VANCOUVER —First Quantum Minerals (TSX: FM) did little to alleviate concerns surrounding its debt position during a conference call on Feb. 19.
The depth of the issue was highlighted when the company’s auditors — PwC — expressed concern with “material uncertainty … in respect to the group’s ability to comply with its debt covenants.” First Quantum is sitting on net debt of just over US$5 billion, and BMO Capital Markets recently questioned “the ability of [the company’s] legacy operations to service debt and fund development at Cobre Panama, with a spot copper price of US$2.08 per lb.”
During First Quantum’s quarterly conference call president Clive Newall acknowledged the risk of a breach of covenant ratio in terms of debt financing agreements. The company is negotiating with lenders to avoid the issue, which would be the second renegotiation in the past 10 months.
“We’re keeping our lending group fully informed on developments and initiatives within the company,” Newall said. “We’ve had many discussions with them over the past few months. They are working alongside us and they’re being patient in terms of solutions. If we look at an asset sale that’s another scenario, but we’re working on many initiatives.”
Notwithstanding the concern around debt levels, First Quantum has performed quite well from a production standpoint over recent quarters. The company reported increased copper production of 120,193 tonnes during the fourth quarter, thanks to ramp-up at its Sentinel project and better year-on-year performances at its Las Cruces, Guelb Moghrein and Kevitsa mines.
The company reported an annual net loss attributable to shareholders of US$496 million, or 77¢ per share, based on sales revenues of US$2.7 billion. First Quantum’s total cost of copper production was estimated at US$2.13 per lb. in 2015, but it noted that the figure had fallen to US$1.82 per lb. by the fourth quarter. Average realized copper price for the year was pegged at US$2.43 per lb.
“Our operational and cost efforts are yielding good results, and we are working on several more initiatives to be in a better position to weather an extended period of low commodity prices,” Newall said. “It’s fair to say that, while the market seems to be focused … on an asset sale, we are working on several alternatives. We will accomplish our goals with a lower debt position, and a capital structure, better suited to the development and start-up of our Cobre Panama project.”
First Quantum’s debt position is largely over-leveraged due to its cash-heavy US$5-billion takeover of Inmet Mining and the Cobre Panama asset in 2013. Development costs at the Panamanian property had ballooned to US$6 billion, and the company has struggled to find the capital to get the mine across the production line.
First Quantum had previously cut its capital expenditure guidance for 2016 to U$710 million, with US$390 million earmarked for Cobre Panama. The company expects to spend nearly US$1.5 billion at the project over the next three years.
“We limited cash-out flow to essential and economically attractive projects,” Newall added. “It’s important to keep the Cobre Panama development going because it’s a great project … it will be a significant earnings and cash generator when in operation.”
Also clouding matters is confusion with Zambian power tariffs at the company’s Sentinel operation and doubt over when a second power line will be energized at the mine. BMO Capital Markets analyst Sasha Bukacheva notes that the additional power connection is expected during the second quarter, but production guidance of between 135,000 and 155,000 tonnes copper is “at risk.”
“We remain concerned with the risks to equity value, given high debt levels and potentially high costs, and strategic consequences of deleveraging, in addition to material operating and fiscal risks to the cash-flow generation of the legacy assets,” Bukacheva wrote on Feb. 17.
BMO Research recently dropped First Quantum’s price target from $8 to $3.60 per share and has a “market perform” rating on the stock.
The company has traded within a 52-week window of $2.15 to $19.83, and closed at $4.58 per share at press time. First Quantum has 689 million shares outstanding for a $2.8-billion market capitalization. The company closed one of the largest equity financings in nearly a decade in mid-2015, when it issued 88.5 million shares at $16.25 for gross proceeds of $1.4 billion.
This reporting is garbage. Much like an article published in the Financial Times the facts are twisted to coincide with whichever analysts are paying you to write this stuff. Do you really think this management team would be full steam ahead at Cobre Panama if they thought they would breach debt covenants? It’s a ridiculous notion.
While you make comments on Cobre Panamas “ballooning costs” you fail to mention costs have been reduced by around 15% from original estimates at a 17% increase in output from what was originally estimated.
If you are go going to write articles learn to look at all the facts instead of reporting onesided personal views intended to meet personal agendas.
It’s criminal how reporters and analysts collaborate to mislead retail investors that don’t know any better. It’s criminal what guys like you do.