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

• Robust copper and gold production: Total copper production reported by the company stood at 205,064 tonnes in Q1 2021, an increase of 5% compared to the previous corresponding period as a result of record production at Cobre Panama and consistent production in Zambia despite heavy rainfall. The gold production was 78,048 ounces in Q1, an increase of 13% from Q1 2020, attributable to record production of 35,898 ounces at Cobre Panama.

Source: Company

• Sold strategic investment: Recently the company announced about selling its 30% equity interest in the Ravensthorpe Nickel Operation “Ravensthorpe” in Western Australia for cash consideration of USD 240 million to POSCO, one of the world’s largest steel producers.  The proceeds of the transaction would be used to reduce the Company’s debt.  It will retain a 70% interest in Ravensthorpe and continue to be the operator. 

• Reduced net debt: The agile management, prudent steps, healthy production and higher average realizations cost of the metals helped the company to clock healthy cash flows and curtails its net debts. In Q1 2021, the company reduced the net debts by USD 347 million to USD 7,062 million and further reduction remains a key priority.

Source: Company

• Higher production guidance: The management has shared it production guidance for the different metals for 2021 to 2023, where they expect to increase the copper production in a range of 820-880 (000 tonnes) and gold production to be in a range of 290-310 (000 ounces).

Source: Company

Financial overview of Q1 2021 (expressed in millions of U.S. dollars)

Source: company

• The company reported higher revenues in Q1 2021, up 42% to USD 1,678 million compared to USD 1,182 million in Q1 2020. An increased sales volume, higher realized copper price, and nickel sales of USD 29 million following the restart of Ravensthorpe were the prime reasons behind higher revenues.
• Operating profit stood at USD 513 million, against USD 4 million in the previous corresponding period.
• On the back of higher gross profit, the company posted healthy EBT of USD 350 million, against a negative EBT of USD 145 million in pcp.
• The company posted net profit of USD 194 million in Q1 2021, compared to a net loss of USD 95 million in pcp. The rise in net profit was primarily due rationales discussed above, partially offset by higher income tax expense. 

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, interest rate risk, and foreign exchange risk. The demand for the metals is other factors that may cause 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 operations performed exceptionally well in Q1 2021, with Cobre Panama generating record quarterly output and the Zambian business performing as expected despite the severe rains. The company generated enormous cash flow as a result of its low expenses and strong copper price, allowing it to decrease its debt. Furthermore, the business recently sold its 30% ownership investment in Ravensthorpe to POSCO for USD 240 million in cash and intends to use the profits to decrease debt, which is a positive development. In addition, the corporation has guided for increase the output of all commodities, which is noteworthy. Therefore, based on the above rationale and valuation, we recommend a “Hold” rating at the closing price of CAD 27.93 on May 19, 2021. We have considered Teck Resources Ltd, Nevada Copper Corp, Lundin Mining Corp etc. as the peer group for the comparison.

One-Year Price Chart (as on May 19, 2021). Source: Refinitiv (Thomson Reuters)

Lundin Mining Corp

Lundin Mining Corp (TSX: LUN), is a diversified Canada-based metals mining company with operations in Chile, the United States, Portugal, and Sweden. The company primarily produces copper, nickel, and zinc, and to a lesser extent, gold, lead, and silver.

Key highlights 

• Diversified revenue mix: The Company's income is derived from a wide range of commodities from various places. In the nature of the firm, this diversification gives resilience. The firm recorded total sales of USD 681 million in the first quarter of 2021, up 80.3% from USD 377.9 million in the first quarter of 2020.

Source: Company 

• Increasing production profile: For the Company, FY 2020 has been a watershed moment. Despite operational issues, all Metals' yearly output met or surpassed the Company's annual output target. Furthermore, the Company anticipates that this upward tendency would continue in the following years. Revenue from the copper category is predicted to climb by over 33% in FY 2021.

Source: Company 

• Rise in Cash flow from operations: In Q1 2021, the company reported Cash flow from operations at USD 158.7 million, an increase of USD 75.3 million compared to USD 83.4 million reported in the previous corresponding period. The increase was primarily attributable to higher gross profit of USD 275.1 million, partially offset by the comparative change in non-cash working capital of USD 176.7 million and increase in cash tax paid.
• Minimizing debts: The on-going steady performance of the company’s operations, agile management and higher average realization price in Q1 2021, helped the company to minimize its net debt to USD 8.1 million, a decrease of USD 55.1 million from the net debt balance as of December 31, 2020. The decrease in net debt is attributable to the positive cash flow impacts.

Source: Company

• Industry Beating Margins: The Company's resilient business and higher average realization price of metals helped in leaping the industry median margins on many fronts in Q1 2021, which is a key positive. The chart below gives a glimpse of this.

Source: Refinitiv (Thomson Reuters)

Financial overview of Q1 2021 (Expressed in thousands of US dollars)

Source: Company 

• In Q1 2021, the Company reported higher revenue, which increased 80.3% to USD 681.4 million, against USD 377.9 million in Q1 2020. The increase was primarily due to higher metal prices and price adjustments (USD 331.0 million), partially offset by lower copper sales volumes.
• The gross profit stood at USD 252.4 million, against a gross loss of USD 22.6 million in the previous corresponding period. The increase was primarily due to higher revenues driven by higher metal prices, partially offset by lower copper sales volumes.

• The company reported higher net earnings of USD 154.2 million, against a net loss of USD 113.5 million in pcp. The transformation was mainly due to higher EBT, partially offset by higher income tax. 

Risks associated with investment 

The Company’s performance is highly exposed to volatility in the underlying commodity prices, especially copper and gold, as they significantly contribute to the group’s top-line and bottom-line. 

Valuation Methodology (Illustrative): Price to Cash Flow 

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

Stock recommendation

In the first quarter, the company's operations functioned admirably. Its Candelaria and Chapada mines boosted mill throughput considerably quarter over quarter, while Zinkgruvan established a new record for zinc ore. The business is well positioned to fulfil its annual target, thanks to improved ore grades at Candelaria and Chapada, which is a significant positive. Furthermore, the firm achieved a robust cash flow from operations of USD 158.7 million and reduced its net debt to USD 8.1 million, a reduction of USD 55.1 million, demonstrating its financial strength. We predict copper prices to stay elevated in the coming months, since most governments across the world have relaxed shutdown restrictions, resulting in more industrial activity resumption. Therefore, based on the above rationale and valuation, we recommend a "Hold" rating on the stock at the closing price of CAD 13.18 on May 19, 2021. We have considered Capstone Mining Corp, First Quantum Minerals Ltd, Kinross Gold Corp, etc. as the peer group for the comparison.

1-Year Price Chart (as on May 19, 2021). Source: Refinitiv (Thomson Reuters)

Disclaimer

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