Dramatic Tension with Mt. Hope

The Journal published this morning that the main backer for General Moly's (GMO) Mt. Hope molybdenum mine, Liu Han (chairman of Hanlong Group), has been detained in China. GMO was hoping to secure a loan to the tune of $660M to finance construction through Hanlong Group.

Having recently wrote a thesis on a quantitative pricing model for molybdenum that mentions GMO as a candidate with significant upside on rising moly prices, I'm inclined to comment.

The gist of my long GMO call focused on a few things:

1. GMO has hedged out the downside on moly prices. Molybdenum prices have hovered in the $10-12 plb range since the start of 2012 and the industry faces a supply glut going forward, so I can't expect prices to rise barring some significant, sustained demand shock. For the first five years of production, GMO has all of it's moly sold through forward contracts. These contracts ensure that 75% of the moly produced in the first five years will be sold at $14-15 plb. When you're hoping to produce 32 million lbs of moly per year out of the gate, that's around $252M in secured revenue. Assuming $10 plb moly, the remaining 8 mlbs would contribute $80M. With cash costs of about $6 plb projected, that means that they're spending around $192M to generate $332M or $140M in profits from moly operations. Net servicing debt and costs not included in cash costs per pound, that $140M number will decline but it's hard not to see profitable operations.
2. In light of (1.), I think GMO can weather the sour moly prices. All they need to do is survive and pray for volatility. Much like in Soviet Russia, in moly, volatility finds you. 2002-2005 isn't likely a repeat scenario, but moly seems like a good a bet as any for upside potential.
   
3. All of this hinges on securing financing. The sooner GMO gets into the game, the better.

Is this news an entry point to upside moly exposure in the long term? Sure looks like it. Shares dropped overnight almost 20%, hitting a low of $2.10 from $2.80 the night before. One thing is for sure. Using this as an entry point is doubling down on volatility: once for molybdenum prices and twice for the Chinese legal system.