First Quantum slows pace at Cobre Panama

VANCOUVER — Development is continuing at First Quantum Minerals’ (TSX: FM; US-OTC: FQVLF) Cobre Panama copper-gold project in Panama, despite concerns of softer metal prices and a tightening of the company’s purse strings. 

First Quantum president Clive Newall said during a fourth-quarter earnings call that the company intends to conserve cash in 2015 by lowering its corporate dividend to 10% from 15% of its comparative earnings, slashing capital expenditures to US$1.2 to US$1.4 billion from a previous US$2.6 billion, and renegotiating its debt facilities with its lead bankers.

“Our plan is to work in terms of the current environment,” Newall said. 

The miner noted the reduced capex reflects completion of a smelter at its Sentinel copper operations in northwestern Zambia, but it also “substantially” reduced planned spending at Cobre this year to US$600 million, without mention of the previous budget.

The total cost to develop the open-pit Cobre Panama mine, 120 km west of the capital Panama City, is estimated at US$6.5 billion.

“The budget isn’t conservative, but certainly there are no alarm bells or red flags indicating there’s a problem,” Newall added.

The savings come from postponing equipment orders and using equipment on-site to meet the company’s annual objectives.  

Juliet Wall, general manager of finance, said during the conference call that the “cash flow reduced this year will come back in during 2016 and 2017.” She predicted that the expenditure “could approximately double,” with new equipment needed for development.

This year at Cobre, construction will continue at power stations and a tailings dam on-site, along with installing six mills and earth and concrete works for a processing plant.

A cash contribution from royalty firm Franco-Nevada (TSX: FNV; NYSE: FNV) — which has a precious-metal stream agreement with First Quantum — will also boost the budget. Under the agreement, Franco will deposit US$1 billion to fund part of the project’s capital costs in return for 86% of the expected payable precious metals over Cobre’s 34-year mine life. 

As part of its new cost-saving objectives, First Quantum has approached Franco to renegotiate the agreement terms. Newall expects some kind of resolution within the next few months, although a 20% cash payment of the project’s US$600-million budget for the year will be received “shortly.”

Cobre is scheduled to produce 320,000 tonnes copper, 100,000 oz. gold, 1.8 million oz. silver and 3,500 tonnes molybdenum annually over its mine life, with output kicking off in late 2017.

Measured and indicated resources total 4.2 billion tonnes of 0.4% copper and 0.07 gram gold per tonne, at a 0.2% copper cut-off.

Newall described 2014 as a “good year for the company,” which reached record copper production — up 4% from the previous year. 

But the year also had its share of setbacks. 

Production was temporarily stalled at its Ravensthorpe nickel mine, 550 km southeast of Perth, Western Australia, due to an acid leak in its leach circuit. The mine has since resumed operations at the 80% level. 

The biggest challenge the company faced was at its Kansanshi copper operations in northern Zambia. The Zambian government had reduced corporate taxes to zero in December, but hiked the mining royalties to 20% — more than triple from the 6% it was before.

The changes are more punitive in a low commodity price environment, and considering copper has floated around its five-and-a-half-year low in January at US$2.45 per lb., First Quantum is feeling the squeeze.

“The royalty regime will adversely impact reported before-tax earnings, and puts our ability to meet the covenants under three of our debt facilities at risk,” the company stated in a press release.

Quantum is engaged in discussions with the Zambian president and has approached its bank lenders to renegotiate its covenants to better reflect the current circumstances.

“We have a supportive banking group and do not expect to encounter any problems during this process,” Newell said. “The amendments will be distributed next week, and we expect to close it off by the third week of March.”

The company reported record copper production for the year totalling 428,000 tonnes and kept low production cash costs, with copper up 8% to US$1.41 per lb., and nickel down 12% to US$4.40 per lb.

Net earnings for 2014, excluding one-time items, were impacted by the lower copper price and placed at US$474.5 million, or 80¢ per share, which is down from US$539.4 million, or US96¢ per share, in 2013.

Cash flow from operations, before working capital changes and taxes paid, amounted to US$1.36 billion last year compared to US$1.44 billion in 2013. First Quantum had an unrestricted $257.4-million cash balance, with committed undrawn facilities of $1 billion at the end of 2014. 

First Quantum shares have traded within a 52-week window of $9.89 to $27.29, and closed down 2% at $15.05 per share at press time. The company has 600.5 million shares outstanding for a $9.1-billion market capitalization.