Taseko’s growth hinges on Gilbraltar expansion

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Williams Lake, B.C. — In recent decades, the Gibraltar copper-molybdenum mine near this Western community was perceived as a “swing producer” — a term used when operators run a mine hard to squeeze out as much profit as possible when metal prices are high, only to suspend operations when prices fall below the costs of production.

A boom-and-bust modus operandi is not what Russell Hallbauer had in mind when he left a senior management position at Teck Cominco (TEK.B-T, TCKBF-O) in mid-2005 to take the helm of Taseko Mines (TKO-T, TGB-X), an emerging copper producer that has operated the 30-year-old mine in partnership with contract miner Ledcor CMI since late 2004.

“A lot of people thought we were going to be a forty-month operation to clean out the remaining reserves in the Pollyanna pit,” Hallbauer told analysts and media during a recent visit. “We’re here for the long term. I didn’t leave a major mining company to run an operation with no upside or future.”

Gibraltar didn’t appear to have much of a future in 1999, when Taseko acquired the dormant mine with its then marginal resources and aging, inefficient mill. Previous operators, including original owner Placer Dome, had proposed modernization programs at various times in order to improve mill reliability, recoveries and overall production, but the investments never materialized, typically because of industry downturns or boardroom-level budget reallocations to sexier priorities.

Taseko wasn’t able to place the mine back into production until late 2004, when rising metal prices ended the prolonged industry downturn. Capital was still scarce at the time, which forced the company and partner Ledcor to opt for a lean operating plan with minimal new investment. As might be expected, the partners faced a string of operating challenges in their first year of production, including lower than expected recoveries, head grades and throughput, compounded by reliability and startup problems associated with the use of old mining and milling equipment. Despite the challenges, persistence paid off, and enough progress was made in 2005 to allow Taseko to step back and develop a long-term strategy to transform Gibraltar into a more sustainable, lower-cost operation.

‘Path forward’ growth

Since becoming president almost a year ago, Hallbauer and John McManus, vice-president of operations, have implemented a three-prong “path forward” growth strategy for Gibraltar. The first step — an ongoing drilling program to boost reserves and resources — resulted in an impressive 30% increase in reserves within the Pollyanna, PGE Connector and Granite Lake pits within one year. This allowed the company to develop a 15-year mine plan, which in turn triggered the second step of the strategy — a $62-million concentrator expansion and upgrade program aimed at boosting production capacity to 100 million lbs. copper from 70 million lbs. by 2008. The company had previously spent $1.5 million to upgrade the molybdenum circuit, which became operational in early 2005.

The first two steps of the three-prong strategy are viewed as the foundation for further growth that would be achieved by constructing a refinery to produce pure cathode copper from concentrates.

“The path forward strategy is also about building a team,” McManus said during a presentation at the mine site.

McManus also came to Taseko from Teck Cominco, as did other individuals at the mine-site team. As a result, the company has a much stronger operations presence than in previous (pre-production) years, when resource development was the main focus. Even so, McManus had high praise for the original team that brought the mine into production under challenging circumstances, particularly the pivotal role played by Tom Milner, the former chief operating officer credited with having kept the mine alive during times when its future was in doubt.

Hallbauer also emphasized the need for in-house talent as the company pursues its growth plans.

“If you have an operation in a great location that also provides longevity, you’re able to hire good people and do things,” he said. “That’s a big plus for us. Once people see the progress we’re having, it naturally attracts (talented) people.”

A stronger in-house operations team brings into question Taseko’s existing partnership with contract miner Ledcor — a question Hallbauer didn’t dance around or deflect.

“It would have been difficult to bring the mine on-stream without such an arrangement,” Hallbauer conceded, while also noting that the joint venture will expire in about two years. “After that, Taseko will become the operator. We don’t see the need to pay a fee for something that we know how to do. That should go to Taseko shareholders.”

In the meantime, Taseko intends to continue with its path forward strategy, including ongoing drilling programs to build on the substantial increase in resources achieved in the 2005 program.

Late last year, Taseko reported that proven and probable reserves had increased 30% to 194 million tons averaging 0.31% copper and 0.01% moly, using conservative figures of US$1.10 per lb. for copper and US$6 per lb. for moly. In addition to the expanded reserves, measured and indicated mineral resources were estimated to total 614 million tons at 0.28% copper and 0.008% moly.

A $2-million exploration program is planned for this year to more fully define material adjacent to existing pits in order to further boost reserves and extend the mine life. The program will include some deeper holes than those typically drilled at Gibraltar, which rarely tested below 700 ft.

Super-pit potential

“We’ve been drilling for three months and are encountering what we expected now,” McManus said. “With the deeper drilling, we’re starting to see the possibility of a super pit, along with potential for push-backs of the older pits.”

Taseko expects to produce between 52-55 million lbs. copper and 850-900 million lbs. moly in fiscal 2006. In the latest quarter ended March 31, Taseko reported net earnings of $3.1 million, on revenue of $31.2 million and $6.3 million from the sale of copper and moly, respectively. Production costs were above forecast, reflecting higher fuel and labour costs, above-budget strip ratios and unbudgeted mill repairs. Costs averaged US$1.07 per lb. copper, (net of byproduct credits) or US$1.50 per lb. copper after including off-property costs such as transport, smelting and refining. The off-site costs are higher than expected because of disputed price participation assessments applied by Glencore. The company has taken its dispute with Glencore over this matter to arbitration.

Taseko expects its operating performance to improve, and has achieved cost savings from optimization programs, including pit-development sequencing. The company has also purchased its leased mining fleet and expects savings as a result of this investment over the long term. But it’s not the mine as much as the mill that stands between Taseko and higher profits and production at Gibraltar. Placer commissioned the concentrator in 1972, and because the ore then was softer and higher-grade than now, the mine was able to repay its capital costs in less than two years. The ore is harder now, grades are lower, and the mill is visibly showing its age.

Modernization plan

The newly approved modernization plan will expand the grinding circuit by incorporating a semi-autogenous grinding (SAG) mill that will improve the efficiency of the current milling and crushing system. The entire flotation recovery system will also be replaced.

Mill capacity is projected to increase by 25% to 46,000 tons per day from the current 36,750 tons, which, combined with the upgraded flotation system, should reduce unit operating costs by about 10% through a combination of increased throughput and improved recoveries for both copper (to 88% from 81%) and moly.

These improvements are projected to boost annual copper production by 30% to about 100 million tons per
year.

“The mill upgrade should also improve reliability, which has been a real problem for us,” McManus said. “Our single-line mills are thirty-five years old, and if you have a problem with two mills, you lose one-third of your circuit. Our upgrade program will get to the heart of this problem, and also give us the capability to boost daily capacity to as much as 50,000 tons.”

Another benefit is that the cost of the mill expansion is less than half the typical cost of new construction, with the added bonus of a shorter period for project completion without any interruption of current copper and moly production.

The items for the mill expansion with the longest lead-time have already been ordered, with some equipment on site. The upgrade to the flotation system will begin first, followed by construction of the grinding circuit this summer.

The company has started refurbishing an existing solvent extraction and electrowinning (SX-EW) plant at a capital cost of about $3 million. The plant is capable of producing up to 7 million lbs. of LME-grade cathode copper per year. During a previous 12-year operating run starting in 1986, the plant produced 85 million lbs. cathode copper at a cost of about US75 per lb. The mine site hosts about 16.5 million tons of proven and probable oxide reserves in the Pollyanna and Connector pits grading 0.148% acid-soluble copper at a 0.1% cutoff (at US$1.10 per lb.), containing about 23 million lbs. of recoverable copper. An oxide zone discovered in 2003 has been drilled and is expected to supplement oxide ore from these pits.

Planning for Prosperity

Hallbauer says investing in the Gibraltar mine and processing complex is part of a broader, long-term strategy to build Taseko into a mid-tier copper producer with multiple operations. A key component of that growth plan is the company’s Prosperity copper-gold project, situated 125 km southwest of Williams Lake, in the sparsely populated Chilcotin region.

Prosperity was extensively drilled and developed in previous decades, resulting in measured and indicated resources totalling 1 billion tonnes grading 0.41 gram gold and 0.24% copper. Previous feasibility studies envisaged a 20-year mine life to produce 230,000 oz. gold and 100 million lbs. copper per year, but low metal prices coupled with a lengthy and costly permitting process under a previous left-leaning provincial government curtailed plans for production.

McManus said an estimated $55 million was spent on environmental related studies before the plug was pulled, with the cost reflecting “escalating demands” by various government agencies, particularly the Department of Fisheries and Oceans (DFO) as part of its ostensible efforts to preserve fisheries habitat.

“That was a contentious issue for us,” he added. “The (permitting) process was almost turned into a kangaroo court by the governments of the day.”

Taseko revived the project in early 2005, spurred by the much-improved outlook for gold and copper prices, and also applied to reactivate the permitting process. With a mining-friendly provincial government in place, the company received an extension order for its project application that is valid until April 30, 2007.

Based on the initial round of consultations with local communities, including First Nations groups, McManus believes the project will be favourably received, particularly in light of the economic devastation to the region caused by the pine-beetle infestation. As well, he notes that federal agencies such as DFO appear more willing to work co-operatively on resource development than in the past.

Buoyed by the favourable response to its mine-development proposal, Taseko is reviewing previous feasibility studies and reassessing the project in light of new technologies, concepts and innovative approaches to mine development, along with major infrastructure plans and proposals for power and roads. An important part of this exercise is efforts to reduce capital costs by developing a scaled-down mine with a smaller footprint that would operate over a longer term.

“What we have to do is build what we can for the lowest cost that’s good,” McManus said. “We think Prosperity has a good chance of getting through the regulatory and permitting process. Now that we have Gibraltar up and running, we’re a member of the community, and we see a real desire to have mining as an economic engine in the region.”

Taseko also owns the Harmony gold project on the Queen Charlotte Islands, but has no immediate plans for development. The company says it intends to keep an eye out for growth opportunities elsewhere in British Columbia, and in other parts of North America.