TC Trading at Liquidation

August 16, 2012 Leave a comment

It’s been a tough year for the molybdenum industry in general and Thompson Creek Metals in particular. The Denver-based miner has seen huge cost overruns on its Mt. Milligan copper-gold mine, a drop in mol production at its flagship pit in Idaho, and a rough start for the new Endako mill. The stock has lost most of its value and is trading near liquidation. It’s fair to say that its been a disastrous 18 months for the shareholders.

One factor that has contributed to Thompson Creek’s woes is the rapid drop in the price of molybdenum, which is currently trading at 11 dollars per pound. This is only a few dollars above production costs for a miner like TC, and has obliterated their cash flow right when they need it most.

In February 2011, when the price of mol was riding high at USD 17.80 per pound, I developed my forward price model for molybdenum, and ran it forward 10,000 times to create a Monte-Carlo simulation. Here’s a screenshot (from my February 2011 post) showing a few sample trajectories. Mol’s got vol, Man.

With the model in hand, we can better appreciate the risks that Thompson Creek was taking as a consequence of their exposure to molybdenum price fluctuations. If you listen to their conference calls over the past year, they are uniformly careful to couch their language with safe regulatory-approved palliatives and disclaimers, “forward looking statements, etc. etc.”. I cannot find any specific indications that they are evaluating their molybdenum price risk with a serious quantitative model. Even a simple bootstrap-based approach of the type that I’ve implemented should have been enough to give them some serious pause.

The following histogram is the result of running the February 2011 model 18 months forward to the present day (August 2012). I show the distribution of molybdenum prices predicted by the model, along with the current spot price as a guilty red bar.

Over 10,000 trials, the average Aug 2012 predicted molybdenum price was 18.1 dollars per pound. TC would not be trading with a two handle had that been the outcome. More importantly, however, the current 11 dollar per pound cost is only one standard deviation beneath the mean. With my model, which is propagated from the heady days of 17.8 dollar per pound mol, there was a 15% chance that the price would be at or below 11 dollars per pound. That, combined with a little forward thinking concering price inflation on big mining projects when the price of gold is sky high, could have kept TC from destroying more than a billion bucks of shareholder value.

Next up, what does the distribution of mol prices look like 18 months forward?

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Predicting Molybdenum Production

March 5, 2011 2 Comments

Going forward, the all-important price of mol will depend sensitively on the competition between supply and demand. For a price inelastic commodity like molybdenum, a relatively small demand-supply imbalance can cause huge price swings. Molybdenum is only a small component of overall steel costs, so manufacturers will pay what it takes to get their mol fix. Likewise, nobody’s hoping for a molybdenum engagement ring. If there’s more than enough mol to go around (as was the case in 1980, when steel-rolling improvements caused the usage of molybdenum in pipelines to crater) then the price collapses. I’m trying to build a quantitative model of this phenomenon.

There’s a very useful investor’s presentation on the Thompson Creek Metals website that contains the following .ppt slide:

The slide shows how world mol demand has increased over the past fifty years, and projects demand to 5 years and 10 years forward, assuming the average year-to-year production increase of 4%. The resulting expectation is that there’ll be 600 million pounds of production in 2015, and 740 million pounds in 2021. Given the difficulty in bringing new projects on line, those numbers seem like likely to support a robust mol price. But can we get confidence limits on these predictions?

I sampled the fifty one production numbers from the above graph with a one-sigma measurement accuracy of ~ ±5 million pounds per year, the resulting series, is:

(86,80,92,95,111,130,132,141,160,180,
170,173,175,181,160,180,200,220,225,
230,240,200,130,210,220,210,200,215,
250,245,220,215,210,200,245,250,300,
305,300,320,300,305,330,350,360,400,
410,470,470,400,480)

I differenced the above sequence to get set of yearly percentage changes in demand. Assuming that these moves are serially uncorrelated on a year-to-year basis (and remembering, of course, that when you assume, you make an ass out of u and me) one can build foward trajectories for demand over the next ten years. Ten random example trajectories look like this:

After ten thousand ten-year trials, the average 2021 molybdenum production is 683±272 million pounds. The resulting distribution looks quite nicely log-normal. Central limit theorem in action:

So 740 million pounds in 2021 looks a little optimistic, but it’s within 1-sigma of expectations. Seems reasonable that you put your best foot forward if you’re doing an investor presentation…

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TC Earnings Call

February 26, 2011 Leave a comment

In academia, one hears of ten-o’clock scholars. In the hurly-burly world of molybdenum speculation, it’s 10:40 AM-o’clock would-be metals analysts. I was not finished preparing Friday morning’s dynamics lecture, and so I wasn’t live on the line for Thompson Creek’s 5:30 AM earnings call. Conveniently, however, the call is online, and so I was able to listen in a day late.

TC’s 2010 full-year performance was pretty much in line with expectations. Full-year production was 32.6 million pounds of mol, costing an average of $6.07 a pound to dig out of the ground and process, and selling for an average of $15.67 per pound. Net income was $113.7 million using generally accepted accounting principles. TC has a slew of outstanding warrants priced in Canadian dollars, which are treated as derivative exposure using US accounting rules. They take a big bite out of the official bottom line. I have not had time to fully understand the underlying story, but I do intend to look in more detail at exactly what’s going on with those bad boys. Non-GAAP net profit for the year was $163.3 million, and $34.4 million for the fourth quarter.

The most interesting part of the call is the Q/A session following the canned presentation. There is a lot of talk about the effect of price inflation on capital expenditures. TC is building out at full bore on both an expansion of the Endako mine, and also on the Mt. Milligan copper-gold project. With metals prices up across the board, there is heavy competition for skilled workers, which drives up Cap-X. Oil’s going up, and ironically, so is the price of steel. TC had 316 mil in the bank at the start of the year. They expect to spend all that, plus all their profits for the year, and are talking about going out on the credit markets for even more dough. It’s clear why they don’t pay a dividend. “Look, dude, it takes money to make money.”

Filed under molybdenum trading Tagged with , ,

Report card

January 22, 2011 1 Comment

Here’s the comparative performance over the past year for four effectively pure play mol names: Adanac (AUAYF, market cap 10M), Roca Mines (ROK, market cap 42M), Thompson Creek (TC, 2.3B), and General Moly (GMO, market cap 408M), along with XLB (basic materials SPDR ETF):

GMO won 2010, hands down. The stock price of this name is doing well because they’ve got clear (Chinese-sourced) bridge financing in place and a good shot at bringing the Mt. Hope mine in Nevada on line. With its projected 40 million pounds per year of mol production, Mt Hope wouldn’t exactly be the best news for TC. Still not sure what’s up with Adanac’s recent flurry of stock trading activity. If Roca Mines 2010 3rd-quarter report is any indication, ROK hasn’t exactly been taking their MAX mine to the max as of late.

Roca and Adanac don’t have associated exchange-traded options, but TC and GMO do. Here, courtesy of ivolatility.com, are one-year time-series plots of realized and implied vol for TC and GMO:


GMO is trading at 80% implied vol, while TC is trading at 50%. I think it might be interesting to investigate trades that short GMO vol and hedge with TC vol. The vol’s all mol after all…

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The Climax Mine

January 21, 2011 Leave a comment

Unlike the extrasolar planets, the underground mines often have evocative names.

My first experience with mines came during high school in the early 1980s, when I got the opportunity to attach myself to a University of Illinois geology research trip to the Creede silver district in Colorado. Man, that was great.  I was impressed by the sharp high-altitude light, the narrow rocky canyons, and the decaying 1890s-era mines — the Last Chance, the Commodore, the Revenue Tunnel, and above all, the fabulous Amethyst mine, where the central vein graded to a staggering 2000 troy ounces of silver per ton of ore.

In the summer of 1983, memories of the Hunt Brothers’ attempt to corner the silver market were still fresh, and Chevron was looking into the possibility of re-opening the Amethyst mine. In what must have been a gross violation of OHSA rules, the Chevron geologists took us into the main tunnel. I remember the amethyst crystals sparkling in the headlamps, and the faint trickle of water filtering through the miocene-era veins of the mountain. Far inside the mine, we turned off the lamps and there was absolute inky blackness.

The fabled Climax Molybdenum Mine is located further north in Colorado near Leadville. The original Climax claim dates to the late 1870s, and production started in 1914. During parts of the 20th-century, the Climax was responsible for three-quarters of world molybdenum production. It was shuttered in 1995, when mol prices were mired near their historic lows.

Down but not out. The Climax Mine is owned by Freeport McMoran (FCX), the S&P100 copper ‘n gold colossus, with a 50 billion market cap, 18 billion in yearly revenus, and 7 billion yearly profit.

According to FCX, the Climax ore body still contains 500 million pounds of molybdenum, and in 2007, with mol prices spiking, plans were announced to reopen the mine, with production projected at 30 million pounds per year starting in 2010. A Climax restart amounts to the equivalent of a whole new TC coming on line — a 6% increase in world production. That’s an elephant in the room.

Not surprisingly, the financial crisis put the Climax plans on ice. FCX estimated their restart cost for Climax at 500 million, of which 200 million was spent prior to the ’08 crash.

The status of Climax is a factor of very considerable interest to investors (read speculators) in AUA.TO, ROK.V, GMO and TC. Adanac’s shaky prospects look even shakier if Freeport McMoran starts shipping 100s of millions of dollars worth of additional high-grade mol. Here’s a link to a July 2009 article in the Summit Daily News that reports on a presentation by FCX executive Fred Mezner to the Summit County Rotatry Club in Frisco Colorado. Mezner said that planets were still on hold at that time prending economic recover. Significantly, the article also points to permitting hurdles that sound like they more problematic than FCX had previously let on.

The economy, stock prices, and especially mol prices have all improved significantly since July of ’09. I haven’t found any news on FCX’s most recent plans for Climax, but it seems likely that they might be back at work (or eying up getting back to work) on the restart. One thing’s for sure: Right now, a producing, environmentally compliant mol mine is a license to print money. The 5 billion dollar question is exactly when that license expires…

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