Okay, you know I am long, but as an exercise in risk management, let's look at what could go wrong, not what might go wrong, but what could go wrong here. What are all the risks associated with TC?
Do these look right?
Did I miss any?
I know these are not the highest probability scenarios, but humor me here. I also realize the firther along we get in 2013 - the lower the likelyhood of any one of these scenarios happening becomes - and in 4 to 6 months, I believe the probability of all of these except #2 to be nearing zero.
That being the case, I would expect the PPS to be reflecting that within two to four months.
1) Scenario One:
Say the MtM production start up in Q-3 2013 is delayed to Q-1 or even Q-2 2014 by, oh I don't know, an indian burial ground is discoverd at the mine site, or because a herd of grizzlies move into camp with cubs and refuse to leave and the Canadian govt won't let TC relocate them for a year.
Q -How long can TC hang on before there are major cash flow issues (assuming the price of moly stays the same or even trends a little lower)?
2) Scenario Two:
Assume MtM starts production on schedule, but for some reason is producing half the output expected initially the first 6 months to a year. Assume Moly prices stay the same or a bit lower. (This would obviously impact PPS, but possibly not too much else?
Q -Debt service should still not be a problem, correct?)
3) Scenario 3:
MtM is up and running mostly on schedule (by the end of this year) but economic activity has not picked up in China and the US and Europe have slid back into recession, moly and copper at all time lows (Although I suppose gold would go up in this scenario?)
Q- Will debt service be a problem. Profits would be low, but still coming in, yes?
4) Scenario 4:
"The Perfect Storm".
A combination of #1 and #3.
Q- Am I correct in thinking that this is the only actual scenario where the finacial viability of TC as a company is in question?
(Prices and demand craters and MtM start up is "signifigantly delayed" by at LEAST 2 quarters).
Sentiment: Strong Buy
1) Scenario One: "Some" delay until potentially Q2-2014 - As of Q4:2013, TC expects to have in excess of $310mm cash on hand. Thus, if there is "some" type of crazy two quarter delay, they will be fine. They might slow moly production to conserve cash, if sales of it are slow in 2014. See 10-K for 2009 for details on what the Statement of Cash Flows - Operating Activities, might look like. Avg. pricing for 2009: $11.27/lb. Not the best of times. Remember to strip out the income from expiration of warrants. It wasn't Armagghedon.
2) Scenario Two: Half the expected production for first two, three quarters after commencing commercial start of operations. Again, $310mm cash on hand. Same as Scenario One - they will be fine, provided they fix the problems by 2017.
3) Scenario Three: Milligan is marginally profitable at $1.50/cu, and $1,000/oz. gold. That should be a bottom of copper, as many marginal copper producers will have boarded up their doors well before prices fall to $1.50/lb. I don't see $1,000 gold until the US starts running $1 trillion dollar SURPLUSES.....annually - - and we all know that's not going to happen anytime soon. So, I've done some modelling of results under various metals pricing scenarios a while back: Assuming they can sell 100% of what Milligan produces (which they are contracted to do - so call this a certainty), they'll still produce cashflow of about $100mm from Milligan. They can cover interest by this amount on consolidated basis. The GSO rainy day fund would still be around, but would be wiped out with repayment of the recently issued GSO's (notes just issued) when they mature in 2017. Moly prices ultimately have a floor, in that most Chinese producers have costs to produce north of $10/lb (due to low grade deposits). TC survives, but life is much more interesting for them, and the stock languishes.
Honestly, I don't expect any major issues. They have already pre-stripped the Milligan deposit and they've been stockpiling some courser ore already. Q4:'13 production from it might be less than stellar, but that will get worked out quickly. It's only one month's operations unless they start-up earlier than Dec 2013 (which is possible). The technology for the process concentrator employs conventional process technologies widely used to process porphyry copper ores. It will work. See the latest NI 43-101. The mechanicals will largely be completed by April 2013. TC indicated recently Milligan is on schedule, and critical equip. is on site. Then they go into pre-commissioning, then commissioning in June.. First feed is in August. Commerical production not scheduled until Dec 2013. They have about six months to ensure a reasonably smooth start of commercial production. They didn't do that w/ Endako. That was rushed into service. Staffing is already underway for MM, and they've hired up some critical mill positions already. Milligan has no litigation risks, as the dumb suit the FN brought in 2010, was dismissed by BC court in June. All permits granted.
All systems go for Milligan by Dec 2013.
Relax, take a deep breath, have a drink.........the agents of fortune favor........... TC.
Keep the faith.
For the record, Q4 results will not be a barn burner. Lower cost inventory produced in Q4 won't find it's way into earnings until Q1-Q2, as TC uses FIFO, and has lots of FG/WIP on hand as of 9/30/12.
So don't have panic attack if their costs aren't sub-$8/lb moly for Q4. 9/30/12 inventory was costed at LCM, and M was about $10.80/lb. That fully loaded (absorbed) cost won't lead to stellar operating earnings, esp. if sales volumes are rather punk (which is expected).
The big news from 2/25 CC will be Milligan update and cashflow generation.
Sentiment: Strong Buy
Absolute worst case scenario: Scientists miscalculated and asteroid 2012 da14 lands squarely on Mt. Milligan wiping out all operations...
There will always be a small risk it will go to zero. Long investing is an inherently optimistic enterprise.
Ultra, thank you for sharing your thoughts, as always.
I am honestly not expecting any major issues, but it always helps to clarify the possible risks and put them in the proper perspective, which you seem to have done quite nicely.
In more in reply to foggie and bills geopolitcal possibilities, to my thinking, those can happen any time, for any reason, to any (and all) stocks.
The major outside, if you will, risks to this project involve more of scenario number one for me, and they would include either of both of; the US sliding back into a recession (always a possiblity with this dysfunctional president AND congress) and Chinese demand tailing off due to serious number fudging and/or other factors (an even more probable event than the US screwing up our own recovery IMHO). So I will watch both of these closely.
But still, neither one of these possible events, together or seperately dampen my entusiasim for TC longterm. Demographic trends and population progression favor this company as long as it takes care of it's part, and executes its business plan without doing anything stupid to destroy shareholder value.
Yes, an outlier or "b;ack swan" event is possible, but most of those I can imagine conjor up much greater worries to me than the health of my TC investment....and if a singular event does indeed occur that will derail TC in particular or the mining industry in general for some time, it seems to be nothing that I can put a quantifiable risk number to, or protect against easily.
Sentiment: Strong Buy
Wow, you could charge good money for that report. I appreciate your sharing all of your research, as well as all other knowledgeable posters here. Ive been on this rollercoaster since 08, and I have always been able count on good info and debate from this forum. Many thanks!
I'm with Foggie, I can't speculate on geo political or worst case scenarious as that would make my mind run wild. Anything's possible in this industry and TC has big potential "if" things go the right way with no major surprises. The macro picture appears to be continuing to incrementally improve here, in europe and in china which is why I'm in this industry in general and TC in particular. But we all know from years of getting burned that doesn't necessarily translate into higher metals prices or TC profits or increased share price, but in general, I like the direction TC is heading.
I really like it when there is actually a real conversation on this board about something that matters. Thanks retaoba for starting it.
I don´t see how Mount Milligan can be delayed. The winter has been fine this winter in BC and the construction seems to be going as planned. I listened to the Royal Golds conference call last week. They said that the mine construction was on schedule. If you go to the Mount Milligan website the most recent news update says the mine is on schedule. On January 22nd TC issued a news release where the CEO was quoted saying the mine construction is on schedule. Sure, something can happen that delays the startup a bit but right now that would only be weeks or couple of months in my opinion. I have been working around construction sites for a long time and my experience is that when there are problems with timeschedule it usually starts to happen early, not at the last stages of the construction.
I don´t pay a lot of attention to the day to day news about the US congress, fiscal cliffs or European debt crisis. Sure, we need our elected leaders around the world to get us through it in one piece but it is not what will drive the copper demand, gold prices or molybdenum supply in the future. The fact is that very few copper mines are being built around the world. It takes longer time today to get all licenses. There is instability in many commodity rich countries and companies are hesitating to invest in such areas.
Steel demand is increasing. The building industry in the US is improving. Car sales have surged in the US and are bottoming out in Europe. China is building Nuclear Power plants (which use a lot of molybdenum) like there is no tomorrow. Oil and gas companies are drilling all over the world like never before increasing the need for pipelines (which need molybdenum). Infrastructure projects in South America, Asia and even in the US are picking up (which need copper and molybdenum). We still need to buy new TV sets, computers, refrigerators and other stuff, and there are more people every day that do that... remember population growth? (and that needs copper). The money printing machines in the US, EU, UK, Japan and other places are red hot which means future inflation. I could go on and on.
I am long TC. Not for the next few months, but for the next few years. You talk about the perfect storm in terms of what can go wrong. I see the perfect storm on the horizon, but with the all the positives coming together at the same time.
By the way. I am from Europe, things are not in a mess here... it is a myth :) I think Europe will start picking up this year and guess which part of the world is the largest maker of stainless steel?
Sentiment: Strong Buy
For me any and all the above are possible, with many more that are not listed. Our friend Murphy is always waiting in the wings to come on stage.
I for one doubt anything very drastic will happen, so I'm just sitting here holding my position and waiting.
I think the lack of news is good. I am encouraged bu the silence out of TGB HQ.
Foggie, what others have I missed?
(Besides random acts of Nature or God, cival war in Canadia, etc)?
Maybe a railroad strike?
I can't think of anything else that would be majorly impactful. You might have some minor events that would impact a single quarter of course....
And yes, at this point in the game, no news is fine by me too!
I totally agree on TGB too - no news always seems better than any news from those guys.
Of course, Russ may have recently burned a big one and is is still sleeping off the dorito hangover under his desk - LOL..
(I kid, I kid).
At least when TGB is quiet we know they are not announcing phase #65 in Gibralter or bulldozing any wigwams, yes?
Sentiment: Strong Buy