First Quantum to sell its DRC assets

First Quantum Minerals (FM-T, FQM-L) is putting an end to its troubles in the Democratic Republic of the Congo (DRC) by agreeing to sell its DRC assets and drop any related legal claims for US$1.25 billion.

Integrated miner Eurasian Natural Resources (ENRC-L) will buy First Quantum’s Frontier and Lonshi copper mines, along with the Kolwezi tailings project and related exploration interests. All of the assets are located in the Katanga province.

First Quantum will receive US$700 million when the transaction closes and a further US$500 million in a three-year promissory note. The deal is contingent on both companies and the Congolese government dismissing any related ligation and outstanding disputes surrounding the assets.  

If the deal goes through it will put a positive spin to First Quantum’s unfortunate saga in the central African country. The company’s chairman and CEO, Phillip Pascall, said he’s “satisfied that we have reached this agreement.”

“It brings to a close First Quantum’s current involvement in the DRC and secures substantial compensation for our shareholders for the loss they have suffered,” he stated in a press release.

The first wave of suffering came when construction at the company’s 65%-owned Kolwezi project was suspended by the General Prosecutor of Katanga in September 2009. The government then sold the Kolwezi project to Israeli businessman Dan Gertler, who sold most of his stake to ENRC.

ENRC reported on Aug. 20, 2010, that it bought 50.5% of Camrose, a company held by the Gertler Family Trust, which holds 70% of the Kolwezi project.

The situation continued to worsen for First Quantum. On Aug. 27, 2010, it reported that the government withdrew its exploitation licence at the 95%-owned Frontier mine, and transferred the mine’s titles to state-owned miner Sodimico.

First Quantum has been fighting back to restore its assets through international arbitration.

It has spent an estimated US$1.1 billion on its DRC assets, and “the US$1.25-billion barely covers off their sunk costs, with no regard for the inherent asset value these operating assets would have,” writes Haywood Securities’ analyst Kerry Smith in a Jan.5 note. But he adds “this deal is a better outcome than we would have expected and allows First Quantum to now focus on their operating and development assets rather than be distracted by shenanigans in the DRC.”

Scotia Capital’s analyst Tom Meyer agrees. “This settlement appears positive for First Quantum and we expect the shares to react accordingly,” he says in a brief note.

By late-afternoon, the company’s shares jumped 5% to $22.20 on 4.1 million shares traded.  

Meyer has reiterated a “1-Sector Outperform” rating on the stock, and increased the company’s estimated earnings per share for 2012 to US$2.88, up a penny.

Analyst Matt Murphy of UBS Investment Research has raised his 12-month target to $25.50/US$25.17 from $24.00/US$23.69, maintaining a buy on the stock.

Following the agreement news, Reuters reported the labour dispute at the company’s Kansanshi copper-gold mine in Zambia has ended. The conflict over higher wages started on Jan. 3, causing the company to cease operations for two days.  

In other recent news, First Quantum is bringing in new faces to its London office. It has appointed Harmony Gold Mining‘s (HMY-N) financial director Hannes Meyer as the company’s chief financial officer as of mid-March, and Juliet Wall will start on Jan. 9 as general manager of finance. Wall will act as interim CFO until Meyer joins the company.