Crunching the Numbers on Thompson Creek Metals
May 11th 2012 2:18PM
Updated May 11th 2012 2:22PM
Grab a piece of unopened mail and flip it over, 'cause we're about to run some timely back-of-the-envelope numbers on Thompson Creek Metals (NYS: TC) .
If you are not familiar with the company, please begin here before continuing. Briefly stated, this is a major producer of molybdenum with 2012 production estimated at a substantial 26 million to 28 million pounds. Beginning in the second half of 2013, the miner will make a transformational move into copper and gold with the start-up of the long-life Mount Milligan mine.
Now, the market has shown itself quite wary of major mine construction projects of late -- and with good reason. The industry has experienced some truly gut-wrenching escalation in the costs for mine construction. Over a five-year period, the estimated price tag for Barrick Gold's (NYS: ABX) 75%-owned Cerro Casale mine has tripled from $2 billion to $6 billion. And for an example from Thompson Creek's own region, Teck Resources' (NYS: TCK) Galore Creek joint venture with NovaGold Resources (ASE: NG) has seen projected capital costs surge 373% since 2006 to $5.2 billion!
Since Thompson Creek's $700 million Canadian dollar acquisition of Terrane Metals in 2010, the anticipated capital cost for Mount Milligan has surged from CA$915 million to between CA$1.4 billion and CA$1.5 billion. With cost inflation of this sort in play, it's a good thing Mt. Milligan is a phenomenally attractive copper and gold project that will remain abundantly lucrative, even with the adjusted capital cost structure. (More on that in a moment.) Furthermore, with the project already well into construction, I presume diminished risk of further cost escalation beyond the revised estimate.
Accordingly, Thompson Creek has been forced to get creative with financing, and this week it raised $412 million through senior notes and tangible equity units to join the $270 million raised last December through a second gold royalty stream with Royal Gold (NAS: RGLD) . On the back of my envelope, I find the company with nearly CA$750 million already standing by to cover the expected remaining cost of between CA$799 million and CA$929 million. So we're very close, and I give the company's cash flow from existing operations a strong chance of covering the difference (thanks in part to the newly expanded Endako mill).
Meanwhile, Thompson Creek's shares have suffered quite a beating from the latest round of fundraising. While existing shareholders like me lick our wounds and maintain our outlook on the long-term profit potential of Mount Milligan, newcomers would appear to have quite a value opportunity before them. You see, as Thompson Creek CEO Kevin Loughrey pointed out to my readers, at current metal prices we will enjoy back-of-the-envelope operating profit of roughly $400 million annually from this one mine alone! Using the parameters offered in that interview, investors can plug in their own long-term price expectations for gold and copper to estimate the payback period for the increased construction cost. But with 22 years of mine life to offer, Mount Milligan makes me happy to wait patiently for the cash-flow bonanza to come. I look forward to adding to my own position near these levels, and despite the recent carnage I will maintain my bullish CAPScall on the stock to reflect my resiliently bullish long-term outlook.
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At the time this article was published Fool contributor Christopher Barker can be found blogging actively and acting Foolishly within the CAPS community under the username TMFSinchiruna. He tweets. He owns shares of Teck Resources and Thompson Creek Metals. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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