Lundin Mining Corp

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 

• Diversified revenue mix: The Company's income is derived from a wide range of commodities from various places. In the nature of the firm, this diversification gives resilience. The firm recorded total sales of USD 756 million in the third quarter of 2021, up 26% from USD 600.7 million in the previous corresponding period.

Source: Company

• 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

• Higher production guidance:For the Company, FY 2020 has been a watershed moment. Despite operational issues, All Metals' yearly output met or surpassed the Company's annual output target. Furthermore, it anticipates that this upward tendency will continue in the next couple of years, which is a key positive. The group has raised the production guidance on each commodity, except the Nickel where it sees some decline.

Source: Company

• 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

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

Source: Company

• 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.
  

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.

Valuation Methodology (Illustrative): Price to Cash Flow based

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 "Buy" rating at the closing price of CAD 10.38 as on December 3, 2021. We have considered Capstone Mining Corp, Turquoise Hill Resources Ltd, B2Gold Corp, etc. as the peer group for the comparison.

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

 Technical Analysis Summary

1-Year Price Chart (as on December 3, 2021). Source: REFINITIV, Analysis by Kalkine Group 

Doman Building Materials Group Ltd

Doman Building Materials Group Ltd (TSX: DBM), formerly CanWel Building Materials Group Ltd is a wholesale distributor of building materials and home renovation products. It primarily serves new home construction, home renovation, and industrial markets, as well as provides its building products to dealer/lumberyard and home improvement centers.

Key highlights

• Consistent dividend distribution: The company has paid a steady dividend based on the performance of the business over the last few quarters, better cost structure, robust balance sheet, and excellent cash flow. The company's quarterly dividend has recently been increased to CAD 0.14 per share, which will be paid on January 14, 2022.  Furthermore, the stock has a solid dividend yield of 8.011%, which appears to be fair considering current macroeconomic conditions and interest rates.

• Strategically Hedging Commodity Prices: Management is putting in place procedures to mitigate the effects of future building material price volatility. These strategies include using vendor managed inventories, direct shipments from the manufacturer to the customer, lumber futures contracts, and the Company's internal policy of optimizing inventory levels to maintain its high level of customer service while minimizing excess inventory that would otherwise be exposed to market fluctuations.

• Competitive Pricing Strength: The group prices its products in the competitive construction materials market so that profitability is based on cost plus value-added services such as wood pressure treating, distribution, short-term financing, and other services provided, giving the company a significant competitive advantage over its competitors.

• Acquires Hixson lumber sales:Recently, on June 4, 2021, the Company announced the acquisition of Texas-based Hixson Lumber Sales (“Hixson”), a leading wholesale and manufacturing company of lumber and treated lumber operating in the Central United States. It acquired all the assets of the “Hixson” for approximately USD 375 million in cash, including inventory. We believe the transaction will facilitate the Company’s growth and would expand its product suite to include new offerings.

Financial overview of Q3 2021

Source: Company

• In Q3 2021, the company posted higher revenue of CAD 625.3 million against CAD 472.2 million in the previous corresponding period, mainly because of increase in sales for the Building Materials segment by CAD 151.2 million.
• In the reported quarter the company witnessed elevated expenses at CAD 63.5 million as compared to CAD 40.7 million for the same quarter in 2020, an increase of CAD 22.8 million or 56.0%.
• Due to elevated expenses the group’s operating profit fell at 17.2 million compared to CAD 46.2 million in pcp.
• Higher finance cost at CAD 8.6 million along acquisition cost dented the group net earnings to CAD 7.7 million against CAD 31.0 million, which was partially supported by income tax recovery.

Risks associated with investment

The Company’s overall business could be impacted due to changes in government policies and regulations along with the demand from the housing starts. Any decline in housing starts could impacts the company’s cash flows. 

Valuation Methodology (Illustrative): EV to EBITDA based Valuation Metrics

Stock recommendation

Lumber prices witnessed large volatility over the last 3-month from peak of approximately USD 1,700 to bottom of approximately USD 440 per thousand board and now stabilizing near USD 910. Moreover, the seasonally adjusted annualized rate for overall Canadian housing starts for the quarter ended September 30, 2021, was 263,254, versus 237,567 in the comparative period of 2020, an increase of 10.8%. the same trend was witnessed in U.S with an increase of 8.7%. The Company sees strong demand and robust pricing across its business platform, which is a key positive. Even the stock is offering a healthy dividend yield of 8.011%, a decent amid a low-interest-rate environment, which is a key aspect for the long-term investors. Therefore, based on the above rationale and valuation, we suggest a "Buy" recommendation on the stock at the closing price of CAD 6.99 on December 03, 2021.

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

 Technical Analysis Summary

1-Year Price Chart (as on December 03, 2021). Source: REFINITIV, Analysis by Kalkine Group

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

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.