First Quantum defends copper hedging amid rising prices

VANCOUVER — First Quantum Minerals (TSX: FM; LON: FQM) met expectations during the second quarter by most production metrics, but a copper-hedging program from two years ago has held back its progress.

The company reported a US$97-million net loss on its hedge book during the quarter, which contributed to a US$35-million — or US5¢-per-share — net loss for shareholders.

The scenario is underpinned by an improved metal environment that has seen spot copper prices jump this year by 15%, or US47¢, to US$2.89 per lb. at press time.

First Quantum Minerals’ 80%-owned Kansanshi copper mine in Zambia. Credit: First Quantum Minerals.

First Quantum reported a US$2.24 per lb. average realized copper price over the second quarter, which was US$33¢ per lb. below the average London Metals Exchange price over the same period. In July the company had 359,000 tonnes copper in outstanding hedges at US$2.43 per pound.

“The healthy copper price increase that started [last year] and the losses incurred under our [hedge program] can obviously be distracting,” First Quantum president Clive Newall said during a July conference call. “But we manage this company for the long term, and the program was put in place for a reason: to protect cash flows in a low metal-price environment ahead of the completion of Cobre Panama. To that end, it has been effective.”

First Quantum confirmed that its large Cobre Panama copper mine project is on track for commissioning in 2018. The US$1.1-billion development lies 120 km west of Panama City, and was reportedly 58% complete in June.

The company ended July with US$450 million in cash and US$838 million in undrawn credit. It reported US$4.8 billion in net debt and needs US$745 million to finish Cobre Panama.

Newall added that hedging “is still a prudent strategy, especially given the copper price volatility. Even so, a sustained higher copper price bodes well for the entire industry.

“We are taking action to manage operational and price risk, and strengthen the balance sheet. We are refinancing the facilities with the aim to extend tenure and maintain liquidity.”

First Quantum Minerals’ Cobre Panama copper project in Panama, 120 km west of Panama city. Credit: First Quantum Minerals.

First Quantum registered a 7% year-on-year jump in quarterly copper production to 142,000 tonnes. The company attributed the growth to its Sentinel mine ramp-up and a strong performance at its Kansanshi operation, which are both in Zambia. It reported quarterly all-in sustaining costs of US$1.50 per lb. copper.

First Quantum expects to produce between 570,000 and 605,000 tonnes copper annually over the next three years. Cobre Panama could add 320,000 tonnes to the production portfolio.

The company is suspending operations at its Ravensthorpe nickel mine in Western Australia in September. It said the mine would otherwise “operate at a loss for the next several years at current nickel prices.”

BMO Capital Markets analyst Alex Terentiew has an “outperform” rating on First Quantum and an $18-per-share target. He said the company’s second quarter was “largely in line” with expectations, but noted its 3¢ earnings-per-share loss came below analyst consensus.

First Quantum shares have traded within a 52-week range of $9.63 to $17.55 per share, and closed at $12.23 at press time.

The company has 689 million shares outstanding for an $8.4-billion market capitalization.