Taseko

June 2017

Taseko

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Taseko                                                Bond Ticker: TKOCN Equity Ticker: TKO CN

 

Isin Issue Size Rating

M / S&P

Coupon Min

Piece

Maturity Next Call Offer YTM
US876511AC01 250 B3 / B- 8 ¾ 1000 June ‘22 June ’19 @ 104 3/8 102 8.25

 

 

 

Bonds issued by the copper miners have recovered along with the copper prices since spring 2016. Copper prices touched US$ 2 per pound during that period and appeared to have found a reasonable stable level at US$2.5 plus since end 2016.

 

Fundamentals of copper looks good with lesser risk of oversupply compared to for example iron ore.  We also see healthy demand growth from cabling including long distance transport of solar and wind generated electricity but also from electric car fleet expansion.

 

We have looked at Taseko to see if the lower rating / higher yield compared to the large cap miners is justified.  We believe the higher yield is due to lack of market cap and dependence on one mine.  Their only operating mine located in BC Canada is called Gibraltar in which Taseko holds a 75% interest. The other 25% is held by a Japanese consortium which bought its interest in 2015 for CAD 187m. Gibraltar is an old mine which ceased operations in 1998 when copper prices were around $1 per pound. Taseko acquired the mine from Boliden in 1999 and restarted production in 2004. After several expansions, the current life time of the mine is 22 years. Production steadily increased to 125m pounds p.a. and cash cost came down with current lower strip ratio’s and other costs savings. The mine also produces silvers and molybdenum as by products.

 

Taseko has a string of non-producing assets mostly in Canada and one in Arizona. These non-producing mines might need to be funded in future probably by way of farm-out transactions. No major capex programs are ongoing.

 

We like Taseko because;

  • It operates in Canada; it does not have the same amount of typical emerging market challenges like First Quantum and Freeport,
  • It has no major Capex commitments like Lundin and First Quantum; mine expansion plans have been completed with no remaining ramp up risks,
  • Cash cost are comparable with to other big copper miners
  • Strong cash flow of close to CAD50m per quarter makes the company less levered compared to the large caps
  • Net debt per 31 March was CAD 235m against 2017 Q1 EBITDA CAD 49m. Based on the current EBITDA levels the leverage is 1.2X, lower than Freeport and First Quantum

 

The company issued in June this year a US$250m 5y Secured 8.75% bond.  The proceeds together with cash on hand in total US$54m was used to repay a credit facility of US$80 and to settle a copper hedge at US$12m and for the redemption of the US$200m 2019 notes. After this refinance and call of the 2019 bond the cash position of CAD 75m .

 

(*) Taseko report its financials in CAD apart from cash cost of production which is reported in USD. Taseko consolidates only its 75% interest Gibraltar. Its operational reporting including copper production is done on a 100% basis.

 

 

 

 

 

In US$ C1 cash cost rating yield Market cap Net Debt
Taseko 1.33 B- 8.5% 0.36 180m
First Quantum 1.20 – 1.40 B1 5 – 7.5% 7.2 4.6b
Freeport 1.39 BB- 4.– 6.5% 17 12b
Lundin 1.2 BB- 5.5% 5.3 70m

 

 

It is common practice among mining companies to capitalise part of the stripping cost based on the argument that part of stripping costs is capex associated with developing the mine. The US$ 1.33 reported cash cost can be used for comparison with other miners. Without this capitalisation, the cash cost would be US$ 0.27 higher at US$ 1.60. Further the by-products contribution is in fact a setoff against copper concentrate treatment charges. In an adverse environment, the by-products contribution could change 10 cents, bringing the real cash cost to US$ 1.70. We estimate that sufficient cash would be produced to just cover the coupon and admin costs (in total USD 38m) at a copper prices of around US$ 2.00.

 

 

Copper price graph

 

Cor Timmermans

 

June 2017

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