Gold mining stock to reduce its political risk

Gold mining stock Centerra Gold has agreed to acquire Thompson Creek Metals. This may not be a text book example supporting the Theory of Complementary Needs, but each has at least some of what the other needs. Thompson needs to make money and repay debt. Centerra needs more political certainty and longer-lasting gold mining operations.

We regularly review Colorado-based Thompson Creek Metals (TSX─TCM) in The Back Page feature of The Investment Reporter. Since we published our March 11 issue, its shares have jumped by 112 per cent. That’s mostly due to Toronto-based Centerra Gold’s (TSX─CG) ‘friendly’ acquisition offer for TCM. Each company has most of what the other needs.

Centerra will issue 0.0988 of its shares for each share of TCM. This was one-third above TCM’s average share price over the previous 20 days. Vote for the takeover. Then exchange your shares in TCM for shares in Centerra. TCM remains a hold. Its share price will now rise and fall with Centerra’s share price. The acquisition will reduce Centerra’s political risk as well as raise its production and returns in the long run. Centerra also remains a hold.

TCM loses money and carries heavy debt

TCM keeps losing money. From 2012 through 2015, it lost US$5.76 a share. This year and next year, the company is expected to lose 21 and 11 U.S. cents a share, respectively. TCM formerly produced plenty of molybdenum, which strengthens steel. But China plans to eliminate excess steel capacity. According to The Globe & Mail: “The molybdenum slump dragged down Thompson Creek’s share price from $25 in 2007.” Indeed, it has suspended molybdenum production in B.C., Idaho and Pennsylvania.

TCM borrowed money to buy the Mount Milligan gold and copper mine in B.C. But its ongoing losses would make it difficult to service this debt. The company’s net debt (total debt less cash) stands at US$731 million. Its credit rating is ‘junk’. Fortunately, Centerra will shoulder TCM’s debt.

TCM’s shareholders will get a stake in a profitable gold mining stock. Centerra is expected to earn seven U.S. cents a share. That’s down by 70 per cent from 23 U.S. cents a share last year. Next year, however, Centerra’s earnings are expected to bounce back to 23 U.S. cents a share. TCM’s shareholders will also earn dividends of 16 cents on their Centerra shares.

Centerra faces political risk. It says it’s “the largest Western-based gold producer in Central Asia”. It owns and operates one gold mine in each of Kyrgyzstan and Mongolia. Kyrgyzstan keeps fighting Centerra over the Kumtor mine. According to The Globe & Mail: “In June, authorities in the Central Asian republic barred several Centerra executives from leaving the country and ordered a review of the legality of agreements that had been signed with the Canadian miner . . . the government relented and handed Centerra two key permits to keep it running through the second half of the year.” Six months is little time. And the murder of Canadian Jim Doak in Mongolia raises doubts about the rule of law in that country.

TCM’s Mount Milligan mine will cut Centerra’s political risk. In 2016, Mount Milligan is expected to produce from 240,000 to 270,000 ounces of gold and from 56 to 65 million pounds of copper. It’s expected to profitably produce low-cost gold and copper for at least the next 20 years. The combined company has prospects to sustain and grow its production base.

 

The Investment Reporter, MPL Communications Inc.
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