First Quantum Minerals' Q1: Saved By Cobre Panama

Summary

• First Quantum produced 452 million lb copper and 78,048 toz gold in Q1.
• The copper AISC declined to $1.72/lb.
• The operating cash flow improved to $743 million and net income to $142 million.
• The Shoemaker-Levy development is progressing well.
• First Quantum should produce 1.73-1.87 billion lb copper, 280,000-300,000 toz gold, and 50.7-59.5 million lb nickel in 2021.

Photo by Hello my names is james,I'm photographer./iStock via Getty Images

First Quantum Minerals (OTCPK:FQVLF) released the Q1 2021 financial results. As expected, high copper prices provided a significant boost to its revenues and cash flows. The net income improved too and the net debt declined.

The copper production amounted to 452 million lb, which represents a 1% increase compared to the previous quarter and a 5% increase compared to the same period of last year. The gold production increased to 78,048 toz, or by 13.5% compared to Q4, as well as compared to Q1 2020. The copper production was supported especially by the very good performance of First Quantum's 90%-owned Cobre Panama mine that set a new production record of 180.87 million lb copper. Cobre Panama experienced 24% quarterly production growth, which compensated for weaker performance of the other assets. Besides copper and gold, First Quantum produced also 10.2 million lb nickel. In this case, the production declined by 17% compared to the previous quarter. However, First Quantum's Ravensthorpe mine was restarted only last year, after being idled since 2017. Therefore, some fluctuations in the production volumes shouldn't be too surprising. In Q1, the production was negatively affected by two autoclave shutdowns, one planned and one unplanned.

Source: Own processing, using data of First Quantum Minerals

First Quantum reported a decline in copper production costs. The cash costs declined to $1.24/lb, or by 3.1% compared to Q4 and by 4.6% compared to Q1 2020. On the other hand, the increased Zambian royalties pushed the AISC higher. Compared to the previous quarter, the AISC declined by 2.8% to $1.72/lb, but compared to Q1 2020, it grew by 4.9%. What is positive, the costs remain relatively stable, in line with the long-term trends.

Source: Own processing, using data of First Quantum Minerals

First Quantum's copper sales volumes declined compared to the previous quarter. While the copper sales amounted to 478.5 million lb in Q4, they declined by 2.9%, to 464.6 million lb, in Q1. The gold sales grew by 9.1% to 77,391 toz, and the nickel sales declined by 56% to 5.2 million lb. However, the declines were more than compensated for by the average realized copper prices that grew from $2.97/lb to $3.25/lb, or by 9.4%. As a result, the revenues grew to $1.678 billion, or by 4.8% compared to Q4 and by 42% compared to Q1 2020. The operating cash flow improved too, growing to $743 million, which is the highest level since Q1 2018. The net income jumped up to $142 million, resulting in an EPS of $0.21. Source: Own processing, using data of Seeking Alpha and First Quantum Minerals

First Quantum's volume of cash, cash equivalents and short-term investments increased to $1.058 billion, which means a 11.4% quarterly increase. At the same time, the total debt declined by 2.6%, to $9.472 billion. Therefore, the net debt decreased to $8.414 billion. Although the net debt keeps on declining, it remains pretty high. Fortunately, the debt maturities are relatively evenly spread over the next 6 years. The biggest portion of debt, $1.6 billion, matures in 2023. Also the rating agencies seem to be comfortable with First Quantum's indebtedness, as Fitch upgraded First Quantum's rating from B- to B, and S&P from CCC+ to B.

Source: Own processing, using data of Seeking Alpha and First Quantum Minerals

The growing copper prices and improving financial results fueled the strong growth of First Quantum's share price. However, as can be seen in the chart below, it is possible to say that the share price was growing notably quicker than revenues and operating cash flows. As a result, the price-to-operating cash flow grew to 8.43 and the price-to-revenues ratio grew to 2.79. Therefore, First Quantum's shares are not as cheap as they were last autumn or summer. What is positive, the balance sheet of the company keeps on strengthening and the net debt-to-operating cash flow ratio declined to 4.47. Although the value is still relatively high, it is much better than the scary value of 10.63 recorded back in Q3 2019.

Source: Own processing

First Quantum released also the 2021 production and cost guidance. It expects to produce 1.73-1.87 billion lb copper at an AISC of $1.7-1.85/lb, 280,000-300,000 toz gold, and 50.7-59.5 million lb nickel at an AISC of $5.5-6/lb. The capital expenditures are projected at $950 million. They should consist of $250 million of capitalized stripping, $290 million of sustaining CAPEX, and the remaining $410 million should be expended on the Shoemaker-Levy development, Kansanshi smelter expansion, fourth crusher at Sentinel, and secondary screening at Cobre Panama.

Source: First Quantum Minerals

Another positive news is that the abovementioned Shoemaker-Levy project development progressed well in Q1. The maintenance and administration facilities, as well as 9 km of conveyor and a conveyor highway overpass, were completed. Shoemaker-Levy is an expansion of the Ravensthorpe nickel mine. It should expand the mine life by 30 years. Shoemaker-Levy contains more than 80% of the total Ravensthorpe complex measured and indicated resources.

First Quantum's shares are in a strong long-term bullish trend, supported by strong copper prices. Despite some turbulence experienced over the last two months, First Quantum's shares approached the late February highs at $25.25. However, they bounced back down to the current level just below $23. But the RSI hasn't reached the overbought levels yet. Although the share price is back at the 10-day moving average, it is still well above the 50-day one. Moreover, the 10-day moving average is above the 50-day one and trending higher. If the copper prices remain at the current levels, it is possible to expect another attack of the recent highs in the near future. If not, some support should be found at the trend line, and then around $19.

What I like about First Quantum's Q1:

• The copper and gold production increased.
• The copper production costs decreased.
• The operating cash flow and net income improved significantly.
• The Shoemaker-Levy development is progressing well.

What I don't like about First Quantum's Q1:

• Except for Cobre Panama, the performance of the other mines worsened.
• The nickel production declined notably.
• The net debt keeps on declining, but it remains high.

Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Comments

[andre171]

What do you think of reports that the Panamanian government is demanding up to 16% royalties for the Cobre Panama mine and is also seeking to end First Quantum's tax exemption in the country. Should we therefore review its relative optimism about First Quantum?

[hksche2000]

FQVLF's debt is (still) high b/c of the enormous costs associated with Cobre in an extremely harsh and difficult access environment, not helped by COVID either. However, now that the mine is operational of late and Cu prices are at all time highs (and going higher), FQVLF will be able to unload a lot of its debt. COBRE is a bonanza and couldn't have come online at a better time. Kudos to the smart and hard driving Canadian mgmt. Job well done!

As long as Panama keeps its end of the bargain and doesn't become another Zambia or Congo, it's heady times ahead for FQVLF until the (Biden $TTTTTTT debt spending induced) next recession hits.

Long FQVLF since 5/20 @$5.70

[alessandro molinari]

cobre panama has exceeded estimates, or the mine is ahead of its time. consequently there will be a boom in revenue for Franco Nevada in the quarterly to be announced in a few days

[DrT]

@alessandro molinari What percentage of FN's revenue comes from cobre?

[alessandro molinari]

@DrT last year 13% on 1 billion in revenue:s21.q4cdn.com/...
as you can see from page 18 of the slides by First Quantum :seekingalpha.com/...
if it proceeds at this rate this year it would exceed 20%

[Peter Arendas]

@alessandro molinari Yes, this is good news for Franco.