Pat McKeough responds to many requests from members of his Inner Circle for advice on specific stocks, as well as questions on investment strategy and the economy. Every week, his comments and recommendations on the most intriguing questions of the past week go out to all Inner Circle members. And each week we offer you a report on one of the stocks profiled in these Q&A sessions. Beginning this week, we give you Pat’s buy-hold-sell recommendation as well as his analysis of the stock. This is part of our new approach offering you regular and specific buy, hold and sell advice in our daily posts. Every week you’ll get “A Stock to Sell” on Monday, “Best Canadian Stocks” on Tuesday, and “Our Top U.S. Stocks” on Thursday.
This week an Inner Circle member asked us about an acquisition by the largest of Canada’s copper stocks. First Quantum Minerals became the leading Canadian copper producer with its 2013 acquisition of Inmet Mining. Now it is making a major acquisition in Argentina. Pat assesses the company’s projected production from the Taca Taca deposit, as well as the considerable political risk of doing business in financially troubled Argentina.
Q: Hi Pat: I’d like to know what you think of First Quantum Minerals. They are in the process of acquiring Lumina Copper, which I own. As always, thank you for your valuable input.
A: First Quantum Minerals, $24.72, symbol FM on Toronto (Shares outstanding: 590.8 million; Market cap: $14.6 billion; www.first-quantum.com), became Canada’s biggest copper producer after its April 2013 acquisition of Inmet Mining.
The company now operates seven mines and five development projects worldwide. It produces copper, nickel, gold, zinc and platinum group metals.
The Inmet acquisition included the Cobre Panama copper project in Panama. Inmet had estimated a cost of $6.4 billion to build an open-pit mine at the site. However, First Quantum believes it can do so faster and cheaper than Inmet’s estimates. Planning is now underway, and first production could come as soon as 2017.
In the three months ended June 30, 2014, First Quantum’s revenue rose 8.7%, to $945.1 million from $869.3 million a year earlier (all amounts except share price and market cap in U.S. dollars). Earnings per share gained 27.8%, to $0.23 from $0.18.
Taca Taca deposit could hold 28 billion ounces of copper and 7 million ounces of gold
First Quantum borrowed about half the $5 billion it paid for Inmet. Its debt now stands at $5.0 billion, or a manageable 34.2% of its market cap. The company should be able to keep generating strong cash flow, even at today’s lower metal prices, which should let it pay down its debt.
The company is now buying Lumina Copper (symbol LCC on Toronto) for $433 million in cash and shares. Lumina’s Taca Taca copper/gold/molybdenum deposit in Argentina could hold as much as 28 billion pounds of copper and 7.1 million ounces of gold.
Lumina started looking for a buyer two years ago, as Argentina fell out of favour with some foreign investors after the country expropriated Spanish oil producer YPF SA.
The company is forecast to report cash flow of $2.38 a share in 2014. That could rise as high as $3.22 next year. The stock trades at 10.4 times this year’s forecast and 7.7 times next year’s estimate.
We view First Quantum Minerals as a hold for highly aggressive investors only.
Last week’s Question and Answer on Stocks featured the world’s largest MacDonald’s franchisee. If you missed it, you can see the article here.
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Pat McKeough responds to many requests from members of his Inner Circle for advice on specific stocks, as well as questions on investment strategy and the economy. Every week, his comments and recommendations on the most intriguing questions of the past week go out to all Inner Circle members. And each week we offer you a report on one of the stocks profiled in these Q&A sessions. Beginning this week, we give you Pat’s buy-hold-sell recommendation as well as his analysis of the stock. This is part of our new approach offering you regular and specific buy, hold and sell advice in our daily posts. Every week you’ll get “A Stock to Sell” on Monday, “Best Canadian Stocks” on Tuesday, and “Our Top U.S. Stocks” on Thursday.
