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Summary

  • Although New Prosperity approval would have been better, if the appeal fails Taseko can focus on eliminating its net debt, strengthening its position if a third proposal is approved.
  • Lower production costs and increased production leads to $50+ million in free cash flow in a weak copper market.
  • Taseko is also partially hedged against further copper price declines.

Taseko Mines (NYSEMKT:TGB) has been affected by a couple of negative items recently. The Canadian government rejected its New Prosperity copper and gold mine proposal for a second time in late February. Taseko is appealing that decision, but there is a significant chance that Taseko may be forced to develop a third proposal. As well, the price of copper has gone down to around $3.00 per pound recently, falling from around $3.25 per pound when I wrote about Taseko a couple of months ago.

Although it would have benefited Taseko to have New Prosperity approved, there is a silver lining in the rejection in that Taseko can continue to strengthen its balance sheet before New Prosperity begins development. Taseko's previous expansion projects at its Gibraltar mine have helped to significantly reduce its cost of production and increase its output. It doesn't have any major capital outlays in the near future and can produce over $50 million in free cash flow per year in a weak copper market, with the potential for much more should the copper market rebound.

The Silver Lining With New Prosperity

As mentioned above, Taseko's New Prosperity mine proposal was recently rejected by the federal government. If its appeal fails, Taseko is likely looking at several years before a third proposal may potentially be approved by the government. This does disrupt Taseko's growth plans and may force it to start developing another project like Aley sooner or purchase a project for development.

The silver lining in a New Prosperity rejection is that many recent large mine projects have been affected by cost overruns that have resulted in near crippling debt loads for the mining companies. New Prosperity's $1.5 billion projected cost is considerable and a cost overrun of only 20% would be equal to half of Taseko's current enterprise value. As New Prosperity is likely delayed by at least several years, this gives Taseko an opportunity to eliminate its net debt in the meantime, leaving it in a much stronger position to deal with potential cost overruns when/if New Prosperity is started.

Taseko's Profitability In A Weak Copper Market

With copper prices at around $3.00 per pound, Taseko can still make over $100 million in EBITDA per year. A strong Canadian dollar and improving production efficiency should allow Taseko to bring its cost of production down to $1.85 per pound including off-site costs. Taseko has also hedged close to half of its share of copper production during the first three quarters of 2014 at $3.00 per pound, partially protecting it against further downside.

All Figures in $US

Copper Price ($ per pound)

3.00

Copper Sales (Taseko's Share) - Million lbs

115

Copper Revenues ($ Million)

345

Silver Revenues ($ Million)

5

Molybdenum Revenues ($ Million)

20

Total Revenues ($ Million)

370

Cost of Sales Excluding Depreciation ($ Million)

237.8

General and Administration ($ Million)

17

Exploration and Evaluation ($ Million)

10

Estimated EBITDA ($ Million)

105.2

Taseko has finished its Gibraltar expansion project, so only maintenance capital expenditures are needed right now. With $13 million per year for capital expenditures and approximately another $20 million for interest payments, after taxes Taseko should be able to generate $50 million to $60 million in free cash flow per year with copper at $3.00 per pound. This would likely increase to around $90 million to $100 million per year if copper reaches $3.50 per pound.

Assuming copper stays at around $3.00 per pound, Taseko will be able to nearly eliminate its current net debt of $199 million in three years, leaving it in a strong financial position to tackle New Prosperity if it should get approved by that time.

Conclusion

Taseko currently trades at an EV/EBITDA ratio of 5.5x based on $3.00 per pound copper. This ratio should improve as Taseko reduces its net debt. If copper remains at $3.00 per pound for the next three years, Taseko's current price reflects an EV/EBITDA ratio of under 4.0x based on expected net debt in three years.

The silver lining with the New Prosperity rejection is that Taseko can nearly eliminate its net debt over the next three years, even in a $3.00 per pound copper market. All value attributed to New Prosperity appears to have been beaten out of the stock price by now, so if anything positive happens with the property (including a sale for anything more than a token amount), it should be beneficial to Taseko. Taseko appears to be a good value going forward, with the company fairly priced for $3.00 per pound copper, no value attributed to its development properties, and the ability to greatly reduce net debt. There are downside risks if copper prices plummet, but Taseko does partially hedge against price decreases, and it appears better positioned than most miners to deal with metal price declines.

Source: Taseko: The Silver Lining With New Prosperity