Chris Mayer, the editor for Agora Financial’s research newsletter Mayer’s Special Situations, examined its prospects and took away these key findings:
“Thompson Creek Metals (TC) is a miner of Molybdenum, or moly (pronounced “molly”), an important metal for strengthening steel and for all kinds of energy applications. It is sometimes known as ‘the energy metal.’ The recession took a big bite out of moly pricing, but it is on the rebound.
“Thompson Creek is the best way to play the rebound in moly. It is a freaking tank, for one thing. It finished the year with $511 million in cash against debt of about $13 million. The market cap is about $2 billion. At present moly prices (about $17/lb.), Thompson Creek should generate over $240 million in operating cash flows this year. At today’s price, the stock goes for only 8 times cash flow. Maintenance capex — just to keep things going — is only about $60 million. So Thompson Creek should do $180 million in free cash flow at current prices. The stock goes for less than 10 times free cash flow, which is a cheap multiple.
“Of course, you get all the upside should moly prices continue to climb. At a moly price of $30/lb. — which is what it was for most of 2004-September 2008 — Thompson Creek’s cash flow explodes.
“There are good reasons to see moly prices rise. First, there is the long-term demand curve, which TC showed during its latest presentation:
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“That’s roughly a 75% increase in a decade. And that assumes historical demand is the best guide. But there are good reasons why moly demand might rise more. This demand is mainly from energy uses and infrastructure investment. Nuclear reactors need moly. Deep-water wells need moly. Tar sands and heavy oils use moly in their pipelines.
“So these are strong new sources of demand that did not impact demand as much in the past. And then you look at where the moly will come from. The financial crisis halted or delayed the development of new mines. China is a potential source for new supply, but its mines are on the higher-cost side of the scale. They will need higher moly prices to encourage investment and bring the new supply online.
“In the meantime, Thompson Creek has a window to make a lot of money.”
It’s evident that higher moly prices are going to impact the TC’s growth potential going forward, yet Mayer sees the company fundamentals as being in the right place for the time being.
You can read more about how to stay apprised of Mayer’s most up-to-date research at the Agora Financial research and reports page here. In July, Mayer will also be speaking at the annual Agora Financial Investment Symposium in Vancouver. You can find additional details about the event and how to attend here.
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