Cobre Panamá Uncertainty And Rising Zambian Costs Will Pressure Margins And Future Cash Flows

Catalysts

About First Quantum Minerals

First Quantum Minerals is a global mining company focused on producing copper, nickel and gold from operations in Zambia, Panama, Turkey, Finland and other jurisdictions.

What are the underlying business or industry changes driving this perspective?

• The dependence on a constructive resolution for Cobre Panamá, within the context of a government led environmental audit and a new agreement that recognizes both national resource ownership and the company’s US$10b investment, could result in a lengthy restart process. This would delay a return of that operation’s contribution to revenue, EBITDA and working capital.
• The transition at Kansanshi S3 from current commissioning benefits to processing lower grade stockpiles before accessing higher grade ore later in the decade introduces a period where throughput may rise but unit costs could be elevated. This would pressure net margins even as reported copper tonnes remain within guidance ranges.
• The reliance on Zambia as a cornerstone jurisdiction, while the Zambian kwacha has strengthened and local royalty and power costs are highlighted as rising influences, leaves group wide C1 and all in costs sensitive to further domestic policy or currency moves. This could constrain future earnings even if volumes hold within stated guidance.
• The increased use of streams and long dated unsecured notes, including the US$1b gold stream and US$1b in 2034 notes, trades future by product and cash flow flexibility for current liquidity. This may limit upside to free cash flow and constrain options for funding large projects from internal cash generation if operating conditions become less favorable.
• The ambition to progress large projects such as Taca Taca in Argentina at a time when the company itself highlights industry wide capital intensity pressure and a higher cost of capital means any future build decision could require substantial additional capital. This would increase execution and cost overrun risk that would directly affect future capex needs, leverage and potential earnings volatility.

Assumptions

How have these above catalysts been quantified?

• This narrative explores a more pessimistic perspective on First Quantum Minerals compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming First Quantum Minerals's revenue will grow by 13.6% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from -3.7% today to 19.0% in 3 years time.
• The bearish analysts expect earnings to reach $1.5 billion (and earnings per share of $1.8) by about July 2029, up from -$201.0 million today. However, there is some disagreement amongst the analysts with the more bullish ones expecting earnings as high as $6.5 billion.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 20.0x on those 2029 earnings, up from -113.7x today. This future PE is greater than the current PE for the GB Metals and Mining industry at 14.5x.
• The bearish analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.55%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• The continued focus on strengthening the balance sheet, including the US$1b gold stream, US$1b of 2034 notes and US$2.3b of liquidity, gives First Quantum more room to absorb setbacks and still fund operations. This could support earnings, interest coverage and free cash flow rather than pressure them.
• The Kansanshi S3 expansion has been completed under its US$1.25b budget and is ramping up ahead of internal expectations. It is intended to move Kansanshi back above 200,000 tonnes of annual copper output over time, which could provide a long term lift to revenue and support better net margins if costs are contained.
• The company highlights that its major recent projects, including Kansanshi S3, Cobre Panamá and Sentinel, were built at capital intensities below the industry levels it cites. If this pattern continues at future projects such as Taca Taca, it could limit future capex per tonne and support returns on invested capital and earnings.
• Management reports quarter over quarter progress in production across Sentinel, Kansanshi and Enterprise with 2025 copper production guidance of 390,000 to 410,000 tonnes and narrowed cost guidance. If this is maintained, it could support stable or higher revenue and help protect operating margins despite cost and currency headwinds.
• At Cobre Panamá, the government-approved preservation and safe management plan, restart work on the power plant and the initiation of an environmental audit by an international firm create a pathway to a potential long term resolution. If such a resolution is reached, it could eventually restore a large contributor to EBITDA, revenue and working capital.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The assumed bearish price target for First Quantum Minerals is CA$40.73, which represents up to two standard deviations below the consensus price target of CA$47.62. This valuation is based on what can be assumed as the expectations of First Quantum Minerals's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of CA$54.93, and the most bearish reporting a price target of just CA$40.73.
• In order for you to agree with the more bearish analyst cohort, you'd need to believe that by 2029, revenues will be $8.0 billion, earnings will come to $1.5 billion, and it would be trading on a PE ratio of 20.0x, assuming you use a discount rate of 8.5%.
• Given the current share price of CA$39.11, the analyst price target of CA$40.73 is 4.0% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.