Buy, Sell, or Hold: Thompson Creek Metals

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When considering any stock for your portfolio, don't be swayed by just the positives. Examine its pros and cons, and decide whether it's possible upside outweighs its risks. Let's take a look at Thompson Creek Metals (NYSE: TC  ) today, and see why you might want to buy, sell, or hold it.

Based in Denver, led by Kevin Loughrey, and with a market capitalization of roughly $400 billion, Thompson Creek specializes in mining, producing, and marketing molybdenum in the U.S. and Canada. Its stock is down about 63% over the past year, and has averaged a 34% loss annually over the past five years. That might be enough to keep many people away, but sometimes fallen stocks can represent great buying opportunities.

One reason to look favorably on Thompson Creek is the business it's in: mining. Our global population is likely to always need minerals and metals mined, though it is a cyclical business. That cyclicality can work in Thompson Creek's favor these days, as the world's economies are starting to pick up a bit after a rough few years. As manufacturing and other activities increase, demand should rise.

A minor metal with a high melting point, molybdenum is mostly used in steel alloys, and molybdenum compounds are used in pigments and flame-resistant coatings, adhesives, and as catalysts for hydrofracking -- among other things. Molybdenum anodes are used in mammography, and molybdenum powder is even used as a fertilizer. In short, it's a rather useful material.

Investors should be forward-looking, and Thompson Creek bulls have high hopes for the company's Mount Milligan mine, which holds the promise of helping Thompson Creek expand into gold and copper production, very cost-effectively. Diversification of operations can serve Thompson Creek very well, as when the price of one metal is down, the others may be up, offsetting some losses. Unfortunately, Thompson Creek has had to sell the rights to about half of its gold production to Royal Gold (Nasdaq: RGLD  ) , in exchange for financing. Still, that only decreases its potential, and doesn't wipe it out.

Then there's China, which recently announced plans to spend about $280 billion beefing up its infrastructure. This bodes well for metals.

With Thompson Creek stock having fallen so much, some now see it as especially attractively valued.

But Thompson Creek isn't without its downsides. For starters, its stock, recently priced around $2.50 per share, is now firmly in penny-stock territory, which does not generally bode well.

Then there's the price of molybdenum, which has fallen sharply, from around $14 per pound of molybdenum oxide a year ago to $10.43 recently. Before the recession, prices topped $35 per pound. The price drop has hurt Thompson Creek's performance, leading it most recently to suspend some operations at an Idaho mine, laying off about 100 people in order to save $100 million in operating costs.

A look at the company's financial statements raises some concerns, too. The share count has been rising in recent years, diluting the value of existing shares. The growth is worth watching, but it doesn't seem out of control. Revenue has fallen in recent years, too, but as the world economy improves and if the Mount Milligan mine performs as expected, that should change in coming years.

On the plus side, while earnings haven't been growing lately, they have mostly remained positive, which is good. But free cash flow is negative and has been growing sharply in the wrong direction. Long-term debt surged in the past year, but that was largely to pay for the build-out of the Mount Milligan mine, where costs have risen. In this business, companies do have to spend significantly in order to get mines up and running, and to keep them running. As my colleague Dan Caplinger has pointed out, "Barrick Gold  (NYSE: ABX  ) had costs for its majority-owned Cerro Casale mine triple, while Teck Resources  (NYSE: TCK  ) and NovaGold Resources' (NYSE: NG  ) Galore Creek joint venture has suffered from projected costs expected almost to quintuple."

Hold (off)
Given the reasons to buy or sell Thompson Creek, it's not unreasonable to decide to just hold off. You might want to wait for higher prices for molybdenum, copper, and/or gold. You might wait to see the Mount Milligan mine start producing, and for Thompson Creek to start posting rising revenue and earnings, along with positive free cash flow. You might want demand for steel to pick up considerably, as well.

You might also look at other mining-related companies, such as Freeport McMoRan Copper & Gold (NYSE: FCX  ) , a low-cost producer of copper and molybdenum. It's positioned to benefit quickly from upturns in metals pricing and it enjoys economies of scale, and diverse operations, too. It has a strong balance sheet and a management that has earned a lot of respect.

The verdict
I'm going to pass on Thompson Creek at the moment, but I want to keep my eye on it. Everyone's investment calculations are different, though, so do your own digging and see what you think. Remember that there are plenty of other compelling stocks out there.

Longtime Fool contributor Selena Maranjian has no positions in the stocks mentioned above. The Motley Fool owns shares of Freeport-McMoRan Copper & Gold. Try any of our Foolish newsletter services free for 30 days. 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 (2) | Recommend This Article (4)

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 October 15, 2012, at 2:59 PM, techpatriot wrote:

    The only problem with your analysis is it doesn't go very deep. You only scratch the surface. You don't go into the why, only the what.

    TC put itself on a precarious situation due to the escalating costs of building out th Mt Milligan property, and yes, less than stellar management decision making.

    Having said that, it is less than a year away from shipping (presold) ore from the Mt Milligan property, which will dramatically change the entire picture for this company. It will be come a copper, moly and gold producer (in that order of revenue) and a profitable one, even at the ridiculously low copper and moly prices we have today.

    There is still some risk associated with this stock, it is not as safe as money n the bank (but then, neither is money in the bank these days).

    However, this stock should be a 3 or 4 bagger in 18 months from these current levels for that that are patient enough to wait. If you want more of a sure thing, wait until it shoots up to 5-6 dollars a share, and buy then for a 50 or 60% gain. When this stock goes up, it's rise is not going to be gradual...

    Or, use conviction to nail down a potential 3-4 bagger, (maybe more?).

    Better, yet, be a conservative fool and buy half now, half later, and ride both purchases up....

  • Report this Comment On October 18, 2012, at 12:16 PM, jrm89 wrote:

    "...and with a market capitalization of roughly $400 billion.."

    Thompson Creek's market cap is currently around 500 MILLION..not billion. 400 billion would make them the third-largest company in the world.

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