FQM Focused on Shareholder Value and the Balance Sheet

“OUR FOCUS IS CLEAR” screamed the First Quantum Mining (FQM) 2015 Annual Report. From the onset, with the paradox of tumbling commodity prices from the New York stock exchange to the London metal exchange, it’s very clear that the management team want to convey a message of focus and strength at the mining conglomerate. They further declare that their guiding fundamentals of business are: safety and balance sheet strengthening. Hence their decision to take decisive measures in protecting the mining company in prevailing market volatility whilst preserving its growth in the midst of a China slowdown and the impact of financial speculators. Some of these measures included the reduction in operating cash outflow, downsizing and renegotiating on timing of receivables. On a higher note, Kansashi saw the completion and ramping up of a new copper smelter that would boost capacity.

Turning to the audited numbers, revenue in 2015 was down 24% while operating cash flow was up by 60%. The latter was indicative of their strategy in motion. A fall in revenue however, lead to negative operating profit and EBITDA. EBITDA volatility is indicative of high fixed costs which the company is hoping to reduce in its quest to strengthen the balance sheet. Gearing was down 12% indicating a push to restructure the company’s capital structure. This is evident as the company sort more current liability debt (up over 600%) over long term debt (down 18%).

In transition, shareholders in 2015 saw a drop in return on equity and capital employed (both in negative territory). This was reflected in the diminished dividend that was paid in 2015 (down 98% from 2014). Patience and watchful eye on metal prices will be necessary. In addition, management’s efforts should be centered at getting more return off their assets. Improving non-current asset turnover and working capital management will be critical areas of focus on the back of newly commissioned smelters.