Disappointing Q2 for First Quantum

Record rainfall, higher costs and a fall in net sales sent First Quantum Minerals (FM-T, GQVLF-O) second-quarter profits tumbling to US$123.1 million (US$1.83 per share), down 18% from the corresponding quarter of last year.

First Quantum’s profit margins per lb. of copper sold took a beating, averaging US$2.11 per lb., down from US$2.67 per lb. during the year-earlier period. Cash unit costs were negatively affected by the processing of lower grade ores at the company’s Kansanshi mine and poor results at Bwana-Lonshi.

Heavy rains at Bwana-Lonshi, in the Copperbelt province of Zambia, caused shortages of high-grade ore for processing. Low ore availability at the Lonshi pit in the Democratic Republic of the Congo, and the exhaustion of run-of-mine grade ore in stockpiles at the Bwana treatment plant contributed to the poor results.

The rains delayed mining at Lonshi, where the company was forced to rebuild pit walls and roads and drain the site. The temporary border closure in early April by DRC officials designed to stop the illegal export of high-grade copper-cobalt ores enhanced production problems, sending ore production down 43% compared with the same period in 2006. The rains raised the average total unit cost of production to US$2.77 per lb., a year-on-year jump of 182%.

Record rainfall did not spare Kansanshi in north-central Zambia. Yet despite a record production quarter, net sales fell 4% year on year to US$247.4 million. Operational problems at its Mufulira smelter left a stockpile of about 3,400 tonnes of copper in concentrate.

Higher ore costs at Kansanshi were the result of First Quantum’s decision to process lower-grade ore and higher acid-consuming mixed ores through the leach circuit. This meant the company had to outsource a significant amount of acid at a much higher marginal cost. Ore costs at Kansanshi were also affected by increased waste stripping and the company’s new deferred stripping policy, which came into effect on Jan. 1. Electricity, wages and oil-based consumables contributed to higher processing costs.

Gains at Guelb Moghrein were unable to offset the poor results elsewhere. Increasing shipments to buyers and a decline in the average total unit costs of production at the Guelb Moghrein copper-gold project in Mauritania resulted in a US$30.9 million operating profit at the mine, a 229% year-on-year rise.

Increasing copper output sent ore and processing costs down by 11% over the previous quarter. With shipments to buyers ramping up, sales volumes soared 172% over the previous quarter to 6,336 tonnes.

First Quantum notes that stockpiled copper in concentrate is expected to be reduced to normal levels by the end of the year, which is expected to impact positively on earnings.

Shares of First Quantum fell to $13.98 apiece on the earnings statement to close at $80.85 on Aug. 10. With its 67.7 million shares outstanding, the company posts a $5.5-billion market capitalization.