First Quantum preps Sentinel for production

First Quantum Minerals (FM-T, FQM-L), which has several copper projects in its development pipeline, has provided a maiden reserve and resource for its Sentinel copper project in Zambia.

The project is part of the company’s Trident project, located 150 km west of its chief asset, the Kansanshi copper-gold mine. The 2,300-sq.-km property also includes the Enterprise nickel project.

On March 26, First Quantum reported copper reserves at Sentinel of 3.9 million tonnes from 774 million tonnes grading 0.5% copper. Measured and indicated resources stood at 5.2 million tonnes from 1.03 billion tonnes grading 0.51% copper.

Both estimates used a 0.2% copper cut-off grade and US$3 per lb. copper price. They were derived from more than 172,000 metres of drilling completed in 514 holes since the company got the property from its February 2010 acquisition of Kiwara PLC.

“We view the development at Sentinel, from acquisition to shovel-ready in two years as very positive, highlighting the company’s ability to add significant value to its acquisitions in a short time frame,” says Scotiabank’s analyst Tom Meyer in a note. He maintains his “first sector outperform” rating on the stock, and has a one-year target of $40.

However, analyst Matt Murphy of UBS Investment Research says Sentinel’s resource grade was 25% below what he expected (0.67% copper). He says the lower resource grade and lower strip ratio of 2.2-to-1, boosts his life-of-mine cash costs estimates from US$1.15 per lb. to US$1.35 per lb. Noting this makes the project an “upper third quartile cash cost producer when it comes on-line in 2014e.”

Murphy has reduced his 12-price target to $23 per share from $25.50, but has kept a “buy” on the stock, given the company’s “strong production growth at below average capital intensities.”

The project is estimated to produce 300,000 tonnes of copper in concentrate a year, with initial annual production of 150,000 tonnes. Sentinel has a mine life of more than 15 years.

The miner’s strategy is to develop the project simultaneously as it constructs a new copper smelter at Kansanshi that would process all of Sentinel’s production, First Quantum’s chairman and chief executive, Philip Pascall, said in a statement. Noting this will eliminate the need to export concentrate to offshore smelters

Construction for Sentinel is slated for mid-year, with commercial production targeted for 2014. This timeline is dependent on First Quantum negotiating commercial terms with the government, including power tariff terms. Discussions are currently underway.

The initial costs to build Sentinel and the smelter project is over US$2.4 billion, notes Pascall, saying on the plus side it could create about 2,400 direct jobs for Zambians.

Cash costs for Sentinel are estimated to fall between US$1.10 and US$1.20 per lb., which some analysts believe is a bit low.

The producer aims to increase the mine’s life by drilling up its inferred resource, and conducting further exploration. Sentinel has another 165.6 million tonnes at 0.42% copper in inferred.

First Quantum has targeted company-wide copper production of at least 450,000 tonnes by 2015, and up to 1 million tonnes once Sentinel and Haquira – its copper project in Peru – swing into full gear, says analyst Kerry Smith of Haywood Securities.

Resource updates at Haquira is due by late next year, and production is tentatively scheduled for late 2016.

Before that, First Quantum will be welcoming full commercial production from its Kevitsa sulphide nickel deposit in Finland in mid-year. It should initially churn out 10,000 tonnes of nickel and 20,000 tonnes of copper a year. Looking to beef up its numbers, the miner plans to bump its throughput rate to 7.5 million tonnes per in 2013. This will boost production to 15,000 tonnes nickel and 28,000 to 30,000 tonnes copper per year. The mine should run for over 20 years at this increased rate.

Also by mid-year, the company plans to complete a 7.2 million tonnes per year oxide expansion at Kansanshi, which it will ramp up to 14.5 million tonnes by mid-2013.

Following the March 26 news, Smith of Haywood reiterated his target price of $22.50 on the stock and “sector perform” rating.