First Quantum’s annual profit hit by lower copper prices

VANCOUVER — Despite a 16% year-on-year jump in copper production Vancouver-based First Quantum Minerals (FM-T, FQM-L) told a familiar story during an annual report on its 2012 fiscal year: falling average realized copper prices and rising operating costs had taken a toll on the company’s bottom line. There was plenty of silver lining for First Quantum shareholders, however, including a sizeable, one-time compensation payment that boosted yearly net earnings.

First Quantum’s copper production clocked in at 307,115 tonnes during 2012 — compared to roughly 266,000 tonnes in 2011 — including record production at its Kansanshi copper-gold operation in Zambia and a successful ramp up at its newly-commissioned Kevitsa copper-nickel development in Finland.

Copper cash costs jumped 6% to US$1.49 per lb.; however, the company notes that costs had been on a downward trend throughout the year and decreased to US$1.45 per lb. in the fourth quarter. The annual increase from US$1.41 per lbs. in 2011 is attributed mainly to a rise in processing costs, including higher acid costs.

Rising costs combined with a 9% drop in average-realized copper prices to US$3.51 per lb. impacted First Quantum’s bottom line. Gross profits fell 16% despite a 25% increase in year-on-year sales revenues. The company recorded US$1.1 billion in profit during 2012, down from US$1.3 billion in 2011.

But when it comes to net earnings and dividends, First Quantum shareholders continue to have something to celebrate. The company received a one-off settlement worth US$1.2 billion from London-based Eurasian Natural Resources (ENRC-L) following a dispute over the seizure of First Quantum’s Frontier copper mine in the Democratic Republic of Congo, which ENRC subsequently purchased for US$175 million.

As a result net earnings to shareholders jumped to US$1.8 billion in 2012, with earnings per share rising from C$1.18 in 2011 to C$3.74 in 2012. That marks a noteable exception to the norm in current markets where major producers have been slashing earnings across the board. First Quantum’s board of directors still knocked its dividen down by C1¢ to C17¢ per share, but overall the company remains a bright spot amongst diversified base-metal producers.

First Quantum looks poised to achieve similar results in 2013, with full-year copper guidance falling in the 302,000 tonnes to 330,000 tonnes range, and gold production between 190,000 oz. and 215,000 oz. Copper cash costs continue to be on the rise, however, and are projected to fall between US$1.50 per lbs. and US$1.60 per lbs. in 2013.

The company will also enjoy its second full year in the nickel business, with 31,000 tonnes to 35,000 tonnes of nickel expected from its wholly-owned Ravensthorpe operation in Western Australia.

On the capital side, First Quantum reported a cash balance of US$309 million to end 2012. The company maintains a full balance in both its US$250-million Kevitsa debt facility and US$1-billion Kansanshi senior term and revolving facility. First Quantum expects capital expenditures in 2013 to total roughly US$2 billion.

First Quantum has made headlines recently with its US$5.1-billion bid for Toronto-based Inmet Mining (IMN-T), and during its annual conference call on March 6, president and director Clive Newall confirmed that Inmet had granted First Quantum data room and site access for the US$6.2-billion Cobre Panama project 120 kilometres west of Panama City.

First Quantum extended the timeline on its Inmet bid in late February due to regulatory concerns, with a new deadline set for midnight on March 11. Newell says though First Quantum remains confident that the Inmet deal will close, the current market landscape is full of opportunities for acquisitions if First Quantum has to look elsewhere.

“There is absolutely no doubt there will be some interesting assets on the market,” Newell commented during First Quantum’s conference call. “There will be opportunities. With regard to other assets it will be exactly the same model; we want to leverage up our unique capability of developing projects more efficiently and at a lower cost than everyone else. So we’ll be looking at development projects, and geographic diversification has always been a major part of our strategy.”

First Quantum jumped 61¢ following its 2012 financial report on March 6 before closing at $18.69 per share. The company has 476 million shares outstanding for an $8.9 billion market capitalization at the time of writing. First Quantum has traded within a 52-week range of $16.46 and $24.90 per share, and hit a first-quarter high of $22.17 in early January.