Lundin Mining Corporation

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:

• Acquisition of Josemaria Resources Inc.: On December 20, 2021, the company announced the acquisition of Josemaria Resources through a plan of arrangement for an implied equity value of approximately USD 485 million. The above acquisition would provide the full access of Josemaria’s copper-gold project located in the San Juan Province of Argentina and would help LUN as a major copper producer with a diversified portfolio of high-quality, long-life base metal assets. Notably, the above would increase the Company's copper production by ~50%, and gold production of more 140%, compared to guidance for FY22.

• Rise in cash flows: In 9MFY21, the company reported a strong surge in cash flows of USD 1,100.777 million v/s USD 393.223 million, supported by stupendous growth in net profit (USD 613.231 million v/s USD 68.285 million in pcp). Free cash flow stood at USD 762 million in 9MFY21, as compared to USD 120.4 million in pcp. The above is expected to support the company’s overall liquidity.

• Higher profitability margins: At the end of Q3FY21, the company reported its EBITDA margin and Operating margin of 53.8% and 40.5%, respectively, as compared to the industry median of 41% and 27%, respectively. Moreover, the company reported a net margin of 25.2% in Q3FY21, as compared to the industry median of 12.9%. The above indicates superior operational efficiency than the industry median.

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:

• LUN declared with its second quarterly result, wherein the group posted revenue of USD 756.394 million, jumped 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 significantly higher at USD 303.941 million, from USD 199.343 million in the previous corresponding period. The increase was driven by higher income, partially offset by higher production cost.
• The quarter witnessed higher general & administrative expenses, partially offset by lower general exploration & business development expense and coupled with a decline 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

Analysis by Kalkine Group

Stock Recommendation:

The stock of LUN carries an impressive dividend yield of ~3.644% on an annualized basis, which looks attractive considering the ongoing interest rate. We have valued the stock using the Price to CF-based relative valuation approach and arrived at a target price offering double-digit upside potential (in % terms). We have considered peers like First Quantum Minerals Ltd, Imperial Metals Corp etc. Considering the aforesaid facts, we recommend a ‘Buy’ rating on the stock at the last traded price of CAD 9.88 on December 31, 2021.

*Depending upon the risk tolerance, investors may consider unwinding their positions in a respective stock once the estimated target price is reached.

Technical Summary Analysis

One-Year Technical Price Chart (as on December 31, 2021). Source: REFINITIV, Analysis by Kalkine Group

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

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