One of the most important things in the junior resource business is the relationships you build and maintain with smart, motivated, influential, and connected people. Being in the news letter world it is always good to connect with other writers and see what stories are catching their attention. I recently had the pleasure of speaking with Andrew Mickey of Q1 Publishing, a very distinguished newsletter writer. Today I have posted a recent article by Andrew dubbed “Resource Investing Legend Places Big Contrarian Bet”. Check it out.
January 19, 2012
Resource Investing Legend Places Big Contrarian Bet
There’s a reason insiders and large investors take large stakes in companies…they know big potential when they see it.
And in the case of NMC Resource Corp (TSXV:NRC) early-stage molybdenum (moly) producer and developer, there are so many reasons the company’s largest shareholders currently hold more than 80% of all outstanding shares.
NMC is in production, generated $2.9 million in cash flow from operations last quarter, recently doubled the resource at its mine, and attracted the one of the most successful mining investors of the last decade to its board and his investment capital.
The future is bright for NMC for a number of reasons.
A Great Indicator of Future Growth
The best indicator that NMC is up to something big is the management that has joined up to back the company.
The latest addition to the NMC board is Paul Matysek. He has been one of the most successful mining entrepreneurs of the last decade. His first big win came in the uranium boom. He led Energy Metals Corp from a $10 million junior exploration firm to a $1.5 billion acquisition. His next major project was Potash One. This company had a similar story. It went from a small potash junior explorer to a $434 million takeover by German potash major K+S Group.
For his role as director, Matysek was afforded 200,000 options at fifty-nine cents per share. But he wasn’t given a free ride. Matysek also put in $500,000 of his own money into the company. In a financing arrangement, which closed on Jan 11, 2012, it appears that Matysek took down the majority of the entire private placement. He received one million shares and a half million warrants (exercisable at $1.00 per share).
In addition to the rare position of top management putting up their money at later stages in development, NMC has a massive level of insider ownership.
NMC’s CEO and its COO both work with South Korea’s Dong Won Resource Group. Dong Won has decades of experience in natural resource project acquisition, development and production. It produced coal in South Korea, oil in Argentina, gold and natural gas in Bolivia, iron in South Korea, and, most recently, moly through NMC Resource.
Dong Won has led the creation and structuring of NMC since its founding in 2009. Dong Won currently owns 60% of all outstanding shares on a fully diluted basis.
On top of that, KTB is a major Korean investment fund. It owns 19% of all issued and outstanding NMC Resource shares.
Why are all the big money/ultra successful resource investors buying in?
A quick look at NMC Resource’s projects shows why.
A Tale of Two Projects
NMC is made up of two projects. One is currently in production. And the second is much bigger and has a lot more potential.
First, NMC’s Moland Mine has been in production for more than 18 months. Its production has steadily increased over that time. It has gone from producing nothing at the start of 2010 to now producing more than 875.9 tonnes per day (tpd) or approximately 1M lbs of Molybdenum a year.
In all, it produced 202.3 tons of moly from July to September of 2011 (the last period official numbers are available for). That’s a total market value of more than $5.65 million worth of moly at current market prices ($14 per pound).
Now, assuming NMC does not increase production to the 1,000 tpd capacity of its mine and moly prices do not go up (two things which are unlikely, but we’re looking for worst case situation here), that’s more than $22 million per year of moly production. At an average cost of production of $7 per pound, that leads to cash flows from operations of just over $11 million per year.
That’s huge for a company with a mere $18 million market cap. But it’s just the start of the NMC story.
The big upside potential is in the future development of NMC which will be driven primarily by its Boss Mountain Mine project in British Columbia.
The Boss Mountain mine is a past-producing mine previously owned by Noranda Mines. The mine, originally discovered in 1917, has a long history of production. The mine operated successfully for more than 20 years starting in the 60s and ending in 1983.
The reason it was able to successfully operate during a relatively average time in the moly market is because it was such high grade moly. The average production grades over that period were from resources grading 0.189% Mo (0.315% MoS2) to 0.26% Mo (0.43% MoS2),
Now that NMC has right to earn 100% interest in the project, it has the potential to tap into the known historical resources with modern technology. And if it was successful when moly prices were $2 to $3 per pound, just imagine the economics when moly is $14 or more per pound.
Now, these projects have proven economical at current moly prices of about $14 per pound. And with NMC’s market cap of about $18 million, there is a lot of upside potential. But here’s the kicker when it comes to moly.
The Great Moly (Re)boom
Also, what’s underway in the moly industry has investors to make fortunes of all over again. Just look at what’s going on.
Moly prices have been on an incredibly volatile ride of the past couple of years.
After spiking in the middle part of the last decade, they have absolutely collapsed:
Since the collapse a new uptrend has formed with just as much upside as there was back in 2005, the last time mol prices reached $14 per pound.
But here’s the problem with the whipsaw in moly prices over the years. The sharp fall-off has caused investment in moly to trail off significantly since 2008.
Research firm Roskill puts supply side of the equation in doubt. The underinvestment in moly in 2009 and 2010 will significantly cut into supplies.
While the supply side looks dreadful for moly, demand is only growing consistently.
The International Molybdenum Association sees consistently rising demand throughout the rest of the decade. Its forecasts have average moly consumption increasing 6% per year through 2019.
The surging demand is coming from energy infrastructure including nuclear power plants, pipelines, and other sources.
For example, it takes an estimated 400,000 pounds of moly to make the stainless steel and high quality alloys necessary to operate a nuclear reactor. There are currently 60 reactors under construction around the world and another 280 planned. Even if none of those planned reactors ever break ground, there’s still going to be a large demand for moly from current construction projects – a level the moly industry is ill-equipped to meet at this point.
On top of that, there’s even more moly needed to complete oil and gas pipelines and refineries around the world. Consider this. About 2600 pounds of moly are used in each mile of pipeline. There are currently about 50,000 miles of pipelines planned or already under construction. In all, that’s demand for an additional 130 million pounds of moly.
That’s on top of the hundreds of millions of pounds of moly used in construction steel, ship building, stainless steel, and other industrial sectors, which have been recovering strongly since 2008.
A Bright Spot in Dark Market
It’s all coming together for NMC resources at the right time.
The TSX Venture Exchange has an incredibly tough year in 2011. The market fell more than 40% from peak to trough. More than 90% of junior exploration stocks were down during that period.
Despite the disastrous market conditions, NMC was one of the few bright spots.
NMC shares surged more than 60% during one of the toughest markets for small and microcap junior miners:
The performance against significant headwinds is a testament to the value of the company. And still, despite its rise, it’s still relatively undervalued.
The Right Mix
In the end, NMC Resources is perfect position to be an exceptional performer regardless of where the overall markets head.
It’s combination of top tier management, large shareholders, sizeable and growing resource base, plan to develop increased value and proven and capable management team, has made and will make NMC Resource Corp (TSX:NRC) one of the biggest development stories of 2012.
From current levels, it’s one of the best values in the market and has already proven its potential in one of the toughest markets. It has done in a tough environment. Just imagine what it will do when the Venture recovers.
Chief Investment Strategist, Q1 Publishing