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23 March 2015

First Quantum Minerals – Agreement on EBITDA covenant

Zambia - TSX and LSE-listed base metals miner First Quantum Minerals (FQM) last week announced that the required threshold of syndicate banks have agreed to the changes requested by the company to the Net Debt to earnings before interest, tax, depreciation and amortization (EBITDA) covenant under its $3.0-billion senior debt facility and the $350-million Kansanshi facility.

As noted previously, changes to this covenant were requested due to the adverse impacts that the new Zambian corporate tax and mining royalty regime, were expected to have on the FQM’s reported EBITDA.

Effective January 1, 2015, royalties were increased from 6% to 20% for open-pit mining and from 6% to 8% for underground mining.

In light of this, new Zambian President Edgar Lungu has plans to reverse the prior government’s royalty increases, but it may come too late to rescue investor confidence in the country’s mining sector.

Combined with the recent significant fall in commodity prices, the tax changes put at risk FQM’s ability to meet the Net Debt to EBITDA covenant, the company reported.

Despite this, FQM’s other covenants remain robust. The Initial Mandated Lead Arrangers on the company's $3.0-billion facility have responded favourably to the cost reduction steps the company has taken. They have agreed to change the affected covenant to reflect current circumstances and provided confirmation that they will recommend such a change to the company's broader lending group who remain supportive of the company.

FQM said in a statement that it remains compliant with all finance covenants under the facility agreement and that it expects to remain compliant at the next covenant test date of March 31, 2015.

Meanwhile, in its full year 2015 guidance release last week, FQM reported that the financial and commodity markets have started 2015 with high volatility on concerns about the global economy, demand for natural resources and companies' liquidity positions.

As a result, FQM’s share price, along with others in the sector, has been materially affected.“While we have high confidence in the mid to long-term outlook for copper, we are mindful of the current concerns. As always, we pay close attention to the company's financial position to make sure there is sufficient flexibility despite having an active project development pipeline,” FQM CEO and chairperson Philip Pascall said.

FQM this year expects to produce a total of between 410 000 and 440 000 t of copper at a cash cost of production of between $1.30 and $1.55 per pound.

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