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Leveraging our preference for relatively low-cost (C1), long-lived copper projects located in mining friendly jurisdictions, Taseko Mines Ltd. (TKO-CN, TKO-LN, TGB) fits the bill on all fronts. With current mining operations in British Columbia (Gibraltar), the production portfolio is expected to be supplemented in the near term with a second operation located in Arizona (Florence). Though both cornerstone copper assets are polar opposites (Gibraltar being Canada’s second largest open-pit copper mine and Florence being an in-situ recovery operation), low costs and environmentally friendly mining methods are hallmarks for both. Further in the pipeline, British Columbia based assets such as Yellowhead and New Prosperity add meaningful Proven & Probable reserves for future optionality – with both of those assets currently being carried seemingly for free at current valuations.
Underpinned by a LT $4.35 per lb copper price and using a weighted valuation methodology incorporating a 1.10x NAV7%-8% target coupled with a 6.5x 2024 EV/EBITDA multiple, we establish a C$3.80 per share, 12-month price objective. This represents upside of +110% from the most recent, intra-day TSX quote. Recent weakness among copper miners has been brough upon by debt ceiling concerns, a strengthening dollar, LME inventories reaching the highest level since March and increasing talk of deflation spurred by recent US and Chinese CPI and PPI figures. As such, shares of Taseko Mines have declined by -20% since the start of the month. That said, shares currently trade at a hard-to-justify 0.53x discount to NAV. This is territory often reserved for non-producing exploration/development companies and not a company such as Taseko which has demonstrated a historic record of positive EBITDA, successful project development and the building of a copper reserve which now outclasses larger peers such as HudBay Mining (HBM), Capstone Mining (CS) and Ero Copper (ERO).
Gibraltar: Earlier this year Taseko increased its ownership stake (from 75.0% to the current 87.5%) in the Gibraltar mine for a total consideration (including contingent payments) capped at $117.0M and to be paid over a 5 year period. Since re-starting the south-central BC mine in 2004, Taseko has invested nearly $700M since 2007 to build a state of the art facility capable of reaching a design capacity of 85,000 tpd (from an initial 36,000 tpd) which at peak may lead to production levels of up to 130M lbs of copper (100%) per year. These upgrades were completed in late 2012. Additionally, due to the reliance of hydro power, Gibraltar has been quantified as a low-carbon operation following independent verification and analysis. Gibraltar has been ranked in the lowest quartile compared to other copper miners throughout the world with Scope 1 GHG emissions of 1.66 t CO2e/t Cu eq. per pound of copper produced. Annual production since 2017 has averaged just below 125M lb however production levels have dipped during the pandemic years and due to a primary recovery shift from the Granite pit into the Pollyanna and Gibraltar pits. That said, mill production is expected to exceed design capacity over the course of FY/2023 as management has guided for 115M lbs of copper production (100%). Over the currently remaining 20-year LOM, we forecast annual production to average an attributable 106M lbs with an the average C1 and AISC being $2.33 and $2.56 per lb. With the major upgrades and refurbishments out of the way, we see Gibraltar as a low maintenance mine which should run consistently near operating capacity while generating stable EBITDA margins in the high 30% level.
Florence: Located south-east of Phoenix, the Florence copper project was acquired in 2014 via acquisition od Curis Resources (the name Curis implying Cu Copper RIS recovery in situ). Following $135M+ invested by the likes of Conoco, Magma copper and BHP Copper, Taseko has since acquisition invested $165M in Florence, including $25M to build a production test facility (PTF) which was inaugurated in 2018. Located near all needed power, transport and rail infrastructure, the current economics envision a 21 year LOM ISR operation capable of producing an average of 85M lbs of high grade copper cathode per year. Much like the ISR recovery methods currently used for uranium recovery in Wyoming or Texas, much of the same process involving injection wells (weak sulfuric acid) and corresponding recovery wells would be used for Florence. Between 2018-2020, the PTF demonstrated smaller scale ISR proof of concept (we visited the site back in 2018). The PTF facilities consisted of an ISR wellfield, a SX/EW processing plant, an acidic reverse-osmosis water treatment plant, a water impoundment, run-off pond, and associated infrastructure. The PTF wellfield was comprised of four injection wells, nine recovery wells, seven observation wells, and four multilevel sampling wells. The purpose of the PTF was to demonstrate hydraulic control and confirm the oxide ore zone behaves hydrologically as an equivalent porous media thereby ensuring protection of underground sources of drinking water. The pictures below are of the various injection/recovery wells and the PTF itself from our visit to site in late 2018:
Today, all that is needed is the final Underground Injection Control Permit which is expected to be issued by the EPA in the months ahead. Once in-hand, a 12-18 month construction period will commence (orders for long lead items have already been placed). We assume production start come 2025. A revised technical report (issued on March 31, 2023) confirmed the production of 1.50B lbs of copper over the total 21 year LOM. Being more conservative, we model the operations to be slightly below the report parameters. We envision an average of 80M lbs of copper produced annually at a C1 cash cost averaging $1.33 per lb (compared to $1.10 in the report). We see grades equating to approximately 1.7 g/L with recoveries increasing to above 70% over time. The total remaining initial capex is seen at approximately $230M, all of which is covered given current cash on hand and a US$400M debt package closed in February. Additionally, keep in mid that in early May a $50M ATM offering was announced (effective until May 26, 2025). In terms of partnerships, recall that in late 2022, Mitsui announced a strategic $50M partnership deal for the development of Florence. The deal itself involves a copper stream on 2.67% of the copper produced (at a delivery price equal to 25% of the copper market price). Moreover, an offtake agreement was signed between both parties for 81% of the copper cathode produced at Florence during the initial years. Mitsui also has the option for an additional $50M investment in return for a 10% equity interest in Florence. Taseko retains a buy-back option on the copper stream. Our production estimates for Gibraltar and Florence are presented below:
Other assets further in the pipeline include the Yellowhead and New Prosperity copper projects which both currently boast billion lb reserves in British Columbia. Aley, also located in in British Columbia is the world’s largest undeveloped niobium deposit (outside of the two operating niobium mines located in Brazil). The total reserves include 84M tonnes in the Proven & Probable category, grading 0.50% Nb205. All of the above mentioned pipeline projects have Preliminary Economic Assessments demonstrating robust economics and long LOMs for the given commodities. Given that that immediate focus is solely on Florence, New Prosperity, Yellowhead and Aley present attractive upside optionality which may either be monetized or developed in the future should pricing remain elevated. For the sake of valuation, these three pipeline projects are hardly given any market value (and for the time being, minimal value in our books as well).
Long-lived mining operations are built on back of quality Proven & Probable reserves (note: pure copper reserves, not a polymetallic mixture of copper equivalent, CuEq). Which is what makes the heavily discounted pipeline projects that more significant. Emphasizing this point, when compared to much larger peers such as (among others) HudBay Mining (HBM), Capstone Mining (CS) and Ero Copper (ERO). The resulting P&P lb. per Mcap is displayed below and emphasizes the severely discounted values currently ascribed to Taseko’s entire project portfolio:
When looking solely at Taseko within the lens of Gibraltar and Florence, our conservative estimates lead us to a waterfall equity valuation of $1.15B representing a marked discount of -52% when compared to the current market capitalization of $545.5M
Underpinned by a LT $4.35 per lb copper price and using a weighted valuation methodology incorporating a 1.10x NAV7%-8% target (75%) coupled with a 6.5x 2024 EV/EBITDA multiple (25%), we establish a C$3.80 per share, 12-month price objective. This represents upside of +110% from the most recent, intra-day TSX quote. Select items from our near-term financial projections along with our valuation methodology and sensitivities are below:
Ultimately, the Taseko Mines story is one of consistent copper production from Gibraltar, meaningful, near term ISR production upside from Florence (fully financed) along with longer term (heavily discounted) optionality from the billion+ copper reserve projects such as Yellowhead and New Prosperity. All assets are located in the mining friendly jurisdictions of British Columbia or Arizona (Florence). Including the longer term portfolio pipeline which is currently being entirely discounted by the market, the Proven & Probable reserve base exceeds that of numerous much larger copper producing TSX listed peers.
