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

• Attained FY21 production guidance: The company announced FY21 copper output of 262,884 tons, up 14 percent year over year and above the middle of its projection. Zinc output was 143,797 tons, which was more than the guidance's midpoint. Gold production, on the other hand, was 167,000 oz, exceeding the company's yearly target. Strong copper and gold production, especially from the Chapada and Candelaria mines, drove these increases.

Source: Company Filings 

• Rise in Cash flow from operations and free cash flows: In Q3 2021, the company reported Cash flow from operations of USD 523.1 million, an increase of USD 250.9 million, compared to USD 272.2 million reported in the previous corresponding period. The increase was primarily attributable to higher gross profit at USD 304.0 million, largely due to higher realized metal prices and price adjustments. Furthermore, the company also clocked elevated free cash flows of USD 407.0 million, against USD 194.4 million in pcp.

Source: Company Filing

• Industry Beating Margins: The Company's resilient business and higher average realization price of metals helped them leaping the industry median margins on many fronts in Q3 2021, which is a key positive. The chart below gives a glimpse of this.

Source: REFINITIV, Analysis by Kalkine Group 

• Acquiring Josemaria Resources: Josemaria Resources, a large copper producer with a diverse portfolio of high-quality, long-life base metal assets, was recently declared as a target for the company. Over the course of a 19-year mine life, Josemaria is predicted to generate over 130,000 tonnes of copper, over 225,000 oz of gold, and 1.0 million oz of silver on average. In comparison to expectations for 2022, this rise would raise the Company's copper output by about 50% and gold production by over 140 percent, which is a significant positive.
  

Risks associated with investment 

The Company’s financial performance is mostly dependent on the price of different metals, especially copper and gold, which directly affects its profitability and cash flow. Any drawdown in the prices of these metals would impact the group’s performance. 

Financial overview of Q3 2021 (Expressed in thousands of US dollars)

Source: Company Filing 

• In Q3 2021, the Company reported higher revenue, which increased 26% to USD 756.4 million, against USD 600.7 million in Q3 2020. The increase was primarily due to higher metal prices and price adjustments.
• The gross profit stood at USD 303.9 million, against USD 199.3 million in the previous corresponding period. The increase was primarily due to higher revenues driven by higher metal prices.

• The company reported higher net earnings of USD 190.5 million, against USD 133.6 million in pcp. The transformation was mainly due to higher EBIT, partially offset by higher income tax.

Valuation Methodology (Illustrative): Price to Cash Flow based

*1USD=1.27CAD

Analysis by Kalkine Group 

Stock recommendation

The company continued to benefit from promising base metal prices, generating more over USD 400 million in free cash flow for the second consecutive quarter. This was backed up by outstanding operational performance, particularly at the Chapada and Zinkgruvan operations, which saw production growth and cash cost decreases from quarter to quarter. Importantly, shaft modifications and substantial maintenance at both Neves-Corvo and Candelaria as part of the Zinc Expansion Project were completed successfully, putting the fourth quarter to be the strongest of the year, which is a key positive. Therefore, based on the above rationale and valuation, we recommend a "Hold" rating at the closing price of CAD 10.91 as on February 7, 2022. We have considered Kinross Gold Corp, Yamana Gold Inc, B2Gold Corp, etc. as the peer group for the comparison.

1-Year Price Chart (as on February 7, 2022). Source: REFINITIV, Analysis by Kalkine Group

*The reference data in this report has been partly sourced from REFINITIV. 

Disclaimer

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