Blue Pearl aims for moly’s top drawer

Vancouver — A US$575-million takeover of a privately held molybdenum producer is expected to transform Blue Pearl Mining (BLE-T, BLEFF-O) from a single-project development company into the world’s largest publicly traded primary molybdenum producer, as well as one of the world’s top-five producers after including state-owned and private corporations that typically produce the metal as a byproduct.

Blue Pearl’s core asset is the Davidson moly project near Smithers, B.C., where a feasibility study and permitting are under way to exploit a high-grade portion of an underground deposit. Measured and indicated resources total 75.5 million tonnes grading 0.177% moly.

Blue Pearl plans to complete the acquisition of privately held Thompson Creek Metals in early October. If all goes as planned, the company will wholly own the Thompson Creek open-pit moly mine and 25,000-tonne-per-day capacity concentrator near Challis, Idaho, and a metallurgical refinery in Pennsylvania with an annual roasting capacity of 35 million lbs. Another core asset will be a 75% interest in the Endako mine near Fraser Lake, B.C., where Blue Pearl had planned to haul ore from its proposed Davidson mine for processing.

“The entire suit of assets is very complementary to our existing assets, and are located in favourable jurisdictions,” said chairman and chief executive Ian McDonald during a conference call with analysts, media and shareholders.

The transaction will also provide Blue Pearl with a production base with potential for growth in the years ahead. Thomson Creek’s equity share of production this year is estimated to total about 26 million lbs. at an average cash cost of US$4.12 per lb. The company’s net earnings for the first nine months (ended June 30, 2006) of fiscal 2006 were US$286 million, based on income from operations of US$407 million.

Along with the US$575-million purchase price, Blue Pearl will be required to make contingency payments of up to US$125 million if prices remain above US$15 per lb. during the next three years. The payments are waived if prices fall and remain below US$15 over this period. The corrosion-resistant metal currently sells for about US$28 to US$30 per lb., up from below US$10 in early 2004, primarily because of a surging demand for its use in high-end steel alloys and oil-and-gas pipelines.

Blue Pearl has secured a commitment letter for a long-term loan of US$450 million, and intends to fund the balance through an equity issue. The company will also acquire Thompson Creek’s working capital of about US$150 million.

McDonald told analysts that the company expects to pay off the debt portion ($450 million) over four years, based on moly prices of US$20 per lb. for 2006, US$15 for 2007, and US$10 for 2009 and thereafter.

“I think we’re being pretty conservative, and our numbers don’t take into account (projected) production from Davidson,” McDonald said. “Nor do they take into account possible optimization at Thompson Creek, which is only operating at seventy-five per cent of capacity at this time because they got behind on some of their stripping.”

McDonald said the goal is to pay off the debt as quickly as possible while prices are strong.

“Debt repayment, reserve expansion and organic growth from projects such as Davidson will be the hallmarks of this company going forward.”

On the operations front, Blue Pearl has made site visits to the operations as part of its due diligence review, which resulted in a strong vote of confidence for existing management’s “expertise and commitment” across the slate of assets.

“We do not plan to tamper with a winning management formula,” McDonald said, adding that the company sees potential synergies between the Endako and Davidson properties, including processing Davidson ore at Endako’s existing mill.

Endako was placed into production by Placer Dome and recently celebrated its 40th year of production. The complex includes an open-pit mine, a concentrator with a capacity of 30,000 tonnes per day, and a roaster. The mine has an estimated 7-year mine life based on proven and probable reserves of 74 million tonnes grading 0.063% moly, and is expected to produce 66 million lbs. moly at an estimated average cash operating cost of US$5.11 per lb. over this period.

The Thompson Creek mine has at least another decade of production based on proven and probable reserves of 64.5 million tonnes grading 0.119% moly. The mine is expected to produce 148 million lbs. moly at an estimated average cash cost of US$3.68 per lb. over the 10-year mine life, which could be extended by converting resources into reserves. Measured and indicated resources (including reserves) stand at 178.6 million tonnes at 0.094% moly, plus another 34.5 million tonnes at 0.066% moly in the inferred category.

Thompson Creek Metals produced about 5% of the world’s moly production in 2004, the last year in which global production figures are available. The top three producers are Chile’s state-owned Codelco at 19%, Phelps Dodge (PD-N) at 13%, and Grupo Mexico (GMBXF-O), at 8%. All three companies produce moly as a byproduct, primarily from large copper or copper-gold mines.

McDonald expressed confidence that the proposed transaction will proceed as planned, as Sojitz Moly Resources — Thomson Creek’s partner at Endako — has waived a first right of refusal in favour of Blue Pearl. Sojitz is a subsidiary of Japanese trading house that will retain rights to market moly production from Endako.