Thompson Creek Metals: Gold Stream Sale Could Be Worth More Than $800 Million

| About: Thompson Creek (TCPTF)

Summary

The remaining 47.75% of the gold stream at Mount Milligan could be worth $851 million at $1,275 gold and an 8% discount rate.

This could pay off both Thompson Creek's secured and unsecured debt, although it is uncertain whether there is an interested buyer for the whole amount.

The remaining company could generate $91 million EBITDA per year at $2.50 copper between 2017 and 2019 if it executes well.

This would allow it to generate decent cash flow as the interest expense is removed.

Reduced copper and gold grades after that point mean that the molybdenum mines need to start operating again for Thompson Creek to have more than modestly positive cash flow.

One potential financing option for Thompson Creek Metals (OTCQX:TCPTF) as it attempts to deal with its upcoming debt maturities is to sell off additional portions of its gold stream. This article will attempt to look at the potential value of the gold stream as well as the effect a sale of the gold stream would have for Thompson Creek.

Gold Production At Mount Milligan

The technical report for Mount Milligan indicates the expected gold grades and recoveries during various time periods. I've adjusted the 2015 to 2019 period to just include 2017 to 2019, and have included the information below, as well as the estimated payable ounces of gold produced each year. This is based on mill throughput of 62,500 tonnes per day.

Years

Gold Grade (g/t)

Gold Recovery (%)

Payable Ounces Per Year

2017-2019

0.51

73.3%

264,579

2020-2024

0.40

72.6%

205,766

2025-2029

0.30

73.4%

155,936

2030-2034

0.26

72.6%

133,671

2035-2038

0.25

68.6%

117,144

Click to enlarge

Value Of The Gold Stream

The following table shows the value (in $ millions) of the remaining 47.75% of the gold stream at Mount Milligan based on various gold prices and discount rates. This assumes that the buyer pays Thompson Creek $435 per payable ounce, similar to the current deal with Royal Gold.

At an 8% discount rate and $1,275 per ounce gold, the remaining gold stream would be worth $851 million. For reference, Scotia Capital believes that streaming companies will look for internal rates of return of approximately 7% to 9% in future streaming deals.

At an 8% discount rate and $1,200 per ounce gold, the value of the gold stream drops to $775 million.

Gold Price / Discount Rate

5%

6%

7%

8%

9%

10%

$1,000

$687

$644

$606

$572

$542

$514

$1,100

$809

$758

$714

$673

$638

$605

$1,200

$931

$872

$821

$775

$733

$696

$1,275

$1,022

$958

$901

$851

$805

$765

$1,300

$1,052

$987

$928

$876

$829

$788

$1,400

$1,174

$1,101

$1,035

$977

$925

$879

$1,500

$1,296

$1,215

$1,143

$1,079

$1,021

$970

Click to enlarge

Effect Of Selling The Gold Stream

Taking things to an extreme, if Thompson Creek sells the rest of its gold stream, it may be able to raise enough to pay off most or all of its outstanding debt. I'd assume that Thompson Creek's ability to use secured debt will be limited if the gold stream is completely sold off, so it would need to be able to pay off most of its debt with the gold stream sale.

With 100% of its gold stream sold off, Thompson Creek would be able to deliver approximately $47 million EBITDA per year at $2 copper, $91 million EBITDA at $2.50 copper and $136 million EBITDA at $3 copper from 2017 to 2019. This does assume that mill throughput averages 62,500 tonnes per day and that recoveries are in-line with the technical report. Thompson Creek's current recoveries are below that level. As well, the molybdenum operations are assumed to be EBITDA neutral. With no interest expenses, Thompson Creek would be able to deliver positive cash flow at $2 copper, although this does require excellent mine operations to hit the throughput and recovery targets.

EBITDA would drop to $25 million at $2.50 copper and $62 million at $3 copper in the 2020 to 2024 period though. For Thompson Creek to generate a solid amount of cash flow in those years may require the molybdenum mines to start producing again.

Conclusion

Selling off the remaining 47.75% of the gold stream may raise enough money to pay off Thompson Creek's debt. The company would still be in good shape for the next few years due to the lack of interest costs. Starting in 2020 though, lower copper and gold grades means that if Thompson Creek sells off its gold stream, it will likely need the molybdenum mines to start producing again or copper prices to increase significantly in order to have more than modestly positive cash flow.

The remaining 47.75% of the gold stream would require a significant investment from the purchasing company though, so it is uncertain whether such a large deal can be made. Royal Gold has previously indicated that it wanted to keep a diversified portfolio, so it appears to be out of the running. It may be more likely that Thompson Creek sells off just a portion of the remaining gold stream and also attempts to refinance its secured debt. In that case, Thompson Creek would need to take additional actions to fully deal with its debt maturities.

The estimated value of the gold stream does indicate that selling it (or part of it) may be a viable option for Thompson Creek to deal with its debt. However, there's no guarantee that the company will make such a deal. I've seen many examples where heavily indebted companies with valuable assets don't end up selling their assets.

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