There is a polite arrogance in the new king of primary molybdenum producers that comes with being the big kid on the block. That’s how the CEO referred to Blue Pearl Mining during our hour-long phone interview in which we discussed developments at his company, the future of the molybdenum market, and startups hoping to emulate his success.
Ian McDonald may well be entitled to his opinions. After all, Blue Pearl could produce the same number of pounds of molybdenum in 2007 as Cameco Corp would produce of uranium. (And free from those pesky legacy contracts or Cigar Lake remediation efforts.) Blue Pearl is now the largest publicly traded primary producer of molybdenum. The company plans to extract about a fifth of the world’s primary molybdenum in 2007, about five percent of the world’s total extracted molybdenum. His company will also roast about 12 percent of the world’s molybdenum. Not bad for a company that was a penny stock about seven months ago.
Blue Pearl has become a Bay Street darling since the company announced its audacious $575 million acquisition of privately held Thompson Creek Metals Company. Having closed the transaction at the end of October, Blue Pearl now owns two operating molybdenum mines and concentrators and a metallurgical facility (roaster) in Pennsylvania. In mid-June, the company’s shares were trading at less than Cdn$1.80; yesterday the stock closed at C$12.06. Since the end of August, shares of Blue Pearl have risen relentlessly, with only brief pauses in consolidation.
We were fortunate to have featured Blue Pearl in our seminal molybdenum article on the metal’s relationship to the energy bull market, last July, at a time when few had heard of the company.
On Monday, the company announced encouraging cash flow from the recently acquired Thompson Creek operations. In the 67 days following this acquisition, Blue Pearl generated revenue of $150.8 million, about $2.25 million per day. Annualized, this could reach more than $800 million in 2007 if the molybdenum price holds firm and production continues as planned.
Production costs from the company’s Thompson Creek and Endako molybdenum mines averaged $6.28/lb. The company sold this production at an average price of $25.74/pound. For 2008, the company expects to extract 27 million pounds from these mines. Firm molybdenum pricing helped Blue Pearl release the $64.3 million second lien credit facility in mid-March. According to Monday’s press release, the company’s cash balance is approximately $135 million.
The company expects its bank debt to fall to $320 million after paying its first quarterly installment in 2007 of $18.75 million. Blue Pearl incurred $401.9 million in long-term debt as part of its acquisition of Thompson Creek Metals. At the current production rate, quarterly bank payments amount to little more than a week’s production.
What’s on Ian McDonald’s mind?
Historically, according to Western Troy’s Rex Loesby, annual demand for molybdenum has grown about four per cent since the 1950s. This fits well with McDonald’s forecast of £700m by 2020. to be the supply,” he told us. And where will this come from? “That, of course, is the big question,” McDonald said. “There is a shortage of new projects in the pipeline.” And he reminded us that China has started to consume more of its own molybdenum production.
As with uranium and other metals, China is a wild card for molybdenum supply. In any molybdenum discussion, China remains a primary concern for miners. “China produced, 13 or 14 years ago, around 110 million pounds and exported 100 million to a market of 230 million pounds,” McDonald said. “Last year, in a £400m market, China produced about £80m, exporting about £30m net, so they’re keeping more. The story is they use more of their own.” He is quick to point out that world demand for molybdenum increased by six percent in 2006, but demand from China increased by 20 percent.
“I’m not going to sugarcoat it,” says McDonald. “If they wanted it to look bad, they would. If they start littering the market, everyone is devastated.” But he doesn’t think this is a likely scenario. There are only 39 large mines in the world that produce molybdenum, he told us. “But in China, there are more than 500 small family-owned operations. China wants to have some world-class companies, and they’ve shut down some of the smaller operations because they don’t use their energy efficiently. If you have a large mining company, they’re going to have a long-term vision and maximize the country’s resources.
The origin of the supply is second only to the growing demand that McDonald’s foresees in the future. “There are a growing number of applications for molybdenum.” He pointed out that cars consume molybdenum. “There’s about £0.9 or so in a dozen different places in the car, and with 55 million cars in the world, that’s about £50 million.” This is probably the third largest application of molybdenum.
“High-end molybdenum stainless steel applications consume the most,” McDonald said. “Any steel that is used in the ocean or near the ocean has molybdenum in it.” He pointed out that Blue Pearl leaves about 10 percent of the company’s molybdenum production in the form of sulfide for the high-end lubrication market: the oil companies. “Most of it becomes technological oxide, MO3, and about 25 percent would be ferromolybdenum,” he said. “We just sold some (ferromoly) in Europe at $34 a pound.”
His company was chosen to help produce advice on the recently launched Sprott Molybdenum Participation Fund. We asked about his involvement. “We get a small fee for storing molybdenum if they decide to buy,” she told us. It would be stored at Blue Pearl’s metallurgical facility in Pennsylvania. “We would also sell some to them,” she added. His company would not be advising the fund in which companies to take investment holdings. “It would be a conflict of interest and we would have to recuse ourselves,” she said.
You see a new offer on the horizon
“There is a tremendous barrier to entry for a new primary molybdenum mine to come online without a forward market,” McDonald noted. “Because without a term sale, the capital financing requirements to build one of these new mines could be very, very challenging.” He believes that one of the other big molybdenum mines will be funded, but cautioned: “I think once one does it, it doesn’t mean they’re all going to do it.” He explained his own personal experience: “When we raised the $575 million last year to buy Thompson Creek, this was a company that made close to $400 million a year after taxes, and we had to do some heavy lifting. … It would be difficult for another junior.”
One place where he sees an imminent supply of molybdenum is Blue Pearl’s Davidson deposit, not far from the company’s Endako mine and milling facilities. “We’ll have feasibility in the second quarter, I say second quarter, but hopefully very soon,” McDonald told us. “It will become the highest grade molybdenum mine in the world.” He said his company was lucky to get it three years ago. “It had been production-ready and had a lot of development done on it.” So the company decided to move on to the final feasibility study instead of bothering with a scoping or pre-feasibility study. He said that the Davidson project would be in full production in 2009.
What about the development of the mine? “There are already 2.5 kilometers of underground works there and the ground conditions are excellent,” he said. “We opened it up a couple of years ago, after no one had been underground in 25 years. The entire 1.5-mile scale fits in a five-gallon paint bucket.” McDonald told us that Blue Pearl plans to just mine the deposit and little else: “We won’t even crush it, just a rock breaker, and we’ll haul it to Endako.”
But Blue Pearl may have a partner in Davidson, the Japanese trading company, Sojitz. “They own 25 percent of Endako and they want to buy 25 percent of Davidson,” McDonald said. “It would make sense, if they have the same percentage of both. There would be no problems with recovery, or mixing of minerals and all that. We would have the same manpower.” He warned that the deal was not yet closed. “We will look to possibly do a transaction with them.”
Another project where McDonald’s hopes to provide additional molybdenum supply is the possible expansion of Endako into a ‘super well’. The company plans to have the scoping study done by the end of this year, possibly in June. “I feel pretty good about it, it’s pretty realistic,” he told us. “We’ve got a massive resource there, and it would be a pretty big job. But it might take some of these other young guys’ breath away.”
We discussed his vision to expand the plant to 50,000 tons per day. “It’s probably 32,000 tons a day now,” he noted. The first step is to redo the reserve and resource calculations at Thompson Creek and Endako using a molybdenum price of $10/lb. The previous price was “too conservative,” according to McDonald’s. We suspect the higher resource figure would open the door to raising the likely $250 million to upgrade the facility to the higher tonnage operation. And his mind is already moving in that direction.
“Let’s say we did a study within the next year,” he explained. “Construction would take until 2008 or 2009. Unfortunately, because the mine has been in operation for forty-two years, we would have to move the existing mill.” The mill would have to be moved because there is ore below the current mill site. “It won’t happen overnight,” she warned.
And what about those other junior molybdenum companies? “We’re not going to grow our business by buying all these other molybdenum deposits,” he replied. “Then we have to go and raise $700m, worry about marketing another £20m a year and stake the company on that. Personally, and our board agrees, we’d rather buy something that’s in production and pay a little more.” , or take something in a feasibility stage, like copper/molybdenum. We have a pretty good balance sheet, or will be by the end of this year. Then maybe we could buy some molybdenum production.”
What are your plans as 2007 progresses? “We qualified for the New York Stock Exchange,” McDonald confided. “We’ve talked to them. I think we’ll get things up and running this spring, and we could look for a consummation in the early fall. We’re coming to the US, we qualified, and they seem pretty interested in having us.”
Just to make sure we got his story right, McDonald added, “We’re not resting on our laurels. We’ve got a lot of growth ahead of us, bringing in Davidson, expanding reserves at both mines and doing a scoping study.” to expand Endako. Our main job is to pay down debt and increase reserves. This is a lot. Everything is within our backyard and with our own experience. Anything we do outside of that, we’ll do other things, I think. , but these are things that are going to be safe.”
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