The Best Stocks for 2011: Thompson Creek Metals

This article is part of our "Best Stocks for 2011" series where our Foolish writers pick their top stocks ideas for the year ahead. Click here to see a review of last year's picks and our 12 recommendations for the year ahead.

Before I tell you why Thompson Creek Metals (NYSE: TC  ) is one of the best stocks to own in 2011, let's get this disclaimer out of the way: It is not for the faint of heart.

Over the past three years, Thompson Creek has seen its share price trade north of $25 and during the bleakest market days watched as its share price dipped below $3. Currently, it's sitting right in the middle of that range at $14.55, and I'm going to give you three reasons why molybdenum and Thompson Creek could be heading higher this year.

Practical uses
Gold and silver usually get all of the attention, but molybdenum, Thompson Creek's primary product, is regularly used as an alloy to strengthen steel. Among molybdenum's popular uses, it can be found as an alloy in rifle barrels, aircraft parts, electrical contacts, and in the steel used in bridge construction. Long story short, molybdenum is plentiful and is going to give you just as much practical application, if not more, than gold or silver.

Chinese demand
Growth in China is being driven by infrastructure projects just as much as it is by electronics. Be it through heavy construction or electrical components, the demand for molybdenum will remain strong as long as China continues to grow its gross domestic product at an impressive rate -- and for those of you keeping score at home, official projections from the International Monetary Fund are for China to grow GDP by an astonishing 10.5% in 2011.

Hedging risk
If you haven't learned it yet, 2010 reminded us that any market uncertainty is met with investors flocking to metals as a hedged-risk investment. Although it'd be highly unlikely that we'd be talking about a European debt crisis a year from now, this is the type of issue that could linger around long enough to erode confidence in the U.S. dollar and move the already inflated metal prices even higher.

Molybdenum, unlike gold and silver, is trading more than 60% below its all-time high set in 2005, so it could have plenty of room to trade higher whether it's from an economic expansion or as a hedge against downside risk.

Good golly, miss moly
Now why Thompson Creek as opposed to the other molybdenum producers? How about tangible results!

Thompson Creek is expected to see a 40% rise in revenues, according to analyst expectations in 2011. A large part of that revenue jump can be attributed to rising molybdenum prices, while its Q3 after-tax margin of 32% represented its highest levels in years.

The balance sheet at Thompson Creek has been managed very prudently, which has allowed for healthy margins and the ability to make key investments in its future, such as its recent purchase of Terrane Metals.

Despite being one of the largest molybdenum producers, Thompson Creek chose to diversify its operations with this purchase, giving it roughly 6 million ounces of gold and 2.1 billion pounds of copper in proven and probable reserves. Copper continues to hit all-time highs and has countless practical uses in electronics. The permits are in place, so all that's left is to begin production from Mount Milligan, Canada, in 2013 and then begin reaping the rewards of those copper reserves.

So why not buy Thompson Creek's competitors? Because they just don't stack up when compared head-to-head.

General Moly (AMEX: GMO  ) , Thompson Creek's closest direct competitor, has failed to produce a dime of revenue and could still be years away from doing so. It did get a major investment from China to help move its Mount Hope development along, but it is still years away from becoming even a minor player.

Freeport-McMoRan (NYSE: FCX  ) , unlike General Moly, is a well-established, diversified juggernaut in the metals sector. I wouldn't bet against Freeport based on its business model and past success, but I would choose Thompson Creek based on a statistical comparison.

Freeport is nearing a price-to-book of nearly five with projected revenue growth of 15% in 2011. It also has a shade more than $1 billion in net debt. Thompson Creek boasts $483 million in net cash, a price-to-book of 1.7, and as alluded to earlier, a nearly 40% projected revenue growth rate in 2011. It's growing faster, its cash situation is a lot healthier, and it's priced far more attractively than Freeport.

Foolish forecast
Thompson Creek provides a near pure play in the molybdenum market, and I see the potential for considerable strength in that market in 2011. Only time will tell if I am right, but Thompson Creek looks poised for a bullish year.

Which is the best stock for 2011? See all 12 candidates here.

Fool contributor Sean Williams does not own shares in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong. Try any of our Foolish newsletter services free for 30 days. The Motley Fool has a disclosure policy.


Read/Post Comments (11) | Recommend This Article (29)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On December 30, 2010, at 12:24 PM, Smalls62 wrote:

    TC is a fine play but you are FOOLish :) to downplay the importance of GMO. Finding a stock before the sun rises unlocks big profits. It should be noted that Hanlong has taken a position in GMO as the two projects in the works by GMO will make it the largest primary moly producer in the world. Take some notes.

    Infrastructure will continue to grow in China and India and this is why Hanlong has taken a position in GMO as moly production is expected to fall short of demands. It may be a good thing production may not happen until 2013. Moly prices expected to rise on demand means the deposits are worth that much more when they are mined and sold. Point is the GMO deposits at a discounted value are still worth much more than the price per share currently provides and the sun is just starting give some light. Some of the final permits to proceed with the Mt. Hope project should be received shortly and then we watch the dawn.

  • Report this Comment On December 30, 2010, at 3:19 PM, TMFUltraLong wrote:

    Smalls62,

    The long-term value of GMO may be there, but this is a "Best Stocks for 2011" thread, so I had to take into account the fact that Mt. Hope won't turn a dime until 2013 at minimum. That and it would take at least until 2014 before they could even begin rivaling Thompson Creek on a production basis. You could probably sit on the sidelines with General Moly and jump in about 18 months from now and be no worse off for the wear.

    TMFUltraLong

  • Report this Comment On December 30, 2010, at 8:44 PM, Awildride4me wrote:

    I'm not going to pass judgment on Thompson Creek but I do suggest that a serious Fool dig (no pun intended) into the interworkings of the physical operations of TC. Check out the environmental issues and the legal hoops TC is facing. For starters, read the technical report (NI 43-101 Report) on its Challis, Idaho operation. Contact the federal land management agency for the Challis operation (Bureau of Land Management) and get updates on the Environmental Impact Statement.

  • Report this Comment On December 30, 2010, at 10:06 PM, majomac wrote:

    TCM has limited upside for their gold, because in buying terraine they conceded the seller would earn the profits north of TCM making asmall profit. However copper is another story - this and moly have lots of potential.

    There's so much optimism today - makes me fearful. Interest rates in China going up - rampant real estate inflation - does that sound like possible trouble over there?" I'll hold for the possible correction in China. If you can get in at a lower proce ($10 - $11) this is a great stock for what will ultimately be a growth economy. After all TCM is well run and serves a growing need.

    John

  • Report this Comment On December 31, 2010, at 9:16 AM, silverminer wrote:

    majomac,

    You appear to be misinformed with respect to the Terrane transaction. Thompson Creek entered into a gold stream transaction with Royal Gold, under which 25% of Mt. Milligan gold will be sold to RGLD at a low price ($400/oz for first 550,000 ounces delivered, $450 thereafter. In return for its claim on that 25% of Mt. Milligan's gold, Thompson Creek receives $311.5 million dollars to fund mine construction. The remaining 75% of Mt. Milligan's reserves -- or about 4.5 million ounces of gold -- remains free and clear ... giving Thompson Creek plentiful upside exposure to gold prices as well as copper and moly.

    Although I have skin in this game with another stock selected as my favorite for 2011, ensuring that Fools are well and fully informed takes precedence over the outcome of a contest any day. :)

    Happy New Year!

    TMFSinchiruna (aka silverminer)

  • Report this Comment On January 03, 2011, at 3:21 PM, Smalls62 wrote:

    TMF UL,

    Permits being issued in 2011 that open the gates to production may be enough of a catalyst for PPS movement that we should revisit your call in 1 year.

    "Copper continues to hit all-time highs and has countless practical uses in electronics. The permits are in place, so all that's left is to begin production from Mount Milligan, Canada, in 2013 and then begin reaping the rewards of those copper reserves."

    If you want to remove factors of future profit potential from my reasoning for 2011 to be a great year for GMO then you shouldn't have mentioned future profits in your list of items for supporting your TC call. That is quite hypocritical of you. As I mentioned TC is a fine play for 2011, but why you choose to single out and down play GMO is questionable when it's on the cusp of final permitting.

  • Report this Comment On January 03, 2011, at 7:41 PM, jlanganki wrote:

    General Moly is not exactly on the cusp of final permitting. The local farmers are still opposing the permitting; the Nevada water commission needs to grant them water rights before they can do anything. The rights were rescinded and have yet to be re-instated. After that, the federal government needs to approve the Environment Impact Statement. Overall, it's not exactly a sure thing yet.

  • Report this Comment On January 04, 2011, at 4:04 PM, Smalls62 wrote:

    Both of these should happen in 2011 and a few select farmers' opinions aren't going to override a hydrology study in the states water rights determination. GMO applied for new points of diversion based on the study also which requires new approval so re-instatement may not be be the correct term in this case. Record of Decision for Environmental Impact also expected in 2011. All expected in less than 12 months after years of leg work to obtain permits is my reasoning for using the term "cusp". Never said it was a sure thing but those could act as a catalyst which could make it a better stock than TC for 2011. I only wrote TC because the author chose to dog GMO when pumping TC. Again, TC is a fine play but there is no need to single out GMO as he pumps TC.

  • Report this Comment On January 05, 2011, at 11:51 PM, jlanganki wrote:

    Don't forget U.S. Energy. They own a potential mine that Thompson Creek is developing. Thompson has an option to buy up to 75% of the mine, but this means U.S. Energy will still be holding on to 25%.

  • Report this Comment On January 06, 2011, at 1:17 AM, TMFUltraLong wrote:

    Smalls62,

    I'm not trying to single out General Moly in a negative sense. I'm merely pointing out that right now, as things sit, Thompson Creek is producing and General Moly is still in the permitting stage. All things told GMO has good investment-backing now and should be producing within two years. But right now, this moment, TC has production in place and its poised to post significant profits and take advantage of any potential moly spikes. It therefore appears to be the better play to me.

    TMFUltraLong

  • Report this Comment On January 06, 2011, at 11:07 PM, jlanganki wrote:

    Thompson Creek has a remaining life expectancy on their mine of 9 years according to GMO in one of their powerpoints. (I'm too lazy to do my own research to verify).

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