Revisiting Miss Moly
I first wrote about moly and Adanac a little over two years ago. Moly was about $14 a pound and AUA shares were $.54. Today moly is twice as high and so is AUA. I managed to make a flying visit to the Ruby Creek Property of Adanac in Northern BC last month so I could update the progress of Adanac President and CEO Larry Reaugh.
When I visited the Ruby Creek property in 2004, Adanac was preparing to twin holes which had first been drilled over 20 years before. Actually, moly had originally been discovered in the early years of the 20th Century but the deposit was in the middle of nowhere. By 1970 the price of molybdenum had advanced to the point where the project appeared economic. Kerr Addison drilled the project and in 1971 commissioned a feasibility study which envisioned an operation somewhere between 15,000 tons and 20,000 tons per day mining. They based their project on a price of $1.80 a pound. The price of moly collapsed and the project was dropped. In 1978 Placer Development optioned the property and started a new drill program. Their study used a figure of $6 a pound for moly. The project proceeded to a feasibility study in 1981 and again the price of moly collapsed in 1982.
The price of moly tends to go up and down like a bride's nightie. It will sulk along for 25 years and all of a sudden explode. There is no shortage of moly projects in the world, I've seen reports showing a 150-year supply identified. The rub tends to be that since so many people have lost so much money consistently on moly, no one wants to make major investments.
Between 1982 and today, moly has been as low as $1.82, where virtually no one makes money; up to as high as $38 a year ago, where everyone thinks they can make money. Up until four years ago, China controlled the supply of moly and unloaded vast quantities on the world market, keeping prices in the gutter. China is now a major net importer as their economy is growing 24/7 and every steel mill in the world is working at full bore to help build the Chinese infrastructure.
Moly, with its high melting point, is used to make hardened steel and stainless steel. With nickel prices above $14, even the alternatives to moly are dear. The price has stabilized over the last year in a fairly narrow band between $22 and $30 a pound.
Larry Reaugh told me two years ago that the Ruby Creek project would work with moly as low as $8 a pound and certainly that seems like a reasonable price to expect. The Chinese who dominated the market for so long have found that it makes a lot more sense for their economy to produce automobiles and stainless steel for building rather than be a simple producer of commodities.
Since 2004, Larry has done everything that he said he would. He came out with an updated 43-101 showing a measured and indicated resource of over 285 million pounds of Mo at a .04% cutoff grade with a further 43 million pounds in the inferred category at the same .04% cutoff grade. The actual grade mined would be .063%.
And this last April the long-awaited bankable feasibility study was completed. It showed a total capital cost estimate of $434 million Canadian. (Capex) The study envisioned a 20 year mine producing about 14 million pounds of Mo the second year and dropping to 4 million recovered pounds of moly by year 20. Total cash cost would start at about $11.25 a ton and drop to about $8.05 by year 5. The economic model saw a price of $22 a pound in 2008 dropping to $8 a pound twelve years later.
When you get into the economic model indicating New Present Value (NPV) and Internal Rate of Return (IRR), the numbers get real interesting. As I said before, the assumptions start with a price of Mo of $22 and decrease to $8 over twelve years. With an 8% discount rate, the project has an IRR of 24.42% and an NPV of $222 million Canadian and a capital payback of 3.1 years. Basically, the larger and more costly the project, the lower the return which is acceptable. If you have a $30 million dollar Capex gold mine, you reasonably expect it to be paid back quicker than a $434 million dollar moly mine. Since the stock is $1.11 and there are about 56 million shares out, the base case makes the NPV worth about four times what the market values AUA at presently.
One of the things I have talked to Larry about before and that I wanted to verify on my visit, was the issue of grade. Since all Larry has was historical and non-43-101 compliant numbers, he had to spend millions of dollars drilling holes where he pretty much knew what he was going to get. And all of the previous holes were vertical holes, not holes drilled at an angle. Many times structures and mineralization tends to be vertical. So it's entirely possible to drill straight down six inches from a perfectly vertical ore body and never find a thing. Larry wanted to be drilling angle holes years ago but in order to use any of the previous data, he had to drill twinning holes and if the original was vertical, the new hole right next to it had to be vertical.
It rubbed Larry the wrong way because all of the bulk samples taken showed higher grades than the drill holes showed. Clearly something wasn't correct. And when I saw the core from this year's angle drilling, Larry was proven right. In most of the core, if the angle of the hole was 60 degrees, the mineralization was 60 degrees, meaning the ore was vertically oriented. Larry can't use his results from this year to increase the 43-101 resource or the grade. But he can increase his confidence level that the grade mined will in fact be higher than the drill results.
In fact, part of the work done by Kerr Addison Mines in 1971 indicated their bulk samples showed grades up to 20% higher than drill results. So, as part of the economic model, a sensitivity study showing a grade increase of only 15% was assumed and it increased the IRR to 35.03% and the NPV to a whopping $405 million Canadian.
Using High Pressure Grinding roll, (HPGR) for grinding increases the NPV from $222 million to $305 million, well worth doing. Taking into account the grade increase of 15% which has a high confidence number and the HPGR which Larry announced months ago, it's easy to say the stock is cheap today.
As yet, no one has stepped up to the plate, $434 million is a big number to swallow. Larry has had a number of discussions with steel milling companies about forward sales of moly. It's a case where he could sell all the moly he could produce today at a great price but people are afraid of the price dropping as it has so many times in the past. Larry has pretty much maintained an 18-month lead time over anyone else who might go into large scale production of moly. Several small juniors are either producing moly today or are about to. I have written about Roxmark (RMKL-C) before, they are producing now. Golden Phoenix (GPXM-OTCBB) is about to begin production in a month or so in a high grade but small deposit in Nevada, and Roca Mines (ROK-V) is saying production in the 4th quarter.
The price of moly has stayed higher longer than anyone would have guessed two years ago. The Chinese do not appear to want to export moly any longer, they have shut down about half their production capability, being more eager to buy moly than to produce it. That reduces the risk of moly being dumped. The longer the price stays high, the more attractive Adanac becomes. It would be far more attractive if the BC government would commit to bringing in power and connecting Atlin to the grid. But government blather a lot and for the first few years, Larry Reaugh is accepting that he probably will have to use expensive diesel power.
With a market cap of about $60 million, Adanac is very attractive. It's entirely possible that someone could attempt to buy the company or buy control at any time. Obviously Larry Reaugh would sell. At a price. And that price will be a lot higher than it is today.
We were big buyers of AUA in the $.50 area two years ago. When the stock shot up into the stratosphere in April, we were looking at a 400% long term capital gain which was very attractive, I buy stocks in the hope of them going up. We don't own shares in AUA today but we are biased and would be buyers at any lower prices. Adanac is an advertiser but has not paid to have this produced.
Written in East End, Grand Cayman on September 28, 2006.