For those of you who've been following my One Person's Trash Is Another Person's Treasure portfolio, it shouldn't come as a surprise to anyone that I love beaten-down, out-of-favor, contrarian, and value plays. One of my primary investing philosophies is to follow the Warren Buffett adage to buy when others are fearful and sell when others are greedy. With that being said, let's delve into two of my top holdings -- Thompson Creek Metals (OTC:TCPTF) and Bank of America (NYSE:BAC) -- and I'll share with you what led me in their direction, as well as where I feel they may head next.
However, before we do that, I should preface this by saying that we at the Fool have strict rules about analyzing companies with market caps below $200 million and volume levels below 250,000 shares per day (you can see the trading requirements we contributors follow by reading the Fool's disclosure policy). As such, I'll be leaving the discussion of my largest holding off the table since it doesn't meet these requirements and discussing Thompson Creek and Bank of America, my No. 2 and No. 3 holdings in terms of dollar value, instead.
A mulligan on Milligan
My initial attraction to Thompson Creek Metals began in 2010 more as a fascination with the application of molybdenum than anything else. That perception changed rapidly after Thompson Creek announced the acquisition of Terrane Metals in July 2010, acquiring the Mt. Milligan copper and gold mine in British Columbia.
On paper, Mt. Milligan is everything that Thompson Creek shareholders had dreamed of and more. The mine was going to diversify Thompson Creek away from just being a molybdenum producer, and it boasted huge promises of profits with 2.1 billion pounds of copper and 6 million ounces of gold to be divvied out over its 22-year lifespan.
Those dreams have been squashed over the past year, however, as molybdenum costs have fallen and Mt. Milligan's build-out costs have soared. Thompson Creek's management had hoped to fund the mine's construction through operating cash flow, but was instead forced to shut down its moly operations in order to conserve cash and sell off its stockpile while also orchestrating two separate gold royalty interest deals with Royal Gold (NASDAQ:RGLD), netting it precious upfront capital in return for giving up 52% of its gold interests to Royal Gold.
The allure of Thompson Creek is purely based on the impending success of Mt. Milligan, which is set to open in the fourth-quarter of this year. While costly, the build-out has remained on track, and I wouldn't be shocked if Thompson Creek turned in $1 in EPS in 2014, placing it at a forward P/E of around three for those of you who hate math!
Furthermore, growth in China is working perfectly in Thompson Creek's favor. Just last week Freeport-McMoRan Copper & Gold's (NYSE:FCX) senior vice president of marketing and sales announced his company's intention to possibly double copper sales to China from 500,000 metric tons to 1 million metric tons, according to a report from Bloomberg. With China passing infrastructure bills aimed at getting its growth back on track, copper usage is expected to remain strong, right in time for Mt. Milligan to come on line.
I've purchased Thompson Creek Metals in numerous blocks over the past year and change and am fully committed to this company for the long haul.
Returns you can bank on
I'm not actually sure there's a more hated big bank than Bank of America, which is precisely what made me like the stock so much back in 2011. My first two purchases came just weeks before Warren Buffett's Berkshire Hathaway (NYSE:BRK.A) unveiled a $5 billion investment in Bank of America via preferred stock with its handsome 6% yield, not to mention the 700 million in stock warrants Berkshire received as well. My final purchase, which more than doubled my initial stake, came three months later.
What I saw in Bank of America back then was an opportunity for it to shed assets and increase liquidity to adequate levels without sacrificing much of its earnings capability. Similar to what AIG did in order to repay its government loans, Bank of America took to the auction block and sold off nearly its entire stake in China Construction Bank for approximately $6.6 billion in cash. It also sold off Merrill Lynch's international wealth management business for $2.5 billion this past summer.
The end result is that Bank of America is much better capitalized than it's been in years. According to its most recent quarterly filing, its tier 1 common capital ratio now sits at 11.06%, total average deposit balances rose by 11% from the previous quarter to $28 billion, and based on the recently conducted stress test results by the Federal Reserve, it -- and 16 of 17 other peers -- passed with flying colors.
Looking ahead, I believe Bank of America has a decent chance to head higher once it can get every last lawsuit tied to the recession and housing bubble behind it. However, I admit that with the markets sitting near all-time highs and potential lawsuits still outstanding, I obliged by taking profits on nearly half of my Bank of America position over the past two weeks. My remaining shares, which are up in excess of 100%, I'm planning to hang onto for the time being.