Pacific Trader: Should you buy into First Quantum’s decarbonization play?

First Quantum Minerals has become the go-to vehicle for investors anticipating a surge in demand for copper.

Credit: First Quantum Minerals

MONEY BELT: Stockpile conveyors at First Quantum Minerals Cobre Panama mine

Kicking off our new B.C.-focused stocks column: a company that’s become a go-to vehicle for investors anticipating a surge in copper demand

The stock: Economists sometimes put the honorific “Dr.” in front of copper for its PhD-like ability to predict the trajectory of the global economy. Right now, it’s flashing green—as are the shareholders of First Quantum Minerals (TSX:FM).

The Vancouver-founded company, which these days splits executive functions between the West Coast and Toronto, has tripled in value over the 12 months to late February. Quite a feat for a large-cap stock ($20-billion-plus valuation), even in the jumpy commodity space.

When you consider the fact First Quantum just eked out a net profit in the latter half of 2020 after four straight quarters of losses, however, its rise warrants closer scrutiny. Lets see what were working with here. 

The drivers: First, the macro environment. Copper has recently hit prices not seen in nine years—nearly US$4 a pound—resulting from a combination of the cyclical churn of matching global investment and production to demand and the secular euphoria around the metal’s role in the post-carbon economy. As many observers have noted, an electric vehicle uses about three times as much copper for its wiring as its internal-combustion predecessor.

Second, First Quantum is among the largest copper pure plays out there for investors, with 87-percent exposure to the metal. (It produces smaller quantities of gold and nickel.)

The company brought the huge Cobre Panama project into production in late 2019 and, after some COVID-19-related curtailments last year, expects the Central American mine to contribute more than a third of its overall output in 2021. It appears to have perfectly hit its window, at the top of the commodity price cycle, to pay down the debt incurred to develop this and other mines.

“I think the company is probably in the best position its been, I would guess, in the last seven [or] eight years, in terms of weve got a lot of the capital projects behind us. Copper prices are good, so the cash-flow generation is good. So we are focusing on debt reduction,” CFO Hannes Meyer said during a conference call on February 17, following First Quantum’s release of its fourth-quarter and full-year 2020 results.

Word on the street: “First Quantum remains a preferred copper name with potential to generate strong free cash flow and can continue to re-rate as Cobre Panama reaches its full potential,” RBC Capital Markets analysts Sam Crittenden, Alexander Jackson and Stephen Morton summed up in a report in the wake of the earnings release. The RBC team has a $31 target for the stock, with upside and downside potential for $37 and $17, respectively.

Given the shares have already tested that target level this week, more-cautious investors will want to wait for a dip before buying in.

Noteworthy: Local hydrogen fuel cell maker Loop Energy begins trading on the TSX on Thursday, February 25, under the symbol LPEN.