Investors of Thompson Creek Metals Company Inc (USA) (NYSE:TC) (TSE:TCM) are concerned with the company's high debt levels and may impact the long-term investment case due to the need to repay debt versus invest in new projects.
Thompson Creek is one of the largest molybdenum miners in the world. It produces molybdenum at its 100 percent-owned Thompson Creek Mine in Idaho and Langeloth Metallurgical Facility in Pennsylvania and its 75 percent-owned Endako Mine in northern British Columbia. The company is in the final stages of ramping up its Mt. Milligan mine in British Columbia.
As of Sept. 30, 2013, Thompson Creek's $926.0 million debt position consisted of the following important notes:
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9.75 percent Senior Secured Notes – $350 million. The notes mature on December 1, 2017 and require semi-annual interest payments onFebruary 1 and August 1 of each year.
7.375 percent Senior Unsecured Notes – $350 million. The notes mature on June 1, 2018 and require semi-annual interest payments on June 1 and December 1 of each year.
12.5 percent Senior Unsecured Notes – $200 million. The notes mature on May 1, 2019 and require semi-annual interest payments on May 1 and November 1 of each year.
As of Sept.30, 2013, the company had cash and cash equivalents of $322.8 million. Cash flow from operations was $19.5 million. Concern in the market exists on how the company will repay the notes.
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The company's ability to pay is largely a function of how smoothly and quickly the Mt. Milligan ramp-up progresses, how much cost cutting can be achieved at the other operations and head office and of course the path of commodity prices in the coming years.
CIBC analyst Tom Meyer, who did not forecast any near-term liquidity issues in his current outlook, emphasized that the ! company is in the early stages of the ramp-up of Mt. Milligan, which will take a few more quarters.
The ease and cost of debt-restructuring is largely a function of the environment and outlook at the time the debt is being restructured. Commodity prices must trend higher by about 30 percent versus current spot prices to avoid debt restructuring (US$12.48/lb Molybdenum, US$4.23/lb copper and US$1,638/oz. gold). Below those levels, some form of debt restructuring would be required. Molybdenum oxide is currently trading around $9.60/lb.
In other words, all else being equal, the company would require a debt restructuring before early 2018, should prices remain unchanged from current levels. Under this scenario, both the 7.375 percent $350 million note and the 12.5 percent $200 million note would require restructuring.
Should commodity prices return to the first quarter of 2011 levels when the base metal valuations last peaked, the concerns about debt levels would fall away, Meyer said.
In another scenario, commodity prices must remain higher that current spot prices by at least 20 percent in order to pay off the two $350 million notes. The remaining 12.5 percent $200 million note would require restructuring before May 2019.
The importance of the Mt. Milligan project to the company should not be ignored as it essentially transforms the company into a diversified miner. Molybdenum as a percentage of sales falls to 40 percent in 2014 from 100 percent at present.
While molybdenum remains out of favor and prospects of a successful start-up of the company's Mt. Milligan copper-gold project are high, the shares correctly reflect the medium-term outlook for the company.
Sources of positive surprises for the shares would include a rebound in molybdenum prices, which seems unlikely given the current economic malaise in the larger western economies.
Though, the company is making positive progress at Mt. Milligan, Meyer feels that the recent share price pullback has provi! ded a buy! ing opportunity, albeit a risky one.
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