The Panamanian assault on the massive Cobre Panama mine operated by First Quantum (FM) is an example of sovereign risk taken by mining companies and the controversy has seen First Quantum shares cut in half in terms of market trading prices. The Panama mine comprises almost half the value of First Quantum and contributes about 5% of the GDP of Panama, so the temperature in the room is pretty high wherever this issue comes up.
In the midst of this, analysts are all over the map. Here are two diverging ratings published by TD Waterhouse this morning.
Barclay’s says “SELL” and puts a $17 price on the shares and BMO Capital says “BUY” and calls for $28 a share. How often do you see a 65% difference in estimated value of a public company?
Two things are worth noting - one, that Panama needs the mine to operate and will either come to a deal of some sort with First Quantum or find another operator and make at least a token effort to compensate First Quantum for loss of its license unless they think they can persuade some other mining firm to risk capital with the prospect of their assets confiscated. I suspect some kind of deal will emerge but I don’t bet on it.
The second thing is that First Quantum has plenty of other assets - its other mines are well managed, operating well, profitable and valuable. FM shares are trading at CDN$15 and I estimate (without much detailed analysis) the other mines are worth at least CDN$12 a share, more or less.
The trading opportunity lies in the high volatility in the shares and the resulting high option premiums that typically (and in this) accompany high volatility. A September 24, 2024 option on FM shares at a strike price of CDN$13 traded yesterday for CDN$5.85 a share. The spread between bid and asked on the option is high, but I was able to sell options of that duration and strike for a realized price of CDN$4.82 so I bought FM shares at CDN$15 and wrote the CDN$13 option at $4.82 net to me, for an all in cost of the position of CDN$10.18. If I get called away at thirteen, I gain amost 30% in 10 months. If the option expires worthless, I have purchased FM shares at $10.18 and believe they are worth at least $12.00 based on my crude valuation.
I could be wrong about the valuation which lies more in the hands of the commodity price auction for copper than in getting the arithmetic right, so my investment question was pretty simple - would I pay ~$10 a share for First Quantum if it lost its Panama mine, received no compensation whatsoever, and trundled on. My answer was - sure, I would. I like the long term outlook for copper and think First Quantum is well managed with good assets.
For me, a ~30% gain in 10 months or a long term investment in FM at $10 a share are both reasonable outcomes. So I put on the position to add to my copper holdings.
So much for the green transition.
1.5% of global production???
https://www.bloomberg.com/news/articles/2023-11-28/panama-to-shut-down-first-quantum-mine-after-ruling-president?srnd=premium-canada