Mount Milligan project weighs on Thompson Creek

Thompson Creek Metals Co. stock has been bludgeoned by bad news on many fronts, most recently amid cost overruns at a project touted as the new jewel in its crown, but analysts and the company say investors will be rewarded for their patience.

The Mount Milligan project, acquired under the $650-million acquisition of Terrane Metals Corp. in 2010, will diversify Thompson Creek from a pure molybdenum miner, adding copper and gold from the deposit in British Columbia.

The move was initially lauded by the market, with the stock jumping more than 60 per cent in the six months after the acquisition was announced. But share price levels started to taper off amid a wave of cost inflation and as commodity prices began to teeter – and then plummeted after the company announced a project financing deal that amounted to a massive dilution of its existing shares.

"It has been a cash burden for us, and continues to be, but one I think that will pay off over time," Thompson Creek chairman and chief executive officer Kevin Loughrey said by telephone from Denver on Thursday. "We believe the stock is significantly undervalued and as Mount Milligan comes closer on line, that value will be realized more fully."

The stock closed at $3.56 a share on Thursday, compared with highs of more than $9 in February and $25 five years ago. Market capitalization is just over $600-million now, compared with about $3-billion in 2007. Only two analysts of 18 who cover the stock suggest investors sell, with nine recommending a "buy" and seven more suggesting a "hold," Bloomberg data show.

"We believe it will take some time to re-rate," Ian Parkinson, an analyst with CIBC World Markets, said in a recent report, noting Thompson Creek was deeply discounted to its peers.

John Hughes, an analyst with Desjardins Securities, fresh from a Mount Milligan site visit, reiterated his buy recommendation on the company on Thursday, with a target price of $9.10 per share.

Much of the price erosion followed the global economic crisis in 2008-09, when commodity prices plunged briefly. But it also has a lot to do with the confusing growth cycle surrounding Mount Milligan.

The latest twist came in May, when the company said it would cost 20 per cent more to build the project – bringing the total bill to as much as $1.5-billion – and then announced plans to raise about $412-million in two debt and equity financings.

The first, for $200-million, was a pretty straightforward senior notes offering due 2019. The second – an offering of tangible equity units for net proceeds of about $212-million – was more complicated, and riled investors because it is to be repaid as a combination of debt and equity that could dilute current shares by as much as 28 per cent.

"That's not a good execution from my perspective," said shareholder Jeffrey Schwarz, chief investment officer of New York-based Metropolitan Capital Advisors Inc., who thinks Thompson Creek mishandled financing of the project as it was hit by soaring costs. "Once they decided to pursue it, they should have made sure they were fully funded, and finally, once they realized they were not, they should've figured out how to do so without the dilution they have imposed on the shareholders."

News of the financing and higher costs helped shave about half the value from Thompson Creek shares in recent weeks.

Before acquiring Terrane, Thompson Creek was a pure play "moly" producer with two mines and a metallurgical roasting facility in Pennsylvania. It decided to diversify into copper and gold as a hedge against commodity price cyclicality.

At the time of the acquisition, copper and gold prices were on a strong upward drive that continued until recent months, when investors began to pull back from the market amid global economic uncertainty, particularly in Europe.

Mount Milligan will start commercial production next year, with average annual production of 81 million pounds of copper and 194,500 ounces of gold per year over its mine life.

"As they get a little further along, the potential for overruns falls," said John Tumazos, an independent research analyst who covers the company. "A year from now, they are going to be glad they did this, I think. Right now it is painful."