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    First Quantum sticks with Zambia

    By: Ken Gooding

    Posted: 2002/04/24 Wed 20:00 ZE2

    LONDON - AIM-listed First Quantum Minerals (LSE:FQM) might be reducing its stake in the troubled Mopani underground copper mine, but it certainly hasn't given up on Zambia and believes that the Zambian copper belt remains largely untapped.
    Clive Newell, the company's chief executive, says that expansion of First Quantum's wholly-owned Bwana Mkubwa mine in Zambia will be completed by August, which should quickly move annual copper output there up from 10,000 to 30,000 tons – at an estimated cost of only 30 cents a pound, net of credits, among the world's lowest.

    First Quantum is also going full steam ahead on its 80%-owned, US$120 million Kansanshi project in Zambia for which the company intends to raise some bridging finance so that construction can start in September or October to beat the rainy season and prevent a delay of six months before start-up. Full project financing should be in place by November.

    Newell says ten banking syndicates are bidding to provide the finance for Kansanshi which is expected to have an open-pit mine producing about 75,000 tons a year of copper at a cost of 40 cents a pound, net of credits.

    Stopping the huge financial drain that Mopani represented will enable First Quantum in future to concentrate on open pit mining from oxide deposits instead of underground sulphides, he points out.

    First Quantum is at one stroke cutting the big losses it is suffering at Mopani while at the same time cleaning up its balance sheet so that there will be only a modest level of debt left. Glencore, the international trading group, in effect is paying US$21.84 million to take 27.1% of Mopani off First Quantum's hands, leaving the latter with a stake reduced from 44% to 16.9%. This "payment" includes US$13.97 million advanced by Glencore for working capital that First Quantum no longer has to find, and US$7.87 million that is First Quantum's share of a loan to Mopani advanced by Glencore – also now forgiven.

    First Quantum's share of Mopani's 2001 losses came to US$8.54 million, contributing to the net loss of US$20.98 million reported by First Quantum this week.

    On the face of it, Glencore is being remarkably generous with this arrangement. Analysts suggest, however, that the privately owned trading group is much more interested in maintaining a steady supply of copper it can trade than in Mopani's losses. On the other hand, the losses, which Newell says will continue for at least another year, represent a big drain for First Quantum

    Newell reckons Mopani's Nkana operations eventually will have a good future. But it will take time to see full results from a team headed by new Mopani chief executive Tim Henderson, turn-round experts imported from Glencore's zinc operations.

    First Quantum believes it is now in shape to interest a wider spectrum of investors and in June or July will take a big party of analysts to see what is happening in Zambia. At present 15 financial institutions intend sending representatives and Newell predicts: "I think we can expect the company will be re-rated after that."

    News of the deal on Mopani with Glencore already has done wonders for the First Quantum share price in London, where it jumped by 18 percent, or 24p to 157p over the past three days. Ironically, in Canada (TSE:FM) the price slipped by more than 4 percent, by 15 cents to C$3.35, as a big shareholder decided to sell, obviously banking on the fact that there might be some willing takers.

    At Bwana Mkubwa the first phase of an expansion programme was completed for US$5.5 million, financed out of cash flow. The second phase, costing US$18 million, will attract project finance for the full amount and First Quantum is negotiating with Standard Chartered Bank about this.

    The operations are scheduled to produce 16,000 tons of copper this year, moving up to 30,000 tons of LME grade copper cathodes when the expansion is completed.

    At present First Quantum is expecting Kansanshi to produce about 75,000 tons of copper a year after coming into production at a cost of US$120 million. Newell says First Quantum has already spent US$30 million on Kansanshi – purchasing its 80 percent from ZCCM, the state-owned group, and on feasibility studies – and bankers are indicating that no more equity will be needed because it is such a robust project. "But we feel that when it comes to the crunch the banks might want us to put in more equity, perhaps another US$15 million."

    First Quantum has given up trying to guess future copper prices, he says, and is using a flat, long-term price of 75 cents a pound (US$1,650 a ton) in all its forecasting, including that for the Kansanshi feasibility study. In 2002, the company produced 50,411 tons of copper at an average cash cost of 64 cents a pound.

    While Newell has high expectations of Zambia, he suggests it will be some time before Zimbabwe sorts itself out. Consequently, First Quantum has written off its entire investment in the Conemara gold mine in that country – US$10.61 million, the biggest element in the 2001 loss.

    Newell says this is tragic, given that 700 people were employed at Conemara and an expansion was planned – even the finance was in place – just before the political situation became difficult. The mine is on care-and-maintenance at present and could be brought back into production when the economic situation in Zimbabwe improved. "But we will probably sell it. It is not a good fit any more in a low-cost copper company."

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