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Crunching the Numbers on Thompson Creek Metals

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Grab a piece of unopened mail and flip it over, 'cause we're about to run some timely back-of-the-envelope numbers on Thompson Creek Metals (NYSE: TC  ) .

If you are not familiar with the company, please begin here before continuing. Briefly stated, this is a major producer of molybdenum with 2012 production estimated at a substantial 26 million to 28 million pounds. Beginning in the second half of 2013, the miner will make a transformational move into copper and gold with the start-up of the long-life Mount Milligan mine.

Now, the market has shown itself quite wary of major mine construction projects of late -- and with good reason. The industry has experienced some truly gut-wrenching escalation in the costs for mine construction. Over a five-year period, the estimated price tag for Barrick Gold's (NYSE: ABX  ) 75%-owned Cerro Casale mine has tripled from $2 billion to $6 billion. And for an example from Thompson Creek's own region, Teck Resources' (NYSE: TCK  ) Galore Creek joint venture with NovaGold Resources (AMEX: NG  ) has seen projected capital costs surge 373% since 2006 to $5.2 billion!

Since Thompson Creek's $700 million Canadian dollar acquisition of Terrane Metals in 2010, the anticipated capital cost for Mount Milligan has surged from CA$915 million to between CA$1.4 billion and CA$1.5 billion. With cost inflation of this sort in play, it's a good thing Mt. Milligan is a phenomenally attractive copper and gold project that will remain abundantly lucrative, even with the adjusted capital cost structure. (More on that in a moment.) Furthermore, with the project already well into construction, I presume diminished risk of further cost escalation beyond the revised estimate.

Accordingly, Thompson Creek has been forced to get creative with financing, and this week it raised $412 million through senior notes and tangible equity units to join the $270 million raised last December through a second gold royalty stream with Royal Gold (Nasdaq: RGLD  ) . On the back of my envelope, I find the company with nearly CA$750 million already standing by to cover the expected remaining cost of between CA$799 million and CA$929 million. So we're very close, and I give the company's cash flow from existing operations a strong chance of covering the difference (thanks in part to the newly expanded Endako mill).

Meanwhile, Thompson Creek's shares have suffered quite a beating from the latest round of fundraising. While existing shareholders like me lick our wounds and maintain our outlook on the long-term profit potential of Mount Milligan, newcomers would appear to have quite a value opportunity before them. You see, as Thompson Creek CEO Kevin Loughrey pointed out to my readers, at current metal prices we will enjoy back-of-the-envelope operating profit of roughly $400 million annually from this one mine alone! Using the parameters offered in that interview, investors can plug in their own long-term price expectations for gold and copper to estimate the payback period for the increased construction cost. But with 22 years of mine life to offer, Mount Milligan makes me happy to wait patiently for the cash-flow bonanza to come. I look forward to adding to my own position near these levels, and despite the recent carnage I will maintain my bullish CAPScall on the stock to reflect my resiliently bullish long-term outlook.

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Fool contributor Christopher Barker can be found blogging actively and acting Foolishly within the CAPS community under the username TMFSinchiruna. He tweets. He owns shares of Teck Resources and Thompson Creek Metals. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Read/Post Comments (8) | Recommend This Article (15)

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 May 11, 2012, at 3:54 PM, SpaceVegetable wrote:

    I agree. I'm long at a higher price point, but added to my position this week. Current pricing is bargain basement, so I plan to buy more soon.

  • Report this Comment On May 12, 2012, at 12:25 PM, djkumquat wrote:

    i've taken a beating, but have added to my position this past week. patience, patience, patience...

  • Report this Comment On May 14, 2012, at 2:42 PM, techpatriot wrote:

    I agree this looks VERY attractive at this price given the future earnings of this company.

    I am a little concerned about management's guidance though. Why issue notes at 12.5% unless the underwriters have a valid reason for such a usurious rate in today's low rate environment?

    Why issue these t-med hybrids at such a discount to future earnings?

    The only reason is if the underwriters are skeptical for some reason known to them and management, or management is either crooked or inept.

    If I am wrong on these speculations, I would like to hear comments back. Maybe I am missing something. But with such a strong asset, for TC to pay. or to have to pay so dearly for capital seems very wrong on many levels.

    While I am not a banker or a risk analysis expert, it would seem the collateral here justifies a much lower premium on capital investment than they settled for.

    I own a good sized position here, and am thinking hard about adding more, but I want to hear a solid explanation from management on this matter first, because it is making me very uneasy.

  • Report this Comment On May 16, 2012, at 12:17 PM, XMFSinchiruna wrote:


    It's a very reasonable question, though I think the rate simply reflects the quite-high debt-to-equity ratio that results from the latest raisings.

    I'll review the transcript from yesterday's conference call and try to offer management's own explanation.

    I certainly see no reason to doubt the integrity or quality of TC management. These capital-cost increases are reflective of an industry-wide trend that has grown surprisingly acute in recent months, and in large measure I view these challenges as externalities beyond the company's control.

  • Report this Comment On May 16, 2012, at 4:14 PM, techpatriot wrote:

    I would like to hear from management on this. Just to be clear, I am not questioning why they needed to raise money, I agree with you, increased costs are an industry wide trend and should be well known to anyone following mining stocks now for even a little while. I also believe it is hard to predict and account for these CAPEX increases when they happen as rapidly as they have recently, worldwide.

    My concern is why they chose this particular method of raising cash. You may be correct, it may just be the debt to equity ratio. But when sitting on such large number of tangible assets, it seems like they could have gone for a better deal.

    It also looks like they went after more money than they needed, (IE the 2019 notes) just to make sure they were done going back to the CAPEX financing well. That should serve to insulate them somewhat from the global macro environment.

    The t-meds, while not as dilutive as they looked at first glance, still seem like an expensive way to raise cash VS selling warrants to existing shareholders.

    I am not sure how the "back of the envelope math" works out as far as the dilutive effect of t-meds VS long term notes at 12.5% either.

    It seems like sense to me that the t-meds share conversion component should have been priced at or around current book value though....

    Maybe you can get management to address that?

    Because, honestly, it "looks" like either a bad deal or a way to line someone's pockets. Neither of which will inspire investor confidence.

    I am glad to hear you believe in management's integrity and abilities. \

    But surely they must know how this looks to investors....

  • Report this Comment On May 16, 2012, at 6:15 PM, techpatriot wrote:

    As an addendum to my above comments:

    I went back and re-listened to the call. Listening between the lines, if you will. It appeared to me that possibly management felt that it's back was somewhat up against the wall on these cost over runs, and that they needed capital in a very specific time frame at a very specific amount. which a shareholder rights offering would not address. It may be possible they were turned down by banks, or that the banks offered even worse financing terms than they obtained on this hybrid tmed offering. Either way, that action still seems a little bit desperate to me, on the part of TC.

    Again, much of this is my interpretation of what was said, and what was unsaid on the conference call.

    Management did seem very confident in both their projections for future cash needs and the mine production timeline, which is somewhat re-assuring.

    They also were upfront about why they did not choose to sell more of the future gold stream, they appear to sincerely believe it has much more upside than they would have been able to obtain right now. I assume that means that they believe gold will be going higher, and they also made a couple of references to their "conservative approach" to valuing their current reserves....which I found interesting as well.

    Now, as far as this tmed offering. I did not discern when the exact stock ratio would be set.

    Nor if these will be actively traded on the TO or NYSE markets?

    Liquidity considerations aside, if they are trading along side the stock, are these a better investment than the common stock?

    And how could we determine that?

  • Report this Comment On May 17, 2012, at 6:16 PM, XMFSinchiruna wrote:

    techpatriot, I'm afraid I don't have answers to your last questions there. I would recommend you contact IR on that one. Thanks for sharing your thoughts.

  • Report this Comment On May 18, 2012, at 4:38 PM, techpatriot wrote:

    Well, it appears as if the market is currently answering one of my questions. At these levels, the common stock is obviously the better buy. I love it when fundamentally solid companies are on sale!

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