Base metals were hardly the talk of the investing community in recent years due to a multiple of factors including diminishing demand. For the long-term investor, this lack of interest might present an opportunity to buy at an attractive price.
Listed below are three reasons why I think First Quantum Minerals Limited (TSX: FM) belongs in your portfolio.
1. Great operator
The recent headwinds for miners have been challenging to say the least. Companies have had to sell mines at substantial discounts to fair value just to keep their heads above water. This storm was caused by a mix of unsustainable price increases and undisciplined investments from certain miners.
However, First Quantum has been cautious and invested in great assets that should bear fruit in the future.
Rarely have its projects exceeded cost estimates — quite a feat in this industry — nor has management paid unreasonable prices for assets. This is demonstrated by the low net debt of $3.35 billion and $1.43 cash cost per lbs of copper as of 2013. Both of these metrics are expected to go up, albeit slightly for 2014 while still staying at the bottom range of its peers.
2. Exposure to the industrial sector *
While First Quantum produces the majority of its revenues from copper—producing 412 281 tonnes in 2013–it also has exposure to additional industrial metals like zinc and to a lesser extent silver.
Copper is renowned to be used in a myriad of industrial uses—mainly construction–silver is less known, but the application for silver will only go up in the future in part because it is the best electrical conductor known to man at the moment. You can find traces of silver in every smartphones, tablets, personal computers and even solar panels.
In 2013, the company acquired Inmet Mining Corporation and at the same time acquired the Cobre Panama project. Previously, Inmet Mining Corporation had struck a deal with Franco-Nevada Corporation (TSX: FNV)(NYSE: FNV) to sell the gold and silver extracted from the mine in exchange for financing. While not as substantial as the copper reserves the Cobre Panama project will bring to the company, having a well-diversified stream of income from different metals should be beneficial. The Cobre Panama mine is scheduled to become operational in the fourth quarter of 2017 if everything goes according to plan.
3. Haquira deposit
The Haquira deposit in Peru contains one of the largest unexploited copper deposits in the world. First Quantum began work in 2014, but mine development has been put on hold to better manage population relocation and environmental care.
The Haquira deposit is estimated to hold in excess of 2 billion tonnes of copper, so while news of the stoppage is not ideal, making sure that the local population is treated fairly is the right thing to do for the long term.
The bottom line
Base metal miners might not be the talk of the town right now, but the world’s economy is slowly getting back on its feet. Consumers around the developed world should start spending again while the emerging markets will need to continue investing in strategic infrastructure to keep up with the growth of their economies. Both of these factors will indirectly benefit the company.
There is value to be found in First Quantum Limited for the long-term investor.
* Editors note: A previous version of this post contained some erroneous production information in section 2. We apologize for any issues this may have caused.
