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TABLE OF CONTENTS Nov 26 - Dec 2, 2012 Volume 98 Number 41 - 0 comments

Taseko hedges its bets with Yellowhead shares

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By: Trish Saywell

In mid-September, Taseko Mines (TKO-T, TGB-X) made a second attempt at permitting its US$1.1-billion New Prosperity copper-gold project in B.C., submitting a revamped environmental impact statement with a US$300-million plan to salvage Fish Lake by moving the company’s tailings facility 2 km upstream.

In the meantime, it is hedging its bets.

Taseko has raised its stake in Yellowhead Mining (YMI-V), which owns 100% of the Harper Creek copper-gold-silver project in south-central B.C., about 150 km north of Kamloops. Yellowhead bills its project  as one of the largest copper-development projects in Canada, and hopes to start production there in 2015. A feasibility study completed in March indicates that the deposit could produce 3.6 billion lb. copper, 372,000 oz. gold and 14 million oz. silver over a 28-year open-pit mine life.

On Nov. 8, Taseko acquired another 7.7 million shares of Yellowhead at 65¢ per share — bringing its total ownership to 10.3 million shares, or 16.8% of the junior’s issued and outstanding shares.

“With Taseko’s controversial New Prosperity copper-gold project advancing through the permitting process, we note that a negative decision by the review panel or the federal government could increase the company’s interest in Yellowhead Mining, as Taseko could potentially look for an alternative production growth vehicle in the Harper Creek copper-gold-silver project,” Laurentian Bank Securities analyst Christopher Chang reasons.  

In a research note, Chang points out that Yellowhead is already seeking joint-venture partners to help fund Harper Creek’s development, which was estimated to cost $839 million in the feasibility study.

Harper Creek’s extensive, low-grade volcanogenic sulphide system contains reserves of 704.4 million tonnes grading 0.26% copper, 0.03 gram gold per tonne and 1.14 grams silver per tonne. The project offers a US$749.7-million pre-tax net present value (NPV), a 20.2% internal rate of return and a five-year payback at US$2.50 per lb. copper at an 8% discount rate. Life-of-mine cash operating costs, including precious metal credits, are estimated at US$1.56 per lb. copper.

“Should Taseko acquire the remaining shares of Yellowhead, we believe the combined company could improve the likelihood of a Harper Creek joint venture, as Taseko’s flagship Gibraltar copper-molybdenum mine already has a 25% minority interest partner” in Japan’s Sojitz Corp., Chang notes.

The Toronto-based mining analyst has a “speculative buy” rating on Yellowhead and a target price of $2.75 per share, which he believes is supported by the company’s “compelling valuation, low political-risk jurisdiction and ongoing project de-risking.”

“Yellowhead Mining is trading at a compelling 82.6% discount to our 10% NPV of $3.21 per share,” he argues. “This compares favourably to our coverage universe average discount of 65.1%.”

And based on an in situ per lb. in the ground valuation, he continues, the company is also trading at a favourable enterprise value of atributable contained copper equivalent of 3¢ per lb., “well below the copper developer peer group of 1.7¢ per lb.”

At press time, Yellowhead was trading at 63¢ per share within a 52-week range of 52¢ to $1.37. The junior has 53 million shares outstanding.

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A worker handles core at Yellowhead Mining's Harper Creek copper-gold-silver project in B.C. Source: Yellowhead Mining
A worker handles core at Yellowhead Mining's Harper Cre...
A drill rig Yellowhead Mining's Harper Creek copper-gold-silver project in south-central B.C. Source: Yellowhead Mining
A drill rig Yellowhead Mining's Harper Creek copper-gol...

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