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GMO > SEC Filings for GMO > Form 10-Q on 4-Aug-2014All Recent SEC Filings

Show all filings for GENERAL MOLY, INC

Form 10-Q for GENERAL MOLY, INC


4-Aug-2014

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 three and six months ended June 30, 2014, and 2013. 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, 2013, which was filed on March 13, 2014.

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. We are also conducting exploration and evaluation activities on our Liberty molybdenum and copper project ("Liberty Project") in Nye County, Nevada. On April 8, 2014, we announced the initiation of a National Instrument 43-101 Standards of Disclosure for Mineral Projects


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of the Canadian Securities Administration ("NI 43-101") compliant Preliminary Economic Assessment ("PEA") on a starter pit project at the Liberty Project. The NI 43-101 is a codified set of rules and guidelines for reporting and displaying information related to mineral properties owned by, or explored by, companies which report these results on stock exchanges within Canada. On July 7, 2014, the Company announced the elevation of the PEA to a Pre-Feasibility Study ("PFS") prepared in accordance with NI 43-101. On July 24, 2014, the Company announced the completion of the updated PFS. This PFS estimates production, capital, operating cost, and economic analysis for this more capital efficient project when compared to earlier studies. A technical report prepared in compliance with NI 43-101 was filed on July 30, 2014.

Mt. Hope Project

In August, 2007, we completed a Bankable Feasibility Study ("Bankable Feasibility Study" or "BFS") that provided data on the viability, expected economics, and production and cost estimates of the project. Since publication of the BFS, we have revised several estimates, based primarily on engineering progress, which is approximately 65% complete at June 30, 2014. Our current estimates for the Mt. Hope Project capital cost requirements are referred to as the "Project Capital Estimate" and our current estimates for the Mt. Hope Project operating costs are referred to as the "Project Operating Cost Estimate". On January 16, 2014, we filed a technical report (the "January 2014 Technical Report") prepared in accordance with NI 43-101 for the Mt. Hope Project. The completed report estimates molybdenum reserves and resources, production, capital and operating cost parameters, along with project economics.

Project Ownership

From October 2005 to January 2008, we owned the rights to 100% of 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 Eureka Moly, LLC ("the LLC"), and in February 2008 entered into an agreement ("LLC Agreement") for the development and operation of the Mt. Hope Project with POS-Minerals Corporation ("POS-Minerals"). Under the LLC Agreement, POS-Minerals owns a 20% interest in the LLC and General Moly, through Nevada Moly, LLC ("Nevada Moly"), a wholly-owned subsidiary, owns an 80% interest. The ownership interests and/or required capital 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 capital contributions to the LLC totaling $100.0 million during the year ended December 31, 2008 ("Initial Contributions"). Additional amounts of $100.7 million were received from POS-Minerals in December 2012, following receipt of major operating permits for the Mt. Hope Project, including the Record of Decision ("ROD") from the U.S. Bureau of Land Management ("BLM").

In addition, as commercial production at the Mt. Hope Project was not achieved by December 31, 2011, the LLC will be required to return to POS-Minerals $36.0 million of its capital contributions, with no corresponding reduction in POS-Minerals' ownership percentage. This return of contributions payment is contingent upon the commencement of commercial production, as defined in the LLC Agreement, and will be due 20 days thereafter. Based on our current plan, subject to availability of full financing for construction of the Mt. Hope Project, we anticipate commercial production will be achieved following a 20 - 24 month construction period. Nevada Moly is obligated under the terms of the LLC Agreement to make capital contributions to the LLC to fund the return of contributions to POS-Minerals upon achievement of commercial production (i.e. when the contingency is resolved). If Nevada Moly does not fund its additional capital contribution in order for the LLC to return to POS-Minerals $36.0 million of its total 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, Nevada Moly's interest in the LLC is subject to dilution by a percentage equal to the ratio of 1.5 times the amount of the unpaid return of contributions over the aggregate amount of deemed capital contributions (as determined under the LLC Agreement) of both parties to the LLC ("Dilution Formula"). At June 30, 2014, the aggregate amount of deemed capital contributions of both parties was $1,070.0 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 the development and operation of the Mt. Hope Project as contemplated by the parties for a period of twelve 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' total contributions to the LLC, which, if not paid timely, would be subject to 10% interest per annum.

Beginning in November 2012, the Company and POS-Minerals began making monthly pro rata capital contributions to the LLC to fund costs incurred as required by the LLC Agreement. The interest of a party in the LLC that does not make its monthly pro rata capital contributions to fund costs incurred is subject to dilution based on the Dilution Formula. The Company and POS-Minerals consented, effective July 1, 2013, to Nevada Moly accepting financial responsibility for POS-Minerals' 20% interest in costs related to Nevada Moly's compensation and reimbursement as Manager of the LLC, and certain owners' costs associated with Nevada Moly's ongoing progress to complete project financing for its 80% interest, resulting in $2.8 million paid by Nevada Moly on behalf of POS-


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Minerals during the term of the consensual agreement, which ended on June 30, 2014. Effective July 1, 2014, POS-Minerals is once again obligated to contribute its 20% interest in all costs incurred by the LLC. Subject to the terms above, all required monthly contributions have been made by both parties.

Permitting Completion and Project Status

On November 16, 2012, the BLM issued its ROD authorizing development of the Mt. Hope Project. The ROD approves the Plan of Operations ("PoO") for construction and operation of the mining and processing facilities and also grants the Rights-of-Way for a 230kV power transmission line, discussed below. Monitoring and mitigation measures identified in the ROD, developed in collaboration with the regulatory agencies involved throughout the permitting process, will avoid, minimize, and mitigate environmental impacts, and reflect the Company's commitment to operate the Mt. Hope Project to the highest environmental standards.

On February 15, 2013, Great Basin Resource Watch and the Western Shoshone Defense Project ("Plaintiffs") filed a Complaint against the U.S. Department of the Interior and the BLM in the U.S. District Court, District of Nevada, seeking relief under the National Environmental Policy Act ("NEPA") and other federal laws challenging the BLM's issuance of the ROD for the Mt. Hope Project, and on February 20, 2013 filed a Motion for Preliminary Injunction. The Court allowed the LLC to intervene in the matter.

On August 22, 2013, the Court denied, without prejudice, the Motion for Preliminary Injunction based on the parties' Joint Stipulation to Continue Preliminary Injunction Oral Argument, which advised the Court that as a result of current economic conditions, including the Company's ongoing financing efforts, all major ground disturbing activities had ceased at the Mt. Hope Project.

On July 23, 2014, the Court denied Plaintiffs' motion for summary judgment in its entirety. Previously, the parties and the Court had agreed to address Plaintiffs' claims under the Complaint based on the administrative record and the parties' motion for summary judgment briefing on the merits. On August 1, 2014, following the denial of summary judgment, the Court entered judgment in favor of the Defendants and the LLC, and against Plaintiffs regarding all claims raised in the Complaint. The Plaintiffs will have sixty (60) days from the entry of Judgment or September 30, 2014 to file a notice to appeal the District Court's decision to the Ninth Circuit Court of Appeals.

The State of Nevada Division of Environmental Protection ("NDEP") issued a Reclamation Permit for the Mt. Hope Project on November 19, 2012, which authorizes surface disturbance and construction of facilities. The Reclamation Permit also approves the Phase 1 reclamation cost estimate of approximately $73.4 million to begin construction and established bonding requirements based on this estimate. On December 18, 2012, BLM accepted the LLC's reclamation surety bonding in satisfaction of financial guarantee requirements under the ROD for the Mt. Hope Project. The surety bond program has been funded with an initial cash payment of $5.6 million specific to the PoO disturbance (and not including an additional $0.7 million in cash bonding posted by the Company for other disturbance outside the PoO at Mt. Hope, and at the Liberty Project) and requires additional cash funding of $11.6 million through the construction process for a total of $17.2 million, which is in alignment with the net cash bonding cost included in the Project Capital Estimate. This total, comprised of the $17.2 million in cash and the remainder in surety bonding, covers the initial surface disturbance and facilities anticipated to be in place in the first three years following construction of the Mt. Hope Project, which are subject to ongoing evaluation thereafter. With the surety program in place and the initial contribution funded, the BLM has authorized that surface disturbance in conformity with the ROD may proceed.

On May 29, 2012, NDEP issued a Class II Air Quality Operating Permit for the Mt. Hope Project. This permit establishes operating restrictions and monitoring requirements associated with specific air emission points.

On November 26, 2012, NDEP issued a Water Pollution Control Permit ("WPC") for the Mt. Hope Project. The WPC also approves the operational and closure plans for the Mt. Hope Project, and establishes monitoring requirements.

The LLC initiated cultural clearance activities at the Mt. Hope Project in early December 2012 upon receipt of an Archaeological Resource Protection Act Permit issued by the State Archeologist at the Nevada State Office of the BLM. Cultural clearance is an important component of the LLC's commitment to environmental protection and will be completed before major earthworks are done in any of the construction areas. The LLC has cleared priority areas for initial construction and will continue mitigation throughout the disturbance footprint. Use of this phased approach is intended to allow the LLC to maintain uninterrupted construction progress once construction resumes.

On January 2, 2013, the Public Utilities Commission of Nevada ("PUCN") issued the LLC a permit to construct a 230kV power line that interconnects with Nevada Energy's transmission system at the existing Machacek Substation located near the town of Eureka, Nevada and extend it approximately 25 miles to the planned Mt. Hope Substation. In addition, the BLM approved the LLC's surety bonds for reclamation of disturbance associated with construction of the 230kV power transmission line. The PUCN permit


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and approved bond allows the LLC to build the transmission infrastructure in a timely manner and provide the necessary capacity to power construction activities and Mt. Hope Project operations. Construction of the transmission line will also include upgrades to the existing Machacek Substation near Eureka that will improve the reliability of electrical power to the community. At full production the Mt. Hope Project will have a total electrical demand load of approximately 75 megawatts. Transmission capacity was secured in 2008 and the LLC will negotiate electrical energy contracts prior to Mt. Hope Project commissioning activities, which will be available once the power line is constructed and energized.

On January 17, 2013, the Federal Energy Regulatory Commission approved an Engineering, Procurement and Construction Agreement contract between Nevada Energy and Mt. Wheeler Power. In turn, in early January 2013, the LLC put in place a contract with Mt. Wheeler Power to provide the interconnect facilities to the Mt. Hope Project. The contract scope is to design and install the interconnect facility at the Machacek Substation, near the town of Eureka, to connect the LLC's future 230kV power line to the utility.

The LLC initiated preliminary construction activities in early January 2013 including early wellfield development and clearing and grubbing of terrain. Completion of the wellfield and water distribution systems are key items to begin major construction activities. Preliminary work also included clearing the open pit minesite, millsite, tailings dam and administrative office areas. Further activities have been suspended as a result of the delay in financing for the Mt. Hope Project and will resume as financing becomes available.

On June 17, 2014, the LLC submitted an amendment to the approved PoO to accommodate minor increases in the disturbance footprint and various design changes. The BLM is expected to require completion of an Environmental Assessment ("EA") to approve the amendment in compliance with NEPA. During the amendment review and preparation of the EA, the approved PoO remains in effect and the LLC is authorized to continue construction under that existing approval. The changes proposed in the amendment are similar to approved activities, and we do not anticipate any additional baseline studies or mitigation will be required. Ongoing changes to permits and the PoO during the life of mining operations are typical as design evolves and operations are optimized.

Capital & Operating Cost Estimates

The development of the Mt. Hope Project has a Project Capital Estimate of $1,312 million, which includes development costs of approximately $1,245 million and $67 million in cash financial guaranty/bonding requirements, advance royalty payments, and power pre-payment estimates. These capital costs were updated in the third quarter of 2012, and were then escalated by approximately 3% in the third quarter of 2013, for those items not yet procured or committed to by contract. The Mt. Hope Project has not materially changed in scope and is currently designed at approximately 65% engineering completion, with solid scope definition. The pricing remains subject to escalation associated with equipment, construction labor and commodity price increases, and project delays, which will continue to be reviewed periodically. The Project Capital Estimate does not include financing costs or amounts necessary to fund operating working capital and potential capital overruns, is subject to additional holding costs as the Company experiences delays in achieving its portion of financing for the Mt. Hope Project, and may be subject to other escalation and de-escalation as contracts and purchase arrangements are finalized at then current pricing. From October 2007 through June 2014, the LLC spent approximately $268.7 million of the estimated $1,312 million on development of the Mt. Hope Project.

The LLC's Project Operating Cost Estimate forecasts molybdenum production of approximately 40 million pounds per year for the first five years of operations at estimated average direct operating costs of $6.28 per pound, based on $90 per barrel oil equivalent energy prices. The Costs Applicable to Sales ("CAS") per pound, including anticipated royalties calculated at a market price of $15 per pound molybdenum, are anticipated to average $7.00 per pound. These cost estimates are based on 2013 constant dollars and are subject to cost inflation or deflation.

Equipment and Supply Procurement

Through June 30, 2014, the LLC has made deposits and/or final payments of $74.1 million on equipment orders, has spent approximately $182.6 million for the development of the Mt. Hope Project and has paid $12.0 million into an escrow arrangement for electricity transmission services, for a total Mt. Hope Project inception-to-date spend of $268.7 million.

In late 2012 and early 2013, the LLC made additional commitments for wellfield materials and equipment, and placed purchase orders for long-lead process equipment including the commitments for the engineering portion of flotation cells and roaster equipment. Based on such commitments, at June 30, 2014, we expect to make additional payments of approximately $0.7 million in 2014 and $14.2 million in 2015. Based on our current cash on hand and our ongoing cash conservation plan, the Company expects it will have adequate liquidity through the end of 2014. However, additional financing will be required to meet commitments and operating costs in 2015.


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In 2012, the LLC issued a firm purchase order for eighteen haul trucks. The order provides for delivery of those haul trucks required to perform initial mine development, which will begin several months prior to commercial production. Non-refundable down-payments of $1.2 million were made in 2012, with pricing subject to escalation as the trucks were not delivered prior to December 31, 2013. During the third quarter of 2013, the LLC renegotiated the timelines for truck delivery, accepting a 3% price increase and delaying deliveries into late 2014. The contract is cancellable with no further liability to the LLC.

Also in 2012, the LLC issued a firm purchase order for four mine production drills with a non-refundable down-payment of $0.4 million, and pricing was subject to escalation if the drills were not delivered by the end of 2013. In June of 2013, the LLC signed a change order, which delayed delivery into the second half of 2014 and triggered a $0.2 million price increase. The contract remains cancellable with no further liability to the LLC.

On June 30, 2012, the LLC's contract to purchase two electric shovels expired. On July 11, 2012, we signed a letter of intent with the same 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 LLC for amounts paid as deposits under the expired contract. The letter of intent 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 LLC. In June 2014, the parties agreed to extend the letter of intent through June 30, 2015.

Water Rights Update

The Nevada State Engineer ("State Engineer") has issued all water permits for the Mt. Hope Project. Eureka County, Nevada and two other parties comprised of three individual water rights holders in Diamond Valley and one in Kobeh Valley filed an appeal in July 2012 to the Nevada Supreme Court challenging the granting of water permits by the State Engineer. On June 26, 2013, the appeal was consolidated with a similar appeal of the State Engineer's approval of the Monitoring, Management and Mitigation Plan ("3M Plan") of the Mt. Hope Project, discussed below, and the Nevada Supreme Court heard oral argument on June 30, 2014 and is expected to issue its ruling in late 2014.

Two individual water rights holders appealed the State Engineer's approval of the 3M Plan to the Nevada State District Court ("District Court"). Following oral argument on April 15, 2013, the District Court denied the Petition for Judicial Review of the 3M Plan and issued its Written Order on May 17, 2013. Thereafter, Petitioners filed an appeal on May 20, 2013 of the District's Court Order to the Nevada Supreme Court, which, as discussed above, has been consolidated with the appeal of the water permits. We remain confident the Nevada Supreme Court will uphold the District Court's Orders regarding the 3M Plan and the water permits.

Notwithstanding the above, subject to receipt of the Nevada Supreme Court's ruling, the Company's water permits have been granted and the water remains available, as described above, for use at the Mt. Hope Project.

Termination of Agreements with Hanlong (USA) Mining Investment Inc.

In March 2010, we signed a series of agreements with Hanlong (USA) Mining Investment, Inc. ("Hanlong"), an affiliate of Sichuan Hanlong Group, a privately held Chinese company. The agreements formed the basis of a $745 million transaction that was intended to provide the Company with adequate capital to contribute its 80% share of costs to develop the Mt. Hope Project. The agreements included a Securities Purchase Agreement (the "Purchase Agreement") that provided for the sale to Hanlong of shares of our common stock in two tranches that would have aggregated 25% of our outstanding stock on a fully diluted basis, conditioned on Hanlong procuring a project financing Term Loan from a Chinese bank; a Stockholder Agreement that provided Hanlong representation on our Board of Directors ("Board"), governed how Hanlong would vote its shares of the Company, and limited Hanlong's ability to purchase or dispose of our securities; and a Bridge Loan whereby Hanlong provided $10 million to the Company to preserve liquidity until availability of the Term Loan. Pursuant to the Purchase Agreement, in December, 2010, we issued 11.8 million shares of common stock for the first tranche to Hanlong, for a purchase price of $40 million. After the share purchase, Hanlong became entitled to nominate one director to serve on our Board, and Nelson Chen was designated by Hanlong to serve in that capacity. We granted Hanlong registration rights with respect to those shares. The Company filed a Registration Statement on Form S-3 in December 2013, which, among other transactions included registration of the Hanlong shares, thereby allowing Hanlong to sell their shares to a third party. The registration statement was declared effective on January 29, 2014.

In October 2012, we entered into an agreement with Hanlong for a Subordinated Debt Facility ("Sub Debt Facility") of up to $125.0 million. Simultaneously with the execution of the Sub Debt Facility, the Company issued a warrant to Hanlong with a 2.5-year maturity to purchase ten million shares of the Company's common stock. In May 2013, the Company and Hanlong mutually agreed to terminate the Sub Debt Facility and warrant to provide the Company with greater flexibility in securing an additional strategic partner. As the warrant was fully vested and exercisable at the time of termination, this resulted in an $11.5 million non-cash charge to the income statement for the remaining unamortized value associated with the issuance of the warrant.


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As a result of Hanlong's failure to timely procure the Term Loan as required by the Purchase Agreement, in August 2013, the Company terminated certain agreements it had in place with Hanlong. In addition, as a result of the failure to procure the Term Loan, Hanlong was obligated to pay the Company a break fee of $10.0 million. The Company and Hanlong agreed to offset the break fee against the repayment of the $10.0 million Bridge Loan. The outstanding balance of the Bridge Loan and related accrued interest were recorded on the income statement as constructive receipt of break fee for $10.0 million and forgiveness of debt of bridge loan interest for $0.8 million. Concurrently, the Company wrote off $6.4 million of debt issuance costs, as those costs were related to Hanlong's obligation to procure the Term Loan to construct the Mt. Hope Project, and that obligation was released upon termination of the Purchase Agreement.

In connection with the termination of the Hanlong agreements, most of the provisions of the Stockholder Agreement were also terminated. Under the continuing provisions of the Stockholder Agreement, Hanlong's right to designate one nominee to the Board continues until such time that Hanlong's ownership percentage falls below 10%. As of June 30, 2014, Hanlong owns approximately 13% of our outstanding common stock. In June, 2013, the Board recommended the election of Mr. Chen as a Class III member, in the Board's slate of nominees submitted to our stockholders, pursuant to the Stockholder Agreement. He was elected by a vote of the stockholders at the Company's 2013 Annual Meeting of Stockholders for a three-year term, expiring in June 2016.

Molybdenum Market Update

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 financial crisis. 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. By the end of 2011, prices had pulled back to $13.30 per pound, decreased further to $11.50 per pound at the end of 2012 and declined to $9.75 per pound at the conclusion of 2013. In 2014, molybdenum has traded in a range of $9.75 per pound to $15.10 per pound, and as of late July 2014, traded at approximately $13.00 per pound according to Ryan's Notes. Year-to-date molybdenum performance has been driven by tighter supply of material and solidifying downstream demand, particularly in the stainless steel, energy infrastructure and transportation industries.

In our BFS and for a portion of our financial evaluations, we use molybdenum prices prepared by an independent commodities research company, CPM Group. Their research is a comprehensive look at both the supply and demand side of the molybdenum market. Through their research, they forecast global growth rates for molybdenum for both supply and demand. CPM Group continues to forecast prices in excess of current spot prices over the long-term. In June 2014, CPM . . .

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