FQM Medium Term Forecast Analysis

For many years, Kansanshi Mining Plc has maintained its status for being one of Africa’s top copper producers and has largely contributed to Zambia’s GDP. Recently, First Quantum achieved annual copper production of 776 thousand tonnes (kt) which is a decline of 5% from the year 2021.

Kansanshi Mine produced 146kt in 2022 which was 56kt lower than what was recorded in 2021, while it’s Kalumbila-based counterpart, the Sentinel, achieved a record quarterly production and saw a year-on-year increase of 242kt of copper.

The decline in copper production at Kansanshi Mine was mainly attributed to low sulphide grades from narrow-veined regions, depleting oxide ore and restricted access to high-grade blocks due to an accumulation of water in the main pit in the second and third quarter.

According to FQMs CEO- Tristan Pascall, he accredited the decrease in copper production to higher water levels from the 2021/22 rainy season which severely affected mining deployment. Risks to global demand have also contributed to a decline to copper prices this year, yet the copper market is facing a global shortage as there has been a lack of capital expenditure to boost supply.

On the other hand, the quarterly increase in the overall copper production was mainly as a result of production at the Sentinel Kalumbila mine. It achieved record throughput levels that set an annual record for 2022 and mined higher grade ore. However, production was impacted in Q1 of 2022 by a delay to Stage 2 North-wall stripping due to wet underfoot conditions preceding an extended rainy season.

According to the FQM News release of [indicate date], copper and nickel production is forecast to grow between 775-865kt and 45-60kt respectively by 2025. The company anticipates an increase in capital expenditure of $1.6 billion in 2023 and $1.8 billion in 2024.

 However, the miner predicts the expenditure to fall by approximately 16.7% to $1.5 billion in 2025 due to the expected completion of the S3 Expansion project at Kansanshi. The increase in 2023 and 2024 are as result of inflationary pressures on sustaining capital and the timing of expenditure for project capital.

In response to global climate change concerns, the company made a significant step towards achieving its target of reducing greenhouse gas emissions by 2030 and this could potentially increase their operating costs in the short term.

Additionally, as of September 2022, the Minister of Finance and National Planning- Dr. Situmbeko Musokotwane announced during the presentation of the 2023 National Budget that the government would be reconstructing the Mineral Tax regime and that excise duties and standard VAT that were previously suspended would be reinstated as of 2023.

The implication of this is that Royalties would now be incurred on an in incremental basis, and the mineral royalty tax bands were amended. This move suggests that the government will be able to raise more revenue from taxing the mines.  

As a result, mines in Zambia should expect a rise in operating costs as of 2023. First Quantum also agreed to repay outstanding VAT claims based on offsets against future corporate income tax and mineral royalty tax payments.

Although FQMs focus on operational improvements has resulted in strong production from Sentinel in Q3 of 2022, headwinds from recessionary concerns and broad cost inflation have led to substantial margin compression across the mining industry.

In an interview, CEO of FQM Tristan Pascall stated that “the company is well positioned to navigate the current period of challenging macroeconomic conditions.” He further stated that the company remains focused on driving productivity, cost improvement at operations, prudently managing capital expenditure and exercising financial discipline.

Overall, Q3 financial results were impacted by margin compression due to declining copper prices and cost inflation. However, this decrease was partially mitigated by higher copper sales volumes.

Although FQM seems to have a positive outlook for the next three years, they will need to ensure they boost production of copper in both Kansanshi and Sentinel Kalumbila in order to achieve their set targets.

Operating costs are likely to increase due to the recent amendments to the Zambian tax regime as well as the company’s decision to be more carbon conscious, so the company is likely to face higher costs of production which will need to be offset by a substantial increase in sales revenue which can hopefully be complimented by a spike in the price of copper on a global scale.