Thompson Creek: Likely Needs Much Higher Metal Prices To Avoid Restructuring

| About: Thompson Creek (TCPTF)

Summary

Thompson Creek reached 60,000 tonnes per day of mill throughput at Mount Milligan by the end of 2015, but needs to demonstrate consistent performance.

2016 guidance indicates that EBITDA is likely to be below $100 million. Cash burn may be around $75 million to $100 million at current prices.

$2 copper doesn't work for Thompson Creek. Likely $3+ copper by 2017 is needed to make refinancing the secured debt achievable.

$3.50 copper may be needed to deal effectively with its unsecured debt if the molybdenum operations remain idled.

Thompson Creek (TC) announced Q4 2015 production results and gave initial guidance for 2016. This guidance indicates that 2016 is likely to be a challenging year for Thompson Creek, with estimated cash burn of $75 million to $100 million. Thompson Creek probably needs copper to reach over $3 by 2017 to avoid restructuring.

Thompson Creek's share price has fallen significantly as copper prices decrease, and as a result its shares have been delisted from the NYSE. Thompson Creek is expected to trade as TCPTF on the OTCQX market and also trades as TCM on the Toronto Stock Exchange.

Notes On Q4 Performance

Thompson Creek ended up with 71.4 million pounds of payable copper production and 218,100 ounces of payable gold production during 2015. This compares to my expectations for 72 million pounds of payable copper production and 210,000 ounces of payable gold production.

Thompson Creek's production was within its most recent guidance, with copper production coming in at the low end of guidance, and gold at the top end of guidance. The copper production was negatively affected by the average daily mill throughput at Mount Milligan, which came in at 48,176 tonnes per day compared to my expectations for 51,000 tonnes per day. Gold production was positively affected by high gold grades of 0.63 grams per tonne, higher than management's expectations for 0.5 grams per tonne gold grades in the second half of 2015.

Thompson Creek did show some progress with throughput at Mount Milligan, reaching an average daily throughput of 61,212 tonnes per day during the last week of December and averaging 59,862 tonnes per day in January so far. Thus it reached its goal of hitting 60,000 tonnes per day by the end of 2015, but has not shown that it can consistently maintain high levels of mill throughput for extended periods of time yet.

2016 Guidance

Thompson Creek provided 2016 guidance that includes increased gold production and decreased copper production as it focuses on mining areas with a higher gold grade due to the current weakness in copper prices.

Click to enlarge

Source: Thompson Creek

I've worked out Thompson Creek's EBITDA from Mount Milligan based on the midpoint of its guidance, including allocating $10 million in selling and marketing expense and $20 million in general and administrative expense to it. EBITDA would range from around $35 million at $1,000 gold and $1.75 copper, to $104 million at $1,200 gold and $2.50 copper. Thompson Creek's molybdenum business is expected to be cash flow neutral, so I've ignored it in this article.

Mount Milligan EBITDA in $ Millions

Gold/Copper

$1.75

$2.00

$2.25

$2.50

$1,000

$35

$50

$65

$80

$1,100

$47

$62

$77

$92

$1,200

$59

$74

$89

$104

Click to enlarge

Thompson Creek has approximately $80 million in cash interest, along with plans for $52 million in capital expenditures in 2016. It also has $24 million in lease obligations due in 2016. Factoring those items in and adjusting for $5 million in stock based compensation results in expectations for $116 million in cash burn at $1,000 gold and $1.75 copper, while $2.50 copper and $1,200 gold reduces the cash burn to $47 million.

2016 Cash Flow In $ Millions

Gold/Copper

$1.75

$2.00

$2.25

$2.50

$1,000

-$116

-$101

-$86

-$71

$1,100

-$104

-$89

-$74

-$59

$1,200

-$92

-$77

-$62

-$47

Click to enlarge

Thompson Creek did assume an exchange rate of US$1.00 to CDN$1.35 in its calculations, and the Canadian dollar is weaker right now. A change of $0.10 in the exchange rate would add roughly $13 million to Thompson Creek's results.

Options For Thompson Creek

Thompson Creek appears likely to burn around $75 million to $100 million during 2016 if copper and gold prices remain near current levels. It is almost certainly not going to be able to pay its 2017 secured debt maturity with cash on hand.

If copper gets back up to $3 or more by 2017, I think Thompson Creek may be able to refinance its secured debt, although it probably needs to have copper get closer to $3.50 (or for gold to significantly increase) to get its leverage ratio to a point where the unsecureds can probably be refinanced with the molybdenum mines still idled.

Thompson Creek's ability to repurchase unsecured debt at a discount may be limited by its secured bond indentures. Payments for unsecured debt repurchases appear to be limited to 50% of consolidated net income since November 2012 (as part of a larger formula). Although I haven't done the calculations for consolidated net income as defined in the indentures, it seems very likely that Thompson Creek's ability to make unsecured debt repurchases is severely constrained.

Thompson Creek's remaining option to deal with its debt (absent a significant increase in metals prices) is to do another gold streaming deal and then use the proceeds to pay off its secured debt and repurchase unsecured debt at a discount (since the secured debt would no longer constrain unsecured debt repurchases once it is gone). However, such a deal would lower Thompson Creek's EBITDA and management may decide that it would rather face a potential restructuring to wipe out much of the debt rather than constrain Thompson Creek's future earnings potential via a streaming deal.

Conclusion

Thompson Creek appears on track to burn around $75 million to $100 million during 2016, in large part due to its high interest costs combined with weak metals prices. As it currently stands, I would say that Thompson Creek probably needs copper prices to reach over $3 by 2017 for it to avoid restructuring. While Thompson Creek could do a gold streaming deal to address its debt, I think there is a high chance that it will decide not to limit its future earnings potential and roll the dice on $3+ copper or bust instead.

Disclosure: I am/we are long TC.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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