Having lost assets in the DRC in difficult circumstances, First Quantum has filed the best legs in Zambia, and reap the results of efforts

London- and Toronto-listed First Quantum this week posted solid results for first-quarter 2011, and headlined its objective to produce 300,000 tonnes of copper in 2011 as a whole, and 200,000 ounces of gold, extracted as by product from two of its copper mines.

First Quantum's founding base of business, the central African copperbelt, straddling Zambia and the Democratic Republic of the Congo, has recently come into focus with the bid by Barrick, the world's biggest gold miner, for Toronto- and Australia-listed Equinox, which mines copper in Zambia, and is due to start mining copper in Saudi Arabia, where it also holds interests in gold-base metal projects. Barrick already produces copper, but is the first major gold miner to consciously bid for a copper miner.

Good copper miners are making very good money. Cynics may well point to Barrick's spin off of African Barrick Gold in 2010, which was listed in London, and in which Barrick remains the biggest shareholder. The apparent contradictions are explained mainly by the above-average stock market valuations commanded by gold stocks, and the relative undervaluation of copper stocks, which can produce genuinely impressive cash flows and profits.

The African copper belt boasts some of the world's highest in situ copper grades, and, in some cases, by-product cobalt, gold, or silver, and even uranium. First Quantum pioneered the resuscitation of the ruined once-nationalised copper mines in the central African copper belt, when it acquired Bwana Mkubwa in Zambia in the mid-1990s. First Quantum was soon mining just across the border in the DRC, at Lonshi, and achieved rapid growth on both sides of the border, attracting interest and investment to the broader area.

But the DRC has proved a bitter pill for First Quantum, which saw its in-build KMT operation in the copper-rich southern Katanga Province seized in 2009, and onsold via a British Virgin Islands (BVI) shell structure. During 2010, First Quantum's Frontier mine was shuttered after further action by DRC authorities. It can be noted that upon the shuttering, various expats were noted on the mine premises, not least Tim Henderson and John Gross, who are, apparently, GM and metallurgist at a Glencore interest in the DRC, known as Mutanda Mine Mumi Copper/Cobalt Project. Approached at the time, early September 2010, for comment, Glencore politely declined.

Both the KMT and Frontier cases are now in international arbitration, in Paris and Washington, respectively. First Quantum is separately suing London-listed ENRC over its announcement that it acquired a majority stake in KMT, via the BVI conduits.

Some kind of revenge seems to be on the menu on the Zambian side of the border. First Quantum recently highlighted the award to it of fresh mining permits in Zambia, which continues to attract foreign investment despite heated debates, and action, and some retraction, on tax issues, over the past few years. In Katanga Province, the only major miner present at the operational level until recently was Freeport-McMoRan, the major shareholder in and operator of Tenke Fungurume, an inheritance, as such, from an earlier acquisition by Freeport-McMoRan.

Earlier this month, First Quantum hosted a high profile groundbreaking at its Trident project in Zambia, where over 140,000 meters of drilling has been completed in more than 380 holes. Based on First Quantum's internally-generated resource estimates, the group is proceeding with the design of a project at Trident that could produce 150,000 tonnes of copper a year, initially, and then expand to 300,000 tonnes of copper. First Quantum is also headed towards producing material amounts of nickel, in Australia and Finland. While First Quantum heads back to its roots with Trident, its expansion from a small base in the mid-1990s has seen it become one of the world's most-demanded copper stocks.

The first major miner to make conscious moves on the central African copperbelt, at least at the operational level, is Brazilian supergroup Vale, the world's No 2 miner, which recently bid for Johannesburg-listed Metorex, which operates in both the DRC (Ruashi) and Zambia (Chibuluma and Sable Zinc). Vale already has an interest in Zambia's Konkola North, which, according to Vale, ranks as the second-largest known resource on the Zambian copperbelt. This is an underground mine with estimated nominal production capacity of 44,000 metric tonnes a year of copper in concentrate, with production scheduled to start up in 2013. This project is part of a joint venture with Johannesburg-listed African Rainbow Minerals.

Early in 2009, Vale acquired a 50% interest in a joint venture with ARM for CAD 81m, with the objective of looking at developing nominal production capacity of 65,000 metric tons of copper a year, at Konkola North and Kalumines. The joint venture also holds extensive further exploration interests.

And then there is Toronto- and London-listed Katanga Mining, which was bailed out by Glencore in 2008 and 2009, in the wake of turmoil in markets generally. Early in 2008, Katanga Mining completed its merger with Nikanor, which held the giant KOV pit, adjacent to Katanga Mining's Kamoto interests.

London-listed Nikanor raised USD 380m in cash upon listing in July 2006, and USD 777m a year later. Upon the business combination of Nikanor and Katanga Mining, USD 446m in cash was returned to Nikanor shareholders, as a capital repayment, or special dividend. The prime beneficiaries were the three major Nikanor founding shareholders: Beny Steinmetz, the UK-based Gertner family, and Daniel Gertler.

JP Morgan Cazenove, pushers of the Nikanor float, were keen to remind investors that the KOV deposits boast one of the highest-grade major copper ore bodies in the world, with 172m tons of indicated mineral resources at an astonishing grade of 5.09% copper, plus a wonderful grade of 0.49% cobalt.

And yet Katanga Mining continues to burn cash, even after yet another rights issue in 2009, which raised USD 245m, entrenching Glencore as the controlling shareholder. During first-quarter 2011, Katanga Mining produced copper metal and concentrate of 18,385 (first-quarter 2010: 12,458) tonnes and 635 (889) tonnes of cobalt. So-called C1 cash costs for the first-quarter 2011 were USD 1.82 (USD 1.34) per pound of copper.

In a filing on 31 March 2011, Katanga Mining described its New Phase 4 expansion which, once completed, is expected to result in total plant capacity of 310,000 tonnes of copper a year. How this is to be financed is yet to be fully described. Equity investors in Katanga Mining have seen the company's issued shares increase from 78m in 2008 to 1.9bn at this point in time.

Katanga Mining
USD m 1Q11 1Q10 2010 2009 2008
Operating cash flow 60 81 167 -180 -45
Capital expenditure -51 -31 -218 -118 -439
Free cash flow 9 50 -52 -298 -484
Equity raised 245
Cash on hand 44 127 30 77 32
Debentures -124 -117 -120 -113 -258
Net debt -81 10 -90 -36 -227
For some investors, a pall remains over mining in the DRC, particularly in Katanga Province, not least on the kind of reception that the spat between First Quantum and ENRC has been given by parts of the London-based media. While Vale has shown something of an appetite for becoming involved in Katanga Province, its focus in the broader region is without question to the east in Tete Province, Mozambique, where Vale is busy commissioning the USD 1.7bn Moatize coal mine, alongside Toronto- and Australia-listed Riversdale's deposits.

Moatize holds resources of more than 1bn tonnes; Moatize I has a nominal production capacity estimated at 11m tonnes of coal, 80% coking. The coal will be transported along the Linha do Sena railway to the historic Beira port. Earlier this year, the first train seen in 25 years arrived at Moatize town.

At Beira, the Mozambique government is building a new facility to handle an additional 18 to 24m tonnes of coal a year. Other transnational companies with a presence in Tete include ENRC, Nippon Steel, Jindal and ETAStar.

Vale, also a global leader in logistics, has bought a 51% stake in Sociedade de Desenvolvimento do Corredor do Norte SA (SDCN), which controls the Corredor de Desenvolvimento do Norte (CDN) and the Central East African Railways (CEAR). CDN holds a concession over 872km of railroad in Mozambique; CEAR holds a concession over 797km of railroad in Malawi. The "first prize" in the network would be access to Katanga Junction, which has historic railroads running in literally all directions. The vast majority are rusted and ruined.

Riversdale and Tata earlier this year bought the balance of shares in Benga Power Project, a USD 1bn investment progressing to initial production in 2013-2014, to produce around 550MW of power, with the objective of increasing to 2,000MW. The miners are also looking at barging along the Zambezi River, following precedents from decades ago.

Riversdale is, of course, headed towards delisting with transnational miner Rio Tinto now holding more than 70% of the shares in Riversdale. At the same time, Rio Tinto has sold out of the huge Chapudi coking coal deposit in South Africa, to Coal of Africa Limited. With corporate action in South Africa and Katanga Province likely to remain subdued for the foreseeable future, which could be quite a while, more corporate action with a Zambian focus could be on the cards.

Which leads back to First Quantum, with its plans to grow to a remarkable 1m annual tonnes of copper, as early as 2015, from the 2011 outlook of 300,000 tonnes. The Kiwara PLC acquisition - now called Sentinel copper and Enterprise nickel - with USD 1bn of capex should add 400,000 tonnes a year of copper, plus, First Quantum has discovered a significant nickel orebody on the Zambian property, 150km from its flagship Kansanshi Mine.
First Quantum
USD m 1Q11 1Q10 2010 2009 2008
Operating cash flow 379.3 164.7 731.3 562.6 765.4
Capital expenditure -189.3 -44.8 -357.6 -361.8 -460.3
Free cash flow 190.0 119.9 373.7 200.8 305.1
Cash on hand 1486.4 548.4 1344.9 919.2 176.2
Debt -530.9 -608.0 -613.1 -630.0 -385.7
Net cash/debt 955.5 -59.6 731.8 289.2 -209.5
With the Ravensthorpe project in Australia (acquired from BHP Billiton) targeted to produce around 40,000 tonnes a year of nickel from the end of 2011, plus Kevitsa in Finland, at 10,000+ tonnes a year from mid-2012, First Quantum is building a significant nickel stream.

The bottom line is that First Quantum has put the disappointment of losing its DRC assets far behind. First Quantum has firmly emerged as a challenger to London-listed Antofagasta's place as the No 2 base metal company in the world behind Freeport-McMoRan. When Barrick officially opens operational offices in Zambia, the game could well be on.

Selected DRC/Zambia stocks

Copper-cobalt Stock From From Value
price high* low* USD bn
NFC CNY 33.27 -24.1% 200.8% 3.273
First Quantum CAD 127.92 -13.8% 165.4% 11.397
Katanga Mining** CAD 1.97 -9.7% 239.3% 3.881
Equinox CAD 8.09 -4.0% 163.5% 7.356
Metorex ZAR 7.13 -4.2% 132.2% 1.057
Anvil** CAD 6.08 -15.8% 129.4% 0.989
Mwana Africa GBP 0.07 -51.0% 5.8% 0.061
Tiger Resources AUD 0.53 -18.0% 200.0% 0.377
African Copper GBP 0.04 -45.7% 0.0% 0.049
Africo** CAD 1.16 -35.6% 52.6% 0.086
Caledonia CAD 0.11 -37.1% 100.0% 0.057
African Eagle GBP 0.11 -33.6% 206.9% 0.074
Geovic*** CAD 0.55 -44.4% 31.0% 0.059
El Nino Ventures CAD 0.15 -21.6% 383.3% 0.018
Averages/total -25.6% 143.6% 28.733
Weighted averages -12.7% 171.2%
Gold stocks
Banro** CAD 3.40 -22.9% 112.5% 0.670
AngloGold Ashanti USD 45.59 -13.8% 19.8% 17.379
Randgold Resources USD 79.90 -24.9% 13.9% 7.273
Mwana Africa GBP 0.07 -51.0% 5.8% 0.061
Mexivada**** CAD 0.12 -36.1% 15.0% 0.006
Gilla Inc. USD 0.02 -82.0% 42.9% 0.001
Loncor Resources** CAD 3.29 -12.3% 406.2% 0.196
Freeport-McMoRan USD 50.67 -17.4% 80.3% 48.004
OM Group USD 36.91 -7.5% 68.0% 1.144
Vedanta GBP 21.70 -17.5% 20.9% 9.411
Lundin CAD 8.83 -5.2% 203.4% 5.310
ENRC GBP 8.69 -24.5% 8.4% 18.253
* 12-month ** DRC only *** Cameroon **** Congo-Brazzaville
Source: market data; table compiled by Barry Sergeant


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