First Quantum Minerals FM cn
December 22, 2005 - 7:12pm EST by
2005 2006
Price: 35.00 EPS
Shares Out. (in M): 0 P/E
Market Cap (in $M): 1,900 P/FCF
Net Debt (in $M): 0 EBIT 0 0

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First Quantum is a copper explorer, miner and producer with mines primarily in Zambia and a small mine (10% of 2006 production) in Mauritania. Production is increasing rapidly from 40 mm tonnes in 2004, to 120 mm tonnes in 2005 and further increasing to 220 mm and 300 mm tonnes in 2006 and 2007 resp. This company is very interesting for several reasons:

1. Analysts have consistently underestimated the future copper price used in their models. As recently as Sept '05, most analysts were using $1.30 and $1.10 per lb for 2006 and 2007. Some have gone to $1.50 for 2006 in Dec. This is still exceedingly low compared to the 2006 futures strip of $1.93 and the 2007 strip of $1.70. Obviously, the longer term price depends on what happens primarily in China and on this I have no special insight. However, I believe that Beijing will not allow any significant slowdown before the 2008 Olympics.

This reluctance of analysts to increase their commodity pricing estimates is very similar to what has happened (and continues) in the oil market.

2. As a result of using a low copper price, the 2006 consensus eps of $3.32 is very understated and at $1.94 copper computes to $5.73. The gap between the consensus and strip copper prices is even bigger in 2007 (55 vs 40 cents in 2006). The consensus eps of $3.20 will be closer to $7.12 in 2007 at a $1.70 futures price. This implies a P/E of 5 and free cash/sh of $6. A P/E of 8 would imply a 60% increase in the stock price.

The estimated eps leverage to a $0.10 increase in Copper price is $.48 and $.67 for 2006 and 2007 respectively.

3. Senior management comes from an engineering background and has brought projects on time and on budget. In terms of capex, the major mine Kansanshi in Zambia will be fully completed in 12 months, compared to an industry norm of 18 months. Similarly, capex costs are $2,000/tonne of annual output versus the norm of $3,500. Cash costs at Kansanshi were $.52 in Q3, again a very competitive price. The company is trying several oxidation, treatment and transportation methods to reduce costs even more.

4. As mentioned earlier, the management is growth oriented and has plans for growth beyond 2007. The company has an extensive land position in the Zambian copperbelt. However, if no new mines are built, no additional capex is required and FM generates significant free cash flow. Maintenance CAPEX from 2008 onwards will be less than DD&A of $50 mm.

This growth profile is in contrast to the big mining companies such as Phelps Dodge, which have weak exploration programs. FM would be a logical acquistion target.

5. Unlike Phelps or Souterhn Peru Copper, FM produces no molybdenum and does not have the risk of decline in the Moly price (this has increased from $3 in 2001 to $30 today.

6. It is inevitable that some costs will rise - the Zambian currency (Kwacha) has appreciated 30%+ in the the last two months. Other costs such as fuel, equipment and local currency labor costs are also up. However, management hopes to offset most of these increases by better proceesing methods.


First Quantum is a growth copper producer with excellent management. Analysts have lagged the futures prices in increasing their commodity assumptions. Consequently the consensus eps estimates of about $3.30 for 2006 and 2007 are low by 60 to 100% resp if the strip pricing is used. If copper stays around the strip prices, this stock will be revalued.
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