First Quantum Minerals: It's All in the Timing

06/18/2014 10:30 am EST

Focus: STOCKS

Jim Jubak

Founder and Editor, JubakPicks.com

Given several acquisition announcements, it certainly seems like this mining and metals company is growing rapidly, but MoneyShow's Jim Jubak still thinks future decisions to invest may hinge on price.

It's a question of timing.

First Quantum Minerals ((FM:TSX) in Toronto and (FQVLF:OP) in New York) is building a world-class copper mining company. Today's announcement of an agreement to acquire Lumina Copper for $433 million is more proof of that—if you needed more evidence after last year's acquisition of Inmet Mining and its huge Cobre Panama copper deposit. Lumina's Taca Taca deposit in Argentina has an indicated mineral resource of 21.2 billion pounds of copper.

Even before the acquisition of Lumina and its Taca Taca copper project, First Quantum was on a steep ramp. Copper production would climb, the company forecast, to 1.3 million metric tons when projects in Zambia, Peru, and Panama hit production. That would be a big increase from the 412,000 metric tons of copper the company produced in 2013 from its seven operating mines. The addition of the Taca Taca deposit will push that future production profile even higher.

Eventually.

To take one example of when, Cobre Panama is projected to produce its first copper in 2017. So what you're buying—if you decide to purchase shares of First Quantum—is really a long option on future copper prices. (First Quantum also produced 248,000 ounces of gold, 55,042 ounces of platinum group metals, 47,066 tons of nickel, and 49,933 tons of zinc in 2013.)

The big question for First Quantum is what copper prices will be in 2017, or so, when Cobre Panama comes on line. It's likely that copper prices will be higher then than they are today, since copper prices are very depressed now. But that depends on economic growth in the United States and, more importantly, China, especially in the housing sector.

The truth, of course, is that nobody knows—although it's not especially hard to find forecasts for copper prices. On June 16, copper on the COMEX sold at $3.05 a pound (or for $6,691 a ton on the London Metal Exchange). Bank of America Merrill Lynch is forecasting that copper prices will fall to $6,500 by the end of the second quarter of 2014. Goldman Sachs is more pessimistic for a slightly longer time period and projects $6,200 at the end of 2014. Credit Suisse is forecasting that copper prices will rise slightly to $3.07 at the end of 2015 from the current $3.05 a pound, and then climb to $3.29 in 2016, and $3.52 in 2017, before falling back to $3.38 in 2018.

The Credit Suisse forecast would be great news for investors in First Quantum since the peak in 2017 is likely to correspond to the beginning of production at Cobre Panama.

All this is, of course, extremely speculative. The best way to take as much risk as you can out of the First Quantum copper option is to buy the shares as cheaply as you can. Today, the stock was down 2.77% to $19.498 a share as of 3:00 PM in New York. The shares have traded as low as $13.57 in the last 52 weeks and as high as $21.48.

If Goldman Sacks is right about copper prices for the end of 2014, or if worries about China's economy kick up again, then I think you should be able to buy First Quantum below today's price. And, at anything less than $18, I certainly would look to add the shares to my Jubak's Picks portfolio.

Full disclosure: I don't own shares of any of the companies mentioned in this post in my personal portfolio. When in 2010 I started the mutual fund I managed, Jubak Global Equity Fund, I liquidated all my individual stock holdings and put the money into the fund. The fund shut its doors at the end of May and my personal portfolio is now in cash. I anticipate putting those funds to work in the market over the next few months and when I do I'll disclose my positions here.

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