ANDREW RACZ [Q]:   When I was in school or college and read about mining, and every mining company of course has a chairman or head, I often thought about the name Guggenheim. Now, in the last fifteen or twenty years, a number of entrepreneurs broke out and created major mining companies like Peter Monk of Barrick or Robert Friedland. At the same time, in the 21st century there are hundreds of mining companies. My first question is, do you have any desire or determination to create something that one day your name will be remembered as head of an important mining company?

BILL PFAFFENBERGER [A]:  I don't think that's actually been my motivation. My motivation has been more than...when the opportunity presents itself, I like to be involved, but I don't look at it as something that for example would make me famous. When the opportunity is there, I really think that if you have the capabilities to apply yourself, you take advantage of them simply because it gives you the accomplishment. So it's not really an issue of becoming famous.

Q:   But do you have any desire to create something that people will remember?

A:   Oh, absolutely. I think that's the objective, and that is what's going on in the world in terms of the demand for metals is not understood by a great number of people. I look at it as just a great opportunity.

Q:   You come from academia.

A:   Yes.

Q:   If I'm correct, you were a professor of mathematics.

A:   That's correct.

Q:   Almost a hundred years ago there was a history professor in New Jersey who never really had any political ambitions until a New Jersey Senator arrived to his home on a Sunday evening and asked him, "Professor Wilson, would you like to be a U.S. Senator?"

A:   A fairly famous event.

Q:   I sometimes feel that academia brings out unusual personality traits which have been utilized for many decades. But suddenly something happens and the professor becomes a Senator, a President. How did you develop this idea of going from being a mathematics professor to being head of a mining company?

A:   Well, unlike a lot of academics who are really focused specifically on the fields that they do research in, and I've never been limited. That is, I've always been interested in investments in general, but I've been interested in mining companies and what they represent in terms of their part of their economy for a long time. My first interests really came in the early eighties, so I've been at it for a while. I thought that my involvement would be peripheral, just being on boards. I'm very good as a strategist, in terms of giving advice on what strategy you should use to actually get yourself known and actually develop what exploration mining companies are supposed to do, and that is develop [floor] bodies, which is in one sense a risky venture. But the other is when you're successful, it can be phenomenally beneficial to a lot of people.

Q:   Now let's break this into two parts. The first part is general, that in the last fifteen years the world has developed, seven billion people are working today. They consume more and more minerals and iron ore, nickel, steel, molybdenum, and there are suddenly tremendous demands in various fields of endeavor and create opportunities for forming and developing a company. That's the first thing. How did this come to you?

A:   Well, the realization of what's going on doesn't happen spontaneously. It's something that develops over time. But once you start to look at what the dynamic is behind what I think will be the shortage in a lot of metals, it all makes sense in terms of why we've come to this point in time.

If seven billion people increase their consumption by $1,000 per year,

Q:   I think what's happened in the last few days in gold is showing what's coming. By today, all over CNN people predicted that gold may hit a thousand because of the monetary problems and the decline of the dollar. And switching to the euro from the dollar, it may create a thousand dollar gold, and that would highlight that the same thing will happen to nickel or molybdenum.

In the 19th century and, in fact, in the first part of the 20th century, gold was used as a storage of value. It became more widely used under the Third Reich when people were smuggling money to Switzerland in numbered accounts, and part of this money was dedicated to be held in gold. Curiously enough, the movement was started by the Germans themselves and the Nazi leaders. The numbered accounts and gold holdings may have been widely used by the Swiss, and it began to be popularized by the Germans, to be followed by the French and wealthy people in the Mediterranean.

Shortly after the war when currencies lost their values between 1944 and 1948, gold was again used as a storage of value all over Europe. Its usage died down in the late forties and did not re-emerge until the energy crisis and the rise of oil prices in 1973. There gold achieved a new significance when President Nixon devalued the dollar on August 15, 1971 and effectively closed the gold window.

Q:   In dollar denominations mainly.

A:   Right. And if they just moved to the average of what other countries who become developed hold in terms of reserves, it will overwhelm the gold market. Gold is going to go up just because the demand is there for them diversifying into something besides currencies. That to me is not something that's indicating a vast inflation coming. It's more an indication of the fact that the world has changed from what it was thirty years ago. If the Chinese and the Japanese move themselves to what would be reasonable reserves of gold, they will overwhelm the gold market. The price of gold is going to go a lot higher.

Q:   Well, gold-backed currency and automatically using gold as a currency reserve has been a thought, many things have been written. I actually had several evenings with President Nixon in 1982 when I suggested to him that the United States should monetize its gold reserves and simply buy out all the Russian bank accounts so the Russians could not renew their loans at the end of the month, and suddenly they would owe the money to the U.S. There are many monetary applications of gold, which is coming, because the higher the price is, the easier it is to make deals.

A:   And I think that who people still clinging to it is an indicator of future inflation is not necessary the case. It's just a component. But it became a mania that as a matter of fact, if you could keep the price of gold down, then what it really meant was that inflation was going nowhere. That's not the case. Now the price of producing gold is much higher, and what we're seeing is a decline in the actual output because the price of gold stayed too long for too long. And it's exactly what's happened with a lot of the other metals. So in terms of it being just a metal and a demand for metal, it's very similar to what's happened in nickel, and it's very similar to what's happening with molybdenum.

Q:   Could you say a few words about how you see the molybdenum market?

A:   The reason I'm interested in molybdenum is basically because the signs are certainly out there and the data is out there to say that I think over the next two or three years there will be an absolute shortage of molybdenum. The impact of that is not being seen by the markets. Molybdenum is not one of the big metals in terms of very very large mining companies who have interest in molybdenum. That interest is a minor part of what they're actually doing. And that's one of the things that's created the market the way it is now. So if you look at just the figures in terms of supply and demand, last year the actual demand for molybdenum was close to the supply at 400 million pounds. But the growth, which some people verified is now going at the higher end of the range, about 6 percent a year, would mean you have to add 24 million pounds of new supply of molybdenum to meet that growth annually. There is nothing coming on stream that's anywhere near that supply.

Having researched molybdenum for more than one year, only recently did a couple of technical experts help us understand how much molybdenum is utilized in the condenser tubes of nuclear and desalination plants. Because of the diversified application for this metal, there is less reliable information about the molybdenum sector than in others we've explored, e.g. uranium.

"Investing in the Great Molybdenum Bull Market"

We will present detailed research in late August. We have discovered two strong-growth areas for molybdenum applications. It's not just the steel market which uses molybdenum. Although the stainless and low alloy markets represent about two-thirds of molybdenum usage, the fastest growing market appears to be catalysts in the moly chemical market. According to Chris Knight of Albemarle Corporation, moly consumption in the catalyst section could grow by more than 30 percent by 2011. The chemical sector could consume as much as 30 million more pounds in the 2006 to 2011 time period.

The global catalyst market is expected to reach U.S. $13 billion in sales this year. Of this the petroleum refining sector should consume about 35 million pounds of molybdenum. The moly is used as a hydroprocessing (HPC) catalyst.

Q:   You are in the exploration business. When you take let's say a million tons, the ton being 22,000 pounds, and let's say it's one percent ore body, roughly I calculate that at $35 a pound for molybdenum, it works out to $600 per pound value. But if the ore body is developed, then about 5 million tons would eventually become over $3 billion in value.

A:   Correct.

Q:   Your company has a market cap of $20 million. Let's say we walk into a business and say, look, we can buy the business for $20 million, and although we have to go out and hustle, get support and financing, five years from now the value of this business will be $3 billion, then each of us would quit our jobs and go and join that company. No?

A:   I would think that would be true, and there's no one rushing out to do it. The reason that no one is rushing out to do it is because there's a disconnect between what is happening in terms of supply and demand and where the supply needs to come from. And that still exists, and it's going to exist until the shortages show up. Then my guess is what you will have is a mad scramble. But it takes a long time to develop a mine.

Q:   Idaho General has a discounted value - I read it today - of $1.4 billion. And they have 38 million pounds of molybdenum under the ground. Apparently they are the largest. There are 60 million shares, a total value of $400M.

A:   I think the actual figure, if they intend to build a mine that will put 38 million pounds of molybdenum a year, which is a very big mine. But again, they're only one project. They're a project that's probably within three or four years of actually producing.

Q:   Three years.

A:   The other is that they actually have to raise the money to do that.

Q:   Now wait a minute. The market cap of Idaho General is $400 million, closer to $100 million. So let's take the scenario, which maybe applies less to Torch, but let's take the scenario where I have a company worth $400 million. But it's already proven by experts, the feasibility study, that it has a discounted value of $1.4 billion. Now, supposed I find Mr. X, who says okay, we invest $500 million to help the refinery and the mine and everything you need. We'll take a 30 percent profit, 40 percent profit on the $500 million, but we sell out at $1.4 billion at current prices, so the original owner is still making over $500 million profit.

A:   There is no forward market in molybdenum.

Q:   Okay, but as steel demand grows, as the Far East develops, India develops, and very soon Africa develops, then suddenly the price of molybdenum will go from $35 to $70 because of the shortage. If there is a shortage, people will pay anything.

A:   That's correct.

Q:   After all, nickel went up to $50,000 from $10,000. When there is a shortage, people pay anything. And molybdenum is a candidate because it's a small part of anything you build.

A:   Yes.

Q:   There is no molybdenum sandwich on the street corner.

A:   No. And the other is that it's used in such small percentages in the product that's produced that the market can actually tolerate fairly large increases int he price of molybdenum. You're [destroying] the demand.

Q:   Idaho General is the largest of the so-called exploration companies in molybdenum. If they had $1.4 billion, discounted value at $35, at $70 it might be running at $4-5 billion. From $1.4 billion it will be up to $5 billion. Therefore, if Mr. Smith invests money to build the necessary facilities he is going to make, through his equity or whatever investments, an extremely good rate of return.

A:   Right. As long as all the things stick together, that's correct.

Q:   So then we take now your company, $20 million. You have 150 million pounds confirmed. You don't have your feasibility study, I admit, but it's $20 million. And the amount of molybdenum you could eventually produce is quite meaningful. Even if the discounted value may not be $1.4 billion, if it's less than half, or a quarter, it's still a tremendous rate of return for those who follow carefully the molybdenum, nickel and steel markets, and on a day-to-day basis adjust their values and attract investments. Correct?

A:   Yes.

Q:   So from here on, and let's say you continue digging to find more molybdenum and you try to confirm it, but at the same time this has become money raising, a media game, and spreading the molybdenum knowledge so you become a company which eventually can either produce molybdenum or be part of another company which has the assets and the wherewithal to develop to the marketplace. That's your job.

A:   Yes. And right now, of course, the difficulties that companies will face and if you look at perfect example, last fall when Thompson Creek was purchased by Blue Pearl, they had real difficulty in actually raising their financing. They were trying to buy a company that after tax had produced $400 million U.S. the year before, and they wanted to borrow $500 million. And the terms on which they were actually able to finally borrow that were actually fairly tough. So one of the difficulties with all of this is because it costs so much to develop the actual mine itself, I think the conditions that exist out there in terms of people predicting what the price of molybdenum will be ten years out, say, has put the monkey wrench in the works in terms of getting a timely supply to come online. And that I think will continue, because it's the bankers who actually set the rules for borrowing the money, or if the money can be borrowed. And they use very conservative estimates of what's going to happen in the future. So they're actually aiding and abetting the shortage.

Q:   But let me mention an example. These are all new concepts, but Goldcorp created Silver Wheaton, and the principle is that Goldcorp provided some money to a silver producing mine, but they had the right to buy silver from them at $4.00. And that's a concept and as we go into the commodity age, these kind of transactions and concepts are going to be born. And there has never been a molybdenum shortage, so there have never been financing gimmicks in the past. But there are going to be because at $70, your assets have gone up not twice but probably four times.

A:   Right. And the fact is that we'll be doing more drilling and it won't be 150 million pounds, it'll be a lot more than that that'll be in the ground. Our aim really is that because we see this coming in the future, our money is best spent by basically increasing the size of the ore body that we have.

Q:   What I see is that you have basically two kinds of jobs. One is to develop ore bodies and find new ore bodies, and so on, to have a bigger portfolio of molybdenum properties tomorrow than you had yesterday. At the same time, you have to make up your mind that in the commodity age, finding partners, financing, underwriters, investment bankers, recognition, is just as much a necessity as finding new molybdenum. The two have to go together, and you cannot neglect any of these functions.

A:   I agree with that.

Q:   Thank you. I just would like to say that since you are in British Columbia, in very early 2002 I went to see a company called Cleveland Cliffs. It's the largest iron ore company and it has one attribute ? they invested $17 million in a steel company called international steel, which was headed by Wilbur Ross, the most famous financier of our time. The only thing I remember about Cleveland Cliffs in all the time I've been in the United States, is that every second year they were near bankruptcy. But the numbers when they told me looked good, and I remember I wrote up the first report at $20. The third report in less than a year was $150. I marketed this and showed it one of the best known financiers in Vancouver, Jimmy Patterson, and he liked the idea. Then he called me one day and said, Andrew, look into this situation. Behind iron ore comes steel, and there will be many other possibilities. This is not a single iron ore game. We are in the commodity age.

Quite frankly, that was a remark which I have utilized ever since, and without him I wouldn't have met you.

Andrew Racz

(Article 62 - posted September 22, 2007)

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