Giving credit where credit is due, Thompson Creek Metals (NYSE:TC) (OTCQX:TCPTF) seems to have turned a bit of a corner in terms of execution. There have been a series of missteps since TCM bought its flagship Mt. Milligan mine in 2009: cost overruns plagued the construction process, and a series of operational problems have lowered throughput since the mine became fully operational in late 2013.
But Thompson Creek did manage to hit a long-held target of getting mill throughput to 60,000 tons per day by the end of the year, per 2015 results released on Thursday, and maintaining that level into January. 2016 production guidance looks solid as well.
The problem is this all looks like too little and too late. The company lost its NYSE listing, unsecured debt trades at 12, and even that solid production guidance implies little, if any, free cash flow next year. There's no chance of the company repaying its debt, and any sort of refinancing seems remote. While Mt. Milligan is a great property, the economics don't work at the moment, and that mine doesn't support the current debt load, let alone any incremental equity value. There might be a speculative case for the unsecured debt, (or the secured 7.375% 2018 issue, priced at 91) but there's really no reason to chase the equity at this point.
Free Cash Flow Problems
Thompson Creek had $217 million in cash at the end of Q3, but it's facing the maturity of $314 million in secured debt in December 2017. Those bonds trade at 84, having fallen sharply over the past eighteen months.
The bull case for the equity included some level of refinancing of this debt, or in a more aggressive scenario, the repayment of the debt and the issuance of new secured debt that could be used to refinance the $500 million-plus in unsecured that comes due in 2018 and 2019.
But TCM is having trouble refinancing, according to Debtwire, and the 2016 production guidance shows why. The company is guiding for production of 55-65 million pounds of copper, and 240-270 thousand ounces of gold, at a by-product cash cost of $0.25-$0.70 per pound. The problem is that with copper below $2, even the optimistic scenario doesn't imply much in the way of cash flow. A $1.75 per pound spread on 65 million pounds implies mine-level profits of about $113 million. But TCM also has about $30 million in corporate-level expenses at its current annual run rate (~$24 million of that in cash). That implies full-year EBITDA of about $90 million - again, in the most optimistic scenario. But interest expense is about $90 million itself, while capex is guided to $52 million, and $72 million if TCM goes forward with a secondary crusher. (This assumes the moly mines run at breakeven in terms of cash flow next year, which looks aggressive as well; care and maintenance costs are in the $20 million range, and the moly segment would have burned about $20 million in cash in 2015 excluding the sale of inventory which won't recur in 2016. Some growth at the Langeloth roasting facility can help but the moly segment still seems likely to be a drag on EBITDA and operating cash flow this year.)
So TCM currently has a ~$115 million shortfall relative to the 2017 issue, yet implied normalized FCF is at least $50 million in the red. That problem doesn't get fixed by rising commodity costs, either; a $1 per pound increase in copper (50%!) and a $200 increase in gold (nearly 20%) only gets free cash flow to about $70 million (and $50 million assuming the crusher goes forward). That's still not enough to repay the 2017 debt, let alone the '18 and '19 issues.
More broadly, the guidance calls into question the oft-made argument that Mt. Milligan is a top-tier property. Certainly, its cost structure is impressive. But with over half the gold sold off in a streaming deal with Royal Gold (NASDAQ:RGLD) and 2016 EBITDA in the range of $60 million (assuming the midpoint of guidance and including a $10 million loss from moly), it's not a terribly profitable property, and there's no way it supports even the ~$650 million net debt, let alone the equity.
Bridging The Gap
The hope from TC shareholders has been that the company can either refinance or repurchase some of that debt - and the company has spent $41 million in debt repurchases through the first three quarters of 2015. The bulk of those repurchases were of the 2017 notes, somewhat oddly purchased at 107.
At current levels, open market repurchases can make a material dent - but the 2017 issue still trades at 83, and TC still doesn't have the cash to repurchase those notes. There's really no other way to raise cash; RGLD already has 52.25% of the gold, and isn't going to spend much more given the financial problems here. The moly assets have little, if any value; with moly near $5, that price needs to double, at least, for the mines to be restarted (which would cost about $100 million).
Barring a huge spike in gold and copper, along with near-flawless execution from a company with a spotty track record in that category, there's simply no value for the equity.
There might be some interest in the 2018s, last traded at 13.75. 6.6x $60 million in EBITDA implies a valuation of ~$460 million and little recovery value for the 2018s or 2019s, but both issues could benefit from (and represent a leveraged bet on) any uptick in commodity prices might change that. TCM has hired Moelis & Co. as an advisor, and open market purchases can change the calculus somewhat, perhaps providing a benefit to the unsecured bonds.
As far as the equity goes however, with copper sub-$2 and debt maturities looming, there's no way to make the math work. For any investor who wants to take a chance on the property, the unsecured debt seems a far wiser investment in terms of risk/reward, since there is some chance of some recovery value in a restructuring. Barring an astronomical rise in commodity prices, however, the chance of any value in Thompson Creek equity seems zero at this point.
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