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TABLE OF CONTENTS Mar 4 - 10, 2013 Volume 99 Number 3 - 0 comments

Taking a closer look at Taseko's options

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By: Trish Saywell

Taseko Mines (TKO-T, TGB-X) could become a consolidator in B.C., or prey to companies like Lundin Mining (LUN-T), Capstone Mining (CS-T) or Teck Resources (TCK-T, TCK-N), Christopher Chang of Laurentian Bank Securities argues.

“With the acquisition of Quadra FNX Mining in 2012, the mid-tier base metals universe continues to shrink with limited alternative investment opportunities,” the mining analyst reasons in a 35-page research report. “Taseko could attract greater investor interest, should the company decide to consolidate both Copper Mountain Mining (CUM-T) and Yellowhead Mining (YMI-T), and create a consolidated, B.C.-themed mid-tier mining company.”

Chang reminds clients that Taseko made an unsuccessful unsolicited offer to acquire Copper Mountain in September 2009, and that it already holds a 16.8% stake in Yellowhead Mining.

“Given the lack of industry exploration success and the continuous desire for production growth and scale, we anticipate mergers-and-acquisitions activity to continue for the foreseeable future,” Chang forecasts. “While we view Taseko as a more likely consolidator, we believe the company represents a relatively attractive acquisition target, given its long asset life, near-term production growth and low political-risk jurisdiction.”

Chang initiated coverage of Taseko in February with a “buy” rating on the stock and a $4-per-share target price. The Vancouver-based company is trading at $3.23 per share within a 52-week range of $2.47 to $4.29, and has about 191 million shares outstanding. The largest disclosed shareholders in the company, Chang says, are RS Investment Management (16.7%), Clarington Investments (1.5%) and Connor Clark (1.2%).

Taseko owns a 75% stake in the Gibraltar copper-molybdenum open-pit mine in B.C., which produced 89.8 million lb. copper and 1.3 million lb. moly in 2012, at an estimated operating cash cost of US$2.47 per lb. copper. Chang expects that Taseko’s flagship operation will produce 125 million lb. copper and 1.7 million lb. moly in 2013, at an average cash-operating cost of US$2.39 per lb. copper. Next year Gibraltar’s copper production could grow to 155 million lb., and in 2015 to between 164.5 million lb. and 172 million lb., he estimates.

Gibraltar is located 65 km north of Williams Lake, B.C., and a consortium of Japanese companies called Caribou Copper consisting of Sojitz Corp., Dowa Metals & Mining and Furukawa hold the remaining 25% stake in the mine. Taseko used the $187 million it received from the consortium to pay for Gibraltar’s phase-three expansion.

Taseko also has a pipeline of “robust growth projects” in B.C., Chang says, which include the New Prosperity copper-gold project, 125 km southwest of Williams Lake, and the Aley niobium project, 140 km north of Mackenzie. At New Prosperity, Taseko is awaiting federal approval of its environmental impact statement, which Chang says “would significantly de-risk the project and re-rate Taseko’s shares higher.”

But the Toronto-based analyst says he has not assumed development of New Prosperity in his financial estimates due to permitting challenges and negotiations with First Nations. The federal government rejected Taseko’s initial development application a little more than two years ago, primarily because the plan involved draining Fish Lake, a site that has spiritual significance to the local Tsilhqot’in First Nation. In September 2012, Taseko submitted a new development plan for the US$1.1-billion project, which would preserve Fish Lake by moving the tailings facility 2 km upstream.

If New Prosperity were to be permitted, however, it would have a 32-year mine life based on proven and probable reserves of 831 million tonnes grading 0.23% copper and 0.41 gram gold per tonne, for 4.2 billion contained lb. copper and 11 million oz. gold, Chang says.

“Should New Prosperity secure federal government approval and commence operations in 2017,” he continues, “Taseko’s consolidated copper production could materially increase to 291 million lb. per annum, while lowering the company’s operating cost to US$1.06 per lb. copper [on a 100% basis].”

As for the Aley project, Taseko plans to update its reserve by mid-2013, and according to Chang, the company envisions that it would produce 12 million lb. niobium a year over 20 years, and make between $350 million and $400 million per year.

Chang points out that Taseko’s current stake in Yellowhead Mining “represents an attractive growth opportunity, should the company encounter additional delays for its New Prosperity project.” Yellowhead owns a 100% stake in the Harper Creek copper-gold-silver project near Vavenby, B.C. Chang estimates that once in production, Harper Creek will produce 141 million lb. copper, 16,000 oz. gold and 421,000 oz. silver a year over a mine life of 32 years, at an average cash-operating cost of US$1.29 per. lb. He also says he expects the project should go into production in 2017 at a capital cost of $923 million, excluding working capital.

“Yellowhead completed a feasibility study for Harper Creek in March 2012, and is evaluating financing strategies such as joint-venture partnerships,” he writes. “Should Taseko acquire the remaining shares of Yellowhead, we believe the combined company would improve the likelihood of a Harper Creek joint venture, as Taseko’s flagship Gibraltar mine already has a 25% minority interest partner with a Japanese consortium . . . furthermore, the overall enhanced company profile, along with a stronger balance sheet, would improve Harper Creek’s funding options, in our view.”

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