Taseko Mines (NYSEMKT:TGB) is now awaiting the Canadian government's decision on its New Prosperity copper and gold mine proposal. This decision is expected by the end of February. Uncertainty about approval of the project has been weighing on Taseko's stock, but we believe that Taseko is currently undervalued even without New Prosperity's approval. The Canadian dollar has weakened significantly since we last wrote about Taseko in September. This makes it quite likely that Taseko will be able to hit the low end of its production cost targets, which would represent a $0.62 per pound decrease in its net cost of copper production from 2012 levels.
The State of New Prosperity
The Canadian government is expected to make a decision on Taseko's New Prosperity project by February 28. The Canadian Environmental Assessment Agency (CEAA) panel's report to the government criticized the environmental impact of the mine, and resulted in Taseko's share price falling nearly 10%. Taseko has appealed the CEAA panel's report, pointing out that the panel omitted the inclusion of a low-permeability basin liner in the tailings storage facility when attempting to determine the environmental impact. The CEAA panel's report is taken into consideration by the Canadian government, but is not a binding recommendation.
With the controversy over the CEAA panel's report though, it is quite uncertain whether New Prosperity will be approved. The provincial government has taken a stronger stance in support of the project recently, but there remains strong opposition from First Nations and environmental groups. Approval of the project will result in significant future upside for Taseko as it is a huge mine with an estimated 7.7 million ounces of gold and 3.6 billion pounds of copper in mineral reserves (worth over $21 billion at current market prices). Rejection of the project will likely result in a significant hit to Taseko's share price, probably dropping it below $2 per share again. However, Taseko is starting to produce significant free cash flow from Gibraltar now that its GDP3 project is completed, allowing it to develop its Aley niobium project if needed, and/or seek other opportunities.
Weaker Canadian Dollar
Taseko's corporate office and all of its properties are located in Canada. That means the weakening Canadian dollar will have a significant impact on reducing expenses and cost of production. On the other hand, metal prices in US dollars have held up much better than the Canadian dollar. For example, copper spot prices were around $3.25 when we last wrote about Taseko in September. Copper spot prices are currently hovering around the same level. For comparison, the CDN/USD exchange rate was $1.03 in September and is now $1.11, making the Canadian dollar nearly 8% weaker now.
We believe that the weak Canadian dollar makes it likely that Taseko can get its cost of production at Gibraltar down to around $1.50 per pound of copper (net of by-product credits). Taseko mentioned a targeted production cost range of $1.50 to $1.70 per pound during its Q2 FY2013 conference call. That was with a CDN/USD exchange rate of $1.04. With a CDN/USD exchange rate of $1.11, the mid-point of that production cost range should be around $1.50 per pound.
As well, should New Prosperity be approved, any continuing weakness in the Canadian dollar will help reduce the construction cost.
Valuing Taseko Without New Prosperity
Here's a look at projected annual numbers assuming a copper price of $3.25 per pound and 153 million pounds of copper production. Gibraltar has the capacity to produce up to 165 million pounds of copper per year, but Taseko has been experiencing some issues in getting mill availability consistently up to targeted levels, so we are now assuming a slightly lower level of production to account for that and other problems that may come up.
Taseko's 75% share of the Gibraltar mine would be 115 million pounds of copper in that case. We have updated production cost estimates to $1.50 per pound net of by-product credits plus an additional $0.35 per pound for off-property cost for transport, treatment and sales based on the weaker Canadian dollar. General and administration expense is reduced due to the weaker Canadian dollar as well.
All Figures in $US
Copper Price ($ per pound)
Copper Sales (Taseko's Share) - Million lbs
Copper Revenues ($ Million)
Silver Revenues ($ Million)
Molybdenum Revenues ($ Million)
Total Revenues ($ Million)
Cost of Sales Excluding Depreciation ($ Million)
General and Administration ($ Million)
Exploration and Evaluation ($ Million)
Estimated EBITDA ($ Million)
Even with slightly less than full production, Taseko should be able to achieve $134 million in annual EBITDA based on current copper prices and the weaker Canadian dollar. At 5x EBITDA, enterprise value would be $670 million, leading to a estimated price per share of $2.44 based on contributions from Gibraltar. It should be noted that Q1 2014 performance may not be as strong since Taseko is currently mining a lower grade section of the Granite Pit at Gibraltar. The copper grade is expected to return to a normal level by May.
Even without approval of the New Prosperity project, we would value Taseko at $2.44 per share based on Gibraltar alone. Add in some value for the Aley and Harmony properties, and Taseko should be worth closer to $2.65 per share without New Prosperity. That being said, the market is likely to look quite unfavorably on a New Prosperity rejection. Therefore, we have partially hedged our long position in Taseko. In the event of a rejection of New Prosperity, we may increase our position in the expectation that Taseko will be seriously undervalued compared to its likely strong financial performance in the latter half of 2014.