On April 25th /08 Wellington West Capital analyst Catherine Gignac provided an update on General Moly Inc. (GMO: TSX)
Company Profile
General Moly Inc. is a U.S. molybdenum mining company focused on the development of the Mt. Hope (80%) molybdenum project in Nevada. Strategic alliances with major steel companies are being secured during this permitting and financing stage. Production is targeted for late 2010 at an average life of mine rate of 38 million pounds molybdenum per year. A pre-feasibility study for the Hall-Tonopah molybdenum project in Nevada is pending.
Event
In a note entitled “Two Development and Evaluation-Stage Primary Molybdenum Projects in Nevada” Gignac explains the reasons behind her Buy rating and target price of $13.00/sh.
Takeaways From The Event
Gignac writes “General Moly is an emerging molybdenum producer in mining friendly Nevada. The Mount Hope Project is one of the world’s largest and highest grade molybdenum deposits. Total annual output is forecast at 38 M lbs/year with a targeted start-up in late 2010. Senior alliances include ArcelorMittal and Korean steel maker POSCO, adding third party credibility as well as helping to reduce financing risk.”
With regards to the Hall-Tonopah project, Gignac writes “Assays from 14 of the 19 Phase II holes received to-date compared well with previous grades from 0.08% to 0.11% molybdenum. Exhibit 1 shows a vertical cross-section through the deposit with superimposed traces of four holes (LM-792, LM-793, LM-827, LM-829). Intersections up to 1,098 ft grading 0.214% molybdenum (LM-792) confirm continuity of the mineralization. The 19 infill holes totaling 25,405 feet initiated in September 2007 were spaced at 100ft to 150ft. To-date, 71 diamond drill holes have been completed. Anaconda and Cyprus Minerals mined the Hall-Tonopah deposit by open pit from 1982-1991, producing approximately 50 million tons grading 0.11% molybdenum (110 M lb). General Moly estimates the companies left 150 million tons of material at about 0.10% or 300 M lbs in-situ. Based on historical compilation and drilling to November 2007, management estimated mineralization totaled 433 million tons grading 0.071% molybdenum. The pre-feasibility study is expected April 29th, and should include a resource estimate as well as preliminary mine economics.”
The Mount Hope project which General Moly owns 80% of, contains 1.3 billion pounds of Proven and Probable reserves. Implementation of the feasibility study schedule and controlling the capital budget is expected to be challenging, as it is with all industry players, especially in the current climate of rising costs of commodity-based construction components. Two shovels have been ordered with delivery planned for May and October 2009. A gyratory crusher, SAG and ball mills were ordered in October 2007 with anticipated delivery in Q4/09. Receipt of all major regulatory permits is expected by Q1/09 in order to commence construction for a production start-up in late 2010. All water rights sufficient for full production were received in January. The company submitted an application for an air quality permit in Q3/07 and the water pollution control permit is on schedule to be submitted by Q1/08. Environmental studies were started in 2005 and a draft Environmental Impact Statement is anticipated shortly. This marks the start of a one-year public comment period. Permitting the proposed 46 M lbs/year molybdenum roaster in Nevada is anticipated to be a hurdle for the company. However, management comments that SO2 emission levels from the proposed roaster of 70-75 tons per year, are amongst the lowest emission levels of comparable roasters in Nevada.”
Commenting on General Moly’s strategic relationships, Gignac writes “Demand for
the projected molybdenum production from the Mount Hope mine is high. The world’s largest steel producer, ArcelorMittal S.A., signed an offtake agreement for approximately 6.5 million lb/yr of future production and separately acquired 8,257,000 shares of General Moly for $8.50/share ($70.2 million) in November 2007. Coghill Capital Management received a one-year “finder’s fee warrant” to purchase one million General Moly shares at $10.00/share, exercisable once production financing for the project is secured. The third largest steel producer, POSCO, acquired a 20% interest in the Mount Hope Project for $170 million, payable in three installments.”
Laslty, concerning the company’s management, Gignac writes “Two new independent directors were added earlier this year adding mining, processing, marketing and global business experience to the board. The management team was created last year and includes environmental, financial, investor relations, project development, business development, marketing, engineering and construction – all critical positions required for a major industrial project such as Mount Hope. The EPCM contract was awarded to M3 Engineering in January 2008 and the project team to-date covers mining, engineering, processing, metallurgy, maintenance, electrical design, and instrumentation and controls – quite a feat to achieve in today’s competitive industry.”
Valuation and Target Price
With regards to valuation, Gignac writes “The POSCO transaction valued Mount Hope at
$850 million, giving a market value of $680 million or $8.22 per diluted share for General Moly’s interest. This compares to the NPV from the feasibility study of $1.75 billion or $16.93 per diluted share for General Moly’s 80% interest. This is 87% higher than the current share price and excludes any value for the Hall-Tonopah Project. The Hall-Tonopah Project pre-feasibility study is expected to be released shortly with a management conference call planned on April 29th.
The total net present value at a 10% discount rate is $1.32 billion or $12.73 per diluted share (after financing). About 90% of the value is from the Mount Hope Project ($11.47/share) and $126 million or $1.22 per diluted share is currently attributed to the Hall-Tonopah Project. There is good leverage to molybdenum with a 16% change in the NPV on a 10% change in our price forecasts. Our target is based on the NAV with no premium at this stage, but we believe this could change as production nears. Post warrant exercise, cash now totals about $123 million. The shares are recommended as Buy with a target price of $13.00 per share."
Investment Risks
Without limitations, some of the risks include reserves and resource risk, development risks, permitting risks, off-take agreements, commodity price risks, geo-political risks, exchange rates, weather related impacts etc.
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