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 Highlights:

• Strong Growth in cash flows: The company reported a solid surge in cash flows and posted cash flow from operations at USD 577.673 million in H1FY21, significantly higher than USD 121.022 million in pcp. The increase was supported by strong earnings growth at USD 422.651 million in H1FY21, as compared to a net loss of USD 65.310 million in pcp. The company reported its free cash flows at USD 354.9 million in H1FY21, as compared to an outflow of USD 74.1 million in pcp.
• Operational update and FY21 Production guidance: The company saw a revival in its operations and reported 40% q-o-q growth in copper production from Neves-Corvo mines. Moreover, the company reported improved feed grades from the above mine. The group is conducting construction activities in the above mine and expects completion by the end of FY21, which is a key positive for the overall production. Within the Zinkgruvan mine, the company made Underground Exploration Advancing and reported 12,000 m of drilling in H1FY21 and currently focusing on underground exploration on the extension of Dalby and area between Burkland and Nygruvan orebodies. Copper production is expected in between 255,000 - 267,000 tonnes in FY21, while Zinc and Gold production is expected in between 140,000 - 146,000 tonnes and 158,000 - 166,000 oz, respectively.

Q2FY21 Financial Highlights:

• LUN declared its second quarterly result, wherein the group posted revenue of USD 872.3 million, reflecting a growth of 64% on y-o-y basis. The increase was primarily due to a strong surge in copper sales as compared to the previous corresponding period (USD 626.615 million v/s USD 376.510 million in pcp).
• Gross profit stood significantly higher at USD 380.2 million, grew 168% over the previous corresponding period. The increase was driven by higher income, partially offset by higher production cost and depreciation.
• Adjusted EBITDA jumped 107% on y-o-y basis to USD 480.7 million.
• The company reported higher net earnings of USD 268.4 million, as compared to USD 48.3 million in pcp.

Source: Company Report

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.

Valuation Methodology (Illustrative): Price to Cash Flow 

Stock Recommendation:

In Q2FY21, the group reported a strong margin profile, wherein EBITDA margin and operating margin stood at 54.7% and 39%, respectively, higher than the industry median of 40.1% and 27.1%. Moreover, net margin stood higher at 30.8% in Q2FY21, better than the industry median of 15.8%. Moreover, the stock carries a dividend yield of ~3.3%, which is decent considering the current interest rate scenario. 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 First Quantum Minerals, Capstone Mining Corp etc. Considering the aforesaid facts, we recommend a ‘Hold’ rating on the stock at the closing price of CAD 10.77 on August 17, 2021.

One-Year Technical Price Chart (as on August 17, 2021). Source: REFINITIV, Analysis by Kalkine Group

Sierra Metals Inc

Sierra Metals Inc (TSX: SMT) is a precious and base metals producer in Latin America. The company acquires, explores, extracts, and produces mineral concentrates consisting of silver, copper, lead, zinc and gold in Mexico and Peru.

Key Highlights:

• Impressive margin profile: In Q2FY21, the company reported a higher margin than the industry median, which indicates improved operational efficiency. Notably, EBITDA margin and operating margin stood 46.8% and 31.6%, respectively, higher than the industry median of 40.1% and 27.1%. Pretax margin also stood higher at 28.4%, as compared to the industry median of 23%.
• Constant improvement in D/E ratio: The company reported an improved D/E ratio over the last five quarters, which is a healthy sign, considering the capital-intensive nature of the sector. Current D/E ratio stands at 0.44x, significantly improved from 0.57x in Q2FY20.
• Balanced risk profile: The company’s operations are not dependent on one segment, and it derives ~39% and ~27% of its revenue from zinc and copper. Silver and lead contribute almost ~19% and ~14% of the total revenue. The group derives 2% of its revenue from gold segment.

Q2FY21 Financial Highlights:

• SMT declared its quarterly result, wherein the group posted revenue of USD 79.449 million, higher than USD 41.901 million in the previous corresponding period (pcp). Higher revenue was primarily driven by a strong performance from silver and zinc segments. The company reported a 62% and 25% increase in throughput from its Yauricocha and Bolivar mines.
• Gross profit stood at USD 33.175 million, higher from USD 11.696 million in Q2FY20. The growth was supported by higher sales, partially offset by higher mining costs (USD 35.549 million v/s USD 21.643 million in pcp), and higher depletion, depreciation and amortization (USD 10.725 million v/s USD 8.562 million in Q2FY20).
• The period was marked by an increase in general and administrative expense (USD 5.187 million v/s USD 4.588 million in pcp) and selling expenses (USD 2.858 million v/s USD 1.979 million in Q2FY20).
• The group reported its net income at USD 11.079 million, significantly higher than USD 0.301 million in Q2FY20.

Source: Company Report

Risks: The income of the company is dependent on the commodity prices in international market. Hence, volatility in price would affect in the overall performance of the company.

Stock Recommendation:

For FY21, the company expects its silver production in between 13.5 M ozs to 14.5 M ozs, while Copper Eq. production is expected at 110 M lbs to 115 M lbs. The company expects its capital expenditure of USD 100 million, including capital investments in the iron-ore processing plant at Bolivar Mine. On the valuation front, the stock is available at an EV to Sales multiple of 0.8x on an NTM basis, as compared to the industry median of 1.9x. Hence, considering the aforesaid facts, we recommend a ‘Hold’ rating on the stock at the closing price of CAD 2.90 on August 17, 2021.

One-Year Technical Price Chart (as on August 17, 2021). Source: REFINITIV, Analysis by Kalkine Group

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

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