Monday, May 21, 2007

Thompson Creek Metals - Ahead of itself?

Blue Pearl, aka Thompson Creek Metals, TCM-TSX, has made more than a few investors a lot of money. In the fall of 2005 the share price was at a low of $0.60. Today they have a share price of $16.63 for a whopping 2700% return.

Futher, they made 45c/eps in Q1/07. Extrapolate that by multiplying by 4 and add at least 10% for the price of molybdenum going up and you get a rough estimate for 2007 eps of about $2, or a P/E of about 8.3.

Their molybdenum production is 21 million pounds per year, increasing to 27 million pounds, and molybdenum prices are up at least 10%, so earning should go up, making this a buy right?

Wrong, very wrong, and here's why.

For this quarter where they report 45c eps commodity prices were so strong, in their opinion, they reduced their inventory levels and they sold 10.5 million pounds for the quarter, twice their level of guidance. They do not have the inventory levels to repeat this feat, so production sales for Q2-Q4, indeed until they build a new mine, should be about half of Q1.

Further, the US dollar is declining so their Canadian costs will go up, about 10% over last quarter just based on the recent strengthening of the Canadian dollar. That increase in molybdenum prices will offset some of the increased costs due to currency losses, but trying to make up for having half the sales simply isn't going to be covered by the increase in molybdenum price.

Then there is share dilution. They earned $47.7 million dollars, and that is over 105,395,000 shares diluted, so they calculated 45c/share. Currently they have 111,749,000 shares, 24,644,000 warrants and 6,943,000 options for fully diluted share capital of 143,336,000 shares, or about 36% more shares then reported. Average the earnings over the full dilution and you get 33c/eps. There will be a substantial difference between earnings and dilute earnings for Q2.

Thompson Creek metals, is highly unlikely to repeat its Q1 earnings for a very long time, and it isn't unrealistic to expect half the Q1 earnings for Q2.


Joe_5000 said...

How much should we adjust the projected earnings down because revenue will be less than last quarter(they sold twice their usual amount by dipping into inventory) ?

Presumably that depends on how they valued their inventory; normally that is done by the lesser of cost or realizable value. In this case, I presume, they sold off an excess inventory they got from the Thompson takeover. Footnote d) gives this explanation on valuation:

"d) Inventories
Product inventories are carried at the lower of cost or net realizable value. Cost is the production costs for ore produced from
the Corporation’s mines and the amount paid for unfinished product from third parties. Production costs include the costs
of materials, direct labour, mine-site overhead and depreciation and depletion. Materials and supplies inventories are carried
at the lower of cost or replacement cost.
The Corporation recorded the inventory acquired as part of the Thompson Creek acquisition at the current market price less
cost to sell and an allowance for a profit margin for the selling effort."

Did Pearl by any chance have an increase in goodwill on their books as a result of the takeover? If so, over what period of time would they amortize it? Shouldn't part of the goodwill - that fraction of the value of the excess attributable to the undervalued moly Thompson had - thus be totally written off when the inventory gets sold? If not, then they booked extra profit without deducting the full "cost".

Unfortunately, that is how a company uses financial engineering to temporarily levitate their stock price, usually in advance of exercising warrants and options and selling the shares. Since Pearl has about 30 million option and warrants outstanding, we must ask, has that happened here?

Deborah said...

Guidance is 21 million pounds, they sold 10.5 million pounds and the management analysis said they reduced their inventory.

I didn't look super closely or set out to come up with an accurate earnings. There was just a lot of red flags that suggest this stock is not going to do better than Q1, and I saw enough to just come up with a guess of about 10-20c less per share, providing sales are in line with guidance.