First Quantum unveils US$1.4B equity raise

First Quantum Minerals (TSX: FM; US-OTC: FQVLF) plans to raise US$1.4 billion through a public offering — increasing the company’s outstanding shares to 689 million.

The funds will help advance and expand production facilities, increase financial flexibility by reducing debt and boost general corporate activities, which include strategic investments that could enhance its returns and growth pipeline.

The company has $6.5 billion in total debt and $6.2 billion in net debt. It plans to spend $600 million this year alone on advancing its Cobre Panama project. The large open-pit copper development is located in Panama, 120 km west of Panama city, and 20 km from the Caribbean Sea coast.

First Quantum is one of the world’s leading copper producers, and other projects in its stable of properties include the Trident project, 150 km west of Solwezi in northwestern Zambia. Trident consists of the Sentinel copper mine development and the Enterprise nickel mine development. It also owns Haquira, one of the world’s major undeveloped copper deposits in southern Peru, next to the Las Bambas copper-gold project.

The public offering, priced in Canadian dollars, is being led by a syndicate of underwriters headed by RBC Capital Markets and Goldman Sachs Canada, and is expected to close on June 4. The financing plan was initially pegged at US$1.3 billion, but the underwriters exercised their over-allotment option on May 25, increasing expected total proceeds of US$1.4 billion.

The news prompted differing views from the analyst community.

“We see this as an opportune moment to raise equity, given the recent strong performance from mining equities,” analysts at U.K.-based Investec Securities commented in a brief comment to clients. “The raising will alleviate pressure on the FQM balance sheet and allow the company greater flexibility going forward.”

David Charles of Dundee Capital Markets calculates that the offering will result in a 13% share dilution, assuming the equity is raised at a 7% discount rate to the $17.25-per-share closing price. He noted that the financing would trim net debt by 30%, from $6.2 billion to $4.7 billion.

“The balance sheet has been deteriorating [and was close to minimum forecasted liquidity levels], but the current equity offering is definitely helping the situation, and we are also taking a leap of faith that First Quantum’s operation in Zambia will deliver in the second half of 2015.

Charles has a $22-per-share target price, and says the company remains the premier copper growth play in the sector.

Other analysts had a more mixed take on the news. Aleksandra Bukacheva of BMO Capital Markets wrote on May 21 that while the financing “would facilitate deleveraging” and “is only modestly dilutive to our net present value (1%),” on the negative side of the ledger, “sourcing external funding suggests there could be more risks in the smelter and Sentinel ramp-up, or current operations at Kansanshi, than previously envisaged by the company.”

Kansanshi is the largest copper mine in Africa, and First Quantum owns 80% of it through a subsidiary. It is 10 km north of Solwezi and 180 km northwest of the Copperbelt town of Chingola.

Investec Securities pointed out in a research note that “the fact that the size of the First Quantum equity issue has been increased to the maximum amount shows that the mining market is alive and well — but only for companies who spend shareholders’ funds wisely.” The London-based investment firm said First Quantum “has demonstrated steady, disciplined growth over the last decade or more, and has invested in projects that their own engineers design and build,” which has “resulted in a near 20 times appreciation in the share price since 2002.”

Earlier this year, First Quantum declared that 2015 would be an important year for the company, explaining that its smelter in Zambia is being commissioned. (The first anode copper was produced in December 2014.) It also noted that first concentrate was also produced at Sentinel during the fourth quarter of 2014.

The company said the smelter’s ramp-up would influence the rate of production build-up of its Sentinel mine, and would also influence the level and mix of operations, and the unit cost of production at Kansanshi.

In 2014, First Quantum produced 427,655 tonnes copper (up 4% year-on-year); 45,879 tonnes nickel (down 3%); 229,813 oz. gold (7% decrease); 55,980 tonnes zinc (up 12%); 34,090 oz. platinum (up 12%); and 25,990 oz. palladium (up 5%).

News of the financing sent First Quantum down $1, or 5.8%, to $16.26 per share, on 10.5 million shares traded. Tom Meyer of CIBC has a 12- to 18-month target price of $26 per share.