Thompson Creek sees its future in copper and gold

Thompson Creek Metals  (TCM-T, TC-N) is a go-to name in the molybdenum space, largely thanks to its namesake mine, which is the fourth-largest moly mine in the world.

But with the price of the metal floundering and the company opening a new copper-gold later this year, the mining community may soon be thinking of Thompson Creek in a different way.

“The moly market is struggling to get its legs underneath it,” Thompson Creek chairman and CEO Kevin Loughrey said during a conference call. “That is the difficult news from the first quarter.”

Moly was selling for above US$45 per lb. at the height of the commodity bull cycle before collapsing to below US$10 per lb. during the financial crisis of 2008. Since then it hasn’t found its former momentum, climbing up into the US$18 range before going on a downward trajectory in 2011. Over the last year it has fallen from just above US$14 per lb. to its current price of US$11.34 per lb.

The problem has been a combination of too much supply coming on stream, and demand falling off as global growth slows.

“Moly does well when the world economy is clicking along,” Loughrey said. “And that is not happening right now . . . we need a catalyst in the market place, and I’m hard-pressed at the moment to see what that catalyst will be . . . something will happen to turn the market around, but what it will take for prices to recover and absorb some of that new production, I can’t see right now.”

And while soft market conditions aren’t forcing the company to cut production yet, the idea isn’t off the table.

Thompson Creek has contracts to sell 80–85% of its moly production for the year. So moving product isn’t a problem. The issue is that while those contracts force buyers to commit how much volume they will take, they do not stipulate a price. Instead, price is determined by the spot price from the previous month. This means that the falling moly price flows right through to Thompson Creek’s books.

The remaining 15% of supply not covered by contracts is sold directly on the spot market — provided the company likes the price. It has the option to stockpile the material to a point, if it believes that it’s more prudent to wait for a future price movement to the upside.

It all adds up to an uncertain future for its flagship Thompson Creek mine in Idaho’s Custer County, as the company suspended a $100-million stripping effort associated with phase eight of the mine plan.

Instead it will carry on with phase seven, which will take it through 2014, and after that it will decide whether to commit to phase eight, or put the mine on care and maintenance.

When asked what the moly price would have to be to keep the mine running beyond phase seven, Loughrey said that it wasn’t only about the spot price, but also about the company’s forecast of where prices were heading, which makes giving an exact price difficult.

“But that price is probably higher than today’s price,” he said. 

As for the company’s future, Mount Milligan looms large on the horizon. 

The copper and gold project in northwestern B.C. is humming along with a mill start-up scheduled for August and commercial production expected in the fourth quarter.

The mine is expected to average 81 million lb. copper and 194,500 oz. gold production per year over its 22-year mine life. It will also offer some diversification.

“I don’t see copper and moly prices as being tied together,” Loughrey says in a follow-up interview. “In 2006, when we became a public company, it was a tough moly market . . . no one really had a sense of what moly was. So we looked for a commodity that was better known, and we landed on copper.”

The company’s research shows the prices of the two metals have a lower correlation than what might be expected, as the copper price is more tied to residential demand, while moly is more connected to steel and industrial demand.

“Copper and moly both do well when the economy is strong, but they also have different demand-and-supply cycles,” he says.

 This is especially evident on the supply side. Unlike with moly, most analysts think copper’s supply surplus is a short-term situation, as major copper mines age and come off stream.

It has Loughrey feeling bullish on the red metal’s long-term prospects — as well as gold’s — and warming to the idea that Thompson Creek could one day become a copper and gold company.

“The numbers tell the story,” he says. “By 2014 or 2015, we are moving to become a copper and gold company on the basis of revenue.”

Not that it was drawn up that way when the company first started looking into copper some eight years ago.

“Sometimes you get to where you are because that’s where you were driving to, and sometimes you find yourself there unexpectedly,” he says. “Most of our expectations showed that we would be a fifty-fifty copper and moly company going forward, but if we don’t restart stripping at Thompson, it’s hard to see that happening.”

Along with the shift in production profile, Mount Milligan will likely restructure the company’s $1-billion debt.

“It is better for us to be in production first and then get re-rated,” he says. “You get more credit if you are in production for a while.”

The company is paying down US$100 million in debt each year, and the first principal repayments begin in 2016. It has already gotten rid of restrictive covenants that were formerly attached to the debt.

Amidst so much change, it is easy to lose sight of the impressive execution that Thompson Creek continues to demonstrate.

Moly production for the quarter was up 74% year-over-year to 7.7 million lb., while cash costs came down to US$5.91 from US$12.95 per lb.

The solid numbers were built on the Thompson Creek mine’s consistent performance and improving economics at its Endako mine in B.C.

Also positive was the fact that sales were up 18%. Not so positive was the 19% price drop to US$11.87 per lb.

For the quarter the company generated US$109 million in revenues and a net income of US$900,000.

Thompson Creek reaffirmed its production and cash-cost guidance for the year, which is estimated to be 27.4 million to 30.5 million lb. moly at cash costs of US$6.50 to $7.50 per lb,

The company has US$469 million cash and expects capex for the year to come in at between US$440 million and US$480 million, most of which is going to Mount Milligan.