slightly dated: Eric Sprott Wants More MolyCanada’s legendary natural resource investor, Eric Sprott, has got moly fever! His eponymous management firm is now preparing a molybdenum participation fund, which will buy and sell physical molybdenum. The Sprott Molybdenum Participation Corp will also invest in companies that explore for, mine and process the metal.
Sound familiar? Uranium Participation Corp debuted in late 2005, accumulating physical uranium for as low as US$20/pound range. Shares in the uranium fund nearly doubled in 2006 in tandem with the spot uranium price.
We interviewed Eric Sprott in October 2004, when he forecast the steep rise in uranium and offered his selection. As usual Sprott Asset Management had entered the uranium market through large, very speculative investments in complete unknowns. Since then, those unfamiliar penny stocks have begun boasting market capitalizations well above $1 billion. Examples include SXR Uranium One, which recently announced a $5 billion merger with UrAsia, and Paladin Resources, which once traded at for three cents, and is now capitalized around C$3 billion.
We followed many ‘Sprott stocks,’ some trading sub-$1/share in 2004, and which have recently traded above $12/share – such as Energy Metals. At one point, the Sprott family of funds held more than 20 percent of the shares in uranium companies such as Energy Metals and Strathmore Minerals. In late February, Jim Cramer recommended Energy Metals on his ‘Mad Money’ television show.
Last summer’s big question in Canada’s financial circles and in the media was: ‘What will be Eric Sprott’s next big thing?’ We concluded it would be molybdenum stocks and reported on that in late July. We interviewed Sprott Asset Management research associate Maria Smirnova and discussed how investing in molybdenum stocks might be another way to ride the energy bull.
While nickel, zinc and uranium prices have soared, molybdenum lagged behind in 2006. After a stellar 2005, during which moly prices jumped to a record $40, increased byproduct mining from copper producers brought the moly price back into the twenties.
But that may not last long. Changes in China’s export laws may help the molybdenum price firm up, according to Ken Reser, one of the early molybdenum mining commentators. In our email exchanges, Reser strongly believes the molybdenum price could go much higher. He’s backed Adanac Molybdenum Corp, a company which hopes to bring its large Ruby Creek deposit into production in 2009.
Early Sprott favorite, Blue Pearl Mining, has since become the world’s fifth largest primary molybdenum producer and is the world’s largest publicly traded primary molybdenum company. The key word is “since.” After Eric Sprott began backing the company, Blue Pearl announced the acquisition of privately held Thompson Creek Metals Company for US$575 million. The acquisition brought the then-tiny company into the molybdenum mining spotlight. During 2007, the company plans to produce about 21 million pounds of molybdenum (gross value at Friday’s closing price: US$593 million). That’s about five percent of global molybdenum mining production!
Another Sprott favorite, Roca Mines hopes to commence molybdenum mining operations this spring as a small-scale producer in British Columbia. The company hopes to expand its molybdenum deposit by pouring in some of the cash flow from its mining production during the first year in hopes of building a much bigger moly mine.
Judging from Eric Sprott’s keen investment eye, the molybdenum price may soon be rising again. And, of course, so will the moly stocks his fund invests in. (We have no relationship with Sprott Asset Management.)
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There is a polite arrogance to the new king of primary molybdenum producers that comes with being the big kid on the block. That’s how executive chairman referred to Blue Pearl Mining during our hour-long telephone interview discussing his company’s developments, the future of the molybdenum market and new companies hoping to imitate his success.
Ian McDonald may very well be entitled to his opinions. After all, Blue Pearl could produce the same number of molybdenum poundage in 2007 as Cameco Corp would produce of uranium. (And unencumbered by those pesky legacy contracts or remediation efforts at Cigar Lake.) Blue Pearl is now the largest publicly traded primary molybdenum producer. The company plans to mine about one-fifth of the world’ primary moly in 2007, about five percent of the world’s total mined molybdenum. His company will also roast about 12 percent of the world’s molybdenum. Not bad for a company which was a penny stock some seven months ago.
Blue Pearl has become the darling of Bay Street since the company announced its audacious US$575 million acquisition of privately owned Thompson Creek Metals Company. Having closed the transaction in late October, Blue Pearl now owns two operating molybdenum mines and concentrators and a metallurgical (roaster) facility in Pennsylvania. In mid June, the company’s shares traded for less than C$1.80; yesterday the stock closed at C$12.06. Since late August, shares in Blue Pearl have climbed relentlessly, with only brief pauses of consolidation.
We were fortunate to have included Blue Pearl in our seminal molybdenum article about the metal’s relationship with the energy bull market, this past July, at a time when few had heard of the company.
On Monday, the company announced encouraging cash flow from the recently acquired Thompson Creek operations. In the 67 days following this acquisition, Blue Pearl generated revenues of $150.8 million, about $2.25 million per day. Annualized, this could reach more than $800 million in 2007 if the price molybdenum remains firm and production continues according to plan.
Production costs for output from the company’s Thompson Creek and Endako molybdenum mines averaged $6.28/pound. The company sold this production at an average price of $25.74/pound. By 2008, the company hopes to mine 27 million pounds from these mines. The firm moly price helped Blue Pearl discharge the Second Lien Credit Facility of $64.3 million in mid March. According to Monday’s news release, the company cash balance stands at approximately $135 million.
The company expects its bank debt to fall to $320 million after paying its first quarterly installment in 2007 of $18.75 million. Blue Pearl incurred $401.9 million in long-term debt as part of its acquisition of Thompson Creek Metals. At its current production pace, the quarterly bank payments amount to a little more than one week’s production.
What’s on Ian McDonald’s Mind?
Historically, according to Western Troy’s Rex Loesby, annual molybdenum demand has grown about four percent since the 1950s. This fits well with McDonald’s forecast of 700 million pounds by 2020. “That’s what will need to be the supply,” he told us. And where will this come from? “That, of course, is the big question,” McDonald said. “There’s a dearth of new projects in the pipeline.” And he reminded us that China has started to consume more of their own molybdenum production.
As with uranium and other metals, China is a wild card for molybdenum supply. In any moly discussion, China remains a primary concern for miners. “China was producing, 13 to 14 years ago, about 110 million pounds and exporting 100 million into a 230-million pound market,” McDonald pointed out. “Last year, in a 400-million pound market, China produced about 80 million pounds, net exporting about 30 million, so they are keeping more. The story is they use more of their own.” He is quick to point out that global moly demand was up six percent in 2006, but China’s demand increased some 20 percent.
“I’m not going to sugar coat it,” McDonald points out. “If they wanted to make it look bad, they would. If they start dumping on the market, everybody’s trashed.” But he doesn’t believe this is a likely scenario. There are only 39 big mines in the world, producing molybdenum, he told us. “But in China, there are over 500 small mom-and-pop operations. China is desirous of having some world-class companies, and they’ve shut down some of the smaller operations because they don’t use their power efficiently. If you have a big mining company, they are going to have a long-term view and maximize the country’s resources.”
From where supply comes from is second to the increasing demand McDonald sees ahead. “There are a growing number of applications for molybdenum.” He pointed out that cars consume molybdenum. “There’s about 0.9 pound or so in about a dozen different places in the automobile, and with 55 million cars in the world, that’s about 50 million pounds.” This is probably the third largest application of moly.
“High-end molybdenum stainless steel applications consume the biggest amount,” McDonald said. “Any steel that’s used in the ocean or near the ocean has got molybdenum in it.” He pointed out that Blue Pearl leaves about 10 percent of the company’s molybdenum production in the sulphide form for the high-end lubrication market – the oil companies. “Most of it is made into tech oxide, MO3, and about 25 percent would be ferromolybdenum,” he said. “We just sold some (ferromoly) in Europe for $34/pound.”
His company was chosen to help produce advice on the newly launched Sprott Molybdenum Participation Fund. We asked about his involvement. “We get a small fee for storing molybdenum if they choose to buy,” he told us. It would be stored at Blue Pearl’s metallurgical facility in Pennsylvania. “We would also sell them some,” he added. His company would not be counseling the fund in which companies to take investment stakes. “It would pose a conflict of interest and we would have to recuse ourselves,” he said.
Sees New Supply on the Horizon Lacking
“There’s a tremendous barrier to entry for a new primary molybdenum mine to come onstream with no forward market,” McDonald observed. “Because without a forward sale, financing requirements for the capital to build one of these new mined could be very, very challenging.” He believes one of the other big molybdenum mines will get financed, but he cautioned, “I think that once one does, it doesn’t mean they are all going to.” He explained his own personal experience, “When we raised the US$575 million last year to buy Thompson Creek, this was a company making close to US$400 million a year after tax, and we had some heavy lifting to do. It was difficult. It would be difficult for another junior.”
One place where he sees imminent molybdenum supply is from Blue Pearl’s Davidson deposit, not far from the company’s Endako mine and milling facility. “We will have the feasibility out in the second quarter – I say second quarter, but I hope it’s very soon,” McDonald told us. “It will become the highest-grade molybdenum mine in the world.” He said his company was lucky to have gotten it three years ago. “It had been ready for production and there was a lot of development done on it.” So, the company decided to move to the final feasibility study instead of bothering with a scoping study or pre-feasibility. He said the Davidson project would be in full production in 2009.
What about mine development? “There’s already 2.5 kilometers of underground workings there and terrific ground conditions,” he said. “We opened that up a couple of years ago, after no one had been underground in 25 years. All of the scaling for the entire 2.5 kilometers fit in a five-gallon paint bucket.” McDonald told us Blue Pearl plans to just mine the deposit and little else, “We will not even crush it, just a rock breaker, and just haul it right down to Endako.”
But Blue Pearl may take in a partner on Davidson – the Japanese trading company, Sojitz. “They own 25 percent of Endako, and they want to buy 25 percent of Davidson,” McDonald said. “It would make sense, if they own the same percentage of both. There wouldn’t be any recovery issues, or combining of ore and al that. We would have the same labor force.” He did caution the deal was not done yet. “We’ll look to possibly do a transaction with them.”
Another project where McDonald hopes will provide additional molybdenum supply comes with the possible expansion of Endako into a ‘super pit.’ The company plans to have the scoping study done later this year, possibly by June. “I feel pretty good about that, it’s pretty realistic,” he told us. “We have a massive resource there, and it would be a pretty big job. But, it could take the wind out of some of these other juniors.”
We discussed his vision of expanding the mill to 50,000 tons per day. “It’s probably 32,000 tons per day now,” he pointed out. The first step involves redoing the reserves and resource calculations at Thompson Creek and Endako using a $10/pound moly price. The previous pricing was “way too conservative,” according to McDonald. We suspect the higher resource figure would open the door to raising the likely $250 million to upgrade the facility to the higher tonnage operation. And his mind is already moving in that direction.
“Let’s say we had a study done within the next year,” he explained. “It would take to 2008 or 2009 to build it. Unfortunately, because the mine has been operating for forty-two years, we would have to move the existing mill.” The mill would have to be moved because there is ore beneath the present mill site. “It won’t happen overnight,” he warned.
And what about those other junior molybdenum companies? “We aren’t going to grow our company by buying all these other moly deposits,” he responded. “Then, we have to go and raise $700 million, worry about marketing another 20 million pounds a year, and betting the company on it. Personally, and our board agrees, we’d rather buy something that’s either in production, and pay a little more for it, or take something at a feasibility stage, like copper/moly. We have a pretty good balance sheet, or we will have by the end of this year. Then maybe we could buy some moly production.”
What are his plans as 2007 rolls on? “We qualify for the New York Stock Exchange,” McDonald confided. “We’ve talked to them. I think we will get the ball rolling this spring, and we could look for an early fall consummation. We are going to come to the U.S., we qualify and they seem pretty keen on having us.”
Just to make sure we got his story right, McDonald added, “We’re not going to sit on our laurels. We have a lot of growth ahead of us, bringing on Davidson, expanding the reserves of both mines and doing a scoping study for expanding Endako. Our main job is to get the debt paid down and increase the reserves. That’s quite a bit. It’s all within our backyard and with our own expertise. Anything we do outside of that – we will do other things, I think, but they are things that are going to be for sure.”