JP Morgan analyst:Thompson Creek Metals:
Concerns on realized pricing, costs and acquisitions overdone; Maintaining ests and $19 PT
Overweight
We think the roughly 10% sell-off in TC represents an attractive buying opportunity, and is not reflective of solid, underlying Q1 results, our forecast for an even better Q2, and TC’s earnings strength and cash flow generation at the current moly price (let alone higher prices). We continue to think TC’s stock is discounting too low of a moly price, around $13/lb, as compared to roughly $17.25/lb today and $26.85/lb over 2004-2008. While we think the company’s interest in acquisitions is acting as an overhang on the stock due to the uncertainty it creates, we ultimately think any acquisition TC does will likely not disappoint investors given management’s generally conservative and disciplined approach to running the business.
· Maintaining estimates, price/cost concerns overdone. We are maintaining our above-consensus EPS estimates for 2010 and 2011 of $1.34 and $2.25 which are based on average moly prices of $18.50/lb and $23/lb, respectively. We are also maintaining our 2QE EPS of
.24 which is based on a $17/lb moly price (current spot at $17.25/lb), and realized prices (assuming the 1-month lag) should hit this level assuming current prices remain constant in May. While some investors seem concerned about rising cash costs in Q2 (due to slightly lower production rates at both mines), we don’t think the increase will be that significant and have captured a step-up in our model.
· In-line Q1 but strong underlying results. TC reported clean Q1 EPS of
.17 vs. our estimate of
.18 and consensus of
.22. The underlying results, however, were stronger than the reported number, as they were achieved with a realized moly price of $14.50/lb (due to the 1-month lag in TC’s pricing) vs. our estimate for the quarter of $16/lb and an average market price in the quarter of $15.73/lb. The price shortfall vs. our estimates was offset by better than expected cash costs at the Thompson Creek mine, which came in at $4.74/lb vs. our estimate of $5.65, while costs at Endako were in line.
· Valuation remains attractive. We are maintaining our Dec. 2010 price target of $19. Our target price assumes a 7.2x 2010E EV/EBITDA multiple, which is a modest premium to TC’s average forward multiple of 6.5x over the past three years. We think the higher multiple is warranted, however, to reflect the expensing of stripping costs going forward, as these costs were previously excluded from EBITDA. The company currently trades at 3.2x our 2010E EBITDA and 2.0x our 2011E EBITDA, and has net cash/share of $3.43 or one-third of TC’s market cap.