Scotia -FM -Sector Outperform with a C$10.50 target
Event
Pertinent Data New Old Rating: -- SO Target: 1-Yr -- $10.50 Adj. EPS15E US$0.11 US$0.08 Adj. EPS16E US$0.07 US$0.09 Adj. EPS17E US$0.49 US$0.46 New Valuation: -- Old Valuation: 50% of 7.0x Avg. 2016/17 EV/EBITDA + 50% of 1.0x 8% NAV Key Risks: Political, commodity, operating, development and balance sheet Div. (NTM) $0.06 Div. (Curr.) $0.13 Yield (Curr.) 5.9% First Quantum released its Q4/15 operating results. Implications
Q4/15 Cu production of 120kt Cu was in line with our estimate; Ni, Zn, and Au production was 8%, 12%, and 4% above our estimates respectively. No operating or cost details were provided. Sentinel produced 15kt of Cu in Q4/15, below our estimate of 19kt, but up from 11kt in Q3/15. There was no update on the power situation; as a result, we have reduced our 2016 Cu estimate to 150kt (from 175kt). 2016 guidance was not disclosed; we anticipate the release of guidance in the next few weeks ahead of the Q4/15 financial results. Cu sales of 118kt (ex 6kt of pre-commercial sales at Sentinel) were also in line; Ni, Zn, and Au sales were all above estimates. Recommendation
While FM has an above average balance sheet/development risk profile, we believe that the current risk-reward trade-off makes sense for investors at what we anticipate to be "bottom of cycle" Cu prices. FM is rated Sector Outperform with a C$10.50 target. Our 12-month target of C$10.50 is based on a 50/50 mix of 7.0x our average 2016E/2017E EV/EBITDA (C$5.93) and 1.0x our 8% NAVPS estimate (C$15.31).