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GMO > SEC Filings for GMO > Form 10-Q on 7-Nov-2012All Recent SEC Filings

Show all filings for GENERAL MOLY, INC

Form 10-Q for GENERAL MOLY, INC


7-Nov-2012

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

References made in this Quarterly Report on Form 10-Q to "we," "our," "us," or the "Company," refer to General Moly, Inc.

The following discussion and analysis of our financial condition and results of operations constitutes management's review of the factors that affected our financial and operating performance for the three and nine months ended September 30, 2012, and 2011. This discussion should be read in conjunction with the consolidated financial statements and notes thereto contained elsewhere in this report and in our Annual Report on Form 10-K for the year ended December 31, 2011, which was filed on March 1, 2012.

We routinely post important information about us on our Company website. Our website address is www.generalmoly.com.

Overview

We are a development stage company and began the development of the Mt. Hope Project on October 4, 2007. During the year ended December 31, 2008 we also completed work on a pre-feasibility study of our Liberty Project, which we updated during 2011. We plan to update metallurgical and waste rock models for the Liberty Project by the end of 2013, in support of long-lead permitting activities.

In July of this year, we completed a review of the capital cost requirements for the Mt. Hope Project, based on current major equipment, labor and material pricing and further engineering definition. The project capital was also updated for currently known permitting and regulatory requirements and includes the schedule impacts of permitting delays since the September 2008 feasibility study update, which was reconfirmed in November 2009. The Mt. Hope Project has not materially changed in scope and is currently designed at approximately 60% engineering completion with solid scope definition. The overall capital cost estimate increased by 11%, or $130 million, and totaled $1,284 million (as reflected in the Q2 2012 column in the table below). The largest affected category of the revised estimate was Owners cost, which increased 48%, or $82 million, driven by schedule delays largely attributed to an extended permitting timeline. Of that amount, $35 million represents holding costs over the 2009 to 2012 period (approximately $0.7 million per month), that were not envisioned in the original estimates. As such, while they are included in the overall project total, they do not contribute directly to the development of the project.

In October of this year, we further refined the capital cost estimate to reflect ongoing softening in the overall market, firm quotes that are better than expected, and modified internal assumptions. The new estimate is reflected in the Q3 2012 column in the table below, and is representative of improvements in
1) Owners costs where Eureka Moly now assumes lower overhead and slower ramp-ups in capitalized internal labor, 2) Contingency, attributable primarily to the mine equipment category where costs are mostly firm with existing commitments, and the outlook for both the new and used market has become more favorable to buyers in recent months, and 3) Reclamation bond collateral requirements, supported by firm quotes from surety underwriters received in the last quarter.

The anticipated capital requirements of the Mt. Hope Project are divided into cost categories in the following table:

                                                        Millions $US
                                                           Q2 2012      Q3 2012
                                                2009       Revised      Revised
Category                                      Estimate     Estimate    Estimate
Mining equipment                             $      134   $      150   $     150
Construction, materials & plant facilities          523          582         583
Owners cost, pre-stripping, camp                    169          251         245
Taxes, freight, commissioning, spares                68           74          73
Equipment suspension costs                            -           11          11
EPCM                                                 59           71          70
Contingency                                          86           76          70
Total Capital                                $    1,039   $    1,215       1,202
Bonding and pre-paid items                          115           69          67
Total Capital Requirement                    $    1,154   $    1,284       1,269

From October 2007 through the nine months ended September 30, 2012, we have spent approximately $201.9 million on the Mt. Hope Project.

In 2009, because of declining molybdenum prices and unanticipated delays in the Mt. Hope Project permitting process, we implemented a cash conservation plan whereby total cash utilization, other than equipment purchases and permitting efforts, was significantly reduced. The Company has maintained its orders for grinding, milling, and other specialty long-lead equipment. However, other engineering, administrative and third party work was slowed or suspended. The Company had cash on hand as of September 30, 2012 of $22.4 million. Based on our current cash on hand, the ongoing cash conservation plan, and expected permitting and financing milestones to be achieved in late 2012 and early 2013, the Company expects it will have adequate liquidity through the restart of the project and execution of the financing plan.


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The worldwide molybdenum price fluctuated between $5.33 per pound in 2003 to over $40.00 per pound in 2005 and traded in the mid-$30s per pound prior to October 2008, when prices fell from approximately $33.50 per pound to $7.70 per pound in April 2009 as a result of the global economic collapse. Subsequent to April 2009, prices slowly rose, finishing 2009 at $12.00 per pound and further increasing to finish 2010 at $16.40 per pound. During 2011, prices traded in a relatively narrow range between $12.85 and $17.70 per pound, finishing the year at $13.40 per pound, according to Ryan's Notes. Throughout 2012, prices have continued to trade in a narrow range and are currently trading at $10.90 per pound.

The permitting process for the Mt. Hope Project has also had an impact on the LLC's activities because of delays experienced from extensive regulatory reviews and additional requests for information on environmental impacts. Nevertheless, the process continues to move toward completion, and the LLC's efforts in this regard have continued full-time. Once the major operating permits and the Record of Decision ("ROD") from the Bureau of Land Management ("BLM") are effective, and financing is available, it is expected that the Mt. Hope Project can be constructed and in production within approximately 20 - 24 months.

Restructuring and Suspension of Project Development

As discussed above, in March 2009, we implemented a cash conservation plan to reduce expenditures and conserve cash in order to maximize financial flexibility. Engineering efforts related to the Mt. Hope Project, which are currently approximately 60% complete, were restarted in January 2012 following the publication of the Draft Environmental Impact Study ("DEIS").

As of March 2009, Eureka Moly (the "LLC"), a limited liability company created with POS-Minerals to develop the Mt. Hope Project, had purchase orders for mining and milling process equipment. Some orders for mining equipment were cancelled, while orders for electric shovels and haul trucks were modified to become cancellable or non-binding. Most equipment orders for the custom-built grinding and other milling process equipment are being completed by the manufacturers, and this equipment is being or will be stored pending commencement of construction. The grinding and milling process equipment require the longest lead times and maintaining these orders is critical to the Company's ability to rapidly restart the Mt. Hope Project development. The LLC completed negotiations with other equipment manufacturers to suspend or terminate fabrication of other milling equipment. As funding becomes available and equipment procurement is restarted, agreements that were suspended or terminated will be renegotiated under new market terms and conditions, as necessary.

Based on our current plan, expected timetable, and the results of such negotiations, we expect to make additional payments on milling process equipment orders of approximately $14.3 million in 2013 and $1.4 in 2014. For the gyratory crusher, SAG and ball mills and related electric mill drives, and some other long-lead equipment, we will own the equipment upon final payments forecasted to occur in early 2013.

On February 28, 2012, the LLC issued a firm purchase order for 18 haul trucks. The order provides for delivery of those haul trucks required to perform initial mine development, currently scheduled for late 2013 or early 2014. A non-refundable down-payment of $0.6 million was made at the time of order with an additional $0.6 million due 12 months prior to truck shipment, but the contract is cancellable with no further liability to the LLC up until the time the trucks are shipped.

On June 25, 2012, the LLC issued a firm purchase order for 4 mine production drills. A non-refundable down-payment of $0.5 million is due 12 months prior to shipment, but the contract is cancellable with no further liability to the LLC up until the time the drills are shipped.

At June 30, 2012, the LLC's contract to purchase two electric shovels expired. We signed a new letter of intent with the vendor providing for the opportunity to purchase the electric shovels at prices consistent with the expired contract, less a special discount in the amount of $3.4 million to provide credit to the Company for amounts paid as deposits under the expired contract. The agreement provides that equipment pricing will remain subject to inflation indexes and guarantees production slots to ensure that the equipment is available when required by the Company.

Early in 2013, the Company has commitments for milling process equipment orders of approximately $13.0 million. If the key milestone of ROD is not achieved by the first quarter of 2013, and if no additional financing has been arranged, the payment terms for these orders would have to be renegotiated. Payment terms on these orders have been extended in previous years, and the Company believes that renegotiation with extended terms would again be likely.


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Permitting Update

The Mt. Hope Project will require both federal and state permits before it can commence construction and operations. Major permits required for the Mt. Hope Project include the ROD, a BLM issued permit, water appropriation permits from the Nevada Division of Water Resources, the water pollution control permit and reclamation permit from the Nevada Department of Environmental Protection - Bureau of Mining Regulation and Reclamation, and an air quality permit from the Nevada Department of Environmental Protection, Bureau of Air Pollution Control ("NDEP - BAPC"). A Notice of Availability for the Final EIS for the Mt Hope Project was published in the Federal Register on October 12, 2012, signifying that the BLM has completed all studies required to issue the ROD. The Company received its Air Quality Permit from the NDEP-BAPC on May 30, 2012.
Applications for other time-critical state permits have been submitted for agency review and approval. The LLC continues to develop and evolve the information supporting these permits based on agency review and feedback. The Nevada Department of Environmental Protection has published notices of their intent to issue both the Water Pollution Control Permit and the Reclamation Permit for the Mt Hope Project. We believe these other major operating permits will be received on or prior to the effective date of the ROD.

Although we currently are targeting the effectiveness of the ROD and the receipt of all major operating permits to occur by the end of 2012, circumstances beyond our control, including reviewing agency delays or requests for additional information or studies, and appeals of the BLM decision, could cause the effective date of the ROD to be delayed. The occurrence of any or a combination of these adverse circumstances may increase the estimated costs of development, require us to obtain additional interim financing, and/or delay our ability to obtain project financing or other significant financing. A delay in the ROD or the receipt of major operating permits also affects the satisfaction of the ROD Contribution Conditions as well as the conditions to Tranche 2 of Hanlong's investment in our common stock.

Water Rights Update

In addition to working to complete the Environmental Impact Study ("EIS"), we recently received regulatory approval to transfer of water rights to mining use. In March, 2009, we were initially granted our water applications in a Ruling by the Nevada State Engineer ("State Engineer"). However, that Ruling was appealed and in April 2010, a Nevada State District Court set aside the Ruling on procedural grounds and remanded the matter for another hearing by the State Engineer.

On July 15, 2011, the State Engineer issued a second Ruling granting the Company's water right applications. That Ruling was appealed in August, 2011 by Eureka County and two other parties comprised of three individual water rights holders in Diamond Valley and one in Kobeh Valley. The appeals were heard on April 3, 2012 before the Nevada State District Court. On June 13, 2012, the Nevada State District Court denied the appeals and affirmed the State Engineer's Ruling. Further, the State Engineer issued all water permits on December 14, 2011 and certain amended permits on January 4, 2012, and the water became available for use at the Mt. Hope Project following the State Engineer's approval of the Company's Monitoring, Management and Mitigation Plan ("3M Plan") on June 6, 2012.

On July 10 and 11, 2012, respectively, Eureka County and two other parties comprised of one individual water rights holder in Diamond Valley and one in Kobeh Valley filed Notices of Appeal, appealing to the Nevada Supreme Court the Nevada State District Court's Order denying their appeals of the State Engineer's July 2011 Ruling. We are confident the Nevada Supreme Court will uphold the Nevada State District Court's Order, which denied all appeals of the State Engineer's Ruling.

On July 5, 2012, the same two individual water rights holders appealing the Nevada State District Court's Order to the Nevada Supreme Court filed an appeal of the State Engineer's approval of the Company's 3M Plan to the same Nevada State District Court. Eureka County did not appeal the approved 3M Plan. We anticipate a favorable Nevada State District Court decision upholding the 3M Plan.

Notwithstanding these further appeals, the Company's water permits have been granted and the water remains available to the Company, for use at the Mt. Hope Project.

Creation of Agricultural Sustainability Trust

On August 19, 2010, the LLC entered into an agreement with the Eureka Producers' Cooperative (the "EPC") whereby the LLC will fund a Sustainability Trust (the "Trust") in exchange for the cooperation of the EPC with respect to the LLC's water rights and permitting of the Mt. Hope Project. The Trust will be tasked with developing and implementing programs that will serve to enhance the sustainability and well-being of the agricultural economy in the Diamond Valley Hydrographic Basin through reduced water consumption.

The Trust may be funded by the LLC over several years based on the achievement of certain milestones. The achievement of these milestones is considered to be probable, and as such $4.0 million is accrued in the Company's September 30, 2012, financial statements and is included in mining properties, land, and water rights.


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The Mt. Hope Project

Effective as of January 1, 2008, we contributed all of our interest in the assets related to the Mt. Hope Project, including our lease of the Mt. Hope Project into a newly formed entity, Eureka Moly, LLC ("LLC"), a Delaware limited liability company, and in February 2008 ("Closing Date") entered into an agreement ("LLC Agreement") for the development and operation of the Mt. Hope Project with POS-Minerals Corporation ("POS-Minerals") an affiliate of POSCO, a large Korean steel company. Under the LLC Agreement, POS-Minerals owns a 20% interest in the LLC and General Moly, through a wholly-owned subsidiary, owns an 80% interest. The ownership interests and/or required contributions under the LLC Agreement can change as discussed below.

Pursuant to the terms of the LLC Agreement, POS-Minerals made its first and second cash contributions to the LLC totaling $100.0 million during the year ended December 31, 2008 ("Initial Contributions"). Additional amounts will be due from POS-Minerals within 15 days after the date ("ROD Contribution Date") that specified conditions ("ROD Contribution Conditions") have been satisfied. The ROD Contribution Conditions are (i) the receipt of major operating permits for the Mt. Hope Project, (ii) confirmation that the Record of Decision ("ROD") from the United States Bureau of Land Management ("BLM") for the Mt. Hope Project has become effective, and (iii) any administrative or judicial appeals with respect thereto are final. We are currently targeting the effectiveness of the ROD and the satisfaction of the other ROD Contribution Conditions to occur before the end of 2012. However, circumstances beyond our control, including reviewing agency delays or requests for additional information or studies, and requests for review or appeals of the BLM decision, could cause the effectiveness of the ROD and/or the satisfaction of the other ROD Contribution Conditions to be delayed beyond that estimated time. Once the ROD is effective, financing is in place, and project construction is initiated, all of which are currently expected to occur by early 2013, we estimate that production will begin approximately 20 - 24 months later.

To maintain its 20% interest in the LLC, POS-Minerals will be required to make an additional $56.0 million contribution ("Third Contribution") plus its 20% share of all Mt. Hope Project costs incurred from the Closing Date to the ROD Contribution Date within 15 days after the ROD Contribution Date ("Catch-Up Contribution"). If POS-Minerals does not make the Third Contribution when due after the ROD Contribution Date, its interest will be reduced to 10%.
Furthermore, if POS-Minerals also fails to make the Catch-Up Contribution its membership interest would be diluted to less than 3%. As a result of the combined failure to fund these two contributions, the membership interest of POS-Minerals would fall below the minimum 5% threshold required by the LLC Agreement and POS-Minerals would be deemed to have resigned and relinquished its membership interest.

In addition, as commercial production at the Mt. Hope Project was not achieved by December 31, 2011, the LLC may be required to return to POS-Minerals $36.0 million of its contributions to the LLC, with no corresponding reduction in POS-Minerals' ownership percentage. Based on our current plan and assuming POS-Minerals has made its additional $56.0 million contribution, a payment to POS-Minerals of $36.0 million will be due 20 days after the commencement of commercial production, as defined in the LLC Agreement. We currently anticipate such payment being made during 2015. If POS-Minerals does not make its additional $56.0 million contribution when due, no return of contributions is required by us. Our wholly-owned subsidiary and 80% owner of the LLC, Nevada Moly, LLC ("Nevada Moly"), is obligated under the terms of the LLC Agreement to make capital contributions to fund the return of contributions to POS-Minerals, if required. If Nevada Moly does not make these capital contributions, POS-Minerals has an election to either make a secured loan to the LLC to fund the return of contributions, or receive an additional interest in the LLC of approximately 5%. In the latter case, our interest in the LLC is subject to dilution by a percentage equal to the ratio of 1.5 times the amount of the unpaid contributions over the aggregate amount of deemed capital contributions (as determined under the LLC Agreement) of both parties to the LLC ("Dilution Formula"). At September 30, 2012, the aggregate amount of deemed capital contributions of both parties was $880.0 million.

Furthermore, the LLC Agreement permits POS-Minerals to put its interest in the LLC to Nevada Moly after a change of control of Nevada Moly or the Company, as defined in the LLC Agreement, followed by a failure to use standard mining industry practice in connection with development and operation of the Mt. Hope Project as contemplated by the parties for a period of 12 consecutive months. If POS-Minerals puts its interest, Nevada Moly or its transferee or surviving entity would be required to purchase the interest for 120% of POS-Minerals' contributions to the LLC plus 10% interest per annum.

The Initial Contributions of $100.0 million that were made by POS-Minerals during 2008 were expended by the second quarter of 2009 in accordance with the program and budget requirements of the Mt. Hope Project. Nevada Moly is required, pursuant to the terms of the LLC Agreement, to advance funds required to pay costs for the development of the Mt. Hope Project that exceed the Initial Contributions until the ROD Contribution Date, at which point the contributions described above to be made by POS-Minerals will be applied to reimburse us for POS-Minerals' share of such development costs. All costs incurred after the ROD Contribution Date will be allocated and funded pro rata based on each party's ownership interest. POS-Minerals' share of such development costs amounted to approximately $40.4 million as of September 30, 2012. The interest of a party in the LLC that does not make its pro rata capital contributions to fund costs incurred after the ROD Contribution Date is subject to dilution based on the Dilution Formula.


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Liquidity, Capital Resources and Capital Requirements

For the period from December 31, 2011, to September 30, 2012

Our total consolidated cash balance at September 30, 2012, was $22.4 million compared to $40.7 million at December 31, 2011. The decrease in our consolidated cash balances for the nine months ended September 30, 2012, was due primarily to development costs and deposits on property, plant and equipment incurred of $12.3 million, and $6.2 million in general and administrative costs, offset by proceeds from stock option exercises.

Based on our current plan and expected timetable, we expect to make additional payments of approximately $14.3 million in 2013 and $1.4 million in 2014. As additional financing becomes available and equipment procurement is restarted, agreements that were suspended or terminated will be renegotiated under current market terms and conditions, as necessary. Based on our Project Capital Estimate we paid an additional $9.0 million related to the Construction Royalty Advance on October 19, 2012. Accordingly, based on our current cash on hand and our ongoing cash conservation plan, the Company expects it will have adequate liquidity through the restart of the project and execution of the financing plan without needing to drawdown available funds from the second $10.0 million tranche of the Bridge Loan.

The anticipated sources of financing described below, combined with funds anticipated to be received from POS-Minerals in order to retain its 20% share, provide substantially all of our currently planned funding required for constructing and placing the Mt. Hope Project into commercial production. We currently anticipate the effectiveness of the ROD and the satisfaction of the other ROD Contribution Conditions to occur before the end of 2012, but circumstances beyond our control could cause the effectiveness of the ROD and/or satisfaction of the other ROD Contribution Conditions to be delayed. Funding requirements for working capital needs beyond the capital costs of the Mt. Hope Project will require additional resources. There can be no assurance that the Company will be successful in raising additional financing in the future on terms acceptable to the Company or at all.

Our ability to maintain adequate liquidity to proceed with the construction of the Mt. Hope Project is dependent on our receipt of ROD and resultant execution of our overall financing plan. If we are unable to access funding as planned (as described in Notes 1 & 2), our liquidity will not be adequate to continue with our development plans and service existing commitments. The Company would then be required to renegotiate payments on existing equipment contracts of $14.3 million (described in Note 10) and the repayment of the $10 million Bridge Loan (described later in Note 2), both of which have previously been renegotiated and extended. The Company believes that renegotiations with extended terms would again be successful; however, failure to renegotiate such commitments could cause contractual defaults, project delays, increased overall project costs, and although considered unlikely, could cause the Company to utilize the remaining cash balance within the next twelve months.

Agreements with Hanlong (USA) Mining Investment Inc.

We have signed a series of agreements (the "Hanlong Transaction") with Hanlong (USA) Mining Investment, Inc. ("Hanlong"), an affiliate of Sichuan Hanlong Group, a large privately held Chinese company. The agreements described below form the basis of a $745 million transaction that is intended to provide the Company with adequate capital to contribute its 80% share of costs to develop the Mt. Hope Project. The agreements include: (a) a Securities Purchase Agreement that provides for the sale to Hanlong of shares of our common stock in two tranches that will aggregate 25% of our outstanding stock on a fully diluted basis for $80 million ($40 million per tranche), conditioned upon us receiving permits for Mt. Hope and Hanlong's use of commercially reasonable efforts to procure a $665 million loan from a Prime Chinese Bank for our use in constructing Mt. Hope; (b) a Bridge Loan whereby Hanlong will provide up to $20 million to the Company to preserve liquidity until permits are received, which will be repaid out of the proceeds of the $665.0 million Term Loan; (c) a Stockholder Agreement that provides Hanlong representation on our Board of Directors ("Board") and the LLC management committee, governs how Hanlong will vote its shares of the Company and limits Hanlong's ability to purchase or dispose of our securities; and (d) a long-term molybdenum supply off-take agreement.

The Securities Purchase Agreement ("Purchase Agreement")

Stock Purchase. The Purchase Agreement provides, subject to its terms and conditions, for the purchase by Hanlong of $80.0 million of our common stock, or approximately 27.5 million shares, which will equal 25% of our common stock on a fully-diluted basis.


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The Purchase Agreement has been amended five times including: (1) a July 30, 2010 amendment extending the deadline for obtaining Chinese government approvals by two months to October 13, 2010, as well as extending the Company's deadline for publishing its DEIS and receiving its ROD ("ROD Condition") to February 28, . . .

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