CA - Lundin Gold: Buy Quality For Best Risk-Adjusted Returns In A Bull Market

2024-04-22 02:17:37 ET

Summary

• Lundin Gold is a high-quality gold miner with a superior asset and an experienced management team.
• The company's Phase 2 expansion project is set to increase production and decrease costs, leading to higher free cash flow.
• The company is a true free cash flow machine, trading at a ~15% free cash flow yield based on current gold prices.
• Despite looking expensive compared to peers, Lundin Gold is reasonably priced, offering some of the best risk-adjusted returns among gold miners.

Introduction

I have often found that high-quality stocks, despite appearing expensive relative to peers of lower quality, nevertheless keep outperforming by a significant margin. In this context, while evaluating a gold miner, high quality can relate to many different aspects. For example, the asset itself could be superior, because of its overall size, the safety of the jurisdiction, or its higher grades, lower costs, and thus higher margins. Arguably, however, the most important variable in my evaluation framework is the management team. A superior management team shows a consistent track record of underpromising and overdelivering. Guidance is routinely met or beat. Communication is transparent. Strategy is clearly set. Focus is put on shareholder returns and value creation. The management team often holds a significant stake in the company, so incentives are aligned. There is no history of dilution under unfavorable conditions, or a blow-up in production costs....

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