Company Overview: Lundin Mining Corporation (TO: LUN) is Canada’s diversified base metal mining company. The company produces copper (66% of 2019 sales), zinc (13% of sales), gold (9% of sales), nickel (7% of sales), lead (3% of sales) and other metals (2% of sales). The company’s operations span across Chile, Brazil, Portugal, Sweden, and the USA.

Stock’s Details

Investment case:

Lundin Mining seems to be in a sweet spot. The company’s years of investments to expand production and lower all-in sustaining costs are only beginning to pay-off. Management’s guidance reflects that the production is likely to ramp up in coming years with lower cash cost, especially for copper and nickel, which could reduce the all-in sustaining costs and boost profitability. Notably, copper generates the major chunk of the company’s revenues, and an increase in production and lower cash costs bodes well for growth. Further, Lundin’s ability to grow its base metals portfolio, competitive cost positioning, mines in low-risk regions and a strong pipeline of development and exploration projects makes at it an attractive bet.

The recent fourth-quarter results indicated an uptick in the realized prices on an annual basis for copper, nickel, and gold, which is positive and is likely to support the upside in the Lundin Mining stock.

In 2019, the company produced 235,498 tonnes of copper, which it expects to increase to 272,000 to 296,000 tonnes in 2020. Production at the company’s Candelaria mine increased by 9% year-on-year to 146,330 tonnes in 2019. Moreover, cash costs improved by 8% year-over-year to US$ 1.54/lb, which was better than the management’s expectations.  As for 2020, copper production at the Candelaria mine is likely to increase by 16% year-over-year. Moreover, management expects cash costs to decrease further to US$ 1.45/lb in 2020, reflecting the realization of benefits from its reinvestments, which is encouraging.

The acquisition of Chapada mine in Brazil is likely to boost copper and gold production. Management expects the annual production of copper to be in the range of 51,000 tonnes and 56,000 tonnes over the next three years, which indicates a significant jump over 2019 levels. In addition to this, the management expects annual gold production to be in the range of 70,000 ounces to 95,000 ounces.

Besides copper, nickel production at the company’s Eagle mine is expected to jump 22% year-over-year to more than 3,000 tonnes. Moreover, management expects a significant decline in the cash cost (US$ 1 from US$ 2.84 in 2019) at the Eagle mine, which is likely to result in lower all-in sustaining costs.

At Neves-Corvo, zinc production is likely to ramp up as the ZEP (Zinc Expansion Project) is commissioned. Zinc production at Zinkgruvan is expected to be flat at 2019 levels.

Lundin Mining Production Profile (Source: Company Reports)

Risks: An anticipated increase in cash costs at Chapada, Neves-Corvo, and Zinkgruvan mines could remain a drag.

Know the operations:

The Candelaria Copper Mining Complex in Chile has two copper mines, Ojos del Salado and Candelaria. Both the operations produce copper as the primary metal, with gold and silver as by-products. Lundin Mining indirectly holds about 80% stake in it. Candelaria plant has a processing capacity of 27.0 million tonnes per annum (or mtpa). On a 100% basis, the company Candelaria operations produced 146,330 tonnes of copper in 2019. Moreover, it produced nearly 88,000 ounces of gold and 1.3 million ounces of silver in concentrate.

The company acquired the Chapada mine in Brazil last year. The mine mainly produces copper with gold and silver being the by-products. In 2019, Chapada produced 30,529 tonnes of copper. Moreover, it produced 54,000 ounces of gold.

The Eagle mine in the USA has a processing capacity of 0.7 mtpa, primarily produces nickel and copper. Besides, the mine also produces a minor amount of gold, platinum, and cobalt as by-products. In 2019, the mine produced 13,494 tonnes of nickel and 14,297 tonnes of copper.

Neves-Corvo mine in Portugal produces five ores with copper and zinc being the primary metal. The mine has a copper processing capacity of 2.6 mtpa. Moreover, its zinc plant has a capacity of 1.1 mtpa. In 2019, Neves-Corvo produced 73,202 tonnes of zinc and 41,436 tonnes of copper.

The Zinkgruvan mine in Sweden produces zinc as the primary metal and has a production capacity of 1.4 mtpa. In 2019, the mine produced 78,313 tonnes of zinc.

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. Higher production driven by the acquisition of Chapada mine in the latter half of the year drove sales and helped offset the negative impact of a decline in net realized metal prices for copper and zinc. Besides, an increase in the treatment and refining charges of zinc further remained a drag.

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.

Balance Sheet and Cash Flows: At the end of 2019, the company had cash & cash equivalents of US$ 250.6 million, as compared to US$ 815.4 million in the prior-year period. The company’s net debt stood at US$ 60.2 million, as compared to the net cash position of US$ 804.4 million in 2018. The year-over-year change reflects the acquisition of Chapada, dividend payments, and capital investments. Cash flow from operations stood at US$ 564.6 million. Moreover, adjusted operating cash flow increased to 75 cents per share from 66 cents per share in 2018.

2019 Financials (Source: Company Reports)

4QFY19 Performance Instills Confidence: 

Lundin Mining posted robust set of numbers in the fourth quarter. The company’s revenues increased by about 39% year-over-year to US$ 568.4 million. Increase in production and higher net price realization across copper, nickel, gold, supported the top-line growth. The company’s gross profit of US$ 145.5 million, implied a year-over-year increase of US$ 73.5 million, driven by the addition of Chapada mine and higher realized prices. Consequently, adjusted EBITDA rose ~49% year-over-year to US$ 234.6 million. Higher gross profit provided a significant boost to the company’s bottom line. During the quarter, the company posted adjusted net earnings of US$ 93.2 million, as compared to US$ 34.8 million in the prior-year period. Adjusted earnings came in at 13 cents per share, as compared to 5 cents per share in the prior year. Adjusted operating cash flow jumped to 28 cents per share from 16 cents per share in the prior-year quarter.

Lundin Mining increased its quarterly dividend by 33% to CAD 0.04 per share, which will be paid on 8 April 2020.

Fourth Quarter Financials (Source: Company Reports)

Top 10 Shareholders: The top 10 shareholders are highlighted in the table, which together forms around 27.3% of the total shareholding. Nemesia S.à.r.l is the entity holding maximum shares in the company at 12.77%. BlackRock Investment Management (UK) Ltd. is the second-largest shareholder, with a holding of 2.59%

Top Ten Shareholders (Source: Thomson Reuters)

Key Metrics (Source: Thomson Reuters)

Key Valuation Metrics (Source: Thomson Reuters)

Valuation Methodology:

Method: EV/EBITDA Multiple Approach

EV/EBITDA Valuation (Source: Thomson Reuters)

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

Stock Recommendation: As on 4 March 2020, the stock has a market cap of ~CAD 5.11 billion with a P/E multiple of 22.85x and an annual dividend yield of ~2.36%. We have valued the stock using the relative valuation method, i.e., EV/EBITDA multiple, and for the said purpose, we have considered peers like First Quantum Minerals Ltd (TO: FM), Teck Resources Ltd (TO: TECK.B), and Kinross Gold Corp (TO: K). The stock trades at a lower valuation multiple when compared with the peer group median. We believe that the multiple is expected to expand in the near term as Lundin Mining is poised to gain from its multi-year investments to expand the production and reduce the cash costs. Management expects production across all the segments to jump in 2020, which is positive. Further, as the global equity markets take a hit from the spread of the coronavirus, metals and mining (companies associated with the commodities) seem to be a safe bet and could outperform the broader markets. We have arrived at a target price with an upside of lower double-digit (in percentage terms). Considering the above factors, we give a “Buy” recommendation on the stock at the current market price of CAD 6.95 per share, up ~2.7% on 4 March 2020.

1-Year daily price chart (as on 4 March 2020). Source: Thomson Reuters

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