$TC - Thompson Creek: Worth A Look Now That Molybdenum Mine Value Has Been Discounted Out Of Price Dec 19 2013, 16:54 | 6 comments | about: TC http://seekingalpha.com/article/1908621-thompson-creek-worth-a-look-now-that-molybdenum-mine-value-has-been-discounted-out-of-price?source=email_sto_bas_mat_5_18&ifp=0 Disclosure: I am long TC. (More...) Thompson Creek Metals (TC) has fallen nearly 50% since we noted in mid-September that the prospect of continued low molybdenum prices limited Thompson Creek's upside. With the fall in share price, Thompson Creek now becomes a company with some potential upside again. In fact, due to the strengthening of the US dollar versus the Canadian dollar, Thompson Creek is probably in a marginally better position than three months ago. since the metal price changes over the last three months have largely balanced out (copper up and gold down). There hasn't been any change to our assessment that its molybdenum mines are unlikely to contribute much to Thompson Creek for at least a while past 2014. The questions surrounding its solvency without molybdenum production appear to be somewhat overblown though. It should be able to generate enough cash flow from Mount Milligan to cover interest expenses and capital expenditures and then some. However, Thompson Creek is vulnerable to falls in gold and copper prices and will need to refinance its debt before its 2017 notes become due. Thompson Creek's Molybdenum Mines As noted in our prior article, the Thompson Creek mine is highly likely to be put in maintenance mode after 2014 if molybdenum prices stay below the $11 to $12 per pound level. The Endako mine will also be put in maintenance mode if prices stay at current levels since its 2014 cash production cost is expected to be $9 to $10.50 per pound. We are going to assume that both mines are going to be put into maintenance mode due to the prolonged slump in molybdenum prices. Due to molybdenum oversupply, investors in Thompson Creek should not count on the molybdenum mines to contribute anything of value for a couple years beyond 2014, and treat it as a nice bonus if they do contribute sooner than that. Thompson Creek's Financials With Mount Milligan Alone At current copper, silver and gold prices, Mount Milligan is expected to contribute $512.35 million in annual revenue during its first six years of operation. The silver production is something that we did not take into account during the earlier review of Mount Milligan. Based on the initial production results, we are going to estimate annual production of 650,000 ounces of silver, which would add $12.51 million to revenue each year. While this is fairly minor, every little bit helps with Thompson Creek at this point. The strong US dollar reduces the cost of the mine operations at Mount Milligan. The last information from Thompson Creek indicated that the cost of mine operations would be $280 million US at a $1 US to $1 CDN exchange rate. With the exchange rate currently at $1 US to $1.065 CDN, we can estimate that the cost of mine operations will fall to around $265 million US, even with some costs (such as fuel) still tied to the US dollar. One thing to note is that the cost guidance may shift as Thompson Creek's new CEO reviews the plans and operations. An update on this is expected for Q1. We are estimating SG&A at $60 million per year after Mount Milligan is in full production, although this may be reduced by an unknown amount if the molybdenum mines are put into long-term care and maintenance mode and corporate resources are reallocated as a result. Thompson Creek EBITDA Total Revenue ($ Million) Thompson Creek will have around $80 million per year in interest expenses after the tMEDS are paid back. Capital expenditures of $60 million per year may also be reduced if the molybdenum mines are in care and maintenance mode. Even at current metal prices Thompson Creek should be able to generate positive cash flow from Mount Milligan alone, although it starts to become questionable if gold and copper prices fall by an additional 10%. Thompson Creek may hedge some of its sales as a result. Thompson Creek's current valuation is at 6.4x EV/FY 2015 EBITDA, after including dilution from tMEDS (a hybrid debt-equity security issued by the company in 2012) and assuming $100 million cash versus $900 million in debt at that time. Achieving $15 million in SG&A cost reductions if the molybdenum mines are in long-term care and maintenance mode would reduce this multiple to 5.9x. Liquidity The table below shows many of the various items that will affect cash between now and the end of 2014. Please note that the table covers five quarters. Some of the items such as SG&A and Mount Milligan production costs may end up being less since Mount Milligan is building up towards full production and may not incur full costs yet. Based on guidance, we are estimating that the Thompson Creek mine will contribute $100 million in gross margin before production ceases. We are also assuming no contribution from the Endako mine at current prices. To achieve a 2014 year-end cash balance of $100 million would require receiving payment for $269 million of product from Mount Milligan by that time. This represents 52% of full year production. Since first production started in late Q3 2013 and commercial production is expected in Q1 2014, this appears to be an achievable goal as long as any ramp-up issues are only minor. Conclusion Despite the criticism Thompson Creek has gotten for cost overruns and other issues with its Mount Milligan mine project, that project may end up saving the company as its legacy molybdenum mines are set to go through an extended period of shutdown due to production costs exceeding molybdenum prices. We feel that Thompson Creek is a good candidate as a speculative mining play now that any value attributed to its molybdenum mine production has been beaten out of its share price. Thompson Creek appears to be able to survive at current metal prices and will benefit from a weaker Canadian dollar. Any value from its molybdenum mines will be a nice bonus that is not factored into our calculations. We have taken a long position in Thompson Creek's tMEDS. These are currently trading at $11.49, with an underlying share value of $10.29 ($1.91 per share times 5.3879 shares). The tMEDS are set to pay six installments of $0.40625 by maturity in May 2015 (total value $2.4375). Thompson Creek's tMEDS offer some downside protection and should deliver a better return than the common stock if the common stock is less than approximately $3.90 in May 2015. One drawback is that the tMEDS have low trading volumes compared to the common stock.