Jiangxi Copper ends First Quantum union
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Canada's System for Electronic Disclosure by Insiders recorded the transaction last week, prompting some market observers to question whether First Quantum is in a weaker position to execute on its organic growth strategy.
BMO Capital Markets said the transaction was "not a surprise". Metals and mining analyst Jackie Przybylowski said the relationship between the partners was strained from the outset, with First Quantum's group director for strategy, Tristan Pascall, characterising Jiangxi as a "donkey" during the first-quarter earnings call, in the context of negotiations between the two groups.
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Przybylowski does see the Jiangxi move as lowering the probability that First Quantum will be taken out by a competitor. Market speculation about a move on the company picked up after Jiangxi forked out over US$1.1 billion to acquire 18% of First Quantum in December last year.
The speculation suggested First Quantum could be split up, with Jiangxi acquiring its Zambia assets (Kansanshi and Sentinel) and Rio Tinto or Freeport-McMoRan taking Cobre Panama. "With Jiangxi no longer involved, the takeout premium that can sometimes boost the First Quantum share price should be lowered," Przybylowski said.
The sale leaves First Quantum with higher exposure to Zambia, with Przybylowski suggesting this isn't currently reflected as a major risk factor in the company's share price, which means "pressure to reduce exposure to the country is lower".
Another consequence of the pull-out is that the Kanshansi smelter expansion won't move ahead as quickly as planned.
Przybylowski said the partnership with Jiangxi was ostensibly to fund a Kansanshi expansion while First Quantum continued to pay down debt.
"However, the actual necessity of a smelter expansion and the timing of when this would be required is unclear. Management had promised to put out a technical report on the smelter expansion in March, but that has been delayed until tentatively sometime later this year," Przybylowski said.
"At the worst-case, if First Quantum isn't able to finance a smelter expansion, production from Zambia would gradually decline. However, we expect production growth at Cobre Panama, which would serve to offset the declines in Zambia."
Cobre Panama is the largest new copper mine to begin production globally in recent years. For the March quarter, First Quantum reported total copper output grew 43% year-on-year to 195,285 tonnes, including 56,240t from Cobre Panama. Kansanshi processed 329,946 dry tonnes of copper concentrate and produced 80,280t of copper anode.
First Quantum will provide updated 2020 production guidance for Cobre Panama with the second quarter results later this month.
At C$13 on Monday, First Quantum shares (TSX:FM) are down 1% year to date.