TPS Trade Alert – December 20, 2013
December 20, 2013
Recommendation:
Buy General Moly (AMEX: GMO) up to $1.30 per share.
Trade Rationale:
With precious metals having lost their luster, investors are revisiting industrial metals as potential “hot commodities” in 2014. In fact, with economic growth likely shifting into a higher gear, industrial metals should see greater demand in the coming year.
Typically, you hear about copper prices as the best gauge of industrial metal demand. To a lesser extent, aluminum will find its way into the financial news.
Of course, steel and iron ore are very important indicators of industrial metal demand, but they don’t have heavily traded or followed future products associated with them.
Here’s the thing…
We’ve found an even better way to invest in the expected surge in industrial metal demand in 2014… molybdenum.
A lesser known element, molybdenum is an essential metal for modern industry. It’s used to strengthen steel and improve its performance and is vital in the energy industry, particularly in refining.
Molybdenum is so important because it has very few substitutes. As such, a producer of this vital metal is going to make for a sound investment as demand grows.
Here’s what’s interesting…
There are very few pure play, investable molybdenum producers.
That’s why we’re really high on General Moly (AMEX: GMO).
GMO is a development stage company that mines molybdenum properties. The company holds 80% interest in the Mt. Hope project, which contains provable molybdenum reserves totaling 1.3 billion pounds. It also holds the Liberty project, which contains both molybdenum and copper. Both projects are located in Nevada.
Mt. Hope is expected to be in production in 2016 and is already fully permitted. Annual production in projected at 40 million pounds of molybdenum, making it a world-class moly project.
GMO has significant partnerships in place to ensure the Mt. Hope project reaches full financing. Plus, 50% of the off-take for the first five years of production is already committed.
Once Mt. Hope is fully underway, the company can shift resources to Liberty which produces both copper and molybdenum.
Speaking of resources, in order to ensure the company is maximizing its liquidity the company implemented a major cost reduction program this past September.
The CEO and Board of Directors all took a 25% reduction in cash compensation. How often do you hear about executives taking a pay cut for the betterment of a company? It just goes to show you how focused management is about getting Mt. Hope off and running.
Finally, as I mentioned earlier, the market molybdenum looks fundamentally strong in the years ahead. Demand is expected to increase to 580 million pounds per year and there are basically no substitutes for the metal.
Moreover, within a decade, GMO is projected to produce 5% of the world’s molybdenum.
Regarding finances, there isn’t much to analyze at this point. The company doesn’t generate revenue yet, and won’t until 2016 most likely.
From a balance sheet perspective, GMO looks about as good as you could hope for a development stage company. They have $26 million in cash and have another $36 million available from its partnerships if necessary. Meanwhile, the company has less than $1 million in debt as most of its financing has come through equity deals.
While it’s difficult to value a development stage, here’s something to chew on.
Currently, the company has a market cap of around $100 million. If Mt. Hope operates as expected once it opens, the company should easily be generating $400 million a year in revenues from that mine alone.
In other words, if you believe GMO is going to get Mt. Hope up and running (and there’s no reason to believe otherwise), then the stock is incredibly cheap.
Let’s go ahead and grab some shares for our portfolio.
Remember to use limit orders when placing your trades. And stick to your position sizing rules.
Key Facts:
| Company: | General Moly |
| Ticker: | GMO |
| Recent Price: | $1.10 |
| Market Cap: | $100 million |
| Avg. Daily Volume: | 227,509 shares |
Chart:
Category: TPS Trade Alert
