Why Did First Quantum Minerals Ltd. Rally 52% in Just 2 Days?

First Quantum Minerals Ltd. (TSX:FM) has turned into a levered play on copper.

| More on:
The Motley Fool

The past few years have not been kind to shareholders of First Quantum Minerals Ltd. (TSX:FM). The stock traded in the high $20s back in 2011, but since then falling copper prices have severely hurt the company’s prospects. By early February the stock had sunk below $3.

Then over the next couple of days, the company’s shares rocketed up by 52%. Of course, this is little consolation for long-term shareholders, but was very profitable for anyone with perfect timing.

So what exactly caused this rally, and is it too late to get in?

Some background

First Quantum has long been regarded as one of the mining industry’s best performers. To be more specific, the company has been very good at buying mines for reasonable prices and then developing them on budget.

First Quantum also had some very ambitious growth plans. The company completed a $5.1 billion acquisition of Inmet Mining in early 2013, securing a massive copper project in Panama (appropriately named Cobre Panama).

When copper prices were healthy and rising, this was all well and good. But as copper prices have plunged, First Quantum has clearly gotten ahead of itself. The company even had to do a massive equity raise last year to cover a funding gap.

Fast forward to today and First Quantum is struggling with its balance sheet. To illustrate how bad the situation has gotten, Moody’s downgraded the company’s debt further into junk status, while there are “significant challenges the company faces in materially lowering its leverage.”

This dire situation has made First Quantum very reliant on higher copper prices. So when the price of copper does increase, the stock reacts forcefully.

A respite for copper

The rally in First Quantum’s shares wasn’t caused by any company-specific news. Instead, copper rallied thanks to some positive economic news from China and a weakening U.S. dollar. Other copper miners also saw their shares gain, although not as much as First Quantum did.

Too risky at this point

The price of copper is overwhelmingly dependent on the Chinese economy, which means that First Quantum is essentially a bet on China.

This is an extremely risky bet to make. We all know that China’s growth has slowed in recent years, and there are some serious concerns about the country, including its overreliance on debt. If China’s economy falters, First Quantum could find itself short of capital once again, and that would be devastating for its shareholders. Your best bet is to look elsewhere.

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 Metals and Mining Stocks

A stock price graph showing growth over time
Metals and Mining Stocks

Why Cameco Stock Soared 23% This Year

Cameco stock continues to ride high on strong supply/demand fundamentals and growing momentum in the nuclear industry.

Read more »

growing plant shoots on stacked coins
Stocks for Beginners

1 Copper Stock to Buy as Copper Prices Shine

The price of copper continues to climb, and more copper production is on the way for this top stock up…

Read more »

silver metal
Metals and Mining Stocks

Buy the Dip: 1 Dividend Stock Due to Shine

This dividend stock's dividend just rose higher as the price of silver dropped, but don't let that scare you off…

Read more »

risk/reward
Metals and Mining Stocks

Iron Stomach? 2 Riskier Stocks That Could Pay Off Big Time in the Future

Two TSX stocks could deliver greater earnings to investors with higher risk appetites.

Read more »

Gold bullion on a chart
Metals and Mining Stocks

This Gold Stock Just Dipped 5%: Time to Buy?

This gold stock has been rising higher and higher but recently went through a 5% dip in share price. So,…

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

Pan American Silver: Buy, Sell, or Hold?

PAAS stock (TSX:PAAS) is up 44% in the last year alone! But it's not all down to the rise in…

Read more »

Nuclear power station cooling tower
Metals and Mining Stocks

1 Canadian Mining Stock Worth a Long-Term Investment

Strong fundamentals should continue to boost Cameco stock's long-term outlook, as the nuclear industry's momentum continues.

Read more »

Super sized rock trucks take a load of platinum rich rock into the crusher.
Metals and Mining Stocks

Lundin Mining Stock: Buy, Sell, or Hold?

Lundin (TSX:LUN) stock saw its shares surge this last year with the price of copper, and more strong guidance could…

Read more »