First Quantum has Growth Potential but Strap on for a Wild Ride

First Quantum is a leading global copper producer. The company also holds significant interests in nickel and engages in the production of gold, silver, zinc, and acid, and related activities including exploration and development. It has operating mines located in Zambia, Panama, Finland, Turkey, Spain, Australia, and Mauritania. 

First Quantum derives nearly 85% of its revenues from copper sales and the balance 15% from the sale of gold, nickel, silver, and others. The company is one of the world’s top 10 copper producers, exporting millions of tonnes of concentrate from multiple countries to customers worldwide.

Its portfolio includes copper mines, particularly Kansanshi in Africa and Cobre Panama in Latin America, and copper and nickel projects in Africa and Australia.

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Key Investment Data

 

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Revenue Growth & Market Exposure

Over the last 25 years, First Quantum has developed skills and expertise in technical, engineering, construction, and operational fields. The company operates long-life mines in several countries and is known for running complex mines and minerals processing plants. It is also exploring the Haquira copper deposit in Peru and progressing the Taca Taca copper-gold-molybdenum deposit in Argentina.

First Quantum’s largest development project to date, Cobre Panama’s precious metals revenues consist of revenues from the sale of metals as well as revenue recognized from the amortization of the precious metals stream arrangement which is indexed to copper sold from the mine. The company, through its subsidiary, MPSA, has a precious metal streaming arrangement with Franco-Nevada.

First Quantum’s portfolio of geographically diversified operating assets comprises high-quality, low-cost copper mines. Its products are sold under pricing arrangements where final prices are set at a specified date based on market prices and the company is responsible for identifying contracts with customers and the transaction price within them.

The company’s revenues have grown at a rate of 15%+ CAGR in the last three years. It is difficult to replicate First Quantum’s operating assets, large geographical presence, and economies of scale. A competitive R&D team focusing on advancing technologies also helps the company to stay ahead of its peers.

The company achieved record annual production at low costs in 2020 with total copper production of 778,911 tonnes, an 11% increase YoY. Gold production also increased by 3% YoY. The company has not experienced any significant disruption to supply chains and product shipments since the onset of the pandemic. Cobre Panama returned to normal operations by the end of the fourth quarter and achieved record production and mill throughput.

First Quantum continues to focus on upgrading the smelter for treating higher volumes of concentrate from both Sentinel and Kansansh. Cobre Panama is expected to achieve 85 MT of mill throughput and annual production of between 300,000 and 330,000 tonnes of copper and between 120,000 and 130,000 ounces of gold in 2021.

Dividends

First Quantum sports a modest annual average yield of 0.04% and a low payout ratio of 25%. Its global operating assets generate strong cash flow and earnings to support dividend growth. It adopted a policy of paying only nominal dividends in the last year.

With the successful ramp-up of Cobre Panama and overall higher production, First Quantum anticipates stronger future cash flow and projects increased dividend payments within the next two years. It also benefitted from the restart of operations at its Ravensthorpe nickel mine.

First Quantum continues to take action to manage operational and price risk to further strengthen the balance sheet. High-quality, low-cost copper mines, particularly Kansanshi in Africa and Cobre Panama in Latin America, and significant copper and nickel projects in Africa and Australia are strong growth enablers for First Quantum.

Copper is a vital component in power generation and transmission, construction, and electronics. Rising prices of precious as well as industrial metals and a recovering global economy should support mining activities. As one of Canada’s large diversified resource companies, First Quantum is favorably placed to leverage its operating and commercial expertise and contribute towards a continued supply of mined materials for global needs.

The company stands an excellent chance to gain from the growing global demand for copper driven by middle-class consumption in developing nations as well as developed economies.

Competition

First Quantum has eight operating mines in seven countries and two significant development projects in its project pipeline. Other leading precious metals mining companies are Agnico Eagle Mines, Franco-Nevada, B2Gold, Osisko Gold Royalties, Wheaton Precious Metals, Barrick Gold, Newmont, Silvercrop Metals, etc. Goldcorp generates its operating cash flows from the sale of gold, silver, lead, zinc, and copper.

Agnico Eagle is a leading mining company in Canada. Teck Resources is another leading copper, zinc, and coal production company. It is one of the biggest global producers of mined zinc and an important producer of copper.

Bottom Line

Mining companies have performed well this year despite pressures caused by the COVID-19 pandemic. First Quantum is well-positioned with its large operating mines and a pipeline of new potential. It expects a combined output of more than 800,000 tonnes of copper per year by 2021.

Precious metals prices are down YTD but a rally in industrial metals prices should support this mining stock in the future. First Quantum is expecting strong demand driven by government spending on infrastructure as the economies recover.

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DISCLOSURE: Please note that I may have a position in one or many of the holdings listed. For a complete list of my holdings, please see my Dividend Portfolio.

DISCLAIMER: Please note that this blog post represents my opinion and not an advice/recommendation. I am not a financial adviser, I am not qualified to give financial advice. Before you buy any stocks/funds consult with a qualified financial planner. Make your investment decisions at your own risk – see my full disclaimer for more details.