I think it is time for a little pep talk and investment overview if anybody new here:
The first mill runs are expected to start in August. The commercial production will be reached in December. And from then Mt. Milligan will be generating depending on metal prices $220-290 million operating cash flow.
Assuming that Molybdenum mines will cover the general and corporate expenses all this cash will flow directly to the bottom line. On a fully diluted basis the company has 222.1 million shares. It is easy to see Thompson Creek making close to $1 per share starting from the end of 2014 when the full commercial production state is reached. Plug in 10-15 price to cash flow ratio and you see the potential for Thompson Creek stock.
Not everything is so rosy though. To construct Mt. Milligan Mine the company had to raise a lot of financing. Thompson Creek’s total debt is close to $1.1 billion. It will probably take 6-7 years to pay it back. Nevertheless $9-12 share price sometime in 2014 seems to be achievable.
See the whole post on my blog at: Investortalkroom or google my name Vitto Shulman
Sentiment: Strong Buy
To ultratrafic2. Thanks for taking a look.
Yes, EPS will be much lower than the cash flow from Mt.Milly because of interest, depreciation and taxes. My thinking is that even if EPS will be lower than $1, say may be .60. The market would still assign value as a multiple of cash flow. And 10-15 ratio over cash flow is very reasonable.
Sentiment: Strong Buy
Some wild cards that TC will experience for 2014 that won't help 2014 EPS that I kind of glossed over.:
Once comm. production is acheived / declared, recoveries will not be 100% out of gate. Tons milled will ramp up to the 60,000 tpd capacity target, but won't get there until April 2014 (assuming Dec 2013 declaration of comm. production). By Feb, MM s/b mid 90's on capacity, however. Recoveries of copper will also not be 100% from get go, and recovery won't hit target spec until probably April, as well. Gold recovery, same thing, but that curve to 100% target recovery spec is flatter (more time). So 2014 is a bad year to take MM production performance and project forward.
Deferred tax exp. on Milligan will be significant in years 1 and years 2, and will taper down from there, probably starting to reverse by year 4. This early year blast on deferred taxes will be caused by tax depr being much greater than IFRS depr in initial year(s). Current tax expense in years 1 and 2 will be minimal but will grow significantly in year 3 and out.
I ignored forex in the previous analysis, but if the CAD weakens against the USD, those I/C notes their Canadian subsidiary which received money from parent, will be taking big hits. This phenomena virtually wiped out Q1 earnings, as the CAD weakened in relation to the USD. How this plays out in 2014, who knows.
Biggest impact to 2014 EPS from these three animals will be deferred tax expense blast on that accelerated Knuck tax depr (vs. GAAP/IFRS - and it's effects on FS of TC), followed by effect on revenue from 1st year ramp up to full production. I don't know where the forex market lands. But the deferred tax exp. beast is real for 2014, abating thereafter. How the market prioritizes these fungibles, is anyone's guess.
2015 cleans up a bit better regarding this krap, extending out today's prices, then. FYI.
Let's take a look at earnings scenarios that get us to $0.60 EPS:
Annual bogey for last sevr. years on selling, gen. & admin, explorat, accretion is $40mm yr.
Their realized selling price for the various types of moly products they make is probably $11 per lb. now, slightly above LME moly oxide spot price, but less for North Am. spot market Let's run with that $11/lb. and extend that out to future periods.
GAAP FG in inventory is $7.02 (fully loaded w. depreciation) at Q1, and with more and more lower cost production going into inventory, bleeding out the higher cost product from prior periods, expect that avg. GAAP FG # to come down.
But for this mulling of numbers, let's assume $7/lb GAAP full absorption cost.
Gross margin per lb. moly = $4/lb. from avg. of material produced at their mines. Langeloth will chip in a margin under a $1/lb for moly products made from 3rd party moly disulfide conc. Let's use a $1 for simplicity regarding Langeloth.
Annual sales will be, figure 27mm lbs. of materal from their mines, and another 8mm lbs. from 3rd party concentrate, which approx. avg. sales for last several years, give or take.
$4 per lb. margin x 27mm lbs. (mined material sold) = $108mm
$1 per lb. margin x 8mm lbs. (Langeloth 3rd pty) = $8mm
Combined, $116mm, less $40mm SGA bogey = $76mm earnings.
Forex? ignore for now, assuming stability & parity to CDN and USD.
NOL's in 2012 shield TC on taxes, for now. Ignore deferred taxes for moly ops.
$76mm falls to bottom line on 221 mm fully diluted shares. This gets us to, figure, $0.34 per share, all other things being equal. Figure we need adde$70mm GAAP net in. out of MM to hit $0.60 EPS share..
We need the following:
$90-100mm to cover depr.
$80mm to cover interest
$70mm to equal net income
$240mm in cash margin (assuming $280mm in "cash costs" is real, and not another mgmt sandbag)
and $520mm in Milligan revenue.
Copper at $3.25 and gold at $1,300 gold gets us close, tax & forex aside.
On a cashflow basis, Milligan looks better on paper, than the GAAP EPS is will be expected to put up, at current metal prices, given that depreciation/depletion, interest expenses, and taxes all boil down into the calcuation of EPS.
Milligan will generate lots of cash (unless metal prices rots a lot further), and TC becomes a cash generator (in time) instead of a company that is scrounging around for, racking up big bills, and disgorging tons of cash on a project that hasn't generated one nickel of cash flow, yet.
Since EPS numbers are not computed (and rarely expressed) in terms of EBITDA, I figured I should mention the reality of deprecation/depletion, TC's interest expense (and how it will be reflected in the FS in the future), and toss in a dose of reality regarding what to expect regarding tax impact on the overall FS of TC once Milligan is rolling.
The takeaway from an operating Milligan: unless metal prices climb back to where they were at the start of the year, the 'elusive goal' of $1 share EPS is a tough nut to crack, but the solvency of TC will be secured if it's generating cash operating margins of $220-290mm a year.
Given I suspect there is a serious element of suspicion in the market regarding the financial viability & solvency of TC (longer term - esp. if unproven Milligan fails) given the debt they've racked up getting Milligan rolling (weighting down the stock with a risk discount....), this phobia tends to dissipate largely when Milligan starts commercial operations and performs as expected / anticipated. Remove the bankruptcy risk discount, and the shares will go up. To where, is anyone's guess.
Keeping it real.
I agree with your numbers, but would the market really take into account the large depreciation deduction from income in valuing such a solid cash-flow beast? Let's just say they have $220 mm in EBITDA, I can understand backing out the $80mm in interest in early years before the retire a lot of debt, but I would think at worst that would be it, so let's say that leaves you with $140mm after debt service. Even at 220mm shares that is still roughly $.65/share in cashflow. Especially once they start retiring debt, wouldn't the market be more likely to attach a multiple and value the stock based on this than it would the reduced profit on their tax return due to large depreciation?
Morningstar's opinion on copper prices for next year. This was analysis came from their 4/18/2013 review of FCX:
"The copper price is the most important assumption in our valuation model. We assume copper falls from 2012's average of $3.60 per pound (down from an all-time annual high of $4 in 2011) to $3 per pound in 2013 and $2.50 per pound in 2014 (all forecast figures in 2012 dollars). A comparatively bullish supply outlook and bearish demand outlook inform this forecast. To summarize, we expect mined copper supply to grow at above-trend rates during the next several years, as projects contemplated amid the recent period of historically high prices reach fruition. Meanwhile we expect demand to underperform the mining industry's expectations, as Chinese fixed-asset investment growth--the single largest driver of copper demand for the past decade--wanes from boom-era highs. All told, we expect an end to the tight supply conditions that have defined the copper market for the past several years and have kept prices well above marginal cost."
Interest Expense: $72mm plus some for the various capital leases, and any amortization associated with capitalized financing costs. So for practical sense, lets use $80mm as the interest expense bogey (real # is probably more like $75-76mm, but hey, I'm rounding up in whole ten millions...)
So, from a cash operating perspective, we'll have $220-$290mm in EBITDA.
Back off of that:
Depreciation of $90-100mm
Interest Exp. of $80mm
Taxes? We'll probably have some deferred tax expense in the initial years Milligan is in operation, but no current expenses as Canadian laws allow for a fairly generous deduction rate for depreciation on mining expenditure which would created tax losses (I expect these to be rather small) in at least the initial year of operation. However, deferred taxes impact net income in the world of GAAP, and to the extent Milligan has Canadian tax depr than IFRS book depr, that means deferred tax expense will be present (and expensed).
The deferred tax expense associated with differences in depreciation (book vs. tax) will likely be the major 'deferred' item effecting the computation of deferred taxes, aside from depletion.
Such deferred tax expense will be partially offset by any deferred tax assets recorded, associated with net operating losses (for tax purposes) that may be created in years One and Two of operation. No valuation allowance would be recorded by TC, most likely, on any NOL's created, so these will mitigate the def. tax liabilities (and expense) from depreciation. On another note: Milligan is owned within a Canadian sub, and Canada does not allow consolidation. So, Endako losses won't offset MM earnings.
So, in the grand scheme of things: from an EPS perspective, reported in their income statement provided to the SEC, it is unlikely that TC will be earning $1 EPS in it's first full year of op's, at current metal prices.
When we were at $1,700/oz. gold, and copper hovering around $4/lb., the odds were better.
I don't want to rain on your parade, but we need to dance:
First paragraph - I am ok with your statement.
Second paragraph - this is where we begin to....diverge.
a) moly contribution margin will probably more than likely cover SGA - agree.
b) fully diluted basis shares used in EPS calc (assuming profits) - agree
c) "making close to $1 per share" - this is where we diverge
Let me explain: on an EBITDA basis, you point makes sense.
On a GAAP basis, you've omitted depreciation and interest expense on the debt.
Currently, Milligan is not in commercial operation. When it is, it's capital costs (approx. $1.5 billion, after reduction [credit] for all the proceeds of pre-commercial operation production that will occur from Aug 2013 "start-up" to declaration of commercial production [Dec 2013 - assuming timetables are met]) will be depreciated over the expected mine life, generally, and ratable resource depletion (in the case of Terrane acquition costs allocated to resources.) My high-line number for this is between $90-$100mm per year.
Depreciation from Milligan will be absorbed into production costs, and when the production is sold, becomes a GAAP-related expense component of overall production costs, and thus impacts EPS. Figure costs of $100mm for this bogey.
Next up: Interest expense. Once the Milligan mine is in commercial production, the cash interest expense on (largely) the various notes TC has issued will be expensed. Currently, since the proceeds from the bond issuance have been used to finance the construction of Milligan, these cash interest expenses (coupons) have been capitalized into the cost of constructing Milligan. After Milligan is declared in commercial operation (again, Dec 2013, cross-your-fingers...), interest expense will be expensed. Since the chances TC repays any debt between now and Dec 2013 is practically nil, interest expense on all the issued notes will drop right into the income statement. That's $72mm - cont.
One major caveat to your bullish theses: a Chinese economic meltdown. If that should happen then all bets are off. Moly and copper prices will get crushed and along with them TC's profits. Moly operations alone could actually cost the company money instead of providing money. There's a reason why the stock has retreated so much lately: with all its debt it's at a vulnerable point should metal prices continue to fall.
Indeed, the stock has fallen because market is taking down obvious future EPS numbers.
If metal prices stabilize at current levels, and assuming Milligan does what it's built to do, the debt is less of a threat at this point. However, w. a Chinese blowup dragging down metal prices further, the risks associated with future servicing of debt increase considerably.
Moly most likely won't cost TC material amounts of money in next two years unless the price haves from current levels ($11/lb. down to $5's per lb.), since they will simply put both TC Idaho mine and Endako on care & maintenance by end of 2014 (once Phase 7 is tapped out), were this to happen.
I don't expect moly to collapse since so much worldwide production comes out of China [from primary moly mines - not copper by-product], and their costs are anywhere from $8-12 per lb. Since China basically produces internally what they use (import little, export little), they are screwed if their own moly mining industry cuts back production sharply. How long those outfits could operate at a major cash loss operating point is anyone's guess, and shutdowns internally within the Chinese moly mining sector will cause steel companies there to secure moly by importing more from sources outside China (US and Chile, are the world's big exporters of moly, as they produce much more than is used internally within each country by wide margin). It was the high worldwide moly prices from 2005 to 2008 that caused the explosion of new moly production expansion in China, as Chinese suppliers have accounted for most of the increased worldwide production the moly market has experienced from 2006 to present (USGS data). Chinese steel makers were actually the parties that helped the Chinese miners to expand (finance) their moly operations during this time.
Anyway, TC needs higher metal prices. It will be good for the stock. Gotta git.
For Metal prices: Yes there are reasons for why the stock retreated lately. But how long it will last? Do you think Chines will stop building infrastructure? No they will continue building up. Other Asian countries will be buying copper and Moly too. US and EU has a lot of airports and bridges which need to be rebuild. If you take 3-5 year outlook Copper and Moly will do fine.
For Gold: Rise in yields will cause The Fed to accelerate QE no tapering in sight. Also Chinese will stimulate more. So gold will do fine.
About Moly operations: The management indicated that they will shut down the mines if they become cash flow negative. Endaco Moly cash flow longer term will be $8-9, so at Moly $10-11 they will break even, plus Langeloth. Moly operations will break even and generate enough cash to pay for GSA expenses.
Since the PRC owns the banks, an economic meltdown would be a conscience decision from people who want to stay in power. I still think this is to shake down the shadow bankers, but then it will be back to bringing electricitiy, cars, housing and gadgets to the people.
Sentiment: Strong Buy