Taseko Mines: Target Price Of $2 Without New Prosperity And $7 With New Prosperity

Taseko Mines (TGB) is currently a mid-tier copper producer that receives 94% of its revenue from copper with molybdenum and silver by-products making up the remainder of the revenue. It recently completed a mine expansion project that increases production capacity by 57% and will see production level and production cost improvements throughout the rest of this year.

Taseko is also currently waiting for a Canadian government decision on whether it can proceed with its New Prosperity copper and gold mining project. If approved, this megaproject would potentially increase Taseko's revenues by nearly 200% over 2014 levels. However, the federal government rejected the project in 2010 over environmental concerns after it had received provincial approval. Taseko redesigned the mine plan to avoid draining Fish Lake, increasing the project cost from $800 million to $1.1 billion.

Valuing Taseko After Completion of GDP3

Taseko completed its Gibraltar Development Plan 3 (GDP3) in early 2013 and is expecting to optimize efficiencies and production levels throughout 2013. This $325 million project was completed on time and on budget, and involved the construction of a 30,000 ton per day concentrator that would help boost production capacity from 105 million pounds of copper per year to 165 million pounds per year. As well, a new molybdenum recovery facility was built that boosts the production of molybdenum by over 1 million pounds per year.

In conjunction with the increased production levels, the cost of production is expected to decrease significantly. CEO Russell Hallbauer mentioned on the Q2 FY2013 conference call that production cost targets were in the $1.50 to $1.70 range per pound of copper, partially dependent on the CAD/USD exchange rate.

Here's a look at projected 2014 numbers assuming a copper price of $3.25 per pound and full production. Taseko's 75% share of the Gibraltar mine is 123.8 million pounds of copper. Cost of sales is based around the higher end of the CEO's expectations for production cost at $1.65 per pound net of by-product credits plus an additional $0.40 per pound for off-property cost for transport, treatment, and sales.

The enhanced production levels plus reduced costs of production make Taseko capable of reaching over $118 million in annual EBITDA at current copper prices. Mid-tier producers are valued at around 4x to 6x EV/EBITDA. At 5x EBITDA, enterprise value would be $592.5 million, leading to a estimated price per share of $2.06.

New Prosperity

Public hearings for Taseko's New Prosperity project concluded on August 23. The panel has 70 days after that point to submit the report to the Canadian government, and the Canadian government has up to another 120 days to make a decision on whether to approve the project. Taseko expects a decision anywhere from November 2013 to February 2014. The project is a contentious one with very significant opposition from First Nations and environmental groups, but also strong support from the local towns.

When the project proposal was rejected by the federal government in November 2010, Taseko's share price dropped 24% from $6.48 to $4.91. This price is 135% above the most recent closing price though.

A comparable mine to New Prosperity is Thompson Creek's Mount Milligan mine. Mount Milligan has 6 million ounces of gold and 2.1 billion pounds of copper in mineral reserves with a 22 year mine life. New Prosperity has 7.7 million ounces of gold and 3.6 billion pounds of copper in mineral reserves with a 33 year mine life.

History of Mount Milligan

We are going to look at the Mount Milligan mine to give us some estimates for potential cost increases to use in conservatively valuing New Prosperity. Although Taseko managed to successfully complete its GDP3 project on time and on budget, large mining projects often have issues with rising costs.

Mount Milligan is a good example to use since that mine is quite similar to New Prosperity. Both are copper-gold mines located in interior British Columbia, had projected development costs of near $1 billion, and projected annual operating costs of $200 million. Mount Milligan was started in 2010 and completed in 2013.

The development cost for Mount Milligan started at $915 million and ended up at $1.5 billion, an increase of 64% from initial projections. The annual operating cost started at $200 million and ended up at $280 million, and increase of 40%. We will use these figures for a conservative valuation of New Prosperity.

Valuing New Prosperity

In May 2010, Taseko entered into a gold stream transaction with Franco-Nevada. Taseko will get $350 million from Franco-Nevada in exchange for 22% of the life of mine gold from New Prosperity. Franco-Nevada will pay Taseko the lower of $400 per ounce (subject to inflationary adjustment) or market price. This amount essentially covers the expected cash cost of production for that gold stream.

Based on that transaction, the entire gold stream for New Prosperity is valued at $1.59 billion. At the time of the transaction the price of gold was $1236 per ounce, with an estimated margin of $836 per ounce.

The price of gold is now $1365 per ounce. If we assume that annual operational costs increase by 40% similar to what happened at Mount Milligan, the cash cost of production per ounce will be $560, leaving a margin of $805 per ounce, which is 4% lower than before. Discounting the gold stream value for New Prosperity by that amount gives us an estimated value of $1.53 billion.

Copper at $3.25 per pound would result in lifetime copper revenues of $11.7 billion, about 11% higher than the gold revenues of $10.5 billion at $1365 per ounce. We are going to value the copper production at 11% higher than the gold production as well, leading to an estimated value of $1.70 billion.

Assuming that New Prosperity faces similar cost overruns as Mount Milligan would push the development cost up from $1.1 billion to $1.8 billion.

Based on that information, the net present value of the New Prosperity project is $1.43 billion. Estimating its effect on market capitalization at 0.65x NPV gives us a value of $930 million, or $4.83 per share. The effect of selling the 22% gold stream to Franco-Nevada at $400 per ounce versus a production cost of $560 per ounce would lower this value to around $4.65.

An alternate way of looking at New Prosperity would be to look at expected EBITDA. New Prosperity is expected to produce 300,000 ounces of gold and 130 million pounds over copper during each of its first five years of mine life. With current prices and operating costs of $280 million, this gives us an annual boost to EBITDA of $488.3 million.

At 5x EBITDA, this becomes $2.442 billion. Adding the $350 million Franco-Nevada payment and subtracting the $1.8 billion in development costs gives us a net value of $992 million or $5.15 per share.

If New Prosperity gets approved, we can expect it to add approximately $5 per share to Taseko's value upon project completion even with a conservative look at development and operating costs. If Taseko is able to keep operating and development costs to current budgeted levels, then the effect on value could be an additional $4 to $6 per share on top. This is based on current gold and copper prices and is highly sensitive to price changes in both directions.

Conclusion

Taseko's current share price does not appear to factor in any value from a potential approval of the New Prosperity project. Based on current copper prices and the projected production and cost improvements at the Gibraltar mine resulting from the GDP3 program, Taseko should be worth $2.06 per share even without New Prosperity or their other projects. Completion of the New Prosperity mine would make Taseko worth $7 in current market conditions, even factoring in significant development and operating cost increases.

An approval of the New Prosperity mine should result in an immediate significant increase in Taseko's share price, as rejection of the previous plan dropped the share price by $1.57 in 2010. Rejection of the current plan may cause Taseko's price to drop significantly again, although the effect should theoretically be more limited this time due to the apparent lack of value attributed to New Prosperity in the share price. Any major decrease on that news may represent an additional buying opportunity since Taseko's value from the Gibraltar mine alone is approximately the current share price.

Taseko also has other projects that should provide additional value such as the Aley niobium project and the Harmony gold project, but we have left those out of the calculations for now since they are further down the pipeline. Taseko lists the value of these assets as $450 million in presentations (converted to $US).