Taseko Mines Limited (TSX:TKO:CA, NYSE:TGB) has been struggling with lower ore grades in H1’22. The Q3 2022 results released today confirmed management’s guidance of expected significant improvement in the ore grade, which led to an increase in production and lower cash costs.

Following the ending of the public comment period for the draft UIC permit at Florence, where the company received overwhelming support by the community, a final decision of the EPA is expected. Meanwhile, the purchase of long-lead items and other pre-construction activities are taking place.

Taseko is still trading well below the estimated NPVs of the operating Gibraltar mine and the near-term production Florence project. Management has mentioned that there are in well-advanced discussions with third-parties about potential minority equity sell or royalty/streaming agreements at Florence. I see this as a potential near-term catalyst, as the value of the project will be attested by a third party.

Q3 overview

As I discussed in my previous article on Taseko, lower-than-average head grades were a serious problem for the already low-grade Gibraltar mine. Fortunately, as management has guided, the copper content of the mined material improved significantly from 0.17% in Q2’22 to 0.22% in Q3’22.

This has led to 36.7% QoQ increase in production to 28.3Mlbs of copper but is 12.7% below the result from Q3’21, when the head grade was 0.28%. 26.7Mlbs of copper were sold during the quarter (32.4Mlbs in Q3’21) at an average realized price of US$3.48/lbs (-18.3% YoY). As a result, revenue for the quarter amounted to CAD$89.7M (-32.3% YoY). Cash costs improved on a quarterly basis by 21.6% at US$2.72/lbs, but were 73.2% higher YoY.

US$0.92/lbs of the increase to Q3’21 cash costs was production related, while US$0.23/lbs was non-production related, primarily due to inflation. The bottom line for the quarter amounted to negative CAD$23.5M or negative EPS of CAD$0.08. However, when accounted for an unrealized FX loss of CAD$28.1M, adjusted EPS was positive at CAD$0.02/share. Taseko benefited from its hedging program, as CAD$16.6M of realized gain on settled copper options was recorded.

Going forward, Taseko has hedged 30Mlbs of its copper H1’23 production for prices below US$3.75/lbs. If normal annual production of 97.5Mlbs (75% basis) at Gibraltar is assumed, the downside protection is for a bit over 60% of output.

Update on the Florence project

Following the conclusion of the public comment period, regarding the draft UIC permit by the EPA, Taseko has provided an update, stating that 98% of the comments were positive. The company has high confidence that a final permit will be issued, the only question is when. Current expectations are that this could happen towards the end of this year or at the beginning of next year. In the meantime, Taseko continued the procurement activities as development costs for the Florence project reached CAD$79.4M YTD (CAD$27.3M in Q3’22 alone).

In the meantime, Taseko continued the procurement activities as development costs for the Florence project reached CAD$79.4M YTD (CAD$27.3M in Q3’22 alone). While I think that current cash and equivalents, in conjunction with cash flow generated from Gibraltar and the US$50M undrawn credit facility, are sufficient for the construction of Florence, in a recent interview, Brian Bergot (Vice President, Investor Relations of the company) has outlined another interesting option. According to him, management is in well-advanced discussions with third parties, regarding a type of asset-level transaction at Florence. This transaction could be a minority equity interest or some form of royalty/streaming agreement.

I think that such a deal, depending on the terms, could potentially reaffirm the value of Florence and strengthen the balance sheet of Taseko. Recall that in 2009, Taseko sold a 25% equity stake in Gibraltar to Sojitz Corporation (OTCPK:SZHFF) for CAD$180M.

Share price and valuation

Looking at the YTD performance of Taseko’s shares, the price is down 47.8%, which is a lot worse than the United States Copper Index Fund (CPER). This goes to show the leverage that Taseko has on the copper price. The current EV of Taseko of about US$610M (using an exchange rate of CAD/USD of 1.37) is still well below the combined estimated NPVs of Gibraltar and Florence of around US$1.5B. Given a current net debt level of slightly above US$300M, this would imply almost x4 of the share price in order for an EV of US$1.5B to be reached.

Besides the issuance of the final UIC, I see the potential for an asset-level transaction at Florence as a potentially significant upside trigger. Looking back in 2009, the share price moved more than 30% higher in the week, following the announcement of the deal with Sojitz for the 25% stake in Gibraltar.

Risks

Lower copper prices risk – due to its hedging program, Taseko is partially protected for drops in copper prices up to June 2023. Given the importance of copper in the energy transition, I think that, more long term, copper prices should go higher, as demand is expected to outpace supply.

Inflation risk – cost pressures have already hurt Taseko’s results, especially given the low-grade nature of Gibraltar (therefore more sensitive to cost increases). The best remedy would be to bring Florence forward, as the project has much superior cost profile. As for the potential effects of inflation on Florence’s construction costs, Taseko is trying to mitigate them by purchasing long-lead items in advance. However, such negative effects couldn’t be fully eliminated.

Permitting risk – the Florence project has suffered from a long permitting process in the USA already. Now that there’s only the final UIC permit to be issued and given the overwhelming public support for the project, I think that any meaningful delays past H1’23 are not likely.

Conclusion

Taseko has posted significant QoQ improvements in its results, due to head grade improvements, which are expected to continue towards the 0.25% average head grade in Q4’22. The company is awaiting the final UIC permit for Florence in order to begin construction. The current Taseko share price seems to be well below the potential, implied by the estimated NPVs of Gibraltar and Florence, while an asset-level transaction at the latter could be a near-term catalyst.