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I feel a bit like Lucille Ball lately, because clearly I have some 'splainin' to do.
My bullish outlook on Thompson Creek Metals (NYSE: TC ) has not been kind to either my own stock portfolio or to those of my readers thus far. Of course, these past couple of years have also been most unkind to Thompson Creek CEO Kevin Loughrey and his team. Yet even as I stare down the trailing devastation in these shares, I ache for this company because I understand what an extremely challenging set of circumstances it's had to face.
When even the biggest miners are suffering from acute cost inflation for mine construction projects, it stands to reason that a small-cap molybdenum miner could be decimated in the midst of a bold growth initiative. But at the time the company acquired Terrane Metals in 2010 and took over construction of the Mt. Milligan copper-gold mine, I think it's safe to say that the company's current predicament could have scarcely been contemplated under even the most extreme sets of contingencies.
Enter the triple-whammy
Thompson Creek Metals has been dealt a crippling triple-whammy of injurious blows -- of which at least two were outside its capacity to control. The miner's second quarter results released last week offer an insightful window into all three of these unfortunate developments.
First, after projected construction costs for Mt. Milligan surged 64% since the Terrane acquisition, Thompson Creek has been forced to sacrifice 52.25% of the mine's future gold production, as well as its formerly solid balance sheet. Gold stream holder Royal Gold (NYSE: RGLD ) will have contributed more than half of the project's construction capital, and it's worth noting that the third stream transaction announced last week reflects a continuing vote of confidence by Royal Gold's management team in Thompson Creek's capacity to complete and successfully operate the Mt. Milligan mine. Because cost escalation at Mt. Milligan has not exceeded the clear inflationary benchmarks set by major miners like Barrick Gold (NYSE: ABX ) with its recent announcement of a 50% to 60% cost increase at Pascua Lama, I believe Thompson Creek has done an adequate job executing at Mt. Milligan under difficult circumstances.
Second, over the course of a very critical year when every penny of cash flow from Thompson Creek's pair of existing molybdenum mines was sorely needed to offset the shortfall between total capital raised and the project's total cost, the price of molybdenum suffered an untimely 16% year-over-year decline to average just $14.55 during the second quarter. Moly developer General Moly (NYSE: GMO ) and copper/moly producer Taseko Mines (NYSE: TGB ) have seen their own share prices under considerable pressure in this difficult price environment.
Third, and certainly the most troubling to observe from a shareholder's perspective, the Endako moly mine and its newly expanded mill have suffered a meaningful production decline in the first half of 2012. Because of a combination of subpar mill recoveries and disappointing ore grades within the open pit mine, cash costs surged above the average realized moly price for the second quarter. The company recorded an associated net loss of $14.8 million. Thompson Creek has opted to cease mining activity at Endako roughly through the first quarter of 2013, and will instead process only stockpiled ore as it attempts to improve mill recoveries. The miner revised the low end of 2012 production guidance by 13% to 22.5 million pounds, and bumped up the lower end of cost guidance by 20% to $9.25 per pound.
This too shall pass
Call me a glutton for punishment, but I'm not bailing on my shares of Thompson Creek Metals here at this multi-year low for the stock. But nor am I following my typical pattern of increasing my investment stake in response to profound weakness of the sort. The addition of negative operating cash flow to an already substantial set of challenges does serve to raise Thompson Creek's risk profile, though ultimately I continue to believe that Mt. Milligan will provide a powerful and lasting catalyst for long-term investment gains. It may even take a few years to recapture the starting price of my bullish CAPScall from just last year at $11.73 per share, but I'm a patient Fool.
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