One Mid-Cap Basic Materials Stock to Hold – LUN

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

• Improved Copper production & Revenue: For FY21, the group reported an increase in the total Copper  production of 262,884 tonnes as compared to 230,781 tonnes in the FY20. Due to which, revenues from the copper increased to  USD 2,344.6 million during the FY21 as compared to USD 1,325.1 million in the pcp. The total  copper  production was within the guidance range of 255,000 to 267,000 tones. Copper constitutes almost 70% of the metals share in terms of production and revenue for the company. 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 company reported an increase in its Net cash balance to USD 563.1 million in the FY21 as compared to the negative cash balance (Net Debt) of USD 63.2 million in the previous comparable period. Further, the cash from operations surged to USD 1,485 million for the reported period vs USD 565.9 million in the FY20. The increased cash balance and cash flows from operations provide a healthy picture of the liquidity of the company to meet its operational expenses and expansionary plans. 

• Dividend distribution: On February 17, 2022, the group declared a quarterly dividend of CAD 0.09 per and a semi-annual performance dividend of CAD 0.11 per share, payable on April 13, 2022. The total dividend distribution increased by more than 140% to CAD 0.39 per share for FY21 as compared to CAD 0.16 per share in FY20.

• Improved profitability margins: During FY21, the company has improved on the various profitability metrics, starting with Gross margins of 41.1% vs goss margins of 24.4% in FY20. The Operating margin for the reported period of the group increased to 38.6% as compared to 19.0% in the pcp. The company’s net margins for FY21 were reported at 26.4% vs Net margins of 9.3% in FY20.

Source: Refinitive, Analysis by Kalkine Group

Risks associated with investment

The company’s revenue is majorly dependent on the volatility of the copper prices along with the demand and supply chain issues. Further, the volatility in the currency, 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 FY21 (Expressed in thousands of USD)

  Source: Company Filing

• For the FY21, the company reported an increase in its total revenues to USD 3,328.7 million vs USD 2,041.5 million in the FY20. The increase was driven by higher sales volume and higher realized metal prices.

• The Gross profit for FY21 increased to USD 1,369.7 million as compared to USD 498.1 million in pcp. The impact of higher revenues was partially offset by the cost of production in the reporting period, which increased to USD 1,436.2 million vs USD 1,095.9 million in the previous comparable period.

• The Earnings before Income taxes during the reported period are stated at USD 1,244.9 million vs USD 341.4 million in the FY20.

• For FY21, the company reported net earnings of USD 879.3 million vs USD 189.0 million in the FY20.

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

Analysis by Kalkine Group 

Stock recommendation 

The stock delivered a positive return of 8.57% in past one month and 43.53% in the past six months. The company reported a higher Adjusted EBITDA of USD 1,869.4 million in the FY21 as compared to USD 856.9 million in the FY20. For FY22, the company has given guidance of  USD 655 million for the total capital expenditure, which signifies the expected higher production in the coming Fiscal year.  The increased revenue to USD 3,328.7 million in FY21 from the total revenues of USD 2,041.5 million during FY20, is a significant push and given the higher production guidance for FY22 and rising metals prices, the company is anticipating to maintain the same pace going forward.

On the valuation front, the stock is measured on the Price to Cash-flow based multiple and we have considered First Quantum Minerals Ltd   Capstone Mining Corp  Orla Mining Ltd., 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 market price of CAD 12.66 on March 21, 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 March 21, 2022). Source: REFINITIV, Analysis by Kalkine Group

Disclaimer

The advice given by Kalkine Canada Advisory Services Inc. and provided on this website is general information only and it does not take into account your investment objectives, financial situation and the particular needs of any particular person. You should therefore consider whether the advice is appropriate to your investment objectives, financial situation and needs before acting upon it. You should seek advice from a financial adviser, stockbroker or other professional (including taxation and legal advice) as necessary before acting on any advice. Not all investments are appropriate for all people. The website www.kalkine.ca is published by Kalkine Canada Advisory Services Inc. The link to our Terms & Conditions has been provided please go through them. On the date of publishing this report (mentioned on the website), employees and/or associates of Kalkine do not hold positions in any of the stocks covered on the website. These stocks can change any time and readers of the reports should not consider these stocks as advice or recommendations later.