Moly Mines Gets Second Chance At Spinifex Ridge

VANCOUVER — Perhaps no other moly junior stands to gain or lose more than Moly Mines (MOL-T, MOL-A). It owns one of the largest and most advanced molybdenum projects in the world, Spinifex Ridge in northwestern Australia, and at the same time is under the gun to repay — or restructure — a US$150-million bridge loan maturing Oct. 31.

Up until last fall, as was the case for many other moly juniors, the future looked bright. This was especially true for Moly Mines, which had produced a feasibility study at Spinifex Ridge, finalized an offtake agreement, fully permitted the mine plan and received community approvals to go ahead with construction and production. The project, unquestionably big and costly to build, has a massive measured and indicated resource of 652 million tonnes grading 0.05% moly and 0.08% copper and a concomitantly heady capital cost in the range of A$500 million to A$1 billion ($458-915 million), depending on the chosen mining scale.

At the time, Moly Mines was moving full steam ahead to get the A$1-billion project (then the only option) under way. And so in August 2008, it announced that it was arranging the US$150-million bridge loan to start buying equipment. The plan was to finance the rest of the project in the months to come.

That, of course, was when the price of moly was more than US$30 per lb.

Then the financial world seemingly collapsed. Credit dried up and the price of moly plummeted to below US$10 per lb., rendering Spinifex Ridge barely economic as its cash cost per lb. moly in the first 10 years was estimated at US$6.82.

For others in the moly sector, the raw reality of the price drop and drying up of funds forced creditor protection upon them. And until recently, with US$150 million borrowed on harsh terms — 20% annual interest and the issue of significant amounts of special warrants — and with an inventory of idle equipment, that seemed a very possible future for Moly Mines.

But you wouldn’t know the company was in a hard way from its share price: It’s now at $1.64 after spending about nine months well below 50¢.

How? For one, fuelling its share price is a surge in the price of moly to above US$17 per lb. this summer. Secondly, Moly Mines is now talking about the real possibility of refinancing its bridge loan with TCW, a U. S.-based investment firm.

But can it work?

“That’s the big question mark on the company right now,” says Stefan Ioannou, an analyst at Haywood Securities who has been following Moly Mines closely. “The big catch, the worst-case scenario, is if TCW decides not to renegotiate . . . from a legal standpoint they (Moly Mines) could lose the project here.”

But as Ioannou points out, that is certainly not how the market is treating Moly Mines. And though even he had put a sell on Moly Mines at 30¢, foreseeing a bleaker future, he now shares some of the optimistic sentiment and doubts bankruptcy is on the horizon.

The ideal course from Moly Mines’ point of view, as explained in a recent quarterly update, is for the US$150-million loan to be restructured into a full financing package. But Ioannou wagers that’s not how it will go.

“They need US$150 million, like now, and they’re sitting on — I’m not sure of the exact value — but somewhere north of US$75 million worth of equipment,” he explains. “And that’s their easiest, most liquid asset right now to get rid of for cash.”

With between US$75 million and US$100 million from an equipment sale, that would leave between US$50 million and US$75 million of the bridge loan to pay off. To that end, Ioannou says Moly Mines has a sweetener in negotiations that are currently unfolding with TCW: A small, but high-grade iron ore project on the Spinifex Ridge property.

“It can arguably generate US$20 million in cash flow a year,” Ioannou says. Moly Mines pegs the project’s capital costs at about the same, US$20 million, and says it could have the Spinifex Ridge iron ore project producing next summer.

“It’s nowhere near the size of some of the other iron ore deposits that are nearby, but it’s very high grade.” Ioannou says.

Moly Mines has pegged the deposit’s indicated resource at 6.1 million tonnes grading 58.9% iron.

A big upside of the iron ore project is its location. Port Hedland, about 100 km northwest, is by volume the world’s second or third-largest iron ore port, Ioannou says. “So it’s something TCW can look at and say: ‘OK, fine. We get one hundred million bucks now, right up front, in terms of repayment from the equipment sale, and we can take cash sweeps from this iron ore project in the interim,'” Ioannou speculates.

And with the loan more or less taken care of, that would still leave the even greater potential of the Spinifex Ridge moly project. “The key with Spinifex Ridge (moly) is that it is decent grade. . . and really from a production point of view, what really separates it from the other moly projects out there is that it is hands-down one of the bigger ones,” Ioannou says. “It’s 24 to 25 million pounds of moly a year at a full-scale operation and there are probably only three or four advanced- stage projects out there that can boast that kind of profile.”

On that list, Ioannou says, are General Moly’s (GMO-T, GMO-X) Mt. Hope and Liberty projects in Nevada, Freeport-McMoRan Copper & Gold’s (FCX-N) Climax project in Colorado, and Quadra Mining’s (QUA-T, QADMF-O) Sierra Gorda project in Chile. “But other than that, when you go to the next big moly project (after Spinifex Ridge) you drop down to 10 million lbs. moly a year production,” he says.

Added to its size profile, Ioannou notes, is its proximity to Port Hedland and by extension to Asia. “It’s not in the Rockies — in the middle of northern B. C. — where there’s no power, no infrastructure,” he explains. “It’s in a good location.” That will give it an advantage over other projects in North and South America that would have significantly higher shipping costs to Asia, costs that aren’t necessarily built into those projects’ cash cost economics.

Ioannou also says that the possibility of Moly Mines being able to finance the project because its share price is over a dollar is now, clearly, much greater.

When Moly Mines was trading at 30¢, raising funds through equity didn’t make sense, Ioannou says. In either the A$528-million, 10-million-tonne-per-year scenario at Spinifex Ridge, or the larger A$1-billion, 20-million-tonne per year alternative, the company would at that share price have to dilute so much as to become a multibillion-share company.

“But over a dollar, the metrics change,” he says. “That has significant implications for working through financing and what that might look like.”

Though the future of Moly Mines is still uncertain — if also improved — one thing is certain: TCW is sitting pretty.

Not only does it look like TCW will have its loan bearing 20% interest repaid, possibly with the sale of equipment, TCW also received special warrants at a very special price as part of the financing. “At the end of the day, it’s been a fantastic deal for TCW,” Ioannou says. “You know the share price has taken off and they’ve got warrants out at. . . a tenth of a cent basically.

“So what’s that?” Ioannou asks. “A thousand times’ return on your money? And when they do that, it’s gonna cost them about $1,800 (or so) to exercise those warrants and they’re gonna end up with about 15 per cent of the company in terms of share capital.”

Ioannou continues: “It’s ridiculous metrics. I remember when the math first came out, I had to redo it five times — I couldn’t believe it. It’s like I’ll give Moly Mines $1,500 for 15% of the company as an option against whether the company goes bankrupt. It’s worth the risk.”