First Quantum Minerals Ltd

First Quantum Minerals Ltd (TSX: FM) is a Canada-based company engaged in the production of copper, nickel, gold, zinc, silver and acid, and other related activities including exploration and development of mining properties. 

Key Highlights

• Change in Senior management: On 21st December 2020, the Company announced the appointment of Mr. Tristan Pascall as Chief Operating Officer, effective January 1, 2021. In addition, Mr. Clive Newall, one of the founders of the Company, has decided to step back from his executive position but would remain as a Director. 

• Record copper production and increased gold output: Cobre Panama and Sentinet delivered robust operational execution in Q3FY20. Higher metal prices and reducing operating costs supported the company to increase EBITDA and net earnings significantly.

Source: Company

• Boosting Production:The Company issued guidance for higher copper and gold production. It expects the copper production for FY2020 to be in a range of 750,000 - 785,000 tonnes, and the gold production would be in between 245,000 -260,000 ounces. The copper production guidance has been increased at Sentinel following a particularly strong six months and Cobre Panama, following a successful ramp-up during the third quarter.

Source: Company

• Reducing the debt burden:The Company has reduced its net debt during Q3 2020, by USD 113 million to USD 7,545 million and expects to have sufficient liquidity through the next 12 months to carry out its operating and capital expenditure plans. 

• Healthy liquidity:In Q3 2020, the Company holds USD 942 million of cash in hand, and expects that its future cash flows would be enough to meet all the current obligations as they become due. The undrawn committed senior debt facilities of USD 100 million as in Q3 2020, also provides a cushion to its liquidity.

Financial overview of Q3 2020 (In millions of U.S. dollars)

Source: Company

• In Q3 2020, the Company posted revenues of USD 1,402 million, increased by 42%, compared to USD 987 million in the previous corresponding period. Commercial copper and gold sales volumes from Cobre Panama and increased sales volumes at Kansanshi along with the higher realized copper and gold prices were the main reason behind this increase in revenue.
• Comparative EBITDA increased significantly to USD 641 million in Q3 2020, compared to USD 354 million for the same period in 2019. Results benefited from higher revenue and lower cash costs.
• Net profit attributable to shareholders posted by the Company was of USD 29 million in Q3 2020 compared to a net loss of USD 73 million in the same period in 2019.

Risks associated with investment

The company is prone to commodity price risk from fluctuations in the market prices of copper, gold, nickel, zinc and other elements and also exposed to interest rate risk, and foreign exchange risk. The demand for the metals is another factor that may affect the actual results, performance or achievements.

Valuation Methodology (Illustrative): EV to EBITDA

Note: All forecasted figures and peers have been taken from Thomson Reuters 

Stock recommendation

The company’s Cobre Panama mine and Sentinet delivered the robust operational execution in Q32020. High metal prices and encouraging operating costs supported the company to increase EBITDA and net earnings significantly. The company also issued its guidance for higher production of both copper and gold. Also, we expect the metal price to remain elevated, which would support the company’s financial performance. Therefore, based on the above rationale and valuation, we have given a “Hold” rating at the closing price of CAD 24.19 on January 19, 2021. We have considered Teck Resources Ltd, Kinross Gold Corp, Lundin Mining Corp etc. as the peer group for the comparison.

Source: Refinitiv (Thomson Reuters)

Lundin Mining Corporation

Lundin Mining Corporation (TSX: LUN) is a diversified Canada-based metals mining company with operations in Chile, the United States, Portugal, and Sweden. 

Key Highlights:

• Production update: On December 21, 2020, the group announced that it had resumed full production at Chapada mine in Brazil. For FY20, production of both copper and gold from Chapada is expected at the lower range of the FY20 guidance of 45,000-50,000 tons of copper and 80,000-85,000 oz of gold.

• Strong Technical indicators: The stock of LUN closed at CAD 11.96, above the long-term simple moving averages (SMAs) of 100-days, 150-days and 200-days, indicating a bullish price trend. Moreover, the stock price is inching closer to the upper band of 52-weeks trading range of CAD 12.47 and CAD 4.08.

Source: Refinitiv, Thomson Reuters

• Impressive Production Profile: The management highlighted positive long-term guidance and expects strong growth in production of copper, zinc and gold. Higher production of minerals provides improved business prospects in the foreseeable future.

Source: Company Presentations

• Better than industry Margins: During Q3FY20, the group reported higher EBITDA margin, operating margin and net margin as compared to the industry median, supported by improved realized metal prices and lower cash costs. EBITDA margin and operating margin stood at 49.2% and 28.9%, respectively in Q3FY20, higher than the industry median of 42.9% and 25.1%, respectively. The company also reported a higher net margin of 22.2% during Q3FY20 as compared to the industry median of 12.1%.

Q3FY20 Financial Highlights:

• LUN impresses with its Q3FY20 results; wherein the group reported revenue of USD 600.7 million, higher than USD 538.7 million in pcp. The increase was driven by improved realized metal prices, as compared to the previous corresponding period (pcp).

Source: Company Presentation

• Gross profit stood significantly higher at USD 199.3 million, as compared to USD 128.6 million in pcp, thanks to lower production costs (USD 279.4 million versus USD 293.9 million in pcp), partially offset by a slightly higher depreciation, depletion and amortization costs (USD 122 million versus USD 116.2 million in Q3FY19).
• The company reported higher net earnings of USD 133.6 million, as compared to USD 32.1 million in pcp.

Q3FY20 Income Statement Highlights (Source: Company Reports) 

Risk: The group’s topline correlated to the price of copper and gold in the international market. Volatility in metal price would affect the group’s performance.

Valuation Methodology (Illustrative): Price to CF based

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

Stock Recommendation:

The group reported strong operating performance and posted cash from operations of USD 393.2 million during 9MFY20, higher than USD 378.2 million in pcp. Moreover, adjusted EBITDA was reported at USD 622.1 million, significantly higher than USD 476.9 million, a year ago. Within the Candelaria mine, the group expects copper production to increase nearly 45% in FY21, supported by improving copper head grades and achievement of planned processing rates. For the next ten years, the mine is expected to deliver an average production of nearly 180,000 tpa. The group is planning for advance exploration & expansion in Chapada mines and would initiate 60,000 m drilling campaign. We have valued the stock using P/CF based relative valuation method and have arrived at a double-digit upside (in percentage terms). For the said purposes, we have considered peers like Imperial Metals Corp, Altius Minerals Corp etc. Considering the aforesaid facts, current price movements, we recommend a ‘Buy’ rating on the stock at the current market price of CAD 11.96 on January 19, 2021.

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

Disclaimer

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