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First Quantum Minerals Ltd. (FM-T) has begun 2024 looking like a winning stock, but its early rebound may add another layer of risk to an investment that has been reeling from setbacks related to the company’s huge copper mine in Panama.

Just ask anyone who jumped on the rally by Laurentian Bank of Canada last July, in the hope of a bidding war for the struggling lender. By the time the bank announced six weeks later that no buyer had emerged, the shares were down nearly 30 per cent.

Now, First Quantum is beckoning investors with a similar promise. In the first week of January, the Vancouver-based copper producer’s share price has surged more than 20 per cent, even as the S&P/TSX materials index – composed of miners and other commodity producers – has retreated 1.4 per cent over this period.

The stock’s gains appear largely related to reports that Barrick Gold Corp. (ABX-T) is considering a takeover bid for First Quantum, after the two companies reportedly discussed a merger proposal last year.

Neither company has offered an official confirmation that a deal is in the works. But the rumours are no doubt fuelling hopes that a takeover by Barrick will reward existing First Quantum shareholders with a handsome premium over the stock’s beaten-up state at the end of 2023.

In December, Panama’s government forced the company to cease operations at its flagship Cobre Panama copper mine indefinitely, following popular protests and a court ruling that the mine’s new contract was unconstitutional.

First Quantum’s share price sank to a low of $9.65 in Toronto by mid-December, down from a recent high of $39.11 in July.

Even at this low point, investors betting on a rebound were making a wild bet. Reopening the mine would rest on successful 2024 elections in Panama and international arbitration, a process that could take a couple of years.

In the meantime, First Quantum faces considerable financial stress, with Cobre Panama’s closure weighing on the company’s cash flow and possibly putting pressure on its debt covenants.

Now, with the stock rallying in the opening days of 2024, the stakes are much higher: The elevated share price is already reflecting a much better outcome for First Quantum, introducing new downside risk should a deal either fail to appear or arrive with a disappointing price.

There is an optimistic case here, too, of course. Copper is a key ingredient in the energy transition, used in everything from electric vehicles to wind turbines. As a result, copper consumption is expected to double by 2035, according to S&P Global, underpinning demand for copper assets.

Regulatory hurdles and popular opposition to new mines add to the appeal of existing mines. Full disclosure: I own shares in Lundin Mining Corp., another Canadian copper producer, for these reasons.

In addition, there are specific reasons that support Barrick’s potential interest in First Quantum. Orest Wowkodaw, an analyst at Bank of Nova Scotia, pointed out that Barrick’s copper mine in Zambia offers a good fit with First Quantum’s assets in the same country.

“Moreover, we note that many gold companies, including Barrick, appear keen to add copper exposure given the emerging energy transition narrative,” Mr. Wowkodaw said in a note this week.

Still, the analyst hasn’t changed his views on First Quantum. He maintained a lukewarm “sector perform” recommendation on the stock, which is the equivalent of “hold.” He also left his price target – or where he expects the shares will trade within 12 months – unchanged at $14.

First Quantum’s share price closed Thursday at $13.05, down 1.8 per cent for the day but up 35 per cent from its mid-December low.

From here, a lot has to go right for investors. Apart from the emergence of an attractive deal, the copper market will have to remain appealing with buoyant commodity prices.

Over the long term, that seems like a slam dunk as the energy transition accelerates.

In the short term, though, copper prices must navigate a global economy that remains fragile after aggressive interest rate hikes by central banks over the past two years caused borrowing costs to soar. As well, China, the world’s largest copper consumer, is facing weaker economy activity and a deflating real estate sector. All this at a time when copper supply is rising.

Copper futures traded at about US$3.85 a pound on Thursday, above recent lows but still well off last year’s high above US$4.25 a pound – suggesting that the outlook for 2024 is less than clear.

First Quantum in December was priced for a dismal future. Now, the stock is primed for success that looks far from secure.

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