Update Thompson Creek Metals (TC)

03/01/2012 5:01 pm EST

Focus: STOCKS

Jim Jubak

Founder and Editor, JubakPicks.com

It looks like the rally in shares of Thompson Creek Metals (TC) is over, put to an end by the company’s own fourth quarter earnings report on February 27. The stock had climbed from $5.93 on November 25, the start of the current market rally, to $9.36 on February 3. Today shares closed at $7.29.

I don’t own molybdenum miner Thompson Creek in my 12 to 18 month Jubak’s Picks portfolio http://jubakpicks.com/ anymore (having sold it out of that portfolio on May 4, 2011) but the stock is still a member of my long-term Jubak Picks portfolio  http://jubakpicks.com//.

In the long-term I continue to like the stock as a way to play the growing global demand for molybdenum, a key ingredient in high-strength steel alloys. But I wouldn’t buy more or start a new position just yet.

This quarter is a good reminder that for a mining company growing sales isn’t all that counts.

In 2011 Thompson Creek saw record sales of 40.1 million pounds of molybdenum and record revenue of $669 million.

But higher costs crushed Thompson Creek’s bottom line. Cash costs soared to $12.69 a pound in the fourth quarter of 2011 from $5.81 in the fourth quarter of 2010. For all of 2011 cash costs per pound came to $7.94, up from $6.07 in 2010. That took earnings per share—excluding one-time gains in both 2010 and 2011—down to 73 cents a share for 2011 against $1.07 a share in 2010.

But rising production costs weren’t the worst part of the cost picture at Thompson Creek. The company announced that capital costs for 2012 would climb to a range of $868 million to $952 million as the company expanded its Endarko mill and continued development at its Mt. Milligan copper and gold mine. According to Deutsche Bank, that’s a big $355 million increase from previous estimates. Capital spending in 2010 came to $803 million.

I don’t think this kind of capital spending revision is all that unusual in the mining industry right now where projects at lots of miners are facing big cost increases and big delays.

But for a company as small as Thompson Creek—current market capitalization is just $1.22 billion—slippage of $355 million is a big deal.

Right now the company is projecting that its capital budget will drop to just $205 million to $265 million in 2013. You can image what whacking $600 million or so off capital spending would do for the bottom line of a company with $669 million in annual revenue.

But the problem is, after the last miss on capital spending, investors aren’t going to believe that capital spending reduction until they see it. I’d wait a quarter or two or three on these shares to see if, say, around the middle of 2012, management thinks capital spending is still on schedule for 2012 and 2013.

Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. The mutual fund I manage, Jubak Global Equity Fund http://jubakfund.com/ , may or may not now own positions in any stock mentioned in this post. The fund did not own shares of Thompson Creek as of the end of December. For a full list of the stocks in the fund as of the end of December see the fund’s portfolio at http://jubakfund.com/about-the-fund/holdings/

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