First Quantum sells Kevitsa to Boliden

VANCOUVER — Burdened with debt, First Quantum Minerals’ (TSX: FM) has struck a deal to sell  its Kevitsa nickel mine in northern Finland to Swedish integrated miner Boliden AB (US-OTC: BDNNF).

Kevitsa is an open-pit nickel-copper-platinum group metals (PGM) mine, 142 km northeast of Rovaniemi, the capital of Finnish Lapland.

First Quantum began commercial production in 2012 at the mine, which produces two concentrates: a nickel-copper-PGM-gold concentrate grading close to 12% nickel, which can yield 10,000 tonnes nickel metal per annum, and a copper-PGM-gold concentrate grading close to 28% copper. The copper content in both concentrates would produce 17,000 tonnes copper annually.

Boliden will pay US$712 million in “cash considerations,” with the transaction expected to close in May.

First Quantum president Clive Newall had outlined during a first-quarter conference call that asset sales were an option to cut US$1 billion in debt this year.

“It’s fair to say that, while the market seems to be focused almost exclusively on an asset sale, we are working on several initiatives to accomplish our goals, which include: a lower debt position, and a capital structure better suited to the development and start-up timetable of our Cobre Panama project. We’re focused on reducing that risk of a breach of the net debt to [earnings] covenant ratio for our financing agreements.”

The large Cobre Panama development lies 120 km west of Panama City, and could start production in 2018. The operation would crank out 320,000 tonnes of copper per year once it ramps up to full processing capacity of 6 million tonnes per month.

First Quantum has cut its capital expense budget at the project by 15% to US$5.5 billion, with US$2.8 billion of that capital remaining. The company expects to spend US$650 million this year, and the rest in 2017.

The Kevitsa sale will shore up First Quantum’s cash position and should allow it to safely meet its earnings covenants in 2016. The company has a US$1.2-billion term loan to amortize this year, which equates to US$200 million due.

In addition, the company is on the hook for debt payments of US$400 million in 2017 and 2018.

Canaccord Genuity analyst Peter Bures gave the Kevitsa terms a thumbs up, and said the transaction was “positive for First Quantum in terms of price received.” Canaccord boosted its price target by $1 to $6 per share.

“This should alleviate much of the ongoing covenant pressure, but that covenant breaches during [the second quarter] are still a risk,” Bures added.

Meanwhile, TD Securities analyst Greg Barnes boosted his 12-month target by $1 to $8.50 per share, based on “steps that [First Quantum] management is taking to address its highly levered balance sheet.” Barnes also noted that management has cited stream sales, or “copper-gold forward sales,” as a means to achieve its debt targets.

Scotiabank analyst Orest Wowkodaw noted that the Kevitsa deal had been “widely anticipated,” though the sale price was “well above market expectations,” which were “below the US$500-million level, given weak nickel prices.”

Scotiabank estimates First Quantum will have an improved liquidity position over the next three years, but it could still run into covenant problems later this year.

BMO Capital Markets analyst Aleksandra Bukacheva covered the transaction from the Boliden side, and agreed that the purchase price “appears high, compared to our estimated net present value for the mine.” BMO Research speculates that “the acquisition value could be enhanced through cost reductions, production expansion or higher nickel prices.”

Boliden president and CEO Lennart Evrell said during a conference call that his team had its eye on Kevitsa for “quite a long time.” The company runs Sweden’s largest copper mine at its Aitik open-pit operation outside the town of Gallivare, and had been looking for a nickel operation to provide feed to its smelting business in Scandinavia.

“It’s nearly a perfect for our long-term strategy, and this is our first opportunity to buy an asset in our home region,” Evrell said. “Kevitsa only started commercial production four years ago, and it has project synergies with Aitik, which is a few hours’ drive away. We’ve really established ourselves in two of the best geological areas in the region, and we’re one of the best mine builders out there. There was simply no alternative out there that carried as many synergies.”

First Quantum shares have traded in a 52-week range of $2.15 to $7.51, and jumped  20% — or $1.28 — after news of the deal, en route to a $7.43-per-share close at press time.

The company has 682 million shares outstanding for a $5.7-billion market capitalization.