The Motley Fool Previous Page

Crunching the Numbers on Thompson Creek Metals

Christopher Barker
May 11, 2012

Grab a piece of unopened mail and flip it over, 'cause we're about to run some timely back-of-the-envelope numbers on Thompson Creek Metals (NYSE: TC  ) .

If you are not familiar with the company, please begin here before continuing. Briefly stated, this is a major producer of molybdenum with 2012 production estimated at a substantial 26 million to 28 million pounds. Beginning in the second half of 2013, the miner will make a transformational move into copper and gold with the start-up of the long-life Mount Milligan mine.

Now, the market has shown itself quite wary of major mine construction projects of late -- and with good reason. The industry has experienced some truly gut-wrenching escalation in the costs for mine construction. Over a five-year period, the estimated price tag for Barrick Gold's (NYSE: ABX  ) 75%-owned Cerro Casale mine has tripled from $2 billion to $6 billion. And for an example from Thompson Creek's own region, Teck Resources' (NYSE: TCK  ) Galore Creek joint venture with NovaGold Resources (AMEX: NG  ) has seen projected capital costs surge 373% since 2006 to $5.2 billion!

Since Thompson Creek's $700 million Canadian dollar acquisition of Terrane Metals in 2010, the anticipated capital cost for Mount Milligan has surged from CA$915 million to between CA$1.4 billion and CA$1.5 billion. With cost inflation of this sort in play, it's a good thing Mt. Milligan is a phenomenally attractive copper and gold project that will remain abundantly lucrative, even with the adjusted capital cost structure. (More on that in a moment.) Furthermore, with the project already well into construction, I presume diminished risk of further cost escalation beyond the revised estimate.

Accordingly, Thompson Creek has been forced to get creative with financing, and this week it raised $412 million through senior notes and tangible equity units to join the $270 million raised last December through a second gold royalty stream w