Thompson Creek boasts stellar Q3

A sudden drop in molybdenum demand over the last few weeks has prompted Thompson Creek Metals (TCM-T, TC-n) to batten down the hatches.

The company is cutting back at an optimal time; profit jumped 66% between the second and third quarters thanks to a pre-planned decision to offload some stockpiled ore.

The increased sales coupled with higher grades put Thompson Creek’s net income at US$100.6 million, up from just US$24 million in the third period of 2007.

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

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

Thompson Creek is in a good po- sition, he added, considering it has a total debt of just US$4.7 million and about US$244 million in cash as of Nov. 5.

The demand drop is a reaction to the lack of liquidity in the credit markets, which has made it hard to get financing for projects in need of steel, Loughrey explained.

“Our sense is that molybdenum demand will come back relatively quickly when the financing mechanisms of the world capital markets loosen up somewhat,” Loughrey said. “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, while moly sales from Thompson Creek mines totalled 6.9 million lbs. The company sold off 1 million lbs. of inventory that had been built up in the second quarter during scheduled maintenance shutdowns at the Langeloth and Endako roasters, located in Pennsylvania and northern B. C., 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,” Loughrey says. “We aren’t as far along in our annual contract negotiations as we would typically be.”

But he doesn’t expect that Thompson Creek 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,” Loughrey 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 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 is under way.

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, B. C. Instead, it will just work on getting environmental permits.

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

But because the company’s longterm outlook for moly demand hasn’t changed, Loughrey says it’s best to continue.

“You don’t want to change longterm projects in response to a short-term phenomenon,” he said. “We think that 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. It currently has 125 million shares outstanding and shares fell nearly 20% on the third-quarter results to $4.24 per share on a volume of 9.7 million shares. The share price has a 52-week range of $4.24-25.