They don’t call these stocks cyclical for no reason.
Shares of Thompson Creek Metals (TC), the world’s largest publicly-traded, pure-play molybdenum producer, are down almost 40% from their April 5 high on fears that the world economy, and especially China’s part of it, is slowing. A slowdown would mean less steel production, lower demand for molybdenum, and falling molybdenum prices.
Thompson Creek’s first quarter earnings, reported on May 5, were solid. The company earned 17 cents a share (excluding a charge due to the Canadian company’s conversion to U.S. accounting standards), up from 9 cents a share in the first quarter of 2009. Molybdenum production in the quarter was a record 8.3 million pounds with sales of 6.7 million pounds. (The company built inventory by 1.5 million pounds in the quarter in preparation for a maintenance shutdown at one of its plants used to process third-party ore concentrates in the second quarter.) The cost of production fell to $5.36 a pound and the company saw an average realized sale price of $14.50 a pound.
Revenue for the quarter came to $128 million.
For the rest of 2010 management projected that the cost of production will average between $6 and $7 a pound. Production for the year will be 29 to 32 million pounds. And molybdenum prices will continue their upward trend—up 43% from the first quarter of 2009—for the rest of 2010. Market prices for the first quarter had averaged $15.73 (Thompson Creek’s sale price usually trails the market price by a month or two).
So what has gone so wrong with the stock?
It’s not so much anything that has happened so far but fears of what might happen. The cash price for molybdenum was above $17 a pound last week—pretty much exactly where I thought it would be when I updated this stock after its fourth quarter—but the fear is that orders from China’s huge steel industry for molybdenum, used in producing high performance steel and stainless steel alloys used in things like the condenser units of power and desalination plants, will fall off and prices will decline.
Could happen, of course. Although at the current price of $8.80 a share the stock is discounting a drop well below $14 a pound. And notice the target prices from the Wall Street investment banks that turned sour on the stock in March or April. Deutsche Bank, for example, cut its target price from $21 to $15.
That’s roughly about 70% above the current share price. (For more on how to handle this drop, see my post https://jubakpicks.com/2010/05/21/sell-sure-but-try-to-do-it-on-the-fundamentals-and-not-in-panic/ )
As of May 25 I’m lowering my target price slightly on Thompson Creek Metals to $16 a share from my previous target of $18 and stretching out the schedule to March 2011 from September 2010.
Full disclosure: I own shares of Thompson Creek Metals in my personal portfolio.
Back to investing:
donzelion
“Just wish I hadn’t pulled the trigger so early.”
Simple solution- just pull that trigger again: ave. your cost down and the yield up. May be a good idea to wait a bit tho- see what happens next!
wester93
Chill out. This is a site for discussing the financial markets. That’s what we are doing. Everyone is invited to express their opinions and insights and ask questions. If you don’t like what you are reading, don’t read it but don’t try to dictate who can post their comments. There appear to be many people here who enjoy what Ed is bringing to the table. So let’s hear your comments on the markets and not personal attacks on other people posting here. I understand the markets are very stressful right now, but don’t take your frustrations out on the people posting here. We are all in the same boat.
That is not called for…he doesn’t blow hard at all.
sigli: I have to point out that that report only covers the period from 2000 to 2008, before Obama took office and Salazar took over Interior. The report on the time since then is still forthcoming. So your pointed comments about “silver-tongued devils” are not just cartoonish but also misplaced.
Although honestly I’d be surprised if the next report was too much better, since it sounds like the abuse and corruption in MMA goes right down to the rank-and-file level, and those sorts of non-political-appointee employees are hard to get rid of, job security in government positions being what it is. We’re going to be paying for the corruption and cronyism of the Bush Administration for a long time. Getting that ship in order is going to take years no matter what, but will certainly also require fixing the root of the problem: the profit motive for regulators to go easy on the industries they’re supposed to regulate.
I get the feeling that this site is turning into EdMcGon’s personal site. An occasional comment from anyone is welcome but this is ridiculous.
Mr. Jubak, you are much to patient with this overbearing blowhard; pull the plug already!
Actually, we do elect wall streeters. With our money. We can choose to vote for some and not others, or none at all. It is interesting to me and certainly a dilemma. I can probably make more money actively inventing my money in my own company rather than hoping the management of a listed company is playing straight for the moment. I have not pulled out of the market, and a lot of my money is in IRA’s, so it is harder for me to invest it elsewhere. That said, I did not fund my SEP last year as I figured that (since I had a bad year) I could invest in my business at a low point and get higher returns. But I struggle with this.
rolfer1,
The problem is we don’t pay the Wall Streeters salaries. We do pay for the public servants. In addition, we grant our public servants the authority to make life difficult (in some cases impossible) for whomever they are overseeing. Wall Streeters have no authority except for what the government allows them (i.e. “too big to fail”).
Ed, sigli, et al. – “regulators aren’t elected” – duh! We don’t elect wall streeters either, but they use more cocaine than anyone outside of hollywood and I’m sure speed and porn are also actively consumed. People are people, foibles and all. Once upon a time civics was taught in high school and even marginally-educated folks had some understanding how government works; that’s no longer the case allowing dogmatic douche-bags to influence public opinion. Government “bureaucrats” and “regulators” were once called “public servants”, which they are – they enforce regulations based on laws passed by Congress, no other ax to grind, no selfish profit motives — unlike those so-admired financial “wizards” on Wall Street (gee, remember the financial meltdown?) or those wonderful bank CEO’s… blah, blah, blah.
Ed,
We are on the same page with China. I think the froth got sucked out of the market and they will grow at the steady 9-10% range. Maybe we need to learn about soft landings like the Chinese!
I’ve been following a lot more closely about China being a great leading indicator for global health. Hard to dispute the info. More research to follow.
I don’t see a big drop in the markets until we see some of the GDP numbers get hammered because of Euro. Could be a few quarters. If China doesn’t overheat we won’t have problems.
We’ll see Durable goods order. Could provide a pop
taterbug820,
I pulled out of all equities last week and went completely with short ETF’s. I ate my losses on GS back on 5/6 when it became apparent GS wasn’t going to fair any better against the market headwinds than the rest of the financial sector.
GS might be a solid buy after a market crash.
grindy2424,
Early to bed, early to rise… 🙂
Actually, I’m selling my short on the financial sector (FAZ). It has become clear that so-called “financial reform” will have no impact, other than to make “too big to fail” financial institutions even bigger.
I’m not buying any equities yet. Right now, I’m concerned the current mini-bull market may be nothing more than a head fake. If you look at yesterday’s volume numbers, during the big drop at the open, volume was heavy. During the rest of the day while the indexes creeped back up, volume was light. That tells me the traders are still overwhelmingly negative.
I expect the market’s bounce will suck in a few people trying to time the bottom. They will be the same people screaming “SELL SELL SELL!” later when the markets crash.
Don’t think I’m all negative though. I’m actually getting close to being bullish on China. I’m getting a lot of good signals, but I need some more confirmation before I jump in.
Ed, are you still holding GS like you said you would. Not sure if it your 135 buy. I know it was close.
Jim-Thanks for the update on TC.
Ed you are up too early in the morning!!!!
You starting to look to buy are staying pat here?
Here’s a little humor to start your day:
http://www.cnbc.com/id/37351133
greenflash98,
You asked me about those Chinese stocks. Before I begin, keep in mind that I would NOT advise buying ANY Chinese stocks yet. The markets are still too worried. With that said…
CMFO: I like the financials, although I would like to see some more cash flow. Still, the ROI is excellent, great margins, low P/E (and low forward P/E), solid insider ownership, and no debt. It is definitely one worth researching further. You will need to watch the yen with this one, since they export a lot to Japan. If the yen starts dropping against the dollar (or if the Chinese begin to float the yuan against the dollar), then CMFO could feel some pain on their bottom line.
CGA: Very similar to CMFO in the financials. The difference comes when you look at the stock performance. There is a clear downward pattern in the chart. I’m not sure why that is without further research, although it may just be mirroring the recent drops in the Chinese stocks. Regardless, this is another one that merits further research.
YONG: This one is in a similar industry to CGA, but the financials aren’t nearly as pretty, mostly due to very tight profit margins. YONG has a very high P/E (although the forward P/E looks good) and a low ROI. However, since YONG and CGA are both in the agricultural industry, I would prefer CGA over YONG just on surface factors. There’s no reason to own both (unless you are looking for a LOT of exposure to Chinese agriculture).
sigli,
Remember, regulators aren’t elected. We could have the most virtuous politicians in the world, and still have scum for bureaucrats.
Jim: Why are costs of production expected to increase 12 – 30%? Is that based on April petrol prices? I’m curious what the total demand picture looks like for moly-alloyed high performance steel, but I’d forgotten desal applications (which should hold steady, while just about everything else is uncertain).
USDAPortfolio – concur on the buying opportunity. DOW under 10k seems like the time to buy dividend payers like Abbott. Just wish I hadn’t pulled the trigger so early.
A word of advice for people. If you are nervous about a stock do your own research so you can make good buy/sell decisions.
Also sentiment is starting to get quite bearish so might be a good time to pick up a few stocks. Who has what on the watch list?
Starting some research with glw, pbr, de, usb, etc. Also outside the lines of regulars in emerging markets.
Dry shipping rates are rising, as well as truck traffic in the US. People were definitely afraid of the doom and gloom. Always a good time to start looking.
To everybody else,
I agree with several others who have commented that we need to treat this correction as a buying opportunity. Many stocks are trading at a “steal” right now.
As hard as it is to look past the recent activity, keep in mind that the market prices are determined by those who choose to go to the market that day. No more, no less. The price will eventually hit the fair market value of the company, but patience is key. Jim has demonstrated — repeatedly — the patience required for a good investor. Be very careful pursuing quick profits and quick trades.
Let me share a quick parable: In March 2009, I bought Burlington Northern Santa Fe. The stock rose quickly, along with the rest of the market. Let’s face it – March 2009 was just a good time to buy anything. But something happened in the 4Q 2009. Berkshire Hathaway bought (the rest of) the company. The stock rose 30% in 1 day.
Acquisitions happen at the fair value of the company. The shareholders will accept no less. I believe we will see a rise in M&A activity over the remainder of 2010 and 2011.
If you own a good company that is significantly undervalued, somebody will recognize the disparity and come along and buy it. Your stock will go up. Just be patient, and do your homework.
I agree with updating under performing stocks. You are seriously late with updating MXWL. Please give an update. This stock is killing me.
Jim,
Thanks for your tip on Abbott Labs. I had this company on my watch list, and already had determined that they were undervalued based on prior fundamentals.
I had just remarked to myself, not 1 day prior to your tip, that I was looking for a company with smart management that would use the strong dollar to fund acquisitions in Emerging Markets. I had also noted that my portfolio is significantly underweight in the health care sector, which should be a good fundamental story going forward. Your tip on their acquisition of Piramal was enough to convince me.
I used this morning’s selloff to buy Abbott Labs with a limit order at $46.50. Abbott Labs is a good fundamental story and I’m willing to be paid with the 3.7% dividend while I wait for the stock to rise after the current correction. My price target for this stock is $58, which is a 24% upside from my buy price. Note that my target price is less than Morningstar’s fair value estimate, which is available at the following link after signing up for a free account:
http://news.morningstar.com/articlenet/article.aspx?id=330415&page=2
Jim
Thank you for the update. In the future when one of your picks drops, say greater than 20% could you please provide a more timely update. Just a suggestion 🙂
As always, thank you for your analysis and helping to keep our heads level. (keeps us from falling off the chair when the graph plummets………
“There isn’t nearly enough porn watching and crystal meth usage in government already!”
The only solution is to elect HONEST and VIRTUOUS people. It seems 1/2 of society thinks character doesn’t matter, and the other half thinks their silver tongued devils are knights in shining honor.
greenflash98,
No they aren’t, but I’ll look into them. Thanks for the tips!
@AdamE-123
In complete agreement with you. I had the good fortune to buy TC back in Nov. 2008, at $3.59. Became my favorite holding through early this year up to $14 (and 300% gain). And watched that fall and fall some more since April…. Unbelievably hard to sell something that has done so well for you. Emotional attachment, I guess. But I let it go last Friday, at $9.42. Obviously still profitable, but still smarts a bit. I know others have been less fortunate 🙁 Jim hit it in his first line, “They don’t call them cyclical for no reason”. I would be shocked if TC could hit Jim’s new target of $16 in 10 months, but it will come back at some point. I just think it will come lower still for now, probably way lower, and I will be looking to rebuy when it does. As EdMcG just said, No way on Earth would I buy just now.
@EdMcG
I subscribe to the MF’s Global Gains, and right now they are very hot on these three in China: CMFO, CGA, and YONG. Are any of these on your aforementioned China watch-and-wait-list? I’m thinking of splitting a full position in my port (about $15K) between the three of them. Your thoughts would be welcome.
Here is why we need more government regulators:
http://news.yahoo.com/s/ap/20100525/ap_on_bi_ge/us_gulf_oil_spill_washington_12
There isn’t nearly enough porn watching and crystal meth usage in government already!
AdamE-123,
I didn’t see that, but thanks for the info!
Seriously, if you look at most commodities, they tanked just like stocks did during the beginning of this recession.
I was looking at PPLT and PALL (physical ETF’s for platinum and palladium respectively) earlier today. If this were a bull market, or even remotely close to a bull, I’d be buying those two like crazy. They were bouncing off low resistance and looking obscenely cheap.
No way on Earth am I buying commodities when we are one piece of bad news away from a crash. The commodity markets may drop more than equities in that scenario.
If you look at Moly charts compared to other metals in 2008 it appeared to hold up better than the rest. Then it dropped like a rock! Wouldn’t be surprised if that happend again.
Jim,
To use another industrial metal, palladium has already fallen about 25% from it’s high earlier this year. Is there some reason why molybdenum can’t fall that much?
Jim,
On the larger more diversified miners what is your thoughts on TCK?