Mixed views on giant First Quantum offering

First Quantum Minerals Ltd. unveiled a blockbuster $1.25-billion stock offering Wednesday night, easily the largest equity deal in the Canadian mining space this year. The Vancouver-based company did not need to raise this much money, so the deal raises an obvious question: Is it worth diluting shareholders so much?

The offering, which is priced at $16.25 a share, will boost the share count by almost 13 per cent. First Quantum wants to pay down debt and accelerate the development of its pipeline of copper projects while the market is slow.

Those are both reasonable goals, but BMO Capital Markets analyst Sasha Bukacheva said the deal raises questions about the health of the company’s key Zambian projects: the Sentinel mine and Kansanshi smelter.

“Sourcing external funding suggests there could be more risks in the smelter and Sentinel ramp-up or current operations at Kansanshi than previously envisaged by the company,” she said in a note.

Dundee Capital Markets analyst David Charles was a little more optimistic. He said he is taking a “leap of faith” that the Zambian operations will deliver in the second half of 2015. He is also pleased that the equity offering will improve the balance sheet, which has been deteriorating as the company plows capital into the Cobre Panama project and faces higher taxes in Zambia.

Charles also said the offering gives First Quantum a stronger bargaining position with Franco-Nevada Corp., which has the right to buy precious metals output from Cobre Panama.

First Quantum could raise up to $1.44 billion from the equity offering if the underwriters exercise the full overallotment option.