Moly Financing Deal Sends GMO Flying
By Ben Abelson
21 Nov 2007 at 02:54 PM GMT-05:00
CHICAGO (ResourceInvestor.com) -- Shares of General Moly, Inc. [AMEX:GMO] soared nearly 20% yesterday on news that the development company had secured a critical equity financing deal with steel giant ArcelorMittal [NYSE:MT]. The deal, which involved increasing outstanding share issuance by nearly 15% via a private placement, will bring General Moly $70 million in capital to develop its massive Mt. Hope molybdenum project.
A key portion of the deal involved an offtake agreement with Arcelor, whereby the global steel titan will purchase about 6.5 million pounds of molybdenum (17% of the mine’s annual output) for five years. While details of this agreement haven’t been fully unveiled, General Moly Director of Investor Relations Seth Foreman noted that the agreement would provide Arcelor with a variable discount to spot moly prices as high as 12%, but would also set a floor under pricing at a variable level between $10 and $15. Citing further negotiations with other parties (the company is looking to lock up as much as 1/3 of Mt. Hope production), Foreman declined to give further details.
But even this hint of further deals provide some insight - that whether through private placements or debt financing, GMO is likely to be securing additional development capital for Mt. Hope in the coming months, a reassuring sight to shareholders who may be concerned with the project’s development risk. Foreman did note that the Arcelor agreement provided GMO with “some guaranteed revenue to take to the debt markets,” thus providing an indication of where future financing may emerge.
The terms of the agreement include issuance of 8.239 million GMO shares at $8.50 per share - or 10% of the firm’s fully diluted share count. One million warrants with a $10 strike were to be issued to Chicago-based Coghill Capital Management as a finder’s fee for bringing the two firms together.
But even if some further dilution is in the cards, the financing progress remains a major milestone in the development of Mt. Hope.
First profiled last May (when it was known as Idaho General Mines), shares of General Moly have since appreciated by more than 50% to a recent price of $9.87 on the back of strong development news and continued strength in the molybdenum market.
The firm’s updated bankable feasibility study, released in late August, has provided investors with further insights as to the true value of the massive 1.3 billion reserve pound project.
Highlights include an estimated 44 year mine life with 38.3 million pounds produced annually in the first five years, and a cash operating cost of $4.42 per pound in that period.
While company estimates always need to be treated with a grain of salt (even when they are ostensibly conducted by an independent geological firm), the economics of the project appear to have reasonable downside protection - although they are obviously highly levered to moly prices.
Using a flat moly pricing curve and a 10% discount rate, the project’s estimated NPV has a massive range.
Using the firm’s ‘base case’ scenario (developed using the pricing estimates from CPM Group noted below) the NPV is $1.4 billion.
Whatever the end value of Mt. Hope, and should moly prices remain north of $30 for any length of time (as they have been recently), it’s obviously a tremendous project for the $560 million market cap General Moly.
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