April 5th, 2009

Only until very recently was Roca Mines on everybody's lips - it was the greatest thing and it was going to make everybody lots of money. And then it fell from over 3.50 down to 0.16 (last close 0.23). It fell for good reasons; since it is a purely Molybdenum play, it had to fall as moly-prices fell. Between '04 and mid-'08 the average price of moly was ~$33, now it's at $8.20.

Buying into a moly-miner is decided by your belief in the price of moly. Knowledgeable people in the industry have maintained for some time that there will be a shortage of moly for some time to come and that prices will on average stay higher. I would think that the spending binge of world governments will affect moly-prices positively and force it higher, since they're spending most of their money on building stuff, which in some cases requires a lot of moly. For example, the world is planning to build a lot of new nuclear reactors (none of which are likely to be postponed) and these suckers take up a lot of moly.

One can argue for and against a rising moly price, but I think that the fairly high and persistent price of moly these last few years seems to show some long-term stability and the sudden fall since this summer looks a bit artificial, so the price will probably move a bit higher.

Basically what makes up Roca is the so-called MAX-project where a mine was recently started. This project holds about 100M pounds of molybdenum, at grades varying from about 2% down to 0,2%. The Ore-body extends towards depth where it remains open - it has been compared to other moly projects that have the same structure, where there are very large high-grade mineralizations at greater depth; this remains a very intriguing possibility.

At the latest reported quarter of the company's operations, they showed a net loss of ~C$5M. The cash-cost per pound of moly was at $5.80 and the MAX-mine produced 679,697 pounds during the quarter at average grades of ~1%. The revenues were C$8.3M (Sept 1 - Nov 30). The company currently has no debt and through recent financing a $2-3M cash position.

I assume that the company is working on cutting down a lot of the unnecessary costs to try and make the loss as small as possible. The exploration properties are pretty much on hold now and I would be suprised if the loss wasn't smaller in the coming report. Considering the low cash-cost of $5.80 I think they might be able to make this a profitable operation at these prices (very uncertain however!).

Today the undiluted mcap of Roca is about C$23M and with a yearly production of, say 2.5M pounds, that's revenues of $20.5M if prices stay the same and after cost of production, a result of $6M. If prices of molybdenum would rise to $12, then the result from the mine operation would be $15,5M, instead. The great increase in revenues with increasing moly-prices is pretty obvious here...

Just based on todays profitability of the MAX-mine I would not buy Roca shares. This is purely a play on the possibility of rising moly prices, since the leverage would be really good here. And as prices move up the company would go ahead with an expansion of operations, and make even more money. As stated above - I beleive in a slightly higher moly price, but this is still very uncertain. I simply can't tell if a few trillion of government spending is going to really do it and as I explained in my previous post, we should perhaps look for signals such as a massive auto-industry bail-out before we can safely say that the governments of the world are really willing to spend any amount to get things going. For some people the signals may already look strong enough to jump on the inflationary rocket-ship... and I would say there's a clear overweight in favour of inflationary price appreciation.