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Editor's note: A previous version of this article stated that Thompson Creek is a rare earth miner and that molybdenum is a rare earth element, which it is not. The Fool regrets the error.
I've found a miner that seems to be much more affordable than its peers. Thompson Creek Metals (NYSE: TC ) currently produces just molybdenum, a metal that is prized for its high melting point and used primarily to make steel.
Historically, demand for molybdenum has grown about 4% annually. After trading for around $30/pound for much of the last decade, molybdenum prices sunk with the recession, but have since recovered to about $14, as the chart below shows:
Source: Thomson Creek Fact Sheet.
Thompson Creek currently has two molybdenum mines in operation and expects to have another, Mt. Milligan, devoted to gold and copper deposits come online in Q4 2013. A look at the table below shows that Thompson Creek is trading at a discount to its peers.
P/E Ratio (TTM)
CAPS Rating (out of 5)
|Molycorp (NYSE: MCP )||2.91||29.64||**|
|General Moly (AMEX: GMO )||2.54||N/A (not profitable)||****|
|Taseko Mines (AMEX: TGB )||1.47||12.61||****|
|Freeport-McMoRan (NYSE: FCX )||2.82||9.78||****|
Sources: Yahoo! Finance, Motley Fool CAPS.
As our CAPS rating system indicates, investors are bullish on all these stocks except for Molycorp, but only Thompson Creek receives the coveted five-star rating.
What a bargain?
A price/book value of less than one generally indicates that either the stock is undervalued, or investors don't trust the company's asset valuation. With a cash balance of $365.4 million, nearly equal to its long-term debt, Thompson can survive any short-term problems that might arise.
Seemingly concerning is the negative free cash flow the company has reported in the last four quarters, but the large capital expenditures necessary to expand its Endako mine and develop the Mt. Milligan mine help explain the FCF losses. Things may get worse before they get better, however. Analysts are projecting a Q4 loss and decreased earnings in 2012 because of lower production guidance and lower molybdenum prices in Q4, which likely explains Thompson's low P/E ratio.
Bring on the reserves
With proven and probable reserves of 481 million pounds of molybdenum, 6 million ounces of gold, and 2.124 billion ounces of copper, Thompson looks like a good value at its current price of $9.11. In 2010, the company cleared operating income of $174 million on the sale of 36.9 million pounds of molybdenum, which equals $4.72 operating income per pound. Assuming that profit figure were to hold and Thompson continues to extract 30 million pounds of molybdenum a year, it would be sitting on discounted cash flows of $1.075 billion from proven and probable moly reserves in its two currently operating mines. This does not include measured or indicated molybdenum reserves, significant revenue from reselling third-party product, the copper and gold under development, or potential income from its exploration properties.
The company estimates annual gold and copper revenues at Mt. Milligan would total $615 million at today's metal prices, essentially doubling sales. Based on these numbers, Thompson's likely future cash flows should easily surpass its current market cap of $1.53 billion.
One more reason this moly miner looks like a good value is the recent flurry of insider buying, including CEO Kevin Loughrey's purchase of 40,000 shares in the last six months.
With its cheap valuation, growth from its new mine, and valuable reserves, Thompson Creek Metals looks like a winner. I've decided to make a bullish CAPScall on Thompson Creek; I think it'll outperform the S&P 500 in the next five years.
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