2024-01-17 15:46:47 ET
Summary
- Taseko Mines reported better-than-expected Q4'23 production figures with improved ore grades.
- Construction progress of the fully permitted Florence copper project is crucial for the near term.
- Taseko's current market cap is significantly lower than the combined estimated values of Gibraltar and Florence, indicating potential upside.
Taseko Mines ( TGB ) has been my biggest copper position and I’ve covered the company a few times with the last article, written in September’23 being available here . There I laid out the case for a gradual share price appreciation as announcements regarding financing/construction are made. Since then, manageme nt announced Q4’23 produ ction figures on January 10th, which were better than expected as ore grades improved significantly throughout the year. At the same time, Taseko was able to secure additional financing for its long-awaited, now fully permitted Florence copper project. Now all eyes will turn of the construction progress of that project. It will be critical for Taseko to complete and put into full production Florence before 2026, when the US$400M are due and the company will need to refinance. I remain bullish on Taseko as the EV continues to be trading at a fraction of the combined estimated values of Gibraltar and Florence.
Solid Q4 at Gibraltar
Taseko began the year with lower-than-average ore grades at its Gibraltar mine, which weighted in on the results. However, just as management has signaled, operations in H2’23 moved into richer areas and ore grade significantly improved, jumping to 0.26% in Q3’23. Needless to say, this led to much lower cash costs/lbs and the company generated CAD$27M cash from operating activities, despite CAD$34.5M of WC adjustment.
The news release abo ut Q4’23 indicates head grade of 0.27%, which is even better. Assuming average realized copper price of US$3.75, cash costs of US$2.20/lbs and positive WC adjustment of around US$6.5M (as the inventory levels decreased), I estimate cash flow from operating activities of about CAD$54M (US$40M). Such strong performance from Gibraltar’s operation could be the source of much needed cash for the construction of the now fully permitted Florence copper project.
The company is yet to announce the Q4'23 financials release date, but judging from history, it will likely be sometime in the second half of February.
All eyes on Florence
Taseko received the long-awaited final UIC permit from the US EPA in September and it became effective from the end of October, following a 45-day period. On 16 January, the company finally provided an update for Florence, indicating first copper production in Q4’25. Wells drilling is yet to begin and under the careers tab on Taseko’s website, the position of drilling manager appears to be still open as of 17 January.
Funding appears to be secured
Of course, the key part of Florence construction will be the financing. Regarding this, management has entered into multiple agreements ranging from potential JV to loan financing, effectively securing more than enough to cover the indicated US$232M of initial CAPEX.
At the same time, at current copper prices and ore grades, Gibraltar is also yielding nice cash flow, so the latest financing where the company entered into a royalty and loan agreement (US$50M each) raises questions about potential CAPEX blowout. The royalty part of the previously announced financing (US$50M) was confirmed again by the company on 16 January, when a definitive agreement with Taurus Mining Royalty was signed. In exchange for the funds, Taseko has to provide its counterparty with 1.95% of gross revenue from Florence.
Timing and balance sheet considerations
On its balance sheet, Taseko has around CAD$637M of IB debt and cash and equivalents of about CAD$82M. In terms of coverage, Net debt/TTM Adj. EBITDA stands at 3.6x as of Q3’23. The lion’s share of Taseko’s debt consists of US$400M (CAD$537.2M) of 7% notes, which are due in February 2026. It’s quite unlikely that the company will be able to repay them with their own funds, so refinancing will probably be the most viable option. In order for the refinancing to happen at the most favorable terms, the macro picture aside, Florence should be completed and operational by them. Lending to a miner with two operating assets, one of which is expected to have Tier 1 operating costs (Florence) would be less risky, hence done so at a lower rate than lending to a miner with only one operating asset with relatively high operating costs.
Valuation discussion
Previously, when valuing Taseko I used the Technical report of Gibraltar from 2022 as a base for the NPV figure. However, now that time has passed, the report is becoming less relevant and there’s the Sojitz deal from 2023 where Taseko acquired additional 12.5% interest in the mine for a total consideration between CAD$60M and CAD$117M. The payments will be made for 5 years and will depend on the operational performance of the property as well as copper prices. Taking the midpoint of the minimum and maximum payments and then multiplying it by 6 gives an indicative value of CAD530M for Taseko’s 75% interest in the mine. While the company now has 87.5% stake, the bulk of payments to Sojitz are yet to be made, so I’m not going to count the additional interest.
For the low-cost Florence project, I’ll use the US$1B (CAD$1.35B) of value, implied by the Mitsui deal, as explained in length in my article about the transaction. This indicates combined value of the two assets of CAD$1,880M. At the same time, Taseko’s current EV is around CAD$1,111M, after accounting for the CAD$557M of net debt. In order for the EV to catch up with my estimate of fair value, shares must trade at CAD$4.56 (US$3.38) each, indicating almost 140% upside from current levels.
The share price has been pretty stagnant and has actually fallen a bit since my last article. Apparently, the final permit for Florence was not much of an upside trigger to my surprise and general negative market outlook has kept the share price suppressed. There appears to be no particular company-specific events that could act as an upside trigger, so my suggestion is that the price action will follow updates, regarding progress at Florence construction.
Risks
The risks to the bullish case for Taseko could be divided on two categories - macro and company specific. On the macro side, a recession could lead to temporary reduction of copper demand, hence its price may fall. The effect will be especially negative for Taseko, as Gibraltar is not a low-cost mine, hence it's extra sensitive to copper price. However, some institutions like Goldman Sachs ( GS ) are projecting a rally of the metal on the back of electrification of the economy.
The most significant company specific risk seems to be delay risk for the construction of Florence. If the project is not completed or at least close to completion when Taseko has to refinance its US$400M notes, it may have to borrow at inferior terms. Regarding this risk, investors should closely monitor the updates that the company is going to provide for the progress at Florence.
Conclusion
Taseko exited 2023 with strong production numbers, beating management’s guidance. Ore grades have improved significantly throughout the year, which is key for a relatively low grade mine such as Gibraltar. At the same time, the market is waiting on construction progress at Florence as the project is fully permitted since Oct’23. In terms of valuation, Taseko is currently trading at a fraction of the estimated values of Gibraltar and Florence, offering considerable upside potential.
For further details see:
Taseko Mines: Strong Finish Of 2023, While All Eyes Turn On Florence