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Sprott Changes Mind about Moly

Just over 2 years ago the outlook for molybdenum demand was extremely bullish as evidenced by this molybdenum market outlook prepared by Sprott Assett Management:

We at Sprott Asset Management are strong believers in the prospects for molybdenum. Over the last two years we dedicated a significant amount of time to studying the demand and supply
factors for the metal and the companies that explore for and mine molybdenum.  We have believed for a while that the fundamentals point towards a period of sustained elevated prices.
Our convictions have never been stronger than they are now.

The creation of the Sprott Molybdenum Participation Corporation (TSX:MLY) in April 2007 certainly showed conviction.

It will provide investors with the opportunity to invest in Physical Molybdenum, which is currently unavailable through an exchange. In addition, it will provide investors with a diversified portfolio of securities of private and public companies that explore for, mine and/or process molybdenum.

The creation of fund buying of a specialty metal in an illiquid market creates all kinds of investment opportunities. Small amounts of capital can move the market significantly. A rising moly price was beneficial to shareholders of junior moly explorers (such as Sprott Asset Management). This moly squeeze play has ended rather badly (see moly price chart below).

Molybdenum price/lb chart

The fund has been trading below its book value and Sprott has become very bearish on the world economy. He foresees a deep depression brought about by overleveraging. Sprott understands the implications of leverage better than most and he is worth paying attention to in spite of this moly miss step.  Following a strategic review announced last month, the directors of Sprott Molybdenum Participation Corporation decided that distributing its assets to shareholders would be in their and the company's best interests. Net asset value of the corporation on Jan. 7, 2009, was $1.75 per share, of which $1.51 per share was held in cash and short-term securities, net of liabilities.

On November 5, 2008 Sprott Molybdenum Participation Corporation was still slightly optimistic:

Sprott Molybdenum's top holdings, Thompson Creek Metals Company Inc. (TSX:TCM), Quadra Mining Ltd. (TSX:QUA) and Mercator Minerals Ltd. (TSX:ML), are all valued at one or two times next year's earnings and have growing production profiles. When confidence returns to the market, the company will look for these companies to outperform their peers in the mining sector.

If you don't believe the world is heading into a multi-year depression and want to fade one of Canada's best investment managers, you could do some digging on these moly castoffs.