Elephant Country

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By Greg Peel

Geologists call Papua New Guinea elephant country – not because a visitor might marvel at the sight of roaming herds of pachyderms, but because one might nevertheless stumble across some very large deposits.

The mainland of PNG features the famous copper-gold mines of Ok Tedi, Porgera and Yandera to name a few, while off to the north east the tiny island of Lihir has made Lihir Gold ((LHG)) one of the world’s significant producers of the precious metal. In between lies the larger island of New Britain, where Exxon first kicked a few rocks back in the 1980s under then general manager (PNG) Bob McNeil. Those original sites were acquired by Macmin Silver ((MMN)) during the 90s, before a scrip-swap saw Canadian miner New Guinea Gold (NGG) take over the rights.

With commodity prices dwindling to uneconomic levels at the end of last century, New Britain’s potential riches laid largely unassessed until recently when NGG unearthed several prospective gold-copper-molybdenum deposits of surprisingly high grade at only shallow initial testing depths. With gold mining as its sole focus, NGG has decided to spin off the copper-molybdenum interests into a new vehicle called Coppermoly (ticker COY once listed). Coppermoly’s IPO closes on December 7 with anticipated listing due on December 19. With 46 years of industry experience, Bob McNeil adds Coppermoly to his chairmanships of NGG, Macmin, Frontier Resources and Golden Tiger Resources.

There is little need here to sing the praises of copper, the price of which has exploded from under US$1/lb to over US$3/lb in the past five years as China has entered the industrial world. Molybdenum – affectionately known as “moly” – is, however, a story that is beginning to excite investors as we head towards the end of the decade. Moly boasts no exchange-traded market nor wealth of specialist derivatives. Like uranium, moly is traded mostly on an over-the-counter basis in a largely opaque market with what spot transactions being visible recorded on a weekly basis by trade publications. Moly reached a price pinnacle in 2004-05 at US$40/lb before a concerted supply expansion from Chile flooded a fledgling market and sent the price back towards US$20/lb. But now that the value of moly in various applications is being more readily recognised, the price is on the move once more. Moly is actually more actively traded than uranium.

For a comprehensive summary of the nature and uses of moly, readers are directed to FNArena’s April feature “Good Golly, It’s Moly” (Commodities; 16/04/07). But suffice to say its uses are many and varied. Around 75% of its use is in stainless and alloy steels, where its hardness, strength, and temperature and corrosion resistance make it a more desirable substitute than metals such as nickel for specific purposes. To date the consumption of moly has been closely correlated to the production of such “austenitic” steels, but as its benefits are coming to be realised the only way is up for its 2.2% average in that market.

Moly is a metal for tomorrow. Moly-steels are more temperature and corrosion resistant than other alloys, and hardness permits lower weight-for-strength ratios. It is the alloy of choice for the new breed of nuclear facilities, for desalination plants, bio-diesel plants and for gas-to-liquid and coal-to-liquid fuel infrastructure. High-grade moly is used in the production of deep oil well drills. It is now popular in oil pipelines and new double-hulled (as per new international requirement) bulk ocean carriers. It’s strength allows for automakers to build safer cars without increasing weight and fuel consumption.

The other 25% of consumption covers a range of applications including lubricants and pigments, but most prospectively in catalysts for the production ultra-low sulphide diesel. North America is in the process of bringing in strict new sulphur emission controls, while at the same time the demand for lower-consumption diesel vehicles is exploding.

Canada’s Scotia Capital last month issued a comprehensive report on the moly industry, in which the analysts proclaimed: “In our opinion the molybdenum market is undergoing an evolution from being driven by by-product copper production to becoming more driven by the economics of primary production”. To date, moly production has been almost always undertaken simply as a viable by-product of copper production. It is usually found in large copper porphyry (lots of ore for a little metal) deposits. With the exception of some moly-specific mining in China, moly production has been determined by copper demand.

Scotia reports Western Europe represented 31% of global moly consumption in 2006, with the US 18% and Japan 17%. China consumed 15%, but at 24% is the world’s second largest producer behind the US (33%) and ahead of Chile (21%). China, nevertheless, boasts what are considered to be the world’s largest reserves (39%) but as Scotia notes, scarce information leaves grades unknown. Metals expert Denis Bartram noted in April that China’s moly production had fallen by as much as 25% in 2002-06, but Scotia is unclear as to what new production could be initiated.

China has introduced tariffs on the export of its moly, preferring to retain the metal for its own use. For one thing, China is building a brand new navy (and Japan is building a brand new air force in response, with both projects expected to be users of moly-steels).

The annual value of consumed moly is around US$10 billion, compared to US$33 billion for nickel and US$118 billion for copper. Scotia notes “the relatively small size of the molybdenum market may limit the ability of companies that are focused solely on molybdenum to grow sufficiently large enough to attract a wider investment audience”. Which means that moly production is still best suited to companies not relying on moly as a sole source of revenue. Copper is the obvious diversification. But Scotia suspects that moly producers will soon find themselves attractive acquisition targets for large diversified mining companies, just as nickel miners have found more recently (witness Xstrata’s bid for of Jubilee Mines ((JBM))).

Which brings us back to Coppermoly.

Coppermoly’s goal is to raise at least $20m to finance an intensive two-year drilling program to define a Joint Ore Reserves Committee (JORC) resource within 18-months to two years. It hopes to move at least one of its three prospective PNG projects to the pre-feasibility stage within two years. It only intends to act as the “spotter”, such that a development partner would be sought once initial goals are achieved.

The company’s Simuku, Mt Nakru and Pleysumi systems are located nearby in the jungles of New Britain. The systems are well defined and previous tenement holders have already sunk a good deal of money into necessary surface exploration, with extensive mapping, geochemical and geophysical surveys completed. The good news is that despite the remote location, two of the three mines already boast road and track access. The deepwater port at provincial capital Kimbe is not far away, and it’s not much further to the island’s airport. Sufficient local infrastructure already exists, so we’re not talking a start-from-scratch in the wilds sort of project. Importantly, most of the necessary equipment is already at hand, alleviating the need to suddenly source this scarce resource. The same is true for personnel. And the local landowners are enthusiastic about the projects, with labour to be sourced from among the native populace.

54 drill holes have been tested over the three projects and significant mineralisation has been defined. Most of the testing has only yet scraped the surface, with a mere two holes having to date exceeded 200m. For those with a geologist bent, some drilling highlights include 74m at 0.78% copper, 94m at 0.43% copper, 205m at 0.40% copper and 58m at 0.53% copper. Significantly higher grades have been found closer to the surface. For those without a geologist bent, suffice to say that’s a lot of copper and some of it is just lying around. Coppermoly’s target is 500-600Mt of ore at 0.5-0.8% copper.

On the moly front, the Simuku trench results include 19m at 0.32% moly, 7m at 0.6% moly, 87m at 0.12% moly and 6m at 0.34% moly with mineralisation open in most directions. Moly deposits are sufficiently high grade at a shallow depth to begin commercial moly mining almost immediately, thus supplementing funds. Cash flow achieved would also potentially be a comfort to investors concerned about the need for any further equity raising. To put the moly levels in perspective, two of the world’s commercial moly producers are the Henderson mine in the US – a resource of 160Mt at 0.2% – and Boss Mountain in Canada (7.5Mt at 0.2%).

Coppermoly’s management team boasts decades of experience in mining and extensive experience in PNG. The company is offering up to 80,000 shares at 25c to supplement around 30,000 shares held by NGG, around 10m shares held by Pacific Kanon Gold, and $10m of seed capital. Twelve weeks after listing shareholders will become entitled to a 1 for 4 option issue at 1c. Previously held shares are subject to escrow restrictions. Lead broker for the IPO is Novus Capital.

Scotia Capital last month upgraded its moly price forecasts from from US$25.25/lb to US$30.43/lb in 2007, US$19.25/lb to US$33.25/lb in 2008, and US$8.00/lb to US$27.00/lb in 2009.

For Australian investors, direct investment in moly is again a story not unlike uranium, with the exception that there are no bans on moly mining. Rio Tinto ((RIO)) is the country’s largest producer, while significant copper-molybdenum resources are being developed by Moly Mines ((MOL)) and D’Aguilar Gold ((DGR)). Moly Mines’ share price has more than doubled since March, while the more diversified D’Aguilar has seen its share price fluctuate with base metal prices. Beyond that there are a handful of small prospectives.

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