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RBC outlines 40% upside for First Quantum on Panama copper project ramp-up

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Essential Metals & Mining Insights - September 2021


RBC outlines 40% upside for First Quantum on Panama copper project ramp-up

RBC Capital Markets upgraded First Quantum Minerals Ltd. to "outperform" from "sector perform" while raising the stock's target price to C$21 from C$15, representing 40% in upside potential.

The analysts expect the stock to re-rate higher as the company's Cobre Panama copper-gold project in Panama ramps up over the next 12 to 18 months.

"Over the 2017-19 period we forecast copper production CAGR of 22.4% with significant growth in free cash flow," RBC said in a Dec. 3 note. "First Quantum trades at a [net asset value] discount of 49% and has the best leverage to copper production growth in our coverage universe."

The upgrade and increased target price incorporate the bank's recent commodity price revisions and its five-year production outlook for First Quantum.

RBC forecast the company's copper production growing to 853,000 tonnes in 2019 from 569,000 tonnes in 2017, with EPS and EBITDA expected to benefit from moderately improved copper price assumptions for 2018 and 2019 as well as higher production in 2019 and 2020, and the net asset value increasing to C$29.50 per share from C$23.01 per share.

The analysts anticipate First Quantum having liquidity of US$1.01 billion by the end of 2018 and US$2.62 billion by the end of 2019, assuming copper prices of US$3/lb for 2018 and US$3.25/lb for 2019.

The miner ended its third quarter with liquidity of C$984 million, comprising C$476 million in cash and C$508 million in undrawn credit.

Following completion of the Cobre Panama ramp-up, First Quantum is set to benefit from production growth and RBC's expectation of a strong copper market, which is expected to be in a growing supply deficit starting in 2019.

"We forecast significant free cash flow generation and deleveraging with modest free cash flow in 2018, growing to US$1.94 billion, US$2.47 billion and US$2.88 billion over the 2019 to 2021 period at our copper assumptions of US$3/lb, US$3.25/lb and US$3.50/lb, respectively," the analysts wrote.

The bank does not expect First Quantum to hedge its 2019 production, while about 33% of its 2018 copper sales are hedged.

Randgold Resources Ltd. also saw an upgrade from RBC, to "sector perform" from "underperform," after a pullback in the stock made the company's valuation more attractive.

"We also believe that 2018 will be a key year for Kibali as the mine ramps up, and should support robust free cash flow generation and rising dividends, with our expectation of a US$2/share dividend to be declared for fiscal 2017," RBC said. The dividend represents US$190 million, which, at the current share price, indicates a 4% dividend yield.

After experiencing a relatively challenging ramp-up at the Kibali gold joint venture in the Democratic Republic of the Congo, the analysts expect 2018 to deliver a further step change in production as the mine ramps up to about 750,000 ounces in fiscal 2018, from the 2017 guidance of 620,000 ounces.

The analysts outlined key challenges in ensuring that underground ore handling infrastructure is tied in as well as the transition at the plant to full sulfide mineralization.

Randgold CEO Mark Bristow has continuously indicated the company's ability to return significant cash to shareholders, while the company has said it aims to hold up to about US$500 million in cash on its balance sheet.

The RBC team also increased its target price for Randgold to £66 per share, up from £58 per share but lower than the company's current price of £68.85 per share, while also outlining an upside scenario of 23% to £83 per share driven by a gold price of US$1,500/oz.

Asanko Gold Inc.'s target price was revised downward by RBC, to C$1 per share from C$1.75 per share, as a result of decreased production and increased all-in costs expected in 2018.

The bank updated its model for Asanko, forecasting consolidated production of 207,000 ounces of gold at all-in sustaining cash costs of US$1,148/oz in 2018, compared to its previous estimate of 248,000 ounces at US$970/oz.

"We expect clarity on future years to be provided when the company releases an optimized mine plan in the first quarter of 2018 in conjunction with a funding solution (likely with Red Kite) in order to fully fund the required infrastructure to access Esaase deposit," the analysts wrote Dec. 3. The Esaase deposit forms part of the company's namesake Asanko mine in Ghana.

Shares of Torex Gold Resources Inc. offer attractive upside potential for long-term investors as the lifting of illegal blockades at its El Limon-Guajes gold mine in Mexico is expected to help the stock regain most of the value that was recently lost.

RBC maintained its "outperform" recommendation on Torex but decreased the stock's target price to C$22 per share from C$28 per share, providing 75% in upside potential as compared to the company's C$12.59 share price as of Dec. 3.

"We expect the main drivers of future share price upside will be directly linked to bringing El Limon-Guajes up to full throughput; demonstrating low all-in sustaining cash costs; alleviating market concerns over jurisdictional challenges; and delivering exploration success at the Sub-Sill (step-out and in-fill drilling), Media Luna (infill) and potentially other regional targets," RBC said.

Torex expects to produce less than 300,000 ounces of gold in 2017, below previous guidance, due to the blockade of the main gate at its El Limon-Guajes site.

In the diversified mining space, RBC believes that Rio Tinto and BHP Billiton Group are now closer to fair value and at a strategic crossroads, as the mining giants and their peers have plateaued after 18 months of deleveraging and cash return-driven revaluations.

"Although M&A or more growth is likely a long-term positive, we remain cautious as investors digest these potential transitions," RBC said in a Dec. 4 note. "We maintain our cautious near-term outlook as we see downside risk to general Chinese growth expectations falling as we head into 2018."

The analysts noted that with valuation disconnects widening again in the sector, pricing dynamics driven by Chinese supply-side reforms are providing winners in Vale SA and Anglo American Plc, while Glencore Plc's recent selloff moved the shares back to an attractive level.

RBC increased its target price on Glencore stock from £4.10 to £4.70, with Anglo's target price increasing to £19.50 from £17 and Vale's target price increasing to US$15 from US$14.50, outlining more than 30% of expected upside with "outperform" ratings for all three diversified miners.

Earlier in the week, Moody's revised its outlook on ArcelorMittal's ratings to positive from stable while affirming the steel giant's Ba1 credit rating.

The move was attributed to "ArcelorMittal's strengthening credit profile on the back of improved market conditions, successful efforts to reduce debt and expectations that its free cash flow will turn positive in 2017-18."

The rating agency expects positive free cash flow of about US$1.1 billion in 2017, assuming a large working capital inflow in the fourth quarter, partly offset by substantial outflows in previous quarters, and free cash flow of more than US$2 billion in 2018 to 2019.

Earlier in the week, S&P Global Ratings raised its corporate credit rating on Alcoa Corp. to BB from BB- with a positive outlook.

The rating agency expects the company's strong credit measures to further improve in 2018 and 2019 on the back of higher aluminum and alumina prices. Costs and net debt for the company have fallen over the past year after the separation of the downstream operations of Arconic Inc.

S&P based its rating on the assumption that the London Metal Exchange aluminum price will be at US$2,100 between 2018 and 2020, with alumina prices expected to remain between 18% and 20% of this level.

S&P Global Ratings and S&P Global Market Intelligence are owned by S&P Global Inc.