Thompson Creek looks challenges in the eye

First the good news: Thompson Creek Metals (TCM-T) says it has enough cash to complete construction of its recently acquired Mt. Milligan copper-gold deposit near Prince George, British Columbia, and that the project remains on target for startup in the third quarter of this year with commercial production to follow in the fourth quarter. The company ended 2012 with $527 million in cash and debt of $938 million.

Thompson Creek Metals also reported that its total molybdenum production in the fourth quarter increased by about 26% from the third quarter to 7.7 million pounds from 6.1 million pounds at its Thompson Creek mine and mill in Idaho and its 75%-owned Endako mine, mill and roasting facility in northern B.C.

The higher production figures were largely due to higher grades and recoveries at the Thompson Creek mine, which churned out 6 million lb. molybdenum at a cash cost of US$4.59 per lb. (Endako produced 1.8 million lb. at a cash cost of US$13.26 per lb., as it struggled with recovery issues at its new mill.)

Other positives included lower average cash costs per lb. of molybdenum produced, which declined by about 31% from the previous quarter to US$6.58 per lb. from $9.46 per lb., and a 42% jump in sales to 8.1 million lb. molybdenum in the fourth quarter from 5.6 million lb. in the third quarter.

But the bad news sucked a little wind from the company’s sails, prompting several analysts to lower their price targets. Not only did Thompson Creek report a net loss in the fourth quarter of US$484.4 million, or US$2.87 per diluted share, which included a US$530.5 million write-down of the Endako mine, but it also unveiled lower production and higher cash-cost guidance for 2013.  

Thompson Creek has trimmed its 2013 production guidance by 6% to 27.5 million-30.5 million lb. molybdenum, down from its previous guidance of 29 million-32.5 million lb. molybdenum, due to water supply issues at the Endako tailings pond (frozen water prevented the sufficient feed of the liquid to the mill). Meanwhile, guidance for cash costs in 2013 has gone up by 4% from the previous US$6.25-7.25 per lb. moly to US$6.50-7.50 per lb.

Estimated capex at Mt. Milligan has also climbed by US$40-50 million because the company wants to build a new operations residence at the mine so that employees do not need to commute to the site from nearby towns. Thompson Creek says it now expects total capex for the project will be US$1.53 billion, up from its original estimate of about US$1.5 billion.

Currently Mt. Milligan construction is about 81% complete and the company says it has spent about 91% of the capex outlined for the mine.

Matthew Gibson and Corey Posesorski of CIBC have cut their 12-18 month target price on the stock from $5.20 per share to $4.90 per share and argue in a Feb. 25 research note that “in order to be buyers of TCM today, investors need to be firm believers in the ramp up of Mt. Milligan and/or in rebounding moly prices…We believe that until Mt. Milligan ramps up, investors should take a wait and see approach.”

“Given today’s spot moly prices of US$11.30 per lb.,” they add, “the likelihood of extended shutdowns at the two operating mines are becoming more likely. Combine this risk with the potential teething issues that Mt. Milligan will face during ramp up and there could be as much as a 62% downside to the name if the stock re-rates to where other single-asset copper producers are trading at the 0.54 times net asset value level that have production difficulties.”

The CIBC analysts also point out that the company expects it will make a decision about restarting stripping activities for Phase 8 of the Thompson Creek mine by June or July of this year. “Given the current market conditions, we expect the company to not restart stripping activities and we have assumed in our model that the mine will be put on care and maintenance in 2015.”

And as for Endako, they say, where “significantly lower recoveries” were “slightly offset by higher grades,” the company’s management “will have to make some tough decisions regarding the viability of the operation in today’s pricing environment” if operating costs cannot be improved.

Pierre Vaillancourt and Darren Wiebe of Macquarie Capital Markets note that while there is optimism about Mt. Milligan, operational issues at Endako and Thompson Creek “will continue to overhang the stock.”

The mining analysts argue that the Thompson Creek mine “needs to re-start waste stripping activities by mid-year in order to continue with production or interrupt mining activities at the end of 2014.”

“Management stated that it would need to see an improvement in the molybdenum price for a resumption of stripping activities at the mine.” The Macquairie analysts have a neutral rating on the stock and a 12-month target price of $4.00 per share.

Gary Lampard of Canaccord Genuity forecasts the company’s cash balance will “trough at US$190 million at end-2013.” He has a hold rating on the stock and has cut his 12-month price target to $3.50 per share from his previous $3.90 per share.

At presstime in Toronto, Thompson Creek Metals was trading at $3.28 per share within a 52-week range of $2.23-8.83. The company has about 169 million shares outstanding.