Holes in Them Thar Hills
03/10/2011 2:39 pm EST
It clearly hasn’t been enough.
On February 24, Thompson Creek Metals (NYSE: TC) reported fourth-quarter and full-year results that showed record production of molybdenum in 2010, as well as a fourth-quarter revenue increase of 48%.
Net income, adjusted to exclude the accounting loss from outstanding stock warrants (incurred when the company switched to US-style GAAP accounting in 2010), increased in the quarter by 43%.
Thompson Creek shares closed at $13.58 that day—and it’s been pretty much downhill ever since. On March 9, the shares closed at $12.28.
Two problems, one short term and one long term, explain that trajectory, I think.
In the short-term, it’s all about oil. Thompson Creek mines molybdenum (primarily, although the company acquired a copper- and gold-mining company last year), which is used to produce steel alloys that are used in the aerospace and automobile industries, among others.
With oil prices surging, the assumption is that demand for cars and planes will fall, with demand for these steel alloys—and molybdenum—following the same downward path.
We’ve got recent experience with what happens to the price of molybdenum when the economy slumps and demand for autos and planes falls: Molybdenum prices averaged $15.67 a pound in 2010, quite a recovery from $11.28 a pound in 2009.
The fear now is that the crisis in Libya will turn into a crisis in Saudi Arabia serious enough to send oil prices to a level that sinks the global economy again. If you think that’s likely—and a significant number of traders do—then you don’t want to own molybdenum or Thompson Creek Metals.
In my opinion, the current high price of oil is closer to a retreat than to $150 or $200 a barrel. I do expect the Libyan civil war to drag on—keeping oil prices high and investors on edge. But I do expect those prices to retreat below $100 a barrel when the fighting is over.
In other words, I’m inclined to tough this one out with Thompson Creek shares, because the rebound is likely to be very quick once the fighting ends, and it’s just about impossible to predict when the fighting will cease.
The long-term problem is actually more worrisome—although I believe the company is taking the right steps to fix it.
Thompson Creek is going to start to see a drop in production from its flagship Thompson Creek Mine in 2012. According to company presentations, molybdenum production will go from an actual 32.6 million pounds in 2010, to a projected 30 to 33 million pounds in 2011, and then 26 to 28 million pounds in 2012.
The entire drop off is attributable to the Thompson Creek Mine—where the company projects production to go from 24 million pounds in 2010 to 15 to 16 million pounds in 2012.
At the same time, costs at Thompson Creek will climb from $5.81 a pound in 2010 to a projected $6 to $7 a pound in 2011, to $8.50 to $9 a pound in 2012.
That kind of cost increase isn’t unusual when a mine has to move more dirt to recover the same amount of ore. But it certainly takes some of the gloss off the projected increase in the price of molybdenum over that period.
For example, the projected increase in the price of molybdenum to $21.75 a pound, from the $15.67 of 2010, isn’t pure gravy that drops straight to the bottom line. Instead it’s a necessity to make up for rising costs and falling production.
It’s not that the company hasn’t been doing anything about the problem, or that it doesn’t have a plan. It’s that the plan has a hole in 2012.
In 2013, the Mount Milligan copper-gold project is expected to go into production, with annual revenue projected at $320 million to $720 million in years one through six. (Thompson Creek Metals’ total 2010 revenue was $595 million.)
The company is in the midst of developing a 760-million-pound molybdenum resource at Mt. Emmons in Colorado, and is doing feasibility studies for the copper-silver-molybdenum Berg project in British Columbia.
None of this—or the acquisitions the company is now scouting in Latin America—will completely fill the 2012 hole.
A recovery in molybdenum prices after a resolution of the Libyan crisis would do good things for the stock. But after that, you’re still looking at a company with a hole in its production profile.
If you don’t own this, I’d wait until we’re closer to 2012 and the fear has had a chance to ripen. If you do own it, either decide to be patient until the company’s mines come in, or decide to sell on any post-Libya bounce.
I certainly wouldn’t look at current weakness as an opportunity to load up the truck.
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 (JUBAX ), may or may not now own positions in any stock mentioned in this post. The fund did own shares of Thompson Creek Metals as of the end of January. For a full list of the stocks in the fund as of the end of January, see the fund’s portfolio here.