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Streaming Through Difficulties

November 30th, 2011

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.

A $26 Per Oz Bargain

October 25th, 2011

Seabridge Shares Are Cheap at the Price

By Ted Niles

Rudi Fronk believes Seabridge Gold Inc TSX:SEA is one of the cheapest gold stocks in the world. A glance at the numbers would seem to support this. At a market cap of roughly $1 billion, with proven and probable reserves at its KSM project in BC of 38.5 million ounces gold, Seabridge stock is now trading at approximately $26 per ounce. And that’s ignoring considerable additional reserves at the project, including 10 billion pounds copper.

The President and CEO notes that the nearest comparable company, NovaGold Resources Inc TSX:NG—with advanced-stage projects in Alaska and BC—is “trading at five to six times our valuation on a reserve basis.” He explains the inconsistency, “The big difference between NovaGold and Seabridge is they already have sponsorship in their projects with big joint venture partners [i.e. Barrick Gold Corporation ABX:CA and Teck Resources Limited TSX:TCK.B]; we don’t yet. When we get that sponsorship through joint ventures, we would expect to see a pretty significant re-rating in our share price. I’d say we’re getting close to that point now.”

Seabridge Shares Are Cheap at the Price

KSM is located 65 kilometres northwest of Stewart, BC and about 20 kilometres southeast of the past-producing Eskay Creek Mine. The project consists of four deposits—Kerr, Sulphurets, Mitchell and Iron Cap—and, in addition to the 38.5 million ounces gold and 10 billion pounds copper already mentioned, it has silver reserves of 214 million ounces and molybdenum reserves of 257 million pounds. Fronk declares, “KSM is the largest undeveloped gold-copper project in the world today in terms of reserves.”

The company is in the midst of a 12,000-metre infill drill program at the Sulphurets deposit to upgrade roughly three million ounces of inferred resources to reserves. October 20 assays include

  • 1.03 g/t gold and 0.1% copper over 182 metres
  • 0.96 g/t gold and 0.1% copper over 150 metres
  • 0.93 g/t gold and 0.51% copper over 143 metres
  • 0.74 g/t gold and 0.3% copper over 105 metres
  • 0.8 g/t gold and 0.47% copper over 86.5 metres
  • 0.38 g/t gold and 0.27% copper over 152 metres
  • 1.57 g/t gold and 0.04% copper over 36.6 metres

Fronk comments that the results “are better than what was expected. In addition to the inferred level, we’re also finding unclassified blocks that we’ll move up to higher categories as well. So I think our objective of three million ounces in addition to reserves is easily going to be achieved there.”

Calculated using a gold price of $1,069 per ounce, Seabridge’s May 2011 updated prefeasibility study gives a base case net present value (at a 5% discount rate) for the KSM project of $2.6 billion, an internal rate of return of 9.2% and a payback period of 6.6 years. The mine life is estimated to be 52 years with average life-of-mine cash operating costs of $231 per ounce of gold after base metal credits.

In addition to updating inferred resources at Sulphurets, Seabridge is also currently testing the Mitchell deposit for underground potential. “Mitchell is the largest of the four deposits—in fact it’s the largest gold deposit ever found in Canada,” Fronk says. “It now has more than a 40-year mine life on an open-pit basis, but there’s a lot of material down dip that is still there as resources. Our thought is, at some point in the Mitchell open-pit life, to move to a block-cave operation to reduce the amount of strip you have to do and continue going well beyond 40 years at Mitchell. We’ve engaged a consulting firm that’s very top-level in terms of block caving, and we did six deep holes for geotechnical purposes at Mitchell this year. One of the holes intersected 810 metres of continuous mineralization from the surface.” In other words, “This ore body is unbelievable.”

When we get that sponsorship through joint ventures, we would expect to see a pretty significant re-rating in our share price —Rudi Fronk

The next major step for Seabridge is permit applications. Fronk reports, “Best-case scenario is you’re looking at 2012 and 2013 for completing the permitting process, then probably a four to five year construction period for this project.”

In spite of its relative remoteness, the KSM project has certain logistical advantages over other major projects in northern BC; namely, it is the closest project of its size to existing roads, to BC Hydro’s Northwest Transmission Line (expected to be completed by late 2013) and to Stewart’s year-round, ice-free port. In addition, Seabridge finds itself in the advantageous position of being fully funded after the June 30 closing of a $30 million private placement with Royal Gold Inc TSX:RGL. (Royal Gold was also granted the option to acquire a 1.25% net smelter royalty on all gold and silver production sales from KSM for $100 million.)

Seabridge’s other major project—Courageous Lake, comprising 85% of the Courageous Lake Greenstone Belt in the Northwest Territories—is, according to Fronk, approximately a year and a half behind the KSM project. It has a mineral resource estimate of 6.8 million ounces gold measured and indicated, and 4.5 million ounces inferred. Seabridge is spending $16 million on the project this year and expects to have a prefeasibility study completed by 2Q 2012. “We’ll have more time and more resources to spend on it after we get the deal done on KSM,” Fronk says.

Fronk sums up, “[KSM] is a project—of scale now—that really few companies in the world have the technical and financial capabilities to build. We’re not one of them. We’ve had a very open-door policy with the big gold mining and base metal companies over the last several years with a view to, at some point, partnering up. We’ve done all the work that we should be doing, and it’s almost time to hand it over to a major in some sort of transaction. Our preferred structure is a joint venture, where we stay in the deal, but they do all the heavy lifting going forward.”

Seabridge has 42.4 million shares trading at $24.61 for a market cap of $1.04 billion. Its other projects include the Grassy Mountain and Quartz Mountain properties in Oregon, the Red Mountain project in BC and the Castle-Black Rock project in Nevada.