Taseko Mines (TGB, TKO.TO) likely is one of the most disappointing copper producers of the past decade as the company’s cash flows remained below expectations.
The recent deal with Mitsui for the Florence copper project appears to be a good one. Mitsui will invest an initial US$50M in cash in return for a streaming arrangement whereby Mitsui will receive 2.67% of the copper produced at Florence at 25% of the market price until 40 million pounds of coper have been delivered.
Mitsui can also elect to invest a second tranche of US$50M in Florence Copper for a 10% equity stake (which would value the entire project at US$1B and Taseko’s stake would subsequently be valued at US$900M or in excess of US$3/share.
Mitsui will be required to pay the first tranche of US$10M when the underground injection control permit will be issued, with four additional quarterly installments of US$10M payable in each of the quarters after receiving the permit.
This seems to be a good deal for Taseko. If Mitsui elects to only invest the initial US$50M, it will receive US$120M in payments assuming a total attributable production of 40 million pounds and an average copper price of US$4 per pound. A 140% absolute return over a 25 year investment horizon (construction + mining) is exceptionally reasonable and the streaming agreement basically offers cheap construction financing for Taseko. The 2.67% streaming deal represents an average of 2.25 million pounds of copper that would have to be delivered to Mitsui under the streaming agreement. At a copper price of $4/pound, that would result in Mitsui making only $6.75M per year so it will only recoup its initial US$50M in the ninth year of the mining operations.
Additionally, should Mitsui invest US$100M, pretty much the entire equity requirement of the US$230M capex would be covered by Mitsui while Taseko would retain a 90% interest in the project with low equity contributions.
An excellent deal for Taseko Mines. Not only because it taps a very cheap financing source, but also because the involvement of Mitsui could be seen as a vote of confidence for the project.
Disclosure: The author has no position in Taseko Mines. Please read our disclaimer.
