General Moly (NYSEMKT:GMO) announced the U.S. Bureau of Land Management on November 16, 2012, issued a Record of Decision for the Environmental Impact Study authorizing development of the Mt. Hope Project in Eureka County, Nevada. General Moly has now completed the Federal National Environmental Policy Act (OTC:NEPA) process. The company is still waiting on two State of Nevada permits for the Water Pollution Control Permit and the Reclamation Permit. Assuming General Moly receives the final two permits soon they plan to finalize financing and begin construction of the Mt. Hope Molybdenum Mine. The company owns 80% of Mt. Hope and its South Korean steel producing joint venture partner POSCO owns the other 20%. The project has financing with backing from large Chinese Conglomerate Hanlong, which signed long-term supply commitments for the molybdenum. Once the mine is fully permitted General Moly could sell Mt. Hope to a company in a stronger financial position should it run into trouble completing the financing of Mt. Hope. An earlier article focused on the Valuation of the Mt. Hope Molybdenum Mine, which is indicative of a potential sale price. Mt. Hope will be the World's largest molybdenum mine.
General Moly is a company with no current revenues, but once the mine is operating the company will generate several hundred million dollars in revenues. The initial mine Plan of Operations is for General Moly to mine 40 million pounds of molybdenum for the first five years from 0.1% molybdenum per ton of mined rock. Molybdenum is currently trading for $11 per pound, but General Moly's supply contract with Hanlong is for $15 per pound. Even at $11 per pound future annual revenue could be between $400 million to $500 million per year. The mine is still a couple of years away from operating if everything goes well, and there is no way to predict what the situation will be with the economy or with molybdenum prices. The mine has an estimated 1.3 billion pounds of proven and probable reserves and General Moly estimates the mine will have a 40 year plus life. General Moly has a second molybdenum mine called the Liberty Project which has a completed pre-feasibility study.
While General Moly has significant upside if it can execute its plans, investors should closely monitor the companies progress. So far they have achieved what they indicated they would do, which is a very good sign. But Thompson Creek (TC) serves as an example of some of the potential pitfalls smaller mining companies can fall into. Thompson Creek operates two molybdenum mines and the markets can be unforgiving for mining companies that fail to operationally execute, or that face uncertain project financing risks. Thompson Creek has been punished by investors for operational miscues and financing uncertainty in finalizing its funding for its Mt. Milligan gold and copper mine. Thompson Creek had serious cost over-runs in the construction of Mt. Milligan. The company is now trading for less than 1/3 of book value. Freeport-McMoran (NYSE:FCX) is an investor in the Mt. Milligan mine and has stepped in to help Thompson Creek by purchasing an additional stake in the mine.
Another large molybdenum mine in the United States that could become operational in the next few years is Mt. Emmons, which belongs to small-cap company U.S. Energy (NASDAQ:USEG). U.S. Energy may or may not open Mt. Emmons. The mine is near Crested Butte and the company has agreed to negotiate with federal authorities on a federal land exchange to satisfy environmentalists. If legislation is approved, then a federal appraisal will assign the value of the mining property. According to federal guidelines an appraisal must combine the use of the cost, market and income methods. The only comparable property is Mt. Hope. To date $180 million has been invested in Mt. Emmons, which is estimated to contain 800 million pounds of molybdenite in much higher concentrations than Mt. Hope. U.S. Energy filed a Plan of Operations for Mt. Emmons with the U.S. Forest Service on October 10, 2012. If the Plan is accepted U.S. Energy will enter the NEPA process. Under current federal guidelines for the NEPA process, once the paperwork is properly filed a response is usually given within 12 months. It takes an average of 3 to 4 years to submit an Enviromental Impact Study and U.S. Energy has declared how close they are to finalizing the process. They simply state they have been working on it for some time. U.S. Energy plans to sell Mt. Emmons if it doesn't go through with a Federal Land Exchange.
General Moly has an experienced management team in place and offers investors significant upside if they are able to achieve all of their financing on favorable terms and successfully open Mt. Hope on time and on budget. Molybdenum prices are currently low because of the weak global economy. But if the economy strengthens by the time General Moly opens Mt. Hope prices could be much higher than the current $11 per pound. Molybdenum prices traded for $17 per pound last year and traded for over $32 per pound before the global financial meltdown in 2008.
Disclosure: I am long USEG. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.