The small number of potentially selected Chinese molybdenum exporters, and falling Chinese exports, is bullish for the molybdenum price. The short-list signals the market that China’s much-feared ‘return’ to the moly market lacks the teeth many anticipated it could have. This fits in with speculation StockInterview discussed with Blue Pearl executive chairman Ian McDonald. In comments not previously published, McDonald told us, “If they (the Chinese) can produce it at $4/pound and can sell steel that has moly in it, they’ll make more money eventually selling the finished product.”

The Chinese export decision could provide a bonanza to the new breed of molybdenum producers in much the same way a tighter uranium supply market recently benefited uranium companies, especially those which moved their development projects into operating mines. Having previously interviewed Scott Broughton, chief executive of Roca Mines Inc (ROCAF), we requested a follow-up conversation to determine when the MAX underground molybdenum mine would commence operations.

Companies selling material into a strong commodities market are frequently rewarded with stronger investor interest. When Roca’s MAX molybdenum mine opens this year, it will be the first new metals mine to open in Canada’s British Columbia province in ten years.

StockInterview: You were delayed with your mine opening late last year. Can you explain what happened to cause the delay?

Scott Broughton: We had originally planned to be in production by the end of 2006. In November, we started to endure some pretty tough winter time conditions. We started off with a lot of rainfall and by the end of November it turned into a lot of snowfall. In fact, we had a record setting year in the area—there was a record total of 35 feet of snow that landed at Trout Lake, the nearest community to us. The bottom line for us was that we obviously had suffered delays as a result of that winter. We found ourselves in a situation where we could spend a lot of time, effort and money trying to fight a condition that was essentially out of our control.

StockInterview: Can you give us guidance as to a realistic mine opening and if you can still make your calendar year 2007 production targets?

Scott Broughton: We made an announcement in November that we were going to make some adjustments to our programs, our construction programs on the surface. The key one was that we were going to accelerate the installation of a second mill, ball mill in our concentrator. That was going to allow us to recover from a delayed start-up and still meet the production targets that we would like to meet for 2007. That’s really how we‘ve tried to resolve or tried to deal with the winter time delays that we’ve endured. In that regards, any real remaining obstacles to that, except that we are still in construction, we are still enjoying some winter time tough conditions though we can definitely see spring is on the horizon and most of our snow is melting away at the moment. We have 50 people working at the site, all working hard to make it come together. We are going to be very proud of it when it’s all bolted together, and it’s actually producing cash flow.

StockInterview: Is this going to be a problem next winter?

Scott Broughton: No, the issues for us were related to, again, the surface construction of the facility, the concentrator itself and also our tailing facility. Both of those areas once constructed, especially grow over time, but they don’t need to grow continuously. We definitely wouldn’t be planning or programming any of that kind of work to happen in the winter time period again.

StockInterview: What is the condition of your two circuits and are there any problems with either circuit?

Scott Broughton: The mill we acquired was a second-hand used mill that was rated for 1,000 ton/day. It was made up of two circuits, primarily described as two circuits, because what they were processing was a zinc and a lead concentrate at that site. That really was the reason for describing these as two separate circuits. At our site, we are reconfiguring that and using officially two ball mills and the remaining equipment that’s in that facility. Originally, we planned to set up one of the mills and that would get us to our 500 ton/day target. As I mentioned, we made a decision in November to accelerate – to expand by putting in both of those mills and getting up to what would be targeted as 1,000 ton/day as quickly as possible.

StockInterview: How do you define ‘as quickly as possible’?

Scott Broughton: I think we would expect both of those mills to be running shortly after the day that we commence production. We are aiming for middle of 2007.

StockInterview: Why are you adding a second tunnel to the underground mine?

Scott Broughton: There’s an analogy here to what we’ve done at the mill. When we encountered the delay, we realized there was an opportunity there to make up time and make up production in a robust molybdenum market. We do have a pretty significant lead time in developing a second underground access. It’s about a 9-month project for us. We decided to do it to facilitate a continuously operated 1,000 ton/day rate of production from the mine, but also to ease the existing bottlenecks and burdens we have on the underground operation.

StockInterview: What’s the benefit for adding a second tunnel?

Scott Broughton: My example or metaphor for what we are trying to achieve here is that we are trying to build at the moment a sailing ship inside of a bottle. When you try to build something inside of a bottle with only one opening, you are bound to have a number of challenges and a number of bottlenecks that might affect you. When we have a second adit, we will be able to have more ventilation forced through the underground workings of the underground mine. We will be able to have more equipment working underground. We will be able to have larger crews working underground. Our ability to move material from production mining will be that much more enhanced. Our cost will be lower. Moreover, we will have a better chance to do more of the underground development as time goes by. There’s a need to always be developing and building new accesses to new parts of the ore body. We need to always be developing this mine in parallel with the mine being production.

StockInterview: Will this lower production because of the increased construction?

Scott Broughton: It’s not going to affect our Phase I production. We’ve always described the development of this mine occurring in phases. Phase I was the first phase where we went in, we went in small, aggressively we minimized the capital cost to get into production. We are only going to mine the highest grade zone that is most easily accessed. That was going to get us into that cash flow scenario and thereby grow the mine and grow our company. There are plans for subsequent phases—we already talked about the 1,000 t/day scenario. That’s moving us towards what I would describe as a full Phase II up to and running a full 1,000 t/day on a continuously operated basis. Right now, what we are able to build is an underground mine that has roughly 500 ton/day of production capacity on a campaigned basis. Campaigning simply means there are periods when we are producing ore from the mine; other periods where we are only able to do development or exploration of material. The sooner we can get out of the campaigned approach and into the continuously operated 1,000 t/day mine, the better for us in terms of how much molybdenum we can produce. We could be out of the campaigned approach by early 2008 when we have the second adit.

StockInterview: The key to spectacular success at MAX really depends upon the results of your deep-hole exploration, hoping to the parallel the success of Phelps Dodge’s Henderson mine. When are you going to start this exploration?

Scott Broughton: We recently did a small financing to start an exploration program. That’s recognition that there is a very good geological target there for Roca to explore sooner rather than later. We’ll start that work as soon as we can locate a drill. I’m going to suggest right that’s on the order of about a month away. Drills in the industry are very hard to come by—they are very busy at the moment as are contractors and miners and anything involved in the mining business right now. I would say somewhere in the order of a month we will be starting the first drill hole subject to the availability of a drill.

StockInterview: How deep will you drill and how many holes do you plan to drill?

Scott Broughton: The target is on the order of 500 meters below our existing tunnel access. We’ll be drilling holes that are on the order of 600 to 800 meters deep to be tested initially. But some of those might also go up to 1,000 meters potentially. Without being too prescriptive about that, you might see us drill on the order of 10 holes that are targeted in that area. They will vary in their depth up to say about 1,000 meters.

StockInterview: How lengthy a drilling program do you expect?

Scott Broughton: It’s a results-dependent program. Most exploration is. The initial phase of what we can do, with the money we just raised, will probably take well into the fall period. It could be well into the fall before we have actual assay results. But in the interim, most of the mineralization at our site is easy to see and easy to spot. We’ll be making adjustments before we drill holes based upon what we discover in the first few.

StockInterview: Sounds like you’ll be busy for the rest of this year. With all of this construction and exploration, at what pace do you plan to mine to play catch up for this late start?

Scott Broughton: We’re building a 1,000 ton/day capacity in our mill. That’s giving us lots of flexibility. As I mentioned with that analogy of building a sailing ship inside a bottle, there’s going to be days when we can move from the underground mine up to 1,000 ton/day of ore, therefore, we have a mine and a mill that are synchronized if you will. There’s going to be other days when the mine might only be able to produce 500 ton/day. We’ll be on and off in that regard basically maximizing them as much as we can in the production. Obviously, we want to make as much molybdenum as we can for 2007 and our current targets are still three million pounds for 2007.

StockInterview: When do you plan on paying back your capital costs?

Scott Broughton: In reality, this company doesn’t have any debt. When we start production here, we all will be working for a company that doesn’t have any debt to service. In real terms, we will be paying back the amount that we’ve invested to date. It is a bit ambiguous but we will have spent on the order of C$20 million by the time we’ve built. Again, we’ve kind of overbuilt above our original Phase I plan. We should see that paid back on the order of months from the time of start-up.

StockInterview: What do you do with your profits, then, as it appears you’ll be profitable/

Scott Broughton: We have always described this mine as a company builder. Right now, in our space, the world is absolutely full of opportunities. You should see us in the near term doing some very tax-efficient things with respect to how we might be able to tackle other projects going forward. There’s the prospect of eventually paying dividends. Bottom line for us is that this is a company that has come up from nothing only a few short years ago. We are the company that has identified this asset and took it forward, built it on a really low budget, and it’s about to generate enormous cash flow. We’d love to be able to demonstrate doing that again to our shareholders.

James Finch contributes to StockInterview.com and other publications. His focus on the uranium mining and nuclear fuel sector resulted in the widely popular “Investing in the Great Uranium Bull Market,” which is now available on http://www.stockinterview.com and on http://www.amazon.com

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