Lundin Mining Corporation (TSX: LUN) is Canada’s diversified metals and mining company. The company primarily produces copper, which accounts for most 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.

Revenue Mix

By Commodity                                                                   By Geography

Investment Rationale

• Outperformed Industry in terms of Margins: In the second quarter of FY20, the company reported EBITDA margin of 44.0% vs Industry Median of 28.7%, Operating margin of 21.4% vs industry median of 11.8% and Net margin of 9.0% whereas industry median stood at 2.5%.

Source: Kalkine Group, Refinitiv (Thomson Reuters)

• Low Balance Sheet Risk: The company has minimal debt contribution in the balance sheet, with Debt/Equity ratio stood at 0.14x, against the industry median of 0.23x. Also, the company’s Net Debt/EBITDA ratio stood at 0.71x, significantly lower than the industry median of 4.82x. These measures imply very low balance sheet risk for the company.

Source: Kalkine Group, Refinitiv (Annual Report)

• Higher Realized Metal Prices: In the second quarter of FY20, the company’s average copper realized prices have improved by 16% and average gold realized prices improved by 32%. As 84% of the group’s total revenue comes from these above-mentioned commodities, an increase in realization prices would bolster the group’s financial condition.

Source: Kalkine Group, Company Filing.

• Higher Underlying Commodity Prices Expected to Benefit Performance in Q3FY20: Copper prices have moved more than 17% over the past one year and hovering above pre-pandemic levels, and gold prices have surged more than 26% in the same period. The rise in the underlying commodity prices would benefit the group’s performance in the second half of the FY20 as well.

• Resilient Operations amid COVID-19 Challenges: Operations performed well in the quarter with copper production at all operations higher than the prior year comparable quarter and record combined throughput of over 1.0 million tonnes at Neves-Corvo. Except for Candelaria, production at all mines remain on target to achieve previously disclosed annual guidance, despite challenges of the COVID-19 pandemic. Furthermore, cash costs at all operations were in-line or better than expected. For Chapada and Eagle, annual cash cost guidance is improving by 24% and 15%, respectively.

Source: Company Filing

• Risk Associated to Investment: Performance of the company is highly exposed to the volatility in the underlying commodity prices, especially copper and gold as they are the major contributors in the group’s top-line and bottom line. Volatility can lead to large swings in the group’s financial performance. Also, the company is exposed to the currency translation risk, steep volatility in the US Dollar could have a positive and negative impact on the group’s performance.

2QFY20: Financial Highlights

Source: Company Filing

• Revenue increased by 44% in the second quarter of FY20, led by a 16% improvement in the copper prices and a 32% surge in the gold prices on a YoY basis. This was partially offset by a 15% slump in the zinc prices and 1% reduction in the Nickel prices over the past one year.
• During the second quarter of 2020, the fast-growing infection rates in Brazil, Chile and the USA have increased the risk of outbreaks in the communities near Chapada, Candelaria and Eagle whereas rates of infection in the areas near the operations in Sweden and Portugal remained relatively stable. However, production disruptions have been minimal, and there has been no significant disruption in the delivery or receipt of goods at the operations because of COVID-19.
• Production costs for the quarter and six months ended June 30, 2020, were USD 17.2 million and USD 90.8 million, respectively, higher than the comparable prior year periods, due to the inclusion of production costs from the Chapada mine and higher sales volumes at Candelaria, partially offset by favourable foreign exchange.
• Gross profit for the quarter ended June 30, 2020, increased by USD 117.0 million compared to the prior-year quarter. The increase was primarily due to the addition of the Chapada mine (USD 59.3 million), higher realized metal prices and price adjustments (USD 40.0 million) and favourable foreign exchange (USD 19.0 million), partially offset by higher depreciation expense at Candelaria (USD 22.1 million).
• Net earnings for the quarter ended June 30, 2020, increased by USD 56.9 million from the prior-year quarter. The increase was attributable to higher gross profit, partially offset by higher income taxes (USD 55.9 million)
• Adjusted earnings for the quarter were USD 63.8 million higher than the prior-year quarter due mainly to higher gross profit offset by higher income taxes.
• Net finance costs for the three and six months ended June 30, 2020 increased over the prior year comparable periods by USD 10.6 million and USD 23.0, million respectively, primarily due to higher interest expense from deferred revenue and lower interest income.
• Cash and cash equivalents of USD 283.9 million as at June 30, 2020 decreased by USD 83.0 million during the quarter including cash flow from operations of USD 37.6 million, which included an outflow of USD 141.4 million for changes in working capital.
• Net debt of USD 220.0 million as at June 30, 2020 reflects an increase of USD 159.7 million since December 31, 2019.

Increasing Production Profile

Source: Company Presentation

Operational Performance

• Candelaria (80% owned): Candelaria produced 35,060 tonnes of copper and approximately 21 thousand ounces of gold in the concentrate on a 100% basis. Copper production for the quarter was higher than the prior-year quarter primarily due to higher copper head grades and recoveries as a more higher-grade open pit, and underground ore was mined.
• Chapada (100% owned): Chapada produced 13,799 tonnes of copper and approximately 23 thousand ounces of gold, in line with the plan. Copper cash costs of USD 0.21/lb were better than expected, benefitting from favourable foreign exchange and higher gold by-product prices.
• Eagle (100% owned): Eagle produced 3,380 tonnes of nickel and 4,102 tonnes of copper during the quarter. Nickel production was comparable to the prior-year quarter. Copper production was higher than the prior-year quarter as a result of higher grades. Nickel cash costs of USD 1.13/lb for the quarter were lower than the prior-year comparable quarter due primarily to lower treatment and refining costs.
• Neves-Corvo (100% owned): Neves-Corvo produced 10,559 tonnes of copper and 18,986 tonnes of zinc for the quarter. Copper production was higher than the prior-year quarter benefitting from record throughput and better recoveries, while zinc production was higher due to higher grades. Copper cash costs of USD 1.75/lb for the quarter were lower than the prior-year quarter due to favourable foreign exchange which was partially offset by lower by-product credits stemming from lower realized zinc prices.
• Zinkgruvan (100% owned): Zinc production of 12,596 tonnes and lead production of 3,799 tonnes was lower than the prior-year quarter due to grades and lower throughput as a result of the sequencing of copper production. Zinc cash costs of CAD 0.56/lb were higher than the prior-year quarter as a result of lower sales volumes and by-product credit metal prices.

Guidance

Source: Company Filing

Top-10 Shareholders

The top 10 shareholders have been highlighted in the table, which together forms around 29.5% of the total shareholding. Nemesia S.à.r.l and Fidelity Management & Research Company LLC hold the maximum interests in the company at 12.8% and 3.16%, respectively. The institutional ownership in the company stood at 39.84% and strategic ownership stood at 13.28%. 

Source: Refinitiv (Thomson Reuters)

Valuation Methodology (Illustrative) : EV to EBITDA Based Valuation Metrics

Note: All forecasted figures have been taken from Refinitiv (Thomson Reuters)

Peer Comparison

Source: Refinitiv (Thomson Reuters)

Stock Recommendation: The group’s operations had a good quarter and, other than Candelaria, are on track to meet previously disclosed production guidance. Also, the company has not experienced significant disruptions to production, shipments of concentrate, or its supply chain due to COVID-19. Moreover, Cash costs at Chapada and Eagle have been better than expected due to favourable by-product metal prices and, at Chapada, favourable foreign exchange; accordingly, cash cost guidance for these two operations has been reduced. Further, in the second quarter of FY20, the company reported better than the industry median margins. Further, the group has a strong balance sheet with the Debt/Equity ratio stood at 0.14x, against the industry median of 0.23x.

Copper prices have recoded a sharp recovery on the London Metal Exchange, with commodity prices are hovering above the pre-pandemic price level. Improvement the copper price is likely to benefit the company’s performance in the near to medium term. Further, copper prices are likely to remain stable in the second half of the year as most of the governments across the globe eased the lockdown restrictions which is likely to result in the resumption of the industrial activities. Also, a higher gold prices bode well for the group as it derive a portion of revenue from the gold sales as well.

Therefore, based on the above rationale and valuation, we have given a “Buy” recommendation at the closing price of CAD 7.45 on October 08, 2020.

1-Year Price Chart (as on October 08, 2020, after the market close). Source: Refinitive (Thomson Reuters)

*Recommendation is valid at October 9, 2020 price as well.

Disclaimer

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