Is This the Best Miner to Cash in on Higher Base Metal Prices?

Cash in on firmer copper and the improving outlook for the global economy by investing in First Quantum Minerals Ltd. (TSX:FM).

| More on:
A miner down a mine shaft

Image source: Getty Images.

The prolonged slump in base metals came to an abrupt halt in late 2016 when growing demand coupled with supply constraints pushed metals such as iron ore, steel, copper, nickel, and zinc higher. While prices for iron ore and steel have softened the outlook for copper, zinc and nickel remains optimistic. The future for copper is upbeat because of increased industrial demand primarily from China, where manufacturing activity continues to expand.

You see, because of its conductive qualities, copper is an integral element used in many industrial applications. It is also widely used in construction, and the renewed focus by Beijing on stimulating growth by investing in critical infrastructure will push copper consumption higher. This is all good news for Canadian metals miner First Quantum Minerals Ltd. (TSX:FM). 

Now what?

First, Quantum derives the majority of its earnings from mining copper, with the remainder coming from gold. The miner has seven operational mines and four development stage projects, including the massive Cobre Panama mine, which is expected to start production in 2018 and ramp up to full commercial operations by 2020. That mine will give First Quantum’s production a significant lift, adding up to 300,000 tonnes of copper annually by 2020 to the miner’s total output.

For the first quarter 2018, copper production grew by 10% year over year to 145,358 tons, while cash costs per pound produced remained flat compared to a year earlier and were 2% lower compared to the previous quarter. Those solid results coupled with higher copper prices, which saw an average realized price of US$2.74 per pound compared to US$2.20 a year earlier, gave First Quantum’s bottom-line a healthy bump. The miner’s net income for the quarter was US$47 million compared to a loss of US$114 million a year earlier, while comparative EBITDA shot up by an impressive 38% year over year.

Quantum’s bottom line will likely continue to grow during 2018 and into 2019 because annual production is expected to expand by 3% and 4%, respectively, when compared to 2017. Gold production will also grow during those years, but only marginally. This bodes well for increased revenue and a stronger bottom line performance, particularly in an operating environment where copper prices are firming.

Another appealing element of First Quantum is that it continues to maintain a solid balance sheet with considerable liquidity. At the end of the first quarter, the miner was in compliance with its financial covenants, with US$810 million of cash on hand along with almost US$1.7 billion in undrawn credit facilities.

Nonetheless, like any miner operating in developing nations, First Quantum is experiencing its share of problems. It is embroiled in a legal wrangle as well as a taxation dispute in Zambia with no end in sight for either. The taxation dispute is somewhat worrying, as it has a potential quantum of US$8 billion once penalties and interest are included. However, First Quantum remains determined to dispute the Zambia Revenue Authority’s initial finding and is negotiating with said authority. 

So what?

First Quantum is an attractive play on higher copper and other metals prices. Its strong balance sheet, ample liquidity, and quality operations combined with higher copper means that its earnings will grow, especially once the Cobre Panama project comes online later this year.

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

Metals and Mining Stocks

Better Metals Buy: Gold Stocks vs. Lithium Stocks

Gold is the evergreen choice as a hedge against inflation and weak markets. In contrast, battery metals may offer unique…

Read more »

tsx today
Metals and Mining Stocks

TSX Today: What to Watch for in Stocks on Wednesday, March 22

The Federal Reserve’s interest rate decision and economic projections are likely to keep the TSX highly volatile today.

Read more »

gold stocks gold mining
Metals and Mining Stocks

Gold Stocks Are Gaining Steam: Are They a Buy at Current Prices?

Gold stocks will likely steal the limelight this year, making up for their last year's underperformance.

Read more »

edit Sale sign, value, discount
Energy Stocks

2 Cheap Canadian Stocks You Can Buy for Less Than $50

You can buy Suncor Energy stock, and this gold stock at cheap valuations today

Read more »

A golden egg in a nest
Bank Stocks

How to Protect Your Retirement Portfolio From a Banking Crisis

The US banking crisis has created a market sell-off. Know how safe your money is and protect your retirement portfolio…

Read more »

Initial Public Offering (IPO) concept image, businessman selecting stock trading interface
Metals and Mining Stocks

Lithium Royalty IPO: Is it the Best Way to Invest in Lithium?

Lithium Royal stock went public on the TSX after it raised $150 million via an IPO. Is LIRC stock a…

Read more »

gold stocks gold mining
Tech Stocks

These Stocks Are Half-Priced, But Are They Actually Worth Buying?

Two top growth stocks have fallen by 50% in the last 12 months, and only one of them is worth…

Read more »

tsx today
Metals and Mining Stocks

TSX Today: What to Watch for in Stocks on Thursday, March 2

Macroeconomic concerns and more corporate earnings could continue to keep TSX stocks volatile today.

Read more »