One Step Closer to a Sure Thing

You'll never find a sure thing in the investment world, but one popular copper miner with a golden pedigree keeps stripping away downside risks while it paves its path to prosperity.

Taseko Mines (AMEX: TGB  ) scored extremely favorable terms on copper hedges announced this week for about half of the June-December 2010 production from its flagship Gibraltar mine. Covering 23 million pounds of forward production, the contracts lock in a minimum sales price of $2.50 per pound for a mine that produced the metal at a comprehensive cost of $1.38 through the first nine months of 2009. Meanwhile, the arrangements leave upside exposure to contracted volumes intact through $3.95 per pound ... almost a third higher than the present spot price of $3.00.

By virtually guaranteeing positive cash flow from Gibraltar operations, Taseko has constructed yet another moat of security from downside risk to shareholders as the company moves toward construction of the recently permitted Prosperity gold and copper mine. Although the company sold a 25% stake in Gibraltar to raise development capital for Prosperity, Gibraltar remains the backbone of Taseko's profit potential until Prosperity comes online in 2012.

Given the impressive clip with which copper prices have rebounded from their 2008 lows beneath $1.50 per pound, and the degree to which China's strategic stockpiling may have bolstered prices in 2009 beyond the pace of recovery in baseline global demand, I view these hedges a very prudent step for Taseko to shield itself from potential volatility.

Furthermore, now that Taseko is embarking upon a product shift to become a primary gold producer, copper hedges will remain a critical tool to preserve favorable by-product cost metrics, just as they have been for my favorite bargain among gold producers: Yamana Gold (NYSE: AUY  ) .

Product hedges are a tricky game for miners, and shareholders are encouraged to track a company's long-term success rate at balancing the parallel burdens of reducing operational risks from volatile markets ... while preserving that all-important upside exposure. Large-scale producers like Southern Copper (NYSE: PCU  ) and Freeport-McMoRan Copper & Gold (NYSE: FCX  ) , with their insanely low costs, can afford to have little or no production hedged. Meanwhile, copper hedges provided a critical lifeline to Teck Resources (NYSE: TCK  ) when that company faced its darkest hour.

With hedge books all but eliminated from the gold industry following Barrick Gold's (NYSE: ABX  ) historic cleansing, Taseko's Prosperity gold production will offer shareholders the upside product-pricing exposure they seek for long-term shareholder gains in a sustained bull market.

I am more often a critic of hedging efforts than I am a fan, but I believe that Taseko is doing right by shareholders by hedging roughly a quarter of 2010 production. Please vote in our Motley Poll to share your take on this move by Taseko, and share your thoughts about product hedging in the comments section below.

Fool contributor Christopher Barker is the commodore of copper and the Colonel Klink of zinc. He can be found blogging actively and acting Foolishly in the CAPS community under the user name TMFSinchiruna. He tweets. He owns shares of Freeport-McMoRan Copper & Gold, Taseko Mines, and Yamana Gold. The Fool's disclosure policy is worth way more than $3.00 per pound.


Read/Post Comments (4) | Recommend This Article (30)

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 February 03, 2010, at 3:41 PM, diesel5 wrote:

    They hedged half or production from the period of June 2010 to Decemebr 2010, not full year 2010 production.

  • Report this Comment On February 03, 2010, at 4:22 PM, XMFSinchiruna wrote:

    diesel5,

    Thank for noticing my error and bringing it to my attention! You are absolutely right ... The hedged production volumes correspond to the period between June 2010 and December 2010, and NOT the full year 2010.

  • Report this Comment On February 03, 2010, at 7:34 PM, ozzfan1317 wrote:

    Although there is no sure thing if you do your HW and only put your money in your best ideas you'll rarely be dissapointed.

  • Report this Comment On February 07, 2010, at 1:57 AM, xiaolifeidao wrote:

    Thx a lot Chris for the excellent article. tgb is going to outperform fcx in the next 5 yrs by at least 100% due to it is smaller base and the gold play, imho.

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