By James West
Tuesday, January 19, 2010
Mosquito Consolidated (TSX:MSQ) CEO Brian McClay has been watching the price of Molybdenum with patient satisfaction. The reason is obvious: Mosquito Consolidated Gold Mines happens to the 100% owner of the world’s largest, as-yet-undeveloped molybdenum deposit on earth. The share price doubled when our coverage began, and so it is with no small satisfaction of our own that we continue to delve into the future of this elephantine opportunity. We’ve chosen Mosquito Consolidated as one of our top picks of the year.
Why? Simply because of its sheer size, and the increasing interest of investors who have the financial resources to build the substantial infrastructure required to extract the mineral value from this deposit. Many readers, and many investment bankers, fall prey to the same clichÃ©; â€œtoo good to be trueâ€.
The disconnect reported by many of subscribers is a common occurrence in the mining industry.
â€œIf the deposit is worth more than US$30 billion, and the company only has 60 million shares outstanding, then why is trading at only $1.50?â€
The answer to that is a little complicated, but also very simple at the same time. A project that is going to take US$2 -3 billion to put into production is very sensitive to market conditions. We’ve just witnessed the price of Moly fall straight out of bed along with other industrial metals as a result of the global economic slump.
But that all is changing, for the moment. The enthusiasm with which G7 governments are printing money has resulted in demand for investment assets, which in turn drives the prices of commodities higher, which itself acts to stimulate economic growth through the capital freed up in profits through trade.
Copper has seen a steady recovery, and now seems headed back towards record territory. Chinese growth was only slowed slightly by the whole crisis, in the health of the Chinese economy has seen demand for everything including molybdenum return to growth. In fact, predictions all seem to favor much higher metals prices in the next decade.
So as long as there’s economic uncertainty in the air, major institutional investors don’t feel compelled to take huge positions in something as yet on paper, but their reticence is exactly the opportunity for the risk tolerant investor. The â€œtoo good to be trueâ€ mentality has been proven wrong before, especially in the mining business. (Carlin, Yanacocha, Voisey’s Bay, Oyu Tolgoiâ€¦but I’ll stop there.)
In the case of the CUMO deposit, the numbers are very real, as the company that did the study will attest.
Fortunately, the Preliminary Economic Assessment (PEA) is using rather conservative pricing scenarios to determine the value of the project.
Preliminary Economic Assessment
Based on a pre-tax financial model (earnings before interest, tax, depreciation and amortization) and using a long-term, base-metal price scenario, Ausenco’s study showed the CUMO project having a Net Present Value (NPV) of US$16 Billion for a 150,000 short tons per day ore production rate and US$10 Billion for a 100,000 short tons per day ore production rate.
Corresponding Internal Rates of Return (IRR) were 36% and 29% respectively — significantly above the minimum 12.5% to 15% IRR typically required for United States-based projects to be considered for production — and straight-line payback periods for start-up capital costs were 2.3 and 3.0 years respectively. These very substantial figures indicate that Mosquito should be developing CUMO toward an initial ore production rate of between 100,000 and 150,000 short tons per day.
The base case economic analysis uses the estimates of capital and operating costs and assumptions as listed in the table below indicates that, given the current estimated mining and plant operating costs, as well as capital cost estimates, the internal rate of return (%IRR), Net Present Value at 5% discount rate (NPV5), payback period (years), discounted payback period at 5% and operating costs per pound of molybdenum oxide are as shown below. All values are calculated based on Earnings Before Interest Tax Depreciation and Amortisation (EBITD&A).
A quarter-century into its mine building life, Mosquito Consolidated has reached world-class status, with tangible multi-billion-dollar resource assets, some of the highest NI 43-101 compliant drill results ever achieved for the company, long mine-life resources, blue chip partnerships, and an excellent management team.
Recent Drilling Continues to Expand the Deposit
In November last year, Mosquito announced assay results that demonstrated the continuing exploration upside of the CUMO deposit, with the discovery of a new copper zone.
The following is from the press release dated November 12, 2009: Hole 49-09 is a vertical hole (-90) drilled to a depth of 867.8 meters (2847 feet),from a site located in the southeast corner between holes 14-77 and 44-08. The hole is designed to extend the mineralized zone intersected in Hole 14-77 (409.6m (1343.8 feet) grading 1.36% Cu Equiv/0.12% Molybdenite equiv.) to the south (figure 1) toward hole 44-08 (low grade hole).
Hole 49-09 intersected molybdenum bearing mineralization from 64.0 (210 feet) to 867.8m (2847) feet. The hole confirms that the molybdenum mineralization is present at depth and fills in a large gap between hole 14-77 and hole 44-08 in the mineral resource.
Assay results returned include:
Hole 48-09 is an angle hole (-70) drilled to a depth of 785.2 meters (2576 feet), bearing 305 degrees azimuth from the same site as Hole 47-09 (598.6m (1123.5 feet) 0.89% Cu Equiv.). The hole is designed to extend the mineralized zone intersected in Hole 47-09 to the north (figure 1). Hole 48-09 intersected molybdenum bearing mineralization from 88.4m (290 feet) to 640.1m (2100 feet). The hole intersected mineralization very similar to Hole 47, with a slight decrease in Molybdenum mineralization. This further confirms the presence of the newly outlined older Copper porphyry System and that the main molybdenum zone continues to the south and west rather than the north. It should be noted that this area was considered waste in the recently announced Preliminary Economic Assessment (see news release dated October 7, 2009).
Assay results returned include:
Geologically, the hole 49-09 confirms the continuation of the main higher grade core to the south and east. Hole 44-08 located to the south drilled over the top of the molybdenum zone, which is beyond the depths of the preliminary open pit design, and indicates the potential for underground accessible mineralization beneath the current pit designs. Hole 52-09 is currently drilling at 2770 feet to further expand information in this area (figure 1).
Hole 48-09 is the second hole drilled into the older, porphyry copper-silver system, which has been cross cut by the younger molybdenum bearing veins. The overall grade is slightly lower than Hole 47-09, due to the drop in molybdenum bearing mineralization. In addition, hole 48-09 intersected the same fault zone as 47-09 at 1736.5 feet. Only weak mineralization was intersected below this fault, indicating the mineralized zone is offset to the south west. Hole 53-09 is currently drilling to fill-in a large gap between hole 47-09 and hole 41-08, to complete this western most fence of holes. Future drilling will continue to follow the mineralization to the west and south west.
When the Newsletter Writers Start Coverage, Things Are About to Change
Newsletter writers don’t like to write about moose pastures or flogged out mineral assets that have more drill holes than swiss cheese. No..we like to cover things that are going to make us look SMART. So that’s why we are happy to see Bob Moriarty of 321Gold.com also covering Mosquito. Bob’s picked many winners over the years, and he makes no bones about his thoughts on the CUMO deposit:
â€œThe company has drilled out a 43-101 resource of about 2.9 billion tons. That is monster. The value of all the contained metal is about $78 billion dollars using today’s prices. There is moly, copper, silver, tungsten and an unusual element called rhenium. Voisey’s Bay only contains $38 billion dollars worth of nickel at today’s price. When you want to compare Mosquito, think Voisey’s Bay and double it.
I don’t doubt for a moment that there are naysayers who would be quick to point out that minerals in the ground don’t represent real value because you don’t mine them all and you don’t recover them all. That’s perfect true. And perfectly meaningless at the same time.
But for the sake of argument, I went to Shaun Dykes, Exploration Manager for Mosquito. He worked up a similar spreadsheet for me showing the gross metal value on a recovered basis. It’s still $66.9 billion. Wow.â€
But its not just newsletter writersâ€¦highly respected industry journal The Northern Miner saw fit to cover the company last year too:
The project, 15 km southwest of Idaho City, is undoubtedly large. The scoping study considers the economics of the Cumo project at four mining rates between 45,000 tonnes per day and 181,000 tonnes per day, projecting initial capital costs in the range of US$1.6 billion to US$3.4 billion.
Mosquito puts the focus squarely on evaluating the project at mid-sized mining rates. In a 91,000-tonne-perday scenario Mosquito pegs start-up costs at US$2.2 billion. With a 40-year mine life Cumo returns a net present value (NPV) of US$10 billion and an internal rate of return (IRR) of 29%.
A larger, 136,000-tonne-per-day mine, would give somewhat better economics. At that mining rate the project, which would initially cost US$2.8 billion to build, got a US$16 billion NPV and a 36% IRR.Payback in the latter two scenarios, based on US$16-per-lb moly oxide, US$2.10-per-lb. copper, US$12-per-oz. silver, US$6-per-gram rhenium and US$148-per-tonne sulphuric acid, would respectively come after 2.3 and 3 years of mining.
In all scenarios the bulk of capital costs are accounted for by the price of building a mill – respectively US$1 billion and US$1.5 billion at the 91,000-tonne-per-day and 136,000-tonne-per-day mining rates – and the cost of pre-stripping development. In the respectively lower and higher mining rate scenarios Mosquito estimates pre-stripping costs at US$700 million and US$640 million.
The scoping study pegs cash costs per lb. moly oxide at an attractive price point: US$3.90 at the 91,000-tonne-per-day mining rate and US$4.30 at the 136,000-tonne-per-day mining rate. The scoping study treats 598 million tonnes of Cumo’s indicated resource grading 0.11% moly oxide and 0.06% copper as ore.
Mosquito exploration manager Shaun Dykes says he has been getting essentially two questions from individuals who have taken a look at the project: “US$2.2 billion. Where are you going to get that? And then, can you get it permitted?”
Permitting, Financing, Construction
Good questions, to be sure, but when the Chinese are involved, numbers like billions don’t seem all that frightening. What we’re likely to see is the incremental growth in capital resources of the company as various financings are completed over time from numerous sources, thereby diversifying the risk.
In terms of permitting, the refusal of permits tends to be either environmental (especially in consideration of groundwater contamination) or political. In the case of CUMO, the state of Idaho is not exactly swimming in cash, and so the political pressure will more likely favour the permitting of the project, as long as the environmental considerations can be satisfactorily addressed.
Make no mistake: this project is just too big and profitable to be left sitting on the sidelines for much longer. Its not a question of â€œifâ€ this project will be permitted, financed and built. Its just a question of â€œwhenâ€.
Follow the company’s progress online at Mosquito Consolidated Gold Mines Limited – Home Page – Tue Jan 19, 2010.