St. LOUIS () -- The world's No. 5 molybdenum producer, Thompson Creek Metals Company Inc. [TSX:TCM], reported last night that a slide has interrupted operations at its 75%-owned Endako Mine in northern British Columbia. This is the second bit of bad news in a week for shareholders of former Blue Pearl Mining.
Shares hit a low of C$19.40 after the news, but have since recovered to C$21.25 on TSX. The stock is off 10% since Friday's close and 17% from October's high of C$25.58 - a 52-week high. However, important to note shares have gained 116% since the start of 2007.
Thompson Creek said the slide occurred late in the evening of 12 November at the east end of the south wall of the Endako Pit, partially burying a shovel that was mining ore. The operator sustained "only a minor injury" in the slide, but operations in the pit remain shut down to assess the situation.
"Management is currently evaluating the situation and will release details of the slide's impact as it becomes more certain in the weeks ahead," the company said in a statement.
Slides have happened at the mine in the past, but the company said it had performed remedial work to prevent a long-term interruption of operations. The mill at Endako will continue to operate, using ore currently being mined from the Denak West Pit, as well as from the mine's stockpile of ore.
"However, the production rate, grade and recoveries at the mill may be affected," noted the company.
The ore grade at the mill averaged 0.06% Mo in the first 10 months of 2007. The Denak West Pit average grade is 0.065% Mo. The stockpile totals 20 million tonnes of ore, which is equivalent to two years production at Endako, with an average estimated grade of 0.039% Mo.
Thompson Creek recently announced the results of the feasibility study on the proposed mill expansion at Endako Mine. The study estimated a cost of C$373 million to increase output to 50,000 tonnes of ore per day from the current 28,000 tonnes per day, but does not include costs related to new mine equipment for sustained operation at current rates.
The company said the expanded facility could be fully operational by the second quarter of 2010 and would involve an increase in annual molybdenum production at Endako to approximately 16 million pounds beginning in 2010 from the current 11.2 million pounds a year.
Wayne Cheveldayoff, Director of Investor Relations for Thompson Creek, told RI that the slide would not affect the mine expansion timeline or costs. He said the company was already scheduled to leave the area in a year and the shut down is a "very short-term thing."
In a research note on Wednesday, John Redstone, an analyst at Desjardins Securities, estimated that if Thompson's share of Endako production were to fall by 1 million pounds in the fourth quarter, the impact on earnings could amount to 10 cents a share.
He forecast the company to earn 43 cents a share in Q4 before any impact of the rock slide, maintaining his forecast for 2007 earnings of $1.48 a share, $2.61 a share in 2008, and a one-year price target of C$30.60.
In a research note published on 12 November, analysts at UBS maintained their "buy" rating on Thompson Creek, but reduced their 12-month target price and earnings per share forecasts for 2007 and 2008.
The analysts moved their 12-month price lower from C$28 to C$27 and reduced earnings per share estimates to $1.73 from $1.58 in 2007 and $2.78 from $2.94 in 2008 due to lower production forecasts in both years.
On Nov. 9, Thompson Creek reduced its molybdenum output forecasts for 2007 to 18-17.5 million pounds from the original estimate of 21 million pounds. In 2008, the company expects its molybdenum production to be in the range of 24-25.5 million pounds, versus a previous estimate of 27 million pounds.
"The second half of 2007 is a transition period for the company as molybdenum production has been lower than what we achieved in the past and substantially below the level we will be able to achieve in future years," said Kevin Loughrey, president and CEO, in a statement.
Production at the company's 100%-owned Thompson Creek in Idaho is expected to be in the range of 10-10.3 million pounds this year, while the company's 75% share of Endako's production is expected to total between 7.5 million-7.7 million pounds. The company attributed the drop to lower-grades at Endako and a change in the mine plan at the Thompson Creek Mine.
"The shift from lower-grade ore to higher-grade ore was expected to occur in 2007 but now the mining of some of the lower-grade ore has been shifted into 2008," the company said.
However, the company estimated production to exceed 34 million pounds in 2009, up from a previous estimate of 29 million pounds for that year, without including any potential output from the company's Davidson deposit.
The Davidson project near Smithers, B.C., contains Measured and Indicated resources of 293 million pounds Mo at a 0.20% cutoff. A feasibility study of the Davidson Project is currently being prepared by external consultants and is expected to be completed in 2007.
Moly Market Analysis
Molybdenum is mainly used as an alloy to strengthen iron and steel, increasing the melting point and enhancing resistance to corrosion. It is a vital component in the making of stainless steel and oil and gas pipelines. China's growth is expected to keep demand for both at record high levels.
Statistics from the U.S. Geological Survey show world-wide molybdenum consumption at an apparent 44,500 tonnes (although reported figures are only 19,300 tonnes). Consumption has increased 25% since 2005 and 84% since 2004. On the supply side, mine production came in at 60,500 tonnes last year, up only 2,500 from 2005.
Source: Roskill Information Services
About 60% of molybdenum production is a byproduct of copper mining, with only five major producers: Kennecott (owned by Rio Tinto [NYSE:RTP]), Grupo Mexico (state-owned), Codelco (Brazilian state-owned) and Phelps Dodge (now Freeport McMoRan [NYSE:FCX]) and Thompson Creek.
Ivan Herring, a consultant on industrial metal sourcing and associated risk management for end users, told listeners at this year's that a supply crisis could be on the horizon unless new mines are brought on rapidly.
He said current demand is strong and that the expansion of uses for molybdenum may cause even the current high demand to increase substantially in the near term. Therefore, any disruption in the supply, such as Thompson Creek's reduced production, could create a market squeeze.
Molybdenum is currently priced at $32.50/lb. In 2007, the molybdenum price has held firm in the $25-$32 range, well above the 2006 average price of around $25/lb.