The Stock Picker’s Guide to First Quantum for 2014

Management has a great track record. Is that worth paying for?

The Motley Fool

When it comes to Canadian miners, very few companies have done as good a job of creating value for shareholders as copper miner First Quantum Minerals (TSX:FM). While the common theme in this sector seems to be poorly timed acquisitions, steep cost overruns, and dramatic write-downs, First Quantum has bucked the trend.

The company prides itself on its strategy of keeping most of its mine development operations in-house, rather than outsourcing the bulk of the work to engineering firms, and its track record speaks for itself. From 2000-2011, production grew 21% per year but much more importantly shareholder returns were 32% per year, well ahead of its peers.

First Quantum is best-known as a copper producer in Africa, but also has operating mines in Europe and Australia. The company has had plans to continue growing rapidly and become one of the world’s largest copper producers.

Yet it was still a big surprise when First Quantum launched a hostile takeover attempt for Inmet Mining in late November 2012. After sweetening the bid slightly to $5.1 billion, the bid was ultimately accepted by Inmet’s shareholders the following year.

The takeover gave First Quantum the Cobre Panama project, a massive undertaking that Inmet estimated would cost $6.2 billion to develop. During the takeover process, First Quantum claimed it could develop the project for up to $1 billion less, and after the bid was successful, the company shut down the project for review. The results were revealed just last week.

Surprisingly First Quantum actually raised the cost estimate for Cobre Panama to $6.4 billion, and also announced the project would take longer to complete than originally expected. On the bright side, the company also raised the annual production forecast by 20%. Analysts generally reacted positively to the news.

The events of last week are a perfect example of how First Quantum is perceived by analysts and investors. In today’s mining environment, most announcements of cost overruns and project delays would not be well-received, even if production estimates were raised at the same time.

In fact, First Quantum and its investors have not been as badly burned in today’s environment as other miners. Over the last two years, First Quantum shares are down 16%. Meanwhile Canada’s largest base metals miner, Teck Resources (TSX:TCK.B)(NYSE:TCK) is down by 57% over the same time period. Other large copper miners Hudbay Minerals Inc (TSX:HBM)(NYSE:HBM) and Lundin Mining Corp (TSX:LUN) have fallen by 50% and 37% respectively.

Such is the conundrum that investors face in every sector. Is it wise to pay a little more for a company with a better track record? Or would it be better to go after a more troubled company, in the hopes of scoring a bargain?

Investing in First Quantum clearly requires having faith that its management will continue to execute as they have done in the past. But if that happens, then the higher stock price will be well worth paying.

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.

Fool contributor Benjamin Sinclair has no positions in any of the stocks mentioned in this article.

More on Investing

Retirement
Investing

Got $5,000? Buy and Hold These 3 Value Stocks for Years

Given their solid underlying businesses, healthy growth prospects, and attractive valuation, I am bullish on these three value stocks.

Read more »

money cash dividends
Stocks for Beginners

Got $1,000 to Invest in Stocks? Put It in This Index Fund

This low-cost beginner-friendly ETF is a great way to invest $1,000.

Read more »

Overhead shot of young adults using technology at a table
Tech Stocks

3 Cheap Tech Stocks to Buy Right Now

Given their long-term growth prospects and discounted stock prices, I am bullish on these tech stocks.

Read more »

money cash dividends
Dividend Stocks

Have $500? 2 Absurdly Cheap Stocks Long-Term Investors Should Buy Right Now

Want some absurdly cheap stocks for your portfolio? Here are two options trading at a huge discount right now.

Read more »

Gas pipelines
Dividend Stocks

TFSA Passive Income: Is Enbridge Stock a Buy, Sell, or Hold?

Enbridge now offers a yield near 8%. Is the dividend safe?

Read more »

A worker uses the cloud for paperless work. tech
Tech Stocks

Wanna Beat the Market? Try These 2 Tech Stocks That Look Undervalued Today

Here's why undervalued TSX stocks such as Vitalhub can help you generate outsized gains in the next 12 months.

Read more »

Redwood trees stretch up to the sunlight.
Tech Stocks

These 3 Magnificent Stocks Keep Driving Higher

Constellation Software, Dollarama and another TSX stock have consistently generated positive investment returns. Here’s why they belong in your retirement…

Read more »

sale discount best price
Dividend Stocks

3 Stocks to Buy While They Are on Sale

Top TSX dividend stocks are trading at discounted prices.

Read more »