Taseko's Dead End to Prosperity

The show must go on, right?

Well-wishers may tell you to break a leg, but that doesn't prepare you for having your arms lopped off.

Taseko Mines (AMEX: TGB  ) stood upon the world's stage while awaiting final regulatory approval for its Prosperity copper and gold mine, but when the curtain closed, the performance was jeered with scathing reviews.

Canada's Environment Minister, Jim Prentice, dealt a crushing blow to Taseko on Tuesday when he announced his government's negative permitting decision for Prosperity. While this may not mark the absolute end of the road for the project, this decision significantly extends a process that has already reached an epic 17-year duration. During after-hours trading, Taseko shares plummeted by nearly 30% to trade for less than $4.60 per share.

Taking his cue from the report of a federal review panel issued back in July -- which Prentice characterized as "scathing" and "probably the most condemning report that I've seen" -- the decision hinged upon the risk that proposed post-project mitigation efforts might fail to adequately restore Fish Lake and the surrounding ecosystem. Taseko's mine plan, which envisioned converting Fish Lake into a tailings pond, had drawn vehement opposition from First Nations and environmentalists alike.

Taseko's best-case scenario
All Taseko can do at this stage is go back to the drawing board, engage in lengthy consultations with groups that opposed the plan, revise the mine plan in a way that addresses the key concerns of regulators and others, and submit that revised plan for another arduous review. The miner has found a key ally in British Columbia Premier Gordon Campbell, and the BC provincial government has already indicated it will work with the company to facilitate another permitting attempt.

The unspeakable scenarios
In the wake of this material setback, investors are forced to concede that a range of undesirable scenarios could now unfold that would block or significantly dilute the prosperity that shareholders have pined for.

The worst-case scenario that I can envision has Taseko spending additional capital for a revised mine plan, failing in that process once more, and then perhaps finding itself unable to monetize the asset at anything other than bargain-basement valuation. As it is, the property's notional value has been severely reduced by this negative decision, and a follow-on failure would tend to further dissuade potential bidders. In that extremely unsettling scenario, a larger, nearby producer like Teck Resources (NYSE: TCK  ) could find itself in a position to swoop in to acquire the property for a pittance.

Under those (or similar) circumstances, fair value for Taseko's shares would essentially revert back to fair value for the flagship Gibraltar mine. Thankfully, we have a strong reference point for determining approximately where that value may lie. Fools may recall that Taseko sold a 25% stake in Gibraltar for $170 million last December to a subsidiary of Japanese trading house Sojitz.

Taseko's remaining 75% stake, therefore, carried a realized market value of $510 million nearly one year ago. Since that time, the company has continued to invest generously in the Gibraltar operation, placing the finishing touches upon a four-year, $300 million expansion initiative. Most recently, these efforts featured the construction of a new SAG mill direct feed system and the procurement of two new Bucyrus (Nasdaq: BUCY  ) shovels. These improvements are finally yielding meaningful production growth, with Gibraltar raising copper production by nearly 28% sequentially to 25.7 million pounds for the third quarter. Molybdenum production surged 37% to 265,000 pounds.

Copper prices have also shown persistent strength since that time, offering context for the stock performance of miners Southern Copper (NYSE: SCCO  ) and Freeport-McMoRan Copper & Gold (NYSE: FCX  ) . Bundling all of these considerations together, I find myself honing in upon a fair value for Taseko's 75% stake in Gibraltar in the range of $660 million to $675 million. Adding in Taseko's net cash position, I believe that Taseko's shares could still justify a price near $4.50 in the sorts of worst-case scenarios where Prosperity is essentially removed from the valuation equation.

What brought you here?
How investors grapple with their deliberations over this stock in the near term is likely to correspond to the source of their initial interest. If Gibraltar was your primary focal point, and you share my forecast for strong earnings performance when Taseko reports next Wednesday, then you might be inclined to stick around and enjoy the results of that $300 million mine expansion.

For those who came to Taseko primarily for a chance at Prosperity (seeking meaningful exposure to gold within the play), it pains me to suggest that it may be time to move on to greener pastures. Much shorter paths to prosperity now exist for Fools seeking bi-metallic exposure to gold and copper, including Ivanhoe Mines (NYSE: IVN  ) with its enormous Oyu Tolgoi project in Mongolia.

Although it has been demoted from five stars to four within our ratings system, Taseko enjoys a loyal and well-informed following within the Motley Fool CAPS community. To see how your fellow investors are reacting to this unfortunate development for the stock, visit the Taseko Mines CAPS page to review recent picks and pitches, and also add the ticker to your watchlist by clicking here.

Fool contributor Christopher Barker can be found blogging actively and acting Foolishly within the CAPS community under the username TMFSinchiruna. He tweets. He owns shares of Freeport-McMoRan Copper & Gold and Taseko Mines. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


Read/Post Comments (4) | Recommend This Article (34)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On November 04, 2010, at 5:17 PM, JUNKKING1 wrote:

    Wow, this was a big blow. What are the chances or possibilities of the Prosperity project getting approved? I recently bought in at $6.07 assuming Prosperity would get approved. Recomendations PLEASE.

  • Report this Comment On November 05, 2010, at 12:07 AM, golddlog wrote:

    Taseko's Prosperity project may not be dead yet. Jim Prentice the Enviornment Minister who handed down the denial of the project resigned today. There seems to be more to this story then fools realize including the announcement that BC Premier and Prosperity advocate Gordon Campbell announced he will be stepping down as Liberal leader in early 2011. Hmmm, a huge run up in TGB stock price the last month or so, sprinkle in a flash crash in mid October, add a lot of short interest leading up to the Prosperity announcement, then a surprising rejection of the Prosperity project with ensuing 30% nosedive in stock price, followed by the resignation of two key players in the process, smells fishy. somebody made a lot of money on this deal and it wasn't me or other fools or Taseko Mines. Still it may not be over just yet. Stay tuned

  • Report this Comment On November 05, 2010, at 12:35 AM, golddlog wrote:

    Apparently Canadian Prime Minister Stephen Harper was infuriated with Jim Prentice for his enviornment ministry's negative permitting of Prosperity project. Harper is well known for his anti-enviornment leanings and it seems Prentice stuck it to him but good as protector of Canada's wildlife. Very interesting.

  • Report this Comment On November 06, 2010, at 9:52 AM, BestGuesser wrote:

    Harper may be less or even not concerned with the environment but to say he is anti-environment suggests that he looks for ways to hurt it and that is not the case. Taseko said spending more than $800 million dollars developing Prosperity made it not economically feasible. Thompson Creek is going to spend $915 million on their Mt. Mulligan mine.

    Prosperity has 7.7 million oz of gold and 3.6 billion pounds of copper. Mt. Mulligan has 6 million oz of gold and 2.1 billion pounds of copper. Looks like Taseko got a little greedy. I think they will make application again with one of the more expensive options they had all along.

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