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Production Decision Coming for Florence Copper; Arizona is Copper ISR

DISCLAIMER: Any written content contained herein should be viewed strictly as analysis & opinion and not in any way as investment advice. No compensation was received for this report. Visitors to this site are encouraged to conduct their own due diligence.

Meaningful news from Taseko Mines (TGB, TKO) today as the stock ended the session +22% after announcing a strategic partnership with Mitsui & Co. (USA) Inc. to advance the Florence Copper Project. This arrangement with Mitsui essentially finalizes the last tranche of financing needed to get the ISR Florence Copper Project into construction.

In forming the partnership, Mitsui agreed to an initial investment of $50M to be used for construction of the commercial production facility, in return for a 2.67% copper stream agreement on the copper produced at Florence. Moreover, Mitsui has the option to invest an additional $50M for a 10% equity interest in Florence Copper. The option is valid over a three year period following construction of the facility. If Mitsui elects to exercise the equity option, the 2.67% copper stream will terminate. Taseko retains the option to buy back 100% of the stream should Mitsui not elect to convert the stream into a 10% interest. Otherwise the stream terminates after delivery of 40M lbs.

We see the deal terms as advantageous for Taseko seeing as it not only provides the final capital required to actually begin construction, but it is also accretive to Taseko based on our back of envelope calculations. Though we value the 2.67% stream at ~$73M ($ copper LT and an 8% discount), we also value Florence at $687M (100%) compared to the potential 10% equity stake (likely in year 3) for an all-in cost of $100M. With ~$100M of cash on hand (recall $142M at the end of Q3) along with an undrawn line of credit of $50M the initial $50M from Mitsui essentially covers the remaining capex required.

Of the ~$275M total capex required (inflation adjusted since the 2017 Technical Report), note that ~$80M was already incurred leaving nearly ~$200M yet to be spent. With ~$100M of cash on hand (recall $142M at the end of Q3) along with an undrawn line of credit of $50M the initial $50M from Mitsui essentially covers the remaining capex required. For added flexibility, note that this excludes the current FCF from the Gibraltar operation which amounts to ~$50M+ annually. A production decision is fast approaching at which point the company will disclose additional details concerning opex and capex estimates. This production decision is expected soon as the US EPA already issued the draft Underground Injection Control (UIC) permit this past August. The EPA is currently reviewing all items related to the comment period ahead of issuing the final UIC permit.

Taseko Mines also has outstanding purchase commitments of $16.4M as at September 30, 2022. Most of the outstanding equipment for the SX/EW plant is expected to be on site by now. Note that using ISR mining methodology, Florence copper is expected to be one of the lowest greenhouse gas intensity (GHG) copper producers in North America. Recall that the proof of concept has already been established, ISR production from a test facility began on a much smaller scale in 2019.

Company wide, note that great mining companies are built on back of a quality asset base. At present when including the reserve base from Gibraltar, Florence, Yellowhead and New Prosperity, few even know that Taseko has a higher copper reserve base (totaling 15.0B lbs) than Lundin Mining (LUN) or HudBay Minerals (HBM) at 12.0B lbs and 9.2B lbs respectively. That said, we are strictly speaking Proven & Probable reserves, the highest quality category for reserve confidence. This quality ensures that post-Florence, the pipeline has other attractive prospects to develop. There will be a re-rating higher as low-cost production (LOM C1 cash cost of $0.90/lb) becomes a closer reality.

We also highlight another Arizona based ISR copper developer. Maybe at the same junction as Taseko approximately 3-4 years ago, Arizona Sonoran Copper Company (ASCU) is a relatively new pure-play entrant to the Arizona ISR copper scene given its November 2021 IPO (19.066M shares issued at an IPO price of C$2.45/share, raising gross proceeds of C$46.7M). Located approximately 50km from Taseko’s Florence copper deposit, Arizona Sonoran’s flagship asset is the wholly owned Cactus Copper project which was purchased in July 2020. Cactus is situated at the intersection of Arizona’s three porphyry belts and is also proximal to a number of large scale regional copper mines and processing facilities.

The Cactus mine currently hosts 1.6B lbs of contained copper in the Indicated category along with 4.9B contained lbs in the Inferred category (1.1B and 3.6B respectively in the leachable category). Via ISR mining, the project is expected to produce 56M lbs of grade A copper cathode per year over an 18 year LOM. Following a May 2022 private placement for C$35M, an ambitious drilling program is expected to continue intersecting high grade copper intervals such as the 302 ft at 1.23% Cu and the 595 ft at 1.29% Cu hit earlier this year in April and February. Note that Pre-Feasibility Study (PFS) drilling was completed in early May, while a 60,000 ft infill drilling program along with a 12,000 ft expansion drilling program is currently underway. Needless to say, given the results to date from this type of aggressive drilling campaign, the risk is on the upside for resource growth and an eventual upgrade in resource quality. The company is lead by the capable hands of CEO George Ogilvie, who most recently lead a turnaround at Battle North, tripling the resource base to 1.2M gold ounces and selling the asset last May to Evolution Mining. Previously, George Ogilvie had a successful tenure as CEO of Kirkland Lake Mining (improving operations at Macassa and acquiring St. Andrews Goldfields) and before that was CEO of Rambler Metals.

Both Florence and Cactus are similar types of ISR amenable copper mines which are situated relatively close to each other. Their stories are at different stages seeing as Taseko is on the cusp of final permitting, construction start and large scale production. Arizona Sonoran is still proving out the resource seeing as mineralization remains open for at least another 1,970 ft to the northwest, with further exploration occurring at the northeast extension as well. Given the current work on technical studies, production may come sooner than one might expect, possibly as early as 2025/2026.

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