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It has been a frustrating, maddening ride for shareholders in Thompson Creek Metals (TC), who have seen the company's stock fall by over half since the beginning of 2011. The producer of molybdenum -- a metal most commonly used in high-strength steel alloys -- has struggled to manage its Mt. Milligan project in British Columbia, a copper and gold mine that was the centerpiece of TC's 2010 purchase of Terrane Metals.

Cost overruns -- due to the rising cost of materials and labor and equipment shortages in the mining industry -- have been the key driver of the stock's struggles. Back in May, the company raised its total expenditure budget for Mt. Milligan -- expected to be completed in the second half of 2013 -- from C$915 million to C$1.265 billion. This raise alone represented about $2 per share in additional capital requirements.

Then, in conjunction with fourth quarter earnings, the company again raised its estimates, by 10 to 20 percent, to C$1.4 to C$1.5 billion. All told, the project is now at least 50% above its current budget, with the overruns representing between $3 and $4 per share.

With the stock having fallen by half from its 52-week high -- a nearly $7 per share drop -- the cost of the overruns seemed priced in. (Given the rise in gold and copper prices over the same period, the future value of the completed project should have increased as well, mitigating some of the loss.) But the second round of overruns raises questions about the company's ability to manage such a large project going forward.

More importantly, it again brings into play funding questions for Mt. Milligan, questions that were supposed to be answered by the secondary gold stream transaction with Royal Gold (RGLD) completed in December. Royal added another $270 million in cash in return for an increase in its ownership stake of the gold stream at the mine from 25% to 40%, at a cost of $435 per ounce. The agreement settled the market, and TC rose over 50% over the next six weeks, benefiting both from increased confidence in the stock and the early-year strength in the broad market. But after the late February announcement of additional overruns, the stock gave back 15% in a single day, and continued to fall toward its 2011 lows, closing Tuesday at $6.74.

A key reason for the stock's recent weakness is that the funding gap may have again appeared. From the company's fourth quarter earnings presentation [click to enlarge]:

TC Screen
chart courtesy Thompson Creek Investor Relations

The $230 million potential funding gap is substantial -- operating cash flow for all of 2011 was just $203 million, and the gap is actually higher than was projected after the third quarter, before the Royal Gold deal. According to the 10-K, the company expects to complete the project using existing funding capabilities, but also noted that "if the actual costs to complete the development of Mt. Milligan are significantly higher than we expect, we may not have enough funds to cover those costs." Given the company's history, and two upward revisions to the capex budget at Mt. Milligan, the risk of a funding gap seems material. With the company's strong asset base -- including undeveloped properties in Canada, the two legacy molybdenum mines, and a smelting operation in Pennsylvania -- it seems likely that the company could acquire additional financing if needed. But at what terms -- and at what cost to shareholders?

All that said, if the company can execute for the next 18 months, and bring Mt. Milligan online in the fourth quarter of 2013 at even the high end of its capex range, there still looks to be substantial value. Based on the recent Royal Gold transaction, the remaining 60% of the gold stream allocated to TC has a net present value of about $1.08 billion, with the total stream estimated at $1.8 billion. (This value includes future cash costs at $435 per ounce.) The mine also has impressive copper reserves, with annual production expected to be 81 million pounds.

Mt. Milligan Profit, Gold and Copper

MetalCurrent Price1Cash Costs2Annual Prod.3Annual Profit
Gold$1,642/oz.$435/oz.256,750 oz.$310MM
Copper$3.92/lb.$1.09/lb.81MM lbs.$229MM
1 -- price as of 4/3/12
2 -- from 4Q earnings presentation and RGLD transaction; copper per-lb price represents balance of $200MM annual costs estimated by TC
3 -- data from 4Q earnings presentation

Again, the entire net present value of the gold stream, based on the Royal Gold transaction (negotiated with gold at a roughly similar price) is about $1.8 billion. With the copper stream representing annual profits of 75% of the gold stream, TC's 100% ownership of copper likely represents in the range of $1.2-$1.3 billion in net present value.

All told, Thompson Creek's ownership rights to the minerals in the Mt. Milligan project have, conservatively estimated, a current value of about $2.3 billion. Given the $1.1 billion remaining in capital expenditures, this puts the current value of Mt. Milligan, net of the Royal Gold transaction, at about $1.2 billion. (This roughly squares with the company's estimate, who has the asset carried at $1.314 billion, according to the 10-K.)

As such, an updated sum-of-the-parts valuation of TC might look like this:

TC Breakdown

AssetValue (MM)
Mt. Milligan Mineral Rights$2,300
Future CapEx($1,100)
Gold Stream Proceeds Due$217
Cash on Hand$295
Total Liabilities1($900)
Total$812
1 -- excludes Gold Stream deferred revenue

At Tuesday's close of $6.74, TC has a market capitalization of just $1.132 billion. If the company's sole asset was the Mt. Milligan mine, a fair value for the stock would be about $812 million.

But, of course, the company maintains its legacy moly operations, which generated $200 million in operating cash flow in 2011 and, after a slight (and planned) slowdown in 2012, are guided to see production increase 10-20% in 2013 over 2011 levels, with cash costs dipping about 10% at the midpoint of the company's estimates. It has the legacy smelting operations in Pennsylvania, and the Berg property carried on the company's books at $38.4 million, plus inventory, accounts receivable, and restricted cash.

If investors assume that Mt. Milligan will succeed -- even at the high end of the company's elevated capex assumptions -- the company's legacy assets are clearly undervalued. This is borne out not only by the analysis of the Mt. Milligan property, but the company's tangible book value, which sits currently at $10 per share.

Thompson Creek's missteps are no doubt frustrating to current shareholders, who have seen their stock punished for the overruns at Mt. Milligan, and, to a lesser extent, the Endako moly mine. Potential investors in the stock should be aware of the risks that additional overruns will cause further declines in the stock price. But if the company can maintain even the high side of its projections, if it can continue -- as it has for eighteen months -- to promise production beginning in late 2013, and if commodity prices avoid all but a catastrophic collapse, TC is a good long-range play.

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

Source: Thompson Creek Missteps Frustrating; But Value Remains