Taseko zips ahead with Gibraltar expansion

SITE VISIT

WILLIAMS LAKE, B. C. — In central British Columbia, where pine beetles are choking the lifeblood out of the lumber industry, Taseko Mines (TKO-T, TGB-X) is a breath of fresh air. Four years ago, the Vancouverbased company revived Gibraltar, a low-grade copper-molybdenum mine 50 km north of Williams Lake that had sat dormant for six years, and now the company is spending almost $500 million to more than triple its annual production.

At the same time, Taseko is doing its all to bring another deposit into production — the Prosperity copper-gold project, just 175 km southwest of Gibraltar. Developing the large open-pit operation would inject $200 million into the economy of south-central B. C. each year for the next 20 years — lending weight to its name.

It was a dark day in Williams Lake when Boliden(BLS-T, BDNNF-O) shut down the mainstay Gibraltar mine in 1998 after 26 years of operation. Afew hundred jobs disappeared and a mill, beside a still-considerable resource base, sat empty and quiet.

Taseko stepped in and bought the mill a year later but left it on care and maintenance because metal prices stayed too low to support the low-grade operation. But in 2004, the company saw its chance and restarted the mine. In the four years since, the mine has produced more than 170 million lbs. copper and 2.1 million lbs. molybdenum.

And now not only is the mine solidly back in action, it is undergoing a serious facelift. The first phase of a three-phase expansion is already complete. In late 2010, when all is said and done, the expanded mill will churn through 85,000 tonnes of ore daily to produce more each year than the operation has done over the last four years combined.

It’s an ambitious plan, backed up by a resource that keeps expanding. And it’s a lot to juggle, with development at Prosperity also a priority, but president and CEO Russell Hallbauer says the company is just doing what it needs to do to cement Taseko’s position as a dynamic mid-scale producer.

“The tremendous amount of exploration we’ve done has really paid off,” says Martin Kostuik, manager of mining at Gibraltar. “And luckily, we have a hard time not finding ore.”

Gibraltar’s ore comes from a series of seven mineralized zones, many of which are primed to grow. On a map, the dotted lines marking current pit limits are dwarfed by the solid lines marking reserve limits. Those enlarged areas are put to shame again in comparison with a red line that sketches out the most promising area for reserve expansion.

“If it all works out perfectly, we will end up with one very large Sbend pit,” Kostuik says.

If Taseko mines out each pit to its reserve limit, the pits grow into one another, resulting in what would be one of the largest open-pit copper mines in Canada.

Copper and molybdenum at Gibraltar are hosted in a large porphyry body that has been faulted up so that it lies close to flat. In some areas, such as the Pollyanna-Gibraltar or PGE pit, the porphyry is considerably fractured, which has allowed oxidation to penetrate to considerable depths. Other areas carry far less fracturing and bear only a thin layer of oxide, as is the case in the Granite pit, currently being mined.

Moving west, the mineralization shifts slightly: molybdenum grades decrease and gold levels rise. To date, ore at Gibraltar has not carried high enough gold grades to consider recovery but Kostuik says exploration work is showing recoverable gold grades in the new areas.

An updated resource estimate in September 2007 boosted the mine’s reserve levels by 100% compared to two years earlier. Proven and probable reserves stand at 384 million tonnes grading 0.31% copper and 0.009% molybdenum. Measured and indicated resources add 530 million tonnes grading 0.309% copper and 0.007% molybdenum to the count.

The total is 11 billion lbs. of contained copper, making Gibraltar Canada’s largest copper deposit in terms of defined reserves plus resources.

John McManus, senior vice-president of operations, says the company is still sorting out the exact sequence in which pits will be mined.

“We’ll stay just in the Granite for at least another five years,” he says. “Then we’ll probably blend into the PGE, then the Gibraltar West, but that’s still something we need to sort out.”

Finding ore is not the hard part at Gibraltar. The challenge is mining and milling enough of the low-grade rock to make the operation profitable.

The expansion

The mill that Taseko restarted in 2004 had a capacity of 30,000 tonnes per day. To achieve the first boost to milling capacity, Taseko’s management simply modernized the 36-year old operation.

For $76 million, Taseko increased capacity to 46,000 tonnes per day. Key to the upgrade was the replacement of 96 small flotation cells, installed in 1972. They were replaced with ten 160-cubic-metre cells that have better retention times, operating costs, and copper recoveries to serve as the rougher circuit. The old flotation cells are now the scavenger circuit.

The other major change was to replace the two secondary crushers with a new, 34-ft.-diameter semi-autogenous grinding (SAG) mill. The huge rotating cylinder — one of the largest SAG mills in Canada — can take chunks of ore as large as 6 inches across. It takes an engine pumping out 13,000 horsepower to spin the mill. To build a foundation big and strong enough to hold the huge item required 1,800 cubic yards of concrete spread in a 34-hour continuous pour to create a pad 8 ft. thick, 50 ft. long, and 40 ft. wide.

Taseko managed to complete the first-phase expansion within its 16- month timeframe and $76-million budget. The mill is not yet running at 46,000 tonnes per day but is getting closer each day, and the company expects to reach design capacity by the end of the summer. In the meantime, work has started on the next step in the program.

In the second phase, capacity is expected to increase to 55,000 tonnes per day by virtue of expanded and modernized regrind, cleaner flotation, and concentrate circuits. Plans also call for a two-stage tailings pumping system and a new pebble crusher. The second stage is the smallest of the three, in that it carries a price tag of only $40 million. Taseko has already spent some 40% ofthatamount on procuring the necessary materials and components; the expansion itself should be complete by year-end.

The new cleaner cell circuit is installed and Taseko plans to get it up and running by the end of July. And on the mining end of things, the first of two new production drills was commissioned in June. The drill is now preparing a new area within the Granite pit.

Plans for a third phase are by far the most ambitious. The goal: to increase capacity to 85,000 tonnes per day. The price tag: $350 million. The day The Northern Miner visited Gibraltar, management had just signed off on $100 million worth of new mining and milling equipment, including two Bucyrus 495 60-yard mining shovels, a production drill, four 240-tonne Terex haul trucks, and a 28-ft. SAG mill. Taseko had already picked up three trucks and a drill in phase one, and will have to add a few more trucks to the fleet to move 85,000 tonnes per day. But securing the long-lead time items in this order — primarily the SAG mill and shovels — means Gibraltar will have all the key components necessary to reach the expansion goal on time.

And what makes the third phase different from the other two is that the final step takes the expansion outside of the building. The first phases do everything possible to expand capacity within the current mill, while the third essentially involves building a complete second milling line, from primary crushing through flotation. The lines will only come back together at the cleaner circuit in the old building.

And the third stage of the expansion includes building a new molybdenum plant. The new plant will replace a moly circuit that never functioned very well to begin
with — McManus says it was “installed off the fly at startup” and recoveries have always been low. Moreover, the process pulls significant copper into the molybdenum concentrate, creating a penalty that Taseko hopes to reduce, if not eliminate, with the new circuit. Plans for the moly plant have been accelerated — it should be up and running next summer, more than a year before the rest of phase three is complete.

When the third stage is complete, a goal targeted at late 2010, the Gibraltar mine will produce 180 million lbs. copper and 4.5 million lbs. molybdenum annually in an operation employing 550 people. Mine life is currently set at 12 years but the company says a reserve update due out in the fall will change that.

Hallbauer says the company is matching up the costs of the expansions with speed. “The payback comes because we’re doing it so quickly,” he says. “We have 40 months of forward curve left and we’re completing it in 25 months.”

And with so much change under way at the mine, Taseko’s management took the opportunity to bring in a consultant to help with efficiencies. As a result, this summer the company is installing a set of new technologies, such as expert grinding assistance, a bubble monitor, GPS truck tracking, and improved data management. The changes will cost $5 million but will save 10 per lb. of copper, a serious payback for a small investment.

It’s also important to note that roughly 10% of Gibraltar’s copper production comes from a small solvent extraction-electrowinning (SX-EW) plant. Rather than treating the small amount of mineralized oxide ore as waste, it is crushed and dumped onto leach pads. The leach solution is then passed through the SX-EW that Taseko got back on its feet in 2007.

Hallbauer calls the oxide process a “small but steady producer at low cost.”

Financing the vision

Taseko plans to fund the expansion costs out of cash flow. To secure that cash flow, the company recently signed a six-year, fixed-rate treatment and refining agreement with MRI Trading, a Swiss-based metal trading house. The agreement guarantees long-term, fixed, low-cost rates for processing Gibraltar production into copper metal. Taseko maintained its ability to sell copper metal at market prices.

Moreover, the agreement framework includes a US$30-million line of credit to add to its roughly $50 million on hand. The line of credit is an important part of Taseko’s plan to fund some 30% of the expansion through debt.

For a low-grade operation, Taseko manages consistently positive returns for investors. In the second quarter of 2008, the company saw $65.4 million in revenue, which translated into after-tax earnings of $16.2 million.

The new flotation cells started to flex their collective muscles over that quarter, resulting in average copper recovery of 81% compared with 78% for the same quarter in 2007. Molybdenum recovery also increased considerably, reaching 40%, up from 34% last year.

On an annual basis, in 2007 Taseko pulled in $218.4 million in revenue and held on to $48.3 million of that as after-tax earnings. Trucks hauled 35.4 million tonnes out of the mine; the mill churned through 9.5 million tonnes of ore averaging 0.328% copper and 0.011% molybdenum. As such, the 2007 average stripping ratio was 2.6.

Production came in at 51.8 million lbs. copper and 580,000 lbs. molybdenum. Total production cash costs at Gibraltar in 2007 were US$1.38 per lb. copper.

Future Prosperity?

Taseko’s other big project, Prosperity, is all-but primed for a production decision but still needs one key ingredient: a go-ahead from the federal and provincial environmental assessment review panels.

Prospectors started exploring around Prosperity in the early 1930s. In 1963, Phelps Dodge (now part of Freeport-McMoRan Copper & Gold [FCX-N]), conducted a small exploration drilling program; Taseko picked up the property in 1969 and continued drilling in the 1970s and 1980s under option agreements with several other companies.

In 1991, Hunter Dickinson acquired Taseko and together, the companies conducted extensive drilling, engineering, metallurgical, and socioeconomic programs. By 1998, Taseko had advanced Prosperity to feasibility but poor metal prices forced the company to move the project to the back burner.

In 2006, Taseko brought Prosperity out of storage. Over the next year, the company completed a full feasibility study that gave Prosperity a green light, confirming that the project is technically and environmentally feasible using long-term metal prices of US$1.50 per lb. copper and US$575 per oz. gold.

Proven and probable reserves at the porphyry deposit add up to 487 million tonnes grading 0.43 gram gold per tonne and 0.22% copper. The resource count more than doubles Prosperity’s tonnage: measured and indicated resources stand at 1.01 billion tonnes grading 0.41 gram gold and 0.24% copper.

Production capital costs come in at $807 million. The project carries a pretax net present value of $260 million, using a 7% discount rate, and an internal rate of return of 12%, which results in a six-year payback. Operating costs are estimated at $6.26 per tonne milled over the 20- year mine life.

The mill would churn through 70,000 tonnes per day to produce 247,000 oz. gold and 108 million lbs. copper each year. The strip ratio is low, at just 0.8 and mine site production costs, net of gold credits, come out at US43 per lb. copper.

The project, while technically and economically sound, still faces three main hurdles. The first is government support — more specifically, an approved environmental assessment. In early July, the provincial government contacted Taseko to say Prosperity’s review process was beginning. Hallbauer is pleased the process had begun but still wants to urge the government to move as quickly as possible.

“We’re ready to invest $800 million in this project right now,” he says. “But to do that, we need a partner in the government. This project would add 0.3 per cent to B. C.’s GDP — that’s bigger than fishing and tourism combined. But if they make this unnecessarily difficult for us, we will take our $800 million and find somewhere else to invest it.”

Prosperity’s potential contribution to the economy of the region can’t be overstated. Williams Lake is a mill town but several of those mills are slated to close or scale back considerably in the next five years because of the devastation caused by the pine beetle. It will be another 40 years before the pine forests in the region are harvestable again. Prosperity stepping into that gap would be a boon to the town in need — the project would create 500 direct and 1,200 indirect jobs.

The timeline for the environmental assessment review is unknown but Hallbauer says Taseko is pushing for a decision by the spring, which would enable production by 2012.

“Governments are slow but we’ve given them all the impetus they need to work a quick decision,” he says.

The second remaining hurdle is negotiating a definite agreement with the Tsilhqot’in First Nations. The Tsilhqot’in won a land claims battle known as the Williams decision, wherein the Supreme Court found the First Nation has a right to hunt and trap birds and animals throughout a 4,381-sq.-km area that includes the Prosperity project. However, the Tsilhqot’in were only granted aboriginal land title to some 2,000 sq. km in an area that does not cover Prosperity.

The decision gave some clarity to each party’s position, allowing the negotiations to continue.

And finally, developing Prosperity would require a 50-km power line extension to be built, a project that still requires approval.

If the expansion at Gibraltar goes ahead as planned and if Prosperity is permitted before spring, Taseko would produce 300 million lbs. copper and close to 300,000 oz. gold in 2013. Production at that level would represent a 700% growth in copper-equivalent production over a five-year
period.

That’s no small feat.