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?