Taseko Mines: A Good Contrarian Bet

Summary

• Taseko Mines (TGB) risk of bankruptcy is relatively low but largely tied to successful commercialization of their Florence Mine project.
• Company has some attractive “shots on goal” including the new “Florence” mine and a real option on higher copper prices.
• Florence mine approval and copper prices are near term catalysts that could drive share prices much higher.
• TGB is not without risk ,however, I believe the current concerns regarding financing of Florence project and 2022 Senior note maturities will be resolved in shareholders' favor.
• A range of potential share price outcomes are presented based on conservative assumptions and an estimate provided by Taseko.

I love stocks that have limited downside and large potential upside. I believe this is a good description of Taseko Mines.

“We don’t feel the equity markets are valuing our assets right now, There’s a big gap right now between the Taseko valuation and the value of our assets.” Quote from Taseko president Stuart McDonald to Mining Journal explaining Taseko’s recent move from the Toronto Stock Exchange (TSX) to the London Stock Exchange (LSE).

I am in full agreement with Mr. McDonald and also agree with his further explanation of why the move makes sense.

“We have also seen the growth of passive investing and ETFs. It’s really had a big impact on the availability of funding in Canada for resource mining. Ten years ago, we had about $30 billion of resource funds in Canada. That number’s down below $3 billion now. That’s a dramatic change in a fairly short period. And we’ve got 1,200 mining companies on the Toronto exchange chasing that.”

The link to the Mining Journal article for the two above quotes is here: Mining Journal: Canada copper miner Taseko becomes the latest to join LSE

Regardless of where Taseko’s main stock exchange listing resides I strongly believe this is a highly undervalued stock particularly with the recent coronavirus inspired sell off.

Whenever I look at an investment I always look at the bankruptcy risk. I want to rule out or understand what the potential for bankruptcy is for any investment that I make. While Taseko does not have a fortress balance sheet I do believe the combination of cash on hand, cash flow, and access to financing make the risk relatively low. They also have hedged 100% of their copper production thru April 2020 at $2.60 (which is good given at time of writing the price of copper is $2.55). Below is snapshot of TGB’s balance sheet.

*Source: TASEKO REPORTS 2019 FOURTH QUARTER AND ANNUAL FINANCIAL RESULTS

Current Assets seem to easily cover any current liabilities. The items that bear additional scrutiny are the $317.7m in Senior notes the company has due as well as “other liabilities” from the table above.

100% of the senior secured notes come due on June 15, 2022. This is a critical date for them as these will need to be refinanced. The senior notes are secured by liens on the shares of Taseko’s wholly owned subsidiary, Gibraltar Mines Ltd. And Taseko’s other properties, other than Yellowhead. The company also has some restrictions on asset sales, issuance of preferred stock and dividends. In the near term it is important to note that there are no maintenance covenants with respect to the Company's financial performance. Taseko now has just over two years to secure refinancing of these June 2022 liabilities as it does not appear possible these will be paid in full at that time. The key issue is the successful commercialization of the Florence mine as this should provide healthy cash flow to augment its Gibraltar mine.

The largest item in “other liabilities is $66m in Provision for Environmental Rehabilitation that is reviewed each year and covers closing and environmental rehabilitation costs for the Gibraltar mine and the new Florence, AZ mine project. This is really a long term liability without a certain due date and is assessed and paid over 20+ years.

It also should be noted that in 2019 they produced CAD $42.6m in cash flow from operating activities and CAD $94.0m in 2018. The driver of the difference was lower copper prices. This is also a capital intensive business (investing cash flow) and this does not factor interest expense (financing cash flow) so the net cash currently produced from their main Gibraltar mine is negligible.

A risk that has been recently highlighted by Elephant Analytics on Seeking Alpha is the delay in financing announcement for the Florence mine.

This is an important issue as much of the near term upside (other than higher copper prices) is dependent upon the full operation and commercialization of the Florence, AZ mine which needs an estimated $200m+ in capex. Lack of financing for Florence before or shortly after final regulatory of the Florence mine would be a red flag in my opinion and a reason to quickly re-evaluate any position in Taseko. In it’s 2019 message to shareholders Taseko President Russell E. Hallbauer indicated that the plan was to have financing strategy in place by end of 2019 and that discussions with potential lenders, royalty companies and strategic partners was on-going. Link to this letter here.

The economics of Florence do appear to be very attractive and thus I continue to believe that financing will be available to bring this mine to operation.

So in summary bankruptcy risk is not zero but it also does not appear high or imminent in my opinion.

Assets and Shots on Goal:

Gibraltar Mine

The company currently operates a large copper mine in British Columbia, Canada named Gibraltar that produces ~130-135m pounds of copper per year at a cash cost of CAD$1.80-CAD$1.90 and also produces molybdenum as a byproduct which helps offset the cost of production for Copper.

The standalone Gibraltar mine has potential to produce significantly more cash flow at higher copper prices as illustrated by the chart below from Taseko’s corporate presentation from November 2019.

* Source Taseko Corporate Presentation November 2019

Anyone familiar with Copper pricing will realize we have been in a low price environment for the last couple of years ,however, this is not likely to last forever as it has dis-incentivized investment into copper. Here is an interesting market overview from Freeport-McMoran’s (FCX) latest corporate presentation.

Per FCX the “incentive” price for copper is $3.30 and thus if there is supply shortage in the market it seems inevitable to me that pricing will go higher from here.

There is also talk that once the coronavirus situation has improved that China will engage in large scale stimulus for their economy and this would be bullish for many commodities including copper.

Florence Mine

The real near-term catalyst for TGB is their Florence mine project located in Florence, Arizona. Production in Florence has been in testing with very good results and involves “In-Situ Copper Recovery Process”.

In November 2019, Taseko announced the results of a Competent Persons Report (“CPR”) prepared by an independent engineering firm, which detailed the following:

• A 20 year mine life
• Annual production capacity of 85 million pounds (40,000 tonnes)
• US$227 million of capex
• After-tax NPV(8%) of US$670 million
• IRR of 40% and a 2.3 year payback
• LOM C1 Cash Costs of US$1.13/lb

Please reference page 11Longer Term Projects:

Yellowhead Copper-Gold Project (Canada)

Taseko recently completed an updated technical and reserve studies for this project using an NPV (8%) and $3.10/lb copper price, gold/oz at $1,350 and $18 Silver price/oz the updated NPV came in at $1.04 billion. This was covered quite well by SA author Peter Arendas here. Taseko's Long-Term Growth Plans Become Clearer

There is significant cap-ex required and its doubtful that Taseko would or could take this on by themselves at this point

New Prosperity Copper-Gold Project (Canada)

This is a project that has faced opposition from local first nations tribes and the federal government ,however, they have made some positive progress on the legal front which allowed them to continue geotechnical work on the project. According to Taseko it is an open-pit mine project with the following characteristics

• 20 year mine
• 7.7m ounces of recoverable gold
• 3.6 billion pounds of recoverable copper
• Life of mine annual production of 540,000 equivalent ounces of gold per year (factors gold @ $1,000 per /oz and copper at $2.75 per oz)

There appear to be many hurdles to overcome both legal, technical, and financing to ever bring this project to fruition ,however, it is in their stable of assets.

Aley Niobium Project (Canada)

According to Taseko this is the world's largest niobium deposit, outside of two operating mines in Brazil. The metal is used in alloys and used in some green technologies such as wind turbines and electric vehicles. This is an open-pit mine project with the following characteristics:

• 24 year mine
• 84 million tonnes grading 0.50% Nb2O%
• After-tax NPV (8%) of CAD$480m ($384 USD at 0.8/1 $CAD to USD exchange rate)

Project appears to be in early stages with additional technical study being done and Taseko is working through Environmental Assessment process.

Valuation Scenarios

I am not a believer in Efficient Market Hypothesis and realizing the actual value of an investment is next to impossible given the wide range of things that simply are not knowable as well as the fact that the market suffers from bouts of over-optimism and extreme fear. This is one reason I like commodity event driven investments in that you can capitalize (hopefully) on the market’s bouts of fear and greed. At the moment my belief is that Taseko's stock price is suffering from an overabundance of fear.

Below, I present two scenarios one that I consider extremely conservative and one that I believe is still very conservative. For both scenarios I give zero value to any of the longer term projects I described above. I also attach a much more optimistic valuation from Taseko’s corporate presentation. I do not assign a huge amount of likelihood to Taseko’s estimate as it likely reflects an optimistic scenario.

Extremely Conservative Scenario:

• Zero NPV assigned to existing Gibraltar mine. This is actually like reducing NPV by an additional $85m as current market cap is given zero value. The current market cap of TGB is ~$85m so very likely the market is assigning some value to the existing assets namely Gibraltar. This is discounted completely in this scenario.
• All long term liabilities (debt + long term environmental rehabilitation provision and all other LT liabilities) = $457m ($CAD 582 x 0.8 assumed CAD/US exchange rate)
• Only incremental value is net of the Florence project at various copper prices less the current existing liabilities.
• Yields a range of $0.00 -$2.10 stock price for TGB (US OTC market)

USD millions except for share price

Copper Price	$2.48	$2.79	$3.00	$3.10	$3.41	$3.72
NPV Florence	356	512	617	667	822	976
Long Term Liabilities	-467	-467	-467	-467	-467	-467
Net of Florence and LT Liab	-111	45	150	200	355	509
Shares Outstanding (millions)	246.2	246.2	246.2	246.2	246.2	246.2
Current Share Price (USD/OTC)	$0.35	$0.35	$0.35	$0.35	$0.35	$0.35
Current Market Value USDm	85	85	85	85	85	85
est. value of common per share	$0.00	$0.18	$0.61	$0.81	$1.44	$2.07
% change from current price	-100%	-46%	74%	132%	312%	491%

Click to enlarge

Very Conservative Valuation

• Zero incremental NPV assigned to existing Gibraltar mine. This basically says that the current $85m market capitalization reflects the full value of all assets less liabilities (primarily Gibraltar) = $85m ; TGB estimates this at $CAD 745 ($596m USD at 0.8 CAD/USD exchange rate)
• Florence NPV estimates provided by Taseko (at 8% NPV) are reduced by ½
• Yields a range of $2.09 -$5.74 stock price for TGB (US OTC market)

Copper Price	$2.48	$2.79	$3.00	$3.10	$3.41	$3.72
1/2 NPV Florence	178	256	309	334	411	488
Current Market Value USDm	85	85	85	85	85	85
estimated revised market value	263	341	393.5	418.5	496	573
Shares Outstanding (millions)	246.2	246.2	246.2	246.2	246.2	246.2
Current Share Price (USD/OTC)	$0.35	$0.35	$0.35	$0.35	$0.35	$0.35
est. value of common per share	$1.07	$1.39	$1.60	$1.70	$2.01	$2.33
% change from current price	205%	296%	357%	386%	476%	565%
	1.07	1.39	1.60	1.70	2.01	2.33

Click to enlarge

Optimistic Scenario

Below is the valuation as presented by Taseko in it’s November 2019 Corporate presentation. As stated I take this with a grain of salt as obviously they are biased and bullish (nothing wrong with that).

The estimate share price based on Taseko’s numbers is presented below.

All numbers in millions (except for share price)

Taseko Valuation Gap ($CAD)	1,000
Current Market Cap ($CAD)	106
Total	1,106
Exchange Rate CAD/USD assumed	0.8
Total Value USD	885
Shares Outstanding (12/2019)	246.2
Current Share Price (USD/OTC)	$0.35
est. value of common per share	$3.59
% change from current price	927%

Click to enlarge

*Source: Author’s calculations based on available data

Conclusion:

I believe that TGB represents a significant upside opportunity for a risk tolerant investor. While the chances of bankruptcy or permanent business impairment do exist they seem relatively remote to me given the assets owned by TGB and the fundamentals of their business.

The current market fears driven by the coronavirus outbreak and general market frothiness have hit all stocks including some that were already inexpensive such as TGB. I believe this has created an even more favorable entry point for TGB and a “real option” on rising copper prices and Taseko’s expected commercialization of the Florence Arizona copper mine. One possible response to the coronavirus induced downturn is strong stimulus from China which is a major buyer of copper. In addition, per Freeport-McMoran and others increased copper production does not make economic sense at the current market prices and needs something closer to $3.30 to drive additional investment. This setup could lead to a run up in copper prices in the near to mid-term future.

Finally, when investing in commodity business it is important to buy when commodity prices are cheap and sell when they become extended. The market runs in cycles and one wants to use market psychology and trend to their advantage.

I have taken the recent downturn as an opportunity to purchase additional shares of TGB and will continue to leg in if the price drops further.

Good luck with your trades and appreciate others’ perspectives.

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.

Please do your own research before making any investment decision. Opinion expressed is that of the author only.

Comments

[hardinzl]

2.50 copper is not good for TGB. Florence taking too long to unfold. Market retraction will last the rest of 2020, EV sales retracting....blablabla
Good article, don’t disagree with analysis totally, but leaning more towards outside stress hurting this company before it can get out of its own way...if Biden is elected, environmentalists will be emboldened and odds shrink incredibly.

[Crowd Noise Fundamentals]

Fair point regarding $2.50 copper and the current macro environment. It is a bit of a dilemma because this is an important project for them and they of course want to generate cash flow quickly. I do think that the macro trends long term for copper are bullish particularly with the lack of incentive to develop additional capacity under $3.00-$3.30 copper price. The positive tailwind to counter your valid concerns is if China and/or US decide to do fiscal stimulus via infrastructure which would drive more demand. I look at TGB as a long term option on Florence and Copper Prices. 2020 may not be the year that this pays off but if they can refinance their debt and get Florence commercialized I see a great return opportunity at some point in the next few years. Thank you for commenting and raising those issues.

[hardinzl]

Yes, good points, just curious and watchful if Trump/China “blow their wad” with expansionary and quantitative tricks too early out of media/market pressure window-jumping and throw us into global recession rather than just letting the fear subside and giving up a bad Qtr. Trump is more of a fiscal a Democrat than the Democrats would like to admit when it means keeping the market afloat. Hope it works out because I want conservative judges to continue to be put on the bench, and yes, if copper rebounds, I will look to re-enter TSK with you...eventually. I already lost 11k at a .63 average price holding it, but got it all back in other moves.

[Crowd Noise Fundamentals]

All US politicians seem very supportive of quantitative easing and large fiscal deficits at the moment. The fixation on the stock market seems misguided to me and has blown a tremendous bubble in many names IMO. You may be right on timing of any buy of TSK/TGB given the likely difficult time ahead for the market. Good luck with your trades!

[investcashwisely]

lol, TGB will be lucky if it avoids bankruptcy

[narod]

Thanks for the great article! I am very optimistic on this stock future and it is one of my major holdings. I expect the Florence test facility to be able to address any environmental concerns. It will provide real numbers and data versus emotional concerns and hunches from the opposition.

[Mr.Sir]

Same here, this price has been a great opportunity to add. My fear which grows with time is that copper may not have hit bottom yet. And this virus scare is driving the prices down even more. Long term TGB should do fine, but Q1 and 2 may keep this at the bottom.

[Crowd Noise Fundamentals]

I agree. A lot depends on Florence and everything I’ve seen seem positive. If they can prove that the in-situ process will not cause damage to the local water system - they should get final approval. They’ll then need financing but I think that will be forthcoming as the project seems attractive. Thanks for the kind words and thoughtful comment.

[Crowd Noise Fundamentals]

I agree we may not have hit bottom. If TGB can survive and get Florence commercialized I see this being a good result particularly from the current market price which is extremely low in my opinion. Let’s hope we are right.

[investcashwisely]

This company is on the brink of failure

[Crowd Noise Fundamentals]

Thanks for commenting. I know you are bearish on the company. What is the context for your comments?

[narod]

How so?

[Beantown1544]

With 1,200 mining companies chasing $3BN in available funding, do you think you're underestimating the financing risk for Florence? If Florence never comes to fruition, what's TGB worth? Also, any environmental concerns that could shelve Florence?

[Crowd Noise Fundamentals]

Thanks for the questions. 1,200 mining companies in Canada with $3BN in the Toronto Stock Exchange (TSX). That was a driver for Taseko to move their primary listing to the London Stock Exchange (LSE). The feeling was that there many more active investors and more liquid market in the LSE. Assigning zero value to any of the other long term assets and nothing for Florence the stock would only be worth ~$20m using their own numbers PV8% of Gibraltar in USD is $596m against current liabilities of $522m. Current market cap is ~$85m. That said they do have the other assets which could theoretically be sold or commercialized.

There are two regulators that they have to work with AZ Department of Environmental Quality and the Federal EPA - permit applications to both were submitted last summer. Once approved there is then a public comment period and the local town of Florence has made legal challenges to stop the Florence mine over environmental concerns. So far Taseko has been able to move forward with test production etc... Below is link to a local article that lays out the town's concerns. Mind you its from August 2018 and Taseko has progressed but gives you the other side of the story.

www.pinalcentral.com/...

(Edited)

[Captainthinker74]

I grew up in Butte, which was considered back in the day to be the richest hill on earth. A LOT of copper came out area, & that's when the world population is much less then it is today. So with such history being the case, their's no doubt in my mind that copper will continue to play a big part in our world, & with plenty of room for growth, & emerging markets it'll likely be bigger then it's ever been as we move forward in time.

[Crowd Noise Fundamentals]

I fully agree. I also see a lack of new investment given the current market prices. Timing is always difficult but there are certainly reasons to be bullish long term on copper. Thanks for the comment.

[Mr.Sir]

great article, I am of the same opinion and have been slowly adding to my position. I think TGB is a long term hold, since they have great upside. Also at this price its a great deal.

[Crowd Noise Fundamentals]

Thank you for the kind words. I have been doing the same. Its very interesting as you know this stock can move fairly quickly and was $0.60 as recently as January. At $0.60 you could also have sold $1.00 August option calls on TGB for $0.05 for part of your position. No bid at the moment but the return can be significant and at a minimum will lower your cost basis if they expired worthless. Appreciate your comment and good luck with the position.