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In last year’s Tax Day blog, “Good Golly Miss Moly,” I wrote about how molybdenum (aka Moly to industry insiders) would be a metal to watch in the coming years as it’s a major component in steel. As we know, steel is critical to building infrastructure and it’s also used heavily in the construction of nuclear power plants. The price of moly has been on a steady rise (except for last year’s credit crisis which tanked it along with the entire materials sector) due to the increasing steel capacity utilization rates in developing countries and improving steel capacity utilization rates in the developed nations. Over the past 50 years, annual moly growth has been averaging a steady 4%, but in 2007 that number jumped to 6.4% mainly due to increasing demand from China.

Now China is one of the world’s major moly producers but its appetite for the metal (and for pretty much everything else on the periodic table) has turned it into a moly importer (it now accounts for 25% of Thompson Creek’s sales) and one of the reasons why it’s been trying to partner with other miners.

Moly is commonly found along with copper so it’s natural that many companies that are principally engaged in copper mining also extract moly as a by-product. Companies that mine moly as a secondary ore are Freeport-McMoran (FCX), Rio Tinto (RTP), Southern Copper (PCU), and BHP Billiton (BHP).

Two US Moly Miners
As for those enterprises that mine moly as their principal ore, several are privately held. There are only two that trade publicly in this country: Thompson Creek (TC) and General Moly (GMO). Thompson Creek has been physically mining the metal while General Moly is still in the planning and permitting stages of developing its two mine areas. Their Mt. Hope project in Nevada is purported to be the largest and highest grade moly deposit in the world with 1.3 billion pounds of extractable ore. The company owns 80% of this project along with Posco (PKX) steel.

One big problem facing General Moly is that it’s going to need big bucks–on the order of $700 million–to actually get the ore out of the ground. How it’s going to accomplish that has been a matter of message board speculation.

According to rknapton commenting on the Motley Fool’s Caps board on 5/19/09: “Will they [GMO] trade off a further portion of thier [sic] interest in the project to fund this? Raise a lot of debt? Issue (and dilute) more shares? These are huge questions and it’ll be interesting to see how it plays out. But, with the current low prices for moly, I think the general outlook for this company is dismal -which is already fully reflected in the stock price. That is why I think it might be a good buying opportunity here. As soon as the infrastructure demand for steel gets back on track, moly, with its low inventory levels, should see a huge run up in price, and thus the moly producers such as TC (and GMO if they ever actually produce) will have a great run.”

Since this comment, the stocks of both companies have nearly doubled. However, there seems to have been some recent profit-taking in TC after it closed over $15 on August 1. Not so for GMO which broke $3 resistance only two days ago.

Barring a trade war with China, it’s possible to see speculators bid up General Moly to its next resistance area in the $5 to $5.20 region. If the company does receive its required financing at Street-acceptable terms, the stock could easily push past this level. For me to be a buyer of Thompson Creek, I’d need to see it resume its upward momentum and blow through the $15 level.

A safer, but less pure, play would be to buy the XME, the Metals & Mining ETF. All in all, current inventories of moly are at very low levels (estimated supply about one month) and unless the world sinks into another recession, demand for it can only rise.

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Disclosure: No positions in any stocks mentioned.

Source: Demand for 'Moly' Can Only Rise