Taseko Takes a Back Alley to Prosperity

All right, so Taseko Mines' (AMEX: TGB  ) last road to prosperity turned out to be something of a dead endat least for now. That doesn't mean this intrepid mid-tier miner won't find an alternative path to expanding mineral wealth in western Canada.

Taseko has found a potential back alley leading straight to profitville. Successful exploration of the company's Aley property in 2010 now has the miner charting a path that leads right through a rare and useful element. The miner has encountered some seriously thick intercepts of high-grade niobium, beginning near the surface, at its Aley property in British Columbia. The discovery appears very promising for supporting a major open-pit mining operation for this obscure resource.

Niobi-who?
I had never heard of niobium, either, until I first purchased shares of gold miner IAMGOLD (NYSE: IAG  ) a few years back. By volume, the element is most widely used as an alloying agent in speciality high-grade steels, for use in automobiles, jet engine components, pipelines, and myriad structural applications. In the United States, 76% of niobium consumption (all imported) relates to steelmaking applications. In small quantities, niobium alloys may also be found in medical applications (pacemakers, imaging equipment, corrective optical lenses, etc.), superconductors, electronic components, jewelry, and coins.

IAMGOLD's Niobec mine in Quebec is one of only three major niobium mines in the world, and the only significant producer located outside of Brazil. The operation is a growing and reliable cash generator for IAMGOLD. Following capacity improvements and modifications to its underground mining methods, IAMGOLD is targeting between 4.7 million and 5 million kg of production for 2011, at an operating margin of $15 to $17 per kilogram.

Growing demand, meet static supply
Global reserves are estimated at about 2.9 million tons, with annual production of 62,000 tons recorded for 2009. Niobium prices are holding steady near $50 per kilogram, but the element's range of applications results in multiple fronts for potential demand growth. As Taseko CEO Russell Hallbauer explains: "With limited near-term niobium production on the horizon and demand steadily growing, an open pit mining operation at Aley has strong potential to become a key asset for Taseko."

As export-focused miners like Peabody Energy (NYSE: BTU  ) have noted, the outlook for sustained economic growth in places like China, India, and key emerging markets is expected to yield about a 30% increase in global steel consumption over the next five years (through 2015). If a demand trend that strong can yield palpable bullish sentiment for molybdenum producers like Thompson Creek Metals (NYSE: TC  ) , consider its potential impact on a market supplied by only three principal mines worldwide.

Foolish showdown: niobium vs. molybdenum
When I compare the niobium market to the better-known molybdenum market, I find that global reserves to 2009 production volume yields a similar landscape for supply between the two elements. Molybdenum reserves provide about 43 years of worldwide production at 2009 levels, while niobium reserves equate to nearly 47 years.

However, whereas molybdenum is produced in vast quantities as a byproduct of mines that primarily target copper, niobium is mined exclusively by targeted operations. This is important, because if world copper demand grows faster than steel demand over the long term, as I believe it will, then byproduct molybdenum volumes from major copper producers like Freeport-McMoRan Copper & Gold (NYSE: FCX  ) and Southern Copper (NYSE: SCCO  ) would increase as a consequence of copper demand. Over in niobium's corner, Taseko's emerging discovery at Aley appears to be the only active prospect out there for greenfield niobium production.

On the demand side, the most salient difference that I have spotted between niobium and molybdenum relates to geography. China, the world's leading steelmaker by a huge margin, happens also to be the world's leading producer of molybdenum. China's 77,000 tons of 2009 molybdenum production accounted for 38.5% of the world's total. By contrast, China must import its niobium consumption, which in my view renders niobium a potential focal point of competing interest from eager importers.

Situated a good deal closer to China than any of the three existing mines, Taseko's Aley project in particular may draw considerable interest from Beijing. We have already witnessed China's unrivaled commitment to securing future supplies for all manner of strategic resources, and even seen a Chinese state-owned enterprise ink a long-term supply agreement with Coeur d'Alene Mines (NYSE: CDE  ) for Alaskan production of another strategic resource: gold. Particularly if Taseko's adapted mine plan for the Prosperity copper and gold project manages to gain federal approval on a second attempt, watch for Taseko to pursue strategic options with Chinese entities in order to fast-track Aley's development.

Taseko's strategic grand slam
If you're having trouble discerning whether molybdenum or niobium presents the greater investment opportunity, then get ready to eat your cake, too. Taseko already produces significant quantities of molybdenum at its flagship 75%-owned Gibraltar mine, which yielded 940,000 pounds of the stuff during 2010. The prospect of adding niobium to the mix with the development of Aley can only sweeten a resource investor's many-sided rationale for owning a slice of Taseko Mines. Taseko's shares surged by more than 15% Tuesday following the company's announcement of the niobium discovery, which I consider a rather muted initial adjustment for a find of this magnitude.

Fool contributor Christopher Barker is the nobleman of niobium. He can be found blogging actively and acting Foolishly within the Motley Fool CAPS community under the username TMFSinchiruna. He tweets. He owns shares of Coeur d'Alene Mines, IAMGOLD, Peabody Energy, Taseko Mines, and Thompson Creek Metals. 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's disclosure policy has an estimated mine life of umpteen gazillion years.


Read/Post Comments (12) | Recommend This Article (48)

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 January 12, 2011, at 3:47 PM, Gonzhouse wrote:

    I was hoping you'd comment on the find of niobium (I'm acquiring a Motley Fool PhD in Metallurgy by following your posts). If TGB can submit a plan for Prosperity that passes the environmental tests, they will have a 3-headed monster going for them: copper, niobium, and gold.

    Got to believe TGB could be even bigger in 2011 than most people realize, even those who read your Top 10 for 2011.

  • Report this Comment On January 12, 2011, at 3:50 PM, Calaveras wrote:

    Something is wrong with the figures cited. If China produces 77,000 pounds of Mo and that is 38.5 % of 2009 world production, then TGB's 940,000 pounds is 470 % of 2009 world production. Not possible.

    That point aside, I also like TGB for the reasons given and for the transparent and skilled management. They missed on first try at Prosperity, but it was IMO reasonable to put forward the most cost-effective plan first.

  • Report this Comment On January 12, 2011, at 4:06 PM, XMFSinchiruna wrote:

    Calaveras,

    Thank you. Of course you are right ... that 77,000 figure should read tons in place of pounds.

    Here is the link to the USGS summary report on molybdenum:

    http://minerals.usgs.gov/minerals/pubs/commodity/molybdenum/...

  • Report this Comment On January 12, 2011, at 5:06 PM, Pennyperson wrote:

    Prosperity that passes the environmental tests, they will have a 3-headed monster going for them: copper, niobium, and gold.

    Forgot - molybdenum. So, you'd have a 4 headed monster =)

  • Report this Comment On January 12, 2011, at 6:33 PM, investmentcafes wrote:

    Thank you for your efforts....on "TGB"... niobium .

    good analysis upon which to define the strategy for "TGB"...i had blogged on the site a week ago not so much for the niobium aspect but the Moly/Copper new phase coming on-line 2qtr 2011..feeling it was undervalued because of that.

    I've done some research,found applicable sites to the Minerals craze.I believe any porfolio should be " Currency" hedged to some degree with the inherent volatility which abounds.See the FX chart's for EUR vs Dol vs Yuan..AUD..JPY..ETc.my basic theme would be the EUR at 1.300 or Dollar =80.would be par...

    The following site is from " Seeking Alpha", author is Gareth Hatch.He helped advise on the recent ETF ,TMR Advanced Rare-Earths Project Index.

    http://seekingalpha.com/instablog/466501-gareth-hatch/126343...

    That is his blog on the Rare Earth sector."To put things in context, as of the beginning of January 2011, I’m tracking 275 rare-earth projects that are being worked on by 180 individual companies in 30 different countries."

    If your seeking to be highly informed and get alot of info about the many different projects,in their various stages of development thats a good place to start,he has a link to his companies site there.

    Disclosure: I have no position in Adanac Moly or TGB, nor any affiliation with Gareth or his website.

    I do believe that recent developments by China,CLF and MT,bid for baffinland{ Which a chinese company is also bidding on,interesting company if you got some spec money to take a flyer with.! The outlook for the minerals not gold,is being bolstered by a rebound in economies but more importantly by forward looking countries/companies locking in the commodities years before the mine is done or materials are even out of the ground says alot about future demand.

    However..yup theres two caveat's...

    1 Have a clearly defined Entry/Exit/Hedge strategy for that/Any investment.

    2 Fundamentals/Technicals..as is the basis for this blog...Future profits vs stock price = at what price to pay for those earnings/stock...

    Is the price of underlying Commodity and Currency chart's in a profitable scenario for the " Trade/Investment" thus justifying an acceptable P/E on a current or Forward Basis.?

    Technicals to be used but not limited to.".200DMA,50 DMA, %R, and Elliot Wave Indicator"

    Thanks for allowing me to add to the information the "FOOL's" can use.

    Happy Trails

  • Report this Comment On January 13, 2011, at 1:27 AM, watcher77 wrote:

    Forget about what GB "might" have and look at what positive attributes they "already" have.

    They already have about the lowest P/E of all the miners.

    They have no debt and about $220 million in cash.

    They have some of the newest most updated and already paid for new equipment in the industry and copper/moly production growing at 10 to 20% per year at their existing mine. They also sold 3 time more copper this quarter than last qtr. when they had shipping problems due to port congestion. So their sales and profit should be up 300% this quarter when they release their next earnings report.

    Even without any new mines or new production TGB is still worth $8 to $10 per share based upon what they already have in production.

    PS: My opinion is very clouded as I own in excess of 10,000 TGB shares and I am still buying more on any dips..

  • Report this Comment On January 13, 2011, at 8:41 AM, XMFSinchiruna wrote:

    watcher77,

    I appreciate your enthusiasm, and I certainly expect the shares to reach those levels, but in Gibraltar we have a clear market-driven indicator of the operation's present value ... namely the purchase price paid by Sojitz for its 25% stake. By taking that purchase price, and accounting for subsequent increases in copper and moly prices, plus the value of new equipment added, production enhancements, etc., you still end up with a market-linked valuation for Gibraltar that's substantially less than the $8-$10 range.

    Ultimately, we'll never know for certain how much of each project is represented in the share price at any given time. In the immediate aftermath of the Prosperity decision, I would speculate that we saw a brisk erasure of all Prosperity-related value, and the stock stabilized around a reassessed view of Gibraltar.

    Once the dust settled, some investors likely pressed positions in hopes of a second chance for Prosperity. This niobium discovery adds a third tangible asset for valuation, though I argued above that the market's recent reaction to the announcement has not necessarily reflected the importance of the find. So roughly speaking I would say the market is assigning about 75-80% of current market cap to Gibraltar, 5-10% to Prosperity (a pittance, since "officially" it's still a dead end), and about 15% to the niobium deposit at Aley.

    Fair value for the 75% Gibraltar stake must remain a fluid calculation, as copper prices and copper production targets are rising in tandem, but at this stage I believe the market has done a fairly effective job at reflecting that fluid value in the shares.

  • Report this Comment On January 13, 2011, at 9:31 AM, dragonLZ wrote:

    TMFSinch, a few months ago, you told us "the fires of American steel industry are growing dim once again"

    (http://caps.fool.com/Blogs/the-clearest-windows-into/426308), now you tell us to expect a 30% increase in global steel consumption, so which one is it?

    p.s.

    I like the 30% increase one much better. :)

    Good Luck.

  • Report this Comment On January 13, 2011, at 9:35 AM, dragonLZ wrote:

    I see the link above doesn't work, but I'm sure you know which article I'm reffering to.

    Btw. +1 rec

    I feel like an idiot for not starting to read your posts and articles much earlier.

  • Report this Comment On January 13, 2011, at 10:56 AM, silverminer wrote:

    dragonLZ,

    I don't want to get into another lengthy discussion on a topic that I think we've already addressed, but:

    The American steel industry is indeed struggling relative to the rest of the world. The lion's share of growth in global steel production will come from China, India, and greater Asia (South Korea, etc.). Adjusting for inventory cycles and government-fueled infrastructure spending, sustainable end-user demand demand domestically remains disappointingly weak.

    One need look no further for corroboration of this geographical disparity than the recent statements from Cliffs Natural Resources regarding the rationale behind their Thompson Consolidated acquisition:

    “Diversifying into Asia is extremely important to our growth,” Cliffs Chief Executive Officer Joseph Carrabba said in a telephone interview. “North America and Europe continue to move rather slowly.”

    Also:

    "Iron-ore prices more than doubled in the past two years, according to the Steel Index, on a surge in demand from India and China. Steel production in China has risen 66 percent in the past five years as Wuhan and its domestic rivals feed the country’s economic boom. U.S. output is down 20 percent over the same period. Prices for the ore in China are forecast to rise another 7 percent this quarter, according to the Steel Index, published by London-based Steel Business Briefing Ltd."

    http://www.bloomberg.com/news/2011-01-12/cliffs-to-buy-conso...

    And this from my discussion of Schnitzer's earnings:

    http://www.fool.com/investing/general/2011/01/10/dont-skip-t...

    Meanwhile, both Schnitzer Steel and competitor Commercial Metals (NYSE: CMC) have been hampered by persistently weak demand for the finished steel products they create from their processed scrap. Schnitzer's steel manufacturing reported a small loss for the fiscal first quarter, suffering a 2% decline in sales volumes. The company expects another break-even result for the ongoing second quarter. Commercial Metals offered some insightful context to accompany a $22 million operating loss from its fabrication unit, explaining: "Commercial construction was weak, steel costs have risen, and recently announced steel price increases will drive margins down further in the short run. The Western region of the U.S. remains the most problematic."

  • Report this Comment On January 13, 2011, at 11:12 AM, dragonLZ wrote:

    Thank you for the explanation, Sinch.

    Sorry, I keep bothering you.

    I'm bullish on steel makers (stainless steel especially) and that's why I keep bugging you whenever I see a sign they might indeed be a good sector to take a look at.

    Sorry once again, and good luck.

  • Report this Comment On August 15, 2011, at 11:14 AM, seabee48 wrote:

    I'm curious to know where you are getting your numbers from with regard to world Niobium reserves sitting at 47 years. CBMM's Araxa mine has somewhere in the region of five hundred (500) years worth of reserves at recent consumption rates.

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