Wednesday, March 9, 2011

Further Notes, Thompson Creek

A couple more notes on Thompson Creek:

1. They have to build the infrastructure at Mt Milligan and another site, which will cost $350M in 2011, likely will run cash to a bit less than $0 in 2011-2012, (currently net positive cash balance after the acquisition of Mt Milligan is about $300M). As long as copper and gold prices stay where they are, this is ok -- I would say copper prices are more vulnerable than gold prices out to 2013.

The expected of revenue from Mt Milligan from copper is $243M per annum at $3,50 lb copper (81M lbs) and from gold is $230M at $1200 gold (relatively even split copper gold). So the expected revenue from Mt Milligan will be about the same as current total sales (2010 sales of $594.8M).

2. Along with note 1, TC just bought Mt Milligan in Oct 2010 for $700M. They financed this with a stock issuance and also a gold forward sales agreement with a company called Rand Gold (I looked at this, and it looks ok). But now as mentioned in point 1, they have to build the mine infrastructure.

3. Molybdenum production will decline at their main Moly mine, Thompson Creek in Idaho in 2012, overall Moly production is expected to be down to 26-28 M lbs in 2012 from 31-33M lbs in 2011. They have to also spend $181M to expand their other Moly mine, Endako, in 2011. Further, cash costs are going up to the $9 range per lb for the thompson creek mine from $7 range in 2011. Endako is not as high quality an asset (grade of 0.,04% Moly verses 0.08% at Thompson Creek). It appears Moly production at Thompson will stablize after 2012, but I am not sure -- mine life currently is 11-14 years at Thompson Creek. Mine life at Endako is also 15 years.

4. Moly prices may come under pressure in 2014, when the largest Moly project in the Western Hemisphere, owned by Moly Corp (ticker: GMO) comes online This project will approximately double US production of Moly, producing 50M lbs per annum of Moly current US production is 56M lbs according to the USGS: http://minerals.usgs.gov/minerals/pubs/commodity/molybdenum/mcs-2011-molyb.pdf World production of Moly is 234M lbs so General Moly will add about 12.8% to world supply. General Moly has Chinese financing for its project so it is most likely going through.

5. Lastly, TC has 22M warrants outstanding with an exercise price of $9, which is actually a lot. These expire on Oct 11, 2011, so the stock could be under pressure from these -- my understanding is that TC will have to pay out cash for the exercise of these warrants. At a stock price of $12.50, this is $3.50*22M or $77M, which is actually going to drain the cash balance of TC further.

So in summary, TC is interesting however will likely be under pressure through 2011 until visibility on the Mt Milligan project is more clear, which will be sometime in 2013. Further, currently copper and some other industrial metals are weakening in anticipation of perhaps less stimulus from the major economies and therefore lower economic growth. So TC (I think) won't see a breakout until 2012 (but can watch the co, see if it gets close to $10 where the warrant exercise won't be such an issue).

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