Saturday, July 20, 2013

Thompson Creek Metals (TC) and Molybdenum Prices

Thompson Creek Metals (TC) mines molybdenum.  It's really helpful that they currently display the market price for moly on their corporate site.  One would think that with several properties and a metallurgical facility they'd be vertically integrated enough to process their own production and that of other miners.

The CEO has been in charge of this company and its pre-merger predecessor for a long time.  It's his show and he wants to retire this year.  He has no academic training in geology or mining engineering, and much of his career involved crafting merger deals.  The COO is also a BA/law grad but with more operational experience in mining.  The rest of this team has been around mining, metallurgy, and related industries for a while.

The good news about their Thompson Creek moly mine is that they have solid 2P estimates.  The bad news is that the mine's 43-101 assumes a moly price of $12/lb.  Check the site's front page again; this week's average moly oxide price was $9.40.  Check the price of moly at InfoMine if you need a second opinion.  This mine is operating at a severe disadvantage.  The Endarko mine also has plenty of 2P ore but its estimates also depend on a long-term moly price of $12/lb.  I don't see how the company can sustain production at a price below the long-term estimate of the price it needs to be successful.

Thompson is developing other projects.  The Mt. Milligan project is almost completely developed but the Cu concentrates and Au grades are extremely poor.  The price of gold has dropped significantly since 2012.  The company's other exploration projects are too early to value, but Berg Property's low MII grades are not encouraging.

The single most important thing I've learned about the mining sector is that a mining company's valuation is determined by the relationship between its grades, its cash costs of production, and the market price of its final product.  Those things matter more than anything else.  A company cannot indefinitely produce a metal at a cash cost that exceeds that metal's world price.  Projects whose costs exceed world prices must either cut their costs or eventually shut down.  Moly prices are at four year lows.  Thompson Creek Metals had massive losses in 2012 and has just barely turned in positive net income as of March 2013.  They will need some serious cost cutting at their two moly mines or a major positive surprise in the grades at their exploratory projects.

Full disclosure:  No position in TC at this time.