Project Summary

The Ruby Creek Molybdenum Deposit is a low-grade bulk type of molybdenum deposit located, at the headwaters of Ruby Creek in the floor of an alpine cirque. It is located about 22 kilometers northeast of Atlin, British Columbia; 124 kilometers southeast of Whitehorse, Yukon Territory in the extreme north western corner of British, Columbia, Canada.

StockInterview:
When you acquired the property, during a period of depressed molybdenum pricing, what did you believe your costs would be?

Larry Reaugh:
Looking back at the older numbers, we thought it might be around $3 to $4/pound. The bankable feasibility is now pointing to US$5.87/pound. It’s interesting in that Blue Pearl, which recently purchased the Thompson Creek’s molybdenum operation, and our property had similar grades and costs. It was very gratifying for us working in the dark with our engineering groups, or our engineering groups working in the dark, to have those similar grades and similar costs.


StockInterview:
Is it realistic that you can raise C$450 million and bring the Ruby Creek molybdenum project into production?

Larry Reaugh:
The bankable feasibility is saying it should go into production. The payback would be three years, based upon a sliding scale of molybdenum from US$22 dropping to $15 over the first five years. We feel that’s conservative. We have a much stronger outlook on molybdenum, and this outlook has been really reinforced in recent years. A 20-percent increase in reserves and grades would reflect in the payoff period, bringing it down to twenty months.


StockInterview:
Let’s set the record straight now. How big is the Ruby Creek deposit, how much is it worth and does your deposit pass muster with the U.S. Securities and Exchange Commission(SEC) definition of reserves?

Larry Reaugh:
The bankable feasibility gives us reserves. It is a reserve. It’s passed muster. I can actually tell you it’s worth US$4.2 billion and, with a possible 20-percent increase in grade, it could be worth over US$5 billion. With this increase in grade, costs could drop to US$4.70/pound. There are 167 million pounds, of which at least 100 million more are under measured and indicated. We could probably go down to $US8/pound and still make some money with cost sliding down to $7/pound. But that would be a dramatic drop in the molybdenum price, and I think that would probably kill every molybdenum project out there.


StockInterview:
What is your major hurdle in selling institutions on your Ruby Creek project?

Larry Reaugh:
It is convincing them that there is a substantial argument for the molybdenum price maintaining. The major problem is the molybdenum price has a volatile history. Most people are afraid of that, but the longer-in-the-tooth this price remains, the more confidence is going to come into the market. Our major hurdle is to get over that feeling of moly ‘falling off the map.’ I think most people don’t see what is happening with molybdenum. A lot of moly will be required to build nuclear power plants because of the corrosion. As uranium demand goes up, it can only benefit the moly story. You can reduce the amount of steel required in pipelines. New pipes are being developed with molybdenum, but have half the weight of the old pipes. You can see the way oil and gas pipelines are going to go. You can reduce the amount of steel that’s required. It is already in the automobile industry, where we want high strength for safety and lighter vehicles for fuel savings. You can probably see this going into the rail lines and for ship building.

StockInterview:
Tell us about your recent drilling and why you are excited about this.

Larry Reaugh:
Recent drilling is telling us there is actually another deposit west. First off, we needed the sample to get a molybdenum concentrate to go to other companies that are off-taking our material. They have to know the specs, and we had to produce a concentrate. We had to drill for it, send down a ton of core and run it through the laboratory, G&T Metallurgical Services (Kamloops, British Columbia). We got a 92.5 percent recovery doing that, which is 3.5 percent greater than the bankable feasibility at 89 percent. This is a huge plus for us – greater recovery and a coarser grind.


StockInterview:
What else did you discover during the angle drilling?

Larry Reaugh:
Going at an angle into the ground, drilling is not only cutting the flat line veins, it’s cutting the vertical. What we found now was that we got stock works – something like a spider web. It gives you greater continuity in the project. The greater the continuity, the greater the confidence in your ore body. Out of the 283 holes drilled in this project, 270 of them have been vertical. We weren’t getting a good picture of what the vertical veins looked like. From these 13 angle holes that we drilled, the results were a staggering 75 percent higher at 0.139 percent. Previously, we got 0.079 percent from the high grade pit area. We are looking somewhere between ten and twenty percent increase in the total reserve volume. It would mean the cost per pound of moly dropping from $5.87 to $4.60/pound.


StockInterview:
How many pounds per ton do you think you will be able to recover from Ruby Creek?

Larry Reaugh:
At 0.079 percent molybdenum, which is what we recover, it would be roughly 1.7 pounds, except for the first five years where we could recover 0.084 percent/ per ton. In the final concentrate, this would translate to 1.66 pounds of recoverable moly per ton.


StockInterview:
But critics point to your lack of infrastructure, specifically the lack of power lines. Will you be using diesel?

Larry Reaugh:
It is expensive and probably adds somewhere close to $1.50 to $2/pound to our cost. That hurts, but in order to make this project happen. There’s actually power within 90 kilometers of this property, We discussed bringing it down, but power companies in Canada and especially in the Yukon have been bit before. They bring in power lines, and then the project doesn’t go ahead. The territory is stuck with the cost. So, they want to see concrete in the ground. They want to see you turning the mill over. And then, they would seriously consider bringing the power down. We will be running with diesel for three or four years. Hopefully, we will be able to get the power lines permitted and have the provinces in the territory bring it down to the site. There is actually a hydroelectric dam, within a few kilometers from our site, the native group is putting in. That would allow them to expand from two megawatts to ten. They could tie it into a grid and sell it to us.


StockInterview:
What is the status of your permitting?

Larry Reaugh:
We are about 60 percent of the way through our permits. We are still shooting for the end of this quarter to have them. We want to be in construction in June of this year. We put together the operating team. There will be more announcements on who we’ve hired: well-known mining specialists in the industry, operators, builders and so on. We are preparing this company to hit the ground running this summer. During the peak of construction, we’ll have up to 1000 people working for us. We will have to pull from all over the province. This is going to benefit the province. It’s going to benefit the people of Atlin, and it’s going to benefit the Taku River Tlingit (TRT). They will be able to become self-sustaining as a group through this large activity of ours. We will train and employ their people and encourage them to set up sub-contractor companies. It’s the same story in the entire industry – we’re all competing for miners.


StockInterview:
You have this much confidence in this project?

Larry Reaugh:
This is a project that’s never been glamorous. It’s a work horse that you can use to build a company, or it can be the start of a company builder. I think the cash flow will always be predictable. You would be able to predict recoveries, to predict your grade. It’s not erratic to put it simply. It will employ about 225 people full time. It’s a project that’s needed in an area in which the population is dwindling.

StockInterview:
Run us step by step through the construction process. What are you first constructing?

Larry Reaugh:
The concentrator itself – that’s the major thing – get the foundations for the concentrator. We’d start pre-stripping although that wouldn’t be something that has to be done immediately. Clearing the site, building out the site, drilling and blasting the foundations and then setting up the cladding of the building so that we can work on this year around. Of course, setting up camp, moving into the camp, setting up the sewer and water systems and all those little things that you never think about that costs a lot of money and have to be done.


StockInterview:
When would you actually be getting around to building out the mining operation?

Larry Reaugh:
Well, we construct all winter. Then we would begin the build-out on the tailings pond, and we would start pre-stripping. We’ve got about 10 million tons to pre-strip. By the way, on our five-year plan, once that’s done, there would be no strip ratio. There would just be ore to haul so our costs would be down considerably on that. The pre-strip would cost $15 to $18 million.


StockInterview:
Where does most of the C$450 million get spent then?

Larry Reaugh:
That would be included in the concrete, construction workers – we would have about 125 on site at that time. Steel, laying pipe and getting the electrical started. All these things come with a big concentrator. 20,000 tons is a fair-size concentrator.


StockInterview:
When will Ruby Creek commence production?

Larry Reaugh:
We will be in production with the commissioning, which is sort of production. It will be low grade material at that time in order to get your recoveries up, your grind rate and everything like that. There are always a few things that have to be worked out that you don’t want to do with the better grade material. We’d be in full production in the beginning of the first quarter 2009, probably commissioning through the last quarter of 2008.


StockInterview:
By 2009 or 2010, won’t you be competing with Climax’s primary moly production and a number of other companies producing copper as a by-product?

Larry Reaugh:
To be honest, I don’t see where the moly supply is going to come from. As far as I can see, it is receding. Climax would be one of the closer ones coming on. I don’t think they’ve made the decision yet, but they have torn down the old infrastructure. They are out for a bankable feasibility bid right now. Climax would bring 20 million pounds, but we also look at the Henderson being ramped up for the last few years. Every year it’s been ramped up to produce more. This will start to recede over the next three years. Codelco is down from about 11 million pounds and it could go down to eight or nine million next year. Highland Valley is down from about 10 million pounds. They boosted it up by the high grade of their moly, and they are down to half of that. Bingham Canyon is sliding continually. By-product production is starting to slide.


StockInterview:
Won’t you need more than one company involved in writing Adanac a check for C$450 million?

Larry Reaugh:
We are talking to refineries and steel companies. I am sure there is going to be sort of mix of some steel companies that will be involved in the strategic partnership on this. It will be two or more because their needs are individual. They don’t need a full-fledged operation. Some also have long-term contracts.


StockInterview:
How much of the project will you have to give up to bring this to fruition?

Larry Reaugh:
We are shooting for around 25 to 30 percent of the project. We’ll do what’s necessary to make this project work. I’ve been in the mining business for 44 years now. I know how these deals come together, and my board has got umpteen experiences on joint ventures and strategic partnerships. We want to put it into production. It’s not to say that once the permits are issued that there couldn’t be some predatory interest out there. When you lay it out on the table, making $300 million in a year after costs is a lot of money.


StockInterview:
How much more will the company shares become diluted to get to your goal?

Larry Reaugh:
We are going to have to put up an equity position that could be anywhere from $60 to $100 million. We expect there will be dilution. Through events we are working with now, we expect the price will increase and we can cut that dilution back. But, I think we would be up to a minimum of 100 million shares, maybe as high as 120 million by the time all is said and done.

We solicited comments from two industry experts about the Adanac Molybdenum Corporation: Otto Spork and David Michaud. Otto Spork’s Strategic Opportunities Hedge Fund has invested in Adanac and was one of the early investors. David Michaud is StockInterview’s consulting metallurgical engineer. He neither holds a position in Adanac nor was he paid to render his technical opinion on the metallurgy.