Summary
- Taseko Mines benefited from high Molybdenum prices in Q4’22 and could achieve record by-product credits in 2023.
- The increased stake in Gibraltar could add around US$13.5M of EBITDA to the current pricing environment.
- Over 70% of attributable production for 2023 is hedged with a floor of US$3.75/lbs, making the company resilient to short-term drops in prices.
Molybdenum prices have more than doubled , since the beginning of 2023. One of the companies that stands to benefit from it is Taseko Mines ( TGB ), as the metal is a by-product from the Gibraltar copper mine. I estimate that the current moly price environment could bring by-product credits north of US$0.50/lbs, which would be a record. In addition, Taseko increased its stake in Gibraltar by 12.5% to 87.5% at terms, which seem very favorable. The recent spike in copper prices allowed management to enter into zero-cost collars, ensuring a US$3.75/lbs price floor for more than 70% of expected production for the year. For these reasons, I think that Taseko is positioned for a solid 2023 in anticipation of receiving the final permit for the construction of the Florence copper project.
Operational overview
A few days ago, Taseko published its Q4'22 and full year statements. The year has been challenging for the company as the results were hit simultaneously by sliding revenues and higher costs. Both lower realized price (US$3.96; -8.1% YoY) and lower production, due to decline in ore grades (0.20%, compared to 0.23% in 2021). 2022 revenue amounted to CAD$391.6M (-9.6% YoY).
Taseko's 2022 operational highlights (Taseko Mines)
At the same time, COGS exploded, as inflation on materials and energy as well as lower production and decrease in capitalized stripping as well as other items sent the C1 costs per pound up by more than US$1.0 to US$2.98. As a result, EBITDA for the year contracted to CAD$109.0M (-45.7% YoY).
Taseko's cost structure change (Taseko Mines)
Taseko ended the year with a cash and equivalents position of CAD$120.9M, compared to CAD$236.8M. However, in 2022 alone, the company incurred more than CAD$101.3M of development costs related to its Florence copper project. The liquidity profile of Taseko is very solid with US$50M of undrawn credit facility, which has the option to be increased to US$80M, US$50M committed by Mitsui for the construction of Florence copper as well as US$25M commitment for SX/EW plant at Florence.
Increased stake at Gibraltar
In February 2022, Taseko concluded an agreement with Sojitz Corporation to acquire its 50% stake in Cariboo Copper Corporation, which in turn owns 25% interest in the Gibraltar copper project. As a result of the transaction, Taseko's stake in the mine will be boosted by 12.5% to 87.5%. The amount of the deal is set to a minimum of CAD$60M, which consist of CAD$10M in initial outlay as well as additional CAD$10M annual instalments for the next 5 years. In addition, is copper prices are above US$3.50/lbs, Sojitz will be entitled to a contingent payments based on a sliding scale starting from 0.38% of Gibraltar's production up to 2.13% if copper prices are at US$5.00/lbs. Those contingent payments are capped at a total amount of CAD$57M for the 5-year period.
Gibraltar overview (Taseko Mines)
While Sojitz cited the poor performance of the asset as the reason for the sale, I find the deal to be a net positive for Taseko. While ore grades have been indeed quite poor, especially in H1'22, there's been an improvement in the second half of the year, which according to management is expected to persist into 2023.
We've made recent progress on addressing the higher-than-normal mining dilution. A number of operating initiatives have been identified and we're in the process of implementing and expect improvements to increase mill head grades going forward. As we've spoken about previously, as we mine deeper into the Gibraltar pit, this issue naturally improves with the larger and more continuous ore zones. So we expect higher grades in 2023.
In the current US$4.00lbs price environment and using the Q4'22 cost structure, the additional 12.5% stake in Gibraltar could generate about US$13.5M of additional EBITDA as it won't add anything to general and administrative expenses or interest payments.
production 100% basis | Mlbs | 115 |
12.5% basis | Mlbs | 14.375 |
copper price | US$/lbs | 4 |
revenue | US | 57.5 |
OPEX/lbs | US$/lbs | 2.75 |
OPEX | US | 39.53125 |
contingent payment | US | 4.43 |
EBITDA | US | 13.5 |
* author's own estimates
Such a figure will be more than enough to cover the CAD$10M in mandatory annual payments to Sojitz in the next five years and still make an addition to free cash flows.
2023 Outlook
The 2023 number could see a great improvement, mainly due to increase in ore grades (therefore higher total production) as well as higher by-product credits. The main source of the latter is the production of molybdenum alongside the copper extraction.
Molybdenum price (tradingeconomics.com)
Moly prices have exploded recently, more than doubling since the beginning of 2023 to more than US$96/kg (approx. US$42/lbs). The metal is an important element, due to its ability to add corrosion resistance and high temperature resilience in steel. However, a market deficit is expected to persist up to 2025, paving the way for a high price environment.
Using the midpoint of moly's production from Gibraltar for 2021 and 2022 of about 1.5Mlbs (131.25Mlbs at 87.5% basis) and a market price of about US$40/lbs, Taseko could add US$52.5M of additional revenue, indicating by-product credits around US$0.52/lbs, compared to just US$0.23/lbs in 2022. Keeping that in mind, it's very possible C1 costs for 2023 to fall towards US$2.5/lbs, which combined with US$4.00/lbs copper price could yield EBITDA north of US$140M.
Taseko's outstanding hedges (Taseko Mines)
It's worth mentioning that management made a very prudent move as it took advantage of the recent spike in copper prices to enter into a zero-cost collar for H2'22 production, securing a price floor of US$3.75/lbs. With that, the total hedged amount for 2023 reached 72Mlbs, which is approx. 72% of the expected attributable production from Gibraltar of 100Mlbs on 87.5% basis.
Conclusion
The recent developments seem positive for Taseko. The high molybdenum price environment, could contribute to record-high by-product credits in 2023. This could be amplified by the acquisition of an additional 12.5% stake in Gibraltar as ore grades are expected to improve. In the case of adverse moves in copper prices, more than 70% of projected 2023 production is floored at US$3.75/lbs. At the same time, the current EV of Taseko stands at below US$800M, while I estimate the combined value of Gibraltar (87.5% basis) and Florence (indicated by the Mitsui deal ) at more than US$1.9B, implying serious upside potential.
For further details see:
Taseko Mines Is Positioned For A Solid 2023