Information about http://www.baystreet.ca/articles/research_reports/jennings_capital/TKO08202008BadQuarterOrOpportunity.pdf

…

Tags: 8 mm, business insurance, company statistics, e mail, mail mark, mail peter, mark turner, market capitalization, mba, metals, p eng, peter campbell, reported q3, risk rating, s 165, sag, target, taseko mines, tsx, warrantee,
Pages: 6
Language: english
Created: Wed Aug 20 12:26:22 2008

Display cached document

Page 1

Page 2

Page 3

Page 4

Page 5

Page 6

August 20, 2008

Recommendation: BUY
TASEKO MINES LIMITED 12-Month Target: C$6.75
(TSX-TKO C$2.83) Risk Rating: ABOVE AVERAGE
WAS IT A BAD QUARTER OR AN Sector: MINING AND METALS
OPPORTUNITY SEIZED? Analyst: PETER CAMPBELL, P.ENG.
e-mail: peter.campbell@jenningscapital.com
Taseko reported Q3/08 financial results, in which the Tel: (416) 304-3963 Fax: (416) 214-0177
net cost per pound of copper produced was US$2.79.
Associate: Mark Turner, MBA
The SAG mill transformer failure reported in May e-mail: mark.turner@jenningscapital.com
resulted in 16 days of lost production. The direct Tel: (416) 304-3964 Fax: (416) 214-0177
impact of this event was to add US$0.52/lb Cu to
production costs. The Company has made a claim Company Statistics
against the supplier's warrantee coverage and its loss- Market Capitalization Basic C$407.8 MM
Basic Shares O/S 144 MM
of-business insurance.
Fully Diluted Shares O/S 165 MM
52-Week Range $2.78 - $6.31
With the mill being down, Taseko increased stripping
Unrestricted Cash (06/30/2008) $35.4MM
in the pit, contributing a cost of US$0.25/lb Cu, and Working Capital (06/30/2008) $73.1MM
accelerated planned maintenance on the grinding Earnings and Valuation Summary
circuit, contributing an additional US$0.13/lb to FYE: Sept. 30 2008E 2009E 2010E 2011E 2012E
copper production costs. CFO before changes in non-cash WC (FD) (C$) $0.67 $0.74 $0.47 $0.27 $0.33
CFO after changes in non-cash WC (FD) (C$) $0.31 $0.64 $0.41 $0.24 $0.26
The Company reported lower than expected mill EPS (FD) (C$) $0.34 $0.39 $0.22 $0.08 $0.12
P/CFO before changes in non-cash WC (FD) 4.2x 3.8x 6.0x 10.3x 8.5x
recoveries: 70% for Cu and 24% Mo. Taseko attributes
P/CFO after changes in non-cash WC (FD) 9.1x 4.4x 6.9x 11.8x 10.7x
this to difficulty stabilizing the interface between the old P/E (FD) 8.4x 7.2x 13.0x 33.8x 24.1x
and new mill circuits. No doubt, this was made more Gibraltar Operations NAV8% C$438.9 MM
difficult by the failure of the transformer. Reduced Prosperity Project NAV12% C$234.6 MM
recoveries contributed an additional US$0.24/lb to
copper production costs.
In order to address poor Mo recovery, the Company
has advanced construction of the new Mo circuit in
the Phase III mill expansion project. Construction of the
new mill circuit is expected to be complete in mid-
2009 and is expected to have a Mo recovery
of approximately 70%.
Taseko has also reported that input costs for fuel, steel,
explosives and reagents have increased. Accordingly,
we have increased our mining and milling costs in
our model.
We believe that most of the excess costs reported for
the quarter represent a combination of "one timers" and Taseko Mines Limited is a mining company that currently
opportunity costs that will result in revenue or cost produces copper and molybdenum from the Gibraltar Mine, located
reduction in future time periods. in south-central British Columbia, Canada. The Company has
completed Phase I of a three-phase mill expansion and
After having made adjustments to our model for modernization project aimed at significantly increasing copper and
molybdenum production. Completion of Phase II should make
recoveries and increased input costs, we continue to Gibraltar the second largest copper mine in Canada. Taseko also
rate the shares of Taseko Mines Limited as a BUY with plans to develop the Prosperity copper-gold project, also located in
a 12-Month target price of $6.75 per fully diluted share. south-central BC, and to have it in production by 2012.

Please see important disclosures on pages 5 and 6.
2

Q3 FINANCIAL RESULTS: BAD QUARTER OR AN OPPORTUNITY SEIZED?
Taseko Mines Limited released its Q3/08 financials on August 12. Revenue was broadly in line on the back of
higher commodity prices, but cash flow and earnings were big misses.
Summary of Q3/08 Financials and JCI Estimates
Actual Estimate
($ million) ($ million) Act/share Est/share
Revenue $53.2 $68.6 $0.37 $0.47
Cash Flow* $12.2 $30.6 $0.09 $0.21
Earnings $3.8 $21.5 $0.03 $0.15
*before changes in non-cash WC
Source: JCI

It had previously been disclosed that the SAG mill transformer suffered a failure during the quarter, which resulted
in 16 days' lost production. This should have accounted for an 18% drop in production, all things being equal. The
headline item contained in financial information was that net production costs for the quarter was US$2.79/lb Cu.
How did a two week production shutdown result in such a high production cost? The Company has provided a
breakdown of the cost variance.
Summary of Cost per lb Cu Variances
Description US$/lb
Canadian to US dollar exchange rate $0.23
Production loss due to transformer failure $0.52
Accelerated maintenance on the grinding circuit during shutdown $0.13
Continued waste stripping during transformer failure $0.25
Increased price of fuel, steel, explosives and reagents $0.26
Below target copper recovery $0.24
Source: JCI from Company Documents

TRANSFORMER FAILURE
The big-ticket item is US$0.52/lb Cu as a direct result of production loss from the transformer failure. The failure
was traced to a defect in the transformer that was present but undetected when it was installed. This is clearly a
one-time occurrence associated with the installation of new equipment. A back-up transformer, which was
unavailable when the main transformer failed, has now been installed. This event represents a loss of production
that has affected Q3 financials, and Taseko intends to pursue a claim against the supplier's warrantee coverage
and a separate claim against its loss-of-business insurance. The loss of production revenue in this quarter will
possibly show up in a subsequent quarter, should the insurance claims be settled in Taseko's favour.

PROBLEM OR OPPORTUNITY?
Accepted business practice is to examine problems that may arise for opportunities they may present. It appears
that this is the approach taken by Taseko management regarding the transformer failure. With the mill idled
because of the transformer failure, the opportunity to complete other work arose. With the SAG mill down,
management advanced required maintenance on the grinding circuit, which contributed another US$0.13 to the
cost of producing a pound of copper in the quarter. Advancing this cost to Q3 means that this cost will not appear
in a subsequent quarter.
The information contained in this report was obtained from sources we believe to be reliable. We do not represent that such information is accurate or complete
and it should not be relied on as such. Any opinions expressed herein reflect our judgment at this date and are subject to change. Jennings Capital Inc. and/or
employees from time to time may hold shares, options or warrants on any issue included in this report and may buy or sell such securities. This report is not to be
construed as an offer to sell or solicitation to buy securities. Member � CIPF. Jennings Capital (USA) Inc. is a member of SIPC.
3

Another opportunity presented by the transformer failure was to permit more stripping to be done during the
quarter. This activity further added US$0.25/lb Cu to the production cost. There was a point last year where tires
for pit equipment were scarce. During this time, stripping in the pit was restricted to ensure ore production, and
Taseko has been playing catch-up ever since. The opportunity to catch up on stripping has brought forward this
expense from subsequent quarters.

RECOVERY SHORTFALL
Copper recovery in the quarter was just 70%, whereas it had been averaging approximately 79% in the previous
four quarters. Taseko attributes this to difficulty stabilizing the interface between the old and new mill circuits. No
doubt, this was made more difficult by the failure of the transformer, which caused the entire mill to be shut down.
While we were not able to account for this specific incident in our model, we have modelled a longer ramp-up
period for all phases of the mill improvements than the Company has suggested. We have modelled both
throughput and recovery improvements more gradually than expected by the Company, and our overall model for
the ramp up remains valid.
Recovery of molybdenum is a different matter. While Taseko has concentrated on circuit improvements for
copper, molybdenum recoveries have suffered. Since the mill was restarted in 2004, Mo recovery has been
erratic and has ranged from a low of 21.4% up to 50.4% (average 33.5%). In recent quarters, Mo recovery
seemed to have stabilized at approximately 40% but this quarter's Mo recovery of just 24.4% is back down to the
bottom of the range. Some may hold the basic assumption that low Mo grade in the feed results in low Mo
recoveries, but the facts do not support this. The correlation coefficient between grade and recovery is only 0.01,
indicating an almost random relationship between these variables. We originally used a 40% Mo recovery in our
model, which appeared to be the recent average. We have now adjusted this recovery down to 25% for fiscal
Q4/08, and 35% thereafter, which is much closer to the overall average recovery in the Mo circuit since the
restart.
Taseko management has recognized that Mo recovery is a problem and is now advancing construction of the new
Mo circuit under Phase III of the mill modernization and improvement program. The Phase III program is basically
the construction of a second mill line including a brand new optimized Mo circuit. Construction of the new Mo
circuit is expected to be complete by mid-2009 and should be able to recover approximately 70% of the Mo in the
feed. We have now modelled steadily increasing Mo recovery beginning in fiscal Q1/10, until maximum recovery
has been achieved in fiscal Q3/11.

INCREASED INPUT PRICES
The mining industry in general has warned that input prices have increased, and Taseko's quarterly results are
one of the first concrete examples of this. Taseko reports that increased costs for fuel, steel, explosives and
reagents accounted for US$0.26/lb Cu in the quarter. While fuel prices have retreated somewhat from the highs
experienced during the quarter, other cost increases are likely to persist. Therefore, we have increased our
mining and milling cost basis by 5%, to reflect this new reality.
SUMMARY
We believe that the majority of the cost variance for the quarter described by the Company are "one timers" that
will either be partially recovered through insurance or represent otherwise future costs advanced into Q3 to take
advantage of the down time in the mill.
We have made a number of changes in our cash flow model to reflect new information reported for the quarter:
1. reduced Mo recovery to 25% in Q4, and 35% thereafter, down from 40%;
2. increased mining and milling costs by 5%; and

The information contained in this report was obtained from sources we believe to be reliable. We do not represent that such information is accurate or complete
and it should not be relied on as such. Any opinions expressed herein reflect our judgment at this date and are subject to change. Jennings Capital Inc. and/or
employees from time to time may hold shares, options or warrants on any issue included in this report and may buy or sell such securities. This report is not to be
construed as an offer to sell or solicitation to buy securities. Member � CIPF. Jennings Capital (USA) Inc. is a member of SIPC.
4

3. incorporated improved Mo recovery resulting from Phase III program, starting in fiscal Q1/10 and
gradually improving until fiscal Q3/11.
As with all our models, we continue to fine tune them on an ongoing basis. In this case, we have adjusted
downward exploration and development expenses at the far end of mine life, as well as refined our near-term
C$/US$ exchange rate to reflect JCI estimates of 0.9708 in Q4/08.
We have left intact our ramp-up assumptions for Phase I and II improvements, as we have taken a conservative
approach to how quickly these can be achieved. Despite increased stripping in the quarter, which should reduce
future stripping activities, we have taken the conservative approach and kept our stripping ratio intact.

VALUATION
After having made the aforementioned adjustments to our model, we continue to rate the shares of
Taseko Mines Limited as a BUY with a 12-month target price of $6.75 per fully diluted share.
Maintaining our valuation methodology, we continue to apply an 8.0x multiple to our next twelve months cash flow
estimate of C$0.664 per fully diluted share, arriving at a value of C$5.31 per FD share for the Gibraltar operations.
We continue to value the Prosperity project on a NAV12% basis, resulting in the addition of C$1.42 per FD share to
our target price.
Combining the valuation of the Gibraltar operations (C$5.31 per FD share) with that of the Prosperity
project (C$1.42 per FD share); we obtain our 12-month target price of C$6.75 per FD share.

Jennings Capital Inc. Research Disclosures
Company Ticker
Taseko Mines Limited TSX-TKO
I, Peter Campbell, hereby certify that the views expressed in this report accurately reflect my personal views about the subject securities or issuers. I
also certify that I have not, am not, and will not receive, directly or indirectly, compensation in exchange for expressing the specific recommendations or
views in this report.
Note: We initiated coverage on Taseko Mines Limited on July 23, 2008 with a BUY recommendation, an ABOVE AVERAGE risk rating and a target
price of C$6.75. Share price at that time was C$3.98.

U.S. Client Disclosures

This research report was prepared by Jennings Capital Inc., a member of the Investment Dealers Association of Canada and the Canadian Investor
Protection Fund and a Participating Organization of the Toronto Stock Exchange and the TSX Venture Exchange. Jennings Capital Inc. is an affiliate of
Jennings Capital (USA) Inc. Jennings Capital (USA) Inc. accepts responsibility for the contents of this research report, subject to the terms and
limitations as set out above. Jennings Capital (USA) Inc. is a registered broker-dealer with the Securities and Exchange Commission and a member of
the National Association of Securities Dealers Inc.
THE FIRM THAT PREPARED THIS REPORT MAY NOT BE SUBJECT TO U.S. RULES WITH REGARD TO THE PREPARATION OF RESEARCH
REPORTS AND THE INDEPENDENCE OF ANALYSTS.
This report does not constitute an offer to sell or the solicitation of an offer to buy any of the securities discussed herein. Any transaction in these
securities by U.S. persons must be effected through either Westminster Securities Corporation, a U.S. broker-dealer registered with the Securities and
Exchange Commission and a member of the National Association of Securities Dealers Inc. and the New York Stock Exchange Inc. or through Jennings
Capital (USA) Inc., A U.S. broker-dealer registered with the Securities and Exchange Commission and a member of the National Association of
Securities Dealers Inc.
U.S. PERSONS
This research report was prepared by an affiliate of Jennings Capital (USA) Inc. or other person that may not be registered as a broker-dealer in the
United States. The firm that prepared this report may not be subject to U.S. rules regarding the preparation of research reports and the independence of
research analysts.
Subject to the limitations on liability described above, Jennings Capital (USA) Inc. takes responsibility for the content of this research report in
accordance with Rule 15a-6 under the U.S. Securities Exchange Act of 1934, as amended. All transactions by U.S. persons in securities discussed in
this report must be performed through Jennings Capital (USA) Inc.

U.K. Client Disclosures

This research report was prepared by Jennings Capital Inc., a member of the Investment Dealers Association of Canada and the Canadian Investor
Protection Fund and a Participating Organization of the Toronto Stock Exchange and the TSX Venture Exchange.
JENNINGS CAPITAL IS NOT SUBJECT TO U.K. RULES WITH REGARD TO THE PREPARATION OF RESEARCH REPORTS AND THE
INDEPENDENCE OF ANALYSTS.
The contents hereof are intended solely for the use of, and may only be issued or passed onto, persons described in part VI of the Financial Services
and Markets Act 2000 (Financial Promotion) Order 2001.
This report does not constitute an offer to sell or the solicitation of an offer to buy any of the securities discussed herein.

Stock Ratings
Speculative Buy: The stock is expected to provide a total return in excess of 10% over the current trading price over the next 12 months; however,
there is material event risk associated with the investment.
Buy: The stock is expected to provide a total return in excess of 10% over the current trading price over the next 12 months.
Hold: The stock is expected to provide a total return of 0% to 10% over the current trading price over the next 12 months.
Sell: The stock is expected to provide a negative total return over the next 12 months.

Risk Ratings
Low/Average Risk -- Stocks with less volatility than the market as a whole, with solid balance sheets and dependable earnings.
Above Average Risk -- Stocks with more volatility than the market. Financial leverage is considerable but not threatening, earnings are more erratic,
or other quality concerns regarding accounting, management track record, and similar issues.
Speculative -- Stocks of unproven companies or ones with very high financial leverage, suspicious accounting, or with other significant quality
concerns. A speculative risk rating implies at least the possibility of financial distress leading to a restructuring.
6

Distribution Ratings: Out of approximately 61 stocks in the Jennings Capital Inc. coverage universe, the ratings distribution is as follows:

BUY 38%
SPECULATIVE BUY 56%
HOLD 0%
RESTRICTED 3%
UNDER REVIEW 0%
SELL 3%
Revised Monthly

Security Abbreviations: NVS (non-voting shares); RVS (restricted voting shares); RS (restricted shares); SVS (subordinate voting shares); MV
(multiple voting shares).
Quarterly Recommendation Hierarchy: Is a ranking distribution identifying the percentage of total, number, and the investment banking relationship
(%) for all recommendation categories that can be found on the Jennings Capital Inc. website (www.JenningsCapital.com).
Analyst Stock Holdings: Equity Research analysts, associates and members of their households are permitted to invest in securities covered by
them. No Jennings Capital Inc. analyst, associate or employee involved in the preparation of an analyst report is permitted to effect a trade in the
security of an issuer whereby there is an outstanding recommendation for a period of 30 calendar days before and 5 calendar days after issuance of
the research report
Compensation: The compensation of the analyst and/or associate who prepared this research report is based upon in part, the overall revenues and
profitability of Jennings Capital Inc. Analysts are compensated on a salary and bonus system. Some factors affecting compensation including the
productivity and quality of research, support to institutional, retail and investment bankers, net revenues to the equity and investment banking revenue
as well as compensation levels for analysts at competing brokerage dealers. Analysts are not directly compensated for specific Investment Banking
transactions.
Jennings Capital Inc. Relationships: Jennings Capital Inc. may receive or seek compensation for investment banking services from all issuers under
research coverage within the next 3 months.
Jennings Capital Inc. or its officers, employees or affiliates may execute transactions in securities mentioned in this report that may not be consistent
with the report's conclusions.

Company Specific Disclosures

Is this an issuer related or industry related publication? Issuer Industry

Does the Analyst or any member of the Analyst's household have a financial interest in the securities Yes No
of the subject issuer? If yes, nature of interest:

Is Jennings Capital Inc. or Jennings Capital (USA) Inc. a market maker in the issuer's securities Yes No
at the date of this report?

Do Jennings Capital Inc., Jennings Capital (USA) Inc. and their affiliates in the aggregate Yes No
beneficially own more than 1% of any class of common equity of the issuer?

Does Jennings Capital Inc., Jennings Capital (USA) Inc. or the Analyst have any actual material conflicts Yes No
of interest with the issuer? Explanation:

Does the Analyst or household member serve as a Director or Officer or Advisory Board Member of Yes No
the issuer?

Has the Analyst received any compensation from the subject company in the past 12 months? Yes No

Has Jennings Capital Inc., Jennings Capital (USA) Inc. and/or any affiliates managed or Yes No
co-managed an offering of securities by the issuer in the past 12 months?

Has Jennings Capital Inc., Jennings Capital (USA) Inc. and/or any affiliates received compensation for Yes No
investment banking and related services from the issuer in the past 12 months?

Has the Analyst had an onsite visit with the Issuer? Yes No
(The extent to which the analyst has viewed the material operations is available on request)

Has the Analyst ever been compensated for travel expenses incurred as a result of an onsite visit with
an Issuer? Yes No