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May 2009



Moly Producer... Eventually...

May 17, 2009 – Comments (2) | RELATED TICKERS: GMO , TCPTF , X

Alright, looked a bit closer at GMO.

I like it enough that I bought a small amount, and will continue to follow it.  But it definitely seems to have a big question mark with it...

On the plus side.  In it's current state it owns 80% of the Mt. Hope project.  The stock is $1.63, but yet they have $1.08 in cash per share and virtually no debt.  The entire enterprise value of the company is just $35 million... which is essentially nothing for a company that states they want to be the worlds largest moly producer.  Crazy.  They estimate 40M lbs a year for the first 5 years, half of that is already contracted out at set prices I guess, but none the less that is a lot of revenues if we say moly might be between $10 and $30 and thus profitable if it cost them perhaps $6 to $9 to extract.  Also TC and GMO have historically been very highly correlated, but just recently TC has diverged up in price quite a bit more than GMO.  Perhaps that divergence will converge again.

As I' ve said before I really like a play on Moly because it is being used more and more in various applications, but yet there is no real inventories stored anywhere.  The TC confrence calls had talked about that in the past, and in the GMO fact sheet they state a commodities research group says there is basically a month supply of total inventory, compared to 4 and 5 month inventories of other metals.  TC in their last conference call even said that 25% of their sales are now to China!  They have never sold to china before, and the CEO even said that 6 months ago he thought they would never have ANY sales to China.  He also said Europe started increasing thier activity with it.  So I really think these low cost producers of moly have some great times ahead of them.

On the downside, when will they start actually producing any revenues?  And what will the capital structure of the company look like at that point?  They are saying perhaps as soon as a year from now.  BUT, it looks like they will need almost $700 million to get this Mt. Hope project financed.  Will they trade off a further portion of thier interest in the project to fund this?  Raise a lot of debt?  Issue (and dilute) more shares?  These are huge questions and it'll be interesting to see how it plays out.  But, with the current low prices for moly, I think the general outlook for this company is dismal -which is already fully reflected in the stock price.  That is why I think it might be a good buying opportunity here.  As soon as the infastructure demand for steel gets back on track, moly, with its low inventory levels should see a huge run up in price, and thus the moly producers such as TC (and GMO if they ever actually produce) will have a great run.


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