Lundin Mining Corp (TSX: LUN), is a diversified Canada-based metals mining company with operations in Chile, the United States, Portugal, and Sweden. The company primarily produces copper, nickel, and zinc, and to a lesser extent, gold, lead, and silver.

Key highlights

• Elevated copper production and revenue:For Q1 2022, the company reported an increase in the total production of copper at 65,081 tonnes as compared to 57,354 tonnes in Q1 2021. Copper constitutes almost 69% of the metals share in terms of revenue for the company. Similarly, the revenues from the copper increased to USD 679.07 million during Q1 2022 as compared to USD 478.91 million in the pcp. Below is the pictorial representation of the contribution of the individual metal in the production and region-wise sales distribution.

• Improving operating matrix:The Company maintained its pace and witnessed spirited performance across its margin profile. The management is continuously raising prudent steps; thus, its presence is increasing along volume and higher average realized metal prices, which is appreciable. We believe the momentum to continue in the foreseeable future, as the Company had big capital investment plans to support future growth.

• Elevated commodity prices to support future earnings: The recent surge in commodity prices is benefiting the company, as we can observe a considerable influence on the precious and industrial metal mining company's balance sheet because of this trend. As prices rise, average realization prices for miners rise, resulting in a stronger margin profile, higher free cash flow generation, and balance sheet deleveraging. The company is well positioned to profit from rising underlying commodity prices and end FY2022 in good financial shape.

• Robust elevation in cash flows: In Q1 2022, the company reported Cash flow from operations of USD 317.2 million, which increased by 100%, compared to USD 158.6 million reported in the previous corresponding period. The increase was primarily attributable to higher net earnings at USD 378.1 million on the back of higher production and higher realized metal prices. Furthermore, the company also clocked elevated free cash flows of USD 186.5 million, against USD 56.0 million in pcp.

• Acquisition of Josemaria Resources Inc:Recently, the group announced the successful completion of the plan arrangement to acquire Josemaria Resources Ltd (TSX: JOSE) at an implied equity value of approximately USD 485 million. An addition of the Josemaria project to Lundin Mining's portfolio solidifies its position as a leading base metals producer with high-quality copper exposure and significant growth. Over the course of a 19-year mine life, Josemaria is predicted to generate over 130,000 tonnes of copper, over 225,000 oz of gold, and 1.0 million oz of silver on average. In comparison to expectations for 2022, this rise would raise the Company's copper output by about 50% and gold production by over 140%, which is a significant positive.

• Steady Guidance for FY 2022: The Company's performance in FY 2021 has strengthened management's confidence, and they recently announced their production projection for FY 2022, and expects stronger growth in Copper and Zinc production, while gold and nickel output would remain constant.

• Strong liquidity: The Company expects, to be able to fund all its contractual commitments and obligations through operating cash flow generated, cash on hand and available debt facilities, which is a key positive. As on March 31, 2022, the company had cash and cash equivalents of USD 733.9 million, which increased by USD 139.8 million, compared to USD 594.0 million on December 31, 2021. While for the same period its net cash increase by USD 141.8 million to USD 704.8 million, compared to USD 563.0 million.
  

Risks associated with investment 

The Company’s financial performance is mostly dependent on the price of different metals, especially copper and gold, which directly affects its profitability and cash flow. Any drawdown in the prices of these metals would impact the group’s performance. 

Financial overview of Q1 2022 (Expressed in thousands of US dollars)

Source: Company Filing 

• Healthy Revenues: In Q1 2022, the Company reported higher revenue, which increased 45% to USD 991.0 million, against USD 681.4 million in Q1 2021. The increase was primarily due to higher metal production.
• Gross profit grew to USD 478.8 million in Q1 2022, an increase of USD 226.4 million compared to the previous corresponding period. The increases were primarily due to higher realized metal prices.
• Increase in earnings before income tax: The company reported higher earnings before income tax in the reported period which stood at USD 455.3 million compared to USD 224.1 million in pcp. The higher earning was also partially supported by income from equity investment in associate.
• Rising net income: Primarily on the back of above discussed rationales the Company’s net income in Q1 2022 stood at USD 378.1 million compared to USD 154.2 million in pcp.

Top-10 Shareholders

The top 10 shareholders have been highlighted in the table, which forms around 36.06% of the total shareholding. Nemesia S.à.r.l and Capital Research Global Investors hold the company's maximum interests at 12.40% and 7.42%, respectively. The company's institutional ownership stood at 44.08%, and ownership of the strategic entities stood at 12.95%.

Valuation Methodology Illustrative: EV to Sales based

*1USD= 1.26 CAD

Analysis by Kalkine Group

Stock Recommendation

The company reported exceptional financial performance in the first quarter of FY 2022, with adjusted EBITDA of USD 588 million, free cash flow of USD 186.5 million, and record net earnings of USD 378.1 million. The current spike in commodity prices benefits the company, as we can see a significant impact on the balance sheet of the precious and industrial metal mining company because of this trend. The company is well positioned to benefit from improving underlying commodity prices and finish fiscal year 2022 in strong financial health.

The company recently completed an acquisition of Josemaria Resources Ltd, and we believe that adding the Josemaria project to Lundin Mining's portfolio will solidify the company's position as a major base metal’s producer with high-quality copper exposure and considerable growth.

Hence, considering all above discussed rationales we recommend a ‘Buy’ rating on the stock at the last closing price of CAD 11.46 as on June 2, 2022. Additionally, the markets are trading in a highly volatile zone currently due to certain macro-economic issues and geopolitical tensions prevailing. Therefore, it is prudent to follow a cautious approach while investing.

One-Year Technical Price Chart (as on June 2, 2022). Source: REFINITIV, Analysis by Kalkine Group

*Recommendation is valid on June 3, 2022, price as well.

Technical Analysis Summary

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