Kansanshi S3 Ramp Up Will Anchor A Stronger Long Term Copper Platform

Catalysts

About First Quantum Minerals

First Quantum Minerals is a global mining company focused on producing copper, nickel and gold from large-scale operations.

What are the underlying business or industry changes driving this perspective?

• The ramp up at the Kansanshi S3 expansion, which produced first concentrate in August and is already contributing copper volumes, supports higher throughput and has scope to improve unit costs and EBITDA as the plant runs closer to nameplate capacity.
• Improving operational performance at Sentinel and Kansanshi, including higher mill throughput and more reliable primary crushing, points to stronger production volumes and supports revenue and cash cost performance.
• Enterprise’s rising nickel production, with a 44% quarter over quarter improvement to nearly 6,000 tonnes, provides additional exposure to energy transition demand, which can support segment revenue and earnings contribution over time.
• First Quantum’s track record of building large projects in house at materially lower capital intensity than many industry projects, such as Kansanshi S3 at about US$12,000 per tonne of annualized copper production, supports capital efficiency and can improve returns on invested capital and free cash flow.
• Progress at Cobre Panamá on preservation, power plant restart preparations and a comprehensive environmental audit by an independent firm keeps the asset in a condition that could allow a future resolution with the government to translate more quickly into renewed production and revenue.
• Advancement of Taca Taca towards an updated technical report and work on the RIGI application in Argentina positions a large copper growth project in a jurisdiction that is seeking foreign investment, which could add a new long-lived source of revenue and earnings if developed.

Assumptions

This narrative explores a more optimistic perspective on First Quantum Minerals compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts. How have these above catalysts been quantified?

• The bullish analysts are assuming First Quantum Minerals's revenue will grow by 31.0% annually over the next 3 years.
• The bullish analysts assume that profit margins will increase from 0.9% today to 21.0% in 3 years time.
• The bullish analysts expect earnings to reach $2.4 billion (and earnings per share of $2.84) by about January 2029, up from $46.0 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bullish analyst cohort, the company would need to trade at a PE ratio of 14.8x on those 2029 earnings, down from 529.3x today. This future PE is lower than the current PE for the GB Metals and Mining industry at 23.7x.
• The bullish analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.8%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• Uncertain timing and outcome of a potential new agreement for Cobre Panamá, along with the 4 to 6 month environmental audit and the 6 to 9 month estimate to restart full operations, could leave a large, capital intensive asset idle for longer than expected. This would weigh on revenue and EBITDA if production does not resume on terms that support returns.
• High and still material net debt of US$4.8b, even after the US$1b gold stream and bond refinancing, leaves the company exposed if copper or nickel prices weaken or if operating issues arise. This could pressure interest coverage and limit flexibility for growth projects, affecting future earnings and free cash flow.
• Rising cost pressures in Zambia, including a stronger Zambian kwacha and expectations for higher Zambian power costs, together with early ramp up phases that rely on lower grade stockpiles at S3, could keep unit costs at elevated levels. This would cap any improvement in net margins and cash generation even if volumes grow.
• Ongoing technical issues such as the fatigue problem on Ball Mill 2 at Sentinel, the need for modifications to the low energy conveyor and potential remedial work on equipment identified during inspections at Cobre Panamá create operational risk. Outages or extended maintenance could limit throughput, which would drag on revenue and EBITDA.
• Large, long dated growth projects like Taca Taca in Argentina depend on supportive permitting, fiscal regimes and access to capital. If inflation in project costs or changes in local policy reduce the economic appeal of new builds, the company may have fewer economically attractive expansion options, which would constrain longer term earnings growth and return on invested capital.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The assumed bullish price target for First Quantum Minerals is CA$46.94, which represents up to two standard deviations above the consensus price target of CA$37.89. This valuation is based on what can be assumed as the expectations of First Quantum Minerals's future earnings growth, profit margins and other risk factors from analysts on the bullish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of CA$46.94, and the most bearish reporting a price target of just CA$28.72.
  
• In order for you to agree with the more bullish analyst cohort, you'd need to believe that by 2029, revenues will be $11.3 billion, earnings will come to $2.4 billion, and it would be trading on a PE ratio of 14.8x, assuming you use a discount rate of 7.8%.
  
• Given the current share price of CA$40.81, the analyst price target of CA$46.94 is 13.1% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.