Taseko Mines: A Growing Copper Producer With Prosperity in the Wings

by: David Zurbuchen

On Monday, September 20, 2010, Taseko Mines (NYSEMKT:TGB) filed a $300 million preliminary base shelf prospectus, communicating to the market that management believes they will receive a positive development decision from Canada’s federal cabinet. And yet the company still trades at levels arguably too low even if we only consider its producing Gibraltar copper mine.

Royalty giant Franco-Nevada (FNNVF.PK) has already agreed to pay over US$350 million for a gold stream on 22% of Prosperity’s gold production subject to full financing of the project and receipt of all material permits to construct and operate the mine. Combined with estimated cash flow from Gibraltar and cash on hand, Taseko estimates that additional financing requirements come in at less than C$200 million. The C$300 million base shelf prospectus could easily fill that gap.

Still, investors should bear in mind that there is vehement First Nations opposition to the project due to the loss of a lake that has historical significance to local tribes. It appears that First Nations across Canada are increasingly focusing on this one project as an exercise of indigenous rights and that might create long-term community relation issues for Prosperity. We do expect a federal decision to be handed down by as early as November, and we maintain that the best way to play the potential of a positive decision is through an intelligent call option strategy that we have previously described for Metal Augmentor subscribers.

Taseko has not yet fully recovered from the large drop in its share price early this past summer on uncertainty surrounding Prosperity’s future but the shares have been showing strength as of late. According to the July 6th conference call held on the subject of Prosperity, the company expects a federal decision to be made by late September or early October. Although there is no deadline for a federal cabinet decision, the company apparently anticipates that it will come quickly once all documents are submitted, given the important economic impact of the project at both the federal and provincial levels. Federal disapproval would almost certainly give the shares a major drubbing but we consider an unfavorable outcome to be unlikely (although not remote). Instead, the federal cabinet may require Taseko to sit down and negotiate with the First Nations in a final attempt to allay concerns. This wouldn’t kill the project but it may delay it indefinitely and for all practical purposes the speculative value assigned to Prosperity’s development would remain minimal. Needless to say we will be closely tracking progress on the federal approval process in our Weekly Mining Review publication.

In any case, let’s focus for a moment on the sunnier side of things: in the event of approval, we’re likely to see a significant boost to Taseko’s share price perhaps toward the $9-$10 level. Such a scenario is what our call option strategy seeks to exploit if our timing turns out to be right. For a historical example of the fireworks that can accompany the provincial and federal approval and subsequent mine construction approval, consider Terrane Metals (TSX-V: TRX; Pink Sheets: TRXOF.PK). On September 9, 2009 Terrane closed at C$0.28. After receiving a Mines Act Permit from the Province of British Columbia on September 10, 2009, Terrane subsequently rose to C$1.52 as it received final environmental assessment approval from the federal government on December 1, 2009. Terrane then went on to hit a high of C$1.72 by mid-December (more than 500% gain in 3 months) and is now being acquired by Thompson Creek Metals (TC). As an aside, it would have made more sense from our perspective for Thompson Creek to enter into a 3-way transaction with Terrane whereby they would acquire the Berg molybdenum project and sell the copper-gold Mt. Milligan development project to a company like, well, you guessed it: Taseko.

While arguably an even higher share price than $9-$10 could be deserved by Taseko once Prosperity is on its way to becoming a mine, we are wary of the legal (and possibly illegal) “remedies” that First Nations activists could pursue given the emotional nature of their opposition. Therefore, we expect the usual exuberance attached to development of a massive project like this will be tempered a bit in this case and we would look to take partial profits on shares and certainly on our call options if the $9-$10 level should be reached.

Shown below are several charts commonly used in our comparative peer analysis technique. It is clear that Taseko looks significantly undervalued in many areas relative to the peer group we selected for comparison.

(Click charts to enlarge)







As is evident from the last chart shown above, there are plenty of copper producers and developers that trade at a significant discount to their fair value as calculated by our valuation model. This is probably explained in a large part by today’s near-record record copper prices and the market’s perception that such high prices will not last forever. And while Taseko does appear to be one of the best values among its peer group, without Prosperity it becomes significantly less attractive and we would probably be putting our money elsewhere.

Another way in which Taseko stands out from its peers is the interest it has received in its projects from outside parties and the sums of money involved. We already mentioned that Franco-Nevada has taken an interest in Prosperity. This was a major acquisition for Franco-Nevada; if Prosperity moves forward, it will be one of their largest royalty streams. Meanwhile, Japanese conglomerate Sojitz paid C$187 million for a 25% stake in Gibraltar. This implies a value of over C$560 million for Taseko’s remaining 75% interest in Gibraltar. Given that Taseko’s enterprise value comes in at under C$800 million, it should be obvious that a major disconnect exists . . . one that a federal approval of Prosperity might quickly remedy.

Disclosure: Long TGB