First Quantum posts disappointing Q3, revises guidance on Kansanshi struggles

First Quantum Minerals (TSX: FM) has reported considerably lower third-quarter financial results, citing margin compression because of a declining copper price, cost inflation, and challenged performance from its Kansanshi copper mine in northwestern Zambia.

The Toronto-domiciled base metals major reported that headline earnings fell 72% quarter-on-quarter from US$337 million in the second quarter to US$96 million in the September quarter, while copper C1 cash costs increased by 8¢ per lb. to US$1.82 per lb.

“The headwinds from recessionary concerns and broad cost inflation have led to substantial margin compression across the industry. In the longer term, we continue to see structural upside in our markets from the ongoing challenges of bringing on new copper supply,” CEO Tristan Pascall said in a statement after markets closed on Tuesday.

Total copper output for the three months was at 194,974 tonnes, up 2,306 tonnes from the prior period. The increase was mainly attributable to Sentinel, also in Zambia, which achieved record output of 64,120 tonnes of copper, up 22% from the June quarter. However, challenges at Kansanshi prompted First Quantum to lower its guidance for 2022.

Kansanshi’s output fell by 25% quarter-on-quarter to 29,862 tonnes owing to lower grades across all three circuits and the resulting impact on recoveries.

First Quantum explained that access to the M12 cutback was restricted until the end of the third quarter, due to water pooling in the main pit. Dewatering of the M12 area has been completed, and planned mining activities resumed toward the end of the third quarter. Kansanshi’s copper C1 cash cost rose 60% to US$2.93 per lb.

As a result of the challenges, the mine is now expected to only produce between 140,000-150,000 tonnes this year. Production volumes are expected to continue at lower levels until the completion of the S3 Expansion project.

First Quantum has also lowered its consolidated 2022 guidance to 755,000-785,000 tonnes, compared with the previous target of 790,000-855,000 tonnes.

First Quantum also increased its copper C1 cash cost guidance from US$1.45-US$1.60 per lb. to US$1.70-US$1.80 per lb., citing overall cost inflation and lower production from the Zambian operations.

Management noted that while market rates for key inputs have declined from elevated levels earlier in the year, there will be a lag before those flow through to operating costs, given high-cost inventories that need to be consumed. In addition, employee costs have structurally increased as the company made cost-of-living adjustments and realigned compensation to market levels; it is unclear at this time how much this will impact operating costs on a go-forward basis.

Meanwhile, the company also said there was no significant update on Law 9 in Panama, where it operates the giant Cobre Panama copper operation.

Management noted discussions around the proposed revisions to the fiscal regime governing Cobre Panama remain underway, with downside protection to the company still a key focus. In September, a bilateral contractual drafting committee was set up as the details continue to get ironed out.

Despite the challenged Q3 earnings report, First Quantum shares added 3% on Wednesday, gaining 76¢ to close at $25.73, although the equity is down 16% over the past 12 months, having touched a low of $18.68 and a high of $45.38. It has a market cap of $17.8 billion.