Taseko Mines — Low Cost Producer Taking Advantage of Rising Copper Prices — A Review

Summary

  • Copper prices are rising and near 8-year highs with demand expected to grow
  • Taseko currently produces copper at a cost of $1.92/lb — current price is $4.1/lb and is hedged well against downside price risk. They are taking advantages of high copper prices
  • An environmentally friendly and low-cost mine under development in Arizona is going through final permitting, and if approved this would be a significant boost to their operation

Taseko Mines Overview

Taseko Mines is a dynamic and growing mining company focused on the operation and development of mines in North America. Headquartered in Vancouver, Taseko operates the state-of-the-art Gibraltar Mine, the second largest copper mine in Canada, with a nearly 700 person workforce producing an average of 140 million pounds of copper and 2.5 million pounds of molybdenum per year. Taseko’s wholly-owned Florence Copper, Yellowhead, and Aley projects are all advanced staged projects that provide the company with a diverse commodity pipeline

Market Outlook

I highlighted two key articles below — essentially copper demand is increasing and supply is dropping, which is starting to be reflected by the price of copper.

  • Copper to flip into deficit
  • Chinese stimulus to support demand
  • Decarbonization bullish for metal

Price of Copper and Taseko’s Hedge

As a mining company a lot of their value ties to the price of copper (I know, pretty obvious) Price of Copper is $4.1/lb as of writing this analysis. This bodes well for Taseko, which we will discuss a little further down in the analysis. Taseko also employees a hedging strategy, like a decent commodity production company should, to limit their downside risk

Mine Overview

  • Taseko bought this mine in 1999 for $1. Can you believe that? Interesting piece of info
  • On a cost per ton milled basis, Gibraltar is one of the lowest cost operations in the world.
  • Cash cost of US$1.80/lb to produce copper
  • Has produced an average of $125 Million lbs of copper on an annual basis
  • Currently in the development phase — permitting in is process with the EPA. All major power, transportation, road and rail infrastructure are in place. Once complete, Florence will be one of the greenest sources of copper in the US
  • Annual production capacity of 85 million pounds
  • Permitting and construction to take place throughout 2021 and production will start in 2022
  • After-tax NPV(7.5%) of US$680 million and an IRR of 37% and a 2.5 year payback

Highlights from Recent Earnings Call — Feb 25, 2021

I pulled a few highlights from a recent earnings call. In summary, they are one o the lowest cost copper producers in the world and their Florence mine adds significant value to Taseko.

  • CEO “We run our mining operations at the highest level we can in the lowest operating cost we can achieve. And on top of that, we ensure that our capital discipline is a №1 priority for us. We produced 123 million pounds of copper for the year at a cash cost of $1.92 a pound,
  • Florence is one of the lowest capex intensity copper projects in the world. It also has a low operating cost of $1.10 a pound. And it’s a green project that will produce refined copper capital with 90% less carbon emissions than a conventional mine. This will become a new U.S. domestic supply of green metal that fits very well into government plans for renewable energy infrastructure and electric vehicle manufacturing.
  • CFO “Florence has a net present value of 680 million based on our 2017 technical report using a $3 copper price. With funding substantially in hand and removing that capex in that model, that increases the funded NPV of Florence up to 900 million or USD 3.25 per share. And if I run that funded Florence model using 3.50 copper price, it’s USD 4 per share. And at today’s copper price of 4.30 per pound, I see an NPV of USD 5.50 per share.”

Financial Highlights and Comparables

  • Analyst Price Target — Average: $2.63 and High: $3.00
  • Price to Book: Taseko has a PB Ratio of 2x compared to the CA Metals and Mining industry average 2.8x. A lower P/B ratio could mean the stock is undervalued.
  • Quick Ratio: 1.25 — The quick ratio is important for evaluating mining companies because of the substantial capital expenditures and financing necessary for mining operations. Analysts and creditors prefer to see quick ratio values higher than 1, the minimum acceptable value
  • Debt Level: TKO’s debt to equity ratio at 1450 which is high. For comparison Copper Mountain Mining Corp has a D/E ratio of 0.6 and a similar market cap

Risk

  • EPA Permit does not get approved — this is unlikely but Taseko is banking on this project coming through as this mine is one of their key assets.
  • ROE: -0.07 — Average ROEs in the mining industry range between 5% and 9%, with the best-performing companies producing ROEs closer to 15% or more. The ratio is calculated by dividing net income by stockholders’ equity.
  • Long Term Liabilities: TKO’s short term assets $157.2Mdo not cover its long term liabilities CA$514.5M.

TLDR

Copper demand is increasing, supply is decreasing, and the price of copper has therefore increased. Taseko is one of the lowest cost copper producers, with a great existing asset, and they are nearing the final stages of developing another low cost and environmentally friendly mine. They are waiting on EPA approval, and if approved, the CFO has projected a value of $4.00 per share.

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