Steel, China, Molybdenum—and where will we find 200 million lbs more of it?

Dr. John Faessel

ON THE MARKET

Commentary and Insights

Faessel Publishing LLC

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World production of crude steel posts the highest monthly total ever

 

Steel, China, Molybdenum—and where will we find 200 million lbs more of it? And at what cost? The low cost producers?

 

Mosquito Consolidated Gold Mines Limited (TSX Venture: MSQ) $ (OTC:MQCMF) on the US OTCQX $0.89

 

First - Breaking News; Mosquito Wins U.S. Forest Service Ruling

Yesterday post-close Mosquito announced that the U.S. Forest Service, Intermountain Region, has rejected the appeal of the Environmental Assessment for the CuMo Exploration Project. This decision provides authorization for Mosquito to begin its exploratory drilling program in early June 2011. Another milestone on the way to breaking ground.

 

Part I.

see Part 2 next month

 

Stepping up next, as the famous Thompson Creek molybdenum mine begins to “play out”*

 

World production of crude steel in March 2011 rose by 7% to 129.3 million tons, the highest monthly total ever. The total of the 3 months to date was 371.5 million tons, nearly 9% higher than the January to March period in 2010. All regions showed an increase in crude steel production in both March and the year to date except for Africa. WORLD STEEL REVIEW, May 2011

 

High strength steel alloys on average contain 8% molybdenum. World demand for molybdenum has grown at a 4% average annual rate over the past 50 years. This growth was interrupted in late 2008 by the economic recession. However, more recently it’s been growing at plus 6% fed by huge Chinese consumption where, interestingly, last October they: 1) classified molybdenum as a strategic material and 2) indicated that the country would restrict the mining and export of the metal starting in 2011. Now factor in the added demand caused by Japan’s epic March 11 magnitude-9 earthquake and subsequent tsunami that decimated the northeastern costal region of the country. Significant increases in steel production will be needed to rebuild infrastructure, retrofit compromised infrastructure, and replace the 320,000 cars lost to the unrelenting waters. Adding to this demand are several new uses for molybdenum, like breakthrough technologies that employ the metal in hydrogen production and desalination, that also look to increase demand.

 

Obviously the impact of China’s staggering growth on the recent rise in demand for hard commodities is profound. Half of global steel production worldwide comes from China, which consumes 33% of all molybdenum. Analysts expect the global demand for products such as iron ore, copper and aluminum to double by 2022, primarily driven by China, India, and the emerging markets bloc. Striking is that China’s 3-year total of foreign hard asset deals is near $150 billion. And that Chinese companies have invested over $25 billion in acquiring stakes in nineteen iron ore start-ups and producers over the past three years.

 

I have visited China twice in recent years and words do not well convey the magnitude of the boom that the country has witnessed. When you consider what's going on over there in terms of construction and the country’s ability to crank out products en masse at 25% or less of what it would cost in the Western world, the situation is breathtaking, and actually disarming. This is raw capitalism the likes of which has not been seen since the Industrial Revolution here in the United States.

 

In China alone there are 25 nuclear power plants under construction, where each plant requires approximately 400,000 pounds of molybdenum for high heat steel applications. Over the next 15 years, China is expected to build the equivalent of New York City—10 times over. New cities, bridges, airports, trains / rails, factories, ship manufacturing, bulldozers, enormous lay downs of pipelines from one end of the country to the other, and massive trucks and more cranes than you can imagine, and new cars seemingly everywhere. No wonder that about 50% of the world's steel is consumed in China and hence also molybdenum, which makes steel stronger and lighter, makes stainless steel more resistant to corrosion, and is ideal for tough environments where heat, pressure, and corrosion are factors.

 

Today, world molybdenum production is about 480 million lbs. By 2016 it is thought to approach 600 million lbs and by 2021, near 700 million lbs. So we’ll need another 200 million pounds of “moly.” And by the way: molybdenum is not recyclable. With China as the big consumer of the metal, obviously they will continue to increase imports. Crucial here is that it costs the Chinese $13/lb. to mine, much higher than the $8 to $10 average for the western world. The recent market price of molybdenum is $17/ lb.

 

Looking beyond China, world demand for “moly” is there and is increasing. Molybdenum production is also increasing, but at generally higher prices per ton to mine. Where is it? And “who” is it? And where will that 200 million pounds metal come from? A key additional question here is obviously: where is the low cost production?

 

*Here is the place to bring in that one of the great molybdenum mines in the world, the Thompson Creek Mine, has seen its highest productions days and is “playing out,” as now they are mining the “push back” of the open pit’s wall structure. It is thought that there are about 10 or 12 years of mine life left. For sake of comparison, let’s briefly compare Thompson Creek with its neighbor Mosquito’s CuMo.

 

Considering that the Thompson Creek Mine and CuMo are almost within sight of each other on a clear day, face the same environmental regulatory issues and statutes, would likely pay their miners about the same, quote their prices per ton in molybdenum oxide, and have about the same “grade” and “cutoff” of ore in a resource calculation of .06 ppm, it’s a worthwhile comparison. In a further ON THE MARKET report I will speak to the rest of the world’s major molybdenum resources.

 

The Thompson Creek Mine is the fourth-largest primary molybdenum mine in the world and the largest mine in mining friendly Idaho. It has operated there since 1983. The mine operates approximately 16 miles upstream from the Salmon River, a “world heritage” river with runs of salmon and steelhead, considered a wilderness and protected river. Noteworthy here is that the mine has no compliance issues and has won several environmental awards. Thompson Creek produces approximately 20 million lbs. of molybdenum oxide per year and represents 6% of the world supply. Importantly, Thompson Creek is non-unionized and has a workforce of 350 employees, resulting in annual payroll and benefits totaling $28 million. Located 60 miles to the northeast of CuMo, it is thought to have 215 million pounds of molybdenum left to mine.

 

Mosquito’s CuMo asset is located in Grimes Creek approximately 43 miles upstream from the Boise River in Idaho. Grimes Creek has been placer mined for gold over the past 100 years. Noteworthy is that there are 23 miles of overturned creek bed below the deposits and that area of Grimes Creek is subject to placer mining on a small scale every year. The entire area has been logged and mined for over a century. CuMo is the largest unmined open pit molybdenum deposit in the world, and also the world’s third-largest silver deposit, ranking behind the Navidad and the Pitarrilla silver projects.

 

CuMo “holds” an astonishing 6 billion tons of molybdenum. A recent calculation by Snowden** announced on 4-27-2011 increased CuMo’s Silver by 65.3%, Copper by 57% and the Molybdenum Oxide (MoO3) by 12.9 %. Remarkably, considering its enormous size, the resources perimeter is only 60% explored so both its eventual footprint and value are almost certain to expand.

 

The mineralized zones of CuMo have different metal and grade distributions so, in the staging of the mine, CuMo’s management has planned to recover the best and highest grade in the first 40-year period. The massive resource is so large that it will be mined for over one hundred years.

 

The grades of metal in the Thompson Creek Mine and at Mosquito’s CuMo mine resource are (or were) identical at 0.06, but because of Thompson Creek’s “playing out” it is mining as low as 0.01 given that now the focus of work is on the residual resource that was put aside over the years.

 

Thompson Creek mines at 28,000 short tons per day with a resource of 371.6 million tons grading 0.063% Mo Equivalent at a cash cost of $5.10 to $5.40 per lb. molybdenum oxide ($11 to 13.50 per short ton), and produces approximately 20 million lbs. of molybdenum oxide per year. CuMo has a resource 5 times the size at a similar grade (2,094 million tons grading 0.062% Mo Equivalent) and is looking to start production at 125,000 short tons per day at a cash cost of $3.67 per lb. molybdenum oxide.

 

In summary, my conclusion as regards the comparison of the Thompson Creek Mine and Mosquito’s CuMo is that, all things considered, Thompson Creek is a very profitable mine and has operated in an environmentally sensitive area for almost 30 years. Nearby CuMo appears to be in a less sensitive area and is orders of magnitude more profitable (by 3 to 4 times) than the Thompson Creek Mine.

 

The chief factor for CuMo’s profitably is the major economies of scale that come into play in mining: Thompson creek mines at a rate of 28,000 tons per day vs. CuMo at 125,000 tons per day.

 

Using Snowdons** and Ausenco’s*** recovery analysis, CuMO is 5.63 times larger with a similar overall grade. Prominently, cost per lb. of molybdenum recovery leans heavily in CuMo’s favor at $5.20 to $3.67. All told, CuMo generates 3.27 times more profit than Thompson Creek. But with present prices of copper and silver, CuMo turns out to be even more profitable.

 

The additional game-changing factum here making it possible to extrapolate higher profits for CuMo’s metal extraction is this: the computations above were derived using Copper at $2 and Silver at $12. However, if we calculate from current market prices of $4 Copper and $36 Silver, profitability skyrockets. Thompson Creek does not have any Copper or Silver like CuMo.

 

The current price of Mosquito shares gives investors a compelling opportunity to participate in what is rapidly becoming one of the best and most profitable mineral deposits in the world, of any kind. I believe that it’s only a matter of a short time before the tremendous value of the CuMo project is reflected in the market considering that the market cap of Mosquito (OTC:MQCMF) is $62 million vs. the market cap of Thompson Creek (TC) at $1.77 billion.

 

 

In my next ON THE MARKET report on Mosquito I will examine the other leading global molybdenum resources for value, grade, and cost per pound of production.

 

**Snowden Engineering Mining Industry Consultants is a premium provider of consulting services, technology solutions and technical training to the Mining and related sectors. Snowden is Vancouver BC based and has offices in Australia, Africa, Europe, and the Americas. http://www.snowdengroup.com

 

***The Ausenco Group (ASX: AAX) headquartered in Brisbane, Australia, is a leading provider of engineering, project management, and operation solutions for the global resources and energy sectors and employs around 2,200 people across 13 countries around the world. http://www.ausenco.com.au

 

I have purchased shares of Mosquito in the open market.

 

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