Thompson Creek Metals Company (TC) is a Canadian mining company and is one of the largest pure molybdenum producers in the world. Molybdenum is alloyed with steel making the steel stronger and is widely used in the iron and steel industry. With declining steel demand owing to the global recession, the price of molybdenum fell from approximately $34 a pound to just under $8 a pound in the last quarter of last year and the during the first quarter of the current financial year.
Thompson Creek was adversely affected by the sharp decline in prices and resorted to production cuts in response to lower molybdenum demand. In January, it announced that its molybdenum production was expected to be in the range of 20 to 24 million pounds in 2009, revised from previous guidance of 31.5 to 34 million pounds. This was in line with the 10 million pound production cut announced by Freeport-McMoRan (FCX), the largest producer of molybdenum in the world.
On May 7, 2009, Thompson Creek declared financial results for the first quarter 2009 with an EPS of $0.09, down from $0.41 in first quarter 2008. It reaffirmed its production guidance and reported a decline in its average cash production costs in the first quarter from $8.29 per pound a year earlier to $5.93 per pound. It also reduced its cash production costs estimate for the current financial year to $6.25 to $7.25 per pound from previous guidance of $7.25 to $8.25 per pound. Further, the company announced that it was ready to modify its production and adjust to the market conditions if and when the situation improved.
With the sharp rebound in commodity prices in May, molybdenum has shown signs of recovery. Molybdenum has risen approximately 25% from its lows and is currently priced at little over $10 a pound. This increase, altough impressive, trails the percentage increase in price witnessed by several other commodities such as copper and oil. Thompson Creek has benefited from this rebound in commodity prices and the changing market sentiment with its stock rallying from a 52-week low of $2.44 a share to $10 a share. However, this is substantially lower than the 52-week high of $21.98 a share and I believe that the stock price can go higher from these levels.
Thompson Creek has a strong balance sheet with $260.6 million in cash, cash equivalents and short term investments and a total debt of $16.9 million at the end of the first quarter. Key financial information for TC is shown below:
- Market Cap = $1.2 billion
- Sales (TTM) = $835.5 million
- EPS (excluding extraordinary items) = $1.09
- Net Profit Margin = 17.7%
- Debt to Equity ratio = 0.01
- Return on Equity = 21.9%
- Current Ratio = 10.03
Analysts expect Thompson Creek to earn $0.07 a share during the current financial year and $0.94 a share during the 2010 financial year. These estimates are very conservative in my opinion and do not account for rising price of molybdenum and operational efficiencies at Thompson Creek.
During the current financial year, I expect the company to report actual production numbers towards the high end of its guidance. Assuming an average molybdenum price of $10 a pound for the rest of the financial year, a production of 23 million pounds, and cash production costs of $7 a pound, I expect Thompson Creek to report an EPS of $0.28. With improving molybdenum price and expanding production at Thompson Creek, I estimate a 2010 EPS of $1.10.
Based on my DCF model, assuming a long term growth rate of 10% and a discount rate of 15%, the fair value of TC is approximately $12 a share. On a relative valuation basis, I project a fair value of $14 a share by applying a multiple of 13 to my 2010 earnings estimate. By combining the two values, I am initiating coverage of Thompson Creek with a BUY rating and a 12-month price target of $13 a share.
Disclosure: Long TC
