Copper-gold miner First Quantum now goes for nickel

First Quantum, the Canadian-based copper-gold miner with its principal operations in Africa and which  is anticipating output this year of 380,000 tons of copper and 205,000 ounces of gold, has been on the boil in the past few weeks, with three announcements that strengthen its position on the continent, and diversify it into nickel production, in Finland and Australia.

The stock already ranks as a premier mid-tier miner, in recognition of its canny management, and its ability to move quickly, even opportunistically, when circumstances permit.

The group owns and operates 80% of the Kansanshi copper-gold mine in Zambia ("a foundation asset"), 95% of Frontier in the Democratic Republic of the Congo, the group's newest mine, and 80% of the Guelb Moghrein gold-copper mine in Mauritania.

The recent diversification will bring benefits, not least a dilution of political risk. First Quantum may be the biggest miner in the central African copperbelt, and insistent that it is compliant with the DRC's Mining Code, but in a September announcement it confirmed suspension of work at the 65%-complete USD 600m Kolwezi tailings project, after it was shuttered by government agents. Issues over the project remain unresolved, but First Quantum is standing its ground.

Elsewhere, it has been business as unusual. On 23 November 2009, First Quantum announced that it would acquire London-listed Kiwara for USD 260m, in a mixture of cash and 1.88m new First Quantum shares. Kiwara's asset is a controlling interest in mineral prospecting licence 267, covering 2,850 km² on the periphery of the Kabombo Dome in Zambia.

On 30 November, First Quantum announced the go ahead for the Kevitsa, Finland project, with a capital cost of USD 400m and first production anticipated for 2012. The mine will produce a cocktail of concentrates, with metals that include copper and gold, led by nickel.

On 8 December First Quantum announced the USD 340m acquisition of Ravensthorpe, Australia from BHP Billiton (ASX: BHP). Ravensthorpe, approved in March 2004, was built at a cost of USD 2.1bn but operations were suspended in January this year, following the precipitous decline in nickel prices, long among the most volatile of any commodity. From highs close to USD 25.00/lb in 2007, nickel fell to nearly USD 4.00/lb within the past year, and has since recovered to over USD 7.00/lb.

There are two main facets to the potential value in Ravensthorpe. First, as BHP Billiton CEO Marius Kloppers has repeatedly said, the world's biggest resources group focuses on Tier I assets. Ravensthorpe may have fallen from that category based on price considerations, but the mine's fundamental and infrastructural values remain intact.

First Quantum anticipates average annual production of about 39,000 tonnes of nickel for the first five years, after restart, and average annual production of 28,000 tonnes over the expected life of mine of 32 years. Cobalt will also be produced.

The second aspect to consider is the particular management style that has been developed by First Quantum. The group ranks as the pioneer miner in reenergizing the Central African Copperbelt, which extends some 500km through Zambia and into the DRC's Katanga province, with a width of around 50km. In 1996 First Quantum acquired Zambia's Bwana Mkubwa, worked on and off since discovery in 1902, as an operation that would exhaust its own ore reserves by mid-2002.

First Quantum started mining at Lonshi, just over the DRC border, in August 2001; a 36km laterite road was built to haul ore from Lonshi to Bwana Mkubwa, near Ndola. The Lonshi orebody was mined out during 2008, by which time First Quantum had graduated into a serious miner.

First Quantum's group copper production has grown from 29,500 tonnes in 2003, all from Bwana/Lonshi, to this year's expected 380,000 tonnes. Group gold production, which started out at a modest 14,300 ounces in 2005, is set to top 200,000 ounces this year, as mentioned.

Beyond its proven ability to extract value from extraordinary situations in challenging locations, generating strong cash flows, First Quantum has demonstrated a relatively conservative approach to managing its balance sheet. Recent acquisitions may stretch matters, but not for long, as the group's cash flow continues to recover on rising copper and gold prices. The balance sheet was strengthened earlier this year, following the issue of fresh equity, and convertibles.

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