The “H” word is no longer dirty. With volatility reigning supreme, Taseko Mines(TKO-T, TGB-X) is taking the prudent step of opening a hedge book to lock in profits on half of its 2009 production.
“You have to say okay, we don’t really know where copper prices are going,” says Taseko’s president and chief executive, Russell Hallbauer. “It’s got just as good of a chance to go down as it does up and this hedge at least protects us on the bottom side while any uptick will take care of itself.”
The uptick will take care of itself because the company will still have 30 million lbs. of copper available to sell at the spot price should it rise above US$2.36 per lb.
Taseko is implementing the hedge through a collared call and put strategy that cost the company nothing to enter into.
The range of the hedge is US$1.88 to US$2.36 per lb., with Taseko getting the prevailing market copper price within that price range.
If the market price goes outside that range, the company gets a minimum of US$1.88 and a maximum of US$2.36 per lb. for the hedged copper.
The decision to hedge at those levels was made easier by the stable production that Taseko’s wholly owned Gibraltar mine, in B. C., has shown since a power outage stopped production for 16 days last summer, and by the company’s success in driving down cash costs.
Hallbauer says cash costs are now roughly US$1.15 per lb.
Such low costs were achieved by using a prudent mine plan that “over-stripped and put a little in the bank” when copper prices were high so that the company could drop the strip ratio when copper prices fell.
Also helping are higher recovery rates, head grades and throughputs achieved through the modernization and expansion of the plant.
When the benefits of such economies of scale are combined with lower shipping and fuel costs, the effects are noticeable.
Furthermore, the company is pushing towards the completion of its phase-two expansion at Gibraltar. The expansion will bring annual production to 115 million lbs. copper and 1 million lbs. molybdenum.
Towards that end, the company recently closed a bought deal that gave it proceeds of $23 million by selling 13.8 million shares at $1.45 apiece. That brings Taseko’s cash position to roughly $48 million, giving it ample room to complete the $10 million worth of capex needed to finish phase two.
Copper’s recent strong run was based on the expectation that government stimulus packages would fuel demand for the metal.
That story, however, may already be coming unwound. Just as Taseko announced its hedge, China revealed its slowest quarterly growth rate in almost 20 years at 6.1%. And in the U. S., housing construction in March fell by almost 11%.
In Toronto on the news, the Vancouver- based company’s shares were up a penny to $1.93 on roughly 350,000 shares traded; at presstime they had dropped to $1.70 apiece. The shares have traded in a 52-week window of 66¢-$5.70 and the company has 153 million shares outstanding.
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