First Quantum Minerals Ltd. and Lundin Mining Corp. have enough nickel exposure to provide investors with an opportunity to benefit from higher prices, but there are plenty of ways they differ.
Neither company faces the risks associated with excessive nickel exposure since the primary focus of both companies is copper, but Tom Meyer, a mining analyst at CIBC World Markets, noted First Quantum’s many projects under development and high debt levels make it the riskier company, all else being equal.
However, he pointed out Lundin likely has a higher level of political risk as a result of its 43% asset exposure to the Democratic Republic of Congo.
In terms of valuation, Mr. Meyer noted Lundin looks inexpensive on both a price-to-free-cash-flow and enterprise-value-to-EBITDA basis.
Lundin also has a less-attractive growth profile than First Quantum, which is expected to grow copper production volumes 94% by 2016, versus just 13% for Lundin in that period.
Despite some of the higher relative risk factors, Mr. Meyer still prefers First Quantum to Lundin for investors looking for nickel exposure. He cited First Quantum’s success in delivering projects, its production growth profile, and its outlook for improving return on invested capital (ROIC).
“The acquisition of Inmet Mining in early 2013 resulted in a collapse in ROIC,” the analyst told clients, adding that returns are expected to rebound with the start of production at the Sentinel copper project in Zambia later this year.