In today’s Daily Alert, Global Investment Strategist Editor Benjamin Shepherd recommends picking up an un-loved, undervalued play on the metal molybdenum.
“As the effects of the recession have rippled through the global economy over the past five years or so, molybdenum prices have nosedived, falling by more than a third just over the past two years. ... Given that it’s primarily used as an alloying agent and the stainless steel market remains extremely weak, that sharp decline in price is hardly surprising. Nonetheless, molybdenum consumption grew by 14% in 2011 and was flat last year. But as the global economy continues to improve, demand growth is expected to average about 4.6% annually over the next five years or so.
“But even as demand grows, supply is tightening.
“China has long been the leading producer of molybdenum in the world, digging up 39% of global supply in 2009. During the last decade, it was also a leading exporter of the metal, sending about 80 million tons of it abroad in an average year.
“That pattern has shifted, though, with China now consuming most of its molybdenum production itself. The country also won’t be exporting much of its excess either, since the government there has designated it a strategic national resource and instituted strict export taxes and lowered export quotas.
“At the same time, global production has also slowed. Molybdenum is primarily produced as a byproduct of other mining activities, particularly copper mining, and annual production has been tightening with the general global decline in activity. In 2010 and 2011, mining production of molybdenum was flat and grew by just 4% last year. As a result, molybdenum stockpiles have been tightening. ...
“Thompson Creek Metals Company, Inc. (TC $2.50 NYSE) is an interesting, soon-to-be diversified play on molybdenum, although it does come with some risks. The miner currently operates two molybdenum mines: its namesake Thompson Creek in Idaho and the Endako mine in British Columbia, Canada. Between the two, the company produces about 28 million pounds of the grey metal each year. In addition to its mines, Thompson Creek also owns a metal roasting facility that is used to refine the raw molybdenum into a pure oxide. That makes the company among only three suppliers of pure molybdenum products in North and South America.
“Thompson Creek was a high-flyer prior to the recession, fetching better than $25 per share back in 2007. Post-recession, the company has been plagued by low molybdenum prices. The company has also run into trouble, thanks to its efforts to diversify its operations.
“The company has been working to develop a new copper and gold mine at Mt. Milligan in British Columbia. With proven and probable reserves of 2.1 billion pounds of copper and six million ounces of gold, the mine would essentially be a piggy bank for Thompson Creek over the next 22 years, with 40% of the mine’s gold already sold to Royal Gold (RGLD). But the Mt. Milligan project has been dealt numerous overruns over the past few years, as costs have shot up from an estimated $815 million at the start of the project to the ultimate total of about $1.5 billion.
“The mine is finally on track to open sometime in the third quarter, with commercial production beginning in the fourth. All necessary contracts have been placed and financing secured.
“Thompson Creek has also run into problems at its Endako mine over the past year. A harsh winter slowed down operations and recovery rates have fallen, all of which served to drive up cash costs. Given the weak molybdenum prices of late, those problems helped to push Thompson Creek to a loss in 2012.
“But there are positives. Not only does Thompson Creek still have more than 515 million pounds of molybdenum reserves, it will soon be adding copper and gold to its mix as well. ... Thompson Creek is a more speculative play at this point, but the global economy won’t remain this weak forever and demand for stainless steel and other products that rely on molybdenum are bound to recover, particularly as China has severely curtailed its exports. At the same time, there is a clear short-term upside catalyst as Mt. Milligan begins operation.
“Thompson Creek’s shares are trading at just 0.3 times book value, a price that doesn’t account for the value of the company’s underlying assets, making the stock’s valuation very attractive.
“Although Thompson Creek Metals Company still faces some challenges, it’s a buy under 4.”
- Benjamin Shepherd, Global Investment Strategist, April 17, 2013