Thompson Creek looks challenges in the eye

First the good news: Thompson Creek Metals (TCM-T, TC-N) says it has enough cash to finish building its recently acquired Mount Milligan copper-gold mine project near Prince George, B.C., and that the project remains on target for start-up 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 a $938-million debt.

Thompson Creek Metals also reported that its total molybdenum production in the fourth quarter increased by 26% from the third quarter to 7.7 million lb. from 6.1 million lb. 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 largely owed to higher grades and recoveries at the Thompson Creek mine, which churned out 6 million lb. moly 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. moly produced, which declined by 31% from the previous quarter to US$6.58 per lb. from US$9.46 per lb., and a 42% jump in sales to 8.1 million lb. moly 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 writedown 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 to 30.5 million lb. moly, down from its previous guidance of 29 million to 32.5 million lb. moly, 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 to US$7.25 per lb. moly to US$6.50 to US$7.50 per lb.

Estimated capital expenditure at Mount Milligan has also climbed by up to US$50 million, as 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 expects that total capex for the project will be US$1.53 billion, up from its original estimate of US$1.5 billion.

Construction at Mount Milligan is 81% complete, and the company says it has spent 91% of the capex outlined for the mine.

Matthew Gibson and Corey Posesorski of CIBC have cut their 12- to 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 Thompson Creek today, investors need to be firm believers in the ramp-up of Mount Milligan and/or in rebounding moly prices . . . we believe that until Mount 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 shut downs at the two operating mines are becoming more likely. Combine this risk with the potential teething issues that Mount 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 Thompson Creek mine’s eighth phase by June or July. “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 “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 Mount 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 restart waste-stripping activities by mid-year in order to continue with production, or interrupt mining activities at the end of 2014.”

They say that “management stated that it would need to see an improvement in the moly price for a resumption of stripping activities at the mine.” The Macquarie analysts have a “neutral” rating on the stock and a 12-month target price of $4 per share.

Gary Lampard of Canaccord Genuity forecasts the company’s cash balance will “trough at US$190 million at the end of 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 press time in Toronto, Thompson Creek Metals was trading at $3.28 per share within a 52-week range of $2.23 to $8.83. The company has 169 million shares outstanding.