General Moly (NYSEMKT:GMO) has announced that a Nevada State District Court has issued an order supporting the Nevada State Engineer's Approval of its Mt. Hope Molybdenite Mine's water rights. General Moly also recently announced that it has received a Class 2 Air Quality Permit from the Bureau of Air Pollution Control within the Nevada Division of Environmental Protection. General Moly had its federal Draft Environmental Impact Statement published in December of 2011 and the company anticipates receiving final full federal approval of its environmental permits this summer. This will allow construction of the mine to commence and it is expected to take 20 months to finish before production can begin. Investors in General Moly need to assign a valuation to Mt. Hope to assess the investment merits of General Moly. This is a small-cap company that will need to rely on access to outside capital to fund the Mt. Hope project. It also is a commodity company and has no control over molybdenum prices. Management has not proven it can successfully operate a mine the size of Mt. Hope. Combine these factors with the natural volatility of small-cap companies and General Moly should only be considered for speculative accounts, or for highly diversified portfolios.
Molybdenum prices have averaged $15 per pound in 2012 and any significant increase in price would rely on a supply shock, such as China banning exports, or robust growth in the global economy. China is the largest producer of molybdenum and the average Chinese mine has cash costs in the $12-$13 range. So $15 should hold unless a significant global recession occurs. General Moly estimates they can produce 40 million pounds of molybdenum per year at an average cost of $5.30 per pound. The mine is estimated to have 1.3 billion pounds of proven and probable molybdenite. These assumptions need to be used in valuing Mt. Hope. Although it needs to be mentioned General Moly has not proven it can achieve this goal. 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 Hanlong, which signed long-term supply commitments for the molybdenum.
General Moly has conducted a bank feasibility study to value Mt. Hope. The study uses an 8% discount rate, an assumed rate for general and administrative expenses, a 6% loan interest rate, and all applicable taxes. It does not include selling or shipping costs, which need to be included. The study assigns an equity value net of debt at three different molybdenum prices; $15, $20, and $25. At $15 per pound the study assumes Mt. Hope is worth $1.2 billion. At $20 per pound the study assumes Mt. Hope is worth $2.08 billion. Finally, at $25 per pound the study assumes Mt. Hope is worth $2.89 billion. Current global economic conditions indicate investors should focus on estimates based on $15 per pound.
General Moly has 96 million shares outstanding with a market cap of $318 million. The company owns 80% of Mt. Hope. Using the $1.2 billion valuation for the mine General Moly has a potential equity upside of $960 million. Selling and shipping costs could reduce the equity value by 10%, giving the mine a potential valuation to General Moly of $864 million. Since the mine won't open for two years it should be discounted @ 8% for a current net present value of $731 million. This offers investors in General Moly significant upside from Mt. Hope if management can execute. The markets can be unforgiving for mining companies that fail to operationally execute, or that face uncertain project financing risks. Thompson Creek (TC) has been punished by investors for operational miscues and financing uncertainty in finalizing its funding for its Mt. Milligan gold and copper mine. The company is trading for less than 1/3 of book value.
The only other large molybdenum mine in the United States that could become operational in the next few years is Mt. Emmons and belongs to micro-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 a higher concentration than Mt. Hope. The market/income method for Mt. Emmons would be similar to the feasibility study for Mt. Hope. This would value Mt. Emmons at $738 million whenever production commenced. If the mine is not exchanged it is estimated it could enter production in 2018. Discounting the net present value by 8% for the next 6 years implies a current income/market value for Mt. Emmons compared to its comparable Mt. Hope of $447 million. It should be noted the company issued a press release estimating an appraisal could come in as low as $50 million to $100 million. If Mt Emmons comes off the market it will diminish future U.S. production and raise the long-term value of Mt. Hope.
Despite the execution risks General Moly has a significant asset in Mt. Hope and offers speculative investors upside potential, especially if the global economy recovers in the next couple of years.
Disclosure: I am long USEG.