This Small-Cap Miner Might Embarrass Wall Street Before the Year Is Over

There's no sugarcoating it: It's been U-G-L-Y with a capital "U" for miners of all forms over the past couple of years, as a slowdown in growth from China coupled with weakening in commodity prices caused practically every miner to clamp down on its capital expenditures and go into cost-saving mode. Most companies have lost a substantial amount of market value over that time while gold and silver, the two most commonly followed precious metals, have only demonstrated flashes of their former glory without any long-term rallies.

Despite this somewhat grim scene for the metals sector, I still see one small-cap company that has all the tools necessary to completely embarrass Wall Street analysts before the end of the year by crushing their current revenue and earnings projections. This miner in question is none other than Thompson Creek Metals (NYSE: TC  ) .

Now, let me clear something up before I move forward, so there's absolutely no shred of doubt as you read my thesis for why Thompson Creek could be set to embarrass Wall Street. I am currently a Thompson Creek shareholder, I also own call options in Thompson Creek, and I've held my shares for longer than a year. My position is targeted as a long-term hold, but I am at least partially biased since Thompson Creek currently is the largest holding in my portfolio. In short, consider that the words you're reading right now come from an investor who has a lot riding on Thompson Creek's long-term success.


Source: Thompson Creek Metals.

Why Thompson Creek has been hammered
There are two main reasons Thompson Creek's share price has been clobbered since the start of 2011.

Perhaps no factor has loomed larger than the development of Mt. Milligan, its copper and gold mine based in British Columbia, which was supposed to originally cost $750 million to develop and wound up seeing costs double to about $1.5 billion. The end result was that Thompson Creek was left with $1 billion in debt (compared to $203 million in cash at the moment), and had to negotiate two upfront cash deals with royalty interest company Royal Gold (NASDAQ: RGLD  ) that essentially gave away a 52.25% interest in the mines' gold production simply to fund Mt. Milligan's development.

Source; Thompson Creek Metals.

Also working against Thompson Creek was a fairly precipitous decline in molybdenum prices. Molybdenum is a material commonly used to strengthen steel, and when construction levels around the globe dropped, an oversupply of molybdenum from miners sacked prices. As moly prices fell, Thompson Creek had no choice but to produce less and cut costs, which adversely affected its profitability in a big way.

Altogether, trying to build out a mine that's costing twice as much as expected, all while the only metal you are producing is precipitously falling made for one horrendous couple of years for Thompson Creek shareholders.

Why Thompson Creek might embarrass Wall Street
But, there are also a number of positive takeaways throughout its struggles to get Mt. Milligan on track that I believe put Thompson Creek on a path to long-term success, as well as on a path to embarrass Wall Street analysts in 2014.

Although the cost of Mt. Milligan far exceeded estimates -- and I certainly can't fault short-sellers for attacking Thompson Creek based on that -- at no point since Thompson Creek acquired Mt. Milligan in 2010 through its acquisition of Terrane Metals has the mine's development not remained on schedule. I believe this is an important and overlooked point that most investors who don't follow Thompson Creek as closely as I do usually miss.

Mine development delays are fairly common today, and they can certainly result in bottom-line underperformance. However, in Mt. Milligan's case it opened up exactly when scheduled, it reached commercial production in February, as expected, and it's set to be cash flow positive in the second-half of 2014. Based on its historical performance there's nothing to make me believe otherwise that this mine won't deliver positive cash flow by the second half of this year.


Mt. Milligan daily mill throughput. Source: Thompson Creek Metals. 

Another recent surprise has been a surge in molybdenum prices. With the U.S. economy finally finding solid footing and sanctions against Russia clouding the future of its molybdenum exports, molybdenum oxide prices have rebounded from roughly $10 a pound in late March to close at $14.52 a pound by the end of May. These higher moly prices mean the potential to ramp up production at its Endako and Thompson Creek moly mines in the coming months in order to benefit from these advantageous prices.

Furthermore, Thompson Creek has instituted significant cost cuts and operational improvements in these mines over the past couple of years which should allow it to produce better margins compared to when molybdenum was at roughly $14.50 a pound two years ago. In Q1 2012 Thompson Creek spent nearly $40 million in capital expenditures on its two moly mines. By comparison, capex didn't even reach $1 million in Q1 2014.  

The end result, I believe is the potential to trample Wall Street's EPS expectations. Current expectations have Thompson Creek producing $0.13 in EPS in 2014. By my personal estimations, taking into consideration higher moly prices, lower capital costs, and Mt. Milligan's track record for staying on schedule, as well as gold and silver prices remaining stable where they're at now, I believe Thompson Creek could double Wall Street's projections and earn somewhere in the neighborhood of $0.25-$0.30 in EPS in 2014. Keep in mind I'm a shareholder and am inherently biased on that accord, but the track record would appear to speak for itself. As long as Thompson Creek continues to manage its debt levels prudently I see no reason this investment won't deliver sizable gains over the long run.

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  • Report this Comment On June 01, 2014, at 10:32 AM, lightdoesnotage wrote:

    Nice write-up. On the yahoo message board for TC we have noticed the market mispricing of TC for some time and have been taking advantage of loading up on some stock at bargain basement prices. The Jan 2015 $2 calls at $0.95 are quite the leverage bargain with the stock trading at $2.82.

  • Report this Comment On June 02, 2014, at 2:29 AM, ultraific3 wrote:

    Sean,

    TC will blow out analyst estimates this year, and for the coming quarters.

    Rising moly prices will have a lot to do with that, as will continued ramp-up of Mt. Milligan.

    Regarding Mt. Milligan, when TC says it will be 'cash-flow positive' in the 2nd half of 2014, I suspect that statement takes into account debt that has been pushed down to the subsidiary level by parent TCMC. So in essence, it's a statement made from the perspective of being 'free cash flow positive' on Milligan, when "debt" is considered, debt that in reality is that of parent. So it's an extreme standard (from perspective of operating performance) that they are making this statement from.

    I say that because in Q1, Mt. Milligan operations were essentially cash-flow positive, if ignoring effects of working capital build (chiefly, build of inventory). Since the inventory of Mt. Milligan is high-salable stock, revenue recognition on the bulk of sales requiring only delivery (to ship) and collection on the provisional invoices generated by such delivery, one has to discount 'inventory build' as a use of cash in assessing Milligan's ability to generate it.

    In Q2, I suspect they will be cash-flow positive (with or without considering inventory build - with occurs in a ramp-up of a mine), but ignoring debt which in reality, attributes to corporate, in reality.

    Needless, Milligan should be generating robust cash-flow this year.

    But TC's improving fortunes are largely driven by the substantial lift-off in molybdenum prices since 4/1/14, and that should add considerable lift to forward quarter EPS.

    Come over to the TC Yahoo board, lots of good chat on the stock there.

    Good luck.

  • Report this Comment On June 02, 2014, at 7:49 PM, ALLWIN wrote:

    Sea:- It's tempting not to add my two cents, albeit from a purely personal perspective! "I sincerely hope you are correct, I hope if will be a very big embarrassment for Wall Street! TC is a large chunk of my portfolio." OOch!

  • Report this Comment On June 03, 2014, at 3:26 PM, techpatriot wrote:

    I have a few comments to add.

    1) It is irrational that TC has not moved up some given the price move of moly.

    However it is a maxim that the market can be irrational longer than you or I can be solvent.....

    2) TC IS a MUCH better long term bet than it was three months ago simply because of the de-risking of the Mt Milligan run up and the stronger cash position Q-2 will leave it in.

    3) If you expect moly to hold or rise over the next few months (and I do) then TC is extremely undervalued.

    It is still undervalued by ANY measure even if you don't expect that however.

    Book value.

    Future cash flow.

    Replacement cost.

    Lack of political risk.

    4) IF (and that is a huge IF) prices of all three metals TC produces were to crater for an extended period of time, TC could have trouble servicing the debt. However the longer moly stays as high as it is, the LESS of an issue that will be. By the end of the year, that scenario will be little more that a an exercise in a "what if" probability.

    Long before TC face bankruptcy other mines will shut down and other companies will go under due to their costs of production. At $1000 gold, $2.50 copper and $10 moly TC should be able to survive (if not now then most certainly by the end of this year, with the increased cash they should bring in in Q2 and increasingly, the way it looks now, Q-3 too).

    There are really three major risks here, in the order of least probable to most probable.

    1) The world slips into a global recession.

    2) TC has an unforeseen problem with phase 8 of their namesake mine.

    3) Mt Milligan has serious ramp up issues.

    I consider #1 to be much less likely than a year ago.

    We will know about #2 on one of the next three TC conference calls - probably the second one, if not then definitely on the third one.

    And with every day that goes by, #3 becomes less of a worry to everyone.

    Value is currently hard to find in this market.

    And much, if not most of the value of TC is NOT currently baked into the PPS.

    And actually, it's not even recognized by Wall Street right now. as you so aptly pointed out in your title.

    There are a couple of analysts that are starting to see the whole picture here, but just a couple.

    If you've listened to the last few TC CC's, too many of the analysts are not even asking the correct fundamental questions right now.

    Some analysts even seem downright mistaken about basic metals supply and demand and don't even have the basic mining knowledge that they should have when covering a stock like TC.

    Granted, TC is not Apple, or even FCX. They probably get the wet behind the ears analysts assigned to them, for the most part.

    And as such, TC is greatly under-priced should current metals pricing trends continue.

    TC is well on it's way to being a cash generating machine in 2015 and beyond.

    The market has not yet caught on.

    That should change rapidly over the next 2 - 5 months.

  • Report this Comment On June 03, 2014, at 3:35 PM, techpatriot wrote:

    I have a few comments to add.

    1) It is irrational that TC has not moved up some given the price move of moly.

    However it is a maxim that the market can be irrational longer than you or I can be solvent.....

    2) TC IS a MUCH better long term bet than it was three months ago simply because of the de-risking of the Mt Milligan run up and the stronger cash position Q-2 will leave it in.

    3) If you expect moly to hold or rise over the next few months (and I do) then TC is extremely undervalued.

    It is still undervalued by ANY measure even if you don't expect that however.

    Book value.

    Future cash flow.

    Replacement cost.

    Lack of political risk.

    4) IF (and that is a huge IF) prices of all three metals TC produces were to crater for an extended period of time, TC could have trouble servicing the debt. However the longer moly stays as high as it is, the LESS of an issue that will be. By the end of the year, that scenario will be little more that a an exercise in a "what if" probability.

    Long before TC face bankruptcy other mines will shut down and other companies will go under due to their costs of production. At $1000 gold, $2.50 copper and $10 moly TC should be able to survive (if not now then most certainly by the end of this year, with the increased cash they should bring in in Q2 and increasingly, the way it looks now, Q-3 too).

    There are really three major risks here, in the order of least probable to most probable.

    1) The world slips into a global recession.

    2) TC has an unforeseen problem with phase 8 of their namesake mine.

    3) Mt Milligan has serious ramp up issues.

    I consider #1 to be much less likely than a year ago.

    We will know about #2 on one of the next three TC conference calls - probably the second one, if not then definitely on the third one.

    And with every day that goes by, #3 becomes less of a worry to everyone.

    Value is currently hard to find in this market.

    And much, if not most of the value of TC is NOT currently baked into the PPS.

    And actually, it's not even recognized by Wall Street right now. as you so aptly pointed out in your title.

    There are a couple of analysts that are starting to see the whole picture here, but just a couple.

    If you've listened to the last few TC CC's, too many of the analysts are not even asking the correct fundamental questions right now.

    Some analysts even seem downright mistaken about basic metals supply and demand and don't even have the basic mining knowledge that they should have when covering a stock like TC.

    Granted, TC is not Apple, or even FCX. They probably get the wet behind the ears analysts assigned to them, for the most part.

    And as such, TC is greatly under-priced should current metals pricing trends continue.

    TC is well on it's way to being a cash generating machine in 2015 and beyond.

    The market has not yet caught on.

    That should change rapidly over the next 2 - 5 months.

  • Report this Comment On June 03, 2014, at 3:40 PM, techpatriot wrote:

    (I apologize for the dual post - browser issues - seems to be no way to delete it....)

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