General Moly whacked by cost overruns at Mt. Hope

It may not be the best time to be in the molybdenum business, as aspiring U.S.-based producer General Moly (GMO-T, GMO-X) finds itself coping with rising costs at its flagship Mt. Hope development in central Nevada, in the face of weakening moly oxide prices that have fallen from the US$15 per lb. level to lows of US$11 per lb. through the first six months of 2012.

The capital cost overrun at Mt. Hope hasn’t come as much of a surprise to markets considering General Moly last updated its bankable feasibility study in November 2009 and capital cost inflation has become widespread in the industry.

The project is north of Eureka, Nev., and hosts reserves totalling 865 million tonnes grading 0.068% moly for 1.3 billion contained lb. — making it one of the largest primary moly deposits in the world.

General Moly owns 80% of Mt. Hope along with Korean steel giant Posco. The mine is expected to produce 20 million lb. moly over its first five years at a cost of US$5.70 per lb., including a by-product copper credit. Mt. Hope is projected to have a 42-year mine life, and capital costs were initially pegged at US$1.15 billion.

News of rising costs at Mt. Hope first hit the wire on Aug. 1, when General Moly completed a capital cost review on the project. The company updated its estimates on all major equipment contracts, labour and material pricing. The review  took into account several permitting delays General Moly had encountered since the initial economic assessment was updated in November 2009.

General Moly found its capital costs had jumped 11% to US$1.3 billion, leaving the company with a US$130-million funding shortfall. With US$197 million already committed to the project, that left US$1.09 billion in remaining expenditures. CEO Bruce D. Hansen said he is  “very pleased that the project has not seen the type of extraordinary escalation in its capital estimate as other projects have recently realized . . . although the increase is not an insignificant amount, we have benefited by the advanced engineering and scope definition, and the fact that the 2008 estimate was completed pre-financial crisis, along with the previously purchased or contracted major long-lead items that have not been subject to significant price escalation.”

The largest inflationary culprit was “owners’ costs,” which jumped 48%, or US$82 million on the back of permitting delays and an increase in regulatory overhead. Construction and material costs jumped US$59 million, or 11% to US$582 million. In addition, a rise in labour costs and pricing for specialized processing equipment accounted for a 12% cost jump.

General Moly secured a US$665-million term loan from the China Development Bank in early February, and is receiving US$320 million from Posco. In a bid to cover the funding shortfall, the company arranged US$125 million in subordinate debt from China’s Hanlong Mining.

The Hanlong financing package contains two tranches. The first consists of US$75 million that will be available during Mt. Hope’s construction period, while the second totals US$50 million that becomes available during a six-month window after construction. The package includes a US$6.25-million financing fee and 2.5-year warrants to purchase 10 million General Moly shares.

CIBC World Markets analyst Ian Parkinson dropped General Moly’s target price by 40¢ to $6.30, citing the revised capital figures and permit delays as the main reasons for the company’s falling valuation.

“General Moly has a US$65-million cushion for funding the project, and with the current financing packages in place, is fully funded to commence construction once all permits are received,” Parkinson writes in an August 8 research update. “However, we believe this leaves a small margin for the company as another increase in [capital expenditure] is not out of the question.”

General Moly is an undiversified, primary moly mine developer, the company’s market valuations have tended to mirror the commodity’s pricing over the first half of 2012. Company shares have dropped 26% or 99¢ since moly prices began to trend downwards in February, and General Moly has been thinly traded with average daily volumes of just 1,228 shares. The company shares have been relatively flat over the first week of August, having gained 2¢ since the capital review announcement, en route to a $2.89 presstime close.