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.

Investment Rationales

• Diversified revenue mix: The Company's income is derived from a wide range of commodities from various places. The firm recorded total sales of USD 756 million in the third quarter of 2021, up 26% from USD 601 million in the previous corresponding period.

Source: Company

• Increasing production profile:For the Company, FY 2020 has been a watershed moment. Despite operational issues, all metal’s yearly output met or surpassed its annual output target. Furthermore, the Company anticipates that this upward tendency will continue in FY 2021, as the company is clocking higher production numbers in many commodities except the Nickel, compared on the sequential basis.

Source: Company

• Updated production guidance for FY 2021: The company's management is optimistic about commodity prices and has projected a good production profile. The firm forecasts consolidated copper and zinc production of 255,000 - 267,000 tonnes and 140,000 - 146,000 tonnes, while the gold production would be in a range of 158,000 - 166,000 oz and nickel at 18,000 - 20,000 tonnes. The company expects healthy growth in term of production numbers compared on Y-o-Y basis.

• Robust free cash flows: In Q3 2021, the company reported robust growth in its free cash flows to USD 407.0 million, an increase of USD 212.6 million, compared to USD 194.4 million in the previous corresponding period. While comparing on YTD basis, the free cash flow increased by USD 641.6. An increase in free cash flow was mainly due to higher cash provided by operating activities.

Source: Company

• Industry beating margins: The company's strong determination enabled them to outperform the industry median margins on several fronts in Q3 2021, which demonstrates the company's competitive edge within the industry. This can be seen in the graph below.

• Minimizing debts: The on-going steady performance of the company’s operations, agile management and higher average realization cost in Q3 2021, helped the company to minimize its total debt to USD 37.6 million, a decrease of USD 103.8 million from the total debt balance as on June 30, 2021. The decrease in total debt is attributable to the positive cash flow impacts.

Source: Company

• Risk 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 Q3 2021 – (In thousands of US dollars)

Source: Company

• Healthy Revenues: In Q3 2021, the Company reported higher revenue, which increased 26% to USD 756.3 million, against USD 600.6 million in Q3 2020. The increase was primarily due to higher metal production.

• Gross profit grew to USD 303.9 million in Q3 2021, an increase of USD 104.6 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 on the reported period which stood at USD 296.2 million compared to USD 163.5 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 company’s net income in Q3 2021 stood at USD 190.5 million compared to USD 133.5 million in pcp.

Top-10 Shareholders

The top 10 shareholders have been highlighted in the table, which forms around 37.30% of the total shareholding. Nemesia S.à.r.l and Capital Research Global Investors hold the company's maximum interests at 12.76% and 7.96%, respectively. The company's institutional ownership stood at 46.19%, and ownership of the strategic entities stood at 13.27%.

Source: REFINITIV, Analysis by Kalkine Group 

Valuation Methodology (Illustrative): EV to Sales based Valuation Metrics

Note: Premium (discount) is based on our assessment of the company’s growth drivers, economic moat, competitive advantage, stock’s current and historical multiple against peer group average/median and investment risks. 

Stock recommendation

The company continued to benefit from favorable base metal prices, generating more than USD 400 million in free cash flow for the second consecutive quarter. This was backed up by solid operational results, particularly at Chapada and Zinkgruvan mines, where production and cash costs improved from quarter to quarter. Importantly, shaft renovations and substantial maintenance at both the Neves-Corvo and Candelaria mines were completed successfully, putting the fourth quarter on track to be the best of the year, which is a significant positive. Additionally, we predict copper prices to stay steady in the coming months, since most governments across the world have relaxed shutdown restrictions, resulting in more industrial activity resumption.

Therefore, based on the above rationale and valuation, we recommend a "Buy" rating at the closing price of CAD 11.17 as on November 4, 2021. We have considered Capstone Mining Corp, First Quantum Minerals Ltd, Hudbay Minerals Inc, etc. as the peer group for the comparison.

*Depending upon the risk tolerance, investors may consider unwinding their positions in a respective stock once the estimated target price is reached. 

Technical Analysis Summary

One-Year Technical Price Chart (as on November 04, 2021). Source: REFINITIV, Analysis by Kalkine Group

*The reference data in this report has been partly sourced from REFINITIV.

*Recommendation is valid on November 05, 2021, price as well.

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Disclaimer

 

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