Freeport-McMoRan: Betting Big On Climax

| About: Freeport-McMoRan Inc. (FCX)

The Chinese government will keep its restrictions on the export of molybdenum in place for 2012. This move should benefit Freeport McMoran (NYSE:FCX) which owns Climax Molybdenum.

The decision not to change the export rules is definitely good news for Freeport which has 2.48 billion pounds of molybdenum in reserve. China has the world's third largest reserve of molybdenum or 90,000 metric tons of the metal. The Chinese government introduced a quota system that restricts exports to 25,000 tons a year and imposes a 15% export tax on molybdenum oxide and a 20% tax on ferrmoly in 2007. The idea behind this is to maintain a strategic reserve of the resource in the world's largest manufacturing nation.

The preservation of this system was announced at the Eighth Annual China Molybdenum Conference in Xian City on March 26 by Jia Hongyan who is general manager of a publication called MolyWorld, Platts Metals Week reported. The export rules should keep Chinese producers from being major players in the world market. China is currently the world's largest producer of Molybdenum according to the US Geological Survey.

The announcement ended speculation that the Chinese government was going to change its' policy. Some conference participates had speculated that China was planning to allow exports to overseas firms if the finished products were shipped back. Instead China will concentrate on developing its own industry.

Interestingly enough, the largest molybdenum producer in the Middle Kingdom, China Molybdenum Company Limited (3993 on the Hong Kong Stock Exchange) which is also known as Luoyang Molybdenum or Luomu is trying to finance a major expansion. Reuters reported that the company has filed the paperwork for a $600 million on the Shanghai stock exchange. Luomu wants to sell up to 542 million shares in order to finance four major projects. The projects include plants to process tungsten and high performance alloys according to Reuters.

Whether Luoyang was planning to increase production and exports is hard to say. How the export restrictions will affect the company's expansion plans remains to be seen. One strong possibility is that the company could look overseas for new sources. Another is that its' leadership now thinks that they have a monopoly on the Chinese market. If Luoyang can meet China's demands there could be no market for Freeport's production in that nation which calls its' expansion efforts into question.

Keeping Chinese molybdenum off the world market should help Freeport McMoran. This is very good timing for Freeport which hopes to resume molybdenum mining at its Climax mine in Lake County, Colorado, near Leadville sometime this year. Climax is one of the world's largest sources of the mineral but it has been shut down since 1995. Climax is the world's oldest molybdenum mine production started there in 1916. According to the renewed Climax would produce around 30 million pounds of molybdenum a year. Climax also owns the Henderson Mine another major molybdenum producer located near Empire, Colorado.

Thompson Creek is on the Move

Freeport is not the only company betting that the demand for molybdenum will keep increasing. Thompson Creek Metals (TC) is putting the finishing touches on a new processing mill at its Endako Mine in British Columbia. A press release indicates that the new mill will increase processing capacity at the facility by 77% from 31,000 tons a day to 55,000 tons a day. The new mill is not totally in production yet because some of its equipment will not be installed until the end of March. Thompson Creek expects the new mill to go into full production sometime in the Second Quarter of 2012. The new mill will cost $527 million Canadian ($530 USD) according to Thompson's website. Endako produced between 10 and 11 million pounds of molybdenum in 2011.

Thompson Creek owns 75% of Endako the other 25% of the open pit operation is owned by Sojitz Corporation (TSE on the Nikkei) of Japan. The reserves at Endako are around 340 million tons of .046% grade molybdenum. It's easy to see why Thompson Creek is expanding production it sold 38.1 million pounds of molybdenum in 2011 and earned $669.1 million in Revenue reported.

Thompson Creek is expanding its' presence in the copper and gold markets as well. The Denver-based company has started construction on its' Mt. Milligan Project in Northern British Colombia. Mt. Milligan which is scheduled to begin production in the fourth quarter of 2013 will be an open pit copper and gold mine.

Copper reserves at Mt. Milligan are estimated at 2.1 billion pounds and gold reserves at the site are estimated at six million ounces which makes it the second largest gold reserve in Canada. Thompson's website reports that it has completed 90% of the engineering for the project and issued 80% of the contracts. Construction of the mill building has begun and power line has been built to the remote mining site, the company reports.

How the falling demand for copper in China and the glut of the metal on the Shanghai market will affect Thompson Creek's plans remains to be seen. Reuters reported that copper stockpiles in Shanghai were expected to reach 600,000-650,000 tons by the end of March. This is more than times the level the same stockpiles were at in January.

We have to ask ourselves where all that extra copper being mined in Canada is going to go? China is the world's largest market for that metal and its demand appears to falling down around 12.5% in February alone according to Reuters. Freeport could hurt harder by this than smaller companies like Thompson Creek because it is more dependent on the Chinese market.

Molybdenum Demand Growing but Production is Growing Faster

Molybdenum seems to be better positioned for growth than copper right now. Demand for the metal grew by 6.2% in 2011, RBC Capital Markets reported. RBC's experts expect demand to grow by 8.4% and 8.8% which means there should be a market for the Climax Mine's added production. Long term figures are not nearly as good molybdenum demand will only grow by 5% in 2014 and 2015.

One problem that could affect all producers is that new production will exceed demand. The US Geological Survey noted that molybdenum production in the US increased by 8% in 2011. This is at a time when Chinese demand for the metal is falling reported that Chinese imports of molybdenum fell by 43% in the first nine months of 2011. This means that a molybdenum glut similar to the copper glut could be right around the corner even with China restricting imports.

Freeport's situation could be made worse by a major molybdenum mine being developed by one of its competitors. The Sierra Gorda project in Chile, which is now owned by the Polish mining company KGHM International (OTC:KGHPF) and KGHM Polska Miedz SA, would produce 54 million pounds of the mineral during its first three years of operation. KGHM acquired Quadra FNX which had started development of Sierra Gorda last month.

Production at Rio Tinto's (NYSE:RIO) Bingam Canyon mine in Utah is scheduled to increase by about 30 million pounds by the end of 2013, Steelguru reports. It is unclear if the market can actually absorb all of that production even with increased demand for steel intensive consumer goods like automobiles. If the new production at Bingam Canyon and Climax works out as predicted that could add 60 million pounds to the market.

This means it might not be a very good time for Freeport to be reopening a major molybdenum mine. The demand might not be there for the production. Particularly if Chinese demand for the metal continues to fall. Freeport's bet on Climax could prove to be premature, particularly if there is no Chinese market for its production.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.