Lundin Mining Corporation (TSX: LUN) is a diversified Canada-based metals mining company with operations in Chile, the United States, Portugal, and Sweden. 

Key Updates:

• Achieved FY21 production guidance: The company showed impressive operational performance and reported FY21 copper production of 262,884 tons, up 14% y-o-y and was above the midpoint of its FY21 guidance. Zinc production stood at 143,797 tons, which was above the midpoint of guidance. On the other hand, gold production stood at 167,000 oz, which exceeded its annual guidance. These growths were driven by strong copper and gold production primarily from its Chapada and Candelaria mines.

Source: Company Report

• Robust margins: At the end of Q3FY21, the company reported its EBITDA margin and Operating margin of 53.8% and 40.5%, respectively, versus the industry median of 42.1% and 27.4%, respectively. Moreover, the company reported a net margin of 25.2% in Q3FY21, as compared to the industry median of 13.4%. The above indicates superior operational efficiency as compared to the industry median.

• Rise in dividend payment: In 9MFY21, the company reported a significantly higher dividend payment of USD 175.885 million, as compared to USD 64.899 million in pcp. This is impressive as most of the organizations are lowering or suspending dividend payments in order to retain liquidity. Additionally, the stock of LUN carries an annualized dividend yield of ~3.321%, which looks attractive considering the current interest rate scenario.

Risk: Due to volatility in the international commodity prices, the company might witness a slide in the realization price, which subsequently dampen the overall performance of the company.

Q3FY21 Financial Highlights:

• In Q3FY21, the company reported its revenue of USD 756.394 million, soared from USD 600.673 million in the previous corresponding period (pcp). The increase was primarily due to a ~24% y-o-y increase in copper prices to USD 4.02/lb. Additionally, a 24% y-oy and 21% y-o-y surge in the Nickel and Zinc prices also supported the growth, partially offset by 10% slide in gold prices.

• Gross profit stood at USD 303.941 million, grew from USD 199.343 million in the previous corresponding period. The surge was driven by higher income, partially offset by an increase production cost.
• The quarter witnessed higher general & administrative expenses, partially offset by lower general exploration & business development expense and a slide in finance costs. Earnings before income taxes surged to USD 296.255 million from USD 163.532 million in pcp.
• The company reported higher net earnings of USD 190.580 million, as compared to USD 133.595 million in pcp.

Q3FY21 Income Statement Highlights (Source: Company Report)

  Valuation Methodology (Illustrative): Price to Cash flow based

   Analysis by Kalkine Group

Stock Recommendation:

In Q3FY21, the company reported a healthy D/E ratio of 0.01x, as compared to the industry median of 0.24x, which indicates higher financial flexibility and is a key positive. We have valued the stock using the Price to CF-based relative valuation approach and arrived at a target price offering single-digit upside potential (in % terms). We have considered peers like Teck Resources Ltd, Imperial Metals Corp etc. Considering the aforesaid facts, we recommend a ‘Hold’ rating on the stock at closing price of CAD 10.84 on January 19, 2022.

One-Year Technical Price Chart (as on January 19, 2022). Source: REFINITIV, Analysis by Kalkine Group

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

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