First Quantum launches US$450-500 million convertible bond issue

African copper-gold miner First Quantum on Wednesday announced the launch of USD 450m, possibly USD 500m, in convertible bonds, apparently facing little luck on copper hedges, and possible heat on its big new project in the Democratic Republic of the Congo. Neither element is mentioned by the company in its official convertible bonds announcement, which was first announced earlier in the day at USD 350m, and up to USD 400m. The issue was increased in line with "significant investor demand". 

There appears little question that First Quantum's copper hedges, taken out during the first quarter of the year, continue to weigh down its cash flows. The latest capital raising may be a little surprising, given that First Quantum on 6 April completed an equity issue of 9.3m new shares, raising CAD 346m. 

For the first quarter of 2009, First Quantum's copper output rose 18%, compared to the first quarter of 2008, to 89,440 tonnes; gold output soared 206% over the period to 50,425 ounces. Net profit, however, collapsed to USD 11m from USD 182m for the year-ago quarter. On 31 March 2009, group net cash was at USD 123m, and total debt stood at USD 425m. 

In response to lower copper prices - which fell from just over USD 4.00/lb in mid-2008 to USD 1.28/lb in December, First Quantum hedged across the first quarter of 2009. By 31 March, when copper was still well below current levels of around USD 2.10/lb, 79,500 tonnes of copper had been hedged. 

Upon reporting its first quarter 2009 results, on 13 May, First Quantum stated that "with the range of possible prices limited by the hedging program", combined with the company's targets remaining unchanged at an average cash cost of production of USD 0.80/lb of copper and production of 380,000 tonnes of copper and 240,000 ounces of gold, for 2009, that it "expects to continue to generate positive operating cash flows sufficient to cover all commitments, financing obligations and capital expenditures over the next 12 months". 

Yet two weeks later, a substantial sizeable convertible bond issue is launched. First Quantum renewed a USD 250m corporate revolving loan in January this year; part of April's equity proceeds were used to repay the outstanding balance of the facility, releasing the entire USD 250m facility as available for draw down. Meanwhile, First Quantum may be facing some challenges by the apparent lack of conclusion to the so-called contracts revisitation process in the Democratic Republic of the Congo, which houses First Quantum's 65% Kolwezi project. 

A syndicate of commercial and development banks were mandated in early 2008 to provide a USD 450m facility for the USD 593m project. Earlier this year, such banks reaffirmed, according to First Quantum, "that, subject to a satisfactory outcome to the revisitation process being conducted in the DRC, they are prepared to provide the financing subject to completion of documentation and standard conditions precedent for a facility of this nature".

The project debt, when available, would be used to repay the funding provided by First Quantum to date. Some USD 365m of the project budget has been committed and some USD 228m spent up to the end of the first quarter 2009, when the overall project was about 56% complete. First Quantum reduced cash outflow to the project during the first quarter, pushing out commissioning to the second quarter of 2010.

Rumblings over the DRC's revisitation process continue, and extend over the biggest copper mine in the DRC, Tenke Fungurume, where Freeport-McMoRan operates and holds 58.8%; Lundin holds 24.8% of the mine and DRC parastatal Gécamines (La Générale des Carrières et des Mines) the balance of 17.5%. The first phase at the mine cost USD 1.8bn to build, and recently produced its first copper cathode.

Where First Quantum holds 65% of Kolwezi, Gécamines holds 12.5%, the Industrial Development Corporation of South Africa 10%, the International Finance Corporation   7.5%, and the government of the DRC, 5%. When commitments were made in November 2007 to proceed with the development of the Kolwezi tailings project, First Quantum, the IDC and IFC were left alone to raise finance or procure third party debt project financing for Kolwezi.

First Quantum owns and operates 80% of the Kansanshi copper-gold mine in Zambia ("a foundation asset"), 95% of Frontier in the Democratic Republic of the Congo, the group's newest mine, 80% of the Guelb Moghrein gold-copper mine in Mauritania, 65% of the developing Kolwezi copper-cobalt project in the DRC, and, among other interests, exploration assets, including the Kevitsa copper-nickel-cobalt-gold-platinum-palladium project in Finland.

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