First Quantum Minerals Ltd.

First Quantum Minerals Ltd. (TSX: FM) is a diversified mining company, which is engaged in the production of copper, nickel, gold, zinc, and acid, and related activities, including exploration and development.

Key Highlights:

• Decline in Debt: The company reported a constant decline in total debt during the recent quarters. At the end of Q4FY20, the company reported total debt of USD 8,359 million, lower than USD 8,577 million in Q2FY20 and USD 9,130 million in Q1FY20, respectively. A lower debt provides improved financial flexibility and a reduction in interest costs. Moreover, the company reported the net debt at USD 7,409 million, lower than USD 7,675 million in Q4FY19.

• Prudent Debt Management: The company has a prudent capital management and debt repayment schedule of USD 561 million in FY21. Moreover, during the Q4FY20, the company completed the offering of USD 1.5 billion Senior Notes with a repayment date in FY22. The above proceedings would be used for the repayment of the existing revolving credit facility and the redemption of the full outstanding Senior Notes due in FY22.

Source: Company Presentation

• Sequential Growth: The company posted a sequential growth(Q-o-Q) of 14% in revenue at USD 1,601 million v/s USD 1,402 million. Also, the sequential growth of 28% and 38% were reported in gross profit and operating income, where the gross profit stood at USD 443 million v/s USD 354 million. Operating profit stood at USD 346 million v/s USD 257 million.

FY20 Financial Highlights:

• FM declared its full-year result, wherein the group reported revenue of USD 5,199 million, higher than USD 4,067 million in FY19. The increase was driven by higher income from copper and gold.

Revenue Bifurcation (Source: Company Reports)

• Gross profit stood significantly higher at USD 1,077 million, v/s USD 790 million in the previous corresponding period. The increase was driven by higher revenue, partially offset by higher cost of sales (USD 4,122 million v/s USD 3,277 million in FY19)
• The company reported a higher net loss of USD 224 million, as compared to a net loss of USD 51 million in FY19.
• Cash and cash equivalents were recorded at USD 950 million, while total assets stood at USD 24,236 million.

FY20 Income Statement Highlights (Source: Company Reports)

Valuation Methodology (Illustrative): Price to CF based

Note: All forecasted figures have been taken from Thomson Reuters

Risk: A volatility in the commodity (Copper and Gold) prices might result in a slide in the realization price, which would take a toll on the cash flows and margins of the company.

Stock Recommendation:

For FY21, the company expects total copper production within 785 tonnes and 850 tonnes, respectively, while capital expenditure is expected at ~USD 950 million, which includes ~USD 700 million in sustaining Capital & Other Projects and the rest for Cobre Panama Development.

Source: Company Report

The stock of FM has generated exuberant returns in the recent past, supported by improved results. The stock soared ~140% and ~316% in the last nine months and one year, respectively. Going forward, we expect the demand for copper to increase which would support the price and subsequently, the company’s topline. We have valued the stock using P/CF based relative valuation method and have arrived at a single-digit upside (in percentage terms). For the said purposes, we have considered peers like Franco-Nevada Corp, Altius Minerals Corp etc. Considering the aforesaid facts, current price movements, we recommend a ‘Hold’ rating on the stock at the current market price of CAD 27.42 on April 06, 2021.

One-Year Price Chart (as on April 06, 2021). 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:

• Impressive FY21 Production Guidance: The company expects that FY21 production to remain elevated and anticipates copper production in between 275,000 to 299,000 tons, higher than 230,781 tons recorded in FY20. Total capital expenditure is expected at USD 610 million, the majority of which (~USD 345 million) is expected to be spent on Candelaria mine. Moreover, for FY21, the company expects a 50% growth in the dividend distribution to CAD 0.24/ share on an annualized basis.

FY21 Guidance (Source: Company Presentation)

• Improved Operations from Candelaria: The company’s operations from its biggest mine, Candelaria remains positive. Apart from a higher copper (~40%) and gold production, the mine is expected to report lower cash cost in the coming years, which is likely to support the company’s margin. Moreover, the mine has a long operational life of more than ~20 years with clear exploration potential.

Candelaria Mine production outlook (Source: Company Presentations)

• Significant reduction of Debt: At the end of FY20, the group reported total debt of USD 203 million, significantly lower than USD 344.2 million and USD 502 million in FY19 and FY18, respectively. The decline of total debt is likely to enhance the overall financial flexibility of the firm and would reduce its finance costs. 

Q4FY20 Financial Highlights:

• LUN declared its Q4FY20 result, wherein the group reported revenue of USD 529.5 million, lower than USD 568.4 million in Q4FY19. The decline was primarily due to lower copper sales v/s the previous corresponding period.

• Gross profit stood significantly higher at USD 179.4 million, v/s USD 145.5 million in the previous corresponding period (pcp). Adjusted EBITDA stood at USD 234.8 million, at par with USD 234.6 million recorded in pcp.

• The company reported higher net earnings of USD 120.8 million, as compared to USD 104.8 million in pcp.

• Cash and cash equivalents were recorded at USD 141.447 million, while total assets stood at USD 7,058.477 million.

FY20 Financial Highlights (Source: Company Presentations)

Risk: The company’s financial performance is dependent on the demand and price of copper. Any volatility in the copper price or a change in demand dynamics would affect the company’s performance.

Valuation Methodology (Illustrative): Price to CF based

Note: All forecasted figures have been taken from Thomson Reuters

Stock Recommendation:

For FY20, the company reported an adjusted EBITDA of USD 856.9 million, higher than USD 705.7 million in FY19. Meanwhile, the company successfully implemented tight cost management, which resulted in a lower annual capital expenditure of USD 431.2 million, v/s USD 445.0 million in FY19. The company is focusing to upgrade and grow its base metals portfolio that would provide stable earnings throughout the cycle. We have valued the stock using P/CF based relative valuation method and have arrived at a single-digit upside (in percentage terms). For the said purposes, we have considered peers like Hudbay Minerals Inc, Agnico Eagle Mines Ltd, etc. Considering the aforesaid facts, current price movements, we recommend a ‘Hold’ rating on the stock at the closing market price of CAD 13.92 on April 06, 2021.

One-Year Price Chart (as on April 06, 2021). Source: Refinitiv (Thomson Reuters)

Disclaimer

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