First Quantum (Price: 1168p | Target: 1331p | Rec: Buy) First Quantum delivered Q1 production in line with our expectations for all mines except Kansanshi, where output was a positive surprise given the usual challenges of the rainy season in Zambia.

While the company is clearly still struggling with the smelter capacity issues in Zambia, progress on its own smelter seems to be gathering momentum and this should alleviate reliance on external downstream capacity.

We lift our target price to 1331p and reiterate our Buy recommendation. * Q1 FY14 results: First Quantum produced 113Kt of copper and 12Kt of nickel in Q1 FY14 and as such has made a good start towards its full-year (reiterated) guidance of 418-444Kt of copper (Investec 439Kt).

The average C1 cash cost for the copper output was US$1.38/lb, which puts the company on track for its US$1.32-1.48/lb target (Investec US$1.38/lb).

Q1 EPS was 22c. * Copper price sensitivity analysis: Our analysis of First Quantum in various consensus-based copper price scenarios demonstrates the company’s leverage to changes in the commodity price.

Consensus low copper price estimates could see our EPS estimate for FY14E fall by 38% and valuation go to 997p.

However, even in our low case scenario, we believe the company would still be able to afford its expansion plans.

Applying the consensus high copper price profile could lift FY14E EPS by 46% and our valuation to 1882p. * Valuation & recommendation: Our target price of 1331p (previously 1270p) is based on an equal blend of NPV and peer group relative earnings multiples.

We have lifted our FY14E earnings estimate from 83c to 105c as we adjust for capitalised interest and we now include two months’ copper production from Sentinel during FY14E given this quarter’s positive development update. * Risks: Key risks to our earnings outlook relate to commodity price volatility and general mining challenges, as well as project delivery.
To access the full note please click here Analyst: Louise Collinge +44 (0)20 7597 5779
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