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If the equity market possessed an all-seeing eye, then value investors would have to step up their game to find diamonds in the rough. Fortunately, a studious Fool enjoys ample opportunities to turn clarity of vision into meaningful profit by understanding the companies that occasionally defy the simplest means of classification.
Let me explain what I mean here with a brief hypothetical. When I mention Apple, you all know and understand this company as the world's most recognizable provider of non-crashing computers and must-have gadgets. But what if Apple were to throw the market a giant curve ball, and begin directing its gifted team of developers to produce a line of home appliances under the Apple brand. Like everything Apple touches, chances are they would design a great product that consumers might flock to. But in the period between the announcement and the launch, the company would no longer fit as neatly into the specific peer comparisons that inform the market's effort to assess value. The company's story would become slightly more complex to tell, and some investors seeking the purer play on mobile igadgets might look elsewhere.
While I don't expect that we'll be washing our dishes in an "iClean" anytime soon, a similar sort of scenario has thrown market valuations for a couple of my favorite resource stocks completely out of whack. The results are some of the clearest value disconnects I have spotted anywhere, and it is my goal to help Foolish investors to see clearly what I believe the market perceives through a blurred or confused lens.
Just what is Thompson Creek Metals?
Thompson Creek Metals (NYSE: TC ) is best known for a base metal that's not very well known. Until fairly recently, the miner had been the market's preferred pure-play vehicle for molybdenum. Molybdenum -- or "moly" to her friends -- is used in high-performance and structural steel alloys where corrosion resistance is a key concern. But in 2010, Thompson Creek threw the market a curveball by acquiring Terrane Metals and its flagship copper-and-gold project called "Mt. Milligan." Suddenly, the market was sent scrambling for an elusive set of peers to which it could compare the company, and moly investors had to decide whether to follow the company in a new and unexpected direction.
As a longstanding Terrane shareholder, I was already intimately familiar with the Mt. Milligan project, and believed very strongly in the considerable valuation upside even from Thompson Creek's acquisition price. Because I also cover steelmakers and metallurgical coal producers for The Motley Fool, I was cognizant of the very bullish long-term global demand forecasts for key steelmaking ingredients as routinely corroborated by Peabody Energy (NYSE: BTU ) and mining-equipment manufacturer Joy Global (Nasdaq: JOYG ) . After researching the particular dynamics of the molybdenum market and its own outlook for long-term growth in demand, and witnessing the market's visible confusion in assigning value to a company that no longer fit inside a convenient cookie-cutter mold, I decided to follow the Mt. Milligan asset through to production as a Thompson Creek shareholder -- and I have never questioned the decision even for a second. Thompson Creek is a core holding in my personal stock portfolio, and a "Top Pick" within my Motley Fool CAPS portfolio.
Today, following a tough year for miners in general, a weak patch for moly prices, and rising pressures on the industry's capital costs for constructing new mines, Thompson Creek's shares remain severely disjointed from the fast-approaching reality of surging cash flows associated with the recently completed mill expansion at their existing Endako molybdenum mine, and the advancing construction of Mt. Milligan slated for first production in late 2013.
Eager to bring a clearer view of the company to my Foolish readers, I decided to go straight to the source and speak with CEO Kevin Loughrey. In this first selection of excerpts from our fascinating conversation, we'll focus on the question of how the equity market can struggle to assign value to companies that defy convenient labels and neat comparisons by transitioning into a product mix as unprecedented as that of Thompson Creek Metals. Be sure to stay tuned for additional installments -- either by bookmarking my article list or following me on Twitter -- where we'll delve into the beautiful numbers that have me counting down the months to production from Mt. Milligan, and ensure that we have a clear view of the enduring value of Thompson Creek's world-class molybdenum assets.
Preamble to a valuable conversation
Christopher Barker: Looking at your structural transition from a molybdenum-only producer to a combined molybdenum, copper, and gold producer, do you perceive an impact where the emerging identity of the company is perhaps not adequately understood or properly valued?
Kevin Loughrey: I think you're right, and to some extent it's a problem of our own making. When we started out, we were a moly-only company. And when we first started out, the two other Chinese moly companies weren't in existence as public entities. So we were the only public moly company in the world that was only producing moly. And when you're the only anything, and it's something positive -- and we thought that certainly was -- you use that. And that was kind of our playing card when we started into the public market. We attracted a lot of people who wanted to invest in moly, and they liked the moly-only story. They had other diversified companies to invest in, but they didn't really have any other moly choices at first, and even later they had no other choices in the Western world. And so that was a significant portion of the shareholder base that we encountered.
As time went on -- as much as we liked the moly story, and we very much do -- we became cognizant of the fact that, from a market perspective, we were not receiving a multiple advantage as a result of that structure. That fact, coupled with our desire to diversify -- and then the fact that when we went out looking for moly properties we didn't find any as good as what we owned -- led us to say, "Well, we should look further afield at the kinds of things we're going to look at." And that's how we came upon Terrane Metals and Mt. Milligan. But I think there were some investors who wanted the absolute pure-play moly vehicle, and although we are still that in terms of present revenue, we're moving in the direction where that's not the case at all. And so we're a little bit now neither fish nor fowl. We're moving to become a diversified company, and we're moving away from being a pure moly company, but we are a pure moly company today and will be for the next year and a half.
And we have always had the problem, and it surprises me, Christopher, how much this still exists. But when I go out and speak with potential shareholders, many of them have trouble understanding the moly market, finding information on the moly market, and they can't check-up on the molybdenum price very readily. And so there is still a significant part of the investing public that doesn't understand us yet. So, we're working to address those things, and I think as Mt. Milligan comes closer to fruition, this will solve itself to some degree.
Barker: So you can relate to a company like IAMGOLD (NYSE: IAG ) in its efforts to help the market grasp the value of its niobium and rare-earths assets when most investors are likely looking primarily for the gold?
Loughrey: Yes, that's very much an issue for them, and it's a problem for a lot of companies out there. That's why you have to be careful because you have to not only add value, but you have to add value in a way that shareholders can see it.
Barker: Can you speak a bit about the valuation that the market is currently ascribing to your shares, and what aspects of the company have potentially been overlooked?
Loughrey: As I look around the industry, it seems to me that companies without much in the way of growth projects that they're working on -- without large capital expenditures in front of them, and therefore with large amounts of cash -- are being valued highly. And companies with big growth projects out in front of them, and expenditures in the future to realize those projects; they're not being valued as well. And we're in that latter category. So we have value there that it doesn't look to us as though market is giving us much credit for, but we're quite excited about where our existing moly operations are headed, and then what Mt. Milligan looks like once it's completed. So, from our standpoint, there's great value that's being unlocked, especially by the development of Mt. Milligan. And I think there's a reasonable likelihood that when the market sees that we can execute that project; that we can get it built -- and then once it is built, that it will perform as expected and that it be quite profitable to us -- that will be a real opportunity to unlock value in the company.
I also think that molybdenum has a bright future. Although we don't make price predictions, we think there's a lot more room to the upside for the price in 2012 and 2013 than there is to the downside. And of course copper and gold are much better known, and we think the outlook for those metals is quite positive as well. So, we think we have a lot of things working for us. We have an excellent workforce, good management, and project-building teams at Endako and at Mt. Milligan. So we think we have a lot of ingredients -- coupled with very good assets -- to really have a nice growth period in front of us built upon the operations we now have and then enhanced by the Mt. Milligan project.
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