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First Quantum stands strong amid cost pressures

First Quantum’s Q2 EBITDA has come in below expectations and the company has indicated higher costs for the year while analyst remain upbeat about the global copper company’s prospects.
First Quantum stands strong amid cost pressures First Quantum stands strong amid cost pressures First Quantum stands strong amid cost pressures First Quantum stands strong amid cost pressures First Quantum stands strong amid cost pressures

First Quantum's Kansanshi

"While global inflationary pressures were present in the first quarter of this year, second quarter costs were further impacted by higher energy and commodity prices resulting from the conflict in Ukraine," First Quantum said in its Q2 results, which were released after market close on July 26.

"Costs for fuel, explosives, freight, mill balls, reagents and other consumables represent almost half of the company's operational production cost base and unit costs in these areas continued to increase throughout the second quarter and rose above levels assumed in current guidance," the Toronto Stock Exchange-listed company said.

Also impacted by lower production in Zambia, First Quantum's C1 cash costs rose to US$1.74 per pound in Q2, which was $0.13/lb higher than Q1. Guidance for 2022 stands at $1.45 to $1.60/lb.

National Bank of Canada Financial Markets said that while the Q2 C1 cash costs were in line with its forecasts, it expects the top end of the 2022 guidance range to be breached, tipping $1.61/lb.

BMO Capital Markets analyst Jackie Przybylowski noted First Quantum's results come early in the reporting season and the company's peers are facing similar issues.

"We expect the market response to commentary that costs are now anticipated at the high end of recently-revised guidance will be viewed negatively, but it's not yet clear that First Quantum will be impacted more than other miners," she said.

"Despite the headwinds, we see opportunities for optimism including strong operating performance at Cobre Panama, a strong and improving balance sheet, and a further derisking in Zambia with commencement of First Quantum's outstanding VAT claims," she said.

The company's EBITDA fell to $906 million in Q2, down from $1.18 billion in Q1.

It came in below consensus estimates of $1,007 million, and NBF's forecast of $1,020 million.

And First Quantum's adjusted earnings per share of $0.49 compared to NBF and consensus estimates of $0.62 and $0.49, respectively.

First Quantum's consolidated copper production in Q2 was 192,668, gold production was 74,959oz, and nickel production was 4,853t. These volumes were broadly in line with NBF's estimates.

The company left its copper production guidance for 2022 unchanged at 790,000-855,000t, while noting that Sentinel and Kansanshi are expected to be towards the lower end of their guidance ranges. NBF expects to see 805,000t.

First Quantum's share price is currently trading at around 20-month lows. It fell 2% day on day to C$19.11 (US$19.11) on July 26.

Przbylowski said while BMO maintains its "market perform" rating for First Quantum, it has lowered its one-year target price to C$35 from C$38 due to the higher cost pressures. NBF targets C$32.5.

First Quantum has a market capitalization of C$13.22 billion.