Taseko Mines: Full-Year Copper Production On Track Despite Low Q1 Production

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About: Taseko Mines Limited (TGB)
by: Elephant Analytics
Summary

Q1 2019 copper production was affected by winter weather issues, harder ore and low copper grades.

The copper grade is expected to be higher in the rest of 2019, putting copper production on track to meet Taseko's full-year guidance.

Florence Copper continues to progress well.

A producing Florence Copper has the potential to more than double Taseko's EBITDAX and its share price (based on current copper prices).

Taseko Mines (TGB) reported relatively low production levels at Gibraltar in Q1 2019 but still looks on track to meet its full-year guidance for copper production. Getting Florence Copper financed and fully operational would be a major boon to Taseko, as it has the potential to at least double its EBITDAX at current copper prices.

Q1 2019 Results

Copper production was pretty low at Gibraltar in Q1 2019 at 24.9 million pounds. This was attributed to a combination of severe winter weather in Western Canada and harder Granite Pit ore, which combined to reduce average mill throughput to 76,000 tons per day (compared to the approximately 82,500 tons per day average in 2018). As well, Taseko mentioned that the mine sequencing at Gibraltar creates some copper head grade variability from quarter to quarter, but this should even out over the full year.

Taseko has reiterated its expectations for copper production at Gibraltar to end up at 130 million pounds (+/- 5%) in 2019. This appears to be a reasonable goal still as long as the copper grade averages out to expected levels for the whole year.

For example, if the copper grade averages 0.27% during the remainder of 2019, then Taseko would produce around 104.8 million pounds of copper at Gibraltar (100% basis) during the remaining three quarters. This assumes that it averages 83,000 tons per day of mill throughput during that period, along with 85% copper recovery.

This would bring total copper production up to 129.7 million pounds for the full year, while the average copper grade for the full year would be 0.257%, which is roughly in line with the life-of-mine average grade.

Notes On Costs

The combined site operating and capitalised stripping costs per ton milled fell slightly (compared to Q4 2018) to $12.45 CAD in Q1 2019. This remains a bit elevated, although it was probably affected by the winter weather issues that affected mill throughput during the quarter.

$ CAD Q1 2018 Q2 2018 Q3 2018 Q4 2018 Q1 2019
Per Ton Milled $11.29 $11.68 $11.87 $12.69 $12.45

I continue to believe that the combined cost per ton milled will likely end up around $11.50-12.00 on average when mill throughput is at normal levels.

On Florence Copper

Florence Copper has made healthy progress, with its first harvest of copper cathode resulting in a high level of purity. I believe that the permitting risk with Florence Copper still appears to be fairly low. It is true that there still appears to be local opposition from the town of Florence. However, the various legal battles to date have all been resolved in favor of Florence Copper, while the legal costs have been significant for a town that has a total budget of around $40 million per year.

Thus, there has been some movement towards working with Taseko to preserve water quality rather than continuing to rack up legal bills in unsuccessful attempts to halt the project.

Valuation

Taseko's current enterprise value of approximately $390 million USD is less than the potential value of Florence Copper by itself. The value of Florence Copper probably will start to be more reflected in the company's share price if/when it gets financing for the project, but it would probably take the project actually being completed and proving that it can deliver margins close to what is in the technical report for the share price to truly soar.

At $2.75 USD copper, Taseko appears able to generate roughly $50 million USD EBITDAX from Gibraltar alone. Florence Copper could add more than $50 million per year in additional cash flow at $2.75 copper, even if operating costs end up $0.20 per pound higher than the assumptions in the technical report. This assumes that Florence Copper is financed through the sale of a copper stream.

Based on a 5x EV/EBITDAX multiple, Taseko would be then worth around approximately $1.10 USD per share based on $2.75 USD copper. A 5.5x EV/EBITDAX multiple instead would increase the company's estimated value to around $1.30 USD per share.

At $3.00 USD copper instead, Taseko would be worth approximately $1.90 USD per share using a 5x EV/EBITDAX multiple. The EV/EBITDAX valuation method does appear to result in a significant discount to NAV still, but is probably more accurate for projecting where Taseko share price will end up.

Conclusion

Taseko's Q1 2019 report involved relatively low production at Gibraltar due to a combination of winter weather effects, harder ore and lower-than-mine-average copper grades. The copper grade should improve significantly, so if the whole year averages out to the life-of-mine average copper grade, the company should be able to meet its copper production guidance for the year.

Getting Florence Copper into operation should greatly improve Taseko's results though, as it has the potential to more than double the company's EBITDAX, even if financed through the sale of a copper stream and assuming that operating costs are higher than the assumptions in the technical report. I'd estimate that Taseko share price could at least double with a fully operational Florence Copper and static copper prices.

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.