Taseko Mines: Solid Margins At Current Copper Prices

Summary

• Q4 2017 production results were weak due to wildfire disruptions.  This is expected to affect Q1 2018 results as well.
• Full-year copper grade should be around life of mine average.
• At the life of mine average copper grade, Gibraltar could produce 131 million pounds of copper (100% basis).
• Operating cost including capitalized stripping is approximately $1.99 USD per pound at that copper grade.
• Taseko is worth an estimated $1.18 to $1.59 USD per share for Gibraltar itself, with additional potential from Florence Copper.

Taseko Mines (NYSE:TGB) has seen its share price dip recently as copper prices have fallen a bit, but it should still be able to generate solid margins at Gibraltar once the copper grade returns to regular levels. Taseko's current share price is probably in the fair range for Gibraltar alone, but it has a chance to increase its value with an operational Florence Copper Project.

Notes On Q4 2017

Taseko's Q4 2017 production results were unexpectedly weak as the disruption to the mine plan caused by the Q3 2017 wildfires resulted in Taseko accessing a higher proportion of lower grade ore. This resulted in a low copper grade of 0.209% for Q4 2017 and only 25.5 million pounds of copper production. The low copper grade and low production levels also resulted in a significant jump in operating costs per pound of copper produced.

The drop in production was surprising since Taseko mentioned higher expectations in its Q3 2017 conference call. At that time Taseko expected to sell approximately 40 million pounds of copper in Q4 2017 while drawing down its elevated inventory levels. Taseko did reduce its copper inventory to 2.7 million pounds, which was its lowest inventory level since Q2 2016, but only sold 32 million pounds of copper in Q4 2017 due to the weak production levels. Taseko would have likely needed to produce around 32.5 million to 33.5 million pounds of copper during Q4 2017 to sell around 40 million pounds of copper during the quarter.

2018 Outlook

While Q4 2017's production was disappointing (and Q1 2018 is expected to be similarly affected by the mine plan disruption), Taseko's longer term outlook appears to be better. Operating costs (including capitalized stripping) remain fairly constant, which should translate into solid full-year results for Taseko when combined with the expectation for the average copper grade for 2018 to be around life of mine average.

The combined capitalized stripping and site operating costs at Gibraltar have stayed within the $10 to $11 CAD per ton range during 2017. In Q4 2017, site operating costs went up from Q3 2017, but the reduction in capitalized stripping offset much of that increase.

Using a combined capitalized stripping and site operating cost of $10.50 CAD per ton milled results in a total cost of $315 million CAD assuming that 30 million tons are milled per year. This translates into approximately $242 million USD per year at an exchange rate of $1.30 CAD to $1.00 USD (the exchange rate has been pretty variable recently).

With Gibraltar's life of mine average copper grade of 0.256%, around 131.3 million pounds of copper per year would be produced (100% basis) with 30 million tons milled and 85.5% recovery. This means that the capitalized stripping and site operating costs equal around $1.85 USD per pound of copper produced.

Off-property costs have typically averaged around $0.33 USD per pound of copper produced. With a molybdenum price of around $12 USD per pound (price is currently above $12 USD per pound), there would be approximately $0.19 USD per pound in by-product credits, using the average molybdenum grade of 0.009% and 50% recovery. This leads to an estimated $1.99 USD in total operating costs per pound of copper produced.

$ USD Per Pound	LOM Average
Site Operating Costs Plus Stripping	$1.85
Byproduct Credits	-$0.19
Off-Property Costs	$0.33
Total Operating Costs	$1.99

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This operating cost number will differ from Taseko's reported total operating costs (C1) per pound of copper since Taseko's reported production cost numbers do not include capitalized stripping. The above $1.99 USD per pound estimate is a more complete view of production costs though.

Valuation

At the current copper price of $3.15 USD per pound, Taseko would expect to generate $299.4 million USD in revenues (net of the 3.5% smelter payable deduction) with its 75% share of the 131.3 million pounds of copper production at Gibraltar. Operating costs are estimated at $196 million USD at $1.97 USD per pound, resulting in estimated EBITDAX of $93.4 million once G&A is subtracted.

	$ Million USD
Revenue (Net of Smelter Payable Deduction)	$299.4
Operating Costs	$196.0
General and Administrative	$10.0
Adjusted EBITDAX	$93.4

Click to enlarge

Taseko's year-end 2017 net debt is around $200 million USD, which results in an estimated value per share of $1.18 USD using a 5x EV/EBITDAX multiple and $1.59 USD using a 6x EV/EBITDAX multiple. This is based on Gibraltar only and does not factor in the potential upside from an operating Florence Copper Project.

Conclusion

Taseko had some hiccups at Gibraltar that were caused by general travel disruption during the worst wildfire season in British Columbia history. This is expected to continue to affect production during Q1 2018, but production should be back to normal thereafter.

Based on life of mine average copper grades, Taseko should generate enough EBITDAX to be worth approximately $1.18 USD to $1.59 USD per share for Gibraltar. As well, at current copper prices it should be able to generate a fair amount of cash flow that can be used to reduce its net debt and/or pay for part of the capital expenditures for the Florence Copper Project.

Analyst’s 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.

Comments

[steady888]

I'm beginning to wonder if $$ can be made in the Miners. When things go well they spend like drunken sailers and when there is some headwinds it's all Katy bar the door!