it was “sweet”.
“Sweet” means the crude oil in question has a low sulphur content. Conversely, “sour” crude oil has high sulphur content. Sulphur is an impurity. Oil refiners must remove it from petroleum before consumers can burn the oil to run their cars or heat their homes. Removing sulphur costs money. So, if you’re an oil refiner, you definitely prefer sweet crude to sour crude. It’s cheaper to drill and refine, and easier to sell. No contest.
But 150 years after oil’s debut, and around a trillion barrels later, sweet crude oil is getting really difficult to find. The new oil fields coming on line these days are sulphur-heavy. Canadian and Venezuelan tar sands hold trillions of barrels of oil. But most of it is sour crude.
Explorers would prefer the sweeter stuff. But with oil in the 21st century, you take it where you can find it. If you’re finding more sour crude than sweet crude, you will have to refine oil with a sulphur content over 1%,
Most major oil companies know this and are already preparing for a world dominated by sour crude. PetroChina recently announced an expansion at one of China’s largest refineries. It’s investing in a huge hydro-treating unit, specifically designed to strip sulphur from oil.
That’s a good start, but it’s not the real start. Before sulphur is even removed, it causes problems. Sulphur corrodes the extraction-point equipment used by oil drillers and producers. Ordinary drill bits and pipelines are completely inadequate for high-sulphur oil finds. Without the right equipment, extracting the sulphur damages the drills and pipes.
The corrosion issue is especially important now that oil companies are heading offshore. There’s a miniboom in drilling deep-sea oil wells. The good news? There’s oil out there. The bad news? It’s sulphur-rich material.
The enormous amount of pipeline required to bring deep-sea oil finds into production will need to be sulphur resistant. Worley-Parsons, possibly the world’s greatest authority on the topic of oil engineering, expects global investment in offshore oil and gas to top US$250 billion by 2010.
Enter molybdenum.
Molly solves both problems that sulphur presents. It has a strong enough composition to withstand sour oil flows, so it’s a vital component of drill bits and pipelines. It can also withstand enormous pressur eunder the weight of the planet’s oceans. Typical stainless steel has around 6-8% molly. Much of the steel in deep-sea rig structures has between 13% and 16%. Every time Exxon taps another deep-sea field, thousands of pounds of molly go into the structure.
But best of all…molly is one of the most efficient catalysts for separating oil from sulphur. By “catalyst”, chemists means that molly helps remove sulphur from the hydrocarbon chains that make up petroleum.Facilities like PetroChina’s will demand thousands of pounds of molly too. Its function as a catalyst is where we expect to see some of the metal’s fastest growth.
Molly is a critical element in the global off-shore energy boom. That alone makes it an intriguing investment. But oil companies aren’t the only firms demanding molly.
The Nuclear Renaissance
In countries like France and Japan, nuclear power is not a political hot potato. It’s an indispensable source of everyday electricity. As global gas reserves deplete, we expect governments and the private sector will shift emphasis onto increasing nuclear capacity. Nuclear produces almost no carbon dioxide emissions in generating base-load electric power. It has other environmental issues, of course. But conditions have never been better for a nuclear power boom. Outside Australia, the rest of the world is jumping on the nuclear bandwagon.
There are currently 441 nuclear reactors humming away around the globe. They churn out 375 gigawatts of electricity per year. That won’t be nearly enough to meet growing demand. Also, most electric power around the world comes from carbon unfriendly coal. More restrictions on coal-fired plants will increase the urgency to replace coal with something cleaner. For some countries, nuclear will be the best option.
According to the World Nuclear Association, the countries planning on ramping up nuclear generation include China, India, Russia, the US, Canada, Brazil, Japan, and the UK. That’s pretty much every big developing nation on the planet, plus a few big developed ones. Many are calling it the “Nuclear Renaissance”. It’s the reason uranium stocks ballooned and deflated last year.
To create new power generation, that list of countries will need to build new reactors, and replace old weary ones. Uranium consulting group UxC sees the number of reactors growing to 700 by 2030. Here is the good news for Australian investors...
Molly is vital to nuclear plants.
Molly alloys are incredibly tough and heat-resistant.
They’re ideal for turbines and nuclear piping, where heat and strength are at a premium. According to the International Molybdenum Association, each new reactor will require somewhere between 170 and 330 kilometres of molly alloy. Any storage facility for nuclear waste will require additional molly.
What would happen if reactors used ordinary steel materials? Well, nickel and zinc make steel tougher, but they wouldn’t stand a chance in the 300ºC-plus heat of a nuclear fission reaction. They’re not even worth considering. No government wants another Three-Mile Island to explain. Because of this, there’s no doubt the nuclear revolution will contribute to molly demand.
The All-Energy Super-Metal is Scarce
In addition to the nuclear and oil industries, manufacturers of all types use molly. The automobile industry buys it for its lightness and strength. Airplanes too; the next time you’re on a domestic flight, remember that molly is helping you stay airborne. It pops up in civil engineering as well. The famous twin Petronas towers in Kuala Lumpur are capped with molybdenum-based materials.
It should be no surprise, then, that almost all forms of energy production use molybdenum. Almost all energies involve intense heat. And almost all of them involve spinning turbines. Some others (apart from oil) require catalysts to purify fossil fuels.
Geothermal producers, coal miners, and hydroelectric dams all need molly to function. Even the desalination industry needs molybdenum.
New nuclear plant construction and the challenges oil drillers face will suck up most of the molybdenum production in the next decade. But budding new energy demand of all types will add weight to the bull-market.
Notably, molly has no viable substitutes. Some similar metals, like vanadium, chromium, columbium, rhodium and tungsten can perform the same tasks. But none are as versatile or abundant as molly.
Substitution is relative. According to metals and minerals analyst Roskill, the few molly substitutes that exist have already boomed in price. What would be the point in switching to another expensive material?
Molly is indispensible to the future of the energy industry. The queue to buy molly is getting longer. Who’s going to step up and meet the looming demand?
Looking at reserves (the future production of molybdenum) most ore is stuck in the ground in China. At this stage, Chinese molly production is heavily fragmented. You find a lot of small companies with undeveloped resources. The industry just hasn’t come together yet. There’s no big firm capable of adding new production quickly over the next two or three years.
Meanwhile, America, the second biggest reserve-holder, has only opened three new molly mines in the last two decades. Traditionally the greatest molybdenum producer, US molybdenum productionhasn’t reacted to higher prices. New investment and construction will take time.
And Chile, “número tres”? Well, molly is often mined as a by-product of copper. Chile’s stateowned copper giant Codelco is one of the top two molly producers…and it’s already shut three Chilean mines this month thanks to power shortages and mining strikes. Chile’s mines rely heavily on hydropower, but the nation’s having its worst drought ever.
In other words, the top three molybdenum producing nations don’t look capable or interested in producing a lot of new molybdenum soon. That’s adding to the shortage.
The molly price has already made a big move. In June 2005, when molly peaked, average molybdenum inventories added up to 4 weeks’ consumption. As of last quarter, they’re down to 7 days worth.
The high price hasn’t slowed consumption at all. Miners still aren’t keeping up with demand. And thanks to the developments in oil extraction and nuclear power, molybdenum producers will continue to struggle to match demand, possibly for years.
A Big Global Producer Few Have Seen Coming
The best pure molybdenum play in Australia is a huge growth prospect. It’s a small company. But that could soon change.
Port Phillip Publishing Pty Ltd holds an Australian Financial Services License: 323 988.
To end your subscription visit this link. To cancel by mail, phone, fax or for any other subscription issues, write us at:
Port Phillip Publishing Attn: Daily Reckoning Australia PO Box 899 Braeside VIC 3195
Tel: 1300 667 481 Fax: (03) 9558 2219
Calculating Your Future Returns
It’s important to remember that investing in shares can lose you some or all of your money. The potential gains in this letter are based on investing in Australian dollars on the Australian Stock Exchange unless otherwise indicated and do not include taxes, brokerage commissions, or associated fees. Please seek independent financial advice regarding your particular situation. Also, while useful for detecting patterns, the past is not a guide to future performance. The value of any investment, and the income derived from it, can go down as well as up. Investments in foreign companies involve risk and may not be suitable for all investors. Specifically, changes in the rates of exchange between currencies may cause a divergence between your nominal gain and your currency-converted gain, making it possible to lose money once your total return is adjusted for currency. For any investment, never invest more than you can afford to lose, and keep in mind the ultimate risk is that you can lose whatever you’ve invested. If in doubt of the suitability of an investment please seek independent financial advice
IRC Price at posting:
0.0¢ Sentiment: Buy Disclosure: Held
(20min delay)