Stock’s Details

Lundin Mining Corporation (TSX: LUN) is Canada’s diversified metals and mining company. The company primarily produces copper, which accounts for the majority of its revenues. Besides, it also produces gold, zinc, and nickel. Lundin Mining carries out its operations in the United States, Brazil, Portugal, Sweden, and Chile.

In the first quarter, copper accounted for 64% of the total revenues. Gold accounted for 15%. Meanwhile, zinc, nickel, and lead accounted for 8%, 6%, and 3% of the total revenues, respectively. While short-term challenges persist owing to the lower metal prices, Lundin Mining’s diversified portfolio, a ramp-up in production, and lower costs call for a long-term buy.  The company stated that the COVID-19 outbreak didn’t have any significant impact on its production, supply-chain, and shipments of concentrate.

Investment Thesis:

• Downside seems to be capped: Lundin Mining stock has been resilient despite a decline in metal prices, primarily of copper, zinc, and nickel. In the first quarter, realized prices for copper decreased about 37% y-o-y. Meanwhile, nickel and zinc prices fell by 54% and 43%, respectively. Investors should note that LUN stock is down by about 12% so far this year despite the considerable decline in metal prices. Meanwhile, LUN stock is more or less flat in the last one year. The stocks resilience comes from the company’s diversified portfolio. Moreover, production ramp-up, favorable foreign exchange rates, and declining costs is likely to cap the downside. Notably, copper being an efficient conductor of heat and electricity, finds its usage in producing renewable power. As renewable power sources steadily become mainstream, the demand for copper is likely to increase. However, this is too early to form an investment case based on demand from the renewable power sector. In the near-term, the coronavirus outbreak has impacted the global manufacturing, which has pulled prices of copper down. We believe prices could stay low in the near-term in the wake of lower manufacturing activities. However, China’s economy is slowly reviving, which is good news as China accounts for the majority of the copper demand. Also, strengthening of the U.S. dollar in comparison to local currencies is benefitting copper producers.

Realized Metal Prices (Source: Company Reports)

• Strong liquidity, Healthy dividends: Lundin Mining has enough liquidity to fund all of its obligations through its operating cash flows and cash in hand. As on March 31, Lundin Mining had cash and cash equivalents of US$ 366.9 million. Meanwhile, cash flow from operations increased to US$ 83.4 million during the first quarter. Further, the company is focusing on reducing costs to boost liquidity. Meanwhile, Lundin Mining is also an ideal income stock. On February 20, Lundin Mining increased its quarterly dividend by 33% to CAD 0.04 per share. Currently, LUN stock offers a dividend yield of 2.35%, which is decent and sustainable in the long run.

• Production ramp-up, lower costs: Lundin Mining has crossed the inflection point and is poised to benefit from strong production volumes and declining costs. Investors should note that Lundin mining’s years of investments to drive down costs and ramp-up production have started to pay-off. Notably, the company expects production to increase in the coming years. Meanwhile, it expects costs to come down, thanks to the years of reinvestments. We believe the company’s ability to grow its portfolio of base metals, mines in low-risk regions, a strong pipeline of development and exploration projects, and competitive cost position makes it an attractive long-term bet.

Production Profile: FY19 to FY21 (Source: Company Reports)

As prices of metals stay low, the company is focusing on lowering costs. Besides, higher by-product credits are a positive. For 2020, the company is forecasting a 30% reduction in capex and a 36% reduction in the exploration expenditure to offset the lower metal prices. However, production is expected to increase significantly over the prior year.

At its Candelaria mine in Chile, the company produced 36,297 tonnes of copper and about 21,000 oz of gold in the first quarter, which was higher than the prior year. Meanwhile, cash cost improved from US$ 1.62/lb to US$ 1.31/lb. Moreover, all-in sustaining costs decreased from US$ 3.30/lb to US$ 2.26/lb.

Going forward, the management expects production to increase and cash costs to decline at its Candelaria mine, which is likely to support profitability amid low prices for copper. For the full-year, the cash cost guidance improved to US$ 1.35/lb of copper from its earlier expectation of US$1.45/lb.

Investors should note that the company’s strategic acquisition of Chapada mine in Brazil last year will boost its gold and copper production. Also, higher precious metal credits are encouraging. The company expects to produce 51,000 tonnes to 56,000 tonnes of copper and 85,000 ounces to 90,000 ounces of gold, which indicates a significant jump over the prior year.

Production and Cash Cost Outlook (Source: Company Reports) 

Q1FY20 Highlights: On April 29, Lundin Mining announced its first quarter results. The company’s first quarter revenues and earnings were marred by lower metal prices of copper, zinc, and nickel. The company posted total revenues of US$ 378.0 million, reflecting a decrease of 9.2% or US$ 38.4 million from the prior year. The y-o-y decline in revenues came on the back of lower metal prices. However, an increase in copper and nickel sales volumes supported the top line. In the first quarter, realized prices for copper decreased about 37% y-o-y. Meanwhile, nickel and zinc prices fell by 54% and 43%, respectively.

During the first quarter, production costs increased by about 36% to US$ 278.7 million, primarily due to the inclusion of the production costs from the Chapada mine. Besides, higher sales volumes further drove production costs higher. Notably, the company acquired the Chapada mine last year.  The company’s adjusted EBITDA came in at US$ 90.3 million, down significantly from US$ 177.0 million in the first quarter of the prior year due to the lower revenues and higher production costs. Depreciation, depletion and amortization expenses came in higher due to the factors mentioned above. The general exploration and business development expenses came in at US$ 13.2 million, reflecting a decline of US$ 5.5 million. Finance costs increased during the first quarter reflects higher interest expenses coupled with lower interest income. Lower metal prices, higher production costs, and an increase in finance costs took a toll on the company’s bottom line. Lundin Mining reported an adjusted net loss of US$ 40.6 million in the first quarter as compared to adjusted earnings of US$ 62.9 million in the prior year.

Cash flow from operating activities increased to US$ 83.4 million in the first quarter, while cash and cash equivalents stood at US$ 366.9 million. Net debt was US$ 117.7 million.

Production and Cash Cost:

Lundin Mining’s Candelaria mine produced 36,297 tonnes of copper in the first quarter, which was higher than the 32,778 tonnes of copper produced in the corresponding prior-year quarter. Meanwhile, the gold and silver production stood at 21,000 oz and 331,000 oz, respectively in the first quarter, which is also higher than the comparable prior year period. Copper cash costs improved significantly from US$ 1.62/lb to US$ 1.31/lb, reflecting favourable foreign exchange rates. Meanwhile, all-in sustaining costs dropped from US$ 3.30/lb to US$ 2.26/lb, reflecting favorable currency movements and lower sustaining capital expenditures.

Chapada mine produced 11,881 tonnes of copper in the first quarter and 18,000 oz of gold. Moreover, the mine produced 57,000 oz of silver. Cash cost stood at US$ 0.92/lb, while all-in sustaining cost was US$ 1.22/lb

The company’s Eagle mine produced 4,378 tonnes of copper, higher than 3,897 tonnes in the prior year quarter. Meanwhile, the mine produced 3,575 tonnes of nickel, down from 4,213 tonnes in the prior year quarter. Lower realized prices took a toll on the mine’s cash cost. Eagle mine’s cash cost came in at US$ 1.43/lb from US$ 0.37/lb. All-in sustaining costs came in at US$ 3.50/lb from US$ 1.65/lb, reflecting higher cash cost.

Neves-Corvo mine in Portugal produced higher copper. However, silver, zinc, and lead production declined on a y-o-y basis. Meanwhile, both cash cost and all-in sustaining costs increased as a result of lower prices and by-product credits. 

Zinkgruvan mine in Sweden witnessed a decline in copper and zinc production. However, lead and silver production increased. Both cash cost and all-in sustaining costs increased as higher zinc treatment and refining charges more than offset the benefits from higher by-product credits.

Q1FY20 Financial Highlights (Source: Company Reports) 

2019 numbers in a nutshell: In 2019, Lundin Mining posted revenues of US$ 1,892.7 million, which implies a year-over-year increase of US$ 167.1 million. Despite a decline in net realized price and higher treatment and refining charges of zinc, gross profit increased to US$ 440.4 million, as compared to US$ 436.6 million in the prior year. The year-over-year increase came on the back of the acquisition of Chapada mine, which added about US$ 104.4 million to the gross profit.  Adjusted EBITDA increased by nearly 10% year-over-year to US$ 705.7 million. Higher revenues, lower exploration and business development expenses, and decline in finance costs supported the company’s adjusted net earnings in 2019. However, adjusted net earnings fell 13% year-over-year to US$ 159.5 million, reflecting lower foreign exchange gains. 

Top 10 Shareholders:

The top 10 shareholders have been highlighted in the table, which together forms around 28.89% of the total shareholding. Nemesia S.à.r.l is the entity holding maximum shares in the company at 12.79%. BlackRock Investment Management (UK) Ltd. is the second-largest shareholder, with a holding of 3.19%.

Top Ten Shareholders (Source: Thomson Reuters) 

Key Metrics:   

In FY19, the company had a gross margin of 23.3%, lower than 25.3% in FY18. However, EBITDA margin increased to 36.4% from 35.9% in FY18. Net margins in FY19 stood at 10.0%, down from 12.5% in the prior year.

Key Metrics (Source: Thomson Reuters)  

Key Valuation Metrics:

Key Valuation Metrics (Source: Thomson Reuters)

Valuation Methodology (Illustrative): EV/EBITDA Multiple Approach

Note: All forecasted figures and peers have been taken from Thomson Reuters, NTM-Next Twelve Months

Stock Recommendation: Lundin Mining remains well positioned to benefit from its multi-year investments to expand the production and reduce costs. The company’s years of strategic business reinvestments have started to pay-off as reflected in the company’s guidance. Management expects production to increase in 2020 and 2021, while it projects costs to decline. While lower metal prices and amid COVID-19 outbreak is likely to hurt its near-term financials, the company is likely to gain in the long run, thanks to its diversified portfolio, a strong pipeline of development and exploration projects, and competitive cost position. Further, the demand from China is picking up which is expected to act as a support to the copper prices. We have valued the stock using EV/EBITDA based relative valuation methodology and considered Freeport-McMoRan Inc (NYSE: FCX), First Quantum Minerals (TSX: FM), Kinross Gold (TSX: K) etc. as peer group. We arrived at a target price with an upside potential of lower double-digit (in percentage terms). We give a “Buy” recommendation on the stock at its closing price of CAD 6.82 per share on April 30, 2020.

LUN One-Year Daily Price Chart (Source: Thomson Reuters)

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Disclaimer

 

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