Fitch Ratings has affirmed Taseko Mines Limited's (Taseko) Long-Term Issuer Default Rating at 'B-', the senior secured notes at 'B-'/'RR4', and the senior secured revolver at 'BB-'/'RR1'.
The ratings reflect Taseko's small size, concentration on one operation and cost position in the fourth quartile of the global copper cost curve. The Gibraltar mine benefits from a stable production profile, a favorable mining jurisdiction and a 23-year mine life.
The Stable Rating Outlook reflects Fitch's view that the Florence project is likely to go forward and that Florence project financing will be limited to USD50 million. Fitch expects cash on hand and FCF would be used to deleverage should the project not go forward.
Key Rating Drivers
Weak Business Profile: Taseko is relatively small and undiversified by operation and metal. It owns 75% of one large-scale operating copper mine in a favorable mining jurisdiction but with costs in the fourth quartile of CRU's cost curve (Gibraltar in British Columbia [BC], Canada) and a near-term development copper project (Florence in Arizona). Fitch estimates the development of Florence would reduce the company's overall cost position by about 15% and increase production by about two-thirds.
Modest Florence Execution Risk: Fitch expects the Florence permitting process to conclude in late 2022/early 2023 and that cash on hand, modest capital raises at the Florence level and FCF from Gibraltar will be sufficient to support remaining development. Taseko reports that there were 27 participants at the Sept. 15, 2022 hearing on the draft Underground Injection Control permit, each supporting the project and issuance of the final permit.
The project is designed to use in-situ copper recovery rather than conventional mining, and will take about 18 months to construct and 18 months to ramp up. Execution risk has been reduced by the 2018 construction and subsequent operation of a production test facility. Detailed engineering and design for the commercial production facility was completed in 2021 and Taseko made most of the initial deposits and awarded the key contract for the major processing equipment associated with the SX/EW plant.
Minimal Other Longer-Term Development: Fitch does not expect material spending on other development until after Florence has ramped up. The company is evaluating the Yellowhead copper project in BC, and other early-stage projects include: Aley (niobium), and New Prosperity (gold and copper) each in BC. Subsidiaries owning Yellowhead, Aley and New Prosperity are unrestricted subsidiaries under the notes.
Copper Sensitivity: Taseko reports that a USD0.25/lb. increase in copper prices increases annual cash flow by USD25 million. Fitch notes that cash flow from operations after interest paid was CAD137 million in 2021. Fitch assumes the 2022 average copper price will be about USD3.95/lb., decreasing to about USD3.63/lb. in 2023 and USD3.40/lb. in 2024 and 2025. This compares with Taseko's 1H22 average realized copper price of USD4.37/lb. and current copper prices are about USD3.53/lb.
Taseko enters into copper option contracts to reduce short-term copper price volatility. As of Aug. 8 2022, the company had collars covering 35 million lbs, of copper maturing from August to December 2022, and 30 million lbs. of copper maturing from January to June 2023, at a USD3.75/lb. floor price. These volumes compare with Taseko's share of 2022 Gibraltar sales volume guidance range of about 82 million-91 million lbs.
High Near-Term Leverage: Fitch expects total debt/operating EBITDA to peak over 5.0x in 2022 given 1H22 lower production and higher costs and to trend toward 4.0x in 2023 and 2024 as Gibraltar's crusher move is completed and grades improve and to about 4.0x in 2024 and 2025 with first production from Florence. If Florence does not go forward, cash on hand would be sufficient to deleverage to levels consistent with the ratings. Consolidated total debt excluding finance leases of CAD524 million was 3.0x LTM June 30, 2022 operating EBITDA of CAD177 million.
Derivation Summary
Taseko is smaller, less operationally diversified and less profitable than HudBay Minerals Inc. (BB-/Stable) and Ero Copper Corp. (B/Stable). Taseko is higher levered than HudBay and Ero Copper, but similarly levered compared with much larger and diversified First Quantum Minerals Ltd. (B+/Positive). Development of the low-cost Florence project would bring size, better profitability and leverage below positive sensitivities. Should the Florence project be canceled, Fitch would expect the company to deleverage from cash on hand, but for the company to remain less diversified than peers.
Key Assumptions
Fitch's Key Assumptions Within Its Rating Case for the Issuer Include:
Taseko's 75% of Gibraltar production is at lower end of guidance;
Copper prices incorporate hedges and Fitch assumptions of USD8700/tonne in 2022, in USD8,000 in 2023, and USD7,500/tonne in 2024 and 2025;
Gibraltar operating expenses declining from USD3.03/lb. in 2022 to USD2.20/lb. longer term;
Taseko's share of Gibraltar capex at roughly CAD60 million in each of 2022 and 2023, and CAD45 million thereafter;
The Florence copper project goes forward roughly in line with the technical report dated Feb. 28, 2017;
Other than modest Florence debt, no other financing activities.
Key Recovery Rating Assumptions
The recovery analysis assumes that Taseko Mines Ltd. would be reorganized as a going-concern in bankruptcy rather than liquidated. Fitch notes that Florence Copper Inc. provides an unsecured guarantee of the notes but may be partially financed on a secured basis, take 18 months to construct and a further 18 months to fully ramp-up.
Fitch has assumed a 10% administrative claim.
Going-Concern (GC) Approach
Taseko's GC EBITDA assumption comprises it's 75% interest in Gibraltar calculated at copper prices of USD3.00/lb. and cash operating costs at USD2.15/lb. The GC EBITDA assumption for 100% of Gibraltar is CAD107 million.
The GC EBITDA estimate reflects Fitch's view of a sustainable, post-reorganization EBITDA level upon which Fitch bases the enterprise valuation.
An Enterprise Value (EV) multiple of 4.0x EBITDA is applied to the Gibraltar GC EBITDA to calculate a post-reorganization EV to reflect Gibraltar's higher cost position as well as solid reserve life and low country risk. The choice of this multiple considered similar public companies trade at EBITDA multiples in the 4x-6x range.
Gibraltar has secured equipment loans which are deemed to be recovered by Gibraltar before the new revolver and notes at the Taseko level.
The residual adjusted post-reorganization EV of Gibraltar after the recovery of Gibraltar obligations becomes CAD372 million (residual value).
75% of the residual value results in outstanding recovery corresponding to the 'RR1' rating on Taseko's revolver assuming full utilization and average recovery corresponding to the 'RR4' rating on Taseko's senior secured notes.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive rating action/upgrade:
The Florence copper project is well advanced, project capex is around USD280 million, project debt is around USD50 million and expected to be nonrecourse, annual production is expected to be around 80 million lbs. and cash costs are in the first quartile of the global cost curve;
Financial policies in place resulting in consolidated total debt/EBITDA after minority distributions sustained below 3.5x.
Factors that could, individually or collectively, lead to negative rating action/downgrade:
A weakening FCF outlook;
Increased costs or material disruption at Gibraltar;
Addition of senior secured debt that weakens recovery prospects;
Consolidated total debt/EBITDA after minority distributions sustained above 4.5x.
Best/Worst Case Rating Scenario
International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579.
Liquidity and Debt Structure
Supportive Liquidity: Taseko will has an undrawn USD50 million revolving credit maturing April 3, 2025 and available cash on hand was CAD177 million at June 30, 2022. The Gibraltar joint venture also has an uncommitted CAD15 million credit facility to provide LOCs to Gibraltar suppliers to support trade finance. Fitch expects FCF to be modest from Gibraltar in 2022 and in the CAD30 million-CAD50 million range per year, thereafter.
Issuer Profile
Taseko is a small mining company headquartered in Vancouver, BC that operates one large-scale, high-cost copper mine in Canada (Gibraltar) and owns a pipeline of projects including: Florence (copper), Aley (niobium), Yellowhead (copper) and New Prosperity (gold and copper). Taseko owns and consolidates 75% of the Gilbraltar mine. The company is working to advance development of the low-cost Florence copper project in Arizona. Exploration and development are expected to be modest at other projects.
Summary of Financial Adjustments
Fitch has made no material adjustments that are not disclosed within the company's public filings.
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
ESG Considerations
Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg.
TASEKO MINES LIMITED 
