General Moly, Inc. (NYSEMKT:GMO) is in the business of exploring, developing and mining molybdenum properties. The near-term corporate objective is to profitably develop and operate the Mt. Hope property, in which they own an 80% interest, and to continue their evaluation of the Liberty project, which they wholly own. Current focus lies in the permitting process as they recently secured a memo of cooperation with Hanlong to finance the projects. By the time both these projects are in production, General Moly will be positioned as the world's largest primary moly producer.
First production within the Mt. Hope property is planned to begin sometime in 2013 with plenty of steps along the way. There are a few very detailed presentations on their homepage at GeneralMoly.com that describe in detail both the financial and geological aspects of the project. At the time first production is set to start there will be a fully diluted 111 million shares with 40 million pounds of moly slated to be produced for each of the first 5 years. These first 5 years already have off-take agreements for 100% of production with half of sales containing hard price floors between $13.00-13.75. There are 1.3 billion pounds of proven and probable reserves with Direct Operating Costs of $5.29 per pound over the first 5 years.
Moly has recently been in the news because China has been racing to secure more moly to help keep pace with their growing demand. It is this future demand which many speculate could take moly prices significantly higher between now and initial production. The current price of moly is $15.75. Even if prices don't rise and their first year average sale price is at $15 they will have a margin of $9.71/pound on a direct operating basis, or $3.49 per share. This sets the table for significant price appreciation between now and production as it closed at $5.71 today.
So if the potential is so great why is GMO still trading at such a discount? There are many factors that one has to consider first. With production two years out molybdenum prices could see a reversal if there is another global downturn. Moly prices were around $35 in 2007 before the bottom fell out. Today a hearing on their application to use water for their Mt. Hope mine in Eureka county began as the prior grant of rights was protested. A conservation trust agreement was set up with a value of between $4-12 million for the Eureka Producers Cooperative with the hopes of appeasing the protestors.
While it seems very likely that they will ultimately receive all rights needed, the uncertainty is what is keeping some investors from piling in. An external relations manager for General Moly Zach Spencer was quoted as saying, "We continue to receive quite a bit of broad-based support throughout the community, and we’re looking forward to completing the permitting process. The project will create jobs for our Nevada economy." They are also awaiting for approval from the U.S. Bureau of Land Management.
The stock has recently seen a new all-time high as it has broken out through a rather fast move up. In August it had dipped below $3, but has since more than doubled. Taking a look at the options, most of the implied volatilities are in the 80s as investors are pricing in a strong chance of a continued move up. The slope of each of the moving averages is heading up as the 200 Day is at $3.68, the 50 day at $4.67 and 10 day at $5.56 taken from Market Edge at the end of last week. This move up has also been accompanied by very strong volume as can be seen in the 6 month chart taken from Yahoo Finance.
The General Moly story is vast, and this is just the tip of the ice berg. What I see as being key is that volume has picked up immensely as financing was obtained, and future molybdenum prices have trended upwards. As long as water rights and permitting continue to stay on a positive track uncertainty will subside and the stock will trade at less of a discount to its future value.
Once this uncertainty has been removed, it should trade at the present value of future cash flows, a significant increase from today's closing price.
Disclosure: I am long GMO.