Thompson Creek: Despite Improvements, Equity Is Still Out Of The Money

| About: Thompson Creek (TCPTF)

Summary

Operating performance at Mount Milligan appears to have finally reached a consistent level near the 60,000 tpd target.

Copper and gold prices have also gone up significantly in the last few months.

Metal prices are still well below what it would take for me to feel comfortable about the equity though.

EBITDA at current metal prices and the current exchange rate is estimated at $80 million, while 2016 cash burn may reach $95 million.

The situation is improving for Thompson Creek's bonds (although the unsecureds are still quite impaired at current metal prices). Equity needs copper prices to go up close to $1.

Thompson Creek (OTCQX:TCPTF) appears to have finally achieved consistent performance at Mount Milligan, with mill throughput reaching its highest quarterly levels by far. As well, copper and gold prices have rallied significantly from early January. That being said, the metal prices are still well below what is needed for Thompson Creek's equity to have value in the long run.

Q1 Production Results

The daily mill throughput at Mount Milligan in Q1 2016 increased by 21% from Q4 2015 levels. This was by far the best quarter for average throughput to date. The increase was driven by both an increase in mill availability and in throughout per available mill hour. Given that daily mill throughput has been fairly strong since late December, it seems likely that throughput performance can be sustained near the 60,000 tonnes per day.

Q1 2015

Q2 2015

Q3 2015

Q4 2015

Q1 2016

Average Daily Mill Throughput (Tonnes)

39,569

44,940

44,077

48,176

58,099

Mill Availability (%)

87.3%

91.2%

90.2%

90.6%

96.6%

Throughput Per Available Hour (Tonnes)

1,889

2,053

2,036

2,216

2,506

Click to enlarge

The copper and gold recoveries did fall during Q1 2016, although that was largely expected according to Thompson Creek's earlier comments about recovery levels. I would say that Mount Milligan's production is still on track to meet guidance.

Effect Of Metal Prices On Results

Thompson Creek's guidance uses an weighted average gold price of $750 per ounce, which incorporate a price of around $1,095 per ounce for the 47.75% share that doesn't go to Royal Gold. At the current gold price of just over $1,250 per ounce, the weighted average gold price is approximately $825 per ounce. The gold price increase helps reduce the unit cash cost per payable pound of copper produced on a byproduct basis.

On the other hand, Thompson Creek's guidance uses an exchange rate of US$1.00 = C$1.35, while the current exchange rate is closer to US$1.00 = C$1.27. That change in the exchange rate offsets some of the improvement seen in gold and copper prices recently. Using the current gold price and exchange rate results in an estimated cash cost of US$0.39 per payable pound of copper on a byproduct basis. This is around $0.08 per point less than the midpoint of guidance.

With copper prices at around $2.22 per pound, that means that Thompson Creek is on track for approximately $80 million EBITDA if the full year metal prices are around current levels. Cash burn is estimated at approximately $95 million in 2016 at the current metal prices and exchange rates, and after including the increased secondary crusher capital expenditures as Thompson Creek is moving forward with that project.

The situation in 2017 should be improved as the secondary crusher comes on line, improving recoveries, cost and throughput. As well, 2017 should not have secondary crusher capital expenditures affecting cash flow either. Still, it seems fairly likely that Thompson Creek will have no more than $100 million in cash as it reaches its 2017 secured debt maturity and attempts to refinance it.

Conclusion

While the consistent mill throughput performance at Mount Milligan and higher copper and gold prices have improved Thompson Creek's outlook, there is a very good chance that these improvements are too little, too late. Thompson Creek is doing what it needs to operationally now, but copper and gold prices are still well below what they need to be.

Thompson Creek has a wave of debt maturities coming in 2017 to 2019 and will probably need to refinance its debt due to its cash balance being limited. If the current copper and gold prices are maintained, it should support a full return on the secured notes and a partial return on the unsecured notes. The equity remains an out of the money option on higher metal prices though, with copper prices needing to go up nearly $1 per pound for the equity to be in the money.

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Disclosure: I am/we are long TCPTF.

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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