There are stocks that occasionally move in and out of my portfolio every few months -- and then there are my core holdings. Without question, Thompson Creek Metals (NYS: TC) has cemented itself as a core holding based on its continued outperformance.
Thompson Creek last night reported its fourth-quarter and year-end results and provided investors with production guidance for 2012 and beyond.
For the quarter, Thompson Creek broke even on EPS, still beating analysts' expectations of a $0.07 loss, and reported revenue of $116.7 million, down from $156.8 million in the year-ago period. But as with most mining companies, Wall Street isn't too concerned with the present so much as it is with the future.
Thompson Creek hit all the right notes (at least with me) with regard to its production guidance. To list a few of the numerous optimistic points:
The company anticipates higher molybdenum ore grades in 2012. In short, this means that even with essentially flat forecasted production of only 26 million to 28 million pounds of molybdenum in 2012 (28.3 million pounds was produced in 2011), the company's yield efficiency will be higher.
Its Mount Milligan copper mine, which contains 2.1 billion pounds of copper and 6 million ounces of gold, is on track to come online in the third quarter of 2013. This mine is the primary reason I own Thompson Creek, as I think investors are hugely underestimating the profitability this mine will have on the stock once it's active. Over the projected 22-year life of the mine, it's expected to yield 81 million pounds of copper and 194,500 ounces of gold every year.
Despite a decline in molybdenum prices in 2011 from 2010, the company realized a 3.9% increase in price realization for the molybdenum it sold. Thompson Creek's management feels confident that moly prices will continue to rebound in 2012.
Of course, the thorn in the side of all mining companies is rapidly rising costs. Higher expenses have been hitting all miners without discrimination, including Kinross Gold (NYS: KGC) , which recently curtailed its plans to build out the Tasiast Mine in Mauritania for up to nine months. In Ghana, Gold Fields (NYS: GFI) may pass on further mine development if the corporate tax on mining rises to 35% from 25% and, on top of this, the government introduces a 10% windfall tax. Even Jaguar Mining (NYS: JAG) is having issues getting its Gurupi project off the ground because it just doesn't have the proper capital.
Have no fear, Thompson Creek shareholders -- management has you covered. The company agreed with Royal Gold (NAS: RGLD) to turn over a 40% stake in the gold production of the Mount Milligan mine in exchange for $270 million. Not a bad deal considering that capital expenditures in 2012 are expected to be in the range of $868 million to $952 million. No one ever said building a mine from scratch was cheap!
When 2012 is over, the fruits of Thompson's growth will really shine. The deal it struck with Royal Gold, based on current gold prices, will completely cover the roughly $200 million in projected mining costs at Mount Milligan. In short, this means that it's actually a net negative cost to mine copper from Mount Milligan, even after Royal Gold pays a significantly reduced price for its 40% share. If gold prices rise as many predict, that'll mean an even greater profit for Thompson Creek.
If you want a truly in-depth look at what's fueling Thompson Creek's growth, including the company's risks and potential rewards, I highly, highly suggest you read the recent series of interviews my Foolish colleague Christopher Barker had with Thompson Creek CEO Kevin Loughrey.
Humor me now, folks: It's math time!
Based on these interviews, Loughrey estimates Mount Milligan costs at about $200 million and total revenue of $650 million after Royal Gold's cut, for a net yield of $450 million. If gold prices jump to $2,000 per ounce, that's another $40 million boost.
Now let's add this to the company's moly mines, which are moving into higher-grade ore. Thompson is forecasting total production of 30 million to 34 million pounds of moly in 2013 at an average cost of $6.75 to $7.75 per pound. Assuming moly prices remain stable, that's an average net of about $9 per pound, or $288 million, assuming the midpoint of the production range.
Assuming no unforeseen production snafu occurs and metal prices remain stable, it's quite possible that Thompson Creek could produce in the neighborhood of $725 million to $775 million, or $4.30 to $4.60 in EPS by 2014, according to my figures. The stock closed yesterday at just $8.69.
I've made my bet to hold Thompson Creek over the long term and will be looking to add to my position over the coming months.
What's your take on Thompson? Share it in the comments section below, and consider adding Thompson Creek Metals to your free and personalized Watchlist.
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At the time thisarticle was published Fool contributorSean Williamsowns shares of Thompson Creek Metals but has no material interest in any other companies mentioned in this article. He loves gold but would not describe himself as a flake. You can follow him on CAPS under the screen nameTMFUltraLong, track every pick he makes under the screen nameTrackUltraLong, and check him out on Twitter, where he goes by the handle@TMFUltraLong. Try any of our Foolish newsletter servicesfree for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has adisclosure policythat's as good as gold ... and copper.
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