Is Thompson Creek Worth More Than $3 a Share?

When a person empathizes strongly with someone else's condition, we say he or she is exhibiting "sympathy pains." Stocks sometimes seem to react that way too, and we note the instance with aphorisms like "a rising tide lifts all boats."

The boat of Thompson Creek Metals (NYSE: TC  ) got a lift on Friday, jumping 13% after China announced it was going on another spending binge. With its economy coming in for a harder landing than many economists anticipated, China said it would spend upwards of $160 billion on new infrastructure projects. Thus, anyone with even a tangential relationship to steel saw its shares rise, most notably mining and resource plays like Cliffs Natural Resources (NYSE: CLF  ) and Alpha Natural Resources (NYSE: ANR  ) , whose stocks jumped 15% and 17%, respectively.

Building highways, bridges, and subways means there's going to be more demand for steel and coal -- and molybdenum, Thompson Creek's moneymaker and a key ingredient in the making of steel. Combined with the European Central Bank's big bond-buying efforts to save the euro, announced last week, and the likelihood the Fed will initiate a new round of quantitative easing to stimulate our economy at home, the government spending spree moved those stocks most likely to benefit from it. Thompson Creek went along for the ride.

Thompson Creek Metals Snapshot

Market Cap $555 million
Revenue (TTM) $499 million
1-Year Stock Return (60.1%)
Return on Investment 1.1%
Est. 5-Year EPS Growth 54.5%
Dividend/Yield NA/NA
Recent Price $3.29
CAPS Rating (out of 5) *****

Source: FinViz.com.

Highfalutin honeys
As much as I like that the molybdenum miner believes its Mount Milligan project will be a huge catalyst for growth, it's still a few years away from realizing the benefits of its investment. Mount Milligan won't be producing until the third quarter of 2013, and more than half the gold it produces will be sold to Royal Gold (Nasdaq: RGLD  ) under a financing arrangement it completed last month to enable it to complete the project.

Although it has issues it needs to correct before it can access the estimated 6 million ounces of gold sitting on top of 2.1 billion pounds of copper, they ought to be addressable. But it doesn't have much bearing on China's announcement the other day. You can understand U.S. Steel (NYSE: X  ) jumping almost 10% on the news, but Thompson Creek has to hope molybdenum prices also surge until Mount Milligan is up and running and it can unload its copper.

A rare opportunity
Average second-quarter molybdenum prices were $14.55 per pound, down 15% from the year ago period, and though China's news can bolster that a bit, it will be little more than a salve until real economic growth unsupported by government stimulus is achieved. Much of China's growth was predicated on selling its goods to Europe, which, despite the announced bond-buying proposals, is still mired in a deep second recession, and the economies of its member states remain balanced on the knife's edge of collapse.

Last quarter, Thompson Creek suffered operating losses of $18 million as a result of higher costs at both its Endako Mine and its eponymous mine in Idaho, as well as lower-than-anticipated ore grades and recovery at both. The miner just shut down Endako and laid off workers for at least two months because molybdenum prices are weak. And though Thompson Creek has initiated various cost-containment programs, we still need to see whether they pay off.

Value is what you get
Still, I think Thompson Creek looks attractive even after Friday's bounce. It trades at just nine times earnings estimates, and with analysts predicting significant EPS growth over the next five years, that represents opportunity. With almost $500 million in revenue, its net profit margins have typically been in the mid-teens, though they've been at both ends of the spectrum. If we say they can get back to double-digit margins over the next few years and trade at multiples similar to where it is now, with typical dilution, we get a price that shows it's fairly valued. Yet if they can achieve historical margins, the price nearly doubles what the market is currently proffering.

I've already rated the molybdenum miner to outperform the broad market indexes on Motley Fool CAPS, but you can tell me in the comments section below if you think Thompson Creek Metals is a stock that floats your boat.

A sky-high opportunity
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Fool contributor Rich Duprey holds no position in any company mentioned. Click here to see his holdings and a short bio. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.


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