Pat McKeough responds to many personal questions on specific stocks and other investment topics from the members of his Inner Circle. Every week, his comments and recommendations on the most intriguing questions of the past week go out to all Inner Circle members. And each week, we offer you one of the highlights from these Q&A sessions.

This week, one question from an Inner Circle member wanted Pat’s input on one of the Canadian commodity stocks that depends heavily on one metal, molybdenum. Thompson Creek has seen a drop-off in both molybdenum prices and its own shares, but it is just possible, Pat says, that this could make it an appealing acquisition for a larger firm.

Q: Hi Pat: Just wondering what your opinion is on Thompson Creek.

A: Thompson Creek Metals Co. Inc., (symbol TCM on Toronto; www.thompsoncreekmetals.com), is a molybdenum producer with mining, milling, roasting and marketing operations in Canada and the U.S.

The company’s operations include the Thompson Creek mine in Idaho, a roasting facility in Langeloth, Pennsylvania, and 75% of the Endako mine and roaster in B.C.

Molybdenum is either mined directly or recovered as a by-product of copper mining. The metal strengthens and prevents rust in alloys and high-temperature steels.

In October 2010, Thompson Creek completed its friendly takeover of Terrane Metals Corp., which owns the Mount Milligan copper/gold project in central B.C. Mount Milligan’s reserves should support a mine that will produce 81 million pounds of copper and 200,000 ounces of gold annually over its 22-year life. Start-up is forecast for 2013.

Thompson Creek paid $693.4 million for Terrane, including $420 million in cash and 24.3 million common shares. Goldcorp (symbol G on Toronto) owned 52.4% of Terrane. As a result of the takeover, Goldcorp now owns 8.7% of Thompson Creek.

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Commodity stocks: Drop in share price could help make Thompson Creek a takeover target

In the three months ended March 31, 2012, Thompson Creek’s revenue fell 45.0%, to $113.6 million from $206.7 million a year earlier (all figures except share price and market cap in U.S. dollars). Cash flow fell sharply, to $0.10 a share from $0.48.

Molybdenum prices fell 15.2% in the quarter, to $14.74 a pound from $17.39. The metal has since dropped to around $12.90 a pound on uncertainty about the direction of the global economy.

Thompson Creek’s shares have moved down from a high of $9.43 in February 2012. That big drop in the stock price mainly reflects the drop in the price of the metal and worries about the economic outlook. However, Thompson Creek’s property holdings still have geological value, and Pat says this disparity between the stock price and asset value could make the company a takeover target. But he adds that it’s a mistake to buy a stock just for its takeover potential, which is highly uncertain.

In the most recent Inner Circle Q&A, Pat also looks at Thompson Creek’s high debt and examines whether the Mount Milligan project can help generate much-needed cash flow for the company. He also considers the outlook for molybdenum prices. He concludes with his clear buy-hold-sell advice on the stock.

(Note: If you are a current member of the Inner Circle, please click here to view Pat’s recommendation. Be sure to log in first.)

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