Lundin Mining Corp. (TSX: LUN) is a Canada-based diversified metal mining company, having operations across Brazil, Chile, Portugal, Sweden, and the United States of America. The company is actively engaged in producing copper, zinc, gold, and nickel.

Key highlights

• Acquisition of Josemaria Resources Inc: On April 28, 2022, the group announced the successful completion of the plan arrangement to acquire Josemaria Resources Ltd (TXS : JOSE) (OMX : JOSE) (OTCQB : JOSEMF), for a total consideration close to CAD 630 million. This acquisition will strengthen Lundin’s asset base as a leader in base metals producer with high-quality copper exposure and significant growth. 

• Higher Copper production & Revenue: For Q1FY22, the company reported an increase in the total production of Copper at 65,081 tonnes as compared to 57,354 tonnes in Q1FY21. Copper constitutes almost 69% of the metals share in terms of production and revenue for the company. Similarly, the revenues from the copper increased to USD 679.07 million during the Q1FY22 as compared to USD 478.91 million in the pcp. Below is the pictorial representation of the contribution of the individual metal in the production and region-wise sales distribution.

Source: Company presentation

• Improved Liquidity: The group reported an increase in its cash and cash equivalent balance to USD 733.87 million in Q1FY22 against USD 594.06 million during Q1FY21. In addition to this, the cash flows from operating activities increased to USD 317.25 million for Q1FY22 vs USD 158.67 million in Q1FY21. The increased cash balance and cash flow from operations depict a positive aspect of the liquidity garnered by the group to meet its operational expenses and expansionary plans. 

• Dividend distribution: On April 27, 2022, the group declared a quarterly dividend of CAD 0.09 per share which is payable on June 22, 2022, to its shareholders with a record date of June 3, 2022.

• Improved profitability margins: During Q1FY22, the company has reported an increased production of copper which was coupled with higher average realized prices of other metals also, etc impacting positively on the profitability margins. Below is the graphical presentation of how the company is ahead of the industry median across various profitability metrics.
  

Source: Refinitive, Analysis by Kalkine Group

Risks associated with investment

Company is generating major revenue from copper sales, hence the volatility in the prices of copper will dampen the compay’s revenues. In addition, the volatility in the foreign exchange, changing mining laws, credit risks, rising transportation, and raw materials cost, are a few of the other risks, the company is facing. 

Financial overview of Q1FY22 (Expressed in thousands of USD)

  Source: Company Filing 

• The company reported an increase in its total revenues to USD 991.07 million during Q1FY22 vs USD 681.47 million in Q1FY21. Revenues from copper sales increased by almost USD 200 million on account of higher production and higher average realized prices during Q1FY22.

• The Gross profit for Q1FY22 increased to USD 478.81 million as compared to USD 252.45 million in Q1FY21 Despite an increase in revenues and total production, the company was successful in limiting its Cash cost during Q1FY22 which marginally rose to USD 217.69 million against USD 200.22 million in Q1FY21, improving the gross profits.

• The Earnings before Income taxes during Q1FY22 more than doubled to USD 455.31 million vs USD 224.12 million in Q1FY21.

• For Q1FY22, the company reported net earnings of USD 378.10 million vs USD 154.21 million in Q1FY21.

 Valuation Methodology (Illustrative): Price to Cash-Flow based

Analysis by Kalkine Group

Stock recommendation 

For Q1 FY22 the company witnessed a surge in the Adjusted EBITDA, which stood at USD 587.77 million against USD 354.43 million in the Q1FY21. The total production of copper, zinc, and nickel is currently above the midpoint as per the company’s guidance for FY22. Further, the current trend of rising prices across base metals along with its demand is also playing in favor of the company which resulted in the improved financial results during Q1FY22.  The increased liquidity position will also be a key pivotal point for the company to meet its working capital needs and finance its expansionary plans.

On the valuation front, the stock is measured on the Price to Cash-flow based multiple and we have considered Teck Resources Ltd., First Quantum Minerals Ltd., Capstone Mining Corp., etc as the peer group for the comparison.

Therefore, based on the above rationale and valuation, we recommend a “Hold” rating at the last closing price of CAD 11.73 on April 29, 2022. Additionally, the markets are trading in a highly volatile zone currently due to certain macro-economic issues and geopolitical tensions prevailing. Therefore, it is prudent to follow a cautious approach while investing.

One-Year Technical Price Chart (as on April 29, 2022). Source: REFINITIV, Analysis by Kalkine Group

Disclaimer

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