Thompson Creek cuts ’09 spending

A sudden drop in molybdenum demand over the last few weeks has prompted Thompson Creek Metals (TCM-T, TC-N, A6R-F) to batten down the hatches after an outstanding third quarter that saw profit jump 66% from the second quarter.

 

Thompson Creek’s third quarter net income was US$100.6 million up from just US$24 million in the same period of 2007 due to increased sales and higher grades and prices.

 

But in October, world molybdenum demand began to plummet causing a collapse in prices. Thompson Creek chairman and CEO Kevin Loughery says he was surprised to see moly fall to about US$12 per lb. over the span of a few weeks after being above US$30 per lb. for more than a year.

 

“I’ve never seen anything like this in this amount of time,” Loughery said during a conference call on Nov. 7. He compared the situation today to a price drop in 1994 when moly fell from about US$8-10 per lb. to US$4 per lb. over the course of several months. “This is going to a third of the price in a few weeks,” Loughery said.

 

Loughery says Thompson Creek is in a good position considering it has a total debt of just US$4.7 million about US$244 million in cash as of Nov. 5.

 

Loughery sees the demand drop a reaction to the lack of liquidity in the credit markets which has made it difficult for projects that require steel to get financing.

 

“Our sense is that molybdenum demand will come back relatively quickly when the financing mechanisms of the world capital markets loosen up somewhat,” Loughery says. “We are producing a lot of molybdenum at low cost and we will continue to do that.”

 

Production increased by 5.1% to 6.5 million lbs. during the quarter but much of the revenue increase came from selling off 1 million lbs. of inventory that had been built up in the second quarter during scheduled maintenance shutdowns of the Langeloth and Endako roasters (located in Pennsylvania and in northern BC, respectively).

  

During the conference call, analysts congratulated the company for its luck of selling the stockpiled ore when it did but most were wondering about Thompson Creek’s plans for 2009.

 

The company typically sells 75-80% of its moly through annual supply contracts that follow the calendar year, and sells the rest through the spot market. Already, Loughrey is preparing for some uncertainty.

 

“We are seeing some hesitancy on the part of customers where we aren’t as far along in our annual contract negotiations as we would typically be,” Loughery said.

 

But he doesn’t expect that the company will lose the contracts completely.

 

“We’ll do business on a modified contract or spot basis until some sense of predictability returns to the marketplace,” Loughery said.

 

Thompson Creek expects production to rise to 31.5-34 million lbs. with about 24.5-26 million lbs. coming from the Thompson Creek mine in Idaho and the remainder coming from its 75%-owned Endako mine. Cash costs to produce molybdenum oxide are expected to be about US$6-7 per lb. in 2009 – about US$5-6 at Thompson Creek and US$8-9 at Endako, where a major expansion plan has been underway.

 

Thompson Creek says it will continue with the US$150-million underground expansion at Endako next year but will hold off on spending US$40 million originally planned for its Davidson project in Smithers, BC. Instead it will just work on getting environmental permits.

 

“If things deteriorate more we can slow down or stop the Endaka expansion plan,” Loughery said.

 

But because the company views the current dip in moly demand and price won’t last because the long-term outlook hasn’t changed, Loughery says its best to continue.

 

“You don’t want to change long term projects in response to a short-term phenomenon,” he said. “We think that as often happens when any commodity price drops this quickly, the rebound is often fairly quick in the opposite direction.”

 

Thompson Creek is also holding back on its share repurchase program for the time being.  It currently has 125 million shares outstanding and shares fell nearly 20% today to $4.24 per share on a trading volume of 9.7 million shares. The company’s share price has a $52-week range of $4.24 and $25.