LUNMF - Lundin Mining's Stock May Become More Attractive During A Recession

2023-08-08 11:59:57 ET

Summary

• Lundin Mining Corporation shares deserve a Hold recommendation due to its robust performance and recent portfolio integration.
• The price of copper could come under pressure in the coming months, but investors should see it as an opportunity to expand their position in Lundin.
• The expected increase in copper demand and supply struggles bode well for Lundin Mining's growth prospects in the copper mining industry.

A Hold Rating for Lundin Mining Corporation

Canadian copper miner Lundin Mining Corporation (LUNMF) shares deserve a Hold recommendation.

The robust performance of the business, which has delivered resilient results despite lower base metal prices, and the recent portfolio integration of a 51% mineral interest in an open-pit copper mine near the well-known Maricunga mineral belt in Chile enhance the company's growth potential significantly.

Thus, the company has another resource to exploit and use as a base to fund growth projects, opening up more opportunities for future production. Investors should take note of Lundin Mining Corporation as it is a very attractive player in the copper mining industry.

Lundin Mining' Shares in the Foreseeable Future

The price of the red metal could come under pressure in the coming months as reliable rumors point to a recession potentially disrupting the mechanism that allowed Lundin Mining's shares to rise much faster (up 58.87%) than other copper miners and outperform the US stock market (up 6.36%) over the past year.

Lundin Mining's investors should not see the possible impact of a recession as a drama, but rather as an opportunity to expand their position, perhaps by taking advantage of a lower share price.

After all, this is a miner with solid growth prospects active in the extraction and supply of copper, the key metal in the process of replacing technologies and services that use fossil fuels with those that use electricity from renewable sources.

The Future of Copper as a Key Element in Electrification

According to this study by the consulting firm McKinsey & Co., the process just mentioned, known as electrification, will contribute significantly to the expected increase in copper demand in the coming years. McKinsey & Co. states that global copper demand is expected to reach 36.6 million tons by 2031, a 46% growth compared to the level of global consumption that Statista.com put at around 25.1 million tons for 2022.

McKinsey & Co. also notes that supply is struggling to keep up with this very rapid growth in demand, and the consulting firm estimates that miners worldwide will be able to muster not much more than 30 million tons of copper by the end of 2031. The expected shortfall of 6.5 million tonnes, which implies the need to meet higher production targets globally, bodes well for operators such as Lundin Mining aiming for growth. In addition, the deficit will also generate upward pressure that will help promote a resilient copper price environment.

About Lundin Mining Corporation

Based in Toronto, Canada, Lundin Mining Corporation is engaged in the global base metal mining industry and has a diversified portfolio of mineral interests in Latin America, the United States, Portugal, and Sweden.

The company also processes zinc, nickel, and gold, but the main focus is copper with substantial production also from Chile, the leading country in the world in terms of annual copper extraction. In fact, according to Statista.com , Chile mined 5.2 million tons of copper in 2022, representing 20.7% of the total world consumption, the amount of which was previously highlighted.

Following the acquisition of 51% of the total issued and outstanding shares of SCM Minera Lumina Copper Chile (the full owner of the Caserones open pit copper/molybdenum mine in Chile), completed on July 13, 2023 , over 75% of Lundin Mining Corporation's total copper production is now in the world's leading copper-producing country.

How Lundin Mining Corporation's Operations Are Developing

Lundin Mining Corporation owns 80% of the Candelaria open pit and underground copper/gold/silver mine in Chile.

In the second quarter of 2023, on a 100% basis, the deposit produced 36,952 tonnes of copper and 21,000 ounces of gold, down 9.8% and 8.7% year-on-year, respectively.

The company's production accounted for 29,562 tons of copper combined with 16,800 ounces of gold in concentrate in the second quarter of 2023.

Due to lower head grades and recovery rates, which were only partially offset by higher throughput, the production of the 2 metals was slightly lower year-on-year, leading to higher operating costs.

However, both production and costs are expected to improve in the future due to mine sequencing and the development of high-profile activities at the mine.

Since last July, Lundin Mining Corporation owns 51% of SCM Minera Lumina Copper Chile, which is the sole owner of the Caserones open-pit copper/molybdenum mine in Chile.

The deposit produced 70,000 tons of copper in the first half of 2023. In the second half, the mineral asset is expected to contribute between 60,000 tons and 65,000 tons at a cash cost of $2.30 to $2.45 per pound of copper. The estimate is on a 100% basis.

Lundin Mining Corporation owns 100% of the Chapada open pit copper/gold/silver mine in Brazil. In the second quarter of 2023, Lundin Mining made 10,697 tonnes of copper and 13,000 ounces of gold at Chapada, slightly more than the 10,345 tonnes of copper but slightly less than the 16,000 ounces of gold in the second quarter of 2022 .

Copper production benefited from higher recoveries so the increase in copper sales volume resulted in lower copper operating costs. Chapada production and costs are expected to improve going forward as operations are on track to encounter higher grades and recoveries.

Lundin Mining Corporation owns 100% of the Eagle Mine , an underground nickel-copper mine located in Michigan's Upper Peninsula, USA.

Eagle mined 3,881 tons of copper and 4,686 tons of nickel in the second quarter of 2023. Year-on-year, this represented an 11.8% decline in copper production and a 0.7% decline in nickel production.

Lower grades and throughput negatively impacted sales volumes, resulting in higher costs in the nickel business, although consumables costs eased somewhat.

However, Eagle production is expected to improve in the second half of the year as the company expects to mine material with higher levels of contained metals.

Lundin Mining Corporation owns 100% of the Neves-Corvo mine, an underground copper-zinc mine located in Castro Verde, Portugal.

In the second quarter of 2023, Neves-Corvo recorded a 3.3% yoy decrease in copper production to 7,610 tons of copper, while zinc production increased by 17.1% yoy to 24,177 tons. While copper production has been affected by lower copper grades, zinc production has benefited from the ramp-up of activities undertaken by the company as part of its zinc business expansion project.

Neves-Corvo produced 15,184 tons of copper and 51,970 tons of zinc in the first half of 2023, which, combined with revised guidance of 33,000 to 38,000 tons of copper and 100,000 to 110,000 tons of zinc, leads to a large production weight of Neves-Corvo in the second half of the current year.

Lundin Mining Corporation owns 100% of the Zinkgruvan zinc/lead/copper/silver underground mine in Sweden.

In the second quarter of 2023, Zinkgruvan mined 11,938 tonnes of zinc (-43.9% on an annual basis) and 3,816 tonnes of lead (-58.2% on an annual basis).

Going forward, Zinkgruvan's operating costs for zinc operations should benefit from larger by-product credits.

The Financial Situation and Business Risk

Revenue was $588.5 million in Q2-2023 , roughly flat year-over-year. It missed analysts' average forecast by $79.41 million.

In Q2-2023, gross profit increased 14.8% year-over-year to $52.8 million. Adjusted income of $16 million was a positive reversal of the adjusted loss of $35.3 million which was reported in the second quarter of 2022. The improvement was due to lower exploration and development expenses and a lower income tax charge.

Cash flow from operations of $194.8 million and cash flow from financing activities of $99.9 million were used to fund capital expenditures of $283.5 million.

Also on June 21, 2023, Lundin Mining Corporation paid a quarterly cash dividend of CA$0.090 (or approximately US$0.06803) per common share on approximately 772.49 million shares outstanding. The distribution leads to a 12-month yield of 3.09% as of this writing, while the S&P 500 currently grants a 1.52% S&P 500 Dividend Yield .

As of August 2, 2023, the company had $270 million in cash and cash equivalents, while the corresponding net debt balance was $930 million. The increase in net debt balance, which was $460 million on July 27, 2022, was due to incurring debt to fund the acquisition of a 51% interest in the Caserones copper mine in Chile.

Regarding the financial health of the company, down this webpage to the Risk section, you can find an Altman Z-Score of 1.62, indicating gray areas and a risk of bankruptcy within the next few years.

The Altman Z-Score measures the likelihood that a company will face bankruptcy problems. If the value is less than or equal to 1.8, the balance sheet is in distress zones, which means a high probability of bankruptcy within a few years. When the ratio is between 1.8 and 3, the balance sheet is in a gray area, which still implies a risk of bankruptcy, albeit moderate. While a score of 3 or higher means that the risk of financial insolvency is extremely low or non-existent.

It must be said that this risk is much less pronounced than it might appear from the index at first glance. First, the good growth prospects, bolstered by the purchase of additional Chilean production of the key metal for the energy transition, significantly reduce risk.

Second, the company would never have obtained a three-year loan of $800 million, with an additional $400 million to close on another stake of up to 19% in the Chilean copper mine Caserones, if current and future operations were not considered sufficiently solvent.

Third, Lundin Mining Corporation's balance sheet shows a 12-month interest coverage ratio of 6.24x, which is well above the minimum tolerable level of 1.5x, indicating that the company has no problem absorbing the financial costs of the outstanding debt.

The index is calculated as a 12-month operating income of $317 million (as of Q2-2023) divided by a 12-month interest expense of $50.8 million (as of Q2-2023).

Outlook Regarding Production, Costs, and Price Environment

For the full year 2023, Lundin Mining Corporation is targeting 296,000 - 325,000 tons of copper at a slightly lower cash cost [$/lb] at Candelaria ($1.80 to $1.95 in 2023 vs $1.96 in 2022), and Neves-Corvo ($2.10 to $2.30 in 2023 vs. $2.27 in 2022) but up for Chapada ($2.35 to $2.55 in 2023 vs. $2.08 in 2022). At Caserones, cash costs will range between $2.30 and $2.45.

The company's earnings depend on the other metals as well, including gold, but copper is the primary source and with the investment in Caserones plus the opportunity to get current mineral interest from 51% to 70% in Chile, earnings will depend on copper for 85% or more.

Thus, the price per pound at which copper will trade going forward will be decisive and, in this light, analysts at Trading Economics predict that copper, whose price per pound was $3.80 at the time of writing, will be higher at around $4.15 in 12 months.

However, if the economy enters a recession, the cycle is not friendly to base metal prices as a decline in consumption and investment provides short-term headwinds to demand for the base metal. This analysis is in line with US housing giant Fannie Mae and credit rating agency Fitch's expectations as they both recently hinted at a downturn in the economic cycle. Fannie Mae has predicted a recession between the end of 2023 and the beginning of 2024 and so did the credit rating agency, which lowered the US's long-term credit rating from AAA to AA+.

A lower price for copper, the main source of income for Lundin Mining, will provide some headwinds for the Canadian copper operator's shares in the short term and provide an opportunity to take advantage of a lower price to buy more shares.

The Valuation of the Stock in Lundin Mining Corporation

Shares of Lundin Mining Corporation were trading at $8.59 at the time of this writing for a market capitalization of $6.72 billion and a 52-week range of $4.54 to $9.13.

Shares are well above the 200-day, 100-day, and 50-day simple moving average lines of $6.98, $7.64, and $8.10, respectively.

A sell-off in US-listed stocks could also cause the share price to fall in a recession, as Lundin Mining Corporation's stock has a very high 24-month beta of 1.85 (scroll down this web page to the "Risk" section).

The 14-day relative strength of 52.30x suggests that shares have plenty of room to the downside to reach lower levels. It is difficult to assess whether the recession could cause a share price fall that occurred after the crisis among US regional banks in March 2023.

If the recession sounds like a big surprise for the US stock market, it cannot be ruled out that stocks will experience another shock, similar to that experienced during the regional banking crisis last March.

As market pundits continue to say that a soft landing of the economy is most likely to happen, ignoring warnings from reliable Fannie Mae and Fitch outlooks, they are practically fueling this surprise.

The increase in interest rates with which the US Federal Reserve will continue to fight the heightened inflation increases the likelihood of a recession.

First, because all the rate hikes implemented so far have not yet been fully passed on to consumption and business investment, so more effects are coming.

Second, monetary tightening has been very aggressive, leading to 11 consecutive rate hikes to stem the highest rate of inflation in 40 years.

And third, interest rates will remain high into 2024 as the Federal Reserve must ensure that inflation returns to the 2% median target before changing its stance.

Investors should then consider a Hold rating rather than buying the shares now due to the possibility of a more attractive market value for the shares of Lundin Mining Corporation.

Shares also trade on the Toronto Stock Exchange under the symbol ( LUN:CA ). Shares were trading at CA$11.63 per unit on the TSE as of this writing for a market cap of CA$8.99 billion. Shares are trading above the 200-day simple moving average of CA$ 9.39, above the 100-day simple moving average of CA$ 10.24, and above the 50-day simple moving average of CA$ 10.76.

Shares are also above the middle point of CA$ 9.085 in the 52 Week Range of CA$ 6.24 to CA$ 11.93. Also, the 14-day Relative Strength Indicator of 57.27x suggests there is room for shares to reach lower price levels.

Conclusion

Lundin Mining Corporation is a solid player in the copper mining industry and may represent a very interesting opportunity to participate in copper's long-term growth prospects. The metal has a bright future and its contribution to the companies that make it available for the energy transition will be cooperative and supportive, provided those companies have growth plans.

Lundin Mining Corporation is targeting growth by expanding the proportion of its portfolio of copper operations through the recent acquisition of a mineral interest in Chile, the world's leading copper producer.

The company also produces other metals, but now it is much more copper than before, and its mineral activities appear to be on the way to a gradual improvement.

The expected recession could make this stock more attractive between late 2023 and early 2024.

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