Message Mar 9 Oct 2012 18:23

First Quantum deserves its premium valuation

Copper miner First Quantum Minerals Ltd. often trades at a sharp premium to its peers, and now is no exception. David Charles, an analyst at Dundee Capital Markets, noted that it trades at 20 times estimated earnings for 2012, and 13.2 times estimated earnings for 2013. The sector averages are 15.9 times and 12.6 times, respectively.

First Quantum is often cited as a takeover target, and many investors believe a takeout premium is built into the stock. But Mr. Charles does not think any takeover is imminent, at least until the company completes its current production growth plans in Zambia.

“Part of the value in [First Quantum] comes from the experience of its management and technical/mine development team and in the event of a takeout, there is no guarantee that the current team would remain in place for the remainder of the current growth phase,” he wrote in a note.
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So what to make of the premium valuation? Mr. Charles simply believes that the company deserves it, and he listed a few reasons why: It should have huge production growth coming on in the next five years, it has a history of successfully operating in difficult environments in Africa (its Congo problems notwithstanding), and its political risk seems manageable compared to some peers.

“We never thought we would say this, but at the moment it appears easier to build mines in Africa than it is in South America. Peru faces several social license issues and Chile is currently grappling with steep power prices, a shaky transmission grid and public questioning of mining projects,” Mr. Charles wrote.

He reiterated his buy rating on the stock and price target of $26.50 a share.