Don’t Try to Catch This Falling Knife: First Quantum Minerals Ltd.

Here’s why I think investors should avoid First Quantum Minerals Ltd. (TSX:FM).

| More on:
The Motley Fool

Softer commodities, in particular copper prices, have brought the spotlight firmly back on base metal miners with fears among investors that the outlook for commodities, including copper, can only worsen. This is bad news for Canada’s largest copper miner First Quantum Minerals Ltd. (TSX:FM), which has seen its share price crash to earth over the last six months, down a massive 54%.

The increasingly pessimistic outlook for copper and other commodities coupled with concerns over First Quantum’s financial condition saw its outlook recently downgraded.

So what?

Copper, which generates 65% of First Quantum’s revenue, recently touched a five-year low, triggering alarm bells among investors and analysts as to the state of the global economy. Such low prices have a significant impact on First Quantum and are a key driver of its decision to defer 2015 capital expenditures in order to preserve its balance sheet.

But the long-term outlook for First Quantum remains pessimistic.

The outlook for copper depends heavily on China, with the metal being a key component in manufacturing and housing construction. In fact, China is one of the world’s single largest consumers of copper. Yet investment in China’s housing sector continues to fall, with 2014 investment down by 10.5% in comparison to 2013.

Even more troubling is that the decline in China’s housing sector is expected to continue and this certainly doesn’t bode well for copper prices. Another concern is that China’s economy continues to slow, with 2014 GDP growth of 7.4%, the lowest level in two decades. Of greater concern, China’s GDP is expected to fall even further to 6.8% in 2015 and then 6.2% in 2016.

This certainly doesn’t bode well for growing copper demand. Declining consumer demand and industrial activity in the Eurozone is also a factor, with the economic region finding itself stuck in a deep economic slump.

The declining outlook for copper will have a deep impact on First Quantum’s financial performance and it appears unlikely the company will deliver any tangible improvements in the foreseeable future.

The uncertainty surrounding First Quantum’s financial position is also of considerable concern. The company has a mountain of debt totalling US$5.5 billion, with net debt a whopping 3.6 times cash flow. This indicates First Quantum is overleveraged and this is particularly worrying in an operating environment where earnings and cash flow will at best remain flat, or more than likely fall.

Now what?

While the consensus analyst outlook for First Quantum is a “buy” I believe it is a company investors should avoid. It is unlikely that First Quantum will be able to sustain any meaningful growth over the long term and the weakness of its balance sheet and flat cash flow growth is of considerable concern in such a difficult operating environment.

There are better investment opportunities offering far greater potential upside coupled with more consistent returns that are not as heavily exposed to the whims of commodity markets and the profound disruption in base metals demand we are now seeing.

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 Matt Smith has no position in any stocks mentioned.

More on Metals and Mining Stocks

Nuclear power station cooling tower
Metals and Mining Stocks

If You’d Invested $1,000 in Cameco Stock 5 Years Ago, This Is How Much You’d Have Now

Cameco (TSX:CCO) stock still looks undervalued, despite a 258% rally. Can the uranium miner deliver more capital gains to shareholders?

Read more »

Super sized rock trucks take a load of platinum rich rock into the crusher.
Stocks for Beginners

Cameco Stock and More: 3 TSX Commodity Titans to Watch in 2024

Cameco stock and these others will provide you with growth that goes beyond just a year or two, with all…

Read more »

Handwriting text writing Are You Ready For Tomorrow question. Concept meaning Preparation to the future Motivation Stand blackboard with white words behind blurry blue paper lobs woody floor.
Stocks for Beginners

3 Reasons to Buy Lundin Stock Like There’s No Tomorrow

Lundin stock (TSX:LUN) has been killing its production of copper and plans on blowing its records out of the water…

Read more »

Gold bars
Stocks for Beginners

TSX Materials in March 2024: The Best Stock to Buy Right Now

Materials have been quite volatile, though the price of gold has surged to all-time highs. That makes this stock a…

Read more »

Gold bars
Metals and Mining Stocks

Will Gold Stocks Rally in 2024?

Down almost 30% from all-time highs, Franco-Nevada is a gold mining stock trading at a discount to consensus price target…

Read more »

A miner down a mine shaft
Stocks for Beginners

Canadian Mining Stocks: Buy, Sell or Hold?

Canadian mining stocks have seemed like such a strong investment, but with shares down significantly this year, what should we…

Read more »

Gold king in chess game face with the another silver team on black background (Concept for company strategy, business victory or decision)
Stocks for Beginners

Great News for Gold Stock Investors!

Gold has hit an all-time high! Which is good news for some gold stocks, and really good news for others.

Read more »

Gold bullion on a chart
Metals and Mining Stocks

If Gold Prices Continue to Climb, These 3 Stocks Could Skyrocket

Market certainty and geopolitical tensions typically enhance the demand for gold, and this rise is reflected in a wide range…

Read more »