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Bernstein analysts flag First Quantum as attractive takeover target

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Bernstein analysts flag First Quantum as attractive takeover target

Sanford C. Bernstein Co. analysts tagged First Quantum Minerals Ltd. as an attractive acquisitiontarget, citing the miner's relatively appealing valuation, its offering of the bestgrowth outlook for copper and lower balance sheet risks.

The TSX-listed company's stock has plunged since its at C$16.25 per shareclosed in June 2015, to a low of C$2.49 per share in January, before reboundingquickly to a high of C$8.47, the analysts said. Since the mid-January lows, theshare price has appreciated by 171% as of March 30.

First Quantum owns a total of 13 copper projects, nine of whichare in the production stage. It produced428,229 tonnes of copper in 2015, but expects lower output of 400,000 tonnes thisyear and in 2017. Output is expected to rise slightly to 407,000 tonnes of copperin 2018.

Bernstein expects First Quantum's production to rise to 938,000tonnes of copper in 2020. The output increase can significantly impact revenue —nearly doubling to US$5.1 billion in 2020 from US$2.7 billion in 2015 — even inthe absence of any increase in commodity prices.

"We see First Quantum offering copper growth into a marketthat will be moving into a structural deficit in the near term," the analystssaid.

Management has also proven to be competent, delivering "impressive"capital cost savings across all operations and reducing CapEx estimates for theCobre Panama projectby 15%.

The company targets net CapEx this year of US$710 million, includingUS$390 million for Cobre Panama.

Leverage concerns, one of the main reasons Bernstein cited forFirst Quantum's share price collapse in 2015, have eased since the company announcedthe US$712 million cash saleof its Kevitsa nickel-copper-platinumgroup elements mine in Finland to BolidenAB.

Bernstein expects the company's net debt to EBITDA ratio to decreasethis year to 3.7x from 5.5x in 2015. Covenants are also unlikely to be breachedfor the 12-month period.

Regarding concerns of delays in the ramp up of the mine in Zambia, theanalysts said these are overdone. "[W]e remain confident that management willsuccessfully take Sentinel to full production by mid-2017."

The impact on EBITDA and net debt should be marginal if delaysare less than one year. For instance, a three-month delay would decrease the company'sEBITDA by 1.7% in 2016 and 2.5% in 2017, while a six-month delay would lower EBITDAby 3.0% in 2016 and 5.1% in 2017.

Sentinel is expected to contribute between 135,000 tonnes and155,000 tonnes of copper this year. Its projected copper output in 2017 would rangefrom 210,000 tonnes to 240,000 tonnes and is expected to grow between 230,000 tonnesand 260,000 tonnes in 2018.

In an earlier note to investors, Bernstein said that First Quantumhas no major short-term liquidity risk, with the company needing to repay only US$790million in debt principal within the next two years and will not need to repay anybond principle before 2019. The copper miner also has access to US$1.8 billion inrevolving credit facilities expiring in 2019.

"We are also confident that banks will agree to renegotiatecovenants," the analysts said.

First Quantum also beat by 355.56% the 2015 calendar-year by S&P CapitalIQ. The miner booked comparative EPS of 41 cents, or US$267 million, versus theexpected 9 cents per share.