Kaiser Blog: MolyMania is Alive and Well!

Kaiser Blog

April 18, 2007

MolyMania is Alive and Well!

An obscure but ubiquitous metal called molybdenum underwent a tenfold spot price increase that started in 2003 and peaked in 2005 at $40 per lb. On January 4, 2005 we published a major report entitled Will MolyMania hit the Juniors in 2005?. At the time there was concern that molybdenum's price spike was due to a perfect but temporary storm of forces that restricted supply while global demand due in part to China's growth was rising. Among the supply restrictions was a processing bottleneck for roasting molybdenite concentrates, a decision by Chinese authorities to shut down several hundred small scale mines for safety reasons, and under-utilized capacity in both primary and secondary molybdenum mine production. Molybdenum is widely used in steel and other metal alloys to provide hardness and corrosion resistance. Molybdenum's low toxicity has also turned it into an important component of catalysts and lubricants, many of which are used by the oil industry. Because molybdenum is an incremental additive with no price competitive substitution possibilities, much as uranium is for nuclear energy, demand for this metal is insensitive to price during the short term. But molybdenum prices are vulnerably to supply pressure in the long run, because, unlike uranium, permitting a molybdenum mine does not have to contend with the bugaboo of radioactivity.

Molybdenum last boomed during the seventies when many of the known molybdenum deposits in Alaska, British Columbia and western United States were delineated. Prices collapsed under the pressures of the 1982 recession and the arrival of molybdenum by-product production from copper mines. Molybdenum languished in the $1-$3 per lb range for more than two decades except for a short-lived spike in 1994-1995 related to a temporary mine shutdown. The world's needs were amply met by Chinese production, several major North American primary molybdenum mines such as Endako and Henderson, and price-insensitive by-product production from North and South American copper mines.

In early 2005 we were cautious about MolyMania catching on because we viewed $30-$40 per lb molybdenum as unsustainable. The industry consensus was that molybdenum prices would soon crash back below $5 per lb as it did during the eighties. Phelps Dodge would put Climax back on stream, the Chilean copper mines would run their molybdenum recovery circuits at full capacity, the Chinese would resume molybdenum production, new roasting capacity in the pipeline would eliminate the processing bottleneck, and some new primary molybdenum mines would be put into production. This consensus came from an industry which was securely in the Cyclical Bear camp. We held the somewhat contrarian view that the Rise of China was a structural phenomenon that would postpone for many years the bust portion of the commodity boom-bust cycle that has plagued the mining industry since World War II. We agreed that molybdenum prices would retreat, but felt that they would stabilize in the $10-$15 per lb level where a fair number of the existing undeveloped molybdenum deposits, some of them controlled by juniors, would be economic. But because nobody likes to catching falling anvils and knives, we felt that MolyMania would kick in only after molybdenum prices had pulled back to a level with which the market had become comfortable with as a new long term price. We expected this to happen during 2005, but molybdenum never dropped below $20 per lb. In fact, by late 2006 molybdenum prices had begun to creep higher.

(Getting a decent moly price chart avaialble for free has been a real pain in the butt. I'm happy to report that Infomine now makes available a current molybdenum price chart at the following link: Infomine Moly Price Chart.)

A shift in the industry consensus occurred in September 2006 when Blue Pearl Mining Ltd, a junior which hoped to develop a molybdenum deposit as an underground mine, negotiated the purchase of Thompson Creek Mining Company, the private owner of two major primary molybdenum mines and several roasters in North America. Blue Pearl was able to raise the US $575 million acquisition cost through a combination of debt and equity. Almost overnight Blue Pearl had turned itself into the only major publicly traded molybdenum producer.

On March 5, 2007 molybdenum received a major endorsement when Eric Sprott, an early investor in the uranium boom which started in 2004 and was still going strong in early 2007, launched the Sprott Molybdenum Participation Corp (MLY-T) as a fund which would invest in physical molybdenum and public companies with molybdenum assets. Sprott Moly raised $189 million and commenced trading on the TSE on April 16, 2007. MolyMania, no longer just a concept, has started to sweep the market, pushing up the prices of juniors with molybdenum projects which languished during 2005-2006 while molybdenum sold at record levels.

Market commentators have started to wave caution flags about UraMania even while they concede that uranium spot prices have nowhere to go but up. Even though more and more people are coming around to the idea that nuclear energy is preferable to global warming linked fossil fuel fired energy, absolutely nobody wants a uranium mine in their back yard, and very few people can imagine anybody else wanting a uranium mine in their backyard. That is a problem for all those juniors with uranium pounds in the ground that have attracted hefty market capitalizations as speculators do the math of X million lbs times $113 per lb U3O8 to generate in situ values reaching billions of dollars. That is a problem for exploration juniors coming up with intersections of uranium mineralized rock worth thousands of dollars per tonne. Cameco's Cigar Lake deposit, among the richest uranium deposits in the world, is serving double time symbolizing why uranium prices are going to the moon and why it might take decades to turn a new uranium discovery into cash flow. To make matters worse, there now are hundreds of juniors claiming to be involved with uranium. Molybdenum does not carry the same degree of NIMBY baggage, and there presently are only several dozen juniors with half decent or better molybdenum projects. No doubt that will change over time, but for now the market's focus is on juniors who already have molybdenum projects.

The explosion of MolyMania has had a very pleasant effect on two toiling geologist juniors which I chose to turn into conflict-free sizable personal investments rather than bottom-fish recommendations. During the past few days Leeward Capital Corp (LWC-V: $0.425) and Geodex Minerals Ltd (GXM-V: $0.96) have announced private placement financings of $2.5 million and $10 million respectively. Jennings Capital is placing 10,000,000 shares at $1.00 to fund the next phase of work on Geodex's Sisson Brook molybdenum-tungsten deposit in New Brunswick. On March 28, 2007 Geodex announced a 43-101 inferred resource calculation for Sisson Brook at various cutoff grades. At the low cutoff end Sisson Brook has 167,400,000 tonnes of 0.122% WO3 (tungsten) and 0.021% molybdenum which at $12/lb tungsten and $30/lb molybdenum represents a rock value of $46 per tonne. This represents an in situ value of $7.7 billion. At a ten times higher cutoff grade Sisson Brook shrivels to 12,300,000 tonnes of 0.281% WO3 and 0.057% Mo which has a rock value of $112 per tonne for an in situ value of $1.4 billion. The next phase of work will include a scoping study which will determine not only what combination of tonnage and cutoff grade Geodex should target for development, but also how low tungsten and molybdenum prices can drop before Sisson Brooks becomes sub-economic.

Just over a year ago I gave a seminar in Vancouver in which I applied the rational speculation model to Geodex's Sisson Brook project in the context of the battle between the Cyclical Bears and Secular Bulls. At the time the Cyclical Bear view that the prevailing metal prices would soon fade away held sway, and juniors like Geodex were being priced accordingly, namely as mired in the mud at the starting gate. My bottom-fishing strategy was to target juniors who controlled deposits that were worthless at the prices of yesterday and potentially very valuable if today's prices were here to stay. My dual assumption was that we would go through an inflection period where the market would start to believe that high metal prices were indeed not going to go away, which would result in a sharp upwards repricing of juniors like Geodex, and that when metal prices did decline, they would settle in at levels well above yesterday's prices that still left these deposits economic and worth developing. We have entered the inflection zone where the market is not just starting to accept higher metal prices as a long term reality, but is even contemplating the possibility that we may see ridiculously higher prices than already witnessed such as has happened with nickel and uranium.

Geodex, of course, has not gone from $0.15 to $0.95 simply because the market has changed the prism through which it views the future. The delineation drilling done during 2006 has boosted the Sisson Brook inferred resource size 50% higher than what management had optimistically hoped for. And while Geodex toiled away on Plan A, exploration on its Plan B indium project at Mt Pleasant has yielded high grade zinc-indium mineralization which supports management's theory that the ground surrounding the old Mt Pleasant Mine has potential for significant new discoveries containing a specialty metal whose price has soared in recent years. And, as usually happens to somebody who has struggled for years butting his head against the wall, Geodex's Plan C strategy of specializing in New Brunswick has resulted in it holding property in the middle of a new uranium staking rush. In fact, a radiometric anomaly has turned up on land Geodex controls not far from its Mt Pleasant play.

Stocks like Geodex are very interesting because they started out as retail plays raising money at cheap prices from moms, pops, and people with too much wax in their ears to hear all those caveats a scrupulous geologist like Jack Marr would trot out at the beginning of his presentations. The Sisson Brook story has outgrown the funding capacity of a retail audience and is now attracting the attention of an institutional audience which is putting up $10 million just as an appetizer. With a solid retail audience already in place, and an institutional audience starting to plug itself in, the $57 million value currently assigned to Geodex's New Brunswick assets stands to double or triple in short order.

Leeward is another toiling geologist junior which less than six months ago was forced to do a desperado financing at $0.10 to raise enough money to keep its Nithi Mountain molybdenum project alive. Leeward spent much of the money in January and February on a drilling program which yielded the best intersections yet on the Nithi Mountain property on the Gamma Zone. But the market was disappointed by the short intervals of moly mineralization obtained on the Gamma West Zone. Readers may recall that Gamma West is a blind target generated by Leeward's Jim Davis through air photo based fracture analysis. In a November 16, 2006 Kaiser Blog comment, Gunning for an Endako Lookalike, I gave a detailed description of this fascinating hypothesis which suggests that Nithi Mountain may host a secret twin to the world class Endako molybdenum deposit. The footprint of the Gamma West "goose egg" is several times bigger than that of the Gamma zone. What made Gamma West exciting was that it exhibited a denser, more complex fracture pattern than Gamma. Molybdenite tends to precipitate within fracture planes, concentrating in narrow seams while disseminating at much lower grade within the surrounding rock. Ore grade is created by averaging these narrow high grade seams over the intervening rock. Nithi Mountain had not been delivering long ore grade intersections because these seams were spaced too far apart in the areas drilled. But at Gamma West the fracturing was much closer together and occurring in all directions, suggesting the presence of a hydrothermal system. But had the Gamma West area been pumped by molybdenum bearing solutions? Perhaps it was just a pyrite system?

When Leeward reported a bunch of 3 metre intervals grading 0.03-0.072% Mo plus a couple higher grade intervals for the Gamma West zone the market was understandably disappointed. Leeward drills into the highly fractured Gamma West target and gets results that pale in comparison to those of the less fractured Gamma zone?

It wasn't until I saw the location map for the drill holes that I began to cheer up. Leeward's 500 metre stepout holes to the west of Gamma had barely scratched the rim of the Gamma West goose egg! Why on earth didn't you drill into the heart of the Gamma West zone and properly kill this story I asked Davis. His answer was plausible. The Gamma West target is located on the southern flank of Nithi Mountain and was not accessible during winter. The closest the drill rig could get was the edge.

Leeward had managed to confirm that the blind Gamma West target did indeed contain molybdenum mineralization. The biggest risk, namely that this highly fractured area represented a barren hydrothermal system, had been eliminated. But why expect the molybdenite to intensify in the heart of the Gamma West zone? Leeward had been using oriented core drilling at Nithi Mountain, which enabled Davis to conduct studies on the orientation of the molybdenum bearing seams at Nithi Mountain. His conclusion is that the orientation of the seams and veins correlate well with the main fracture directions at Nithi Mountain. In other words, if the molybdenite encountered in the less intensely fractured periphery of the Gamma West target correlates with local fracture directions, mirroring a pattern observed within the entire mineralized Nithi Mountain system, there is a very good chance that the more abundant fractures in the heart of the Gamma West target will also contain molybdenite. And that should translate into ore grade intersections when Leeward resumes drilling in mid May. Leeward's Jim Davis has in fact developed an unusual confidence that seems to have washed over into a variety of quarters, not the least of which is the source of the $2.5 million financing at $0.34 for flow-through and $0.30 for non-flow-through which has stipulated that its identity not be disclosed. Unlike all of Leeward's other financings, this one appears to have been a done deal the instant it was announced. The stock's sharp move above $0.40 suggests that Leeward, like Geodex, has started to attract an institutional audience.

What seems to be attracting this new money is not so much the bluesky potential of the Gamma West target, but more so the potential to delineate a 50-100 million tonne resource in the Gamma area. The question is, what grade? Blue Pearl has announced a new measured and drill indicated resource of 492 million tonnes of 0.043% Mo at a cutoff grade of 0.02% which it believes will extend Endako's mine life well beyond 2013. Blue Pearl is now conducting a study on the feasibility of converting the three existing pits into a single super-pit that targets surrounding and deeper ore. The goal is to boost production capacity from 30,000 to 50,000 tonnes per day and allow both Endako roasters to be operational. What remains to be determined is the impact a higher stripping ratio will have on the mine economics. Leeward's Davis is quite confident he can deliver lots of tonnage at Nithi Mountain if he uses a 0.02% Mo cutoff, and is optimistic that he can improve the grade. Best of all, any ore Leeward develops at Nithi Mountain will be near surface and have a much lower stripping cost than required by the ore still in the ground at Endako. In other words, while retail adopted Leeward at $0.10 in the hopes that Gamma West would turn into an Endako scale discovery that takes the stock to $10 and beyond, institutional money is now climbing on board with the expectation that delineation drilling will outline a resource worth several hundred million dollars which may attract an offer at $2 or better from Blue Pearl once a 43-101 resource calculation is available. Leeward will have two drills working by mid May, one drilling the Gamma zone on 50 metre centres to delineate a "consolation prize" which may attract a buyout from Blue Pearl, and the other probing the Gamma West target in the hope of revealing a world class molybdenum deposit which justifies development on a standalone basis. We won't know the end of the Gamma delineation story for at least another year, and while we may know the good or bad news about Gamma West by this summer, at prices below $2 the Gamma West news is irrelevant.

*JK owns shares of Leeward and Geodex