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When trading stocks it is of paramount
importance to remove phrases like “I hope, I wish, if only’ from
your vocabulary. Instead I have learned to deal with stocks in probabilities.
What is the probability of profiting from this stock if x equals 1 and y equals
2. By calculating probabilities two wonderful things happen. All emotion is
removed from trading and a dispassionate approach to trading can take place
and we can better assess the risk to reward ratio and determine if this is a
trade that we want to undertake. In trading emotion is the bullet that will
kill you. Stick with probabilities.
I
own a sizable stake in a company called General Moly (GMO) which I will use
as a proxy for my thesis. When I first learned of it I studied the project and
determined that they owned the rights to the Mt. Hope project which is their
flagship project. I learned that when they received their permit to begin
building the infrastructure for the mine that they would be sitting on the
world’s largest deposit of molybdenum. I also learned that they owned a
site called the Liberty project that they would deal with at a later date but
from the preliminary analysis they had done they are sure that this project
will also produce a windfall amount of molybdenum.
So what’s so great about molybdenum?
Molybdenum is an alloy that is a byproduct of mining copper. When molybdenum
is mixed with iron ore one can create lightweight, incredibly strong
stainless steel that is impervious to high degrees of temperature and pressure.
I concluded that this would make it an essential ingredient for building oil
rigs and nuclear reactors as well as basic infrastructure. I also learned
that while China exported 97% of the world’s rare earth elements (that
has subsequently changed) they were actually net importers of molybdenum.
My next
step was to learn about the management team. I read everything I could find
on the management of this company and was very pleased to learn that CEO
Bruce Hansen had amassed an amazing team that were not looking to be acquired
but instead were looking to take this company into the arena of being the
suppliers of molybdenum to the world.
What did their balance sheet look like? They
had received a loan from one of the largest producers of steel in the world,
a South Korean company called Posco. They had also received financing from a
Japanese company called Sojitz and finally they had received a bridge loan
from a Chinese company called Hanlong for the amount of 50 million dollars
with the promise that when permitted they would receive an additional 665
million dollar loan to fast track the project into production. Make no
mistake; the South Koreans, the Japanese and the Chinese were not being
benevolent. They do not want the loans paid back in dollars they want the
loans paid back in molybdenum.
So
everything was going as scripted when a “Black Swan” appeared out
of nowhere and in December of 2010 with the stock trading at around $7.00 an
issue came up regarding the water rights. To the credit of General Moly they
have from the beginning of the project dealt with every problem with complete
transparency, they have followed the law “chapter and verse” and
there have been no mistakes made. This was no different. This did, however,
slow the process down and the stock immediately became the backyard of the
short sellers who used this as an opportunity to further drive the price
down.
We will
fast forward to last week when the state engineer granted the water rights to
General Moly. I expected the stock to bounce to its previous level before the
water rights problem but that did not happen. What had changed fundamentally?
I got out my pencil and sharpened it. To use the latest balance sheet figures
I could find I determined that if I used a proxy price of $15.00 a lb for molybdenum
then the company should have a net present value (NPR) of 1.2 billion dollars
or a 66% increase over where the stock is presently trading as far as market
capitalization. Given the discount to the NPV, does this imply that the
market believes that there is a 66% chance that this project will not go into
production? I conclude that this is simply not the case.
Let’s
honestly look at the risks at this point. Let’s assume the worst case
scenario, China doesn’t come through with the expected financing or the
Record of Decision (ROD) comes back negative or the Molybdenum concentrations
are significantly less than expected or finally the management cannot perform
adequately enough to get this through to production. China is contractually
obligated to provide financing once permitted and moreover they need the
molybdenum. There have been extensive exploratory bore holes done and
everyone knows what is under the ground. The management team has performed
spectacularly at every turn and I see no evidence of that changing. The X
factor as I see it is the ROD and every due diligence has been taken. I see
this as a probability of 80 to 90% that the ROD will come back positively. So
other than the ROD, how can this kind of discount to the NPV be justified?
I conclude
that the stock based on the fundamental analysis should be trading at the $10
to $12.00 range. Indeed the afore mentioned price of molybdenum that my
analysis was based on was $15.00 a pound and as I write this, Freeport Mac
Moran (FCX) one of the largest copper producers in the world, reported that
they had sold the molybdenum (which I said was a byproduct of copper mining)
at a price of $18.00 per pound. I believe this is hedge funds continuing to
try and drive the price down and judging by what I see on the tape they are
beginning to run out of gas. Yesterday the stock closed at $4.78 but I do not
see it trading there for much longer so I would encourage anyone who is
interested in making a profit to take a look at this project and if you like
what you see stake you claim at a very discounted price. I do not believe it
will last much longer under $5.00.
I have
learned through bitter experience to “never say never” but as I
have previously stated I see the probability of this project coming to
fruition as 80 to 90%. Surely somebody in Nevada wants a billion dollar mine
to operate there. Consider the tax revenues generated for the State and the
town of Eureka and the thousands of good paying jobs this project will
create.
Current Recommendations
1. U.S Gold (UXG) Buy under $7.00 Target price: $30.00 by 2015( July 21,
2011)
2. General Moly (GMO) Buy under $5.00 Target price: $10.00 by end of
2012. (July 21, 2011)
3. Quest Rare Minerals (QRM) Buy under $6.00 Target price: $15.00 by 2015
(July 21, 2011)
4. Tasman Metals (TASXF) Buy under $5.00 Target price: $16.00 by 2015
(July 21, 2001)
5. Avalon Metals (AVL) Buy under $6.50 Target price: $13.00 by 2015 (July
21, 2011)
6. Sprott Silver ETF (PSLV) Buy under $18.00 Target $25.00 (July 21,
2011)
7. Sprott Gold ETF (PHYS) Buy under $14.00 Target $20.00 (July 21, 2011)
8. Cameco Uranium (CCJ) Buy under $26.00 Target $48.00 (July 21, 2011)
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