XASE:GMO General Moly Inc Quarterly Report 10-Q Filing - 6/30/2012

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Table of Contents

 

 

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

x      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended June 30, 2012

 

o         TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from                 to                

 

Commission File Number: 001-32986

 

General Moly, Inc.

(Exact name of registrant as specified in its charter)

 

DELAWARE

 

91-0232000

(State or other jurisdiction

 

(I.R.S. Employer

of incorporation or organization)

 

Identification No.)

 

1726 Cole Blvd., Suite 115
Lakewood, CO 80401
Telephone:  (303) 928-8599
(Address and telephone number of principal executive offices)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  YES x NO o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  YES x NO o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer o

 

Accelerated filer x

 

 

 

Non-accelerated filer o

 

Smaller reporting company o

(Do not check if smaller reporting company)

 

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  YES o NO x

 

The number of shares outstanding of issuer’s common stock as of August 6, 2012, was 91,234,140.

 

 

 




Table of Contents

 

PART I - FINANCIAL INFORMATION

 

ITEM 1.                  FINANCIAL STATEMENTS

 

GENERAL MOLY, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED BALANCE SHEETS

 

(In thousands, except par value amounts)

 

 

 

June 30,
2012
(Unaudited)

 

December 31,
2011

 

ASSETS:

 

 

 

 

 

CURRENT ASSETS

 

 

 

 

 

Cash and cash equivalents

 

$

28,202

 

$

40,709

 

Deposits, prepaid expenses and other current assets

 

127

 

105

 

Total Current Assets

 

28,329

 

40,814

 

Mining properties, land and water rights — Note 4

 

156,281

 

143,732

 

Deposits on project property, plant and equipment

 

67,102

 

66,474

 

Restricted cash held for electricity transmission

 

12,005

 

12,005

 

Restricted cash held for reclamation bonds

 

1,133

 

1,133

 

Non-mining property and equipment, net

 

711

 

819

 

Capitalized debt issuance costs

 

5,240

 

3,136

 

Other assets

 

2,994

 

2,994

 

TOTAL ASSETS

 

$

273,795

 

$

271,107

 

LIABILITIES, CONTINGENTLY REDEEMABLE NONCONTROLLING INTEREST AND EQUITY:

 

 

 

 

 

CURRENT LIABILITIES

 

 

 

 

 

Accounts payable and accrued liabilities

 

$

3,654

 

$

4,568

 

Accrued advance royalties

 

8,950

 

8,950

 

Accrued payments to Agricultural Sustainability Trust and Hanlong

 

4,000

 

2,000

 

Current portion of long term debt

 

10,685

 

10,596

 

Total Current Liabilities

 

27,289

 

26,114

 

Provision for post closure reclamation and remediation costs

 

627

 

587

 

Deferred gain

 

1,450

 

1,150

 

Accrued advance royalties

 

5,200

 

 

Accrued payments to Agricultural Sustainability Trust

 

2,000

 

2,000

 

Long term debt, net of current portion

 

95

 

131

 

Total Liabilities

 

36,661

 

29,982

 

 

 

 

 

 

 

COMMITMENTS AND CONTINGENCIES — Note 10

 

 

 

 

 

 

 

 

 

 

 

CONTINGENTLY REDEEMABLE NONCONTROLLING INTEREST

 

98,073

 

98,073

 

 

 

 

 

 

 

EQUITY

 

 

 

 

 

Common stock, $0.001 par value; 200,000,000 shares authorized, 91,226,533 and 90,818,248 shares issued and outstanding, respectively

 

91

 

91

 

Additional paid-in capital

 

257,737

 

255,894

 

Accumulated deficit before exploration stage

 

(213

)

(213

)

Accumulated deficit during exploration and development stage

 

(118,554

)

(112,720

)

Total Equity

 

139,061

 

143,052

 

TOTAL LIABILITIES, CONTINGENTLY REDEEMABLE NONCONTROLLING INTEREST AND EQUITY

 

$

273,795

 

$

271,107

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

3



Table of Contents

 

GENERAL MOLY, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

 

(Unaudited — In thousands, except per share amounts)

 

 

 

Three Months Ended

 

Six Months Ended

 

January 1, 2002
(Inception of
Exploration

 

 

 

June 30,
2012

 

June 30,
2011

 

June 30,
2012

 

June 30,
2011

 

Stage) to June
30, 2012

 

 

 

 

 

 

 

 

 

 

 

 

 

REVENUES

 

$

 

$

 

$

 

$

 

$

 

OPERATING EXPENSES:

 

 

 

 

 

 

 

 

 

 

 

Exploration and evaluation

 

156

 

288

 

324

 

456

 

40,025

 

Write downs of development and deposits

 

 

3,403

 

 

3,403

 

8,819

 

General and administrative expenses

 

2,457

 

2,291

 

5,382

 

6,228

 

75,157

 

TOTAL OPERATING EXPENSES

 

2,613

 

5,982

 

5,706

 

10,087

 

124,001

 

LOSS FROM OPERATIONS

 

(2,613

)

(5,982

)

(5,706

)

(10,087

)

(124,001

)

OTHER INCOME / (EXPENSE)

 

 

 

 

 

 

 

 

 

 

 

Interest and dividend income

 

 

8

 

 

19

 

4,062

 

Interest expense

 

(64

)

(66

)

(128

)

(126

)

(542

)

TOTAL OTHER (EXPENSE) / INCOME , NET

 

(64

)

(58

)

(128

)

(107

)

3,520

 

LOSS BEFORE INCOME TAXES

 

(2,677

)

(6,040

)

(5,834

)

(10,194

)

(120,481

)

Income Taxes

 

 

 

 

 

 

CONSOLIDATED NET LOSS

 

$

(2,677

)

$

(6,040

)

$

(5,834

)

$

(10,194

)

$

(120,481

)

Less: Net loss attributable to contingently redeemable noncontrolling interest

 

 

680

 

 

680

 

1,927

 

NET LOSS ATTRIBUTABLE TO GENERAL MOLY, INC.

 

$

(2,677

)

$

(5,360

)

$

(5,834

)

$

(9,514

)

$

(118,554

)

Basic and diluted net loss attributable to General Moly per share of common stock

 

$

(0.03

)

$

(0.06

)

$

(0.06

)

$

(0.10

)

 

 

Weighted average number of shares outstanding — basic and diluted

 

91,223

 

90,750

 

91,199

 

90,749

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

COMPREHENSIVE LOSS

 

$

(2,677

)

$

(5,360

)

$

(5,834

)

$

(9,514

)

$

(118,554

)

 

The accompanying notes are an integral part of these consolidated financial statements.

 

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Table of Contents

 

GENERAL MOLY, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF CASH FLOWS

 

(Unaudited — In thousands)

 

 

 

Six Months Ended

 

January 1, 2002
(Inception of
Exploration
Stage) to

 

 

 

June 30,
2012

 

June 30,
2011

 

June 30,
2012

 

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

 

 

Net Loss

 

$

(5,834

)

$

(10,194

)

$

(120,481

)

Adjustments to reconcile net loss to net cash used by operating activities:

 

 

 

 

 

 

 

Depreciation and amortization

 

209

 

198

 

1,853

 

Interest expense

 

128

 

126

 

542

 

Equity compensation for employees and directors

 

995

 

1,282

 

17,807

 

(Increase) in deposits, prepaid expenses and other

 

(22

)

(291

)

(35

)

Increase (Decrease) in accounts payable and accrued liabilities

 

777

 

(2,655

)

(6,526

)

Increase (Decrease) in post closure reclamation and remediation costs

 

40

 

(12

)

418

 

Write downs of development and deposits

 

 

3,403

 

8,819

 

Services and expenses paid with common stock

 

 

 

1,990

 

Repricing of warrants

 

 

 

965

 

(Increase) in restricted cash held for electricity transmission

 

 

 

(12,005

)

Net cash used by operating activities

 

(3,707

)

(8,143

)

(106,653

)

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

 

 

Purchase and development of mining properties, land and water rights

 

(7,161

)

(4,743

)

(127,983

)

Deposits on property, plant and equipment

 

(2,319

)

(6

)

(70,226

)

Proceeds from option to purchase agreements

 

300

 

585

 

1,450

 

Purchase of securities

 

 

 

(137

)

Increase in restricted cash held for reclamation bonds

 

 

 

(642

)

Cash provided by sale of marketable securities

 

 

 

246

 

Net cash used by investing activities

 

(9,180

)

(4,164

)

(197,292

)

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

 

 

Proceeds from issuance of stock, net of issuance costs

 

559

 

19,412

 

228,278

 

Net (decrease) increase in leased assets

 

(75

)

(99

)

57

 

Payments for debt issuance costs

 

(104

)

(1,310

)

(3,240

)

Proceeds from debt

 

 

 

10,000

 

Cash proceeds from POS-Minerals Corporation

 

 

 

100,000

 

Cash paid to POS-Minerals Corporation for purchase price adjustment

 

 

 

(2,994

)

Net cash provided by financing activities

 

380

 

18,003

 

332,101

 

Net increase (decrease) in cash and cash equivalents

 

(12,507

)

5,696

 

28,156

 

Cash and cash equivalents, beginning of period

 

40,709

 

53,571

 

46

 

Cash and cash equivalents, end of period

 

$

28,202

 

$

59,267

 

$

28,202

 

NON-CASH INVESTING AND FINANCING ACTIVITIES:

 

 

 

 

 

 

 

Equity compensation capitalized as development

 

$

289

 

$

112

 

$

6,747

 

Accrued portion of advance royalties

 

5,200

 

 

14,150

 

Accrued portion of capitalized debt issuance costs

 

2,000

 

 

2,000

 

Restricted cash held for reclamation bond acquired in an acquisition

 

 

 

491

 

Post closure reclamation and remediation costs and accounts payable assumed in an acquisition

 

 

 

263

 

Common stock and warrants issued for property and equipment

 

 

 

1,586

 

Accrued portion of payments to the Agricultural Sustainability Trust

 

 

 

4,000

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

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Table of Contents

 

GENERAL MOLY, INC.
(A DEVELOPMENT STAGE COMPANY)

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 1 — DESCRIPTION OF BUSINESS

 

General Moly, Inc. (“we,” “us,” “our,” “Company,” or “General Moly”) is a Delaware corporation originally incorporated as General Mines Corporation on November 23, 1925.  We have gone through several name changes and on October 5, 2007, we reincorporated in the State of Delaware (“Reincorporation”) through a merger involving Idaho General Mines, Inc. and General Moly, Inc., a Delaware corporation that was a wholly owned subsidiary of Idaho General Mines, Inc. The Reincorporation was effected by merging Idaho General Mines, Inc. with and into General Moly, with General Moly being the surviving entity.  For purposes of the Company’s reporting status with the United States Securities and Exchange Commission (“SEC”), General Moly is deemed a successor to Idaho General Mines, Inc.

 

We were in the exploration stage from January 1, 2002 until October 4, 2007, when our Board of Directors (“Board”) approved the development of the Mt. Hope molybdenum property (“Mt. Hope Project”) in Eureka County, Nevada.  The Company is now in the development stage and is currently proceeding with the development of the Mt. Hope Project.  We are also conducting evaluation activities on our Liberty molybdenum property (“Liberty Project”) in Nye County, Nevada.

 

The Mt. Hope Project.  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 with Mt. Hope Mines, Inc. (“MHMI”) into a newly formed entity, Eureka Moly, LLC, a Delaware limited liability company (“LLC”), 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 effective date of the ROD and the satisfaction of the other ROD Contribution Conditions to occur in the second half of this year.  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.  Once the ROD is effective and financing is in place, we expect that production will begin approximately 20 - 24 months following initiation of project construction.

 

To maintain its 20% interest in the LLC, POS-Minerals will be required to make an additional $56.0 million 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.  If POS-Minerals does not make its additional $56.0 million contribution when due after the ROD Contribution Date, its interest will be reduced to 10%.

 

In addition, as commercial production, as defined in the LLC Agreement, 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 within 15 days after the ROD Contribution Date, a payment to POS-Minerals of $36.0 million will be due 20 days after the commencement of commercial production.  We currently anticipate such payment being made during 2015.  If POS-Minerals does

 

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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 June 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 totaling $100.0 million that were made by POS-Minerals during 2008 were expended by the second quarter of 2009 in connection 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 $39.4 million as of June 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.

 

NOTE 2 — LIQUIDITY AND CAPITAL REQUIREMENTS AND RESTRUCTURING

 

Our consolidated cash balance at June 30, 2012, was $28.2 million compared to $40.7 million at December 31, 2011.  The cash needs for the development of the Mt. Hope Project require that we and/or the LLC finalize the financing described below and receive the additional capital contributions from POS-Minerals.

 

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.  Funding requirements for working capital and potential capital overrun needs 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.

 

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 Limited, 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; (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, which requires Hanlong to purchase the Company’s entire share of the Mt. Hope

 

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molybdenum production above that necessary for the Company to meet its existing supply commitments until the expiration of those commitments.

 

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.

 

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 Draft Environmental Impact Statement (“DEIS”) and receiving its ROD (“ROD Condition”) to February 28, 2011, and November 30, 2011, respectively.  Hanlong has received Chinese government approvals for its equity investment in us and our DEIS has been published; (2) an October 26, 2010 amendment setting the closing of Hanlong’s purchase of the first $40.0 million tranche of equity for December 20, 2010 and eliminating the condition that required us to have our DEIS published prior to closing this funding; (3) a December 20, 2010 amendment that made certain non-substantive changes in connection with the closing of the first tranche of Hanlong’s equity investment (“Tranche 1”); (4) a July 7, 2011 amendment that eliminated the deadline for publication of the DEIS, extended the ROD deadline from November 30, 2011 to the earlier of nine months following DEIS publication or September 30, 2012, extended Hanlong’s commitment to make available the Term Loan from two months following the ROD to nine months following the ROD, provided the ability for the Company to extend the ROD Condition date to the earlier of 12 months following DEIS publication and December 30, 2012 (“ROD Condition Extension”), and extended the maturity date of the Bridge Loan to the earlier of (i) 270 days after the issuance of the ROD, (ii) the date on which the Purchase Agreement terminates, and (iii) the earlier of December 31, 2012 and the availability of the Term Loan; and (5) a June 14, 2012 amendment that provided notice to Hanlong that the Company does not expect the BLM to issue the ROD before September 2, 2012 and does expect the ROD to be issued prior to December 2, 2012 and further provides notice that the Company wishes to utilize the ROD Condition Extension, thereby amending the date by which the ROD must be issued to December 2, 2012.

 

The Purchase Agreement may be terminated by either party (provided the terminating party is not in default) if the closing of the second tranche (“Tranche 2”) has not occurred on or before the earlier of September 30, 2012 (unless the parties have agreed to the ROD Condition Extension, in which case the date shall be December 31, 2012) or 12 months after the issuance of the ROD.

 

As discussed above, the second equity tranche will be for a purchase price of an additional $40.0 million.  Significant conditions to the closing of Tranche 2 include issuance of the ROD for the Mt. Hope Project by the BLM, approval of the Plan of Operations for the Mt. Hope Project (the “POO”) by the BLM, and the completion of documentation for and satisfaction of conditions precedent for the availability of funding under the Term Loan, described below.

 

Hanlong will have the right to purchase a portion of any additional shares of common stock that we issue so that it can maintain its percentage ownership, unless its ownership is at the time below 5% at the earlier of the closing of Tranche 2 or closing of the Term Loan.  It may also acquire additional shares so that it maintains a 20% indirect interest in the Mt. Hope Project if our interest in the LLC is reduced below 80%.  If we issue shares to fund the Mt. Hope Project under certain circumstances, and on or before the date of commercial production, and Hanlong exercises its rights to maintain its percentage interest, we will be obligated to refund to Hanlong the cost of such shares over a three-year period up to an aggregate of $9.0 million.

 

Break Fees.  A break fee is payable by both the Company and Hanlong if the Purchase Agreement terminates because of the failure of certain conditions.  A break fee of $10.0 million is payable to the Company if the Purchase Agreement is terminated because Hanlong fails to obtain necessary Chinese government approvals, which may be offset against any balances owed by the Company under the Bridge Loan.  A break fee of $5.0 million is payable to Hanlong if the ROD is not timely received or the condition waived and the Purchase Agreement is terminated.  The Company’s break fee may be increased by $5.0 million if the Purchase Agreement is terminated and the Company has violated the “no-shop” provisions of the Purchase Agreement.  The break fees may also be increased by up to $2.0 million, in addition to the payment of $2.0 million by the Company, if the Company requests

 

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and Hanlong grants an extension concerning the ROD deadline (the “ROD Extension Fee”).  Any such fee would be credited against the arrangement fee described below.  As the achievement of ROD by the September 2, 2012 deadline is now less than probable, a $2.0 million ROD Extension Fee has been accrued as of June 30, 2012, and is included in capitalized debt issuance costs.  The break fee payable by the Company to Hanlong may be paid in cash, or, in certain circumstances, in shares of our common stock at our option.  If paid in shares, the price would be the volume weighted average of our common stock on the NYSE Amex for the five days ending six days after the announcement of the termination.  On January 9, 2012, the Company and Hanlong executed an Option Agreement concerning the payment date for the ROD Extension Fee under the Purchase Agreement, for no consideration.  The option must be exercised on or before December 31, 2012.  On June 14, 2012, the Company exercised the option, thereby amending the Purchase Agreement to extend payment of the ROD Extension Fee from December 2012 until April 30, 2013.

 

Stockholder Agreement

 

In connection with Hanlong’s purchase of our shares, Hanlong signed a Stockholder Agreement with the Company that limits Hanlong’s future acquisitions of our common stock, provides for designation of up to two directors to our Board and representation on the LLC management committee, and places some restrictions on Hanlong’s voting and disposition of our shares.

 

After the Tranche 1 closing, Hanlong became entitled to nominate one director to serve on our Board and one representative to the LLC management committee.  Nelson Chen currently serves in both of these capacities.  After the Tranche 2 closing, Hanlong will be entitled to nominate a second director.  The Company will include and recommend the election of Hanlong’s nominees in the Board’s slate of nominees submitted to our stockholders, subject to the Board’s fiduciary obligations and compliance by the nominee with applicable law and Company requirements concerning disclosure of information.  The Hanlong nominees may also serve on committees for which they are eligible.

 

Hanlong has agreed not to purchase additional shares, except as permitted by the Purchase Agreement, without the Company’s prior consent, and has agreed that it will not solicit proxies, join a group with respect to our equity securities, solicit or encourage an offer from another person for the Company, call a meeting of the Company’s stockholders or make a proposal to the Company’s stockholders, except to the Board.  If our Board receives an offer for the Company, for its assets or a merger that the Board determines is in the best interests of the Company’s stockholders, Hanlong is required to vote in favor of such a transaction or tender its shares unless it proposes an alternative transaction that our Board determines is more favorable to our stockholders than the offer received.

 

Hanlong may not, without the prior written consent of the Board, transfer ownership of their securities if the recipient would acquire beneficial ownership of more than 5% of our common stock as of the date of such transfer.  The restrictions on Hanlong’s share ownership, voting, disposition and drag-along rights will terminate on the earlier of the time that Hanlong owns less than 10% of our common stock, the date that is 6 months after the date that commercial production begins at the Mt. Hope Project, and June 30, 2014.

 

Bridge Loan

 

Hanlong agreed to provide a $20.0 million Bridge Loan to the Company, available in two equal $10.0 million tranches.  On April 28, 2010, we drew down the first $10.0 million tranche.  The second tranche became available after receiving stockholder approval of the Hanlong Transaction.  The first tranche of the Bridge Loan bears interest at a rate tied to the London Interbank Offered Rate (“LIBOR”) plus 2% per annum.  The second tranche of the Bridge Loan will bear interest at 10% per annum and is undrawn.  The Bridge Loan will be repaid from the proceeds of the Term Loan.  The second tranche may also be repaid at the Company’s election, in shares of the Company’s common stock.  If paid in shares, the price would be the volume weighted average of the Company’s shares on the NYSE Amex for a five-day period after public announcement of the event that required repayment.  The Company may offset its right to receive the break fee against its obligations to repay borrowings under the Bridge Loan.  On January 9, 2012, the Company and Hanlong executed a second Option Agreement concerning the Bridge Loan Agreement.  On June 14, 2012, the Company exercised the option, thereby amending the Bridge Loan Agreement for no consideration to extend the maturity date of the Bridge Loan from December 31, 2012 until

 

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April 30, 2013.  The option also has the effect of potentially extending the availability of the undrawn $10.0 million second tranche to April 30, 2013 since the availability of the second tranche ends the earliest of the Tranche 2 closing date, the maturity of the Bridge Loan and the first borrowing under the Term Loan.

 

The outstanding balance of the Bridge Loan and related accrued interest are recorded as a current liability as of June 30, 2012 as the latest available maturity date of the Bridge Loan is April 30, 2013.  The Bridge Loan and our obligation to pay a break fee to Hanlong under the Purchase Agreement are secured by a pledge by us of a 10% interest in the LLC.

 

Chinese Bank Term Loan

 

Hanlong is obligated to use commercially reasonable efforts to procure a Term Loan in an amount of at least $665.0 million.  The Term Loan is expected to bear interest at a rate tied to the LIBOR plus a spread of between 2% and 4% per annum.  The Purchase Agreement provides that the Term Loan will have customary covenants and conditions; however, the terms of the Term Loan have not yet been negotiated with the lender and we have no assurance as to the final terms of the Term Loan.  On February 16, 2012, the Company announced China Development Bank (“CDB”) had confirmed the basic terms underlying a proposed $665.0 million term loan to finance the Company’s 80% share of development costs for the Mt. Hope project, including a CDB intention to lend $399.0 million and arrange a consortium of Chinese and international banks to fund the balance of $266.0 million.  The Term Loan is anticipated to carry a maturity of 12 years including a 30 month grace period to allow for the construction of the Mt. Hope Project.  The interest rate will remain subject to market conditions and Chinese government policy.  The Company and Hanlong are continuing to work with CDB with a target of having the Term Loan completed, approved and available to the Company upon receipt of Mt. Hope’s operating permits.  Hanlong or an affiliate is obligated to guarantee the Term Loan.  When funds can be drawn by the Company under the Term Loan, the Company will pay a $15.0 million arrangement fee to Hanlong who will pay fees and expenses associated with the Term Loan before the Term Loan Closing, including those charged by the Chinese bank.

 

Hanlong Letter of Intent

 

On July 31, 2012, the Company and Hanlong signed a non-binding letter of intent (“LOI”) under which Hanlong agreed to provide or arrange a credit facility not to exceed $125.0 million to assist the Company in financing capital cost increases, which are discussed in Management’s Discussion & Analysis.  The LOI contemplates the negotiation and signing of a definitive agreement concerning the credit facility.  Under the LOI, Tranche A in the amount of $75.0 million would be available to the Company during the Mt. Hope Project’s construction period.  Tranche B, in the amount of $50.0 million, would be available during the six month period following construction.  Tranche A of the $125.0 million facility can be reduced to the extent equipment is leased by the Company.  In exchange for the facility, the Company will pay a fee to Hanlong in the amount of $6.3 million, payable at closing of the Term Loan, and will issue warrants with a 2.5 year maturity to purchase ten million shares of the Company’s common stock.  The warrants will be priced at a 15% premium to the 10 day volume weighted average price before the signing of a definitive loan agreement under the LOI.  If the Tranche 2 purchase of stock under the Purchase Agreement occurs and the warrants are exercised, Hanlong would own approximately 31% of our outstanding shares.  Both tranches will mature 5 years after the achievement of commercial production at the Mt. Hope Project and will have mandatory payments of 50% of the Company’s semi-annual free net cash flow after debt service payments on the Term Loan and any other Mt. Hope Project funding requirements.  The facility will be subordinated to the Term Loan, will have covenants similar to the Term Loan, and will bear interest at 6-month LIBOR plus 4%, with interest paid semi-annually.  The parties intend to negotiate a binding agreement on or before October 26, 2012 and the Company has agreed not to seek competitive financing until the signing of the binding agreement.

 

Cash Conservation Plan

 

The Company continues to operate under a cash conservation plan implemented in March 2009 designed to reduce expenditures and conserve cash in order to maximize financial flexibility until all permits are issued and project funding becomes available.

 

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When we commenced cash conservation, the Company had purchase orders for mining and milling process equipment.  Some orders for mining equipment were cancelled in 2009, 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 the equipment is being stored.  The grinding and milling process equipment required the longest lead times and maintaining these orders were critical to the Company’s ability to rapidly restart the Mt. Hope Project development.  The Company 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 $1.4 million in 2012 and $13.0 million in 2013.  Based on payments made in 2009, 2010, and 2011 and upon making the final payments in 2012 and early 2013 for the gyratory crusher, SAG and ball mills and related electric mill drives, and some other long-lead equipment, we will own this equipment.  Early next year, 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 1st 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 is confident that renegotiation with extended terms would again be likely.

 

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 the second half of 2013.  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 in early 2014.  All deposits are non-refundable.

 

On June 25, 2012, the LLC issued a firm purchase order for four 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 in early 2014.

 

At June 30, 2012, our 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’s equipment pricing will remain subject to inflation indexes and guarantees production slots to ensure that the equipment is available when required by the Company.  The Company anticipates issuing a new purchase order by mid- 2013, at which time a down payment of approximately $6 million will be required.

 

The cash conservation plan reduced our total cash utilization for general administrative and overhead expenses to approximately $1 million per month, inclusive of maintenance costs at the Liberty Project.  Such ongoing costs, combined with the $1.4 million in process equipment commitments noted above and the $9.0 million in construction royalty advances described in Note 10 — “Commitments and Contingencies” comprise the spending requirements the Company has in place through the end of 2012 without restarting the project.  Based on our current cash on hand and this ongoing cash conservation plan, the Company expects it will have adequate liquidity through the restart of the project and execution of the financing plan.

 

NOTE 3 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

The interim consolidated financial statements (“interim statements”) of the Company are unaudited.  In the opinion of management, all adjustments and disclosures necessary for a fair presentation of these interim statements have been included.  All such adjustments are, in the opinion of management, of a normal recurring nature.  The results reported in these interim statements are not necessarily indicative of the results that may be reported for the entire year.  These interim statements should be read in conjunction with the consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2011, filed with the Securities and Exchange Commission (“SEC”) on March 1, 2012.

 

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This summary of significant accounting policies is presented to assist in understanding the financial statements.  The financial statements and notes are representations of the Company’s management, which is responsible for their integrity and objectivity.  These accounting policies conform to accounting principles generally accepted in the United States of America (“GAAP”) and have been consistently applied in the preparation of the financial statements.

 

Accounting Method

 

Our financial statements are prepared using the accrual basis of accounting in accordance with GAAP.  With the exception of the LLC, all of our subsidiaries are wholly owned.  In February 2008, we entered into the LLC Agreement, which established our ownership interest in the LLC at 80%.  These interim statements include all of our wholly owned subsidiaries and the LLC.  The POS-Minerals contributions attributable to their 20% interest are shown as Contingently Redeemable Noncontrolling Interest on the Consolidated Balance Sheet.  For certain periods presented, the LLC had net operating expenses and, accordingly, the net loss attributable to contingently redeemable noncontrolling interest is reflected separately on the Consolidated Statement of Operations.

 

Contingently Redeemable Noncontrolling Interest (“CRNCI”)

 

On January 1, 2009, we adopted Financial Accounting Standards Board (“FASB”) authoritative guidance related to Noncontrolling Interests in Consolidated Financial Statements, the provisions of which, among others, require the recognition of a noncontrolling interest (previously referred to as minority interest), as a component of equity in the consolidated financial statements and separate from the parent’s equity for all periods presented. In addition, the amount of net income or loss attributable to the noncontrolling interest is included in net income or loss on the face of the consolidated statement of operations.  Under GAAP, certain noncontrolling interests in consolidated entities meet the definition of mandatorily redeemable financial instruments if the ability to redeem the interest is outside of the control of the consolidating entity.  As described in Note 1 — “Description of Business”, the LLC Agreement permits POS-Minerals the option to put its interest in the LLC to Nevada Moly upon a change of control, 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.  As such, the CRNCI has continued to be shown as a separate caption between liabilities and equity (mezzanine section).  The carrying value of the CRNCI reflects the investment of the noncontrolling interest, less losses attributable to the interest.

 

Estimates

 

The process of preparing consolidated financial statements requires the use of estimates and assumptions regarding certain types of assets, liabilities, revenues, and expenses.  Such estimates primarily relate to unsettled transactions and events as of the date of the financial statements.  Accordingly, upon settlement, actual results may differ from estimated amounts.

 

Cash and Cash Equivalents

 

We consider all highly liquid investments with original maturities of three months or less to be cash equivalents. The Company’s cash equivalent instruments are classified within Level 1 of the fair value hierarchy established by FASB guidance for Fair Value Measurements because they are valued based on quoted market prices in active markets.  These cash instruments included $20.0 million in U.S. Treasury securities at June 30, 2012.

 

Exploration and Development Stage Activities

 

We were in the exploration stage from January 2002 until October 4, 2007.  On October 4, 2007, our Board approved the development of the Mt. Hope Project as contemplated in the Bankable Feasibility Study and we then entered into the development stage.  We have not realized any revenue from operations.  We will be primarily engaged in development of the Mt. Hope Project and exploration and evaluation of the Liberty Project until we enter the production stage of the Mt. Hope Project.

 

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Basic and Diluted Net Loss Per Share

 

Net loss per share was computed by dividing the net loss attributable to General Moly, Inc. by the weighted average number of shares outstanding during the period.  The weighted average number of shares was calculated by taking the number of shares outstanding and weighting them by the amount of time that they were outstanding.  Outstanding warrants to purchase 1,000,000 and 1,000,000  shares of common stock, options to purchase 1,364,991 and 2,484,990 shares of common stock, and unvested stock awards totaling 700,862 and 439,530 at June 30, 2012, and 2011, respectively, and 1,234,945 and 797,605 shares under Stock Appreciation Rights at June 30, 2012, and 2011, respectively, were not included in the computation of diluted loss per share for the three and six months ended June 30, 2012, and 2011, respectively, because to do so would have been anti-dilutive.  Therefore, basic loss per share is the same as diluted loss per share.

 

Mineral Exploration and Development Costs

 

All exploration expenditures are expensed as incurred.  Significant property acquisition payments for active exploration properties are capitalized.  If no economic ore body is discovered, previously capitalized costs are expensed in the period the property is abandoned.  Expenditures to develop new mines, to define further mineralization in existing ore bodies, and to expand the capacity of operating mines, are capitalized and amortized on a units-of-production basis over proven and probable reserves.

 

Should a property be abandoned, its capitalized costs are charged to operations.  The Company charges to the consolidated statement of operations the allocable portion of capitalized costs attributable to properties sold.  Capitalized costs are allocated to properties sold based on the proportion of claims sold to the claims remaining within the project area.

 

Mining Properties, Land and Water Rights

 

Costs of acquiring and developing mining properties, land and water rights are capitalized as appropriate by project area.  Exploration and related costs and costs to maintain mining properties, land and water rights are expensed as incurred while the property is in the exploration and evaluation stage.  Development and related costs and costs to maintain mining properties, land and water rights are capitalized as incurred while the property is in the development stage.  When a property reaches the production stage, the related capitalized costs are amortized using the units-of-production basis over proven and probable reserves.  Mining properties, land and water rights are periodically assessed for impairment of value, and any subsequent losses are charged to operations at the time of impairment.  If a property is abandoned or sold, a gain or loss is recognized and included in the consolidated statement of operations.

 

The Company has capitalized royalty payments made to MHMI during the development stage.  The amounts will be applied to production royalties owed upon the commencement of production.

 

Depreciation and Amortization

 

Property and equipment are recorded at cost and depreciated using the straight-line method over the estimated useful lives of the assets.  Property and equipment are depreciated using the following estimated useful lives:

 

Field equipment

 

Four to ten years

Office furniture, fixtures, and equipment

 

Five to seven years

Vehicles

 

Three to five years

Leasehold improvements

 

Three years or the term of the lease, whichever is shorter

Residential trailers

 

Ten to twenty years

Buildings and improvements

 

Ten to twenty seven and one-half years

 

At June 30, 2012 and 2011, accumulated depreciation and amortization was $1.6 and $1.2 million, respectively, of which $1.3 and $0.9 million, respectively, was capitalized.

 

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Provision for Taxes

 

Income taxes are provided based upon the asset and liability method of accounting.  Under this approach, deferred income taxes are recorded to reflect the tax consequences in future years of differences between the tax basis of assets and liabilities and their financial reporting amounts at each year-end.  In accordance with authoritative guidance under Accounting Standards Codification (“ASC”) 740, Income Taxes, a valuation allowance is recorded against the deferred tax asset if management does not believe the Company has met the “more likely than not” standard to allow recognition of such an asset.

 

Reclamation and Remediation

 

Expenditures for ongoing compliance with environmental regulations that relate to current operations are expensed or capitalized as appropriate.  Expenditures resulting from the remediation of existing conditions caused by past operations that do not contribute to future revenue generation are expensed.  Liabilities are recognized when environmental assessments indicate that remediation efforts are probable and the costs can be reasonably estimated.

 

Estimates of such liabilities are based upon currently available facts, existing technology and presently enacted laws and regulations taking into consideration the likely effects of inflation and other societal and economic factors, and include estimates of associated legal costs.  These amounts also reflect prior experience in remediating contaminated sites, other companies’ clean-up experience and data released by the United States Environmental Protection Agency (“EPA”) or other organizations.  Such estimates are by their nature imprecise and can be expected to be revised over time because of changes in government regulations, operations, technology and inflation.  Recoveries are evaluated separately from the liability. When recovery is assured, the Company records and reports an asset separately from the associated liability.

 

Stock-based Compensation

 

Stock-based compensation represents the fair value related to stock-based awards granted to members of the Board, officers and employees.  The Company uses the Black-Scholes model to determine the fair value of stock-based awards under authoritative guidance for Stock-Based Compensation.  For stock based compensation that is earned upon the satisfaction of a service condition, the cost is recognized on a straight-line basis (net of estimated forfeitures) over the requisite vesting period (up to three years).  Awards expire five years from the date of vesting.

 

Further information regarding stock-based compensation can be found in Note 7 — “Equity Incentives.”

 

Debt

 

The Company has determined that the Bridge Loan is a Level 3 financial instrument because it includes unobservable inputs to its fair value analysis. We have utilized the discounted cash flow income approach to calculate the fair value of the Bridge Loan liability as of June 30, 2012. Inputs to this valuation are as follows:

 

Interest Rate

 

LIBOR plus 4.25%

Discount Rate

 

8%

Term to Maturity

 

10 months

Principal Amount

 

$10.0 million

 

The Interest Rate was determined based on recent equipment financing terms quoted to the Company. The Discount Rate is consistent with that used in the Company’s long term operational plans. The Term to Maturity is the expected remaining duration of the Bridge Loan as of June 30, 2012. Based on the inputs above, the fair value of the Bridge Loan at June 30, 2012 was $10.6 million compared to a recorded value of $10.5 million, including accrued interest.

 

The fair value calculation would change based on changes to unobservable inputs such as the implicit interest rate. An increase of 1% in the implicit interest rate would increase the fair value of the Bridge Loan by $0.2 million.

 

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There have been no changes in the method used to calculate the fair value of the Bridge Loan during the period.

 

Debt Issuance Costs

 

The Company has capitalized certain costs such as technical due diligence, related legal fees, and advances against the arrangement fee in the amount of $5.2 million incurred in direct pursuit of the Term Loan based on our belief that it is more probable than not that the Company will receive the Term Loan.  A portion of these costs were incurred on behalf of Hanlong and will be offset against the $15.0 million arrangement fee to be paid by the Company to Hanlong upon the closing of the Term Loan.  These costs will be amortized over the life of the Term Loan using the effective interest method once the Term Loan has been made available.

 

Comprehensive Loss

 

For the three months ended June 30, 2012, and 2011, respectively, the Company’s comprehensive loss was equal to the respective net loss for each of the periods presented.

 

Recently Adopted Accounting Pronouncements

 

Comprehensive Income (Topic 220): Presentation of Comprehensive Income

 

In June 2011, the FASB issued Accounting Standards Update (ASU) 2011-02, Comprehensive Income (Topic 220): Presentation of Comprehensive Income.  Under the amendments, an entity has the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. This guidance is effective for the Company for the fiscal year beginning after December 15, 2011. The adoption of this guidance did not have a material effect on its financial condition, results of operation, or cash flows.

 

Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS

 

In May 2011, the FASB issued Accounting Standards Update (ASU) 2011-04, Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS. The Update amends fair value measurements and disclosures to (1) clarify the board’s intent in respect of existing measurement guidance, (2) revise certain measurement guidance that changes or modifies a principle, and (3) add disclosure requirements concerning the measurement uncertainty of Level 3 measurements. This guidance is effective for the Company for the first interim and annual period beginning on or after December 15, 2011. The adoption of this guidance did not have a material effect on its financial condition, results of operation, or cash flows.

 

NOTE 4 — MINING PROPERTIES, LAND AND WATER RIGHTS

 

We currently have interests in two mining properties that are the primary focus of our operations.  The Mt. Hope Project is currently in the development stage and the Liberty Property is in the exploration and evaluation stage.  We also have certain other, non-core, mining properties that are being evaluated for future exploration or sale.  The following is a summary of mining properties, land and water rights at June 30, 2012 and December 31, 2011 (in thousands):

 

 

 

At
June 30, 2012

 

At
 December 31,
2011

 

Mt. Hope Project:

 

 

 

 

 

Development costs

 

$

107,338

 

$

99,984

 

Mineral, land and water rights

 

10,526

 

10,526

 

Advance Royalties

 

27,800

 

22,600

 

Total Mt. Hope Project

 

145,664

 

133,110

 

Total Liberty Property

 

9,728

 

9,733

 

Other Properties

 

889

 

889

 

Total

 

$

156,281

 

$

143,732

 

 

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On June 26, 2009, the Company and Josephine Mining Corp. (“JMC”), a privately-owned Canadian company whose president is a related party to a member of the Company’s Board, entered into an Option to Purchase Agreement for the Company’s non-core Turner Gold property, a multi-metallic property located in Josephine County, Oregon, which the Company had acquired in 2004.  JMC paid $0.1 million upon entering into the agreement, an additional $0.3 million in January 2011, and an additional $0.3 million in December 2011, which are non-refundable and will be applied to the purchase price at the completion of the agreement. The $0.7 million has been recorded as a deferred gain pending completion of the purchase.  A final payment of $1.35 million is due at the earlier of September 28, 2012 or upon receipt by JMC of all permits and approvals necessary to commence mining operations plus three months.  The periodic payments allow JMC certain exploratory rights.  Ownership of the Turner Gold property will transfer to JMC upon the final payment. The Company will also retain a production royalty of 1.5% of all net smelter returns on future production from the property, should JMC acquire the property.  The book value of the Company’s investment in the Turner Gold property is approximately $0.8 million.

 

On March 8, 2010, the Company and Ascot USA, Inc. (“Ascot”), a Washington corporation, entered into an Option to Purchase Agreement for the Company’s non-core Margaret property, an undivided 50% interest in the reserved mineral rights and all of the Company’s interest in the 105 unpatented mining claims comprising the Red Bonanza Property, situated in the St. Helens Mining District, Skamania County, Washington.  The Company acquired the property in 2004.  Ascot paid $0.1 million upon entering into the agreement and an additional $0.3 million in May 2011.  Once made, each option payment is non-refundable.  The $0.4 million has been recorded as a deferred gain pending completion of the purchase.  The final installment payment of $1.6 million was due on or before June 8, 2012.  On May 30, 2012, the Company and Ascot executed an amendment allowing Ascot to extend the payment date for the third and final installment by making a payment of $335,000 on that date.  Of this amount, $300,000 shall apply to the purchase price with the remaining $35,000 considered a deferral fee.  The final payment of $1.3 million is due on or before October 10, 2012.  The periodic payments allow Ascot certain exploratory rights.  If Ascot makes all three of the installment payments, ownership of the Margaret property will transfer to Ascot upon the final payment.  The Company will also retain a production royalty of 1.5% of all net smelter returns on future production from the property, should Ascot acquire the property.  The Company carries no book value in the property.

 

On September 30, 2011, the Company and Russell Mining & Minerals, Inc. (“RMMI”), a privately-owned company whose president is a related party to one of the Company’s Board members, entered into an Option to Purchase Agreement for the Company’s non-core Detroit Copper property, a multi-metallic property located in Marion County, Oregon. RMMI paid $0.1 million upon entering into the agreement. Once made, each option payment is non-refundable. The $0.1 million has been recorded as a deferred gain pending completion of the purchase. If RMMI proceeds, an additional $0.3 million installment payment is due March 31, 2013, and the final installment payment of $1.6 million is due on or before September 30, 2014. The final option payment may be extended by RMMI by up to two years by making non-refundable installment payments of $160,000 in each year to be extended, which are not applied to the purchase price of the property.  The periodic payments allow RMMI certain exploratory rights.  If RMMI makes all three of the installment payments, ownership of the Detroit Copper property will transfer to RMMI upon the final payment. The Company has also retained a Production Royalty of 1.5% of all net smelter returns on future production from the property.  The Company currently carries no book value in the project.

 

Development costs and Deposits on project property, plant and equipment

 

As of June 30, 2012, development costs for the Mt. Hope Project amounted to $107.3 million including hydrology and drilling costs, expenditures to further the permitting process, capitalized salaries, project engineering costs, and other expenditures required to fully develop the Mt. Hope Project.  Deposits on project property, plant and equipment of $67.1 million represent ongoing progress payments on equipment orders for the custom-built grinding and milling equipment, related electric mill drives, and other processing equipment that require the longest lead times.

 

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Restricted Cash held for Electricity Transmission

 

The Company has paid $12.0 million into an escrow arrangement for electricity transmission services.  The amount represents security on a transmission contract that will provide power to the Mt. Hope Project, and is accounted for as restricted cash.  All amounts escrowed are to be returned to the Company as electricity is delivered or on December 1, 2015, in the event that electricity transmission at the Mt. Hope Project has not commenced or at the time the agreement is cancelled by the Company.

 

NOTE 5 — COMMON STOCK UNITS, COMMON STOCK AND COMMON STOCK WARRANTS

 

During the three and six months ended June 30, 2012, we issued 5,589 and 661,781 shares of common stock pursuant to stock awards under the 2006 Equity Incentive Plan.

 

All warrants outstanding at June 30, 2012 are exercisable at $5.00 per share once General Moly has received financing necessary for the commencement of commercial production at the Mt. Hope Project and will expire one year thereafter.

 

Pursuant to our Certificate of Incorporation, we are authorized to issue 200,000,000 shares of $0.001 par value common stock.  All shares have equal voting rights, are non-assessable and have one vote per share.  Voting rights are not cumulative and therefore, the holders of more than 50% of the common stock could, if they choose to do so, elect all of the directors of the Company.

 

NOTE 6 — PREFERRED STOCK

 

Pursuant to our Certificate of Incorporation we are authorized to issue 10,000,000 shares of $0.001 per share par value preferred stock.  The authorized but unissued shares of preferred stock may be issued in designated series from time to time by one or more resolutions adopted by the Board.  The Board has the authority to determine the preferences, limitations and relative rights of each series of preferred stock.  At June 30, 2012, and 2011, no shares of preferred stock were issued or outstanding.

 

NOTE 7 — EQUITY INCENTIVES

 

In 2006, the Board and shareholders of the Company approved the 2006 Equity Incentive Plan (“2006 Plan”) that replaced the 2003 Equity Incentive Plan (“2003 Plan”).  In May 2010, our shareholders approved an amendment to the 2006 Plan increasing the number of shares that may be issued under the plan by 4,500,000 shares to 9,600,000 shares.  The 2006 Plan authorizes the Board, or a committee of the Board, to issue or transfer up to an aggregate of 9,600,000 shares of common stock, of which 3,819,366 remain available for issuance as of June 30, 2012.  Awards under the 2006 Plan may include incentive stock options, non-statutory stock options, restricted stock units, restricted stock awards, and stock appreciation rights (“SARs”).  At the option of the Board, SARs may be settled with cash, shares, or a combination of cash and shares.  The Company settles the exercise of other stock-based compensation with newly issued common shares.

 

Stock-based compensation cost is estimated at the grant date based on the award’s fair value as calculated by the Black-Scholes option pricing model and is recognized as compensation ratably on a straight-line basis over the requisite vesting/service period.  As of June 30, 2012, there was $2.7 million of total unrecognized compensation cost related to share-based compensation arrangements, which is expected to be recognized over a weighted-average period of 1.7 years.

 

Stock Options and Stock Appreciation Rights

 

All stock options and SARs are approved prior to or on the date of grant.  Stock options and SARs are granted at an exercise price equal to or greater than the Company’s closing stock price on the date of grant.  Both award types vest over a period of zero to three years with a contractual term of five years after vesting.  The Company estimates the fair value of stock options and SARs using the Black-Scholes valuation model.  Key inputs and assumptions used to estimate the fair value of stock options and SARs include the grant price of the award, expected option term, volatility of the Company’s stock, the risk-free rate and the Company’s dividend yield.  The following table presents the weighted-average assumptions used in the valuation and the resulting weighted-average fair value per option or SAR granted:

 

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For the Six Months Ended June 30:

 

2012

 

Expected Life *

 

3.5 to 5.5 years

 

Interest Rate+

 

0.39% to 2.84%

 

Volatility **+

 

86.39% to 95.57%

 

Dividend Yields

 

 

Weighted Average Fair Value of Stock Options Granted During the Year

 

$

 

Weighted Average Fair Value of Stock Appreciation Rights Granted During the Year

 

$

 

 


*

 

The expected life is the number of years that the Company estimates, based upon history, that options or SARs will be outstanding prior to exercise or forfeiture.

**

 

The Company’s estimates of expected volatility are principally based on the historic volatility of the Company’s common stock over the most recent period commensurate with the estimated expected life of the Company’s stock options and other relevant factors.

+

 

The interest rate and volatility used by the Company in calculating stock compensation expense represent the values in effect at the date of grant for all awards. These values are periodically updated for stock appreciation rights, which may be settled in cash to reflect the current market conditions.

 

At June 30, 2012, the aggregate intrinsic value of outstanding and exercisable (fully vested) options and SARs was $0.8 million and had a weighted-average remaining contractual term of 2.1 years.  The total intrinsic value of options exercised during the three and six months ended June 30, 2012 was $0.2 million.  No SARs were exercised during the three and six months ended June 30, 2012.

 

Restricted Stock Units and Stock Awards

 

Grants of restricted stock units and stock awards (“Stock Awards”) have been made to Board members, officers, and employees.  Stock Awards have been granted as performance based, earned over a required service period, or to Board members and the Company Secretary without any service requirement.  Time based grants for officers and employees generally vest and stock is received without restriction to the extent of one-third of the granted stock for each year following the date of grant.  Stock Awards issued to members of the Board and the Company Secretary that are fully vested at the time of issuance are recognized as compensation expense upon grant of the award.

 

The compensation expense recognized by the Company for Stock Awards is based on the closing market price of the Company’s common stock on the date of grant.  For the six months ended June 30, 2012, the weighted-average grant-date fair value for Stock Awards was $3.26.

 

Summary of Equity Incentive Awards

 

The following table summarizes activity under the Plans during the six months ended June 30, 2012:

 

 

 

Stock Options

 

SARs

 

Stock Awards

 

 

 

Weighted
Average
Exercise
Price

 

Number of
Shares
Under Option

 

Weighted
Average
Strike
Price

 

Number
of Shares
Under
Option

 

Weighted
Average
Grant
Price

 

Number of
Shares

 

Balance at January 1, 2012

 

$

5.46

 

2,484,990

 

$

3.21

 

1,290,499

 

$

5.39

 

615,763

 

Awards Granted

 

 

 

 

 

3.26

 

256,092

 

Awards Exercised or Earned

 

2.78

 

(610,000

)

 

 

3.30

 

(166,439

)

Awards Forfeited

 

 

 

4.11

 

(36,641

)

3.80

 

(4,554

)

Awards Expired

 

5.53

 

(509,999

)

4.52

 

(18,913

)

 

 

Balance at June 30, 2012

 

$

6.14

 

1,364,991

 

$

3.16

 

1,234,945

 

$

4.69

 

700,862

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Exercisable at June 30, 2012

 

$

6.11

 

1,214,991

 

$

1.68

 

472,893

 

 

 

 

 

 

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A summary of the status of the non-vested awards as of June 30, 2012 and changes during the six months ended June 30, 2012 is presented below.

 

 

 

Stock Options

 

SARs

 

Stock Awards

 

 

 

Weighted
Average
Fair
Value

 

Number of
Shares
Under Option

 

Weighted
Average
Fair
Value

 

Number
of Shares
Under
Option

 

Weighted
Average
Fair
Value

 

Number of
Shares

 

Balance at January 1, 2012

 

$

6.25

 

155,000

 

$

3.67

 

940,215

 

$

5.39

 

615,763

 

Awards Granted

 

 

 

 

 

3.26

 

256,092

 

Awards Vested or Earned

 

1.69

 

(5,000

)

1.32

 

(141,522

)

3.30

 

(166,439

)

Awards Forfeited

 

 

 

4.11

 

(36,641

)

3.80

 

(4,554

)

Balance at June 30, 2012

 

$

6.40

 

150,000

 

$

4.08

 

762,052

 

$

4.69

 

700,862

 

 

Compensation Cost Recognized and Capitalized Related to Equity Incentives

 

Summary of Compensation Cost Recognized and
Capitalized related to Equity Incentives for the
Six Months Ended June 30 (in thousands):

 

2012

 

2011

 

Stock Options*

 

$

1

 

$

(60

)

SARs

 

 

 

 

 

Performance based

 

185

 

168

 

Vesting over time

 

179

 

272

 

Stock Awards:

 

 

 

 

 

Performance based*

 

165

 

73

 

Vesting over time

 

226

 

131

 

Board of Directors and Secretary

 

528

 

810

 

Total

 

$

1,284

 

$

1,394

 

Included in:

 

 

 

 

 

Capitalized as Development

 

289

 

112

 

Expensed

 

995

 

1,282

 

 

 

$

1,284

 

$

1,394

 

 


*

 

The Company recorded forfeitures during 2011 related to unvested options of terminated employees and performance-based restricted shares forfeited as a result of the failure to achieve certain associated milestones required for vesting.

 

Taxes

 

A portion of the Company’s granted options are intended to qualify as incentive stock options (“ISO”) for income tax purposes.  As such, a tax benefit is not recorded at the time the compensation cost related to the options is recorded for book purposes due to the fact that an ISO does not ordinarily result in a tax benefit unless there is a disqualifying disposition.  Stock option grants of non-qualified options result in the creation of a deferred tax asset, which is a temporary difference, until the time that the option is exercised.  Any excess tax benefits from non-qualified stock option exercises are not recorded until the tax deduction reduces income tax payable.

 

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NOTE 8 — CHANGES IN CONTINGENTLY REDEEMABLE NONCONTROLLING INTEREST AND EQUITY

 

 

 

Activity for
Six Months Ended

 

Changes in Contingently Redeemable Noncontrolling
Interest (Dollars in thousands)

 

June 30,
2012

 

June 30,
2011

 

Total Contingently Redeemable Noncontrolling Interest December 31, 2011, & 2010, respectively

 

$

98,073

 

$

98,753

 

Less: Net Loss Attributable to Contingently Redeemable Noncontrolling Interest

 

 

680

 

Total Contingently Redeemable Noncontrolling Interest June 30, 2012, and 2011, respectively

 

$

98,073

 

$

98,073

 

 

 

 

Activity for
Six Months Ended

 

Changes in Equity

 

June 30,
2012

 

June 30,
2011

 

Common stock:

 

 

 

 

 

At beginning of period

 

91

 

85

 

Stock Awards

 

 

6

 

At end of period

 

91

 

91

 

 

 

 

 

 

 

Additional paid-in capital:

 

 

 

 

 

At beginning of period

 

255,894

 

234,517

 

Exercised options

 

559

 

356

 

Exercised warrants

 

 

19,051

 

Stock based compensation

 

1,284

 

1,394

 

At end of period

 

257,737

 

255,318

 

Accumulated deficit:

 

 

 

 

 

At beginning of period

 

(112,933

)

(98,165

)

Consolidated net loss

 

(5,834

)

(9,514

)

At end of period

 

(118,767

)

(107,679

)

 

 

 

 

 

 

Total Equity June 30, 2012, and 2011, respectively

 

$

139,061

 

$

147,730

 

 

NOTE 9 — INCOME TAXES

 

At June 30, 2012, and December 31, 2011, we had deferred tax assets principally arising from the net operating loss carry-forwards for income tax purposes multiplied by an expected rate of 35%. As management of the Company cannot determine that it is more likely than not that we will realize the benefit of the deferred tax assets, a valuation allowance equal to the net deferred tax asset has been established at June 30, 2012, and December 31, 2011. The significant components of the deferred tax asset at June 30, 2012, and December 31, 2011 were as follows (in thousands):

 

 

 

June 30,
2012

 

December 31,
2011

 

Operating loss carry forward

 

$

162,945

 

$

143,412

 

Unamortized exploration expense

 

11,071

 

11,546

 

Fixed asset depreciation

 

178

 

109

 

Deductible stock based compensation

 

4,141

 

3,835

 

Other

 

241

 

251

 

Deductible temporary difference

 

$

178,576

 

$

159,153

 

Taxable temporary difference — Investment in Eureka Moly, LLC

 

$

(71,491

)

$

(64,979

)

Net deductible temporary difference

 

$

107,085

 

$

94,174

 

Deferred tax asset

 

$

37,480

 

$

32,961

 

Deferred tax asset valuation allowance

 

$

(37,480

)

$

(32,961

)

Net deferred tax asset

 

$

 

$

 

 

At June 30, 2012, and December 31, 2011 we had net operating loss carry forwards of approximately $163.0 million and $143.4 million, respectively, which expire in the years 2017 through 2032.  The carry forward

 

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amounts as of June 30, 2012, reflect $7.1 million in operating losses acquired in the acquisition of the Liberty Project that the Company anticipates will be recoverable prior to their expiration.  The change in the allowance account from December 31, 2011 to June 30, 2012 was $4.5 million.

 

As of June 30, 2012 and 2011, the Company had no unrecognized tax benefits.  There was no change in the amount of unrecognized tax benefits as a result of tax positions taken during the year or in prior periods or due to settlements with taxing authorities or lapses of applicable statues of limitations.  The Company is open to federal and state tax audits until the applicable statutes of limitations expire.

 

NOTE 10 — COMMITMENTS AND CONTINGENCIES

 

Mt. Hope Project

 

The Mt. Hope Lease Agreement (“Lease Agreement”) with MHMI may be terminated upon the expiration of its 30-year term, earlier at the election of the LLC, or upon a material breach of the agreement and failure to cure such breach.  If the LLC terminates the lease, termination is effective 30 days after receipt by MHMI of written notice to terminate the Mt. Hope Lease and no further payments would be due to MHMI.  In order to maintain the lease, the LLC must pay certain deferral fees and advance royalties as discussed below.

 

The Lease Agreement requires a payment of 3% of certain construction capital costs, defined in the Lease Agreement as the Capital Construction Cost Estimate (the “Estimate”).  The Estimate payment is treated as an Advance Royalty payment under the Lease Agreement.  The LLC is obligated to pay a portion of the Estimate each time capital is raised for the Mt. Hope Project based on 3% of the expected capital to be used for those certain construction capital costs defined in the lease.  Through June 30, 2012, we have paid $13.7 million of the total Estimate.  We paid $0.6 million in early 2011 as a result of the exercise of outstanding warrants and another $9.0 million in October 2011.  Based on the Lease Agreement, an additional $9.0 million must be paid on or before October 19, 2012.  Furthermore, a final Estimate payment will be due following the commencement of commercial production, after as-built costs are definitively determined.  Based on the revised capital estimate discussed in Management’s Discussion & Analysis below, and the current timeline for the commencement of commercial production, the Company estimates that an additional $4.2 million will be due during the second half of 2015.  Both the $9.0 million and the $4.2 million have been accrued as of June 30, 2012.

 

The LLC is also obligated to make a minimum annual advance royalty (“Annual Advance Royalty”) of $0.5 million each October 19 following the payment in October of 2012, for any year wherein commercial production has not been achieved or the Production Royalty (as hereinafter defined) is less than $0.5 million.  As commercial production is not anticipated to commence until 2015, the Company has accrued $1.0 million in Annual Advance Royalty payments which will be due in two $0.5 million installments in 2013 and 2014.  The Estimate and the Annual Advance Royalty are collectively referred to as the “Advance Royalties.”  All Advance Royalties are credited against the MHMI Production Royalties once the mine has achieved commercial production.  After the mine begins production, the LLC estimates that the Production Royalties will be in excess of the Annual Advance Royalties for the life of the project and, further, the Estimate will be credited against MHMI Production Royalties at the rate of 50% of Production Royalties on an annual basis until fully consumed.

 

Deposits on project property, plant and equipment

 

At June 30, 2012, we have active orders with varying stages of fabrication on milling process equipment comprised of two 230kV primary transformers and substation, a primary crusher, a semi-autogenous mill, two ball mills, and various motors for the mills.  We have suspended fabrication on 16 flotation cells, lime slaking equipment, hydrocyclones, and other smaller milling process equipment with the ability to re-initiate fabrication at any time.  The LLC terminated the fabrication of two multi-hearth molybdenum roasters and has received finished goods of the partially completed order.  We plan to re-establish a new purchase order with this manufacturer as financing becomes available and equipment procurement is restarted under then current market terms and conditions.

 

The following table sets forth the LLC’s cash commitments under mining and milling equipment contracts (collectively, “Purchase Contracts”) at June 30, 2012, (in millions):

 

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Year

 

As of
June 30, 2012

 

2012

 

1.4

 

2013 and thereafter

 

13.0

 

Total (1)

 

$

14.4

 

 


(1)                                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 the second half of 2013.  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, our 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’s 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 next year, 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 1st 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 is confident that renegotiation with extended terms would again be likely.

 

Obligations under capital and operating leases

 

We have contractual obligations under capital and operating leases that will require a total of $0.4 million in payments over the next three years.  Assets under capital lease relate to light vehicles leased by the Company for use in operations.  Operating leases consist primarily of rents on office facilities and office equipment.  Our expected payments are $0.3 million, $0.1 million and nil for the years ended December 31, 2012, 2013, and 2014, respectively.  We incurred charges of approximately nil for the three and six months ended June 30, 2012 in amortization on assets under capital lease.

 

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 $4.0 million 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, which are considered probable, and as such $4.0 million has been accrued in the Company’s June 30, 2012, financial statements and is included in mining properties, land, and water rights.

 

Permitting Considerations

 

In the ordinary course of business, mining companies are required to seek governmental permits for expansion of existing operations or for the commencement of new operations. The LLC will be required to obtain a

 

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ROD from the BLM authorizing implementation of the Mt. Hope Project POO.  This approval can be obtained only after successful completion of the National Environmental Policy Act process of environmental evaluation, which incorporates substantial public comment.  The LLC will also need to obtain various state and federal permits including water protection, air quality, water rights and reclamation permits.  In addition to requiring permits for the development of the Mt. Hope Project, we will need to obtain and modify various mining and environmental permits during the life of the Mt. Hope Project.  Obtaining, modifying, and renewing the necessary governmental permits is a complex and time-consuming process involving numerous jurisdictions and often involving public hearings and substantial expenditures.  The duration and success of the LLC’s efforts to obtain, modify or renew permits will be contingent upon many variables, some of which are not within the LLC’s control.  Increased costs or delays could occur, depending on the nature of the activity to be permitted and the interpretation of applicable requirements implemented by the permitting authority.  All necessary permits may not be obtained and, if obtained, may not be renewed, or the costs involved in each case may exceed those that we previously estimated.  It is possible that the costs and delays associated with compliance with such standards and regulations could become such that the LLC would not proceed with the development or operation of the Mt. Hope Project.

 

Water Rights Considerations

 

In addition to working to complete the Environmental Impact Study (“EIS”), we recently finalized the 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 14, 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 that 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 water remains available to the Company, as described above, for use at the Mt. Hope Project.

 

Environmental Considerations

 

Our mineral property holdings in Shoshone County, Idaho include lands contained in mining districts that have been designated as “Superfund” sites pursuant to the Comprehensive Environmental Response, Compensation, and Liability Act.  This “Superfund Site” was established to investigate and remediate primarily the Bunker Hill properties of Smelterville, Idaho, a small portion of Shoshone County where a large smelter was located.  However, because of the extent of environmental impact caused by the historical mining in the mining district, the Superfund Site covers the majority of Shoshone County including our Chicago-London and Little Pine Creek properties as well as many small towns located in Northern Idaho.  We have conducted a property environmental investigation of these properties, which revealed no evidence of material adverse environmental effects at either property.  We are

 

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unaware of any pending action or proceeding relating to any regulatory matters that would affect our financial position due to these inactive mining claims in Shoshone County.

 

NOTE 11 — SUBSEQUENT EVENTS

 

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 that 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.

 

Hanlong Letter of Intent.  On July 31, 2012, the Company and Hanlong signed a non-binding Letter of Intent (“LOI”) under which Hanlong agreed to provide or arrange a credit facility not to exceed $125.0 million to assist the Company in financing capital cost increases, which are discussed above.  The LOI contemplates the negotiation and signing of a definitive agreement concerning the credit facility.  Under the LOI, Tranche A in the amount of $75.0 million would be available to the Company during the Mt. Hope Project’s construction period.  Tranche B, in the amount of $50.0 million, would be available during the six month period following construction.  Tranche A of the $125.0 million facility can be reduced to the extent equipment is leased by the Company.  In exchange for the facility, the Company will pay a fee to Hanlong in the amount of $6.3 million, payable at closing of the Term Loan, and will issue warrants with a 2.5 year maturity to purchase ten million shares of the Company’s common stock.  The warrants will be priced at a 15% premium to the 10 day volume weighted average price before the signing of a definitive loan agreement under the LOI.  If the Tranche 2 purchase of stock under the Purchase Agreement occurs and the warrants are exercised, Hanlong would own approximately 31% of our outstanding shares.  Both tranches will mature 5 years after the achievement of commercial production at the Mt. Hope Project and will have mandatory payments of 50% of the Company’s semi-annual free net cash flow after debt service payments on the Term Loan and any other Mt. Hope Project funding requirements.  The facility will be subordinated to the Term Loan, will have covenants similar to the Term Loan, and will bear interest at 6-month LIBOR plus 4%, with interest paid semi-annually.  The parties intend to negotiate a binding agreement on or before October 26, 2012 and the Company has agreed not to seek competitive financing until the signing of the binding agreement.

 

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 six months ended June 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.

 

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We recently 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 60% engineering completion with solid scope definition.  The overall capital cost estimate has increased by 11%, or $130 million, and now totals $1,284 million.  The Company’s 80% share of the increase is $104 million.  This estimate will continue to be reviewed and is subject to change based on labor, equipment and construction material escalation, changes in project design, schedule delays, regulatory requirements and other factors.

 

The largest affected category of the estimate is owners’ cost which increased 48%, or $82 million, driven primarily by schedule delays largely attributed to an extended permitting timeline, as well as increased actual and forecasted permitting costs, driven by additional permitting requirements.  Construction, materials and plant facility costs increased 11%, or $59 million, driven primarily by construction labor costs and the pricing for specialized process equipment.  We have benefited in this category from our strategically placed equipment orders for primarily crushing and grinding equipment in 2007 and 2008 resulting in lower pricing than is currently available.  The mining equipment category increased $12%, or $16 million.  Over 70% of the initial mining fleet has been committed with firm pricing under purchase agreements.

 

Before bonding and pre-paid items, the capital cost estimate increased by 17%, or $176 million.  The reclamation bonding requirement grew by $10 million to a forecasted $75 million, representing a 15% increase, offset by an estimated $56 million of the bonding requirement that can now be funded through a surety arrangement, based on discussions with surety providers.

 

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

 

 

 

Millions $US

 

Category

 

2009
Estimate

 

2012
Revised
Estimate

 

Mining equipment

 

$

134

 

$

150

 

Construction, materials & plant facilities

 

523

 

582

 

Owners cost, pre-stripping, camp

 

169

 

251

 

Taxes, freight, commissioning, spares

 

68

 

74

 

Equipment suspension costs

 

 

11

 

EPCM

 

59

 

71

 

Contingency

 

86

 

76

 

Total Capital

 

$

1,039

 

$

1,215

 

Bonding and pre-paid items

 

115

 

69

 

Total Capital Requirement

 

$

1,154

 

$

1,284

 

 

From October 2007 through the six months ended June 30, 2012, we have spent approximately $196.9 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 reduced to approximately $1 million per month.  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 June 30, 2012 of $28.2 million to meet its funding requirements for 2012.  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.

 

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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.  In the first half of 2012, prices have continued to trade in a narrow range and are currently trading at $11.80 per pound.

 

The permitting process for the Mt. Hope Project has also had an impact on our 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 our 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 currently are 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 $1.4 million in 2012 and $13.0 million in 2013.  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 2012 and 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 the second half of 2013.  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, our 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’s equipment pricing will remain subject to inflation indexes and guarantees production slots to ensure that the equipment is available when required by the Company.

 

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Early next year, 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 1st 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 is confident that renegotiation with extended terms would again be likely.

 

The cash conservation plan reduced our total cash utilization for general administrative and overhead expenses to approximately $1 million per month, inclusive of maintenance costs at the Liberty Project.

 

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”).  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.  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 in the second half of this year, 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 finalized the 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 14, 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

 

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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 water remains available to the Company, as described above, for use at the Mt. Hope Project.

 

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 June 30, 2012, financial statements and is included in mining properties, land, and water rights.

 

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 in the second half of this year.  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 and financing is in place, we expect that production will begin approximately 20 — 24 months following initiation of project construction.

 

To maintain its 20% interest in the LLC, POS-Minerals will be required to make an additional $56.0 million 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.  If POS-Minerals does not make its additional $56.0 million contribution when due after the ROD Contribution Date, its interest will be reduced to 10%.

 

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 2014.  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

 

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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, 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 $39.4 million as of June 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.

 

Liquidity, Capital Resources and Capital Requirements

 

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

 

Our total consolidated cash balance at June 30, 2012, was $28.2 million compared to $40.7 million at December 31, 2011.  The decrease in our consolidated cash balances for the six months ended June 30, 2012, was due primarily to development costs and deposits on property, plant and equipment incurred of $9.4 million, and $3.7 million in general and administrative costs, partially offset by $0.6 million in proceeds from stock option exercises.

 

Under our cash conservation plan, our non-equipment related cash requirements have declined to approximately $1 million per month.  Based on our current plan and expected timetable, we expect to make additional payments of approximately $1.4 million under milling process equipment orders through the end of 2012, and $13.0 million in 2013.  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 estimate that an additional $9.0 million related to the Construction Royalty Advance must be paid on or before October 19, 2012, which amount has been accrued.  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 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 in the second half of this year, 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.

 

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

 

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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; (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.

 

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, 2011, and November 30, 2011, respectively.  Hanlong has received Chinese government approvals for its equity investment in us and our DEIS has been published; (2) an October 26, 2010 amendment setting the closing of Hanlong’s purchase of the first $40.0 million tranche of equity for December 20, 2010 and eliminating the condition that required us to have our DEIS published prior to closing this funding; (3) a December 20, 2010 amendment that made certain non-substantive changes in connection with the closing of the first tranche of Hanlong’s equity investment (“Tranche 1”); (4) a July 7, 2011 amendment that eliminated the deadline for publication of the DEIS, extended the ROD deadline from November 30, 2011 to the earlier of nine months following DEIS publication or September 30, 2012, extended Hanlong’s commitment to make available the Term Loan from two months following the ROD to nine months following the ROD, provided the ability of the Company to extend the ROD Condition date to the earlier of 12 months following DEIS and December 30, 2012 (“ROD Condition Extension”), and extended the maturity date of the Bridge Loan to the earlier of (i) 270 days after the issuance of the ROD, (ii) the date on which the Purchase Agreement terminates, and (iii) the earlier of December 31, 2012 and the availability of the Term Loan; and (5) a June 14, 2012 amendment that provided notice to Hanlong that the Company does not expect the BLM to issue the ROD before September 2, 2012 and does expect the ROD to be issued prior to December 2, 2012 and further provides notice that the Company wishes to utilize the ROD Condition Extension, thereby amending the date by which the ROD must be issued to December 2, 2012.

 

The Purchase Agreement may be terminated by either party (provided the terminating party is not in default) if the closing of the second tranche (“Tranche 2”) has not occurred on or before the earlier of September 30, 2012 (unless the parties have agreed to the ROD Condition Extension, in which case the date shall be December 31, 2012) or 12 months after the issuance of the ROD.

 

As discussed above, the second equity tranche will be for a purchase price of an additional $40.0 million.  Significant conditions to the closing of Tranche 2 include issuance of the ROD for the Mt. Hope Project by the BLM, approval of the plan of operations for the Mt. Hope Project (the “POO”) by the BLM, and the completion of documentation for and satisfaction of conditions precedent for the availability of funding under the Term Loan, described below.

 

Hanlong will have the right to purchase a portion of any additional shares of common stock that we issue so that it can maintain its percentage ownership, unless its ownership is at the time below 5% at the earlier of the closing of Tranche 2 or closing of the Term Loan.  It may also acquire additional shares so that it maintains a 20% indirect interest in the Mt. Hope Project if our interest in the LLC is reduced below 80%.  If we issue shares to fund the Mt. Hope Project under certain circumstances, and on or before the date of commercial production, and Hanlong exercises its rights to maintain its percentage interest, we will be obligated to refund to Hanlong the cost of such shares over a three-year period up to an aggregate of $9.0 million.

 

Break Fees.  A break fee is payable by both the Company and Hanlong if the Purchase Agreement terminates because of the failure of certain conditions.  A break fee of $10.0 million is payable to the Company if

 

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the Purchase Agreement is terminated because Hanlong fails to obtain necessary Chinese government approvals, which may be offset against any balances owed by the Company under the Bridge Loan.  A break fee of $5.0 million is payable to Hanlong if the ROD is not timely received or the condition waived and the Purchase Agreement is terminated.  The Company’s break fee may be increased by $5.0 million if the Purchase Agreement is terminated and the Company has violated the “no-shop” provisions of the Purchase Agreement.  The break fees may also be increased by up to $2.0 million, in addition to the payment of $2.0 million by the Company, if the Company requests and Hanlong grants an extension concerning the ROD deadline (the “ROD Extension Fee”).  Any such fee would be credited against the arrangement fee described below.  As the achievement of ROD by the September 2, 2012 deadline is now less than probable, a $2.0 million ROD Extension Fee has been accrued as of June 30, 2012, and is included in capitalized debt issuance costs.  The break fee payable by the Company to Hanlong may be paid in cash, or, in certain circumstances, in shares of our common stock at our option.  If paid in shares, the price would be the volume weighted average of our common stock on the NYSE Amex for the five days ending six days after the announcement of the termination.  On January 9, 2012, the Company and Hanlong executed an Option Agreement concerning the payment date for the ROD Extension Fee under the Purchase Agreement, for no consideration.  The option must be exercised on or before December 31, 2012.  On June 14, 2012, the Company exercised the option, thereby amending the Purchase Agreement to extend payment of the ROD Extension Fee from December 2012 until April 30, 2013.

 

Bridge Loan

 

Hanlong agreed to provide a $20.0 million Bridge Loan to the Company, available in two equal $10.0 million tranches.  On April 28, 2010, we drew down the first $10.0 million tranche.  The second tranche became available after receiving stockholder approval of the Hanlong Transaction.  The first tranche of the Bridge Loan bears interest at a rate tied to the London Interbank Offered Rate (“ LIBOR”) plus 2% per annum.  The second tranche of the Bridge Loan will bear interest at 10% per annum and is undrawn.  The Bridge Loan will be repaid from the proceeds of the Term Loan.  The second tranche may also be repaid at the Company’s election, in shares of the Company’s common stock.  If paid in shares, the price would be the volume weighted average of the Company’s shares on the NYSE Amex for a five-day period after public announcement of the event that required repayment.  The Company may offset its right to receive the break fee against its obligations to repay borrowings under the Bridge Loan.  On January 9, 2012, the Company and Hanlong executed a second Option Agreement concerning the Bridge Loan Agreement.  On June 14, 2012, the Company exercised the option, thereby amending the Bridge Loan Agreement for no consideration to extend the maturity date of the Bridge Loan from December 31, 2012 until April 30, 2013.  The option also has the effect of potentially extending the availability of the undrawn $10.0 million second tranche to April 30, 2013 since the availability of the second tranche ends the earliest of the Tranche 2 closing date, the maturity of the Bridge Loan and the first borrowing under the Term Loan.

 

The outstanding balance of the Bridge Loan and related accrued interest are recorded as a current liability as of June 30, 2012 as the Company anticipates the Term Loan will become available within the next 12 months and given the latest available maturity date of the Bridge Loan is April 30, 2013.  The Bridge Loan and our obligation to pay a break fee to Hanlong under the Purchase Agreement are secured by a pledge by us of a 10% interest in the LLC.

 

Stockholder Agreement

 

In connection with Hanlong’s purchase of our shares, Hanlong signed a Stockholder Agreement with the Company that limits Hanlong’s future acquisitions of our common stock, provides for designation of up to two directors to our Board and representation on the LLC management committee, and places some restrictions on Hanlong’s voting and disposition of our shares.

 

After the Tranche 1 closing, Hanlong became entitled to nominate one director to serve on our Board and one representative to the LLC management committee.  Nelson Chen currently serves in both of these capacities.  After the Tranche 2 closing, Hanlong will be entitled to nominate a second director.  The Company will include and recommend the election of Hanlong’s nominees in the Board’s slate of nominees submitted to our stockholders, subject to the Board’s fiduciary obligations and compliance by the nominee with applicable law and Company requirements concerning disclosure of information.  The Hanlong nominees may also serve on committees for which they are eligible.

 

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Hanlong has agreed not to purchase additional shares, except as permitted by the Purchase Agreement, without the Company’s prior consent, and has agreed that it will not solicit proxies, join a group with respect to our equity securities, solicit or encourage an offer from another person for the Company, call a meeting of the Company’s stockholders or make a proposal to the Company’s stockholders, except to the Board.  If our Board receives an offer for the Company, for its assets or a merger that the Board determines is in the best interests of the Company’s stockholders, Hanlong is required to vote in favor of such a transaction or tender its shares unless it proposes an alternative transaction that our Board determines is more favorable to our stockholders than the offer received.

 

Hanlong may not, without the prior written consent of the Board, transfer ownership of their securities if the recipient would acquire beneficial ownership of more than 5% of our common stock as of the date of such transfer.  The restrictions on Hanlong’s share ownership, voting, disposition and drag-along rights will terminate on the earlier of the time that Hanlong owns less than 10% of our common stock, the date that is 6 months after the date that commercial production begins at the Mt. Hope Project, and June 30, 2014.

 

Chinese Bank Term Loan

 

Hanlong is obligated to use commercially reasonable efforts to procure a Term Loan in an amount of at least $665.0 million.  The Term Loan is expected to bear interest at a rate tied to the LIBOR plus a spread of between 2% and 4% per annum.  The Purchase Agreement provides that the Term Loan will have customary covenants and conditions; however, the terms of the Term Loan have not yet been negotiated with the lender and we have no assurance as to the final terms of the Term Loan.  On February 16, 2012, the Company announced China Development Bank (“CDB”) had confirmed the basic terms underlying a proposed $665 million term loan to finance the Company’s 80% share of development costs for Mt. Hope project, including a CDB intention to lend $399 million and arrange a consortium of Chinese and international banks to fund the balance of $266 million.  The Term Loan is anticipated to carry a maturity of 12 years including a 30 month grace period to allow for the construction of the Mt. Hope Project.  The interest rate will remain subject to market conditions and Chinese government policy.  The Company and Hanlong are continuing to work with CDB with a target of having the Term Loan completed, approved and available to the Company upon receipt of Mt. Hope’s operating permits.  Hanlong or an affiliate is obligated to guarantee the Term Loan.  When funds can be drawn by the Company under the Term Loan, the Company will pay a $15.0 million arrangement fee to Hanlong who will pay fees and expenses associated with the Term Loan before the Term Loan Closing, including those charged by the Chinese bank.

 

Hanlong Letter of Intent

 

On July 31, 2012, the Company and Hanlong signed a non-binding Letter of Intent (“LOI”) under which Hanlong agreed to provide or arrange a credit facility not to exceed $125.0 million to assist the Company in financing capital cost increases, which are discussed above.  The LOI contemplates the negotiation and signing of a definitive agreement concerning the credit facility.  Under the LOI, Tranche A in the amount of $75.0 million would be available to the Company during the Mt. Hope Project’s construction period.  Tranche B, in the amount of $50.0 million, would be available during the six month period following construction.  Tranche A of the $125.0 million facility can be reduced to the extent equipment is leased by the Company.  In exchange for the facility, the Company will pay a fee to Hanlong in the amount of $6.3 million, payable at closing of the Term Loan, and will issue warrants with a 2.5 year maturity to purchase ten million shares of the Company’s common stock.  The warrants will be priced at a 15% premium to the 10 day volume weighted average price before the signing of a definitive loan agreement under the LOI.  If the Tranche 2 purchase of stock under the Purchase Agreement occurs and the warrants are exercised, Hanlong would own approximately 31% of our outstanding shares.  Both tranches will mature 5 years after the achievement of commercial production at the Mt. Hope Project and will have mandatory payments of 50% of the Company’s semi-annual free net cash flow after debt service payments on the Term Loan and any other Mt. Hope Project funding requirements.  The facility will be subordinated to the Term Loan, will have covenants similar to the Term Loan, and will bear interest at 6-month LIBOR plus 4%, with interest paid semi-annually.  The parties intend to negotiate a binding agreement on or before October 26, 2012, and the Company has agreed not to seek competitive financing until the signing of the binding agreement.

 

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Other Capital Requirements

 

We also require additional capital to maintain our mining claims and other rights related to the Liberty Project, as well as continue payment of ongoing general and administrative costs associated with supporting our planned operations.

 

Results of Operations

 

Three months ended June 30, 2012, compared to three months ended June 30, 2011

 

For the three months ended June 30, 2012, we had a consolidated net loss of $2.7 million compared with a consolidated net loss of $6.0 million in the same period for 2011.  The 2011 net loss includes a $3.4 million write down as discussed below.

 

For the three months ended June 30, 2012, and 2011, exploration and evaluation expenses at the Liberty Project were $0.2 million and $0.3 million, respectively due to a decrease in costs related to updating the pre-feasibility study.

 

For the three months ended June 30, 2012, and 2011, write downs of development and deposits were nil and $3.4 million, respectively.  The decrease in costs compared to the previous year relates to the write off of long-term deposits on mining equipment with the passage of a June 30, 2011 deadline for a firm purchase order.

 

For the three months ended June 30, 2012, and 2011, general and administrative expenses were $2.5 million and $2.3 million, respectively.  The increase in costs compared to the previous year relates primarily to overall increases in travel expenses and general payroll costs.

 

Interest income was nil for the three months ended June 30, 2012, and 2011, as a result of substantially lower interest rates and lower consolidated cash balances in 2012 and 2011.  Interest expense was $0.1 million and $0.1 million for the three months ended June 30, 2012, and 2011, respectively, as a result of interest accrued on the bridge loan outstanding during 2012 and 2011.

 

Six months ended June 30, 2012, compared to six months ended June 30, 2011

 

For the six months ended June 30, 2012, we had a consolidated net loss of $5.8 million compared with a consolidated net loss of $10.2 million in the same period for 2011.  The 2011 net loss includes a $3.4 million write down as discussed below.

 

For the six months ended June 30, 2012, and 2011, exploration and evaluation expenses at the Liberty Project were $0.3 million and $0.5 million, respectively due to a decrease in costs related to updating the pre-feasibility study.

 

For the six months ended June 30, 2012, and 2011, write downs of development and deposits were nil and $3.4 million, respectively.  The decrease in costs compared to the previous year relates to the write off of long-term deposits on mining equipment with the passage of a June 30, 2011 deadline for a firm purchase order.

 

For the six months ended June 30, 2012, and 2011, general and administrative expenses were $5.4 million and $6.2 million, respectively.  The decrease in costs compared to the previous year relates primarily to overall decreases in business development costs as well as equity compensation costs related to the Company’s portion of payroll taxes on vested share awards.

 

Interest income was nil for the six months ended June 30, 2012, and 2011, as a result of substantially lower interest rates and lower consolidated cash balances in 2012 and 2011.  Interest expense was $0.1 million and $0.1 for the three months ended June 30, 2012, and 2011 as a result of interest accrued on the bridge loan outstanding during 2012 and 2011.

 

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Contractual Obligations

 

Our contractual obligations as of June 30, 2012 were as follows, based on permitting expectations:

 

 

 

Payments due by period
(in millions)

 

Contractual obligations

 

Total

 

2012

 

2013 -
2015

 

2016 -
2017

 

2018 &
Beyond

 

Long-Term Debt (Capital Lease) Obligations

 

$

0.1

 

$

0.1

 

$

 

$

 

$

 

Operating Lease Obligations

 

0.3

 

0.2

 

0.1

 

 

 

Agricultural Sustainability Trust Contributions

 

4.0

 

2.0

 

2.0

 

 

 

Equipment Purchase Contracts

 

14.4

 

1.4

 

13.0

 

 

 

Advance Royalties

 

14.2

 

9.0

 

5.2

 

 

 

Provision for post closure reclamation and remediation

 

0.6

 

 

 

 

0.6

 

Total

 

$

33.6

 

$

12.7

 

$

20.3

 

$

 

$

0.6

 

 

We have active orders with varying stages of fabrication on milling process equipment comprised of two 230kV primary transformers and substation, a primary crusher, a semi-autogenous mill, two ball mills, and various motors for the mills.  We have suspended fabrication on 16 flotation cells, lime slaking equipment, hydrocyclones, and other smaller milling process equipment with the ability to re-initiate fabrication at any time.  The LLC terminated the fabrication of two multi-hearth molybdenum roasters and have received finished goods of the partially completed order.  The LLC plans to re-establish a new purchase order with this manufacturer as financing becomes available and equipment procurement is restarted under then current market terms and conditions.

 

At June 30, 2012, our contract to purchase two electric shovels expired.  We have signed a new letter of intent with the vendor providing for the purchase of 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 previously paid as deposits under the expired contract.  The agreement will remain subject to inflation indexes and guarantees production slots to ensure that the equipment is available when required by the Company.

 

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 the second half of 2013.  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.

 

The following table sets forth the LLC’s cash commitments under mining and milling equipment contracts (collectively, “Purchase Contracts”) at June 30, 2012 (in millions):

 

Period

 

Cash Commitments
Under Equipment
Purchase Contracts as
of June 30, 2012

 

3rd Quarter 2012

 

 

4th Quarter 2012

 

1.4

 

Total 2012

 

1.4

 

2013

 

13.0

 

2014

 

 

2015

 

 

Total

 

$

14.4

 

 

34



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If the Company does not make payments required under the purchase contracts, it could be subject to claims for breach of contract or to cancellation of the purchase contract.  In addition, we may proceed to selectively suspend, cancel or attempt to renegotiate additional purchase contracts if we are forced to further conserve cash.  See “Liquidity, Capital Resources and Capital Requirements” above.  If we cancel or breach any contracts, we will take all appropriate action to minimize any losses, but could be subject under the contracts or applicable law.  The cancellation of certain key contracts would cause a delay in the commencement of operations, have ramifications under the LLC Agreement with POS-Minerals and would add to the cost to develop our interest in the Mt. Hope Project.

 

ITEM 3.                  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Commodity Price Risk

 

We are a development stage company in the business of the exploration, development and mining of properties primarily containing molybdenum.  As a result, upon commencement of production, our financial performance could be materially affected by fluctuations in the market price of molybdenum and other metals we may mine.  The market prices of metals can fluctuate widely due to a number of factors.  These factors include fluctuations with respect to the rate of inflation, the exchange rates of the U.S. dollar and other currencies, interest rates, global or regional political and economic conditions, banking environment, global and regional demand, production costs, and investor sentiment.

 

In order to better manage commodity price risk and to seek to reduce the negative impact of fluctuations in prices, we have entered into long term supply contracts for our portion of the Mt. Hope production.  On December 28, 2007, we entered into a molybdenum supply agreement with ArcelorMittal S.A. (“ArcelorMittal”), the world’s largest steel company, that provides for ArcelorMittal to purchase 6.5 million pounds of molybdenum per year, plus or minus 10%, once the Mt. Hope Project commences commercial operations at minimum specified levels. The supply agreement provides for a floor price along with a discount for spot prices above the floor price and expires five years after the commencement of commercial production at the Mt. Hope Project.  Both the floor and threshold levels at which the percentage discounts change are indexed to a producer price index. On April 16, 2010, ArcelorMittal and the Company entered into an extension molybdenum supply agreement, providing ArcelorMittal with a five-year option to make effective an agreement to purchase from the Company 3.0 million pounds of molybdenum per year for 10 years following the expiration of the initial supply agreement.  The additional optional off-take will be priced in alignment with the Company’s existing supply agreements.  In order for ArcelorMittal to exercise this option and make the extension agreement effective, ArcelorMittal must have beneficial ownership of more than 11.1 million shares of Company common stock on or prior to April 15, 2015.  According to public filings, on January 25, 2011, the boards of directors of ArcelorMittal S.A. and APERAM each approved the transfer of the assets comprising ArcelorMittal’s stainless and specialty steels businesses from its carbon steel and mining businesses to APERAM, a separate entity incorporated in the Grand Duchy of Luxembourg.  This transfer included the off-take agreement the Company had in place with ArcelorMittal and the shares of the Company’s common stock previously owned by ArcelorMittal.

 

Additionally, on May 14, 2008, we entered into a molybdenum supply agreement with SeAH Besteel Corporation (“SeAH Besteel”), Korea’s largest manufacturer of specialty steels, which provides for SeAH Besteel to purchase 4.0 million pounds of molybdenum per year, plus or minus 10%, once the Mt. Hope Project commences commercial operations at minimum specified levels. Like the ArcelorMittal supply agreement, the supply agreement with SeAH Besteel provides for a floor price along with staged discounts for spot prices above the floor price and expires five years from the date of first supply under the agreement.  Both the floor and threshold levels at which the percentage discounts change are indexed to a producer price index.

 

On August 8, 2008, the Company entered into a molybdenum supply agreement (“Sojitz Agreement”) with Sojitz Corporation (“Sojitz”).  The Sojitz Agreement provides for the supply of 5.0 million pounds per year of molybdenum for five years, beginning once the Mt. Hope Project reaches certain minimum commercial production levels.  One million annual pounds sold under the Sojitz Agreement will be subject to a per-pound molybdenum floor price and is offset by a flat discount to spot molybdenum prices above the floor.  The remaining 4.0 million annual pounds sold under the Sojitz Agreement will be sold with reference to spot molybdenum prices without regard to a floor price.  The Sojitz Agreement includes a provision that allows Sojitz the option to cancel in the event that supply from the Mt. Hope Project has not begun by January 1, 2013.  Based on our current development

 

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timeline, Sojitz will have the option to cancel its contract or participate in the molybdenum supply agreement as described above.  If Sojitz elects to cancel its contract with us, the supply of 5.0 million pounds per year of molybdenum for five years will be assumed by Hanlong, pursuant to the terms of the Hanlong molybdenum supply agreement described below.

 

On March 4, 2010, the Company entered into a molybdenum supply agreement (“Hanlong Agreement”) with Hanlong.  The Hanlong Agreement requires Hanlong to purchase the Company’s entire share of the Mt. Hope molybdenum production above that necessary for the Company to meet its existing supply commitments until the expiration of those commitments.  After the expiration of the existing supply agreements, until the original scheduled maturity date of the Term Loan, or if the Company elects not to enter into the Term Loan, 14 years after commencement of commercial production, Hanlong must annually purchase the greater of 16 million pounds or 70% of the Company’s share of Mt. Hope production.  Following the original scheduled maturity date of the Term Loan, or if the Company elects not to enter into the Term Loan, 14 years after commencement of commercial production from the Mt. Hope Mine, Hanlong must purchase a percentage of the Company’s share of Mt. Hope production equal to 2.5 times Hanlong’s fully diluted percentage ownership of our common stock.  Subject to certain exceptions, the Hanlong Agreement will terminate once Hanlong’s fully-diluted ownership percentage falls below 5%.  As long as Hanlong continues to guarantee the Term Loan, the Hanlong Agreement will not terminate even if Hanlong’s ownership falls below 5%.  If the cause of Hanlong’s ownership falling below 5% is a change of control of the Company or a dilutive transaction in which Hanlong does not have the right to participate, the Hanlong Agreement will not terminate and Hanlong will be obligated to continue to purchase a percentage of the Company’s share of Mt. Hope production equal to 2.5 times Hanlong’s fully-diluted percentage ownership of the Company as it existed immediately prior to such change of control or dilutive transaction.  If the Company elects not to enter into the Term Loan, and the second loan tranche does not close, Hanlong’s obligation to purchase the Company’s share of Mt. Hope production in each of the periods described above will be half of the obligations described above.  The supply off-take agreement provides for a floor price, along with a discount for spot prices above the floor price, for twenty-five percent of the production Hanlong receives. The remaining 75% of the production Hanlong receives will be sold with reference to spot molybdenum prices less a small discount.

 

All four long term supply agreements provide for supply only after commercial production levels are achieved, and no provisions require the Company to deliver product or make any payments if commercial production is never achieved or declines, in later periods and have floor prices ranging from $14.25 to $15.00 per pound and incremental discounts above the floor price.  The agreements require that monthly shortfalls be made up only if the Company’s portion of Mt. Hope production is available for delivery, after POS-Minerals has taken its share.  In no event do these requirements to make up monthly shortfalls become obligations of the Company if production does not meet targeted levels.

 

Furthermore, each of the agreements have take-or-pay provisions that require the buyers to either take delivery of product made available by the Company, or to pay as though they had taken delivery pursuant to the term of the agreements.

 

While we have not used derivative financial instruments in the past, we may elect to enter into derivative financial instruments to manage commodity price risk.  We have not entered into any market risk sensitive instruments for trading or speculative purposes and do not expect to enter into derivative or other financial instruments for trading or speculative purposes.

 

Interest Rate Risk

 

As of June 30, 2012, we had a balance of cash and cash equivalents of $28.2 million.  Interest rates on short term, highly liquid investments have not changed materially since December 31, 2011, and continue to be 1% or less on an annualized basis.  Our debt agreements have interest rates of LIBOR plus a percentage.  Any significant rise in the LIBOR rate during the course of our debt agreements may affect our ability to service the debt.

 

ITEM 4.                  CONTROLS AND PROCEDURES

 

An evaluation was performed under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, of the effectiveness of our disclosure

 

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Table of Contents

 

controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (“Exchange Act”)) as of the end of the period covered by this Quarterly Report on Form 10-Q.  Based on the foregoing, our management concluded that our disclosure controls and procedures are effective to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission rules and forms and such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, to allow timely decisions regarding required disclosure.

 

There was no change in our internal control over financial reporting that occurred during the quarter ended June 30, 2012, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

PART II - OTHER INFORMATION

 

ITEM 1.                  LEGAL PROCEEDINGS

 

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 14, 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 water remains available to the Company, as described above, for use at the Mt. Hope Project.

 

ITEM 1A.               RISK FACTORS.

 

Our Annual Report on Form 10-K for the year ended December 31, 2011, including the discussion under the heading “Risk Factors” therein, and this report describe risks that may materially and adversely affect our business, results of operations or financial condition.  The risks described in our Annual Report on Form 10-K and this report are not the only risks facing us. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operations.

 

Special Note Regarding Forward-Looking Statements

 

Certain statements in this report may constitute forward-looking statements, which involve known and unknown risks, uncertainties and other factors, which may cause actual results, performance or achievements of our Company, the Mt. Hope Project, Liberty Property and our other projects, or industry results, to be materially different from any

 

37



Table of Contents

 

future results, performance or achievements expressed or implied by such forward-looking statements.  We use the words “may,” “will,” “believe,” “expect,” “anticipate,” “intend,” “future,” “plan,” “estimate,” “potential,” and other similar expressions to identify forward-looking statements.  These forward-looking statements are subject to a number of risks, uncertainties and assumptions that could cause actual results to differ materially from those in the forward looking statements. Such risks, uncertainties and assumptions are described in the “Risk Factors” section included in our Annual Report on Form 10-K for the year ended December 31, 2011, and this report, and include, among other things:

 

·      our investors may lose their entire investment in our securities;

·      our dependence on the success of the Mt. Hope Project;

·      investments and additional capital financing by Hanlong and a loan from a Chinese bank are subject to significant consents, approvals and conditions precedent which may not be obtained or met;

·      issues related to the management of the Mt. Hope Project pursuant to the LLC Agreement;

·      fluctuations in the market price of, and demand for, molybdenum and other metals;

·      counter party risks;

·      the ability to obtain all required permits and approvals for the Mt. Hope Project and the Liberty Project, and the costs and risk associated with the defense of protracted administrative and judicial appeals of approved water and operating permits;

·      the timing of exploration, development and production activities and estimated future production, if any;

·      estimates related to costs of production, capital, operating and exploration expenditures;

·      the estimation and realization of mineral reserves and production estimates, if any;

·      inherent operating hazards of mining;

·      title disputes or claims; and

·      climate change and climate change legislation for planned future operations;

·      government regulation of mining operations, environmental conditions and risks, reclamation and rehabilitation expenses;

·      compliance/non-compliance with the Mt. Hope lease;

·      losing key personnel or the inability to attract and retain additional personnel;

·      reliance on independent contractors, experts, technical and operational service providers over whom we have limited control;

·      increased costs can affect our profitability;

·      shortages of critical parts, equipment, and skilled labor may adversely affect our development costs;

·      legislation may make it difficult to retain or attract officers and directors and can increase costs of doing business;

·      provisions of Delaware law and our charter and bylaws may delay or prevent transactions that would benefit shareholders.

 

You should not place undue reliance on these forward-looking statements, which speak only as of the date of this report.  These forward-looking statements are based on our current expectations and are subject to a number of risks and uncertainties, including those set forth above.  Although we believe that the expectations reflected in these forward-looking statements are reasonable, our actual results could differ materially from those expressed in these forward-looking statements, and any events anticipated in the forward-looking statements may not actually occur.  Except as required by law, we undertake no duty to update any forward-looking statements after the date of this report to conform those statements to actual results or to reflect the occurrence of unanticipated events.  We qualify all forward-looking statements contained in this report by the foregoing cautionary statements.

 

ITEM 2.                  UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

None.

 

ITEM 3.                  DEFAULTS UPON SENIOR SECURITIES

 

None.

 

38



Table of Contents

 

ITEM 4.                  MINE SAFETY DISCLOSURES

 

ITEM 5.                  OTHER INFORMATION

 

None.

 

ITEM 6.                  EXHIBITS

 

Exhibit 
Number

 

Description of Exhibit

10.1†

 

Amendment No. 5 and Notice Pursuant to Securities Purchase Agreement dated June 14, 2012, by and between General Moly, Inc. and Hanlong (USA) Mining Investment, Inc. (Filed as Exhibit 10.1 to our Current Report on Form 8-K filed on June 15, 2012).

10.2†

 

Amendment No. 3 and Notice Pursuant to Bridge Loan Agreement dated June 14, 2012, by and between General Moly, Inc. and Hanlong (USA) Mining Investment, Inc. (Filed as Exhibit 10.2 to our Current Report on Form 8-K filed on June 15, 2012).

31.1

 

Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2

 

Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32.1

 

Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

32.2

 

Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

101

 

The following XBRL (Extensible Business Reporting Language) materials are filed herewith: (i) XBRL Instance; (ii) XBRL Taxonomy Extension Schema; (iii) XBRL Taxonomy Extension Calculation; (iv) Taxonomy Extension Labels, (v) XBRL Taxonomy Extension Presentation, and (vi) XBRL Taxonomy Extension Definition. In accordance with Rule 406T of Regulation S-T, the information in these exhibits is furnished and deemed not filed or a part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, is deemed not filed for purposes of Section 18 of the Exchange Act of 1934, and otherwise not subject to liability under these sections and shall not be incorporated by reference into any registration statement or other document filed under the Securities Act of 1933, as amended, except as expressly set forth by the specific reference in such filing.

 


 

Previously filed as indicated and incorporated herein by reference.

 

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Table of Contents

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

Dated: August 7, 2012

 

 

GENERAL MOLY, INC.

 

 

 

By:

/s/ David A. Chaput

 

 

David A. Chaput

 

 

Chief Financial Officer and

 

 

Duly Authorized Officer

 

40


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