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 

• Higher cash flow from operations: Cash flow from operations for the quarter ended September 30, 2020, was USD 272.2 million, reflecting an increase of USD 160.6 million in comparison to the USD 111.6 million reported in the prior-year quarter.

• A healthy balance sheet with falling Net debts: At the end of the quarter, the Company’sNet debt reflected an increase of USD 63.8 million and stood at USD 124.0 million as compared to USD 60.2 million on December 31, 2019. Subsequent to the quarter results, the Company reported cash and a net debt balance of approximately USD 280.0 million and USD 65.0 million, respectively on October 28, 2020.

• Outperformed industry in terms of margins: The company outperformed the industry in terms of margins. In Q3 2020, the company reported an EBITDA margin of 49.2%, an Operating margin of 28.9% and net margin of 22.2%.

Source: Refinitiv (Thomson Reuters) 

Financial overview of Q3 2020 (in thousands of US dollars, except per share amounts)

Source: Company 

• In Q3 2020 the company reported revenue of USD 600.6 million as compared to USD 528.7 million in the previous corresponding period, primarily due to higher realized metal prices.

• Gross profit increase by USD 70.7 million to USD 199.3 million in Q3 2020, as compared to USD 128.6 million in pcp. The increase was primarily due to higher realized metal prices and price adjustments worth USD 81.0 million.

• In Q3 2020 the company’s reported Net earnings increased by USD 101.5 million to USD 133.6 million, compared to USD 32 million in the prior-year quarter. The increase was attributable to higher gross profit, lower finance costs and lower income taxes. 

Risks associated with investment

The company’s performance is highly exposed to the volatility in the underlying commodity prices, especially copper and gold as they the significant contributors in the group’s top-line and bottom-line. Volatility can lead to large swings in the company’s financial performance. Also, the company is exposed to currency transaction risk. 

Valuation Methodology (Illustrative): Price to Cash Flow 

Note: All forecasted figures and peers have been taken from Thomson Reuters 

Stock recommendation

The group posted a robust set of numbers in Q3 2020, where the company posted higher revenues and higher net income in comparison to Q3 2019, on the back of low operating expenditures and higher realized metal prices. The Company has not experienced any significant disruptions to production, shipments of concentrate, or its supply chain due to COVID-19. We expect the copper prices to remain stable in the upcoming period as most of the governments across the globe eased the lockdown restrictions, which is likely to result in increased industrial activities. Also, a higher gold price is positive for the group as it derives a portion of revenue from the gold sales as well. Therefore, based on the above rationale and valuation, we have given a ‘Hold’ rating at the closing price of CAD 9.92 on December 8, 2020. We have considered First Quantum Minerals Ltd, Agnico Eagle Mines Ltd, Kinross Gold Corp, etc. as the peer group for the comparison.

Source: Refinitiv (Thomson Reuters)

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