FQM at 2017 Half Year
Energy, Mining

It has been a busy year for FQM in the Zambian mining industry. In what was analogous to a Mexican standoff, the company reported in is September 14 press release that an agreement had finally been reached regarding how much the firm would be paying for energy for the remainder of 2017. The terms of the deal they reached with ZESCO and the Government of the Republic of Zambia included First Quantum agreeing to a tariff increase, to approximately $0.09 per kilowatt hour, provided that Kansanshi and Sentinel could each import a portion of their total power requirements from alternative suppliers. In addition, unrestricted power would be made available to the company’s operations with the tariff increment being implemented in two phases, with the first commencing immediately and the second being applied once the details of power import arrangements are agreed and formalized by contract. Their statement also made mention of the fact that the tariff will be reviewed upon finalization of a Cost of Service Study which has been commissioned by the Energy Regulation Board. The study is expected to be available in early 2018. However, the deal sweetener has to be the inclusion of a commitment to provide continuous unrestricted supply of power to First Quantum’s operations and to facilitate the importation of power from alternative suppliers. A thorough study of grid congestion would obviously be required for the latter part of the sweetener is achievable.
The firm was proud to announce that through management action, budgeted production at the Kansanshi and Sentinel mines have been maintained for the quarter to date. According to their 9th August SENS announcement published on LuSE, the mining company announced a comparative loss of $18 million ($0.03 per share1) and cash flows from continuing operating activities of $205 million ($0.30 per share1) for the three months ended June 30, 2017. The comparative loss includes a $97 million loss realized under the copper sales hedge program for which no tax credit is available.

Source: FQM 2017 half year results

However, they announced stronger operating results for the quarter due to continued growth in copper production. 8% over Q2 2016 and 7% over Q1 2017 from the ramp-up of commercial operations at the Sentinel mine and strong production at the Kansanshi mine. This translated to a record throughput of 334,269 tonnes of concentrate at the Kansanshi copper smelter. In addition, the firm maintained a low unit copper production cost signaling improvement in the operations management.

Philip Pascall is bullish on the performance of the firm at half year. In his statement, he stated that “First Quantum’s financial position is much improved. Its debt maturity structure had been greatly strengthened following the liability management initiatives undertaken. With the cash generated by our operations, cash on hand, committed, undrawn credit facilities and continuing initiatives to further strengthen the balance sheet, the Company is well-positioned to continue to execute its strategy”. It is clear from his statement that Philip and his team have been employing a mix in his capital structure that has opted for the more liquid assets (cash) to help strengthen the balance sheet. In his 2016 annual report, he exposed part of FQM’s strategy as one that sought good-quality assets to which they could apply their unique technical expertise and in jurisdictions where they could operate safely and cost effectively. Zambia appears to be one of those jurisdictions and the firm believes in its strategy so much that it its funding the setup of a high quality mill balls plant that will service the local and international mining community. By the end of the first quarter of 2018, a building site in Kalumbila will be transformed into a USD 40 million manufacturing facility that will produce mill balls that Sentinal mine will benefit from. This confirms that FQM’s strategy is based on reinforcement of resources and capabilities in order to achieve competitive advantage.

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