First Quantum Minerals Ltd. was upgraded to buy from hold at TD Securities as a result of improvements to both its liquidity position and the power situation in Zambia.
Analyst Greg Barnes, who also raised his price target on the stock to $13.50 from $11, noted that water levels at the Kariba Dam, the world’s largest man-made reservoir, have improved following the rainy seasons. First Quantum and other miners depend on the dam for power.
He pointed out that with the first of two 150 MW units at a coal power plant being commissioned this month, the improving power situation is an important catalyst for energizing the second power line into First Quantum’s Sentinel copper mine.
That project is expected to reach commercial production in the third quarter of 2016 and produce approximately 135 metric tonnes of copper this year.
As for First Quantum’s liquidity, the sale of the Kevitsa mine in Finland for US$700 million, hedging copper at price above US$2.25 per pound, and renegotiating the terms of its senior debt facility have all helped.
Barnes now thinks the company should have enough liquidity to complete construction of the Cobre Panama project, even at a copper price of US$1.80, a forecast that includes the potential sale of the Cobre Panama power plant in 2017.
However, the analyst cautioned that First Quantum’s debt covenants will become an issue of copper remains below US$2.10.
If the metal stays below that level on a sustained basis through 2020, Barnes noted that First Quantum would slightly exceed its required covenant ratio in 2018. That assumes the Cobre Panama power plant is not sold, and/or the Cobra Panama project debt facility is not put in place.