Thompson Creek: A Deeper Look At Its Guidance And The Decrease In Gold Production

| About: Thompson Creek (TCPTF)

Summary

Thompson Creek's gold production was high in Q3 2014 due to particularly high gold ore grades that quarter. Q4 2014 is closer to average.

Thompson Creek probably should have tweaked its guidance in its Q3 2014 report. An October mill shutdown and recovery issues made it difficult for November/December to make up the gap.

2015 production guidance appears reasonable although perhaps somewhat aggressive as there is limited capacity to have mill throughput and recovery issues and still make midpoint of guidance.

Cost and revenue guidance appears conservative on the other hand due to use of low molybdenum and gold prices and a Canadian exchange rate of $1.15 CAD to $1 USD.

One item that was noticeable with Thompson Creek's (TC) Q4 2014 production was the significant decrease in gold production from 60.4k ounces in Q3 2014 to 41k ounces in Q4 2014. A closer look at the details indicate that the decrease was mainly due to abnormally high gold ore grades in Q3 and lower than expected gold recovery levels in Q4. Thompson Creek likely should have tweaked its full year guidance in its Q3 2014 report though, since the combined effect of the mill shutdown in October and the lower recovery rates in October made it likely that Thompson Creek would be able to hit the bottom end of its guidance range only if performance was extremely strong in November and December.

Looking at 2015 guidance indicates that the production ranges are feasible, although there is no room for significant problems. It will probably take around 57,000 to 57,500 tonnes per day of mill throughput to reach the midpoint of guidance. Current mill throughput was above 50,000 tonnes per day in late January with a target of reaching 60,000 tonnes per day by the end of the year. Cost guidance appears particularly conservative, with the weaker Canadian dollar and higher gold prices likely translating into a $0.30 per pound improvement in its copper by-product unit cash costs compared to guidance.

Explaining Q4 Gold and Copper Production

Thompson Creek mentioned in its presentation that the average mill throughput during Q4 2014 was 43,781 tonnes per day, which translates into 4.028 million tonnes over the quarter. It also mentioned that copper recovery decreased to 79.0% during the quarter. From this we can estimate that the average copper ore grade was 0.27% during Q4 2014, which is an increase from Q3 2014's 0.251%, but largely in-line with the 0.267% grade during the first nine months of 2014 and the 0.267% grade mentioned as the first full year average in the feasibility study.

 

Q3 2014

Q4 2014

Milled (000's tonnes)

3,721

4,028

Copper ore grade (%)

0.251%

0.270%

Copper recovery (%)

83.1%

79.0%

Copper payable production (000's lbs)

16,267

18,006

Source: Thompson Creek's presentation and quarterly reports

Doing a similar exercise with gold would lead us to estimate that the gold ore grade during Q4 2014 averaged 0.54 grams per tonne. This is less than the average gold grade of 0.672 grams per tonne during the first nine months of 2014, but close to the feasibility study's first full year average of 0.569 grams per tonne. From looking at the feasibility study, it looks like the 0.785 grams per tonne gold grade in Q3 2014 is more of an outlier.

 

Q3 2014

Q4 2014

Milled (000's tonnes)

3,721

4,028

Gold ore grade (g per tonne)

0.785

0.540

Gold recovery (%)

66.6%

60.8%

Gold payable production (ounces)

60,366

41,030

Source: Thompson Creek's presentation and quarterly reports

2014 Guidance Accuracy

It does seems that Thompson Creek should have tweaked its 2014 full year guidance in its Q3 2014 report though. After the scheduled three day mill shutdown in October and low recovery rates during that month, it was very unlikely that Thompson Creek would reach the midpoint of its guidance, and challenging for it to reach the bottom end of guidance, especially for gold.

Thompson Creek needed Q4 production of 18.4 million pounds of copper and 48,400 ounces of gold to make the low end of guidance and 23.4 million pounds of copper and 53,400 ounces of gold to reach the midpoint of guidance.

Using October's reported numbers and assuming design recovery percentages in November and December, plus improvements to 47,000 tpd in mill throughput in November and 48,000 tpd in December would result in 19.4 million pounds of copper production at an average grade of 0.27%. This is probably an ideal scenario for November and December and would result in 66 million pounds of production in 2014, versus guidance for 65 million to 75 million pounds.

Month

Mill Throughput (tpd)

Recovery (%)

Copper production (000's lbs)

October

42,340

75.9%

5,633

November

47,000

84.0%

6,698

December

48,000

84.0%

7,068

Total

   

19,399

In this scenario gold production would be 46.3k ounces in Q4 at grades of 0.54 grams per ton, bringing the full year total to 182.9k ounces versus guidance for 185k to 195k ounces.

Month

Mill Throughput (tpd)

Recovery (%)

Gold production (ounces)

October

42,340

55.8%

12,281

November

47,000

70.0%

16,550

December

48,000

70.0%

17,465

Total

   

46,296

To reach the bottom end of full year guidance would have required an average grade of 0.565 grams per ton as well as the ideal recovery rates and mill throughput outlined above.

I believe that it would have been better for Thompson Creek to have updated full year production guidance during its Q3 2014 earnings report to around 64 million to 67 million pounds of copper and 175,000 to 185,000 ounces of gold given the challenges in October.

Feasibility Of 2015 Guidance

After running the numbers for 2015, it appears that Thompson Creek's guidance is generally feasible although I would not expect production to exceed the top end of guidance unless the 2015 average grades are better than what Perron discussed during the recent conference call. It would probably take average copper ore grades of 0.27+% and average gold ore grades of 0.55+ grams per tonne to exceed the top end of guidance, along with strong recovery and mill throughput performance.

At average grades of around 0.25% to 0.26% copper and 0.50 to 0.55 grams of gold per tonne, the midpoint of guidance could probably be achieved with 83% copper recovery and 67% gold recovery along with average mill throughput of around 57,000 to 57,500 tpd. The gold and copper recovery rates are roughly equivalent to Q3 2014 performance.

On the other hand, the guidance around certain revenue and cost items is probably conservative. The sale of molybdenum inventory is based on $8 to $9 per pound prices, while prices are slightly above $9 per pound. That probably won't make a big difference unless molybdenum prices really improve, but even $9 to $10 per pound could add several million to Thompson Creek's cash flow. As well, Thompson Creek can use its Langeloth roasting facilities to get a higher realized price on its molybdenum.

I've also mentioned before that Thompson Creek is using a gold price of $1200 per ounce and an exchange rate of $1.00 USD=$1.15 CAD, both of which are currently running quite favorable to those numbers.

Conclusion

Thompson Creek probably should have tweaked its 2014 guidance to be more conservative during its Q3 2014 report since it already had October's results at that point and the mill shutdown and recovery issues during that month meant that even top-notch performance during November and December would allow it only to meet the bottom end of copper guidance and still miss on its guidance for gold.

For 2015, its production guidance appears achievable although there is limited room for further issues with mill throughput and recovery, especially if it wants to reach the higher end of guidance. On the other hand, cost guidance in particular looks conservative, with the recent changes to the Canadian dollar and gold prices reducing its copper by-product unit cash costs by approximately $0.30 per pound versus guidance.

Disclosure: The author is long TC.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

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