Should You Steel Yourself for Thompson Creek's Recovery?

The world's top value investors love it when their best stock ideas are selling at bargain-basement prices. For those rarefied investors, companies offering fire-sale prices become no-brainer buys. So regular investors like you and me would do well to emulate the masters and look at companies offering a "buy one, get one" sale on their stocks.

Molybdenum miner Thompson Creek Metals (NYSE: TC  ) has dug itself a deep hole it needs to climb out of. Falling metals prices, steep financing needs, a costly financing partnership, and its best mine still at least a year away from production have stacked the deck against it. While you'll naturally want to do more due diligence before buying in, this still might be an opportunity to pick up a quality stock at a severe discount.

Thompson Creek Metals snapshot

Market Cap

$467 million

Revenues (TTM)

$499 million

1-Year Stock Return

(60.5%)

Return on Investment

1.1%

Dividend and Yield

N/A

Estimated 5-Year EPS Growth

54.5%

52-Week High

$9.50

Recent Price

$2.77

% Below 52-Week High

(70.8%)

CAPS Rating

*****

Source: FinViz.com. N/A = not available, Thompson Creek Metals doesn't pay a dividend

Let's just make sure there's nothing more seriously wrong with it before you go and plug it into your portfolio.

A dirty word
It all boils down to the Mt. Milligan copper mine in Canada. Thompson Creek already mines and markets molybdenum the U.S. and Canada, but it has been hurt by depressed pricing for the metal that's key to producing steel. Southern Copper (NYSE: SCCO  ) recently reported its third-quarter earnings were hurt in part by falling molybdenum prices that were down more than 19% from the year-ago period. The market researchers at CPM Group say molybdenum hit $11.10 a ton in August, the lowest it's been since 2009, but Freeport-McMoRan (NYSE: FCX  ) has been modeling $13 per ton for the second half of 2012.

In addition to battling lower pricing, Thompson Creek has been waging a war on rising costs associated with its Endako Mine and its Thompson Creek Idaho mine, which caused it to post operating losses of $18 million last quarter, not to mention lower-than-anticipated ore grades and recovery at both. Of course, cost overruns are nothing new to mining operations as Taseko Mines (NYSEMKT: TGB  ) is also experiencing a period of elevated expenses at its Gibraltar project and it anticipates seeing them at higher levels for some time to come, but as its projects come online it also forecasts that they'll start dropping, perhaps as soon as the first quarter of 2013.

To help complete the Mt. Milligan project, the miner had to offer Royal Gold (Nasdaq: RGLD  ) over 52% of the gold it ultimately produces at a price of $435 an ounce, or the market rate if it's lower, an agreement that diminishes the value of the project while not completely eliminating it. With gold currently trading around $1,690 an ounce, that's a hefty discount for the lion's share of the production, but underscores the financial need Thompson Creek had to get the project done. As the saying goes, beggars can't be choosers.

Those kinds of financial concerns, and the usurious rates it's had to pay to get the job done (not to mention it doesn't expect the project to be producing until sometime late next year), have weighed on its stock.

Despite the Royal Gold deal, gold's high price doesn't seem like it's going to crater, so the profits it should realize on the rest of the output, plus the copper it will be able to sell, still makes it a profitable venture. It's why I've rated Thompson Creek to outperform the broad indexes on Motley Fool CAPS, the 180,000 member-driven investor community that translates informed opinion into stock ratings of one to five stars. That the miner still fetches a top-tier rating suggests others agree it's going to come out ahead in the end.

At less than nine times earnings estimates and with analysts predicting significant EPS growth over the next five years, it trades at just a quarter of its growth potential. Let me know in the comments section below if you think Thompson Creek Metals can steel itself for the rise that's bound to come.

Have half a mind
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  • Report this Comment On November 07, 2012, at 12:42 PM, djkumquat wrote:

    been waiting a long time for TC to pop. any day now...

  • Report this Comment On November 11, 2012, at 6:19 PM, SWG1954 wrote:

    Stay patient fool investors! TC will be a winner with a double-up by end of 2013.

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