For months I have sat back quietly and anxiously observing the unfolding events surrounding Adanac Molybdenum Corp. Like any shareholder, I am anything but happy with the performance of the shares.
As all of you know; AUA is in a position to actively pursue the raising of funds to put Ruby Creek into production. Unfortunately for shareholders the timing of raising these funds coincided with the subprime meltdown. Make no mistake about the seriousness of the subprime meltdown. This is a direct challenge to the financial system of the US as well as the rest of the world.
As a result of this meltdown in conjunction with other things which I will address later on, money that is available for investments in projects such as Ruby Creek has become overly cautious. I can fully understand this hesitation and I also understand, but totally disagree, with any kind of rationale attempting to explain or justify the share price at these levels.
Many concerned investors have called and emailed me over the last several months with very heavy concerns about the investments they have made in AUA. Technicians and sophisticated investors understand the ugly and pathetic price action in the stock is not a good forecast of things to come. In every case I have encouraged investors to examine what they see going forward in the molybdenum markets.
It is times like this where your opinion may differ from mine and therefore it is necessary for each you to do your own homework and come to your own conclusions
Ongoing research in the moly market reveals that the demand for moly continues to increase at 5%+/year while the supply continues to fall at 5%/year. Analysts continue to foresee this pattern into the future until new supply is able to come online. The price of moly has been firm and slowly rising for many months and analysts believe the price of moly will continue to move higher. The growth in China and India continues to be very strong and few analysts expect any weakness of any significance for a long time to come. Most believe a slowdown in the US will have very little impact upon the growth in these two countries. In other words, the rest of the world, through the development of their own markets, continues to wean itself off of the dependence of the US consumer. The time is rapidly approaching where internal growth in China and India is reaching the stage where it is becoming an absolute necessity to keep the valuable natural resources that they produce available for use only at home.
I believe there is a very real possibility that a decade from now the world will look at the natural resource markets and then wonder how companies with the resources of AUA were allowed to be overlooked, ignored and eventually bought out at prices that in no way reflect the future fully developed value of these in ground and untapped resources. The fact that China has now implemented policies which inhibit and prohibit the future free trade of these resources mined within their own borders is proof to me that those, on the demand side of the market, who know and understand the supply shortfalls of the future, are sending a message that should be heard and listened to by all.
In otherwords, I continue to view the overall health of the moly market as being very positive to those who benefit from taking moly out of the ground. As a result, I view investments in the natural resource sector and base metals sector as investments that offer the potential for exceptional returns to those who have the foresight to recognize the fact that there is a limited supply to meet the increasing demand which may stay very strong and continue to grow for years to come.
JUNIOR MINING SUPPORT LACKING;
History has shown, mining projects, like Ruby Creek, that have advanced to the stage of development, where production is only a matter of time and money usually have many financing options available to them in raising the funds to go into production.
I have been involved with AUA for over three years now. In that period of time I have closely observed how the management of Ruby Creek has turned an exploration project into an economic body of ore destined to become a major primary molybdenum mine.
What most people do not realize about the AUA Ruby Creek story is the fact that this whole project was funded and brought to this stage of development without the aid of any major fund or institution. I find this to be both remarkable and very confusing. Remarkable in light of the point that I do not know of any other major projects, not to say there are none, that have advanced to this stage of development where the only obstacle left is the major financing to go into production without having the support of any major funds and institutions.
I am a numbers cruncher and when I put numbers together dealing with the estimated future revenues based on criteria that supports these numbers I find myself real confused in the fact that funds, institutions, pension plans, moly producers as well as moly end users have not, to this point in time, been motivated to take an interest in AUA and Ruby Creek. When estimates from Ruby Creek are compared with the production and earnings from current moly producers I find that Ruby Creek has estimates that, in my opinion, most moly producers would or should welcome as a part of their own.
In a prior AUA Update dated last December I laid out the format as to how I arrived at the numbers I use to get the estimates I have. For those of you who may not have that article I would be glad to resend it to you if would like to read it again or if you did not receive it in the first place.
For purposes of illustration, I will now take these numbers and show investors what AUA, assuming it were in production, would contribute to the actual year end numbers of a major mining company. Everyone familiar with the base metals industry is aware of Teck Cominco TCK therefore I am going to use the recently reported year end 2007 numbers from TCK for the purposes of illustrating my estimated EBIDA numbers for AUA and how they would compare to the actual 2007 EBIDA numbers from TCK.
THE NUMBERS COMPARED TO TECK COMINCO TCK 2007 RESULTS
With financing in 2008 AUA should be in production in the 1st half of 2010. I will use multiple costs and production numbers to show a wide range of potential EBIDA Cash Flow for comparison sake.
TCK 2007 Results
Total TCK outstanding shares 442,000,000
ACTUAL TCK 2007 EPS $3.74
Total TCK 2007 Earnings $1,615 Billion
TCK 2007 EBIDA $2.6Billion
Average moly price received by TCK in 2007 = $30/lb
AUA EBIDA Numbers assuming $30/lb/Rev with three different cost levels and four different production levels. These are my numbers and I personally believe 12,000,000lbs/yr production to be very conservative with the likelihood that real production will fall between the 15,000,000lbs/yr and 18,000,000 lbs/yr.
Cap-ex of Ruby Creek is now expected to be around $700,000,000
Below is a table showing AUA EBIDA Numbers (in millions) based upon production and costs as listed in the table and price/lb of moly at $30/lb.
AUA ESTIMATED EBIDA CASH FLOW IN MILLIONS
Cost/lb $ 8 $10 $12
Lbs/year
12,000,000 $264 $240 $216
15,000,000 $330 $300 $270
18,000,000 $396 $360 $324
21,000,000 $462 $420 $378
Worst case payback $700,000,000 cap ex divided by $216,000,000 = 3.24 years
Best case payback $700,000,000 divided by $462,000,000 = 1.515 years
Using 15,000,000lbs/yr and 18,000,000lbs/yr gives us payback of 2.59-1.767 years
In this section I will compare the Estimated AUA EBIDA Numbers as a percentage of the 2007 TCK EBIDA Numbers
% AUA EBIDA VS TCK 2007 EBIDA OF $2.6 B
Cost/Lb $8 $10 $12
LBS/YR
12,000,000 10.1% 9.23% 8.30%
15,000,000 12.69% 11.54% 10.38%
18,000,000 15.23% 13.85% 12.46%
21,000,000 17.77% 16.15% 14.54%
Here again on a worst case basis AUA would increase the EBIDA of TCK by 8.3% using 12,000,000 lb/prod/yr with a $12/lb cost and 10.1% using an $8 cost/lb. Using the more likely 15,000,000 lb/yr with a $12/lb cost EBIDA of TCK would increase by 10.38% and 12.69% using $8/cost/lb. With 18,000,000 lb/yr with a cost of $12/lb would increase TCK EBIDA by 12.46% and 15.23% using $8/lb cost.
These numbers alone do not mean much until the cost associated to acquire AUA are taken into consideration.
AUA currently has roughly 150,000,000 shares outstanding fully diluted. With a current market price of roughly $.75/sh the total market cap of AUA is a paltry $112,500,000. The total picture becomes highly visible when one realizes that for Teck Cominco to buy AUA out near its all-time high of $3.00/sh dilution to TCK with 442,000,000 using its own stock as payment at the current price of $45/sh would be:
Aua market cap = $450,000,000 Divided by the current market price of TCK @ $45/sh = 10,000,000 shares dilution to TCK or 10,000,000 divided by 442,000,000 = 2.26% dilution to TCK
I know that in the case of AUA everything is an estimate and the 18 month construction time frame plus the Cap-ex cost of $700,000,000 is not taken into consideration. But the real question I have for the management of TCK is “wouldn’t you like to increase your EBIDA numbers from 8.3% to 15.23% for dilution of only 2.26% to your shareholders?” The added bonus to this is the extra12,000,000-18,000,000lbs of molybdenum you will produce a year. The addition of AUA would more than triple your 2007 moly production of 7,350,000 lbs.
At year end Teck Cominco had a cash balance of $1,400,000,000 and a 2007 cash flow of $1,700,000,000. With this size of a “war chest” I find it confusing to understand, knowing that AUA is still first in line to come into production and the fact that AUA is a Canadian Project, how an initial investment in the open market of $11,250,000, or .8% of cash on hand, with AUA @ $.75/sh giving TCK an initial 10% ownership of AUA would not be something well worth considering just to get a “little toe in the water.” I find it very difficult to refer to this as an investment since we all know that if Teck Cominco’s name were to become associated with AUA the price of AUA”s stock would soar overnight making this investment a home run. Picking up AUA shares in the open market at the current depressed prices would also decrease the overall price paid to acquire AUA in the event of a buyout.
NEXT IS THOMPSON CREEK METALS TCM:
Since Blue Pearl bought out the privately owned Thompson Creek Mines I have been a little envious. Overnight this little company hit the big time by becoming the owners of the 4th and 5th largest primary moly mine producers in the world. The purchase of Thompson Creek turned out to be a real coup. I have said this in recent articles and time is proving that these guys seem to know what they are doing.
At this time Thompson Creek TCM has $236,000,000 in long term debt remaining from the buyout of Thompson Creek. This figure fell from $402,000,000 the year before. This $166,000,000 decrease in long term debt equates to a decrease of 42% in their long term debt. After paying their debt down 42% Thompson Creek was still able to post net earnings of $157,000,000 or $1.24/sh fully diluted. These earnings were realized from 75% ownership of the Endako Mine, the Thompson Creek Mine and a wholly owned metallurgical facility near Pittsburgh Pa. that roasts 10% of the world’s molybdenum.
Total TCM moly production for 2007 was less than 20,000,000lbs which was sold for an average price of $28.77/lb. TCM estimates that moly production for 2008 from the Endako Mine (75% net) will range from 6,500,000-7,500,000lbs and the Thompson Creek Mine is expected to have production of 16,500,000-17,000,000lbs. This gives TCM total estimated 2008 moly production numbers of 23,000,000-24,500,000lbs.
TCM has 145,000,000 fully diluted shares outstanding @ $20/sh TCM has a market cap of roughly $3,000,000,000. Now I want to do something a little different.
Let’s assume that TCM does achieve moly production of 25,000,000 lbs and AUA has production of 15,000,000lbs/year when it comes online in 2010. The PA roaster lost money in 2007 so I will not include anything for it in the numbers I am going to show.
Estimated 2008 production of 25,000,000lbs moly has equated into a market cap of $3,000,000,000.
AUA estimated production beginning second half 2010 is 15,000,000 lbs/year = 60% of TCM 2008 estimated production numbers. Now I know the capital has to be raised and there is probably a minimum of an 18 month timeframe to put Ruby Creek into production after the money is raised but the question I have here is “if all things were equal and AUA was owned by TCM “would the market cap of TCM be increased by 60% or $1,800,000,000 since 15,000,000lbs production = 60% of 25,000,000lbs?”
$3,000,000,000 X 60% = $1,800,000,000
Now deduct $1,000,000,000 for production and financing costs leaving $800,000,000 of future net worth that will increase proportionately as the debt to put Ruby Creek into production is paid off.
It is also very important for investors to understand that Ruby Creek has in excess of 20 years worth of reserves and the recent drilling has found what is expected to be 2 new bodies of ore with grades well in excess of the conservative grades stated in the 2006 feasibility report. Aua is expecting additional assay results from drilling that was completed in 2007. You must also remember that the best grades the company has are to be found in these recent drill programs. When Ruby Creek comes online, if it were owned by TCM, would make a very nice addition to Endako and Thompson Creek since both of these mines have their best years of production behind them.
If the $800,000,000 were applicable then that would value AUA at a substantially higher price than the current market of $.75/sh with a total market cap of $112,500,000.
$800,000,000 divided by 150,000,000 AUA fully diluted shares = $5.23/sh
Again my point comes back to the fact that companies like Teck Cominco and Thompson Creek Metals would be well ahead of the game by owning Ruby Creek while at the same time playing defense and denying Ruby Creek’s production from those they view as competition. This brings me to the last point I want to make in dealing with another possible mine that is being talked about as being reactivated.
THE CLIMAX MINE AND FREEPORT MCMORAN FMX:
“Why reactivate the Climax Mine?”
Freeport McMoRan FMX is the largest producer of molybdenum in the world. I have no intentions of breaking down the numbers in FMX like I did for TCK. What I do find as very important here is the fact that FMX has stated they will reactivate the Climax Mine in Colorado. Now this could reflect two thoughts. The first is the intention to really bring the Climax Mine back online and into production.
The second thought is to use this as a deterrent to keep financing from becoming available to those who need it to get their moly mines online. Creating the illusion of a future glut of moly is an easy way to slow new mines from coming online. This is a great defensive move as it keeps the production of moly to those who are already there. In essence the pie is split between a small group of producers.
There is proof moly producers believed moly prices would fall back to the old levels as major moly producers high-graded their ore bodies cherry picking the best grades. The high-grading of their ore bodies can only mean a supply decrease in the future as these same producers are forced to produce from lower grade bodies of ore.
It appears that anyone who felt moly prices would retrace to the old levels were wrong.
The only man I know of who had the future supply and demand for moly mapped out correctly was the “Founding Father” of AUA Larry Reaugh. Make no mistake about the fact that Larry Reaugh was several years ahead of anyone else when it came to recognizing the future for base metals. I will get Into Larry lastly when I address the recent changes in the corporate management of AUA.
Now back to point one of reactivating the Climax Mine. The question I have here is real simple “WHY?” This mine has been shut down for years. The costs associated with reopening and permitting this mine could be competitive with the costs associated with putting Ruby Creek into production by the time FMX does all the work and receives the permits.
I have read that there is a billion gallons of contaminated water within the underground structure of the Climax Mine that must be dealt with. Who knows what the true cost and time constraints are going to be to clean up this problem? Who knows what the permitting hassles are going to be? I can see this as possibly becoming a nightmare of gigantic proportions before it is all said and done. In the end permits could still be denied.
On the other hand, everything has fallen into place for AUA. The question I have for the management of FMX is real simple “why would you go through all the hassles of reactivating the Climax Mine when you have Ruby Creek in a tidy package waiting to be financed?” By turning your attentions to Ruby Creek you would be denying your competition the opportunity to acquire Ruby Creek and the molybdenum supply that will come out of the ground. The bonus to all this is the fact that you would still own the Climax Mine and if necessary have the option to reactivate it anytime you want while denying your competition ownership rights of AUA.
At this point in time Ruby Creek is like a neatly wrapped Christmas present under the tree just waiting to be opened by its eventual owners.
Now I want to compare Ruby Creek to a competitive project called Mount Hope owned by General Moly GMO.
MOUNT HOPE OWNED BY GENERAL MOLY GMO:
Here is another company that I must admit I have to tip my hat too. These guys through all their management changes seem to have their project on the right track. I am impressed with the support they have garnered in moving forward. I believe these guys have strengths where the management of AUA has shown weakness. These guys have the institutional support necessary to move their project along in a manner that will keep dilution to a minimum.
Gmo has Arcelor Mittal owning 10% of the company and Posco stepping up with financing to where they will own 20% of the moly that comes out of the ground. These companies are the
#1 and
#3 steel companies in the world. As end users of moly they understand the growth in demand as well as the supply constraints of the moly market. Mt Hope enjoys the advantage of having 1,300,000,000 lbs of reserves versus AUA’s 300,000,000 lbs. I have been told that the large volume of reserves is a very attractive feature that GMO possesses that end users want to see. The only question I have here is how AUA can be discounted when their main body of ore has in excess of twenty two years worth of production reserves and the body of ore is open in two directions? A special bonus to AUA is the probability that the most recent drill results from Ruby Creek may have discovered two new bodies of ore that have both depth and the best grades found to date.
In the end, who knows just what the total reserves of Ruby Creek will be when the final drill bit is taken out of the ground? I think there is a very strong possibility that the reserves of AUA will rival those of Mount Hope.
This brings me to the point where analysts like to compare these projects based on Net Present Value NPV. If Aua was at the exploratory stage of development I would have no problem with this. The fact of the matter is that AUA is at the stage where funding takes the company into production. With funding I believe evaluations should move from NPV to cash flow and earnings projections. I find it confusing to understand how the NPV of a company is less than the earnings the company will generate over a 2-3 year period of time. You cannot compare “apples to oranges” and expect the results to taste the same.
POSCO 20% INTEREST
Posco is in the process of acquiring ownership of 20% of the moly that will come out of the ground at Mount Hope. For this right they will be responsible for all cap-ex and production cost associated with the 20%. In addition to this they will pay GMO a total of $170,000,000 in three staged payments of $50,000,000, $50,000,000 and $70,000,000. $170,000,000 is 20% of the expected total cap-ex cost to put Mount Hope into production. At the time of the announcement the share price of GMO was roughly $10/sh. With 83,000,000 shares outstanding fully diluted this also represents roughly 20% of the market cap of GMO. I find it rather opportune to have both your market cap and your cap-ex roughly the same upon completing an agreement of this nature.
Posco estimates that the amount of moly they will receive each year will total 7,700,000/lbs. If one were to equate this venture to AUA the 7,700,000lbs would equal about half of the roughly 15,000,000lbs of production that I believe AUA can achieve when it comes into production.
Let’s look at some numbers and see what this $170,000,000 would look like if it were put into AUA for half of its production.
