Exploration Upside, Adequately Priced:  Headquartered in Vancouver, Lundin Gold (TSX: LUG) owns the Fruta del Norte gold mine in Ecuador. Investors should note that the Fruta del Norte started commercial production in February 2020, which was ahead of the schedule. Moreover, the mine produces high grade gold assets with low all-in sustaining costs.

On March 22, Lundin Gold announced that it has suspended the operations at its Fruta del Norte gold mine temporarily amid COVID-19 outbreak.

FY19 Highlights: The company started commercial production at its Fruta del Norte gold mine in February and produced a total of 28,678 ounces of gold. Lundin Gold exported the initial production, resulting in concentrate sales of US$ 20.9 million. The company had about 153,000 tonnes of ore stockpiled by the end of FY19. The company reported net loss of US$ 40.8 million, up from US$ 23.5 million in the prior year. At the end of FY19, Lundin Gold had cash of US$ 75.7 million. Meanwhile, total assets stood at US$ 1409.0 million.

Financial Highlights (Source: Company Reports)

Stock recommendation: Shares of Lundin Gold are up 27.1% so far this year, thanks to the start of the commercial production at its Fruta del Norte mine and higher gold prices.  The stock got a beating by the end of the March as the company announced the temporary suspension of operations at its Fruta del Norte gold mine. Though the company has not specified the duration of the suspension, we believe the issue is transitory and is likely to abate soon. Further, Lundin Gold remains well-positioned to benefit from the ramp-up in production and low costs. The company increased its projected average annual gold production to 325,000 ounces from 310,000 ounces per year for over 14-years of mine life. Meanwhile, it expects AISC to be US$ 621, which is at the lower end of the curve. LUG stock is trading roughly 27% below its 52-week high of CAD 13.49 and is likely to benefit from the current economic environment, which is favorable for gold companies. However, Lundin Gold trades at a forward EV/EBITDA multiple of 8.1x (roughly in-line with the industry), which implies that the stock is adequately priced at the moment. We would like to wait for development on the exploration front and recommend a ‘Watch’ on LUG stock at the closing price of CAD 10.59 on April 29, 2020. 

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

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