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Morningstar | First Quantum Reports Solid 2Q on Higher Copper Prices; Shares Remain Overvalued. See Updated Analyst Note from 31 Jul 2018

First Quantum reported solid second-quarter earnings as higher copper prices and volumes boosted EBITDA to $466 million during the quarter, up from $267 million a year ago. In the earnings release, management maintained 2018 annual production guidance of 590,000 metric tons of copper at an all-in sustaining cost ranging between $1.65 and $1.85 per pound. Having updated our valuation model, we maintain our fair value estimate of CAD 7.00. Our no-moat rating also remains intact.

Our copper price forecast is unchanged. We continue to forecast average 2018 copper prices of $3.00 per pound. Although prices averaged $3.14 during the first half of the year, they have fallen over 10% in July and now sit around $2.80 per pound as of July 31. As new supply ramps up and demand growth in China continues to slow, we expect prices to fall further in 2019 to $2.70 per pound. Our long-term 2022 copper price forecast is also unchanged at $2.34 per pound (in nominal terms).

We continue to view First Quantum as overvalued, with the stock trading at over 2.5 times our fair value estimate. The current stock price just shy of $20 per share on July 31 at the time of writing reflects expectations for higher long-term copper prices. Given our long-term forecast for lower copper prices, we forecast that operating margins will fall from over 24% in 2018 to roughly 11% by 2022.

First Quantum's multiple disputes with the Zambian government are still ongoing. First Quantum and the Zambian Revenue Authority continue to negotiate over the Zambian agency's claims for unpaid import duties. We expect this dispute to take some time to resolve. We note that our base-case fair value estimate does not include the impact of any potential fines. However, our bear-case fair value estimate of 0.30 per share, does reflect a scenario where First Quantum loses its controlling equity interest in both the Kansanshi and Sentinel mines in lieu of paying the fines.

For more information on the Zambian tax dispute, see our March 21 note "We've Updated Our First Quantum Bear Case as Zambian Government Imposes Additional Mining Tax."