Thompson Creek slides after earnings report

Rising costs took a toll on the bottom line for the molybdenum miner.

By Jim J. Jubak Mar 1, 2012 6:16PM
It looks like the rally in shares of Thompson Creek Metals (TC) is over, put to an end by the company's own fourth-quarter earnings report on Feb. 27. The stock had climbed from $5.93 on Nov. 25, the start of the current market rally, to $9.36 on Feb. 3. Shares closed Thursday at $7.29.

I don't own molybdenum miner Thompson Creek in my 12-to-18 month Jubak's Picks portfolio anymore (having sold it out of that portfolio on May 4, 2011) but the stock is still a member of my long-term Jubak Picks portfolio.

In the long-term, I continue to like the stock as a way to play the growing global demand for molybdenum, a key ingredient in high-strength steel alloys. But I wouldn't buy more or start a new position just yet.

This quarter is a good reminder that for a mining company, growing sales isn't all that counts.

In 2011, Thompson Creek saw record sales of 40.1 million pounds of molybdenum and record revenue of $669 million.

But higher costs crushed Thompson Creek's bottom line. Cash costs soared to $12.69 a pound in the fourth quarter from $5.81 in the fourth quarter of 2010. For all of 2011, cash costs per pound came to $7.94, up from $6.07 in 2010. That took earnings per share -- excluding one-time gains in both 2010 and 2011 -- down to 73 cents a share for 2011 against $1.07 a share in 2010.

But rising production costs weren't the worst part of the cost picture at Thompson Creek. The company announced that capital costs for 2012 would climb to a range of $868 million to $952 million as the company expanded its Endarko mill and continued development at its Mt. Milligan copper and gold mine. According to Deutsche Bank, that's a big $355 million increase from previous estimates. Capital spending in 2010 came to $803 million.

I don't think this kind of capital spending revision is all that unusual in the mining industry right now, where projects at lots of miners are facing big cost increases and big delays.

But for a company as small as Thompson Creek -- current market capitalization is just $1.22 billion -- slippage of $355 million is a big deal.

Right now the company is projecting that its capital budget will drop to just $205 million to $265 million in 2013. You can image what whacking $600 million or so off capital spending would do for the bottom line of a company with $669 million in annual revenue.

But the problem is, after the last miss on capital spending, investors aren't going to believe that capital spending reduction until they see it. I'd wait a quarter or two or three on these shares to see if, say, around the middle of 2012, management thinks capital spending is still on schedule for 2012 and 2013.

At the time of this writing, Jim Jubak didn't own shares of any companies mentioned in this post in personal portfolios. The mutual fund he manages, Jubak Global Equity Fund (JUBAX), may or may not own positions in any stock mentioned. The fund did not own shares of Thompson Creek as of the end of December. For a full list of the stocks in the fund as of the end of the most recent quarter, see the fund's portfolio here. 
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