Friday 30th September 2016

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Streaming Through Difficulties

Thompson Creek Sees 3Q 2013 Copper-Gold Production

By Ted Niles

Thompson Creek Metals Company Inc TSX:TCM derived two advantages from its acquisition of Terrane Metals in October 2010. An outstanding asset in the Mt Milligan copper-gold project, due to begin production 3Q 2013, and an opportunity to broaden the company’s focus from pure molybdenum producer. Nevertheless, 2011′s growing pains have been sharp, and shares of Thompson Creek have lost half their value. “We’re living in an inflationary world in terms of building these mines,” Chairman and CEO Kevin Loughrey remarks. “It’s just something we have to live with.”

A number of factors have conspired against the company, including the recent drop in value of the Canadian dollar, but the main culprit is the recent increase to capital expenditures at the Mt Milligan project. Located 90 kilometres north of Prince George, BC, it has NI 43-101 proven and probable mineral reserves of an impressive 6.02 million ounces gold and 2.12 billion pounds copper. A 2009 feasibility study estimated a 22-year mine life with annual production of 194,500 ounces gold and 81 million pounds copper. Capex for the project was originally set at $915 million, but Thompson Creek announced May 6 that this had risen to $1.27 billion, due to increases in the cost of labour and material as well as the exchange rate.

Thompson Creek Sees 3Q 2013 Copper-Gold Production

A lacklustre 3Q performance from the company’s two molybdenum mines—Idaho’s Thompson Creek and BC’s Endako—has only exacerbated the problem. “Looking at it in a vacuum,” Loughrey says, “it was a tough quarter with production down and costs up.” Delays in the mill-expansion program at Endako have resulted in a 15% capital-cost increase from the original estimate of $550 million. However, Loughrey argues that setbacks at the Thompson Creek mine are more appearance than reality. “We sequenced things at Thompson Creek differently primarily for safety. And the mining engineers would say that, from an efficiency standpoint, this is the best way to do it. In other words, at the end of the year, we’ll have spent less money doing it that way. If you step back from the results a little bit and look at the entire year, it’s exactly where we thought we would be.”

These increased costs have left Thompson Creek with a funding problem. According to the company’s 3Q investor report, estimated capital expenditures exceed its cash resources by $83.3 million. Furthermore, the company’s depressed share price prevented it recently from exercising $220 million in warrants.

“As a result of not getting the warrants and the capital projects inflating a little bit, we’re kind of close financially,” explains Loughrey. “If the molybdenum price rebounded strongly enough for a while, we probably wouldn’t need the financing. Not wanting to count on that, we think it’s appropriate that we do some additional financing. So we’ll be out looking to see what we can do with the gold in terms of assuring that we have enough cash in hand to get those projects built.”

So Thompson Creek will likely enter into another gold-streaming arrangement, similar to the one it made with Royal Gold Inc TSX:RGL when it acquired Mt Milligan in 2010. For total consideration of $311.5 million, Royal Gold acquired the right to 25% of the payable gold from the project. Given that gold is much more valuable than 13 months ago, Thompson Creek would likely pull off another streaming financing—estimated by RBC Capital Markets analyst Fraser Phillips at between $100 million and $300 million—with a smaller stream.

Seeking Alpha’s Vince Martin maintained November 23 that while the company’s funding issue is very real, the gold-streaming option presents “a very clear solution,” adding, “When the concern over the funding gap finally disappears, what will remain is a vastly undervalued company.”

Funding shortfall aside, Loughrey is pleased with progress at Mt Milligan. “We’re very much on schedule, maybe even a tad ahead of schedule in most respects there,” he reports. “The engineering work is about 75% done, which is huge because everything else follows engineering. We did a study of every major mine plan that we could find over the past year, and not one of them had come in on budget. Over half of the material that we need for Mt Milligan has been purchased, and over half of the cost of that $1.27 billion is committed. The price is firm, so that leaves less than half subject to inflationary pressures.”

We’re quite pleased with where we are strategically. We have some tactical issues to deal with but that’s why they call it work —Kevin Loughrey

Loughrey is confident that next year’s production projections for the Thompson Creek and Endako molybdenum mines, 26 to 28 million pounds at $8 a pound, will be met. “We can already see that we’re starting on our way back, and 2012 will be a more typically sequenced year,” he says.

Regarding the market for molybdenum generally, Loughrey adds, “It has apparently bottomed out and has started to move back up. We think it’ll continue, but we see caution in the marketplace. I always point out that the difference from this and 2008 was that then the actual demand dropped off the table. There was no demand; we had lots of inventory; and so we were in this destocking phenomenon. But we don’t have any inventory now, so that’s much different.”

“If this is uncertainty and weak economic activity,” Loughrey concludes, “then we can withstand this. We won’t do great, but we’ll do okay. But I believe there’s more upside potential now than down frankly. We’re quite pleased with where we are strategically. We have some tactical issues to deal with, but that’s why they call it work. I think we’ll emerge really nicely.”

At press time, Thompson Creek had 167.9 million shares trading at $7.15 for a market cap of $1.2 billion. Third-quarter financials released November 7 revealed 3Q revenue of $154.8 million (compared to $161.8 million for 3Q 2010). The company sold 9.6 million pounds of molybdenum (10.3 million pounds in 3Q 2010) and produced 3.7 million pounds (8 million pounds in 3Q 2010). Foreign exchange losses were $23.9 million. Net income was $45.6 million, $0.27 per share ($31.1 million in 3Q 2010). The company had $365.4 million cash and equivalents September 30 and total debt of $368 million, compared to debt of $22 million December 31, 2010.

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