Permitting issues at Pebble may prove costly distraction for First Quantum Minerals

By Peter Kennedy

A decision by First Quantum Minerals Ltd. [FM-TSX] to sign an option deal to potentially earn a 50% interest in Northern Dynasty Minerals Ltd.‘s [NDM-TSX, NAK-NYSE] massive Pebble copper-gold project in Alaska may prove to be a costly distraction due to ongoing permitting challenges at Pebble.

First Quantum Chairman Philip Pascall said the option deal is an important opportunity to carry out a detailed assessment of one of the world’s largest undeveloped mining projects. Pebble is currently host to a measured and indicated resource of 6.4 billion tonnes, grading 0.4% copper and 0.34 g/t gold (or 0.76% copper equivalent including all by-products).

But in a research report, Scotiabank analyst Orest Wowkodaw was much less enthusiastic. While he said the framework allows First Quantum a long-dated option to acquire a large stake in the world’s largest copper-gold project, Wowkodaw said he has a number of concerns about the deal, including:

• The very high permitting risk associated with Pebble, which has been a lightning rod for environmentalists and Alaska residents who say such a large project is a threat local salmon fisheries;
• The large potential investment required by First Quantum only to earn a 50% interest.

The potential distraction that this project and the ongoing permitting issues could cause may impact the completion and ramp up of the company’s Cobre Panama Project and potential future developments of Taca Taca and Haquira.

First Quantum has emerged on the Pebble scene because Northern Dynasty needed to find a joint venture partner to replace Anglo American, which had the right to earn a 50% interest in the project, but withdrew from the partnership in September, 2013 after investing US $541 million.

Over a four-year option period, which can be extended by two years, First Quantum will have the right to invest $150 million to advance the permitting process for Pebble.

Under the agreement, First Quantum can earn a 50% stake in Pebble by investing another $1.35 billion, after which First Quantum and Northern Dynasty would each be responsible for 50% of remaining capital expenditures.

News of the agreement comes just four months after First Quantum said it will spend $635 million to boost its stake in the Cobre Panama mining project to 90%. It said the $5.5 billion project is over 60% complete and on schedule for a gradual start-up beginning in 2020.

Cobre Panama is a large open-pit copper development project located in the Panama jungle, about 120 km west of Panama City.

First Quantum also holds a 100% interest in the Taca Taca Project in Argentina. Taca Taca is a copper-gold-molybdenum porphyry deposit which is currently in the advanced exploration stage. Haquira is a large undeveloped copper deposit, located in southern Peru.

An expenditure of $150 million over four to six years is not large amount of money for a company of First Quantum’s size. In the first nine months of 2017, First Quantum saw its revenue increase to US $2.42 billion from US $1.98 billion in the previous nine-month period. The company is among the world’s leading copper producers and has mining operations in Australia, Africa, Turkey, Spain, and Finland.

But in his report, Scotiabank’s Wowkodaw said he would have preferred greater permitting visibility for this investment in Pebble, which is about to enter the rigorous state and federal permitting process.

However, in an interview with the Anchorage Daily News, U.S. mining analyst John Tumazos took a different view. “This strengthens the probability of completion a great deal now that First Quantum is involved,” he said.  Tumazos went on to say that First Quantum could fund the Pebble project using revenue from one of its other mines.

First Quantum shares fell 0.59% or $0.10 to $16.95 Tuesday to trade in a 52-week range of $17.55 and $9.69.