First Quantum scrapes by in Q2

Tax credits enabled First Quantum Minerals (FM-T) to overcome a net operating loss and record a small profit for the second quarter.

Net earnings totalled US$64,000 in the three months ended June 30, compared with US$2.1 million in the corresponding quarter ended May 31, 2002. Both periods include tax recoveries of US$131,000 and US$2.5 million, respectively, and, in the case of the recent one, an unrealized foreign exchange loss of US$1.2 million, without which net earnings would have been US$900,000.

First Quantum’s top line fared better, soaring to US$12.7 million from $5.1 million a year earlier, reflecting a threefold increase in cathode production at the expanded Bwana Mkubwa solvent extraction-electrowinning copper plant in Zambia. This, in turn, translated into US$2.3 million more in gross operating profit.

Cash flow from operations also improved, rising to US$2.7 million from US$1.5 million, reflecting the foreign exchange loss and higher accounting charges. Both amounts are reduced to US$1.9 million and negative US$1.3 million, respectively, by changes to non-cash working capital.

For the first six months of this year, First Quantum reported a loss of US$86,000 on revenue of US$22.9 million, compared with a loss of US$2.4 million on US$33.2 million in the first half of fiscal 2002. Here, the difference in revenue reflects the inclusion of the Mufulira and Nkana mines, also in Zambia, in which First Quantum owned 44% until March 31, 2001. It now owns 18.8% and thus no longer consolidates their results.

Bwana Mkubwa cranked out 6,734 tonnes of cathode during the recent quarter, bringing 6-month output to 11,093 tonnes. Both volumes are considerably higher than a year ago, reflecting the plant’s expansion.

Cash costs in each of the recent periods averaged US44 per lb. copper, net of surplus acid credits. Total costs remained virtually unchanged, averaging US70 over the 6-month period, or a penny more than the quarter, and this would have been US6 lower if not for the foreign exchange loss.

Still, costs are up significantly from a year earlier, reflecting the additional costs associated with mining, transporting and grinding of ore from Lonshi, situated 35 km to the east, in the Democratic Republic of Congo. The Bwana Mkubwa tailings were basically hosed down and transported in slurry form to the plant, making the operation much cheaper to run.

By year-end, Bwana Mkubwa is expected to have produced 28,700 tonnes of the red metal, at a cash cost of US35 per lb., net of acid credits. Annual production thereafter is projected at 30,000 tonnes, at an average cash cost of US30 per lb.

Erected in 1998, Bwana Mkubwa had been designed to produce 10,000 tonnes cathode annually from tailings left over from historic operations. In 2002, the plant was redesigned at a cost of US$25 million in order to process oxides from the Lonshi deposit.

Discovered in 2000, Lonshi has since grown to 7.3 million tonnes at a grade of 5.01% copper. The measured and indicated resource is hosted by a 15-metre-thick package of weathered Roan clastics and distal units that outcrop on surface and dip to the east at 38.

Open-pit mining and stockpiling began in mid-2001, plant expansion followed in early 2002, and commercial operations began in July, when 2,656 tonnes of cathode were produced. That’s 6% more than the expected minimum of 2,500 tonnes but still 417 tonnes shy of full capacity.

During the first half of the year, miners extracted 14,228 tonnes of ore and 942,885 tonnes of waste from the pit, putting the stripping ratio at 66-to-1. Stripping ends in July, so the ratio, as well as First Quantum’s operating costs, should decline over the remainder of the year.

“Achieving expanded design capacity…is an important milestone in the history of Bwana Mkubwa,” Chairman Philip Pascall states in a release. “With Lonshi’s high-grade copper reserves as feedstock, (its) future as a low-cost producer is secure.”

Adds Pascall: “The facility also is now capable of treating most oxide ores that exist within the Copperbelt. This capability offers First Quantum the opportunity to pursue additional sources of oxide feed both through acquisition and exploration, with the goal of expanding copper production further at Bwana Mkubwa.”

The current resource at Lonshi only includes oxides, though not for a lack of primary mineralization. Last year, three holes reported 11.92% copper over 4 metres of primary sulphide mineralization, 7.77% copper over 2 metres and 6.95% copper over 5 metres.

First Quantum owns Bwana Mkubwa outright and has an 85% stake in Lonshi.

First Quantum also has an 80% interest in the developing Kansanshi copper-gold deposit, which is 15 km from Solwezi, in Zambia’s North Western province. It, too, sits in the Copperbelt, being locally hosted by the northwesterly trending Kansanshi antiform, which exposes rocks of the Late Proterozoic Kansanshi Mine formation.

Copper mineralization occurs in steeply dipping, north-trending quartz-carbonate veins and in flat-lying stratabound layers in altered phyllitic rocks of the Mine formation.

Oxide and mixed reserves stand at 46.9 million tonnes grading 2.25% copper and 0.29 gram gold per tonne and primary reserves at 95.6 million tonnes grading 1.03% copper and 0.19 gram gold. GRD Minproc of Australia estimated both figures using a cutoff grade of 0.5% copper.

According to GRD Minproc, the reserve can support 16 years of operations to produce some 722,812 tonnes copper cathode, 912,525 tonnes copper-in-concentrate and 395,479 oz. gold-in-concentrate. Copper recovery rates are expected to average 80%.

Cash costs are projected at US36 per lb. copper for the first decade and at US38 per lb. for the remaining 6 years. Both estimates are net of gold credits and assume that First Quantum will mine the deposit itself.

During the first 3 years, miners will extract an average 4 million tonnes of oxides and mixed ore and 2.1 million tonnes of primary sulphides from two deposits. Production thereafter will be augmented by 3.9 million tonnes of sulphides, with cathode output starting to decline in year 11, owing to depletion of weathered ore.

In all, 199 million tonnes of waste and 143 million tonnes of ore will be mined, putting the stripping ratio at 1.39-to-1.

Capital costs are pegged at US$163.4 million, or US$143 million if contract miners are employed. Another US$118 million is needed for sustaining and expansion capital.

Payback occurs in four years, assuming copper prices average US72 per lb. and gold averages US$330 per oz. This is reduced by just over a year if copper alone increases by US3 per lb.

First Quantum recently raised $29.43 million by issuing 5.5 million shares at $5.35 per share. The bought-deal financing was underwritten by a syndicate led by RBC Capital Markets.

Net proceeds are earmarked for Kansanshi, and negotiations with lending institutions for project financing are nearing conclusion.

First Quantum owns three other properties in the Copperbelt, one of which Casmyn Corp has a right to a 15% participating interest after $3 million has been spent. The others, Mwinilunga and Luamata, are subject to an option agreement with BHP Billiton (BHP-N) that grants it a right to a 51% participating interest in three areas, each being as large as 500 sq. km.

By mid-May, when the deal was inked, the pair had spent US$670,000 on exploration, including soil sampling and reconnaissance drilling, resulting in the discovery of two prospects. The funds came from BHP’s purchase of 222,222 First Quantum treasury shares at $4.50 apiece, as was required under terms of the original deal.

The Musangila prospect is an 8-km-long soil anomaly that has yielded more than 100 parts per million (ppm) copper. Rapid air-blast drilling returned a best result of 1.32% copper and 2.01% cobalt near the base of the Kalahari sand cover.

The Kakoma 2 prospect, also covered by the Kalahari, is a tight, refolded synform. Sulphide lenses and ferruginous siltstones intersected in the limb of the fold carried up to 883 ppm copper, and 400 ppm copper was yielded from weathered limonitic and calcareous quartzite in the fold closure.

Follow-up magnetic surveying suggests the Kakoma 2 structure extends for 8 km along strike. Most of the anomaly remains untested.

By June 2004, BHP expects to have spent US$1.05 million on follow-up drilling and airborne geophysical surveying, or just under half the total amount it is required to spend over the deal’s 4-year term. Should an economic deposit be found, it can increase its stake to 70% by arranging all development financing, recouping First Quantum’s share out of future cash flows.

The deal is subject to a back-in right held by Phelps Dodge (pd-n), which sold the licences to First Quantum. The Mwinilunga right kicks in after US$5 million has been spent there and the Luamata right, after US$2 million.

BHP’s and First Quantum’s interests would be reduced proportionately.

On June 30, First Quantum had US$22.4 million in current assets and US$21.2 million in current debts for a working capital of US$1.1 million. Among the assets is US$5.1 million in cash and equivalents.