Send this article to a friend
Print this page


Problems underlie First Quantum's record quarter
Allan Seccombe
Posted: Wed, 14 May 2008

[miningmx.com] -- FIRST Quantum posted a number of records in its first quarter of 2008, including production and operating profit, as it moves towards output of more than 346,000 tonnes/year of copper over the next five years from 2009.

As good as the financial and operational results were there were still a number of problematic issues the company had to deal with, including rising taxes in Zambia, rains hampering development of its opencast Frontier mine and bans on ore transport to Zambia from the Democratic Republic of Congo (DRC).

"The Q1 results have been saved by strong performance at the Kansanshi copper mine where a reduction in the tolled cathode copper produced should raise margins," said Fairfax in its daily market report.

First Quantum is forecasting a strong growth in production as the Kolwezi tailings project in the DRC and the recently acquired Kevitsa nickel, copper and platinum group metal project in Finland add to more tonnes to its 346,000 tonnes of output from existing operation. First Quantum bought Scandinavian Minerals for $282m.

The $553m Kolwezi project is on track to begin commercial production in the first quarter of 2010, with output of 35,000 tonnes/year copper and 7,000 tonnes of cobalt hydroxide.

First Quantum produced 75,616 tonnes of copper in the three months to end-March, a record driven by a sound performance from the Kansanshi mine in Zambia, and a record operating profit of $354m. A 36% increase in the received copper price contributed towards the company’s good quarterly financial performance.

First Quantum maintained its production outlook for 2008 of 310,000 tonnes at an average cash cost of production of $1.15 to $1.20/lb. This compares to $0.99/lb in the first quarter.

The increase in costs would come from higher global sulphur prices, which makes leaching more expensive. Treatment charges (TC) and refining charges (RC) are rising as are diesel prices.

In the month of April, First Quantum produced 25,500 tonnes of copper and sold 23,100 tonnes.

"We are looking for a more substantial increase in quarterly earnings over the rest of the year as higher copper production combines with higher copper prices to drive earnings ahead. Earnings have been held back by a number of issues, which have caused First Quantum to take additional costs in Q1," said Fairfax.

First Quantum renewed its warning that Zambia’s new tax regime introduced in March could deter investment in new and existing projects if it was enforced for companies that have Development Agreements with the government providing for a stable fiscal environment.

First Quantum pointed out it had the right to pursue international arbitration if that Agreement was violated. Tax rates have been increased to 30% from 25%, and the company reflected a $17m provison for future tax liabilities.

The new regime includes a new windfall tax on copper sales revenue based on trigger prices for copper above $2.50/lb; a new variable tax of 15% of taxable income where the profit margin exceeds 8% and no windfall tax applies; a concentrate export levy of 15% and an increase in the royalty rate from 0.6% to 3%.

“Currently, the Company is seeking mediation along with other mining companies operating in Zambia with similar agreements. The financial impact of the proposed changes on the Company is uncertain,” it said.

First Quantum’s quarterly net profit was 132% higher year-on-year at $182m.

“However, the increased Zambian tax rates hampered further increases in net profit and earnings per share due to the restatement of the future income tax liability at a higher tax rate,” it said.

First Quantum was unable to ship any ore to Zambia from its Lonshi project in Democratic Republic of Congo (DRC) for the full quarter, continuing from November last year. There is a stockpile of 76,000 tonnes of ore grading 5.8% at the mine.

“The Company believes it has satisfied all requirements to allow the shipment of ore to Bwana from Lonshi. Discussions are ongoing but the border remains closed as of the date of this report,” it said.

There is ample capacity at the Bwana processing plant, which normally treats Lonshi ore, to treat the backlogged material once it can be shipped south.