Taseko Mines: Treading Water In 2016

| About: Taseko Mines (TGB)

Summary

Taseko's breakeven point is estimated at a copper price of $2.25 per pound in 2016.

The weak Canadian dollar partially mitigates the effects of lower copper grades in 2016, to keep total production costs under USD $2 per pound, including off-property costs.

With the Red Kite loan maturing in May, and the potential for cash burn in 2016, Taseko may need to seek financing in the form of secured debt.

Taseko believes it can refinance the loan at a lower rate, although copper prices were around 30 cents higher at the time the company last discussed refinancing options.

mining Taseko Mines (NYSEMKT:TGB) announced 2015 production results and gave some information about 2016 as well. It appears that Taseko's breakeven point in 2016 will be around $2.25 copper. Between the potential for cash burn in 2016 and its maturing Red Kite loan, Taseko will likely need to find additional financing in 2016, perhaps in the form of secured debt. Taseko needs some sort of financing to potentially avoid running out of liquidity in 2016 since the Red Kite repayment may take up half of Taseko's cash and sub $2 copper could use up most of the rest. Management believed that the refinancing could be done at a lower rate (albeit that comment was made when copper was around $0.30 higher, so there is some uncertainty until a deal is actually made).

2016 Cost Of Production

We can attempt to calculate Taseko's cost of production from the information that it provided in its operational update. Taseko mentioned that the average grade at Gibraltar will be lower in 2016 than 2015, with lower grades in the first half of the year before increasing in the second half of the year. Taseko expects that its cost per ton milled in 2016 will be similar to 2015. This would put the cost per ton milled at approximately $10 CDN.

With approximately 31 million tons milled per year, the operating costs at Gibraltar are estimated at $310 million CDN for 2016. Taseko expects copper production of 130 million to 140 pounds in 2016, so at the midpoint, the cost of production would be $2.30 CDN per pound. At an exchange rate of $1.45 CDN to $1.00 USD, the cost of production at Gibraltar is therefore expected to be $1.58 USD per pound in 2016.

Due to the molybdenum circuit being put on care and maintenance, there are no byproduct credits. The off-property costs may be similar to Q3 2015 levels at $0.34 USD per pound, bringing the total cost to $1.92 USD per pound. This is lower than overall 2015 levels since the off-property costs have been declining and also included $0.03 per pound of molybdenum off-property costs prior to the molybdenum circuit being put on care and maintenance.

With the total cost of production at $1.92 USD per pound, the gross margin for Gibraltar (for Taseko's 75% share) would be negative $17 million at $1.75 per pound copper to positive $84 million at $2.75 copper. This assumes that the Canadian dollar exchange rate remains at current levels.

There will probably be some correlation between copper prices and the Canadian dollar though (weaker copper prices in conjunction with a weaker Canadian dollar), so the mine gross margin might be closer to negative $13 million at $1.75 copper to positive $72 million at $2.75 copper after adjusting for the estimated effects of the fluctuating currency.

Copper Price Per Pound (NYSEARCA:USD)

$1.75

$2.00

$2.25

$2.50

$2.75

Mine Gross Margin - Variable Currency (Millions of USD)

-$13

$8

$29

$51

$72

Mine Gross Margin - Fixed Currency (Millions of USD)

-$17

$8

$33

$59

$84

Click to enlarge

2016 Cash Flow Projections

After figuring out the estimated mine gross margin, we can attempt to project Taseko's cash flow in 2016. Taseko does have approximately $32 million due in May 2016 from the finance loan it acquired as part of the Curis transaction. Taseko believes that it can refinance this loan with a longer maturity and at a lower cost that the current loan, which has an 11% interest rate. Copper prices have continued to deteriorate since Taseko last discussed refinancing, but I am going to assume that it will be able to refinance the loan using secured debt.

Taseko has around $9 million USD in general and administrative expense per year. Interest costs are approximately $19 million per year including the estimated interest cost from the new secured debt,while capital expenditures are expected to be under $5 million in 2016.

This results in estimated cash flow in 2016 ranging from approximately negative $45 million at $1.75 copper to positive $39 million at $2.75 copper. These estimates incorporate the effect of the Canadian dollar exchange rate varying in conjunction with copper prices.

Copper Price Per Pound (USD)

$1.75

$2.00

$2.25

$2.50

$2.75

Cash Flow - Variable Currency (Millions of USD)

-$45

-$24

-$3

$19

$39

Cash Flow - Fixed Currency (Millions of USD)

-$49

-$24

$1

$27

$52

Click to enlarge

Conclusion

With copper prices dropping below $2 per pound, Taseko may just be trying to keep afloat during 2016. It has an estimated $65 million USD in cash at the end of 2015, and requires approximately $2.25 per pound copper to break even as a company. At current copper prices, Gibraltar's production is very marginally profitable after factoring in off-property costs.

There is some hope that copper prices may rebound somewhat, as many analysts believe that the current copper price does not accurately reflect the supply/demand picture. However, there is quite a bit of uncertainty around copper prices, and Taseko needs to carefully weigh the need to bolster its liquidity versus increasing its interest costs too much when refinancing its Red Kite loan (and potentially taking on more debt).

Disclosure: I am/we are long TGB.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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