Company will start mining its moly deposit when prices for the metal will have likely recovered.
[Editor’s note: The following article appeared on www.rockbottomreport.com on November 17.]
Long standing shareholders of General Moly (TSX: T.GMO, Stock Forum) are certainly not happy with the performance of this stock in the past 12 months. Shares have been beaten down from a high of $12.57 to Friday’s close of $1.15! This scenario, however, has created a fantastic buying opportunity for new investors.
Molybdenum, once an obscure buzzword in the investment world, has caught fire over the past decade as worldwide spending on infrastructure skyrocketed. The metal’s soaring price triggered a massive staking rush by junior mining companies across the globe; and activated several then dormant moly mines.
Molybdenum is not traded like other metals such as gold, copper or zinc. There is no open spot market. Because it is a rare earth element, it is actually purchased by steel and fertilizer companies directly from miners. There is simply not enough of it to be traded on a commodities exchange like other metals.
Due to the unfolding economic crisis, many projects have been slashed worldwide. This has caused a temporary lull in demand for most metals in recent months. Copper, zinc and nickel are down over 50% since July! Because purchase contracts for moly are few and far between, its price held steady at the last negotiated rate of $34/pound. However as the latest wave of contracts were negotiated and made, the price has been slashed to coincide with the drop in demand.
This is not a positive development for moly miners, however we at Rock Bottom believe nothing could be better for forward looking investors. Here’s the kicker - General Moly isn’t selling any molybdenum yet. Other miners, however, are taking a beating; and shares of GMO were dragged down with the rest of the market.
The current drop in price has caused some major mines, like Freeport-McMoran’s in Colorado, to cut production and close its operations. The drop in price simply makes these large mines uneconomical. The shut down is of course temporary and will be reactivated when the price re-stabilizes to higher levels. But it will take Freeport 12 to 18 months to get back to full capacity.
Shutdowns like this will eventually put a strain on the supply/demand chain and bring prices higher. In the meantime, however, it will put serious strain on GMO’s future competition at a time when GMO’s mines will be coming on stream. GMO will start mining its massive world class moly deposit at a time when prices for the metal will have more than likely recovered. Additionally, to combat the economic crisis, governments around the world are implementing massive infrastructure projects to boost jobs and spending. Moly is heavily used in infrastructure and steel markets.
Governments all over the world are tackling the current economic crisis in different ways. One approach is starting to emerge in many countries. President-elect Barack Obama has repeatedly stated that the best way to fight through a crisis like this is by implementing more building projects. Referring to the Tennessee Valley Authority project under FDR during the Great Depression, Obama claims that infrastructure projects offer the best for both the country and its citizens. For example, China recently unveiled a $586 billion economic stimulus that will invest heavily into the country’s growing infrastructural needs. Steelmakers require molybdenum for building everything from pipelines to construction equipment. As a result, demand for moly over the next 12 to18 months will go through the roof!
Enter General Moly
General Moly’s Mt. Hope mine begins production in 2010-2011. The first catalyst on schedule for this junior to-be miner, which could result in a double or triple of the share price, is the receiving of mining permits; this is slated to happen early next year.
General Moly’s Mt. Hope project is one of the world’s largest and highest grade molybdenum projects containing 1.3 billion pounds of Proven and Probable Reserves. In February 2008, the company finalized a joint venture with POSCO, the world’s third largest steel company, whereby POSCO will earn a 20% ownership of Mt. Hope by contributing $170 million to the joint venture in addition to 20% of capital costs. On a pro rate basis, this values the project at $850 million.
When moly prices were stronger, General Moly’s 80% ownership interest translated into a NPV (net present value) per share of approximately $17 on a fully-diluted share basis. - NPV values derived in the company’s BFS (bankable feasibility study) were driven by molybdenum prices forecast by CPM Group.
Mt. Hope is expected to produce more than 38 million pounds annually (approximately 30 million net to General Moly) over its first five years of operations and high grades will make Mt. Hope one of the lowest-cost primary producers. The company expects production at Mt. Hope to begin in late 2010.
Moly Price After tax NPV Internal Rate of Return
$10 $226 ($ Millions ) 11.5%
$15 $1,364 24.7%
$20 $2,400 34.5%
$25 $3,460 43.4%
$30 $4,521 51.6%
$35 $5,581 59.1%
It’s easy to see why this project is so valuable. Its high grade ore makes it possible to achieve a low cost of production, giving it a very strong rate of return and quick payback.
As if this was not enough to justify a market cap two or three times higher that where it currently is, GMO is also sitting on 503 million lbs of molybdenum on its Liberty project in Nevada. A prefeasibility study has been completed and calls for a 33 year mine life, with anticipated production cost at only $6.21/lb (copper credits included).
General Moly is on its way toward becoming the world’s next and largest producer of high grade low cost molybdenum. It will be gearing up for production at a time where the prices will have stabilized, giving it a future valuation at multiples above the current market cap. GMO has 82.6 million shares outstanding fully diluted.
This article was written by a member of the Stockhouse community.
Read more Stockhouse articles by Andrew Delic.
