Investing in mining companies can be tough sledding for many investors. This is a space that’s inherently filled with promoters, a host of dubious characters, and plenty of scams throughout history that can turn plenty of investors off. But for those looking to gain exposure to metals (including precious metals), First Quantum Minerals (TSX: FM) remains a top option for investors to consider.
Now, this stock is down considerably over the past year, losing roughly 45% of its value over this timeframe. Much of this appears to be due to profitability metrics that have turned negative, as the company continues to invest in ramping up its operations. Let’s dive into what to make of this move, and whether this stock is a buy right now.
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Fundamentals improving
Despite reporting a net loss of $0.06 per share on revenue that declined on a year-over-year basis, First Quantum did see some positive improvements in its Q2 results. The company noted gross profit of US$333 million, which was actually up on a year-over-year basis. This indicates the copper miner is becoming increasingly focused on controlling its costs and bringing its cash flow statement into the green.
The company did bring in net cash from operating activities of US$397 million during the quarter, which was accompanied by US$134 million in net cash from financing activity. Thus, this is a still a company that’s adding debt to its balance sheet.
But that debt is being used to finance the construction of its Taca Taca project copper mine in Argentina, a $3.5 billion project according to its most recent estimates.
Copper prices and prices of other base metals, which First Quantum focuses on, haven’t helped the company’s case as of yet. However, if we do see these metals turn around (alongside expectations of stronger global growth), this is a company that could be positioned for upside from its current depressed levels.
So, is First Quantum a buy?
In my view, this is a mining stock that probably carries too much risk right now. There are various macro factors outside of the company’s control (most notably commodity prices) that have the potential to derail the company’s balance sheet further. It’s worth noting that First Quantum’s fundamental deterioration (outside of a positive surprise with its gross margins) indicates that investing heavily in production may be the last thing investors want to see. Given the stock’s move over the past year, this appears to be the case.
For now, I’d remain cautious with this name. But if we do see copper and other base metals start to break out, I think this stock could have amplified upside and may be one worth keeping on the watch list for this reason.
