Seeking Alpha
What is your profession? ×
Long/short equity
Profile| Send Message|
( followers)


Thompson Creek is still evaluating whether to invest in stripping at its Thompson Creek mine.

This decision is partially based on sustainability of higher molybdenum prices, with the coming impact of Sierra Gorda supply playing a significant factor as I anticipated in April.

A new factor is competition for limited financial resources in the form of a potential secondary crusher purchase for Mount Milligan.

The most likely scenario may be a slower stripping schedule, spreading the cost over several years to ensure positive cash flow, while allowing time for molybdenum demand to recover.

I mentioned in a previous article that much of the upside with Thompson Creek Metals (NYSE:TC) was tied to its ability to make the necessary investments in stripping to bring its Thompson Creek molybdenum mine back into production. This mine is currently scheduled to go on care and maintenance after 2014. On its Q2 2014 conference call, Thompson Creek disclosed more information about the factors influencing its decision to proceed with stripping or not. There are basically two things that need to happen for stripping at Thompson Creek to proceed. The first is that management needs to be comfortable that molybdenum prices will remain at least fairly close to current levels even with the added supply from the Sierra Gorda mine coming online. The second is that sufficient funding needs to be found to commit to the stripping project. The $80 million stripping cost is a significant investment for a company with a heavy debt load and other potential capital investments that it must decide on.

The price of molybdenum has risen significantly to over $13 per pound from the $11.50 per pound level when I wrote the previous article. This is above the $12 per pound level that I mentioned would likely convince Thompson Creek that it was worthwhile to proceed with the stripping investment. However, I also mentioned that $12+ per pound price would need to be sustained and that the opening of the Sierra Gorda mine (adding 50 million pounds of molybdenum supply per year) would have an impact on the price of molybdenum. The comments on Q2 2014 conference call confirm that management is wary that the added supply from the Sierra Gorda mine may have a significant effect on molybdenum prices. Therefore, even though molybdenum prices are well above $12 per pound right now, that may not translate into sustained prices at that level in 2016 (the earliest that Thompson Creek could resume production).

A second factor affecting the decision to invest in stripping appears to be funding related. Thompson Creek Metals already has a heavy debt load and may invest in a secondary crusher for Mount Milligan that would cost between $50 million and $75 million. That investment would bring its liquidity down close to its targeted minimum liquidity level of $75 million to $100 million and likely make proceeding with stripping at full pace unlikely. Thompson Creek needs to be careful with its liquidity right now and can't risk spending $80 million on stripping unless it is sure that the project will pay back fairly quickly. I estimate that spending $80 million on stripping in 2015 would make Thompson Creek free cash flow negative for that year. However, a large increase in metal prices (especially copper) may improve its cash flow by enough to make its decision to proceed with full pace stripping easier even if there is some uncertainty about future molybdenum prices. A significant decrease in metal prices (even if only for gold and copper, not molybdenum) may force Thompson Creek to put off stripping entirely for now. At current prices though, the most likely option seems to be a slower stripping plan that spreads out the $80 million cost over several years. This has the advantage of reducing the annual stripping cost to a level that is easily covered by Thompson Creek's cash flow. As well, production may not resume until around 2018 in that case, giving the global economy more time to recover and generate more demand, while Sierra Gorda concurrently nears the end of its five year high molybdenum production phase (production is expected to drop to 25 million pounds per year after the first five years). In such a scenario, while Thompson Creek may have some upside tied to increased metal prices, the large potential upside of restored Thompson Creek production would be delayed for several years.

Disclosure: The author is long TC. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.