First Quantam’s Quarter Hurt By Lower Prices


Lower prices for key metals copper, gold, and nickel predictably weighed on First Quantum’s second-quarter profitability. Excluding the acquisition of Inmet, which closed toward the end of the first quarter of this year, gross profit declined 30% to $193 million. The acquired assets added $71 million to that figure before one-time accounting adjustments associated with the deal.

Operationally, it was a solid quarter and management affirmed prior volume and unit cost guidance. Production was up at legacy operations. Copper cash costs excluding the recently acquired Inmet assets declined to $1.47 per pound after byproduct credits from $1.53. Including the Inmet assets, costs were $1.34/lb. This afforded ample headroom versus the price of copper, which averaged $3.25/ lb in the quarter.

Analysts expect prices to fall over the next few years on weaker Chinese demand growth (China accounts for about 40% of global consumption) and a bumper crop of supply additions. For growth-rich First Quantum, rising production should more than offset the price headwind as far as earnings are concerned, though not returns on invested capital, and we continue to view the firm as a no-moat operator.

A good deal of the volume growth would come from the massive Cobre Panama project acquired in the Inmet deal. Management indicated the undertaking remains “under review” with a revised capital cost and project time table expected in the fourth quarter. Morningstar’s fair value estimate, which has been trimmed to CAD 17 on lower near-term gold prices, assumes the company can improve on the capital and operating cost estimates of the prior owner.


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