Molybdenum

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Sprott to unwind moly fund

Expects long slump

Peter Koven, Financial Post

Published: Saturday, January 10, 2009

http://www.financialpost.com/story.html?id=1161544

Investment guru Eric Sprott is as negative as almost anyone when it comes to the global economy. And that led him to yesterday's announcement that he is unwinding his molybdenum fund.

Mr. Sprott launched the Sprott Molybdenum Participation Corp. in early 2007 to give investors a unique, publicly-traded vehicle invested exclusively in the silvery-white metal and the companies mining it.

At the time, it seemed like a good idea as the molybdenum (or moly) market was red-hot. Moly is used in high-quality steels with applications in the energy industry. That made it an ideal place for long-term energy bulls like Mr. Sprott, a big believer in the "Peak Oil" thesis.

But in early November, the wheels suddenly came off. After holding around US$33 a pound for more than a year, the moly price collapsed almost overnight to US$10 as the reality of the global recession started to kick in.

Like the moly miners themselves, the share price of the Sprott molybdenum fund took an immediate dive. By early December, it was trading way below its book value.

A more bullish investor might have decided to ride out the tough times in the hopes that the moly price and the value of the fund would eventually increase. But Mr. Sprott is not that guy.

He believes that the world economy is at the beginning of a very long and deep depression brought about by the over-leveraging of the financial system. With the deleveraging likely to go on for years, he does not think moly prices will recover anytime soon.

That all led to yesterday's announcement that the $62-million fund will be unwound, with the proceeds distributed to shareholders.

"One problem with a commodity is a very small difference between supply and demand can crush the price, or cause it to go up," Mr. Sprott said in an interview. "And obviously we've lost demand for molybdenum here, and it could be a long while before that reverses itself."

In the short-term, industry experts generally agree with Mr. Sprott that the moly price will continue to struggle.

"For the next couple of years, we're probably looking at a moly price of US$10 to US$12 a pound," said an analyst, who asked not to be named. "Eric's probably thinking, 'What's the point?'"

But there is some hope from analysts that moly could recover faster than other metals because moly-bearing steels are specifically tied to the energy sector, where there is still a lot of activity. The outlook is much weaker for steels that are widely used in the auto sector.

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