Thompson Creek weighs risk and reward at Davidson (April 21, 2008)

Vancouver — Risk-averse major mining companies didn’t rush to revive molybdenum properties as prices began to climb in 2004, after averaging US$4.50 per lb. for a decade. They’d seen moly prices soar in the 1980s, only to crash a year or so later.

But Toronto-based junior Blue Pearl Mining looked to the future instead of the past and moved quickly in 2005 to tie up the historic Yorke-Hardy deposit on the outskirts of Smithers, B.C.

The company hasn’t looked back since.

Through an audacious US$575-million transaction in fall 2006, Blue Pearl acquired Thompson Creek Metals (TCM-T, TC-N), adopted its name, beefed up its board and transformed it into one of the largest publicly traded, primary moly producers in the world.

The company’s assets now include its namesake mine and mill in Idaho, 75% of the Endako open-pit mine and processing facilities near Fraser Lake, B.C., and a metallurgical roasting plant in Pennsylvania.

Throughout all this, the Yorke-Hardy deposit appeared to be back on the back burner, where it had been for decades since its discovery in 1944, with the notable exception of the mid-1960s to 1970s when two American mining companies drilled the deposit and carried out an underground development program. The project was put on hold because of weak metal prices and ultimately dropped in the 1990s.

But with a positive feasibility study in hand, Thompson Creek is now pondering a production decision for the deposit, since renamed Davidson to honor the perseverance of a geologist who had spent his early career trying to advance the project toward production.

President Kevin Loughrey notes that the study indicates positive project economics based on the assumption that moly prices will be “considerably lower” in the years ahead than at present. The study assumes an average price of US$16.13 per lb. over the 10-year production period, about half the current level of US$34 per lb.

Molybdenum prices have remained robust since climbing off the floor in 2004, because of continued strong demand, mostly from China and other emerging economies. Molybdenum is used as an alloy to strengthen steel, increase its melting point, and enhance its resistance to corrosion.

Uncertainty about long-term prices has prompted Thompson Creek to take a cautious approach toward mine planning at Davidson. The company doesn’t envision a bulk-scale operation based on total measured and indicated resources of 77.2 million tonnes averaging 0.169% molybdenum, but instead is considering mining a smaller higher-grade core.

The study assumes that 7.3 million tonnes of proven and probable reserves (along with another 500,000 tonnes of sub-grade material) will be mined and processed over 12 years, 10 of these at full production. The average grade is estimated at 0.265% contained molybdenum.

Mining could continue if prices remain strong and the remaining resources prove to be economic in future years.

The current mine plan is based on a declining cutoff grade strategy, starting at 0.24% molybdenum for primary stopes in the first three years. The cutoff grade is then lowered to 0.21% molybdenum for some primary and secondary stopes, and lowered again to 0.18% for secondary stopes.

Thompson Creek requested a study that examined only a limited portion of the deposit in order to mine the deposit “as soon as possible” and benefit from high moly prices.

Another reason for prudence is that the company’s board has recently approved plans to expand the capacity of the Endako mine to 50,000 tonnes per day, starting in 2010. The mine’s current daily capacity is 28,000 tonnes.

The expansion program proposed for Endako over the next two years comes with a price tag of $373.6 million. Thompson Creek owns 75% of the mine and will have to provide the lion’s share of the capital costs, which it intends to fund from internal cash flow.

Joint-venture partner Sojitz Corp. has approved the Endako expansion and agreed to fund its 25% share of costs.

Thompson Creek is discussing the Davidson project with Sojitz as well, as ore mined from the project would be trucked 200 km for processing at the Endako mill.

The company notes that Sojitz has “indicated an interest in partial ownership” of Davidson. As these discussions continue, the partners are reviewing the study and expect to make a yeah-or-nay decision in the next few months.

The study projects that a 2,000-tonne-per-day underground operation would produce 4.5-5 million lbs. molybdenum annually after milling and roasting, or an estimated 40.3 million lbs. over the mine life. Assuming the receipt of mining permits late this year, initial production would begin in August 2009, ramping up to full production in spring 2010.

Capital costs are estimated at $109 million, which includes $65.7 million for underground development and equipment and $43.3 million for surface infrastructure.

Assuming a positive production decision, Thompson Creek believes that mine development could be funded from internal cash flow.

Average annual cash costs are estimated at US$9.46 per lb. over the proposed mine life.

The estimated pretax internal rate of return (IRR) is 20% with payback of capital in 3.4 years from the start of full production. Assumed moly prices were: US$27 per lb. in 2009; US$23 per lb. in 2010; US$17.50 in 2011; and US$14 per lb. thereafter.

The IRR would increase to 43% if moly prices are 20% higher than assumed. On the other hand, the project would not have a positive return if molybdenum prices are 20% lower than assumed levels.

The Davidson project is situated 9 km northwest of Smithers, within Hudson Bay Mountain. The feasibility study envisages building a 3-km-long adit as a haulage ramp from the base of the mountain upward toward the deposit at an incline of about 10%, and enlarging an existing 2-km-long adit for air-intake ventilation and as a secondary access to the deposit.

Other infrastructure proposed for the project includes a water treatment plan, access roads, mine-related buildings and ore-handling facilities at Endako.

Thompson Creek generated net income of $157.3 million on revenues of $914.4 million in 2007. Since the Blue Pearl transaction in October 2006, the company has used $342 million to reduce debt, which includes a contingent purchase price payment (related to the transaction) of $100 million earlier this year.