Thompson Creek mastering Milligan’s mill,but shutters Endako mine

VANCOUVER — It’s a tale of two B.C. mines for producer Thompson Creek Metals (TSX: TCM; NYSE: TC). The company is achieving operational reliability at its low-cost Mount Milligan copper-gold asset, and it also put its Endako molybdenum operation on care and maintenance, terminating 270 employees.

In many ways the news symbolizes Thompson Creek’s strategic diversification away from moly driving profit. The company rose to prominence on the back of the industrial metal with operations at Endako and its Thompson Creek mine and mill in Custer County, Idaho. Following the commissioning of Milligan, however, Thompson Creek appears to be positioned for the future as a low-cost, copper-gold producer.

Endako sits 161 km northwest of Prince George and has been in production since 1965. The company operated the mine alongside Vancouver-based Sojitz Moly Resources, and the companies originally announced a suspension of operations at the site in December 2014.

The closure will hit hardest the nearby town of Fish Lake, which has a population of 1,200. Thompson Creek figures its share of the suspension costs — including severance — will total US$20 million this year, and US$5 million in 2016.

“As we mentioned in the past, we wanted to wait at least one quarter to see what was happening with the metal price. As most everyone is aware the metal price is not going in the right direction for us,” CEO Jacques Perron said during a conference call.

“The current and expected [moly] price cannot support profitable operations at Endako, but we’ll continue to closely monitor market conditions and re-evaluate the status of the [operation],” he added after the closure.

Moly oxide prices have tumbled over 47% year-on-year, from US$15 per lb. in June 2014 to US$7.94 per lb. at press time. Thompson Creek reported Endako was producing moly at between US$10.50 and US$12 per lb. last year.

According to provincial government estimates in 2012, Endako was expected to crank out $100 million annually in economic activity, including: direct wages, purchases and taxes for the region.

Meanwhile, recent news has been much better at Milligan, where Thompson Creek has recovered from an underwhelming start to the year. In early May the company reported that first-quarter results did “not meet expectations,” with throughput and production at the mine negatively impacted by several operational and mechanical issues in the mill.

Average mill throughput for the first quarter was 39,600 tonnes per day, though Thompson Creek reported improvement in March, when it achieved average throughputs of 50,000 to 54,000 tonnes per day. The numbers remain well below the operation’s nameplate capacity of 60,000 tonnes per day.

The company cranked out 15.4 million lb. payable copper and 46,000 oz. payable gold during the quarter, and registered a net loss of US$87 million, or 41¢ per share. Milligan remains a bright spot due to its low operating costs, which were pegged at US$1.12 per lb. copper on a co-product basis to start the year.

“We didn’t have stability in the circuit so we had fluctuating operational conditions, which don’t help with recoveries,” Perron explained.

“But our guys at site have been doing a great job in the last month and a half. We made some modifications to our flotation cells, and like we always said, Milligan will be a low-cost producer. We’re seeing some improvements on recoveries where we’re doing a good job on controlling what you can control, and one of the things we can control is cost. So we’re happy with the results there.”

On June 2 Thompson Creek announced that it had achieved average mill throughput at Milligan of 50,700 tonnes per day in May. The company is reportedly employing temporary mobile crushing measures to raise throughput to the design rate by year-end, while buying a US$75-million secondary crusher is a longer-term alternative to enhance mill rates.

Thompson Creek could crank out between 70,000 and 90,000 lb. copper this year at by-product cash costs ranging from US70¢ to US90¢ per lb., with annual gold production estimated at 210,000 oz. The company’s remaining moly operation — namely the Langeloth processing facility in Pennsylvania — is expected to contribute between US$25 million and US$27 million in total cash flow.

“I think we have lot of work to do. We were not happy with the throughput situation at Milligan in the first quarter, but we believe we have solutions to all our issues and we’re working diligently,” Perron said. “We have seen great performance from our [copper-gold] business in the first quarter. We’re happy to see that it will be cash positive this year, and the results so far in the first quarter are in line with our plans.”

BMO Capital Markets analyst Aleksandra Bukacheva has a “market perform” stock rating on Thompson Creek, along with a $2 per share price target.

Bukacheva wrote on June 2 that she was “encouraged” by the company’s progress at Mt. Milligan after an “operationally challenging” first quarter. “We note that at spot commodity prices, Thompson Creek’s net present value is negative due to substantial debt balances, however, cash generation at the full design rate at [Milligan] appears compelling.”

BMO Research notes that Thompson Creek is sitting on large debt balances of US$900 million, and even with Milligan at full capacity, the company will have trouble repaying US$350 million in 2017 due to “onerous” interest expenses. The balance sheet issues have led some analysts to speculate Thompson Creek would be best served with a takeover offer from a larger, better capitalized mining company.

Thompson Creek has traded within a 52-week range of $1.08 to $3.38, and jumped 16% after news of its improvements at Milligan en route to a $1.33-per-share close at press time. The company has 215 million shares outstanding for a $287-million market capitalization, and reported cash and equivalents of US$238 million at the end of March.