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Taseko Mines (NYSE:TGB) had a tough quarter due to lower than expected copper grades at Gibraltar. This resulted in its copper production being around 20% lower than planned. Production picked up significantly in July (up around 35% from Q2 2022 levels) and the combination of improved grades and soft ore should allow production to be strong during the remainder of the year.
Copper prices have also fallen by over US$0.50 since I looked at Taseko a few months ago. At current copper prices, it may need to utilize its credit facility to help pay for Florence Copper while maintaining sufficient working capital. If copper averages closer to US$4.25 until the end of 2023, then it should be able to pay for Florence Copper without utilizing its credit facility.
Weak Production At Gibraltar
The Q2 2022 production results at Gibraltar were disappointing. Taseko had previously indicated that it expected stronger production in Q2 compared to Q1 as copper grades improved. Instead, production ended up at 20.7 million pounds (100% basis) in Q2 2022, down from at 21.4 million pounds (100% basis) in Q1 2022. This was 5 million pounds (100% basis) lower than planned.
Taseko attributed this to unexpected ore gaps and small ore zones in the upper benches of the Gibraltar Pit. This resulted in the copper grade ending up at 0.17% compared to the expected 0.21% grade for the quarter.
Taseko is making its way deeper into the Gibraltar Pit, so this isn’t an issue anymore. It produced a much better 9.5 million pounds (100% basis) of copper in July and expects strong production over the second half of 2022 as copper grades improve and mill throughput is aided by softer ore. Taseko noted that mill throughput averaged 95,000 tons per day in July, compared to design capacity of 85,000 tons per day.
Taseko has maintained its guidance for 109.25 million pounds to 120.75 million pounds (100% basis) of copper production during 2022, but now expects to end up around the low end of its guidance. To get to the low end, it needs to average 90,000+ tons per day of mill throughput along with copper grades around reserve average of 0.25% and copper recoveries in the mid-80s. This appears theoretically doable, although there is not much room for slippage.
Florence Copper Update
The never ending wait for Florence Copper’s draft underground injection control permit continues, but I believe the issuance of that permit is relatively imminent. Taseko indicated that the EPA is now pushing the dates back by a week at a time, which is a shorter period than before. The EPA could certainly continue to revise its timelines, but now that the dates are being pushed back a week at a time, I’d expect the draft UIC permit to be issued in August or September.
Estimated 2H 2022 And 2023 Results
Production at Gibraltar has picked up as mining moves deeper into the Gibraltar Pit. I’ve modeled Taseko’s estimated cash flow for 2H 2022 and 2023 combined in a scenario where 2022 production ends up at the low end of its guidance range and 2023 production ends up around 130 million pounds (100% basis).
At around US$3.75 copper (near current prices), Taseko is projected to generate around USD$75 million in positive cash flow (before Florence Copper capex) by the end of 2023. This includes US$12 million in hedging proceeds that it realized in July 2022.
Taseko had US$137 million in cash on hand at the end of Q2 2022, so at US$3.75 copper, it would end up with around US$212 million in cash at the end of 2023.
| Copper Price | $3.25 | $3.75 | $4.25 | $4.75 |
| Revenue | $461 | $532 | $603 | $674 |
| Cost Of Production (Including Capitalized Stripping and Maintenance Capex) | -$390 | -$390 | -$390 | -$390 |
| Hedging Value | $46 | $12 | $12 | $8 |
| Interest Costs | -$42 | -$42 | -$42 | -$42 |
| G&A | -$12 | -$12 | -$12 | -$12 |
| Equipment Loan, Lease Repayments, Gibraltar Crusher Capex | -$25 | -$25 | -$25 | -$25 |
| Estimated Cash Flow | $38 | $75 | $146 | $213 |
Taseko may have around US$190 million in remaining spending for Florence Copper, so in this US$3.75 scenario it could theoretically pay for Florence Copper with cash on hand, although it may utilize its currently undrawn US$50 million credit facility to make sure it maintains sufficient operational working capital.
At lower copper prices (such as US$3.25 copper), Taseko is more likely to need a small amount of financing (in addition to its credit facility) to pay for Florence Copper.
At US$4.25 copper, Taseko should be able to pay for Florence Copper without drawing on its credit facility.
Notes On Valuation
At its current share price of a bit over US$1 per share, Taseko appears to be roughly fairly priced for approximately $4 long-term copper without Florence Copper. Assuming that Florence Copper becomes fully operational, Taseko’s current price would be roughly fair for a long-term US$3 copper scenario instead.
Florence Copper would significantly enhance Taseko’s ability to generate cash flow compared to with Gibraltar alone. This is particularly true at lower copper prices.
Conclusion
Copper production at Gibraltar was quite weak in Q2 2022, underperforming plan by around 20%. However, production picked up in July and should be strong during the remainder of the year.
The wait for the Florence Copper draft UIC permit continues, although I expect this permit to be issued in August/September now. Taseko appears to have sufficient liquidity to fund Florence Copper at current copper prices, although it may need a small amount of additional financing if copper prices move lower.
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Image and article originally from seekingalpha.com. Read the original article here.