Steel Yourself for Growth

07/24/2008 12:00 am EST


Roger Conrad

Chief Analyst/Managing Partner, Capitalist Times

Roger Conrad & Yiannis Mostrous, editors of Vital Resource Investor, say the supplier of a key element in steel production should benefit from continued growth in China.

China Molybdenum (Hong Kong: 3993, OTC: CMCLF) has one of the largest molybdenum mines in China with a mine life of about 40 years, and the company is responsible for 7% of global output.

Molybdenum (from the Greek word "molybdos," which means lead-like) is a silvery white, flexible metal with an exceptionally high melting point (2,625 degrees Celsius). It's used principally as an alloying agent in steel, cast iron, and super alloys to enhance hardness, strength, toughness, and resistance to wear and corrosion.

It's employed in the production of steel, molybdenum's most significant end use. It's also used in the oil and gas industry for removing sulfur. In finished products, it's used in construction, machinery, automobiles, aircrafts, ship building, oil pipes, drilling platforms, lubricants, and catalysts.

One of the interesting growth characteristics of the company is that it's expected to be involved in the industry merger and acquisition (M&A) action. China continues to engineer consolidation across the board in the resource industry, pushing the smaller, inefficient players out of the way. The M&A program will allow China Molybdenum to mitigate some of the risks that it now faces as production comes out of one mine, where any problems can lead to higher costs.

The company has also been diversifying into gold and has acquired three operating mines this year at US$240 per ounce, a good price given the metal's strength and long-term positive fundamentals. Although we view this as a good opportunity longer term, we have to see evidence that management will adapt to the different requirements of the gold mining business.

Demand for molybdenum in China will remain strong and should get a boost as the country increases its gas pipeline network by 50,000 kilometers, a project that's expected to require at least 25,000 tons of molybdenum per year for the next decade.

China Molybdenum is one of the lower-cost producers in the world. And, although costs should increase going forward because of higher electricity prices, the company will remain a robust, inexpensive producer. Given our expectation that molybdenum prices will remain at high levels, its low-cost production capabilities will become one of the company's great assets.

China Molybdenum is a leveraged play, so it's more volatile. The shares are down
7% since first recommended here, and it represents good value at these levels. Buy China Molybdenum at current levels, preferably in Hong Kong markets.

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