Newcrest analysts initiate coverage of First Quantum

The release of positive first-quarter results has prompted Newcrest Capital analysts David Davidson and David Christie to initiate coverage of First Quantum Minerals (FM-T).

The company joined the ranks of copper producers in early 1998 when it commissioned the Bwana Mkubwa mine in Zambia. More recently, and in partnership with Glencore International, the company added to its African holdings through the purchase of the Mufulira and Nkana operations, also in Zambia’s copper belt.

“First Quantum is highly leveraged to its increasing copper production when compared to its peers,” the analysts note in a May research report. “At this stage in the company’s life, valuation is best established by net asset value, which we determine to be $7.38. Consequently, we are recommending a buy with a 12-month target price of $6.”

First Quantum has 32.3 million shares outstanding, which currently trade at about $2.55 each.

In the first quarter of this year, the Bwana Mkubwa solvent extraction-electrowinning (SX-EW) mine and integrated sulphuric acid plant produced 5.4 million lbs. of London Metal Exchange grade cathode copper and 11,194 tonnes of surplus acid. Cash operating costs were US45 cents per lb. of copper and US21 per lb. net of surplus acid production, compared with US42 and US8 net of surplus acid contribution a year earlier.

Earnings of US$130,000 (or 0.01 per share) were reported in the first quarter, compared with a loss of US$290,000 million a year earlier. Revenue between the two periods fell slightly, to US$7.97 million from US$8 million.

The company also operates the Connemara gold mine, in Zimbabwe, which produced 21,588 oz. last year at a cash cost of US$215 per oz. In the first three months of this year, Connemara turned out 5,557 oz. gold at a cash operating cost of US$247 per oz., compared with 3,420 oz. at a cash operating cost of US$296 per oz. a year earlier.

First Quantum and consortium partner Glencore International of Switzerland recently purchased a 90% interest in Mopani Copper Mines from the government of Zambia. This company had previously acquired the Mulfulria division and the Nkana operation (including mine, concentrator and cobalt plant). The government will retain a 10% interest in Mopani; First Quantum will hold 44% of the company, whereas Glencore will hold 46%.

The combined sulphide and oxide resource of the consortium’s Mulfulria and Nkana divisions is estimated at 162.3 million tonnes grading 2.42% copper and 0.08% cobalt, which includes a combined reserve of 94.1 million tonnes grading 2.38% copper and 0.08% cobalt.

“First Quantum,” the analysts note, “is in the process of advancing from a small production base of 5,263 tonnes of copper in 1998, to year 2000 copper production of 33,000 tonnes, and up to 60,000 tonnes by the year 2000.”

Clive Newell, chairman, believes the Mulfulria and Nkana operations will bring the company into the mid-tier of copper producers. “The attraction of the Nkana assets is the large resources that will result in sustained production for at least the next 100 years,” he said earlier this year. “The importance of the Mulfulria assets lie in its smelting and refining capacity and its strategic importance to the Copperbelt as a whole.”

An estimated US$159 million is expected to be invested in the Mulfulria and Nkana operations over the next three years. First Quantum recently acquired the assets of Cyprus Amax Zambia from Phelps Dodge Exploration. The assets include three prospecting licences, and related property data.