First Quantum Minerals (TSX:FM), valued at $10.34 billion by market cap, is engaged in the exploration, development, and production of mineral properties. It explores commodities such as copper, nickel, pyrite, gold, silver, and zinc ores. First Quantum is well diversified, with mines operating in Zambia, Panama, Finland, Turkey, Spain, and Australia.
In the last 10 years, the TSX mining stock has returned less than 5% to shareholders, trailing the broader markets by a wide margin. Down 61% from all-time highs, let’s see if FM stock trades at an attractive multiple in November 2024.
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Why is First Quantum stock underperforming?
A key driver of a company’s stock price is its earnings growth. In the last 10 years, First Quantum has increased its adjusted earnings per share at a compounded annual growth rate of 8.8%, which is encouraging for a company in the cyclical mining sector.
However, First Quantum has wrestled with operational difficulties at its mines due to lower-than-expected production levels, rising costs, and power outages, all of which have impacted investor confidence.
Like other mining stocks, First Quantum’s performance is tied to the commodity prices it mines. First Quantum derives the majority of its revenue from mining copper, which has experienced significant volatility in the past decade.
In June 2023, First Quantum paid shareholders an annual dividend of $0.29 per share, indicating a trailing yield of 1.7%. However, the payout was lowered to $0.21 per share in November 2021 and was altogether suspended in 2024.
Dividend-paying companies must generate sufficient cash flows to pay shareholders a regular dividend and strengthen the balance sheet. In the last 12 months, the mining company reported a free cash outflow of $462 million, compared to a free cash flow of almost $2 billion in 2021.
Another reason for investor pessimism is First Quantum’s high debt balance. It ended the third quarter (Q3) of 2024 with a long-term debt of $7 billion. In the September quarter, its interest expense stood at $672 million, higher than its operating income of $652 million.
How did First Quantum Perform in Q3 of 2024?
In Q3, First Quantum’s copper production stood at 116,000 tons, up 13% over Q2. Its improved volumes led to a sequential decline in C1 cash costs, which averaged $1.57 per pound. The C1 cost is a metric miners use to assess the direct costs of producing a mineral. It is expressed on a per-unit basis, providing insights into profitability.
First Quantum’s strong performance in Q3 has allowed It to increase its copper production guidance for 2024 to between 400,000 and 420,000 tons.
Despite lower copper prices, First Quantum increased revenue and EBITDA (earnings before interest, tax, depreciation, and amortization) by 4% and 55%, year over year in Q3. With $1.5 billion in liquidity, First Quantum must shore up the bottom line to regain investor confidence.
Priced at 33 times forward earnings, the beaten-down TSX stock trades at a premium, given its low profit margins and negative cash flow. Given consensus price target estimates, analysts tracking FM stock expect it to decline by 10% over the next 12 months.
