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Summary
- By 2018, First Quantum will move into fourth place amongst the world’s copper miners, and may challenge for first place before the end of this decade.
- Shares have recently dropped about 15% after second quarter results narrowly missing expectations due mostly one time costs.
- The recent price drop presents an opportunity for a long-term investment in a well managed and growing company.
Q2 results published earlier this month by First Quantum (OTCPK:FQVLF) showed an increase in production and increased earnings, but came in slightly below analyst expectations due mostly to an increase in operating costs in the Zambian copper mining operations. Following this narrow miss, the share price has dropped by about 15%.
However, increases in operating costs in the Zambian operations were a one-time expense, and those costs are expected to drop further when the Kansanshi copper smelter starts production at the end of this year. Investors should take this as a good opportunity to buy into one of the best managed and fastest growing companies in the base metals industry.
Zambian Operations
The reasons behind the increased operating costs in Zambia were related to the constraints under which the mines have to operate because of a lack of suitable processing facilities in Zambia.
The Zambian operations, which account for a major portion of First Quantum’s production, include both oxide and sulphide ores. Oxides are normally processed by high pressure leaching using sulphuric acid, followed by solvent extraction and electro-winning. Sulphides are processed by smelting, which is done at one or more Zambian smelters owned by other companies. Exporting of concentrate from Zambia to smelters in other parts of the world is possible but is prohibitively expensive due to high transportation costs and a tax on export of unprocessed copper.
However, there is not enough smelting capacity in Zambia to process all of the production from several mines in the copper belt area. This places a constraint on production at First Quantum’s Kansanshi mine. In the first quarter of this year, about 170,000 tonnes of sulphide concentrates had to be stockpiled because of a lack of smelting capacity. In the second quarter, First Quantum altered its mining plans to increase the mining of oxide ore and reduce the mining of sulphide ore. This new mining plan has allowed First Quantum to maintain production without increasing the size of the sulphide concentrate stockpile. However, the change in mining plan required an increase in operating costs associated with moving a large waste dump.
There is also a constraint on processing of the oxide ore. The leaching process requires large volumes of sulphuric acid, which is either purchased from one of the Zambian smelters, or produced by burning of sulphur in First Quantum’s own acid plant. The capacity of that acid plant and the availability of sulphuric acid from the other smelters place a limit on how much oxide ore can be processed.
