2 Reasons to Avoid First Quantum Minerals Ltd, and 1 Stock to Buy Instead

First Quantum Minerals Ltd (TSX:FM) has a track record like no other mining company in Canada. But there are still better options for your portfolio.

| More on:
The Motley Fool

Of all the mining companies in Canada, or perhaps even the world, none have a better track record than First Quantum Minerals Ltd (TSX: FM). Over the past 15 years, it has developed a reputation for buying assets very cheaply, and developing them within budget. These two traits are very rarely found in the mining industry.

Shareholders have clearly benefited along the way, with First Quantum shares returning 38% per year for the past 15 years. But there are still reasons to avoid the company, and two of them are detailed below. Then we show you a mining stock you should buy instead.

2 reasons to avoid First Quantum

1. Geopolitical risk

Let’s take a look at where some of First Quantum’s mines are located. The flagship mine for so many years has been Kansanshi, which is in Zambia. The company also has a big mine in Mauritania. Both of these countries have had their issues in the past. And First Quantum has been burned badly by geopolitical risk before – back in 2010, the company lost its mines in the Democratic Republic of the Congo to a government seizure.

Other countries have their own issues. For example, First Quantum inherited the Cobre Panama project when it acquired Inmet Mining in early 2013. And while Panama is a healthy country and a strong democratic government, costs could be an issue – the Panama Canal is being extended, putting a big strain on the company’s workforce. If there are any delays in that project, First Quantum could pay through the roof to develop its mine.

2. Issues with copper

First Quantum made nearly three quarters of its income from copper last year, and this is a market that has its concerns.

On the demand side, weakness in the China growth story is a big problem. And many observers believe the situation in that country will get much worse. In a recent interview with Charlie Rose, short-seller Jim Chanos explained thoroughly why he’s betting against China. And how is he making that bet? By shorting companies that rely on China as a customer, such as miners.

Meanwhile, copper mine supply has not slowed down, having increased every year since 2010. As a result, the industry is in surplus, which even First Quantum acknowledges. At this point, it’s hard to tell when that will end.

1 stock to buy instead: Goldcorp

If you’re thinking of buying First Quantum, you’re clearly looking for a first-class operator. And over on the gold side, that company is without a doubt Goldcorp Inc (TSX: G)(NYSE: GG).

Unlike many of its peers, Goldcorp has done a fabulous job over the years. It has not gotten carried away in pursuit of growth, and does not have an overstretched balance sheet. And unlike First Quantum, Goldcorp operates in relatively safe geographies like Canada, the United States, Mexico, and Chile.

Better yet, gold is not subject to the same China concerns that copper is. And many other gold producers are cutting back, which eventually could put gold supply under some serious downward pressure.

Goldcorp may not often be thought of as a substitute for First Quantum. But as can be seen above, it should be.

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 position in any stocks mentioned.

More on Investing

Smiling diverse couple holding Christmas presents while walking through a winter forest

3 Dirt-Cheap TSX Stocks I’d Snatch Up Before the Holidays

Canadians should look to snatch up dirt-cheap TSX stocks like Park Lawn (TSX:PLC) and others before the holidays.

Read more »

eat food

Goodfood Stock Doubles Within Days: Time to Buy?

Goodfood (TSX:FOOD) stock has surged 125% in the last few weeks, so what happened, and should investors hop back on…

Read more »

A worker uses the cloud for paperless work. tech

Brookfield Asset Management Spin-Off: What Investors Need to Know

The current company is changing its name to Brookfield Corporation, and it will issue shares of a newly created asset…

Read more »

Investor wonders if it's safe to buy stocks now
Bank Stocks

Should You Buy CIBC Stock Now?

CIBC stock looks cheap. Is it a good buy today, or is more downside on the way?

Read more »

A meter measures energy use.
Dividend Stocks

3 Utility Stocks That Are Too Cheap to Ignore

Some utility stocks are priced too low to overlook. Here are three stellar options that every investor should consider buying…

Read more »

stock research, analyze data
Dividend Stocks

Rogers Stock Rose 10% in November: Is it a Buy Today?

Which is a better in the Canadian telecom sector: BCE or Rogers stock?

Read more »


Magna Stock Rose 9% in November: Is it a Buy Today?

Here's why Magna (TSX:MG) stock may be a solid bet in this difficult macroeconomic environment right now.

Read more »

stock data
Tech Stocks

If I Could Only Buy 1 Stock Before 2023, This Would Be It

This stock is the one company that really doesn't deserve its ultra-low share price, so I'll definitely pick it up…

Read more »