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TEXT - S&P rates Thompson Creek proposed notes
November 14, 2012 / 9:03 PM / 5 years ago

TEXT - S&P rates Thompson Creek proposed notes

Overview
     -- We are assigning our 'B' issue-level rating and '1' recovery rating to 
Thompson Creek Metals Co.'s proposed US$350 million senior secured notes. 
     -- At the same time, we are lowering our issue-level rating on the 
company's unsecured debt to 'CCC-' from 'CCC' and revising our recovery rating 
on the debt to '6' from '5' due to the higher amount of priority claims in the 
company's pro forma capital structure.
     -- We are also affirming our 'CCC+' long-term corporate credit rating on 
Thompson Creek. 
     -- We assume that the proceeds from the notes will be used for general 
corporate purposes including replacing Thompson Creek's existing US$300 
million senior secured revolving credit facility and potentially helping to 
fund the remaining capital outlays at its Mt. Milligan project in British 
Columbia.
     -- The negative outlook reflects our view that Thompson Creek's 
diminishing operating margins could drain planned funding sources set up to 
support the remaining capital requirements at the Mt. Milligan project.
Rating Action
On Nov. 14, 2012, Standard & Poor's Ratings Services assigned its 'B' 
issue-level rating and '1' recovery rating to Thompson Creek Metals Co.'s 
US$350 million senior secured notes. 

A '1' recovery rating indicates our expectation of a very high (90%-100%) 
recovery in a default scenario. We expect the notes will rank senior to 
Thompson Creek's existing and future subordinated debt. We assume that the 
proceeds from the notes will be used for general corporate purposes including: 
replacing the company's existing US$300 million senior secured revolving 
credit facility and potentially helping to fund the remaining capital outlays 
at its Mt. Milligan project in British Columbia.

At the same time, we lowered our issue-level rating on Thompson Creek's 
unsecured debt to 'CCC-' from 'CCC' and revised our recovery rating on the 
debt to '6' from '5' due to the higher amount of priority claims in the 
company's pro forma capital structure. A '6' recovery rating indicates our 
expectation of a negligible (0%-10%) recovery in a default scenario.

Finally, Standard & Poor's affirmed its 'CCC+' long-term corporate credit 
rating on Thompson Creek. The outlook is negative.

Rationale
The ratings on Thompson Creek reflect what Standard & Poor's views as the 
company's highly leveraged financial risk profile, characterized by a heavy 
debt burden and less-than-adequate liquidity. We view the company's business 
risk profile as vulnerable due to its reliance on volatile molybdenum prices, 
which have weakened during a phase of large capital expenditures; limited 
operating diversity; and the capital intensity of its operations. Partially 
offsetting these factors, in Standard & Poor's opinion, are the company's long 
reserve life--based on contemporary molybdenum prices--at Endako, its primary 
operating mine.

We believe that capital spending and liquidity remain the primary drivers on 
our ratings on Thompson Creek through next year. The proposed US$350 million 
secured notes offering alleviates any potential covenant compliance challenges 
that might have occurred when the company attempted to draw down on its 
revolving credit facility. However, we estimate that financial flexibility 
remains very tight given potential inflationary pressures at the Mt. Milligan 
project and the continuing prospect of negative mine-level operating cash 
flows. Moreover, we believe that any prolonged operating disruptions at its 
producing mines could drain Thompson Creek's large pro forma cash balances at 
a time when nearly all available funding is directed toward completing the 
development of the Mt. Milligan project.

While credit metrics are likely to be exceptionally weak in the next few 
quarters given the higher pro forma debt, we do not yet envision a specific 
default scenario for the corporate credit rating because Thompson Creek has 
several options to alleviate any potential near-term financial stress. These 
include the ability to delay or defer portions of its planned capital spend to 
conserve its substantial cash balances as well as seek out liquidity from 
nontraditional debt or equity funding sources.

Our base case incorporates the following assumptions for Thompson Creek 
through next year:
     -- A molybdenum price of about US$13.00 per pound;
     -- Molybdenum production from the company's two mines increases to more 
than 30 million pounds next year from about 24 million pounds in 2012;
     -- At an estimated cash cost of about US$10.00 per pound, we expect the 
company to generate no EBITDA in 2012. EBITDA could rebound sharply in 2013 to 
more than US$150 million as the announced suspension in stripping activity at 
the Thompson Creek mine lowers aggregate cash costs to about US$7.00 per pound 
of molybdenum.
     -- In this scenario, we expect annual free cash burn to remain solidly 
negative for the remainder of the Mt. Milligan construction period along with 
a debt-to-EBITDA leverage ratio above 10.0x and funds from operations (FFO) to 
debt of about 0%.
Liquidity
Thompson Creek's liquidity is less than adequate based on our criteria. This 
evaluation considers the following factors:
     -- We expect that sources of liquidity through next year will be less 
than 1.2x uses.
     -- Sources less uses of cash are about zero.
     -- We expect the company to generate significantly negative free 
operating cash flow of close to US$1.0 billion in 2012 and US$280 million in 
2013 after taking into account capital expenditures of about C$900 million in 
2012 and C$335 million in 2013.
     -- Thompson Creek's maturities through next year are light, with about 
US$6.7 million due in 2012 and US$6.9 million due in 2013.
     -- The company has limited ability to absorb high-impact, low probability 
events without the need for refinancing.

As of Sept. 30, 2012, and pro forma to the proposed secured notes offering, 
Thompson Creek has about US$700 million in cash on hand. In addition, through 
third-quarter 2013, the company expects to receive about US$207 million in 
scheduled payments from Royal Gold Inc. (not rated) under the terms of its 
gold stream transaction.

Recovery analysis
For the complete recovery analysis, see the recovery report on Thompson Creek 
to be published on RatingsDirect on the Global Credit Portal following this 
report.

Outlook
The negative outlook reflects our view that Thompson Creek's weak operating 
margins could drain previously arranged funding sources set up to support the 
large capital requirements at Mt. Milligan. We estimate that, using our base 
case assumptions, any positive FFO generation in 2013 will be entirely 
consumed by the company's planned capital spend, leading to negative free 
operating cash flow generation through the remainder of the development period 
at Mt. Milligan.

We could lower the ratings further should Thompson's financial flexibility 
continue to tighten in the next several quarters due to a combination of 
contracting margins and additional capital spending increases at Mt. Milligan.

A revision to stable is unlikely in the next six-to-eight months, given the 
large outlays remaining at Mt. Milligan as well as its exposure to volatile 
molybdenum prices. However, one could occur if Mt. Milligan reaches key 
milestones on time and on budget and if molybdenum prices increase sustainably 
above US$17.00 per pound, thereby accelerating the upward trajectory in EBITDA 
generation in the next year.  We estimate that these factors could return its 
liquidity position to adequate and lower its adjusted debt-to-EBITDA leverage 
ratio to below 5x.

Related Criteria And Research
     -- General Criteria: Criteria For Assigning 'CCC+', 'CCC', 'CCC-', And 
'CC' Ratings, Oct. 1, 2012
     -- Methodology and Assumptions: Liquidity Descriptors For Global 
Corporate Issuers, Sept. 28, 2011
     -- Key Credit Factors: Methodology And Assumptions On Risks In The Mining 
Industry, June 23, 2009
     -- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008
Ratings List
Thompson Creek Metals Co.

Ratings Lowered/Recovery Ratings Revised
                                        To                 From
Senior unsecured
  US$200 mil 12.50% nts due 05/01/2019  CCC-               CCC 
   Recovery rating                      6                  5
  US$350 mil  7.375%   nts due          CCC-               CCC 
  06/01/2018                            
   Recovery rating                      6                  5

Ratings Assigned

Senior Secured
  US$350 mil nts due 2018         B                  
   Recovery rating                      1                  

Ratings Affirmed
Corporate credit rating                 CCC+/Negative/--   
Senior secured                          B                   
  Recovery rating                       1

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