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Hidden Value/midasletter

posted on Apr 07, 2009 06:49AM
Rocky Mountain Resources’ Hidden Value
By James West
Monday, April 6th, 2009
DENVER - Contrarian investors make their money when they buy stock – not when they sell it. What is meant by that is that savvy investors build winning positions by acquiring stocks that are out of favor with the market, or are not properly understood.
Rocky Mountain Resources (TSX.V:RKY) is a company that falls well outside of the standard configuration of a natural resource development company. It might even be best described as unique.
Rocky Mountain has two projects, and is developing both in pursuit of two very different minerals that are not part of the daily investor lexicon.
Phosphates, whose primary use is in agricultural fertilizer -- it’s the “P” in the NPK (Nitrogen Phosphate Potassium) trio of basic nutrients for all plants - is used by farmers the world over to optimize yields and soil fertility.
Phosphate prices were decimated starting in October last year as a wholesale abandonment of all investments related to commodities caused prices to crash while the sudden loss of financing impaired the ability of farmers to take delivery of phosphates for spring application.
These factors have led to significant reductions in demand. The chief executive officer of Agrium - another publicly-traded fertilizer company - estimated that demand in the fall of 2008 was down by 20% for nitrogen, down by 50% for phosphate, and down by 50% for potash. These demand reductions have led to price declines for both anhydrous ammonia and phosphates (Source: CIBC World Markets, Equity Research Company Update, Agrium Inc., December 2, 2008).
Vanadium, used in the production of hardened steels, was in diminishing supply and growing demand before the onset of the current economic contraction. Phosphates, the company’s second commodity, was in a similar phase of increasing global demand amid diminishing supply. Both minerals occupy niche positions and are affected by very different supply and demand metrics.
Vanadium prices fluctuated wildly during 2008 — between $90/kg and $26/kg for ferrovanadium at the end of the year – as a result of volatility induced by market instability associated with the economic downturn. Vanadium pentoxide prices followed a similar trend with prices that escalated to $18/lb during June 2008 and thereafter falling to $7/lb in December 2008.
The opportunity for investors who can afford to buy and hold companies with major proven deposits is that companies like Rocky Mountain are extremely depressed in price since the sell-off last year, and have yet to see the recovery that occurred throughout Q109 with precious metals stocks. That means there’s a lot of hidden value in companies who have a quick path to production in close proximity to major centers.
For some time now, analysts and economists agree that China will be the driving force behind the demand for commodities as it continues to invest in infrastructure. But the United States is also going to see a great deal of investment in infrastructure once Obama’s plans to invest in infrastructure as a way to cure the American economy are realized.
And that’s where the opportunity lies for Rocky Mountain Resources and its shareholders.
Gibellini, located in Eureka County, Nevada, is a 2,624 acre vanadium project that contains two deposits – the Vanadium Hill and the Rich Hill. A scoping study completed last year outlines a production scenario from Vanadium Hill whereby 2 million tonnes of ore would be processed over a minimum mine life of 8 years averaging 0.35% vanadium pentoxide.
The company’s second project is its Paris Hills property, near Paris, Idaho. Paris Hills was the subject earlier this year of a 43-101 resource calculation that stipulated a phosphate resource of 120.7 million tons grading 23.6% P2O5 along with a vanadium/phosphate resource of 44 million tons grading 0.79% V2O5 and 9.7% P2O5.
Detailed project economics are outside the scope of the NI 43-101 technical report for Paris Hills. In the report, for the purpose of estimating cut-off grade and assessing reasonable prospects for economic extraction, AMEC does propose projected long term pricing for phosphate and vanadium as well as order-of-magnitude operating costs for mining and processing:
  • The long term price for phosphate rock is estimated in the range of $100 to $150 per ton based on content of 29% P2O5;
  • Vanadium pricing is projected at $5.90 per pound V2O5;
  • For extraction by underground methods, two methods are proposed for the phosphate bearing and vanadium bearing materials: 1) room and pillar for the flat-lying portion of the material comprising the majority of the deposit, at an estimated direct cost of $25 per ton; and 2) cut and fill with non-cemented backfill for the smaller volume of material in the overturned limb, at an estimated direct cost of $52/ton;
  • Processing proposed to upgrade phosphate comprises crushing, grinding, and cyclone washing at an estimated direct cost of $4.39 per ton of plant feed to produce approximately 30% P2O5.
  • Proposed processing for the vanadium bearing material is more complex comprising a two stage roast, washing, leaching, and solvent extraction at an estimated direct cost of $27.07 per ton of plant feed. Products of the process would be V2O5and phosphate rock grading around 30% P2O5.
“The resource estimates for Paris Hills are truly exciting news,” stated Tom DeMull, President of Rocky Mountain Resources. “The phosphate mineral resource estimate exceeds our expectations for this stage of the project. The existence of a near-surface, high-grade zone of phosphate rock is another pleasant surprise. Our immediate priority will be to develop plans to investigate this high grade zone as a starter operation.”
The high grade zone identified in the 43-101 report consists of 4.6 million tons of near surface, market grade phosphate rock containing 29% P2O5.
Find out more by visiting the company’s web site at http://www.rkyresources.com .
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