moly mines moving spinifex ridge forward

Monday, November 10, 2008

Moly Mines moving Spinifex Ridge forward - other Molybdenum projects wither.

by Andrew McCrea


Moly Mines Limited (ASX/TSX:MOL) has recently raised $US150m in debt finance facility from Trust Company of the West (TCW) . Observers and some analysts believed the terms were stiff. TCW negotiated and achieved an effective rate of interest of 20% on the facility as well as the grant of attached warrants that can be converted into 15% of ordinary shares of Moly Mines for consideration of $A1,500.

We tend to view the transaction in a different way. The funding facility provides financial security for Moly Mines for the next twelve months, allowing it to ride-out the current global capital markets turmoil and removes any requirement for Moly Mines to need to consider further equity capital market issuances prior to full funding for the Project.

Moly Mines always had a large financing obligation to move Spinifex Ridge to production. Moly Mines had little by way of asset collateral, and no cash flows to obtain a low cost debt facility. Therefore, Moly Mines had three alternatives. Raise cash that was effectively backed by no hard assets or cash flows – which meant debt financing in the (higher risk) high yield securities market, project financing or equity financing.

Equity financing was not an option in the current market, without “giving away” the company at such a low strike price, that any upside which would have been lost to current shareholders. Project financing was and is an option. Debt financing with an equity “kicker” was the chosen alternative - with no alternative but to borrow in the high yield market.

In addition, TCW may elect to roll-over their interim funding into full project funding, it would reduce project funding required.
At some stage, Moly Mines was always going need to issue further equity to part finance Spinifex Ridge. It has been remarkable to date Moly Mines doesn’t have a greater issued ordinary capital than 86.2 million shares. Dilution was always going to be a factor, as it is for all developmental companies.

The interim financing is not the end of capital requirements. There is a still a hefty $US686 million in capital required. However, there is now breathing space over the next 12 months for Moly Mines to progress and develop Spinifex Ridge in an orderly fashion AND, hope that capital markets are kinder over the next 12 months.

Almost $US125 million of the capital cost relates to energy to power Spinifex Ridge. The Company is evaluating alternatives that would lead to a power provider building, owning and operating this item of infrastructure and selling power to the Project, further reducing the capital requirement to US$563.4 million. Our sources indicate that there could be better news on this front in 2009.

Huge positives for Moly Mines

- “Cash” is king for developmental companies for the foreseeable future. The Financing facility allows Moly Mines to continue developing Spinifex Ridge unlike other potential new mine companies.
- Spinifex Ridge would rank Moly Mines as a top ten global producer of molybdenum
- No new production of Molybdenum is likely to occur between now and 2010
- Good medium to long term outlook for molybdenum demand and molybdenum price
- Cash costs are relatively low (sale of iron ore at Spinifex Ridge would provide cash credits and reduce cash costs). Our estimate of cash costs is US$9 per lb (excluding royalties and excluding low grade credit) including lower copper prices and iron ore prices and cost of roasting). This represents cash cushion relative to molybdenum price of $US20 per pound on 8 November 2008).
- Spinifex Ridge becomes an important supply source of molybdenum when the following is taken into account:

Current molybdenum consumption is in the order of 400 million pounds per annum. It is estimated to be growing at 3-5% per annum. This implies that new supply of 12-20 million pounds of molybdenum will be found each year just to satisfy demand for molybdenum. (This assumes Chinese GDP growth of 8% per annum).

Even if Mt Hope came on-stream in 2011, supply of molybdenum is unlikely to satisfy demand. Other possible new mines at Ruby Creek, Climax and (some) Chinese molybdenum mine production are unlikely to be all on-stream by 2012. This implies strong project impetus for Moly Mines and support from industry and capital market sources.

The most advanced molybdenum project that would challenge Moly Mine’s first mover advantage is General Moly’s (TSX:GMO) Mt Hope Project in Nevada. Currently, General Moly says it continues “to be confident that the Mt. Hope project will be able to be financed. Given the project's overall quality including high grades and low operating costs in addition to the project's wide support from the steel industry, Mt. Hope continues to be on track to be fully permitted and financed in time for late-2010 startup."

That said, Mt Hope requires $US1,039m in financing, which is a significant order in this market. However, it also has cash reserves allowing it and Moly Mines to have a reasonable hope that capital markets may improve in 2009.
- The long term outlook for molybdenum is still considered sound by industry analysts and end users.

Molybdenum price

The price of molybdenum has fallen in US dollar terms over the past month from $US33.50 per pound to current $US20.00 per pound. No commodity can defy the law of demand and supply – or market perceptions. However, there is reason for more optimism for molybdenum than most other commodities because of the relatively stronger demand-supply situation.

In Australian dollars, which is how Moly Mines will bring its future molybdenum revenues and costs to account, the fall is not as bad. The molybdenum price in Australian dollars is approximately $A29.40 a pound (depending on $A/$US strike price and molybdenum price in US dollars).

At estimated cash cost of production of $US9.00 per pound, future cash flows are still substantial for Moly Mines and significant for the project and for shareholders. This cost could be further reduced if the molybdenum price retraces in 2009. This appears more likely when more and more new mines like Thompson Creek Metal’s Davidson Creek molybdenum project are being shelved.

Our view remains that short term falls in the price of molybdenum have more to do with the current freeze in capital markets, deleveraging by commodity investors and general fear rather than pertaining to fundamentals in the molybdenum market. We are optimistic that capital markets will slowly recover and this will lead to finance becoming available for projects with sound economic fundamentals, like Moly Mines.

Sell-down by major shareholder

Over the past two weeks, major shareholder Harbinger Capital which held 19.8% of the issued capital of Moly Mines has lodged two notices of disposal of shares. It now holds only 9.6% of Moly Mines issued capital. It is understood from industry sources that Harbinger has shifted investment focus from resources to European investments. It is not known if the entire parcel is for sale, but if it is assumed so, the “overhang” of shares could be over within a week or so. It will be interesting to determine the nature of the buyer of the shares if it is a large shareholder and their intentions.

Comment by Andrew McCrea

For current shareholders, it has been a volatile time. However, there is cautious optimism for believing that when the overhang of shares is no longer an issue that a “floor” share price might start to form for future growth. Moly Mines has done everything right and ticked every box that it could have done including the financing facility and terms negotiated.

With a bit of luck, Moly Mines could be significantly more advanced in its race to raise additional finance within 12 months from now. Of course, capital markets would also need to play their part and recover. On our estimates, we can see a significantly higher market valuation for Moly Mines at that time. We are optimistic that the company will procure project finance from industry and strategic partners in 2009. This would significantly de-risk the project and the company.

We believe the Moly Mines share price at that time should be over $A1.25 per share, based on our earnings and market “assessment” valuations. Depending on the terms of future project finance, our valuation could increase above $A1.25 per share. As usual, volatility and risk factors will continue to be high. With these elements, companies without earnings are not for the faint of heart. However, Spinifex Ridge has global significance to the molybdenum industry.