Molybdenum. It's the mineral you can't pronounce, probably hadn't heard of a couple years ago, and isn't nearly as hot as it used to be.That, at least, is a reasonable conclusion from looking at the share prices of molybdenum miners.
A big part of the story, as with all industrial commodities, relied on the ever-expanding, insatiable Chinese economy, a concept that's taken a few dings in recent months. As the spot price of molybdenum has declined, so too have the shares of its producers, many by two-thirds or more.
And this is where we find TSX-listed Thompson Creek Metals. The stock traded above $15 at the beginning of 2011; it's now struggling to stay above $2.50, a painful 80 per cent drop. There are perfectly good reasons for the decline; however, the molybdenum story also remains compelling enough to make Thompson Creek an intriguing possibility for investors willing to take on a significant amount of risk.
Named for its molybdenum-producing mine in Idaho, Thompson Creek also operates mines in Pennsylvania and British Columbia, and has three more projects in B.C., including its Mount Milligan copper-and-gold asset located 155 kilometres northwest of Prince George.
Thompson Creek's 2012 has been pretty much what investors do not want from a mining company. The price it's realized from molybdenum sales has dropped by nearly 20 per cent. At the same time, it's on track to produce less of the mineral. And the company's cash costs of mining each pound of molybdenum are running more than 50 per cent above 2011 levels due to operational problems.
Savvy readers can surmise that this adds up to problems with profitability. While the company reported $288.7-million in net income on $661.3-million in 2011 sales, a delightful 43 per cent net margin, 2012 is looking like a loser. According to Capital IQ, Thompson Creek is expected to post a $21-million net loss on just under $460-million in sales this year. And, distressingly, the company has battled this year to finance its operations and avoid violating its covenants with its bankers. It obtained permission from the bankers to issue debt in May, and, in part to avoid a covenant breach this fall, agreed to sell a chunk of future gold production from its Mount Milligan project to Royal Gold.
The Royal Gold deal "should eliminate the need for additional financing for Mount Milligan under our base case assumptions," says analyst Fraser Phillips of RBC Dominion Securities Inc. "However, financing risk remains given the current macro environment, falling moly prices, the possibility of cost overruns, and completion and start-risk, and we believe this will continue to weigh on the shares in the near-term."
Investors who like healthy balance sheets, growing earnings, and minimal risk can check out now, if they haven't already. Investors with an appetite for taking on big risks for outsized gains, however, should read on.
Mr. Phillips has a "market perform" rating, but a $3.85 12-month price target, which is 50 per cent above current levels. And the period beyond the next 12 months seems most promising.
"Longer term, we continue to believe that the moly market could strengthen significantly once sustained demand growth is re-established, and we believe [Thompson Creek] is well-positioned to benefit from any rally," Mr. Phillips says. "Mount Milligan adds growth and diversification and offers significant upside potential once in production."
Look to the past: At about $2.50, Thompson Creek is trading at less than 1.5 times its calendar 2011 earnings per share of $1.71.
Look to the hopes for the future: It trades at 1.3 times Mr. Phillips' estimate for 2014 operating earnings of $1.92. Its current enterprise value – market capitalization plus net debt – is 0.5 times Capital IQ's estimate of 2014 revenue.
The molybdenum story may have temporarily lost its lustre. If the metal shines again, however, Thompson Creek is poised to shine right along with it.
David Milstead