More Woes for Moly Market Darling
By Jon A. Nones
14 Nov 2007 at 03:57 PM GMT-05:00
St. LOUIS (ResourceInvestor.com) -- The world's No. 5 molybdenum producer, Thompson Creek Metals Company Inc. [TSX:TCM], reported last night that a slide has interrupted operations at its 75%-owned Endako Mine in northern British Columbia. This is the second bit of bad news in a week for shareholders of former Blue Pearl Mining.
Shares hit a low of C$19.40 after the news, but have since recovered to C$21.25 on TSX. The stock is off 10% since Friday’s close and 17% from October’s high of C$25.58 - a 52-week high. However, important to note shares have gained 116% since the start of 2007.
Thompson Creek said the slide occurred late in the evening of 12 November at the east end of the south wall of the Endako Pit, partially burying a shovel that was mining ore. The operator sustained “only a minor injury” in the slide, but operations in the pit remain shut down to assess the situation.
“Management is currently evaluating the situation and will release details of the slide's impact as it becomes more certain in the weeks ahead,” the company said in a statement.
Slides have happened at the mine in the past, but the company said it had performed remedial work to prevent a long-term interruption of operations. The mill at Endako will continue to operate, using ore currently being mined from the Denak West Pit, as well as from the mine's stockpile of ore.
“However, the production rate, grade and recoveries at the mill may be affected,” noted the company.
The ore grade at the mill averaged 0.06% Mo in the first 10 months of 2007. The Denak West Pit average grade is 0.065% Mo. The stockpile totals 20 million tonnes of ore, which is equivalent to two years production at Endako, with an average estimated grade of 0.039% Mo.
Thompson Creek recently announced the results of the feasibility study on the proposed mill expansion at Endako Mine. The study estimated a cost of C$373 million to increase output to 50,000 tonnes of ore per day from the current 28,000 tonnes per day, but does not include costs related to new mine equipment for sustained operation at current rates.
The company said the expanded facility could be fully operational by the second quarter of 2010 and would involve an increase in annual molybdenum production at Endako to approximately 16 million pounds beginning in 2010 from the current 11.2 million pounds a year.
Wayne Cheveldayoff, Director of Investor Relations for Thompson Creek, told RI that the slide would not affect the mine expansion timeline or costs. He said the company was already scheduled to leave the area in a year and the shut down is a “very short-term think.”
In a research note on Wednesday, John Redstone, an analyst at Desjardins Securities, estimated that if Thompson's share of Endako production were to fall by 1 million pounds in the fourth quarter, the impact on earnings could amount to 10 cents a share.
He forecast the company to earn 43 cents a share in Q4 before any impact of the rock slide, maintaining his forecast for 2007 earnings of $1.48 a share, $2.61 a share in 2008, and a one-year price target of C$30.60.
In a research note published on 12 November, analysts at UBS maintained their "buy" rating on Thompson Creek, but reduced their 12-month target price and earnings per share forecasts for 2007 and 2008.
The analysts moved their 12-month price lower from C$28 to C$27 and reduced earnings per share estimates to $1.73 from $1.58 in 2007 and $2.78 from $2.94 in 2008 due to lower production forecasts in both years.
On Nov. 9, Thompson Creek reduced its molybdenum output forecasts for 2007 to 18-17.5 million pounds from the original estimate of 21 million pounds. In 2008, the company expects its molybdenum production to be in the range of 24-25.5 million pounds, versus a previous estimate of 27 million pounds.
“The second half of 2007 is a transition period for the company as molybdenum production has been lower than what we achieved in the past and substantially below the level we will be able to achieve in future years,” said Kevin Loughrey, president and CEO, in a statement.
Production at the company’s 100%-owned Thompson Creek in Idaho is expected to be in the range of 10-10.3 million pounds this year, while the company's 75% share of Endako's production is expected to total between 7.5 million-7.7 million pounds. The company attributed the drop to lower-grades at Endako and a change in the mine plan at the Thompson Creek Mine.
“The shift from lower-grade ore to higher-grade ore was expected to occur in 2007 but now the mining of some of the lower-grade ore has been shifted into 2008,” the company said.
However, the company estimated production to exceed 34 million pounds in 2009, up from a previous estimate of 29 million pounds for that year, without including any potential output from the company's Davidson deposit.
The Davidson project near Smithers, B.C., contains Measured and Indicated resources of 293 million pounds Mo at a 0.20% cutoff. A feasibility study of the Davidson Project is currently being prepared by external consultants and is expected to be completed in 2007.
Moly Market Analysis
Molybdenum is mainly used as an alloy to strengthen iron and steel, increasing the melting point and enhancing resistance to corrosion. It is a vital component in the making of stainless steel and oil and gas pipelines. China’s growth is expected to keep demand for both at record high levels.
Statistics from the U.S. Geological Survey show world-wide molybdenum consumption at an apparent 44,500 tonnes (although reported figures are only 19,300 tonnes). Consumption has increased 25% since 2005 and 84% since 2004. On the supply side, mine production came in at 60,500 tonnes last year, up only 2,500 from 2005.
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| Source: Roskill Information Services |
About 60% of molybdenum production is a byproduct of copper mining, with only five major producers: Kennecott (owned by Rio Tinto [NYSE:RTP]), Grupo Mexico (state-owned), Codelco (Brazilian state-owned) and Phelps Dodge (now Freeport McMoRan [NYSE:FCX]) and Thompson Creek.
Ivan Herring, a consultant on industrial metal sourcing and associated risk management for end users, told listeners at this year’s Hard Assets Conference in Las Vegas that a supply crisis could be on the horizon unless new mines are brought on rapidly.
He said current demand is strong and that the expansion of uses for molybdenum may cause even the current high demand to increase substantially in the near term. Therefore, any disruption in the supply, such as Thompson Creek’s reduced production, could create a market squeeze.
Molybdenum is currently priced at $32.50/lb. In 2007, the molybdenum price has held firm in the $25-$32 range, well above the 2006 average price of around $25/lb.
Thompson Creek Experiences Difficult Q3, Expects to Miss Production Target by 5%
By Laura Bobak
13 Aug 2007 at 02:25 PM GMT-04:00
TORONTO (CP) -- Thompson Creek Metals Co. [TSX:TCM] says it's experiencing a ''difficult'' third quarter that will result in a reduced full-year production target, although the molybdenum miner expects output to rebound in the fourth quarter.
The company, one of the world's largest publicly traded molybdenum producers, saw its shares rise by about 8.3% on the TSX in midday trading Monday, by C$1.50 to C$19.50, after the stock closed down 80 cents Friday.
CEO Kevin Loughrey told analysts in a conference call Monday that production will soon improve.
''Thompson Creek (mine) has been, as predicted, in something of a transition stage,'' Loughrey told analysts.
The production decrease is partly due to a slowdown at the company's Thompson Creek open-pit molybdenum mine and mill in
Production is expected to pick up in the fourth quarter when the company proceeds to the next phase of its mine plan this year. The company is currently processing ore from stockpiles with variable ore grades until it can implement the next stage.
Loughrey said the company's previous production target of 21 million pounds of molybdenum in 2007 ''looks unlikely'' and said the company will likely be miss that by about 4% to 5%.
''It's very difficult to predict,'' he said.
Company officials said the firm's strategy in the second quarter included buying molybdenum and reselling it at a higher price.
Loughrey also said the company is planning to reduce its debt to a more manageable level of about C$200 million this year.
Profits reached almost US$57 million in that quarter on revenues of $248 million, partly as a result of rising molybdenum prices, the company reported Friday.
Thompson Creek which reports in U.S. dollars, said the net income translated into 45 cents a share in the second quarter. That beat analyst consensus estimates of 34 cents per share.
In the 2006 period, the company lost C$2.8 million or six cents per share, but was still in a developmental phase.
Analyst John Redstone, with Desjardins Securities, rated Thompson Creek a ''top pick'' in an Aug. 13 note to investors and attributed the company's good second quarter results to lower than expected costs and higher than forecast molybdenum prices.
Redstone said the price of molybdenum rose sharply in the second quarter from the mid US$20 level to more than US$30 per pound.
The company realized a price of $29.50 per pound in the second quarter, and Redstone said a US$1 per pound change in the molybdenum price alters the company's annual earnings by about 10 cents per share.
Redstone said the slowdown at the Thompson Creek mine in the second half of this year may be partially offset by the higher molybdenum prices realized recently.
Thompson Creek, formerly Blue Pearl Mining Ltd., has 700 employees. The firm owns the Thompson Creek open-pit molybdenum mine and mill in
A Wardrop Engineering study concluded that reserves are expected to be 276 million tonnes of ore, with an average grade of 0.085% molybdenum disulphide, containing 310 million pounds of molybdenum at US$10 a pound.
The previous reserve estimates and mine plan extending to 2013 for Endako assumed a long-term molybdenum price of just US$3.50 per pound and included 2.5 years of milling low-grade stockpile material.
The company has a mill and roasting facility in northern
Thompson Creek is also developing the Davidson high-grade underground molybdenum project near Smithers, B.C.
Loughrey said he expects production to start up there in late 2008, with more significant operations ramping up in 2009.
''We think things are proceeding well at Davidson,'' he said, adding delays are the results of a shortage of third-party consultants, who are in huge demand as the mining sector booms. ''We're seeing the light at the end of the tunnel there.''
Loughrey also said the company is planning a listing on the New York Stock Exchange later this year and already has a ticker symbol reserved.
Moly Mines Ltd. (MYMNF.PK) shares were up 35% Friday morning after the miner announced that the final feasibility study on its Spinifex Ridge molybdenum-copper project in Western Australia is expected to be released shortly.
Once the feasibility study is complete, Moly Mines will move directly into project implementation, including certain construction activities and the organizing and structuring of financing for the mine, according to a statement.
The company also said it is considering the possible 50% expansion of the mine from the initial base case pf 15 million tons per year to a possible 25 million tons per year. (14-July)
James Finch submits: The high price of molybdenum may finally take the Ruby Creek molybdenum deposit the final steps on its way to becoming a mine. By then, it will have been about 40 years since it was first discovered, and another 30 years since it was nearly ready to become a mine.
But, it may be more than the high price of molybdenum which could officially make Ruby Creek one of Canada’s newest molybdenum mines. Perseverance by Larry Reaugh, executive chairman of the Adanac Molybdenum Corporation (AUAYF.PK), who with a bit of luck and 44 years in the mining experience – not to mention of few mines he’s brought home, all add up to what it takes, these days, in pushing a project through to completioWe talked to Larry Reaugh over three telephone interviews to find out how he got this far and what steps he needs to take to bring Ruby Creek to her final destination: a moly mine producing some 14 million pounds of molybdenum every year.
Project Summary
The Ruby Creek Molybdenum Deposit is a low-grade bulk type of molybdenum deposit located, at the headwaters of Ruby Creek in the floor of an alpine cirque. It is located about 22 kilometers northeast of Atlin, British Columbia; 124 kilometers southeast of Whitehorse, Yukon Territory in the extreme north western corner of British, Columbia, Canada.
StockInterview: How did you get started in molybdenum mining?
Larry Reaugh: I started in the early to mid-nineties exploring for molybdenum. My background was with Bethlehem Copper (since acquired by Teck Cominco), a fairly major mining corporation at the time, which did a lot of exploration for copper and molybdenum in the 1960s and 1970s. I started in the engineering office, worked my way up into construction as a chief surveyor and then assistant to the manager. So, I worked closely with the engineering firms and contractors that were doing that infrastructure build-out. Later, I worked as a safety engineer there for a number of years.
StockInterview: How did you acquire the Ruby Creek project?
Larry Reaugh: It was being in the right area at the right time and being lucky. I’d like to say this was due to my experience in molybdenum for the previous seven years. But in 2000, I had needed properties of merit for two of my companies, and I was looking at tungsten. While researching tungsten, I found two significant tungsten occurrences that had past production. We staked those and took half of the Adanac open pit. We didn’t even know it was open. Then, we staked the rest of it. Everybody told me to throw the shirt in – this was back in 2000. Those who had the property were unable to maintain it. So, it came open. That got rid of royalties accompanying the property – that was a big plus! We own it 100 percent, no royalties whatsoever on the property, which is a big plus. Previously, the property had been burdened with a 3.5-percent net smelter return [NSR] to Johns Manville.
StockInterview: What’s the background on the Ruby Creek property?
Larry Reaugh: Kerr Addison, a subsidiary of the Noranda Corporation, took the property on so they could earn a 60-percent interest for bringing it into production. They had to contend with the 3.5-percent NSR, but they were also trying to do this when molybdenum was selling at $1.80/pound. Eventually, they dropped the property. Placer had a base metals business as well as gold mining. They took this to a stage two feasibility whereby they were in the permit stage. They held public meetings, answering questions for 18 months, and by that time, molybdenum slipped back to $6/pound. Placer put it on the shelf and eventually went out of the base metals business. We restaked the property and expanded the ground.
StockInterview: What led you to expand the ground under your control?
Larry Reaugh: Once we got the footprint of the mine, we made sure we had a good buffer zone all around it. When I talk about the footprint, I’m talking about the concentrator, the open pit, the tailings, the waste dumps, and the drainage ditches. Anything that’s significant to developing a deposit.
StockInterview: When you acquired the property, during a period of depressed molybdenum pricing, what did you believe your costs would be?
Larry Reaugh: Looking back at the older numbers, we thought it might be around $3 to $4/pound. The bankable feasibility is now pointing to US$5.87/pound. It’s interesting in that Blue Pearl, which recently purchased the Thompson Creek’s molybdenum operation, and our property had similar grades and costs. It was very gratifying for us working in the dark with our engineering groups, or our engineering groups working in the dark, to have those similar grades and similar costs.
StockInterview: Is it realistic that you can raise C$450 million and bring the Ruby Creek molybdenum project into production?
Larry Reaugh: The bankable feasibility is saying it should go into production. The payback would be three years, based upon a sliding scale of molybdenum from US$22 dropping to $15 over the first five years. We feel that’s conservative. We have a much stronger outlook on molybdenum, and this outlook has been really reinforced in recent years. A 20-percent increase in reserves and grades would reflect in the payoff period, bringing it down to twenty months.
StockInterview: Let’s set the record straight now. How big is the Ruby Creek deposit, how much is it worth and does your deposit pass muster with the U.S. Securities and Exchange [SEC]definition of reserves?
Larry Reaugh: The bankable feasibility gives us reserves. It is a reserve. It’s passed muster. I can actually tell you it’s worth US$4.2 billion and, with a possible 20-percent increase in grade, it could be worth over US$5 billion. With this increase in grade, costs could drop to US$4.70/pound. There are 167 million pounds, of which at least 100 million are under measured and indicated. We could probably go down to $US8/pound and still make some money with cost sliding down to $7/pound. But that would be a dramatic drop in the molybdenum price, and I think that would probably kill every molybdenum project out there.
StockInterview: What is your major hurdle in selling institutions on your Ruby Creek project?
Larry Reaugh: It is convincing them that there is a substantial argument for the molybdenum price maintaining. The major problem is the molybdenum price has a volatile history. Most people are afraid of that, but the longer-in-the-tooth this price remains, the more confidence is going to come into the market. Our major hurdle is to get over that feeling of moly ‘falling off the map.’ I think most people don’t see what is happening with molybdenum. A lot of moly will be required to build nuclear power plants because of the corrosion. As uranium demand goes up, it can only benefit the moly story. You can reduce the amount of steel required in pipelines. New pipes are being developed with molybdenum, but have half the weight of the old pipes. You can see the way oil and gas pipelines are going to go. You can reduce the amount of steel that’s required. It is already in the automobile industry, where we want high strength for safety and lighter vehicles for fuel savings. You can probably see this going into the rail lines and for ship building.
StockInterview: Tell us about your recent drilling and why you are excited about this.
Larry Reaugh: Recent drilling is telling us there actually another deposit west. First off, we needed the sample to get a molybdenum concentrate to go to other companies that are off-taking our material. They have to know the specs, and we had to produce a concentrate. We had to drill for it, send down a ton of core and run it through the laboratory, G&T Metallurgical Services (Kamloops, British Columbia). We got a 92.5 percent recovery doing that, which is 3.5 percent greater than the bankable feasibility at 89 percent. This is a huge plus for us – greater recovery and a coarser grind.
StockInterview: What else did you discover during the angle drilling?
Larry Reaugh: Going at an angle into the ground, drilling is not only cutting the flat line veins, it’s cutting the vertical. What we found now was that we got stock works – something like a spider web. It gives you greater continuity in the project. The greater the continuity, the greater the confidence in your ore body. Out of the 283 holes drilling in this project, 270 of them have been vertical. We weren’t getting a good picture of what the vertical veins looked like. From these 13 angle holes that we drilled, the results were a staggering 75 percent higher at 0.139 percent. Previously, we got 0.79 percent from the high grade pit area. We are looking somewhere between ten and twenty percent increase in the total reserve volume. It would mean the cost per pound of moly dropping from $5.87 to $4.60/pound.
StockInterview: How many pounds per ton do you think you will be able to recover from Ruby Creek?
Larry Reaugh: At 0.79 percent molybdenum, which is what we recover, it would be roughly 1.7 pounds, except for the first five years where we could recover 0.84 percent/ per ton. In the final concentrate, this would translate to 1.66 pounds of recoverable moly per ton.
StockInterview: But critics point to your lack of infrastructure, specifically the lack of power lines. Will you be using diesel?
Larry Reaugh: It is expensive and probably adds somewhere close to $1.50 to $2/pound to our cost. That hurts, but in order to make this project happen. There’s actually power within 90 kilometers of this property, We discussed bringing it down, but power companies in Canada and especially in the Yukon have been bit before. They bring in power lines, and then the project doesn’t go ahead. The territory is stuck with the cost. So, they want to see concrete in the ground. They want to see you turning the mill over. And then, they would seriously consider bringing the power down. We will be running with diesel for three or four years. Hopefully, we will be able to get the power lines permitted and have the provinces in the territory bring it down to the site. There is actually a hydroelectric dam, within a few kilometers from our site, the native group is putting in. That would allow them to expand from two megawatts to ten. They could tie it into a grid and sell it to us.
StockInterview: What is the status of your permit?
Larry Reaugh: We are about 60 percent of the way through our permits. We are still shooting for the end of this quarter to have them. We want to be in construction in June of this year. We put together the operating team. There will be more announcements on who we’ve hired: well-known mining specialists in the industry, operators, builders and so on. We are preparing this company to hit the ground running this summer. During the peak of construction, we’ll have up to 1000 people working for us. We will have to pull from all over the province. This is going to benefit the province. It’s going to benefit the people of Atlin, and it’s going to benefit the Taku River Tlingit [TRT]. They will be able to become self-sustaining as a group through this large activity of ours. We will train and employ their people and encourage them to set up sub-contractor companies. It’s the same story in the entire industry – we’re all competing for miners.
StockInterview: You have this much confidence in this project?
Larry Reaugh: This is a project that’s never been glamorous. It’s a work horse that you can use to build a company, or it can be the start of a company builder. I think the cash flow will always be predictable. You would be able to predict recoveries, to predict your grade. It’s not erratic to put it simply. It will employ about 225 people full time. It’s a project that’s needed in an area in which the population is dwindling.
StockInterview: Run us step by step through the construction process. What are you first constructing?
Larry Reaugh: The concentrator itself – that’s the major thing – get the foundations for the concentrator. We’d start pre-stripping although that wouldn’t be something that has to be done immediately. Clearing the site, building out the site, drilling and blasting the foundations and then setting up the cladding of the building so that we can work on this year around. Of course, setting up camp, moving into the camp, setting up the sewer and water systems and all those little things that you never think about that costs a lot of money and have to be done.
StockInterview: When do you actually getting around to building out the mining operation?
Larry Reaugh: Well, we construct all winter. Then we would begin the build-out on the tailings pond, and we would start pre-stripping. We’ve got about 10 million tons to pre-strip. By the way, on our five-year plan, once that’s done, there would be no strip ratio. There would just be ore to haul so our costs would be down considerably on that. The pre-strip would cost $15 to $18 million.
StockInterview: Where does most of the C$450 million get spent then?
Larry Reaugh: That would be included in the concrete, construction workers – we would have about 125 on site at that time. Steel, laying pipe and getting the electrical started. All these things come with a big concentrator. 20,000 tons is a fair-size concentrator.
StockInterview: When will Ruby Creek commence production?
Larry Reaugh: We will be in production with the commissioning, which is sort of production. It will be low grade material at that time in order to get your recoveries up, your grind rate and everything like that. There are always a few things that have to be worked out that you don’t want to do with the better grade material. We’d be in full production in the beginning of the first quarter 2009, probably commissioning through the last quarter of 2008.
StockInterview: By 2009 or 2010, won’t you be competing with Climax’s primary moly production and a number of other companies producing copper as a by-product?
Larry Reaugh: To be honest, I don’t see where the moly supply is going to come from. As far as I can see, it is receding. Climax would be one of the closer ones coming on. I don’t think they’ve made the decision yet, but they have torn down the old infrastructure. They are out for a bankable feasibility right now. Climax would bring 20 million pounds, but we also look at the Henderson being ramped up for the last three years. Every year it’s been ramped up to produce more. This will start to recede over the next three years. Codelco is down from about 11 million pounds and it could go down to eight or nine million next year. Highland Valley is down from about 10 million pounds. They boosted it up by the high grade of their moly, and they are down to half of that. Bingham Canyon is sliding continually. By-product production is starting to slide.
StockInterview: Won’t you need more than one company involved in writing Adanac a check for C$450 million?
Larry Reaugh: We are talking to refineries and steel companies. I am sure there is going to be sort of mix of some steel companies that will be involved in the strategic partnership on this. It will be two or more because their needs are individual. They don’t need a full-fledged operation. Some also have long-term contracts.
StockInterview: How much of the project will you have to give up to bring this to fruition?
Larry Reaugh: We are shooting for around 25 to 30 percent of the project. We’ll do what’s necessary to make this project work. I’ve been in the mining business for 44 years now. I know how these deals come together, and my board has got umpteen experiences on joint ventures, and strategic partnerships. We want to put it into production. It’s not to say that once the permits are issued that there couldn’t be some predatory interest out there. When you lay it out on the table, $300 million after costs in a year is a lot of money.
StockInterview: How much more will the company shares become diluted to get to your goal?
Larry Reaugh: We are going to have to put up an equity position that could be anywhere from $60 to $100 million. We expect there will be dilution. Through events we are working with now, we expect the price will increase and we can cut that dilution back. But, I think we would be up to a minimum of 100 million shares, maybe as high as 120 million by the time all is said and done.
Second Opinions
We solicited comments from two industry experts about the Adanac Molybdenum Corporation: Otto Spork and David Michaud. One of Canada’s top investment funds in 2006, Otto Spork’s Strategic Opportunities Hedge Fund was an earlier investor in Adanac. David Michaud is our consulting metallurgical engineer. He neither holds an equity position in Adanac nor was he paid to render his technical opinion on the metallurgy of this deposit.
According to metallurgist, David Michaud:
“Adanac Molybdenum Corp has a rare case of Text Book Molybdenum Metallurgy 101. It has a super coarse Endako Mines-like primary grind, flash rougher flotation and relatively strong regrind requirements. This makes for a nice clean Moly concentrate. An asset like this, once licensed in Canada, could attract attention from several mid-tier mining companies looking for metal reserves in politically safe countries.”
In a brief telephone interview with Otto Spork, who was traveling in Europe, we were told:
“We are still very bullish on moly because demand is far exceeding supply and industry is finding more uses for the metal. We believe the price is going to slowly creep up. We like and are very bullish about Adanac. Larry Reaugh is very astute and has put properties into production. He’s been in mining for nearly 40 years. We consider Adanac very undervalued. It has recently gone off the radar screen because of Blue Pearl Mining. Adanac’s properties can be very profitable and are well on their way to getting permits to go into production.”
For the utilities hoping to obtain nuclear fuel for their reactors, a rising uranium price and lessened available SWU capacity to meet their needs exacerbate the worry about whether or not the nuclear renaissance can be realistically sustained. For molybdenum, soaring stainless steel and super alloy demand helps keep the silvery metal well above the actual production costs to mine it. Plans for building more pipelines with stronger anti-corrosive properties adds a sexy energy twist, spicing up what Raymond James mining analyst Bart Jaworski calls a boring story.
With uranium, there is excitement because a very small number of new near-term producers recently signed contracts to sell future U3O8 production with escalating floor price protection, or simply sold production at/near the record uranium price. Obviously, they benefit, and so do their shareholders. For uranium companies hoping to produce within the next five to six years, higher prices are likely to attract deep-pocket joint venture partners to bring their mines into production, or to further their development activities. Or simply to raise more cash for their treasury by selling shares at a price they might never have imagined possible two years ago. To the physical uranium speculator, it has provided a double-, triple-, or higher-digit ‘paper return’ on an investment.
The point of rising metals prices was to encourage new production in the respective sector. In the case of molybdenum, the metal’s price is pretty much dictated by a relatively small number of western hemisphere copper producers, such as Phelps Dodge (PD), BHP Billiton (BHP), Teck Cominco (TCK) and Chilean-state-owned Codelco. And of course, the eastern hemisphere wild card: China. Molybdenum can be a copper mine’s byproduct, which is basically produced for little or no cost. Aside from a very small number of new near-term primary molybdenum producers, where is the excitement in this sector?
It’s not in the price. In a previous interview with Michael Magyar, USGS molybdenum specialist, he told us:
“The price is now trending anywhere. It’s just drifting around $25/pound.”
Another industry expert agreed the price is likely to stagnate at this new level for a while.
Despite the ranting of some, molybdenum oxide is unlikely to soon return to the May to July 2005 highs circa $40/pound. The price anomaly was just that – an industry caught off guard too quickly and producing too little. And which within a six-month period caught up with itself. Similar to those projects we have been investigating in the uranium sector, those hoping and praying for another supersonic price rise in molybdenum are those backing the more marginal mining projects. After all, if you don’t have economic grades, a parabolic price rise is just the right shade of lipstick for the pig some companies hope to pawn off on the unwary.
Last month, we published “In the Case of Uranium Stocks, Smaller May Be Better". Part of the problem impacting the larger uranium companies, such as Cameco Corp (CCJ) and ERA (Australia) are the legacy contracts whereupon utilities continue to get uranium for less than $30/pound, and in some cases for less than $20/pound. After ERA recently announced record fourth quarter U3O8 production, the Australian media highlighted the Down Under miner had mostly missed out on the record price of uranium because of those long-term contracts.
With molybdenum, the smaller projects may be better with regards to the opportunities investors must choose from. In early November in a two-part series, we interviewed William G. Cook, the North American representative for Derek Raphael & Company – currently the world’s largest molybdenum trader. He advised us:
“I do not believe we will see any of the moly mega deposits developed in the foreseeable future.”
Cook warned of the considerable capital costs, reclamation liabilities and operating costs for the behemoth projects. Instead, he pointed to the smaller, higher grade primary molybdenum deposits. It’s where he sees the future of moly production as a complement to byproduct and Chinese production. His emphasis was on “higher” grade deposits. As with other industry experts we interviewed, it is those lower grade deposits which raise the experts’ eyebrows.
Where Does the Price Hysteria Come From?
Molybdenum strongly depends upon stainless steel production. According to the recently published U.S. Geological Survey, Mineral Commodities Summaries, producers of iron, steel and superalloys consumed 74 percent of the molybdenum mined in 2006. Movements in stainless steel demand can impact the moly price.
Before the holidays, the highly respected MEPS consulting firm forecast higher movement in stainless steel prices. Increasing nickel prices on the London Metal Exchange [LME] during December were cited for the likely higher transaction values for stainless steel into the second quarter of this year.
As of this week, the nickel division of the world’s fourth largest copper miner, Swiss-based mining giant Xstrata [XSRAF], faces a mining strike in Sudbury, Ontario if the company doesn’t come to terms with a union of 1,000 workers, which voted on Tuesday to strike by the end of the month. In a similar type of strike nearly two years ago, copper production dropped by 9.6 percent in a quarter at a Falconbridge processing plant (Xstrata acquired Falconbridge since then).
On Thursday, nickel touched a record $36,050/tonne because of those strike concerns. About two-thirds of the world’s nickel mining is used to make stainless steel. Some analysts forecast stainless steel production to grow by 7.5 percent this year. Concern in the trading markets is the 87 percent drop in available nickel stocks in LME warehouses from a year ago. A bit more than one day’s global consumption is now warehoused by the LME. Clearly, a short squeeze is roiling the nickel market. And that impact could spread as a price panic perception moves into other alloys required by the stainless steel production markets.
But where does one find the substance with regards to molybdenum pricing? The market has tightened up in January because of China’s new export licensing system. That may just be a temporary blip in the trader’s food chain.
In a July 2005 article written for Colorado Central Magazine, author and former molybdenum miner Steve Voynick wrote:
“… there is always concern about the economic validity of price spikes, those sudden, short-term jumps that stand apart from long-term price rises.”
In his article, Voynick argued for the re-opening of the primary moly mine Climax, but he warned about price stability for this metal:
“Historically, moly-market price spikes have shown little stability. Unlike long-term price trends, they are not based so much on true supply and demand as they are on fears of a moly shortage that spur speculative buying.”
During the last moly price boom, primary molybdenum mines produced 75 percent of the world’s supply. Because of the rise of copper prices, the majority of moly production comes as a byproduct of the world’s leading copper mines. Primary producers are now the swing producers, filling the supply gaps when there is increased demand for molybdenum.
We would imagine companies planning to bring molybdenum mines online by the end of this decade carefully study the price trend of copper as well as molybdenum. Australia’s Olympic Dam faces a similar dilemma with their massive uranium forecasts. Should the price of copper not sustain above a certain level, the low-grade uranium might not be economically mined. In this case, BHP could likely spend $5 billion in construction costs to expand the company’s uranium production.
Part of the fidgeting we’ve heard from the emerging moly companies about the metal’s price is not about how much higher molybdenum’s price will rise. Their twitches are accompanied by the anxiety over how economic their projects will remain should moly dive as it has in the past. Previous moly price rallies were sharp spikes followed by mercurial descents. Breathtaking on an historical chart, but not the slap-on-the-knee kind of laugh if one was mining during that era. Jobs were lost, mines closed and assets gobbled up by those less dependent upon the moly price.
Why should molybdenum’s price sustain this time, and why should this chart later look different from the one of the past three decades? Yes, yes, yes, of course we are in a commodity super cycle. But even during a secular bull market there are catastrophic plunges washing out the weaker management teams, the less-well-financed and those with more dubious projects.
Should Molybdenum Sustain at Current Levels?
Current developments in the molybdenum and energy markets may offer strong hope for many of the primary producers proposing or planning projects through 2010. Part of the breakdown during the molybdenum production cycle could come from roasting capacity. We covered those concerns in a previous article. Another comes from more recent research, although we concentrated upon the high-maintenance energy sector in our inaugural molybdenum article, this past July.
Every year, about $37 billion worth of natural gas goes up in smoke or pumped underground to drive more crude to the surface, mostly because of the lack of gas pipelines. According to Hart Energy Publishing’s Pipeline and Gas Technology information center:
“Operators are constructing, planning or studying the feasibility of building some 72,924 miles of crude oil, natural gas and refined products pipelines throughout the world to meet growing energy demand.”
Almost 77 percent of worldwide pipeline construction is to transport natural gas – more than 55,000 miles planned or underway. Under construction or being planned are nearly 14,000 miles of crude oil pipelines.
Intrinsic to the future and more lasting success of these pipeline projects is the emerging trend toward the replacement of Stainless Steel Type 316 with a higher moly content stainless steel product called 6Mo Grade, or 6-percent Molybdenum Stainless Steels. Because of the increased construction of offshore and sour gas pipelines, great resistance to chloride-induced corrosion is required. Stainless steels are basically iron-chromium alloys; the brunt of the protective film comes from sufficient chromium. Type 316 Stainless Steel contains 16 percent chromium and 10 percent nickel and two percent molybdenum.
Increasing the molybdenum content in pipelines might help reduce the number of pipeline catastrophes and minimize the disruption of energy supplies. [Photo courtesy: International Molybdenum Association]Type 316 has broken down when exposed to saline water, seawater or brackish water. Sour gas can have high halide levels (excess benzyl halide and alkyl halide) which can accelerate the corrosion of ferrous metals. The 6Mo grade is 50 percent stronger than the 300-series and has very high resistance to stress corrosion cracking, pitting and crevice corrosion. The higher moly grade is generally found in desalination equipment, flue gas desulphurization scrubbers, chemical processing equipment and oil/gas production equipment.
Here’s the key point with this chemistry lesson. Because of the high nickel price, which is now approaching precious metals status, the authentic structure of the stainless steel alloy can still be maintained, but with lesser nickel and more molybdenum. In other words, because of the tight nickel inventories, manufacturers have begun hunting for substitutes for this metal. In multiple energy-related situations, moly could find its way as a ‘substitution metal’ for nickel in stainless steel production.
Molybdenum strengthens the nickel matrix and extends service temperatures. In the extreme case, the nickel-based Alloy C-276® contains 15 to 17 percent molybdenum and is used for the construction of seawater-based flue-gas desulphurization plants. The higher moly content offsets the highly corrosive combination of seawater and sulfur-laden flue gases. As the major energy companies delve into the crummier fossil fuels, the sulfur content rises, thereby ultimately demanding a greater percentage of the molybdenum component.
From this aspect, there may be merit the molybdenum price can provide some excitement through the end of the decade and perhaps some promise for some, if not all, of the junior molybdenum exploration and development companies. Coupled with the roasting capacity problem, as we discussed in the previously referenced article, this molybdenum cycle offers more hope of longevity than the two previous spikes.
Overview of Potential Primary Molybdenum Producers
A few junior molybdenum developers were brought to our attention during our research in the molybdenum market over the past six months. Not all were included in this overview. We reviewed each and are reporting them alphabetically, not according to their merits.
Adanac
The principal project of the Adanac Molybdenum Corporation [CVE:AUA] is a low grade bulk molybdenum deposit located less than 100 miles southeast of Whitehorse in Canada’s Yukon Territory. Since the early 1970s, the Ruby Creek property has shown promise of, but only of an historical (Non 43-101 compliant) resource of more than 100 million tons with an average grade of 0.16 percent MoS2. The Adanac website boasts of 220 million pounds of Molybdenum, but no mining has taken place since a 1971 feasibility report was submitted on the property.
Various mining companies have proposed mining and milling operations on the property, including Kerr Adison, Climax Molybdenum of BC, Placer Development Ltd and the original Adanac Mining and Exploration company. In a May 2005 NI 43-101 report, using a cut-off grade of greater than 0.10 percent moly, the company reported a measured and indicated resource of 24.2 million pounds of moly.
Adanac Chairman Larry Reaugh optimistically reported in a CBC News interview on January 17th:
“I would estimate that somewhere between 12 and 15 million pounds of moly a year would be produced from that mine for the first five years."
The company is hoping for a partner to put up about $400 million to bring this project into production. Adanac offers a copy of its bankable feasibilities on the company website.
In an email from Ken Reser, a highly respected molybdenum commentator, we were told Larry Reaugh has discussed the company’s Ruby Creek project with at least five major corporations, which Reser reported have approached Reaugh about bringing the project online. Several newsletters have praised this company’s efforts. Reser also consults for Adanac. He also told us the Ruby Creek project is a short while away from permitting.
Blue Pearl MiningThe Blue Pearl Mining [TSE:BLE]company bills itself as “The World’s Largest Publicly Traded Pure Molybdenum Producer” on its website. No surprise there. In December, the company was chosen by Standard & Poor’s/Toronto Stock Exchange Composit Index to join its list of market benchmark companies. The Index accounts for about 70 percent of the market capitalization for companies listed on the TSX.
This past Wednesday, Blue Pearl increased its production estimates over the next three years. By 2009, the company hopes to produce 29 million pounds of molybdenum. Late last year, Blue Pearl bought Idaho’s Thompson Creek moly mine, a 75-percent interest in British Columbia’s Endako mine and the Langeloth Metallurgical Complex in Pennsylvania. This supplemented the company’s Davidson molybdenum deposit, which it also hopes to develop before the decade ends.
Idaho’s Thompson Creek mine is expected to produce more 148 million pounds of molybdenum over its ten-year mine life at an average operating cost of US$3.68/pound. Of particular interest to us is the company’s roasting capacity of 35 million pounds at the metallurgical complex in Pennsylvania, which converts the concentrates to molybdenum oxide. It houses six multiple-hearth roasters required for the conversion process. As the company approaches the 29 million-pound production level, other near-term molybdenum producers may need to look elsewhere to convert their concentrates.
In a Canadian Press interview, the company’s executive chairman Ian McDonald said:
“We think the price of moly looks good here for the next year or two at least - probably longer - because there's been an under-investment in the moly business for the last 20 years.”
We couldn’t agree more with Mr. McDonald, who is nobody’s fool.
Idaho General Mines (GMO)According to the company’s website:
"[Idaho General Mines Inc.] plans to become a major world molybdenum producer with the beginning of mining of Mount Hope in 2009. Idaho General holds the Mount Hope Project in central Nevada which contains one of the largest molybdenum-porphyry deposits in the world, a nearly one-billion ton ore body that will produce approximately 1.3 billion pounds of recoverable molybdenum during its 53-year lifetime. A feasibility study has been completed and the project is now currently being permitted for operations in Nevada.”
This is probably the largest molybdenum property on our radar. We have wondered over the course of various email exchanges with the army of Idaho General Mines proponents (and possibly promoters) whether this property is too big. So far, it has held up to scrutiny. In an email exchange with David Michaud, a metallurgical engineer with whom we routinely consult (and who is also a technical advisor for United Bolero, a smaller molybdenum exploration company), we played devil’s advocate.
Michaud, who is intimately familiar with United Bolero’s property, explained the metallurgy for their Bald Butte moly property in Montana:
“At a flotation feed sizing of about 135µm K80, the liberation of the molybdenite, when assessed in two dimensions, was 56 percent. When compared to similar ores now being processed worldwide, this level of liberation is sufficient to allow successful flotation recovery of most of the molybdenite bearing particles into a rougher concentrate. There is some evidence from mineral fragmentation studies, which suggests that still coarser flotation feed sizings could be used to achieve much the same molybdenite liberation levels; and hence, very similar metallurgical performances.”
He added:
“Liberated grains of molybdenite were 91 percent captured into the final concentrate. Approximately 11 percent of the molybdenite bearing binary composites were captured – predictably these composites contained significant amounts of molybdenite, probably accounting for their enhanced floatability.”
When we questioned him about Idaho General’s property, Michaud gave the tentative thumbs up, stating, “I don’t think GMO will be much different.” He explained the closeology between Montana, where Bald Butte is located, and Idaho would likely carry over, metallurgically speaking. The one question Michaud had concerned the ‘grind size,” which was not found on the company’s website and in our preliminary research. Further investigation would require studying the drill cores. He said, “No drill samples, no DNA.” Which is fair.
In a recent email from someone knowledgeable about the property and its chemistry, he brought up was a conversion plant. He wrote to us:
“Other operations have insurmountable logistics and environmental hoops to overcome, Mt. Hope is located 65 miles to a rail head and proposes to have its own conversion plant, hence – its concentrate is not held hostage by outsourced conversion.”
This is the sticky point for us with respect to Idaho General. By the time the ambitious Mt. Hope project comes online, the Climax molybdenum mine may also be coming back online. If Idaho General proposes to annually mine along the lines of 35 million pounds, and Climax mines 20 to 30 million pounds annually, where will Idaho General roast the moly concentrates and convert these to molybdenum oxide. Permitting a roaster in the United States, we have been told, could be a fool’s errand. As one wag put it, “Hell will freeze over first.” Mt. Hope is big, and the company has begun the permitting process. It would be interesting to fast forward to 2009 or 2010 and find out how the project has been advanced.
Roca Mines Inc.Quietly, Roca Mines [CVE:ROK] is moving forward toward becoming a small-scale molybdenum producer. A hiccup in their plans to mill the moly ore at British Columbia’s MAX deposit and begin selling it, as had previously been announced, was delayed by a few months. The company cited weather-related problems during the construction of their tailings facility. On a positive note, the company plans expanding mill capacity to 1,000 tpd.
In crunching the numbers to determine the value of the rock for the MAX deposit, Michaud concluded, “It’s rich.” Depending upon how the numbers were calculated, this deposit could be worth between US$561/tonne to US$660/tonne. Cost of operations could be as low as $71/tonne to a higher level. Estimated recovery could run between 85 and 90 percent depending on how this start-up mine plays out. On a milling level of 1000 tpd, this equates to about 35,000 pounds per day of moly sulfide concentrate, or about 20,000 pounds of molybdenum oxide per day.
Bluntly said, if Roca delivers on its plan of selling 3 million pounds of contained molybdenum in 2007, and the moly price hovers at the $25/pound level, the company stands to rapidly build its treasury. We interviewed Scott Broughton this past week, which helps provide a better of this company’s plans.
ConclusionMolybdenum might likely be premature in creating the sort of excitement found with the uranium price frenzy and the explosion of junior uranium companies of 2006. There may be some life this year in the moly sector. Most mining analysts are forecasting a slow drifting in the molybdenum price over the course of the 2007 to 2010 period. Some are the same analysts who were cautious in the uranium price outlook before Cameco Corp announced severe flooding at the company’s northern Saskatchewan Cigar Lake uranium mine in the Athabasca region. Since then, the uranium price shows the potential for additional hysteria coming into this New Year.
Molybdenum does not, at least not yet, carry with it the overpowering supply/demand imbalance. However, the current price levels induce the further exploration and development of previously explored properties and especially those which have stronger degrees of deposit delineation from the earlier, but short-lived molybdenum boom.
PANIC among MOLY traders
Record nickel prices are one of the key drivers. Scarce inventory has forced ThyssenKrupp AG, the world’s largest stainless steel manufacturer, to start reducing the company’s use of nickel. Further cuts are being contemplated.
Finnish austenitic provider Outokumpu plans to increase production of ferritic stainless steels. Ferritic steels continue to use molybdenum, but are nickel-free. Outokumpu recently released a low-alloyed duplex stainless steel, trademarked LDX2101, with low nickel content, but balanced with manganese, nitrogen and molybdenum. Allegheny Ludlum began campaigning for greater manganese use earlier this year in stainless steel products.
According to the International Stainless Steel Forum, the fastest growing type of stainless are those grades absent the nickel content, or with lesser nickel in the composition. In a recent article we covered the soaring substitution of super-ferritic stainless steels for copper-nickel and austenitic condenser tubes in nuclear reactors, coal-fired power plants and other power plants.
Plymouth Tube general manager Dan Janikowski told us, “This year, at the pace we are going, we will sell more of this tubing than we've ever sold before. We are working at a record pace.” He was referring to the high chromium, low nickel stainless steel tube called UNS #S44660, which contains 3.7 percent molybdenum.
The S44660 tubing is presently used in Lake Maracaibo’s PDVSA collection towers (Venezuela) and in the U.S. government’s Strategic Petroleum reserves for cooling gas and/or crude when utilizing sea or brackish waters.
This week, Janikowski meets with General Electric (GE) to discuss plans for reactor condenser tubing for nuclear power plants to be constructed for Entergy (ETR) and Dominion (D). Recently, his company won the contractor to supply tubing to China’s Qinshan #2 reactor. He estimated condenser tubing for new power plants can range between 35,000 and 41,000 pounds of molybdenum.
Our research shows there could be more than 1,000 power plants constructed around the world over the next decade. This quantity of molybdenum consumption alone would represent about one year’s of current mining production. China is reportedly constructing between one and two power plants per week.
According to Janikowski and Edward Blessman, technical director of Trent Tube, the major business with respect to the North American power plant market comes from re-tubing worn-out or eroded copper-nickel tubes in the plant’s steam condensers. These come in the form of life extensions for both nuclear and fossil fuel plants. “Two-thirds of our activity is in re-tubing existing plants,” Blessman told us. “Scarcity of water is driving the re-tubing.”
New water rules in Nevada, New York, Missouri, Iowa and Arizona have forced power plants to use treated sewage water as cooling water. Utilities can’t get fresh water to use in cooling their plants. Blessman explained that secondary water, such as waste water, can have elevated levels of hydrogen sulfide, ammonia and chloride. These chemicals punish copper-nickel tubing. The highly corrosive water-environment has driven the replacement for super-ferritic stainless steel tubing. Janikowski and Blessman agreed this trend is expected to accelerate because of lessened water availability.
Nowhere is this scarcity more evident than in the Middle East. They both agreed this region has run out of fresh water and are using sea water or treated waste water in their district cooling and refrigeration.
We spoke with Otto Spork, who had been traveling in Europe. His Toronto-based Sextant Strategic Opportunities Fund was recently ranked the ‘best-performing Canadian fund’ over the past twelve months with 117-percent returns for that period. Spork, who had been traveling through the Middle East to promote his recently launched Global Water Fund, confirmed there was no surplus fresh water left in Saudi Arabia, Bahrain or the United Arab Emirates. He called the situation ‘desperate.”
This has driven more countries in this region to construct more desalination plants – another potential key driver for the molybdenum price.
Another key factor driving the molybdenum demand, according to Blessman, is the growing number of regulations about copper discharges into the environment. Blessman explained, “Federal limits are one parts per million, which is very easy to meet with copper alloy tubes.” But he added, “Localized limits, mostly state driven, could be much more stringent.” Blessman pointed to the 12 parts per billion (ppb) discharge limits recently issued for new permits at three NIPSCo (Northern Indiana Public Service) coal-fired plants which discharge into Lake Michigan. He told us this was reported at the Champaign Electric Utility Chemistry workshop last month. “I know of another plant here in Wisconsin with 45 ppb limits.
What we didn’t realize is the impact of corrosive water on copper-nickel tubing. Janikowski told us, “Condensers weighing 800 thousand pounds at installation weigh about one-half as much because of all the copper discharges over time.” These discharges can eventually pose a danger and/or downtime during the power plant’s operation.
In a paper Janikowski presented at an industry workshop in 2003, he wrote, “The copper can replate on turbine blades, resulting in loss of efficiency, or on boiler tubes, resulting in premature failures. In some North American regions, high discharge levels have prevented the reuse of copper alloys in power plant heat exchangers.”
“Copper-nickel isn’t totally out of use, but the high cost and copper release issues have cut into the amount used,” Blessman told us. “My personal estimate is these are less than 20 percent of the power condenser market these days.” Janikowski agrees, “We know of only one new power plant sited or built in the past ten years in North America using copper-nickel tubing. All of the other new plants have chosen stainless steel or titanium. Some existing power plants are still re-tubing with copper-based tubing but this percentage is dropping.”
Because of the high price of titanium and nine-month (or longer) lead times, stainless is outpacing titanium by four to one for such tubing.
The high price of nickel and the far lower price of chromium are driving manufacturers to rely more upon molybdenum for the improved thermal performance required in many power-related applications. The crossover to secondary water for cooling power plants demands a high level of corrosion-resistance not found in many replacement metals.
Investment Opportunities in Molybdenum Companies
At this time, there are less than a full handful of primary molybdenum producers. The majority of molybdenum production comes as a byproduct of copper mining. A year ago, we forecast the rise of primary molybdenum producers. Shares in companies we began covering a year ago, such as Thompson Creek [TSX: TCM] and expectant producer Roca Mines (ROCAF.PK), have appreciated exponentially.
How much upside is left?
This depends more upon the price of molybdenum than any other factors. A year ago, moly companies were kneeling in their prayer boxes, hoping molybdenum would not sink into the teens. Back then, we argued it would go in the opposite direction. Industry forecasts were less sanguine and suggested we were mistaken.
About eleven months ago we talked with Michael Magyar, the USGS molybdenum commodity specialist about pricing of the metal. He explained, “The molybdenum market usually needs about 10 to 12 weeks of inventory for its comfort level.” That comes to about 60 to 80 million pounds. “The amount of moly floating around right now, in the hands of producers and traders, might be about 10 million pounds.” About two weeks of production.
In November 2006, Magyar told us, “There is not enough excess to rebuild inventories.” Clearly, the moly supply climate got tighter since we began coverage on this space.
In the May 2007 Monthly Stainless Steel Report prepared by Damstahl, the company forecast that molybdenum ore supply is expected to increase by only 12 percent to 460 million pounds by 2009. The Danish stainless steel manufacturer wrote, “The market will remain tight for some time.” This compares with a statement one trader made to American Metal Market magazine in late May, “The demand is there but the supply isn’t.”
On May 29th, the supply got tighter. The recently IPO’ed Sprott Molybdenum Participation Fund [TSX: MLY] announced the purchase of 600,000 pounds of molybdenum.
Eric Sprott, who has been promoting his moly fund in the media, has reached legendary status among Canadians for his prescient investing in the uranium sector three years ago. For example, one of Sprott’s favorite uranium companies, Energy Metals (EMU), announced on Monday it would be acquired by Uranium One at more than 1000 percent from the level where the fund manager began acquiring the company's shares.
We believe Sprott will repeat his success in the molybdenum market.
This past week, Sprott told Canada’s Business Television, “Our view is that moly, which at one time touched $40, could have a very good chance of going back there again.” He believes inventories have been depleted and that demand has already exceeded supply.
One of the molybdenum companies in which Sprott has invested is Roca Mines. We talked with Scott Broughton, chief executive of this company. He agreed with Sprott, “Current demand for concentrates is clearly outpacing supply.” Broughton knows this because his company will be mining and milling at the MAX molybdenum deposit in British Columbia this summer. “We have gotten significant, recent interest from Asian and North American buyers,” he told StockInterview. “Those buyers are both end-users and metals brokers desperately seeking off-take, despite the fact that Roca Mines already committed its production for 2007.”
Some miners are not surprised at the molybdenum price’s strong rally over the past year. Adanac Molybdenum Corp’s (AUAYF.PK) executive vice chairman Larry Reaugh told us, “I’ve been watching the moly story unfold since our exploration days in the mid 1990s. The usual market demand will be further upwardly affected through new usage created by environment, energy and water requirements in emerging economies in Asia, South America and the Middle East.”
Reaugh, who follows the sector like a hawk, believes the molybdenum price will eclipse the previous 2005 highs, as early as this summer. (Top-rated fund manager Otto Spork, mentioned earlier in this article, has molybdenum exposure through his fund’s investments in Adanac.)
Pioneering moly commentator Ken Reser is overjoyed with recent developments in the market place, but insists, “Moly prices have a fair ways to climb yet as more new uses and realities of molybdenum demand present themselves. Reser, who also serves as a research consultant to Adanac, believes molybdenum could become front page news soon, as we have found in the uranium mining market.
But Reser warns, “Many investors are going to be burned by the rainbow chasers and fly-by-nights.” We agree because we’ve seen the number of uranium ‘mining’ companies grow from 30 to more than 400, since we began covering this space. Most lack the technical expertise or deposits required to commence mining operations.
Nonetheless, we anticipate this growing interest in molybdenum mining companies will continue to attract herds of investors. In a recent article we prepared a ‘ratings checklist’ for investors to utilize when evaluating the smaller, and possibly prospective, molybdenum juniors.
There is presently a growing panic among molybdenum traders. From our sources, it appears reduced inventories have been overpowered by rushing demand for the silvery-white ‘energy metal.’
On the day before the Ryan’s Notes metals conference at the New York Athletic Club on Tuesday, our sources told us moly traders are sweating, scrambling to find inventory. One told us, “$50 per pound molybdenum is a heartbeat away.” This would represent an increase of nearly 50 percent from present pricing.
How did this tightly controlled, somewhat secretive and closed market get out of control?
Idaho General Leads Moly Mania
By Ben Abelson
01 May 2007 at 03:28 PM GMT-04:00
CHICAGO (ResourceInvestor.com) -- In the past few months, molybdenum has emerged from a crop of base metals to capture investor interest. Of the handful of domestic pure-play moly names skyrocketing on the recent supply crunch and Canadian ETF listing, Idaho General Mines [AMEX:GMO] has begun to emerge as pack leader.
With a long-lived development project easily worth four times GMO’s current stock price, it’s no wonder investors have put the company’s share on their short list since mid-March.
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Moly Madness
As previously discussed in Resource Investor (see “Moly Plays Spike on Supply Crunch”), the molybdenum market’s been going gangbusters this spring on the back of some strong fundamental supply/demand news hitting the markets. While Blue Pearl [TSX:BLE] has emerged as an investor’s favourite for pure-play molybdenum exposure, Idaho General is quickly becoming another crowd darling.
The company is currently in the process of developing the Mount Hope project in Nevada, which contains 1.2 billions pounds of recoverable molybdenum over a 50+ year mine life.
An initial feasibility study dating from 2005, and internal company estimates, put the project’s NPV at over $2 billion at current ($30/lb+) molybdenum prices. While this is likely subject to the usual underestimation of costs and overestimation of grades common to feasibility reports (especially those that are 2-years old), with GMO’s market cap currently just north of $250 million, there’s still plenty of room for value-creation even with cost revisions.
Indeed, even with more historically reasonable moly prices - say at $15/lb - the company still predicts an NPV above $800 million, making the company worth a speculative investment by anyone favouring moly exposure.
While the startup costs at Mt. Hope are significant (as recently estimated at $600-$700 million), and will likely require a JV or significant external funding, the project’s robust economics (a cash cost of $4-$5/lb moly) make the project value accretive at moly prices as low as $10/lb, according to company estimates this year.
This lack of leverage also gives investors some downside cushion from the extreme volatility present in the illiquid molybdenum markets.
With the stock price currently trading above $6, nearly triple the $2 fetched in early March, there’s certainly no rush to jump into the shares. Still, for astute investors looking for moly exposure, an investment on any non-material market reaction to the downside could be worthwhile.
Key Dates
Apart from the gyrations of moly prices, a few crucial dates in Mt. Hope’s development stand out in the near future. A bankable feasibility study should be completed by late summer or early fall. While we expect cash costs and production costs rise from the prior 2005 report (reflecting primarily higher labour and commodity input costs), so long as the cost spike isn’t wholly unreasonable, the release of this study should elicit further confidence toward the project’s development - and could easily send shares higher.
This being said, a large-scale cost escalation - on the order of 50%-plus - could impact shares to the downside.
With production not slated to begin until 2010, and the current moly cycle (from early this decade) already aging, it’s unlikely that investors would actually look to hold Idaho General very long into its production phase (it’s a fair bet that moly prices won’t remain accommodating over the course of the mine’s 50-year-plus life).
That being said, assuming the underlying commodity prices remain somewhat elevated over the course of the next 12-18 months, it’s very likely that GMO could see strong gains at it reaches crucial development milestones.
With its still relatively small market cap, the shares could be worth a small punt for speculators - with an eye toward holding for upwards of one year.
