Molybdenum Market What If???

February 16, 2006

Much has been made of the fact companies with pure molybdenum deposits have not reacted as strongly as one might expect based on the base metal bull market and the price of molybdenum now having sustained a price north of $15.00 for approaching 2 years now. I am asked constantly why I believe that is the case.

Here is what I believe.

I believe if there was a large primary producer of molybdenum in North America trading publicly, we would not be seeing the sluggishness we're seeing. Unfortunately the only large primary molybdenum producer in North America is Thompson Creek with the Endako mine and it is not publicly traded on any of the North American exchanges. Of course there is Teck Cominco, Phelps Dodge, Amerigo and other producers in North America whose bottom lines have been bouyed greatly by their molybdenum profits, but they do not qualify as they are not primary molybdenum producers.

In the landscape known as "Molyland", there are no large primary molybdenum producers to blaze the trail and garner the attention of institutions that molybdenum certainly should be seeing along with copper, uranium, zinc and the other top performing base metals.

Therefore I have decided to pose the question of, "What if?"

What if there was a large publicly traded primary molybdenum producer in North America?

Adanac Moly Corp is the closest to becoming that large primary molybdenum producer. Adanac Moly Corp is a publicly traded company on the TSX Venture exchange and trades under the ticker symbol AUA.

They have spent two years on the project along with almost $10 million spent on drilling, bringing the resource to 43-101 compliance and completing all of its environmental studies (including the environmental baseline study and the socio-economic impact study, both of which take almost that entire 2 years to complete). This is of course in order to bring their proposed 20,000 tonne per day open pit operation near Atlin BC into production. With completed pre-feasibility studies and being in the process of releasing their final bankable feasibility studies (280 million lbs molybdenum) and applying for their permits with a projected late summer 2006 mine construction commencement date, I have decided to use them as a model. In my opinion, they are the only open pit mining company who is actually going to see the light of day any time soon.

In fact Adanac is a minimum 18 months ahead of the curve and as stated clearly in their mission statement, they are looking "To become the first successful publicly traded primary molybdenum producer in 20 years."

Now that I have set out the reasons why I use Adanac as the model, let's explore the what ifs and see where it takes us. I am not going to deal with share price here, I am merely going to look at Adanac Moly Corp. and ask, what if it was producing today?

If one looks at Cameco (CCO - TSX) you will see what happens to a company when the funds step up looking for a specific metal. In this case uranium. Uranium at the time was hot and getting hotter, the retail sector and funds went looking for pure uranium plays and landed on Cameco, what did their stock do you ask? Have a look at the chart ***

*** Company has since split the stock 2 for 1.

Also interesting to note, that despite forecasts to the contrary, uranium has remained hot.

Of course as CCO traded higher, investors went looking for "the next one". Before anyone knew what was happening, uranium and uranium stocks took off. This is what pure molybdenum plays lack.

So this brings me to why I am writing this. Here is what Adanac Moly Corp. looks like if it had been a producer for the past two years. Since we're looking at late summer 2006 to commence construction, let's say Adanac started producing in June 2004 for our "what if" model.

Of note, I will use the numbers provided by Minnovex, Golder, Klohn Crippen and Wardrop engineering who completed Adanac's pre and final bankable feasibility studies. In other words, these numbers are not pulled out of thin air nor are they guesses.

The reports can be viewed here:

Production is slated to be 15 million lbs per year (from a 20,000 tonne per day concentrator) for the first 5 years due to production beginning in the high grade starter pit. This starter pit boasts an impressive grade of 0.136% MoS2; so in our "what if" scenario here is what that means with Adanac having been a producer since June 2004:

From June 2004 to present they would have produced 24 million lbs, multiplied by US$25.00 per/lb you come out at US$600,000,000

At a cost of US$5.00 per/lb (keeping in mind that number comes from the top engineering firms in the world in a pre-feasibility report) their cost is US$120,000,000

This translates to a pre-tax profit of US$480,000,000 and this in only the first 19 months of production!

Assuming 100 million shares fully diluted for Adanac's part in the mine financing, which is usually 10% of the capex, that is a stunning $4.80 earnings per share. I think it is safe to assume with numbers like this, molybdenum would be getting a much better showing than what it currently is. Especially in light of an overall grade that has Adanac Moly Corp forecasting a 20 year mine life.

Most incredible of all though, is that the above number is greater by roughly US$80,000,000 than their capex, suggesting full mine payback while realizing a pre-tax profit of US$80,000,000 and this after 19 months of production!

The capper?

This "what if" scenario will not take long to unfold as Adanac continues to meet or exceed its timeline. A timeline that has mine construction commencing this summer and production commencing late 2007/early 2008.

It was said to me many times by my father that if one looks after the pennies, the dollars will look after themselves. With molybdenum not receiving the attention that other base metals are enjoying because there are no publicly traded large pure molybdenum companies out there that can grab the imaginations of the funds, what becomes of this metal and the company that is the first large primary molybdenum producer to go online?

One only need look at the Cameco chart to get a pretty good idea.

Michael Alexander
Accelerated Capital Investments Ltd.
Phone: 519-471-3243
E-mail: [email protected]


Disclaimer: The opinions expressed above are those of Accelerated Capital and Michael Alexander. Michael Alexander is not an IDA accredited analyst nor a licensed broker and as such the above is not intended to be taken as investment advice. It is to be taken as opinion, with an invitation to perform further due diligence to assist you in making a more informed investment decision. Michael Alexander is employed by Adanac Moly Corp. to perform Investor and Public Relations for which a remuneration is received. Michael Alexander also owns AUA personally.

Gold is the official state mineral of Alaska.

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