Idaho General Leads Moly Mania
By Ben Abelson
01 May 2007 at 03:28 PM GMT-04:00
resourceinvestor.com
CHICAGO (ResourceInvestor.com) -- In the past few months, molybdenum has emerged from a crop of base metals to capture investor interest. Of the handful of domestic pure-play moly names skyrocketing on the recent supply crunch and Canadian ETF listing, Idaho General Mines [AMEX:GMO] has begun to emerge as pack leader.
With a long-lived development project easily worth four times GMO’s current stock price, it’s no wonder investors have put the company’s share on their short list since mid-March.
Moly Madness
As previously discussed in Resource Investor (see “Moly Plays Spike on Supply Crunch”), the molybdenum market’s been going gangbusters this spring on the back of some strong fundamental supply/demand news hitting the markets. While Blue Pearl [TSX:BLE] has emerged as an investor’s favourite for pure-play molybdenum exposure, Idaho General is quickly becoming another crowd darling.
The company is currently in the process of developing the Mount Hope project in Nevada, which contains 1.2 billions pounds of recoverable molybdenum over a 50+ year mine life.
An initial feasibility study dating from 2005, and internal company estimates, put the project’s NPV at over $2 billion at current ($30/lb+) molybdenum prices. While this is likely subject to the usual underestimation of costs and overestimation of grades common to feasibility reports (especially those that are 2-years old), with GMO’s market cap currently just north of $250 million, there’s still plenty of room for value-creation even with cost revisions.
Indeed, even with more historically reasonable moly prices - say at $15/lb - the company still predicts an NPV above $800 million, making the company worth a speculative investment by anyone favouring moly exposure.
While the startup costs at Mt. Hope are significant (as estimated $600-$700 million), and will likely require a JV or significant external funding, the project’s robust economics (a cash cost of $4-$5/lb moly) make the project value accretive at moly prices as low as $10/lb, according to company estimates.
This lack of leverage also gives investors some downside cushion from the extreme volatility present in the illiquid molybdenum markets.
With the stock price currently trading above $6, nearly triple the $2 fetched in early March, there’s certainly no rush to jump into the shares. Still, for astute investors looking for moly exposure, an investment on any non-material market reaction to the downside could be worthwhile.
Key Dates
Apart from the gyrations of moly prices, a few crucial dates in Mt. Hope’s development stand out in the near future. A bankable feasibility study should be completed by late summer or early fall. While we expect cash costs and production costs rise from the prior 2005 report (reflecting primarily higher labour and commodity input costs), so long as the cost spike isn’t wholly unreasonable, the release of this study should elicit further confidence toward the project’s development - and could easily send shares higher.
This being said, a large-scale cost escalation - on the order of 50%-plus - could impact shares to the downside.
With production not slated to begin until 2010, and the current moly cycle (from early this decade) already aging, it’s unlikely that investors would actually look to hold Idaho General very long into its production phase (it’s a fair bet that moly prices won’t remain accommodating over the course of the mine’s 50-year-plus life).
That being said, assuming the underlying commodity prices remain somewhat elevated over the course of the next 12-18 months, it’s very likely that GMO could see strong gains at it reaches crucial development milestones.
With its still relatively small market cap, the shares could be worth a small punt for speculators - with an eye toward holding for upwards of one year. |
