“H” word no longer a bad word

The “H” word is no longer a dirty word. 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 take the spot price should it go above the upper limit of 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 for the hedged copper.

The decision to hedge at those levels was made easier by the stable production that its wholly owned Gibraltar mine has shown since a power outage stopped production for 16 days last summer and by the success the company has had in driving down cash costs at the B.C. mine.

Hallbauer says cash costs are now coming in at roughly US$1.15 per lb.

Such low costs were achieved, he says, 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 dropped.

Also helping is higher recovery rates, higher head grades and higher throughputs achieved through the modernization and expansion of the plant.

When the benefits of such economies of scale are mixed in with lower shipping and lower fuel costs, the effects are noticeable.

Furthermore, the company is in the midst of adding to its economies of scale as it is pushing towards the completion of its phase two expansion at Gibraltar. The expansion will bring annual production to 115 million lbs of copper and one million lbs of molybdenum.

Towards that end, the company closed a bought deal that gave it proceeds of $23 million by selling 13.8 million shares at $1.45 per share. That brings the company’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 announced its slowest quarterly growth rate as it came in at 6.1% and March housing construction fell by almost 11% in the U.S.,

In Toronto on April 16, the Vancouver-based company’s shares were up a penny to $1.93 on roughly 350,000 shares traded. Its shares have moved between $5.70 and 66¢ over the last 52-week period and it has 153 million shares outstanding.