First Quantum’s Kansanshi gets mixed reviews

VANCOUVER — An updated technical report filed by First Quantum Minerals (TSX: FM; US-OTC: FQVLF) on its 80% owned Kansanshi copper operations, 10 km north of Solwezi, Zambia, sent analysts scrambling to lower target share prices for the international producer after it revealed a slower production schedule and a decrease in reserves.

According to the report, reserves for the mine are down from 692 million tonnes at 0.7% total copper to 668 million tonnes at 0.7% total copper (using a 0.2% total copper cut-off).

Production is expected at 15.9 million tonnes of ore this year and 53.7 million tonnes by 2020, which falls short of analyst expectations, who foresaw a faster ramp-up in processing stockpiled ore.

Reacting to the results, Salman Partners lowered its 12-month target price on the share price from $25.43 to $19.23 per share, but kept a positive rating on the stock, calling the company “Canada’s most liquid pure play on copper.” 

Other analyst groups have also reduced target prices and updated ratings on the shares. Credit Suisse dropped its target from $23 to $18.50, and has a “neutral” rating on the stock, whereas analysts at Barclays reiterated an “overweight” rating and set a $21.75 price target on the shares.  

In response, First Quantum issued a release stating the production schedule in the report is a conservative estimate that’s “not intended as guidance,” and “serves only to satisfy the requirements of national reporting standards of 43-101.”

It states that Kansanshi has “considerable upside potential” in its inferred resource, which totals 669 million tonnes at 0.6% copper. Up to 80% of the deposit’s inferred resources have historically been converted into the measured and indicated categories.  

Meanwhile, Douglas Rowlings, a Moody’s Investor analyst, has a negative outlook on First Quantum, and is concerned the company faces “downward pressure,” despite a $1.1-billion equity raise in June. 

He reckons the proceeds were a means of prefunding $1 billion in capital expenditures the company plans to spend this year, rather than paying down its $1-billion revolving credit facility. 

Due to persistently weak copper prices and an increase in mining royalties in Zambia to 9% from 6% a year ago, he says the company could have a hard time funding capex with internal cash flows.  

First Quantum’s biggest development project — the Cobre Panama copper mine, 120 km west of Panama City, Panama — has a US$6.4-billion price tag, with US$600 million to be spent this year. 

Adding to the cash burden at Cobre, Franco-Nevada (TSX: FNV; NYSE: FNX) — First Quantum’s financial backer at Cobre — has yet to make this year’s US$284-million payment as part of a streaming agreement. 

Rowlings suspects that First Quantum will also face steady headwinds, as Zambia’s rising national debt — currently US$8 billion — may force the government to raise taxes once again.

And he predicts the debt situation in Zambia will likely not improve in the short-term, based on a correlation between the country’s economy and the copper price, which he expects will remain low.

This could leave First Quantum exposed, considering almost half of its revenue comes from its operations in Zambia, which also include its new Sentinel copper mine and smelter, 150 km west of Solwezi. 

He says in the longer term, delivering the Cobre Panama mine in 2018 will help diversify revenue and improve the company’s credit profile. 

First Quantum shares have traded within a 52-week range of $9.89 to $27.29, and closed $12.29 per share at press time. The company has 682.2 million shares outstanding for an $8.4-billion market capitalization.

First Quantum will release its second-quarter results after the market closes on July 29. Company-wide during the first quarter, First Quantum produced 96,318 tonnes copper at US$1.39 per lb., 6,268 tonnes nickel at US$4.40 per lb. and 52,782 oz. gold as a by-product.