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Summary

  • Taseko's share price is now at an appropriate level for its Gibraltar production and Aley and Harmony properties.
  • The recent Supreme Court of Canada ruling on aboriginal title for the Tsilhqot'in Nation does not appear to be a game changer for New Prosperity.
  • New Prosperity should be given minimal to no value in a conservative valuation calculation.

Taseko Mines (NYSEMKT:TGB) has now increased by over 25% since I last wrote about it in late March and is close to the $2.65 per share value that I mentioned in January based on its value excluding New Prosperity. That value was calculated at a time where copper was around $3.25 per pound and the Canadian dollar was at around $1.11 to the US dollar. With the stronger Canadian dollar now, Taseko's costs increase slightly. An updated value calculation puts Taseko's current value at closer to $2.50 per share, although the difference between $2.50 per share and $2.65 per share is fairly marginal.

I also believe that the recent Supreme Court of Canada ruling on aboriginal title in the area near New Prosperity does not significantly change that project's prospects, and thus it is prudent to continue to exclude the value of New Prosperity from valuation calculations. Therefore I believe that Taseko is not significantly undervalued anymore and am taking a more neutral position on it.

Update On New Prosperity

The Supreme Court of Canada recently granted the Tsilhqot'in Nation aboriginal title to 1,750 square kilometers of land near the New Prosperity mine site. The aboriginal title area does not include Fish Lake or other parts of the New Prosperity site, leading Taseko to issue a press release about how New Prosperity is the only proposed mine in British Columbia that is definitely not in an area of aboriginal title.

That is true. However, although the Tsilhqot'in had included Fish Lake in their claim area, previous lower court rulings (in 2007 and 2012) had not included Fish Lake in the area that the Tsilhqot'in could claim title to. Instead, Fish Lake was deemed to be in an area that the Tsilhqot'in had hunting, trapping and gathering rights. This Supreme Court ruling does remove the possibility of the worst case scenario for Taseko - which would have involved the Supreme Court expanding the aboriginal title area from the lower court rulings to include Fish Lake. The situation otherwise doesn't appear markedly different to what has been going on in the last few years.

Fish Lake is still in an area where the Tsilhqot'in have hunting, trapping and gathering rights. The Tsilhqot'in and environmental groups are still staunchly opposed to New Prosperity. Years of battling have led to poor relations between the Tsilhqot'in and Taseko. Prime Minister Stephen Harper sharply criticized the last proposal for New Prosperity. The continuing barriers facing New Prosperity's approval mean that it should still be excluded from any conservative valuation calculations involving Taseko.

Updating Taseko's Value

Back in January, I estimated Taseko's value at $2.44 per share based on Gibraltar alone, with the value of the Aley and Harmony properties bringing it closer to $2.65 per share.

Here's a look at projected annual numbers assuming a copper price of $3.25 per pound and 160 million pounds of copper production. Gibraltar has the capacity to produce up to 165 million pounds of copper per year, but I am leaving a little bit of room for any issues that may affect production slightly. Taseko hit a high of 38.5 million pounds of copper production in Q2, even while going through a lower grade section of the mine, so 160 million pounds per year appears reasonable now that mill availability appears on target. Taseko has a 75% share of the Gibraltar mine, so its' share would be 120 million pounds of copper.

I have updated production cost estimates to $1.55 per pound net of by-product credits plus an additional $0.40 per pound for off-property cost for transport, treatment and sales.. This is slightly higher than my previous estimate, mainly due to a stronger Canadian dollar. Taseko's Q1 2014 production costs were significantly higher, but management noted in the conference call that Q1's costs were expected to be a blip and that the downward trend in late 2013 was expected to continue in Q2.

All Figures in $US

 

Copper Price ($ per pound)

3.25

Copper Sales (Taseko's Share) - Million lbs

120.0

  

Copper Revenues ($ Million)

390.0

Silver Revenues ($ Million)

5.0

Molybdenum Revenues ($ Million)

22.0

Total Revenues ($ Million)

417.0

  

Cost of Sales Excluding Depreciation ($ Million)

261.0

General and Administration ($ Million)

18.0

Exploration and Evaluation ($ Million)

10.0

  

Estimated EBITDA ($ Million)

128.0

  

Taseko should be able to achieve $128 million in annual EBITDA based on the updated figures in this scenario. At 5x EBITDA, enterprise value would be $640 million, leading to a estimated price per share of $2.29 based on contributions from Gibraltar alone. Adding in the value from Aley and Harmony would bring this to around $2.50 per share.

Conclusion

With Taseko trading at around $2.50 per share, it can no longer be considered significantly undervalued based on copper market conditions if you exclude New Prosperity from any value calculations. I do not believe that the Supreme Court of Canada's ruling makes it significantly easier for New Prosperity to be approved. As well, the current Conservative government is probably the most favorable to mining of the major political parties, so the 2015 election may bring to power a government even less inclined to approve New Prosperity. Given the continuing difficulties in getting New Prosperity approved, it would be better to assign a zero or near zero value to New Prosperity when valuing Taseko.

Potential drivers of upside for Taseko include a stronger copper market, a weaker Canadian dollar, or the implementation of various development projects. These projects include further development of Aley, or expanding Gibraltar's production capacity some more.

Source: Taseko: No Longer Significantly Undervalued At Over $2.50 Per Share

Additional disclosure: I own some in-the-money covered calls for Taseko, but have sold the rest of my position.