First Quantum Minerals Ltd (TSX: FM) is a diversified mining company and is engaged in the production of copper, nickel, gold, and zinc, and related activities including exploration and development. The group’s mines are located in Zambia, Finland, Turkey, Spain, and Mauritania.

Guidance: The group reduced its production guidance and expect copper production to 755,000 to 805,000 tonnes, a reduction of 75,000 tonnes and gold production to 250,000 to 270,000 ounces, a reduction of 30,000 ounces. The production at Cobre Panama was put on temporary suspension on account of COVID-19, and it was put on preservation and sage maintenance. Consequently, the group has reduced the production guidance for Cobre Panama to 210,000 to 235,000 kt of copper and 90,000 to 100,000 koz of gold. Production guidance for all other operations remains unchanged from previously disclosed.

Q1FY20 Financial Highlights: FM declared its quarterly results, wherein the Company reported revenue of USD 1,182 million, as compared to USD 857 million, aided by tremendous growth from both copper and gold segments. The quarter was marked by higher copper sales of 189,953 tonnes, against 130,262 tonnes in Q1FY19, while Gold sales, during the quarter, were reported at 73,782 ounces, significantly higher than 46,790 ounces in pcp. Gross profit was marred by a significantly higher cost of sales, which includes a surge in costs of production and depreciation from the previous corresponding period. Operating profit stood lower at USD 4 million, as compared to USD 153 million in pcp, primarily attributable to higher foreign exchange losses, included within other expense and a marginal increase in general & administrative expense. The quarter witnessed a significant rise in the finance costs, an increase in the Movement in Zambian VAT discount, partially offset by the income tax credit. Net loss stood at CAD 95 million, as compared to net earnings of USD 65 million in pcp. The group exited the quarter with Cash and cash equivalents USD 1,515 million and total assets of USD 25,064 million.

Income Statement Highlights (Source: Company Reports)

Valuation Methodology: Price to Cash Flow Based Relative Valuation (Illustrative)

Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation: The stock of FM corrected ~27% so far this year due to the recent jolt in the global equity market on account of COVID 19 pandemic. However, the prices of gold have remained elevated in the recent past, as investors were moving towards ‘safe heavens’ category. Higher gold prices augers well for the group’s top line and sustainable cash flows for the company. The demand for copper is likely to increase in the near term as the industrial activities have started to resume following the easing in lockdown restrictions across the globe. Consequently, copper prices are likely to move northward. The company’s copper hedge program, which utilizes both unmargined copper forward sales and unmargined zero cost collar sales contracts, mitigates the price volatility, which is positive. The stock recorded a pullback rally and soared ~18% in last five trading sessions. At the last traded price, the stock was trading above its 50-days and 100 days simple moving average of CAD 7.85 and CAD 8.96, respectively, indicating a medium-term bullish trend. We have valued the stock using Price to Cash flow based relative valuation method and have arrived at a target upside offering double-digit (in percentage terms). For the said purposes, we have considered peers like Lundin Mining Corp, Kinross Gold Corp, Kaz Minerals PLC etc. Hence, we recommend a ‘Buy’ rating on the stock at the current market price of CAD 9.52 on June 5, 2020.

FM Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

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