TCM: A Huge Upside Potential:
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Summary
- The production at Mt. Milligan is growing and cash costs should decline below the current level of $0.77/lb of copper.
- The share price is insanely low because the market fears the debt load.
- The debt load shouldn't be any problem, the company should be able to refinance it favorably and even to repay it completely.
- A simple valuation method shows that the shares of Thompson Creek Metals have 500% growth potential, assuming unchanged commodity prices, cash costs and production volumes.
Thompson Creek Metals (NYSE:TC) is an American mining company with operations in the USA and Canada. It used to be focused on molybdenum production but it completed the construction of a huge copper-gold mine (Mt. Milligan) in 2013. Although the ramp up of production at Mt. Milligan is slower than originally expected and the whole construction experienced a significant cost overrun, the current molybdenum market situation shows that the decision to diversify the production mix into copper and gold was a sensible one. Molybdenum prices are depressed and Thompson Creek Metals would have a hard time surviving if it was still focused on molybdenum.
Today, Mt. Milligan is being ramped up to its full capacity and Thompson Creek Metals starts to reap first profits. The adjusted net income was $4 million in 1Q2014, $22 million in 2Q2014 and $38 million in 3Q2014. The net income should keep on growing as the production numbers are expected to increase and cash costs are expected to decrease. The throughput was approximately 25% below the designed capacity in Q3. The copper cash costs after by-product credits were only $0.77/lb which makes of Mt. Milligan one of the lowest cost copper producers.
Although the profits are growing even at the current copper and gold prices, the market doesn't reflect it. The 2014 estimated P/E ratio is only 4.4. It is able to expect 2015 EPS of approximately $0.68 (4 x the 3Q2014 adjusted EPS of $0.17). At the current share price of $1.45, the P/E ratio would be only 2.13. The most probable reason is the fear from the significant debt load.
Is the debt really too high?
The debt is approximately $900 million which is almost three times higher than the market capitalisation of the company. Another problem is that the senior notes are due in 2017, 2018 and 2019. And the company must pay interests of almost $90 million per year. Table below shows the structure of senior secured and unsecured notes.
| maturity |
amount |
interest rate |
| 2017 |
$347,800,000 |
9.75% |
| 2018 |
$350,000,000 |
7.375% |
| 2019 |
$200,000,000 |
12.5% |
Source: Thompson Creek Metals
The debt really seems to be quite high. On the other hand the company is profitable right now and the profitability is growing. Assuming that the molybdenum, copper and gold prices as well as the production numbers and cash costs will stay at the same level as in 3Q2014 throughout the whole 2015, net income should be more than $150 million in 2015. This should be more than enough for Thompson Creek Metals to secure refinancing of its debt at significantly better conditions. The senior notes were issued in 2012 when Thompson Creek Metals had to cope with significant cost overruns and there were serious doubts whether it will be able to finish the construction of Mt. Milligan. Now the mine is up and running, it is profitable and its economics should keep on improving. It shouldn't be any problem for Thompson Creek Metals to issue some new notes with significantly lower interest rates to repay the old ones.
The company had $266.6 million in cash and cash equivalents at the end of 3Q2014. Assuming net income of $150 million in 2015, 2016, 2017, 2018 and 2019, the company would be able to repay all of its debts. The table below assumes unchanged costs and production volumes. The net income numbers don't take into account decreased interest payments after particular debt repayments. For example the repayment of the notes due in 2017 would decrease the interest payments by $34 million in the following years. I didn't reflect it in the calculation in order to make it more conservative.
| year |
net income |
repayment |
cash balance |
| 2014 |
|
|
$266,600,000 |
| 2015 |
$150,000,000 |
|
$416,600,000 |
| 2016 |
$150,000,000 |
|
$566,600,000 |
| 2017 |
$150,000,000 |
$347,800,000 |
$368,800,000 |
| 2018 |
$150,000,000 |
$350,000,000 |
$168,800,000 |
| 2019 |
$150,000,000 |
$200,000,000 |
$118,800,000 |
Source: own calculations
The above-mentioned situation is possible but improbable. The company will probably repay a part of its debt from its cash flow and issue some new notes with a lower interest rate to replace the rest of the old ones.
What is the real value of Thompson Creek Metals shares?
I am sure that the company is worth significantly more than its current market value of $310 million. The adjusted EPS was $0.17 in 3Q2014. The production volume should be able to grow by 20-25% to reach the designed capacity of the mine. The cash costs should decline with the growing volume of production. Both of these factors should lead to growth of the earnings. I will assume that the production will not grow and the costs will not decline so that I can offset the negative impacts of potential declines of molybdenum, copper and gold prices.
Assuming conditions similar to 3Q2014, the EPS should be $0.68 in 2015. The average P/E ratio of some of the best known copper producers is 12.69 (table below). Using the average P/E ratio leads to $8.63 per share. It is almost 500% more than the current share price.
| company |
estimated P/E (12/2014) |
| Copper Mountain |
9.50 |
| Freeport-McMoRan |
12.25 |
| Grupo Mexico |
13.89 |
| KGHM Polska Miedz |
9.45 |
| Southern Copper |
18.38 |
| average |
12.69 |
Source: own processing, using data of Bloomberg
Conclusions:
Thompson Creek Metals has a huge growth potential even in the current market situation. It is one of the lowest cost copper producers and this position will be probably even strengthened in the coming quarters. The profitability of the company is growing but the market is afraid of the seemingly huge debt load. But as I showed in this article, the debt shouldn't be any problem for the company unless copper and gold prices suffer another collapse. Any decline of molybdenum price shouldn't cause too big problem because the company is prepared to put its molybdenum mines on care and maintenance if needed. The share price should start to grow in the coming months as the market realizes the true value of Thompson Creek Metals. The tax loss selling season may represent a great opportunity to initiate a new position or to increase the old one.