First Quantum to expand Kansanshi in Zambia

Already one of the largest copper-producing companies in the world, First Quantum Minerals‘ (FM-T, FQM-L) plans to expand production capacity in Zambia at its Kansanshi copper-gold mine by 60% to about 400,000 tonnes of copper per year by 2015, and advance its Sentinel deposit, is getting rave reviews. 

“The expansion solidifies Kansanshi as a strategic asset,” Tom Meyer of Raymond James wrote in a research note to clients. “Kansanshi could break the top-ten list of the largest copper mines in the world, an attractive asset for larger competitors, in our opinion.”

Meyer hiked his 52-week target price on First Quantum’s stock to $230 per share from his previous target of $215. In Toronto the company is currently trading at $116.87. Over the last year First Quantum has traded between a low of $48.20 per share on June 8 2010 and a high of $126.35 on Jan. 13, 2011.

In an update on expansion and development objectives on Jan. 25, First Quantum noted that the expansion at Kansanshi, 10 km north of the town of Solwezi and 180 km to the northwest of the Copperbelt town of Chingola, will take place in two stages.

Phase I, which is already underway, will boost annual production capacity to about 285,000 tonnes by expanding the treatment capacity of the oxide circuit by about 20% to 8.5 million tonnes and by building in flexibility to allow for the mixed and sulphide circuits to be switched as needed to suit mining activity. Construction is forecast to be completed in the fourth quarter of 2011 and the total cost of Phase I will be about US$40 million.

The second Phase will start in the second half of 2012 and will involve building a new concentrator with an annual throughput of 25 million tonnes of ore. The capital budget of Phase II is estimated to be about US$350 million and commissioning is targeted for the first six months of 2014.

In addition, First Quantum plans to spend about US$16 million on drilling at its Southeast Dome prospect at Kansanshi and expects to have an updated reserve and resource estimate by the end of the year.

At its Sentinel deposit, also in Zambia, an NI 43-101 resource estimate is expected in the middle of this year. In the meantime, an updated internal study “assumes a resource of at least 700 million tonnes, headgrade in the range of 0.65% to 0.80% copper, and annual throughput rate of 40 million tonnes of ore for annual production of approximately 250,000 tonnes of copper,” First Quantum stated. 

Subject to the results of resource and mine studies at Sentinel, securing the relevant permits and approval by the board of directors, development at Sentinel, also in Zambia, could start this year with commercial production to follow in 2014. First Quantum currently has 14 drill rigs at the site.

With an expansion at Kansanshi and potentially new production from Sentinel, First Quantum is considering the possibility of building a copper smelter close to Kansanshi. (The nearest smelters are currently about 250 km away.) The company expects to reach a decision sometime in the second half of this year.

In a note to clients, mining analyst Onno Rutten of UBS Research pointed out that First Quantum’s expansion “signals an aggressive desire to grow and would require US$2.35 per lb. copper to break even.”

“With the Kansanshi expansion in our base case, we now estimate a 5-year production compound annual growth rate (CAGR) of 25% for First Quantum, the highest of its peer group” Rutten continued. “First Quantum’s production guidance (which excludes Sentinel and Haquira) remains ahead of our estimates and we believe First Quantum can self-fund its $2.3 billion project pipeline.”

Rutten’s 52-week target price on First Quantum’s stock remains unchanged at $135 per share.

Meyer of Raymond James estimates First Quantum will see free cash flow generation of an estimated US$1.5 billion in 2011 and about US$1.4 billion in 2012.