Taseko Mines Stock: Secures More Funding For Florence Copper (NYSE:TGB)

Taseko Mines (NYSE:TGB) looks to be in good shape to fund Florence Copper after securing US$50 million in funding from Mitsui (with the potential for another US$50 million) as well as another US$25 million from Banc of America Leasing & Capital. Copper and molybdenum prices have also improved significantly from a few months ago and the difference in those commodity prices might increase Taseko’s cash flow by US$90 million per year at 2023 production levels.

Taseko is still waiting for the final UIC permit for Florence Copper, although I’ve noted before that I’ve set my expectation for that permit to be issued in Q2 2023. A fully operational Florence Copper could result in Taseko generating around US$0.80 per share in pre-tax cash flow per year at US$4 copper, resulting in an estimated value of US$4 to US5 per share in my opinion.

Mitsui Investment Details

Mitsui is initially investing US$50 million in exchange for 2.67% of the Florence’s copper production (up to 40 million pounds received). The first US$10 million will be available after the final UIC permit for Florence Copper is received, followed by additional US$10 million quarterly installments for four quarters.

Mitsui is expected to receive an average of approximately 2.27 million pounds of copper per year from this agreement. Mitsui will pay 25% of the market price for copper, so at US$4 copper, Mitsui would pay US$1 per pound for the copper it receives and it would essentially net US$6.8 million per year. Mitsui is thus paying around 7.35x annual cash flow at US$4 copper.

Mitsui also has the option to invest another US$50 million (bringing its total up to US$100 million) for a 10% equity interest in Florence Copper. This equity option is exercisable by Mitsui within three years of the completion of Florence’s commercial production facility. If the equity option is exercised, the copper stream will terminate. If Mitsui does not exercise the equity option, then Taseko has the right to buy back the copper stream.

Q4 2022 Production

Production at Gibraltar in Q4 2022 was below expectations. Taseko mentioned that Q4 2022 copper production was 27 million pounds (100% basis). Taseko previously expected Q4 2022 copper production to be approximately 31 million pounds, a 10% increase over Q3 2022 copper production.

The approximately 4 million pound copper production shortfall in Q4 2022 was primarily attributable to mill downtime in December, as severe cold weather combined with a sitewide power outage knocked out milling operations for a few days.

As well, there still appears to be some challenges with continued higher than normal mining dilution in the Gibraltar pit. Copper grades were expected to improve in Q4 2022 compared to Q3 2022, but instead copper grades were similar.

Taseko initially expected full-year copper production to end up at 109 million to 121 million pounds in 2022, with a midpoint of 115 million pounds. The mining dilution (when pockets of waste are unable to be separated out from the ore) issues have improved since early in 2022 when mining operations involved smaller ore zones. Copper production was up approximately 30% in 2H 2022 compared to 1H 2022 despite the December mill downtime. However, Taseko is still working on getting copper production fully up to expectations.

Copper And Molybdenum Prices

Copper and molybdenum prices have both surged recently. Copper was most recently at $4.21 per pound, up approximately $0.40 per pound from the end of 2022 and around $0.80 per pound in late October. Molybdenum has reached over $30 per pound, compared to around $20 per pound in late November.

If molybdenum prices remain that strong, that pricing increase should contribute to an additional byproduct credit of around US$0.15 per pound of copper produced at Gibraltar compared to a few months ago. This is based on life-of-mine average grades and recoveries for copper and molybdenum.

Thus at current prices, independent of the effect of changes in production levels, the margins at Gibraltar may be close to US$1 per pound better than around three months ago. Over a full year, this would translate into over US$90 million in improved cash flow.

Notes On Valuation

While inflation has increased the cost of completing Florence Copper, Taseko has secured additional funding without giving up much in the way of upside. If Mitsui elects to invest US$100 million, Taseko would still own 90% of Florence Copper’s equity.

At US$4 copper and Florence Copper at full production, along with US$15 to US$20 molybdenum, Taseko may be able to generate over US$225 million in positive cash flow per year after factoring in G&A and interest costs. This does not include potential cash income taxes though.

There is some uncertainty about what Florence’s production costs are now given that the Technical Report is from 2017. That report has production costs (including planned ongoing capex requirements) at US$1.53 per pound of copper produced from years 2 to 12. I’ve assumed that those costs are now around US$2.00 per pound of copper produced.

Based on the above assumptions, I believe Taseko could generate around US$0.80 per share in pre-tax free cash flow in this long-term US$4 copper environment. This should support a value of US$4 per share for Taseko’s common shares at a 20% free cash flow yield (not including the impact of cash income taxes) or US$5 per share at a 16% free cash flow yield.

At a long-term US$3.50 copper environment instead, Taseko’s value is estimated at around US$2.50 to US$3.50 per share instead with a fully operational Florence Copper.

Conclusion

The additional funding for Florence Copper from Mitsui and Banc of America Leasing & Capital combined with increased cash flow from Gibraltar (with improved copper and molybdenum prices) should put Taseko in good shape to complete Florence Copper’s construction. It is still waiting for the final UIC permit, which given the pace of the permitting process before, I’d expect in Q2 2023.

Taseko is giving up a small proportion (2.67%) of Florence’s copper production or equity (10% with a US$100 million investment), allowing it to retain most of the benefits of the project.

The Mitsui deal also highlights the potential value of Florence Copper, with Mitsui getting an equity option that essentially values 100% of Florence Copper at US$1 billion.

I believe that Taseko could be worth US$4 to US$5 per share in a long-term US$4.00 copper environment and with a fully operational Florence Copper. That project would be very beneficial to Taseko in giving it an asset with lower-cost production than Gibraltar that would also insulate it from some of the effects of fluctuating production at Gibraltar.