There's some very good news for Freeport-McMoRan (NYSE:FCX) and its stock holders. The use of molybdenum was at an all-time high in 2011 according to the International Molybdenum Association. Freeport is the world's largest producer of the metal, which is used to strengthen steel.
This should benefit Freeport's stock value and justify its decision to reopen its historic Climax molybdenum mine near Leadville, Colorado. That could help the company make up for any losses caused by falling demand for its other major metal copper.
The association's report did contain some potentially bad news for Freeport stock holders. It noted that the two biggest users of Molybdenum were China and Europe. The Chinese used 168 million pounds of the metal in 2011 which was up from 148.5 million tons used in 2010. The Europeans used 133 million points in 2011 which was twenty million more than they consumed in 2010.
The bad news is the ongoing economic downturn, especially in Europe, where auto sales have fallen by 20% in some markets because of the Greek debt crisis. The auto industry is one of the biggest users of steel. Falls in industrial production have also been reported in China. The reason why this is so bad for Freeport is obvious - around 80% of the world's molybdenum is used in steel production.
Any serious economic downturn in Europe and China could lead to a fall in demand for molybdenum, which could lower demand and Freeport's profits. Instead of making money by reopening the Climax, Freeport could take a loss on its decision to increase production.
Things could get even worse for Freeport if the Chinese start dumping molybdenum on the international market. China is the world's second largest producer of the metal, digging out around 177 million pounds of it in 2011, according to the association. If China's miners can't sell their production at home, they may start selling it on the international market which undercut prices and Freeport's potential profits.
Freeport Drilling for Gold and Molybdenum Near Mt. Milligan
Freeport-McMoRan's Canadian subsidiary is paying Serengeti Resources (NYSE:SIR) to drill for copper and gold on the Choo property near the Mount Milligan Gold Project in British Columbia. A press release indicates that Serengeti's geologists think there could be a large deposit of gold, copper, molybdenum and platinum on the property.
Freeport will fund will fund the drilling and owns a 51% interest in the property. The Choo property is close to Mt. Milligan, where Thompson Creek Metals (NYSE:TC) is developing an open pit copper and gold mine. Thompson Creek estimates that there are 81 million pounds of copper and 194,500 ounces of gold at Mt. Milligan.
If Freeport and Serengeti can get results at Choo that are similar to those at Mt. Miligan, they should have a winner on their hands. There are some other advantages to the Choo site it can be connected to British Columbia's electrical grid, so power should not be a problem. Another advantage to the site is that there an existing road connecting the area to the towns of Fort St. James and McKenzie.
This should really boost Serengeti's stock value and it could also push up Freeport-McMoRan's stock value. Another stock that could go up if the Choo exploration is successful is Freeport-McMoRan Limited of Canada (FMCL). The two companies have budgeted $1.05 million to drill around 10 holes at the site. I recommend buying Freeport-McMoRan, Serengeti Resources and Freeport-McMoRan Limited of Canada today.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.