It takes money to make money, and that lesson is proving painful for Thompson Creek (NYSE:TC) and its investors. Higher than expected development costs for the critical Mt. Milligan project have dented management credibility, while dilutive financing has smacked the stock. Making matters worse, investors seem to be back in one of those moods where steel (the primary market for molybdenum) and copper (a major future commodity for Thompson Creek) are doomed to eternal malaise.

Thompson Creek is absolutely not a stock for the mortgage money, nor for impatient investors, but for those who believe a steel rebound is probable and want an undervalued play on a small industrial metals miner, this is a stock worth checking out.

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Molybdenum - Whither Steel Goest
For better or worse, molybdenum is a co-traveler with steel. Nearly 70% of molybdenum goes to some sort of steel production; about one-quarter goes to stainless steel, about 10% goes to specialty applications like tool steel, and about one-third goes to the steel used in applications like construction and rails.

What that means, then, is that challenging results at companies like Voestalpine, Outokumpu, ArcelorMittal (NYSE:MT), U.S. Steel (NYSE:X) and the like are creating challenges in the molybdenum market. To that end, molybdenum prices have spent most of the past year and a half in decline. What's more, with Europe still in crisis and building activity apparently slowing down in markets like China and Brazil, it's not hard to see why investors are nervous.

SEE: 5 Other Countries Affected By A Troubled Europe

Paying up to Diversify
Thompson Creek has long been fairly competitive in terms of its cash molybdenum production costs, but the company has made a major commitment to expand beyond this one metal. The Mt. Milligan project in British Columbia is expected to double the size of the company and diversify the company with major new contributions from copper and gold.

Unfortunately, costs to develop Mt. Milligan have come in higher than management originally projected and there are still execution risks tied to the expected start up in 2013. To that end, management raised over $400 million in early May, a financing that should cover the company's project funding gap for the next two years, but came at the cost of significant dilution.

SEE: The Dangers Of Share Dilution

Will the Market Still Be There?
Apart from the risks tied to getting the Mt. Milligan project up and running, there are broader macro factors that Thompson Creek can't really alter. Specifically, some analysts and investors have started to sour on the long-term outlook for industrial metals like molybdenum and copper - arguing that emerging markets have built (or perhaps even over-built) the infrastructure they need, and that mining project expansions have filled the supply gap that led to prior price spikes.

In other words, Thompson Creek could get these mines up and running, continue to produce molybdenum at attractive prices, and still go nowhere. It's basically the same reason that Freeport-McMoRan (NYSE:FCX) has been so weak (despite restarting the Climax molybdenum mine), and it's done no favors for General Moly (AMEX:GMO) either.

The Bottom Line
For better or worse, big swings in commodity prices is just part of investing in companies like Thompson Creek and Freeport; no different than the risks of good/bad clinical data when investing in biotechs. Investors who really think they have insight into the global economic outlook and the demand for industrial metals may have an advantage, while the rest of us are consigned to trying to identify efficient producers trading at historically appealing valuations.

To that end, the valuation of Thompson Creek does not seem demanding. On the basis of 2012 estimates (which are somewhat depressed), the stock should trade somewhere around $4, but that fair value target jumps if the investor is willing to look out two years to the post-Mt. Milligan start-up era. Clearly there are still risks; further drops in molybdenum and/or copper prices will be bad news, as will any hints of start-up delays. Nevertheless, this stock seems undervalued relative to those risks and aggressive investors looking to play a rebound in industrial metals demand ought to check this one out.

At the time of writing, Stephen Simpson did not own shares in any of the companies mentioned in this article.

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