Should First Quantum Shareholders be Concerned?

There are numerous examples of shareholder value destroying mega-mergers in the mining world. First Quantum’s takeover of Inmet could be heading in that direction, already.

| More on:
The Motley Fool

The ink has barely dried on the mining world’s most recent mega-merger and already it looks like it could turn out to be a huge mistake.  Finalized near the end of March, First Quantum’s (TSX:FM) +$6 billion takeout of Inmet Mining (TSX:IMN) has created the largest copper focused miner in the world and what First Quantum expects will become a top 5 global copper producer by 2018.

By completing the relatively uncontested transaction, First Quantum was able to scoop one of the world’s great potential copper mines – the $6.2 billion Cobre Panama project.  The Cobre Panama copper deposit is massive, but contrary to what many a miner might have you believe, size doesn’t necessarily matter.  Details like revenues and expenses are what investors’ truly care about.

Uh-oh

And while First Quantum is confident it can cut costs from the existing Cobre Panama budget (believe it when you see it) the recent price performance of copper does not bode well for the top line of a company that just went all-in.

A Financial Times article out over the weekend indicated global copper production is rising at its fastest rate in a decade.  Wood Mackenzie, a leading consultancy, expects 2013 to see the biggest percentage increase in global mine production since 2004.

Demand for the metal, primarily from China which generates 40% of global demand, has been insatiable for a good chunk of the past decade.  Supply couldn’t keep up.

The thing about commodities however is that when you throw enough money at them, you tend to find more.  Billions have been poured into copper projects around the world and these projects are finally beginning to come on-line.  These projects are why supply is increasing at a faster rate than demand and the price of copper has declined by 28% from its 2011 high.

The scariest part of the supply/demand equation is that the copper price hasn’t fallen far enough to make producers scale back on production.  The price of approximately U$3.30/lb still compares favourably to the average production cost of about $2/lb.

Foolish Takeaway

Time will tell how this takeover plays out for First Quantum shareholders.  It could turn out that Inmet’s executives, who disapproved of the hostile bid, end up with the last laugh.  It wasn’t too long ago that Barrick Gold (TSX:ABX,NYSE:ABX) spent $7.3 billion on a copper asset that is now carried on the books for just $3.1 billion.  Should the price of copper continue on its current path, First Quantum shareholders may regret the day Cobre Panama came into their life.

If you’re looking for a commodity with a far more appealing supply/demand relationship than copper, look no further than uranium.  Supply is in fact being removed from the market just as demand is set to take-off!  Uranium has the potential to be the fuel that powers the 21st century and currently the market is completely ignoring it.  Click here now for instant access to our FREE report titled “Fuel Your Portfolio With This Energetic Commodity”.  We think you’ll be surprised just how bright the future is for uranium, just how far two Canadian names have fallen, AND how fast they could rebound. Click here now to access this free report, and hop on for the nuclear ride of your life.

Follow us on Twitter and Facebook for the latest in Foolish investing.

Fool contributor Iain Butler owns shares of Barrick Gold.  The Motley Fool has no positions in the stocks mentioned above.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

More on Investing

A worker gives a business presentation.
Dividend Stocks

TSX Communications in April 2024: The Best Stocks to Buy Right Now

Here are two of the best TSX communication stocks you can buy in April 2024 and hold for years to…

Read more »

Man holding magnifying glass over a document
Tech Stocks

Watching This 1 Key Metric Could Help You Beat the Stock Market

One key metric that Buffett looks at is the return on equity. Here's why you should watch it.

Read more »

Man considering whether to sell or buy
Dividend Stocks

Royal Bank of Canada Stock: Buy, Sell, or Hold?

Royal Bank of Canada (TSX:RY) has a high dividend yield. Should you buy it?

Read more »

oil tank at night
Energy Stocks

Is Suncor a Buy, Sell, or Hold?

Suncor Energy stock is off to a strong start in 2024. Is the TSX energy stock a good buy right…

Read more »

Daffodils in bloom
Tech Stocks

2 Best “Magnificent Seven” Stocks to Buy in April

Two surging mega-cap tech stocks are the best buys among the “Magnificent Seven” this April.

Read more »

A golden egg in a nest
Stocks for Beginners

Got $5,000? 5 Stocks to Buy for Lasting Wealth

Got $5,000 to build a long-term compounding stock portfolio? Here are five top Canadian stocks to building lasting lifetime wealth.

Read more »

Businessman looking at a red arrow crashing through the floor
Dividend Stocks

BCE’s Stock Price Has Fallen to its 10-Year Low of $44: How Low Can it Go?

BCE stock price has dipped 39% in two years and shows no signs of growth in the next few months.…

Read more »

Dollar symbol and Canadian flag on keyboard
Dividend Stocks

Invest $10,000 in This Dividend Stock for $3,974.80 in Passive Income

This dividend stock gives you far more passive income than just from dividends alone, so consider it if you want…

Read more »