We receive a number of questions on mining stocks from members of our Inner Circle service. This week I received this question from a member who wonders whether the market is giving this stock enough respect.
Q: Could I please have your opinion on Thompson Creek Metals? There is a lot of local enthusiasm in B.C., but the market does not seem to share the same optimism. Thanks.
A: Thompson Creek Metals Co. Inc., $7.78, symbol TCM on Toronto, www.thompsoncreekmetals.com), is a Canadian molybdenum producer with mining, milling, roasting and marketing operations in Canada and the U.S.
This mining stock’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 helps strengthen alloys and high-temperature steels, and prevents them from rusting.
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Mining stocks: Molybdenum prices rise and fall with the economy
In the three months ended June 30, 2011, Thompson Creek’s revenue jumped 28.6%, to $190.9 million from $148.4 million a year earlier (all figures in U.S. dollars). That’s mainly because the company produced 30.4% more molybdenum in the latest quarter compared to a year earlier. As well, Molybdenum prices rose 2.6%, to $17.28 a pound from $16.84. Molybdenum has since dropped to around $14.70 a pound on uncertainty about the direction of the global economy.
Excluding one-time items, the company’s earnings jumped 54.3%. However, earnings per share fell 8.1% on 19.7% more shares outstanding. Cash flow rose 4.3% in the latest quarter.
As of June 30, 2011, the company held cash of $560.4 million, or $3.25 a share. Its long-term debt of $363.7 million is a reasonable 30.3% of its market cap.
On October 20, 2010, Thompson Creek completed its friendly takeover of Terrane Metals Corp. Terrane owns the Mount Milligan copper/gold project in central B.C. This project’s reserves should support a mine that will produce 81 million pounds of copper and 200,000 ounces of gold a year over its 22-year life. The mine could start up in 2013. This purchase allows Thompson Creek to expand into other areas beyond molybdenum.
Thompson Creek paid $700 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 roughly 8% of Thompson Creek.
While it was pursuing Terrane, Thompson Creek reached a gold-selling deal with Royal Gold (symbol RGL on Toronto). Under the terms of this arrangement, Royal Gold will receive 25% of the gold that Terrane’s Mount Milligan mine produces over its working life. In return, Royal Gold paid Thompson Creek $226.5 million when the takeover closed, and will pay $85 million more during the mine’s construction, for a total of $311.5 million.
A renewed global economic recovery would push up molybdenum prices. The metal offers opportunities for gains, but only for highly aggressive investors who are willing to accept substantial risk. The Terrane purchase gives Thompson Creek additional growth prospects. As well, the company is expanding the mill at Endako, with start-up projected for early next year.
The stock trades at 6.9 times this year’s forecast cash flow of $1.12 a share, based on today’s lower molybdenum price.
Thompson Creek Metals is okay for aggressive investors to hold.
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