Thompson Creek Metals: Discussing A Sale Of Mount Milligan

| About: Thompson Creek (TCPTF)

Summary

Thompson Creek is reportedly seeking offers for Mount Milligan, with talk about a $780+ million value.

Mount Milligan is attractive as a Canadian mine. Miner share valuations have improved in recent months, increasing their ability to do acquisitions.

If structured as an asset sale, getting $780 million for Mount Milligan should take care of Thompson Creek's debt, although the remaining company would have limited value assets.

Any transaction is probably going to end up with the debt mostly/completely paid off. There is more uncertainty about what value will be left for the equity though.

Equity is higher risk, but not necessarily higher reward than the unsecured debt.

Thompson Creek Metals (OTCQX:TCPTF) is reportedly soliciting offers for Mount Milligan. A Globe & Mail article notes that Mount Milligan has attracted interest due to stronger gold prices and its location in a low country risk mining area (Canada). It is uncertain, however, whether the offers will involve Thompson Creek as a whole, or whether the bids are for just the Mount Milligan asset.

Potential Suitors

Kinross Gold (NYSE:KGC) and Centerra Gold (OTCPK:CAGDF) are listed in the article as two potential suitors. These seem plausible, although Centerra's continuing disputes with the Kyrgyz Republic may hamper its ability to enter into a large deal.

With a $6.42 billion market cap and $0.76 billion in cash on hand, Kinross has the ability to pull off a deal for Mount Milligan/Thompson Creek reasonably easily. Kinross is also looking at potentially losing over 400,000 gold equivalent ounces of North American production over the next few years as its Fort Knox and Kettle River mines reach the end of their lives, so adding another North American mine makes sense for it in terms of asset balance.

Centerra is a smaller company with a $1.3 billion market cap and around $400 million cash on hand, so making a deal for Mount Milligan may be tougher to accomplish. Getting a mine in a stable jurisdiction would be quite beneficial for Centerra as it has been having a challenging time with its continuing disputes with the Kyrgyz Republic. Approximately 90% of its revenue comes from the Kumtor mine located in the Kyrgyz Republic and Centerra has been attempting to diversify its operations as a result. However, the Kyrgyz Republic has also previously threatened to sue Centerra over past equity issuances that diluted its stake in the company, and may get in the way of any large acquisition attempt by Centerra.

Valuation

The Globe & Mail article mentioned that Thompson Creek "is banking" on offers of around $780 million USD ($1 billion CDN). It is uncertain how any potential deal will be structured since Thompson Creek's molybdenum assets aren't very desirable at the moment, but it does sound like an asset sale of Mount Milligan may be on the table. Getting $780+ million would allow Thompson Creek to pay off all of its debt, but it then would be left with just Langeloth plus its two idled molybdenum mines as well as a little bit of cash.

In any case, getting at least $780 million for Mount Milligan seems quite plausible. Mount Milligan's gold production is set to decline after the next few years as its gold grade goes down. The following table shows gold grades and production (assuming 62,500 tonnes per day in mill throughput after the secondary crusher is operational).

Years

Gold Grade (g/t)

Gold Recovery (%)

Payable Ounces Per Year

2017-2019

0.51

73.3%

264,579

2020-2024

0.4

72.6%

205,766

2025-2029

0.3

73.4%

155,936

2030-2034

0.26

72.6%

133,671

2035-2038

0.25

68.6%

117,144

Click to enlarge

This table shows copper production, which doesn't decline as much during the life of the mine.

Years

Copper Grade (%)

Copper Recovery (%)

Payable Pounds (Million) Per Year

2017-2019

0.23

84.6%

89.1

2020-2024

0.18

83.8%

73.8

2025-2029

0.22

85.0%

88.2

2030-2034

0.18

83.7%

73.5

2035-2038

0.20

83.6%

75.6

Click to enlarge

At current prices of $2.06 per pound for copper and $1,285 per ounce for gold, Mount Milligan's mine level EBITDA is around $179 million per year during the next three years, although this drops off to $99 million per year in 2020 to 2024 and continues falling over time. This assumes an exchange rate of $1.28 CAD to $1.00 USD along with $290 million CAD in annual costs for Mount Milligan (based on 62,500 tpd mill throughput and some savings as a result of the secondary crusher).

At long-term prices of $2.75 per pound for copper and $1,100 per ounce for gold, along with a $1.20 CAD to $1.00 USD exchange rate, Mount Milligan's mine level EBITDA improves a bit to $203 million per year during the next three years.

Years

Annual EBITDA ($ Million) @ Current Prices

Annual EBITDA ($ Million) @ LT Prices

2017-2019

$179

$203

2020-2024

$99

$116

2025-2029

$86

$118

2030-2034

$37

$61

2035-2038

$27

$54

Click to enlarge

An offer of $780 million for Mount Milligan should pay back reasonably quickly at current prices due to the higher grades over the next few years, although one needs to factor in sustaining capital costs as well as the remaining costs for the mine tailings dam. The IRR including those costs is estimated at around 9% for a $780 million offer at current prices.

I had discussed a gold stream sale in a previous article, but a full mine sale may be easier to accomplish. The value of a full mine sale is not too different from the value of the remaining gold stream at current prices, since Mount Milligan's EBITDA at $2.06 copper and a 100% gold stream sale is very limited after 2019.

Effect On Thompson Creek

An asset sale of Mount Milligan for $780 million would be enough to cover Thompson Creek's debt, but would leave the company with only Langeloth and its two idled molybdenum mines along with a limited amount of remaining cash.

Otherwise a company could make a bid for Thompson Creek as a whole and then retire its debt as all its note maturities can be optionally redeemed now, albeit at a slight premium for two of the three note maturities.

The results of any transaction is likely to result in Thompson Creek's secured debt being fully paid back. The unsecured debt appears to have a solid possibility of being fully paid back as well. I am less positive about Thompson Creek's equity as significant risk remains. If Thompson Creek sells Mount Milligan as an asset, the result could be a temporarily debt-free company with remaining assets that may take years to have significant combined value again. If Thompson Creek as a company is sold, the offer for its equity may be above current share prices, but probably less than what it was valued at in mid-2015 or before.

Conclusion

Thompson Creek as a company has been burdened by high-interest debt combined with prior operational problems in getting Mount Milligan fully ramped up. Production should be pretty strong for Mount Milligan after the secondary crusher is up and running. However, Thompson Creek may need to sell Mount Milligan (or itself) to deal with its upcoming debt maturities. There is enough value in Mount Milligan to probably pay back most to all of its debt. The rest of Thompson Creek's assets have limited combined value currently though, and the equity remains a gamble. The results could be good for the equity compared to its current price, but long-term holders may see a significant loss. I am more favorable towards Thompson Creek's debt, which would probably be paid off as the result of a transaction.

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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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.

Additional disclosure: I have a long position in Thompson Creek's unsecured bonds

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