LUNMF - Lundin Mining: Solid Q3 Supports A Tentative BUY Rating

2023-11-10 11:36:52 ET

Summary

• Lundin Mining Corporation reported strong Q3 results, with record metal production and positive free cash flow.
• The benefits of the Caserones acquisition are already showing.
• The company's balance sheet is stretched, but ongoing positive cash flow is expected to reduce the debt load. Sufficient liquidity is available to drive organic growth.
• The current valuation justifies a tentative BUY rating.

Lundin Mining Corporation ( LUNMF ) reported Q3 results on November 1, the first quarter including copper and molybdenum production from the newly acquired majority stake in the Caserones mine. This acquisition seemed to inspire the market when it was announced in late March and the share price pulled ahead of peers ( COPX ) in the aftermath. Additionally, the Q3 earnings call was the last such occasion for CEO Peter Rockandel before handing over the reins to Jack Lundin at the end of this year.

Plenty of reasons to be curious, we thought, and so we sat down to listen to the earnings call, study the MD&A and financial statements , and update our charts. Here is a condensed tour of the latest data points, followed by our updated investment thesis for this diversified base metal miner.

Operations

It seems that Lundin Mining is off to a strong start at Caserones as production at this mine has already exceeded initial expectations in its first quarter under Lundin Mining's co-ownership. In fact, the company's consolidated metal production hit an all-time high of 206,000 copper-equivalent tonnes in Q3 thanks to the maiden contributions from the Caserones mine. And there was more good news coming out of Chile for Lundin Mining as the EIA for the extension of operations at Candelaria was received, most likely pushing the mine life of this asset out to 2040.

Sticking with Candelaria, we note another quarter of slightly less-than-average copper production, at elevated cash costs and all-in-sustaining costs too close to the copper price for comfort. We expect to see higher grades in Q4 which should help to improve the performance of this asset into the end of the year.

Copper production at the Chapada mine is also weighted to the second half of the year, and Q3 results already showed a marked improvement in grades and throughput that resulted in higher copper production and lower costs quarter-on-quarter. This trend should continue well into Q4.

Zinkgruvan had a strong quarter, and Neves Corvo seemed to be working through the teething problems of the recently completed Zinc Expansion Project, aka the ZEPP. And finally, the Eagle mine experienced slightly lower grades and recoveries than expected, offset by higher throughput, resulting in another typical quarter for this asset.

Operations at Caserones stood out in Q3, while the legacy portfolio delivered a solid quarter overall. This was especially pleasing after a somewhat lukewarm first half of the year, and it has put Lundin Mining on track to achieve metal production at or above the midpoint of the guidance for most metals in the company's product mix.

Looking at sales by mine site illustrated in the chart below, we note the welcome diversification provided by the addition of the 51% stake in the Caserones mine. Candelaria is no longer the single dominant asset within Lundin Mining's portfolio, and Caserones might well grow to exceed Candelaria in importance for the company as it becomes the anchor asset in the developing Vicuna copper district straddling the Chilean-Argentine border.

Financial Results

Revenues amounted to $992M, the second-highest quarterly top-line result in the company's history. Margins remained under pressure, however, as cost inflation continued to take its toll. A $53M investment towards project development activities at Josemaria represented the lion's share of growth capex spent in Q3, while sustaining capex across the operating portfolio amounted to $180M. And when it came to cash flow considerations, we were pleased to note Lundin Mining has returned to positive free cash flow in Q3.

The Caserones acquisition closed in July and it was financed mostly by debt. This new debt left its mark on the company's balance sheet, which sported $1.5B in total debt obligations at the end of Q3. This still leaves Lundin Mining with $1.4B in liquidity which should suffice to fund the company's growth initiatives. Nevertheless, ongoing positive free cash flow will be key in the coming quarters in order to reduce the debt load and return the balance sheet to its former strength. And with this stretched balance sheet it is probably safe to say that Lundin Mining is done with MD&A for the time being.

Summary & Investment Thesis

Copper remains the dominant metal within Lundin Mining's product mix, followed by zinc as a distant second. The company's share price is therefore firmly linked to the price of the red metal. And this is where we see potential short-term risks as we expect copper price weakness to persist for some time to come. Taking a longer-term view we expect copper to return to rally mode in due time as macro tailwinds drive increasing demand for the metal. If these predictions are correct, then we submit that the coming months might well present a us with an attractive buying opportunity for copper miners in general, and Lundin Mining in particular.

The high quality of Lundin Mining's portfolio of operating base metals mines ensures free cash flow generation throughout the metal price cycles and we are not worried about the company's ability to service its debt during periods of metal price weakness.

The Caserones acquisition not only added an attractive asset to the company's portfolio, it also established an operating base to develop the commanding land position in the Vicuna belt which the Lundin group companies have established on both sides of the Chilean-Argentine border. The market was rightly enthusiastic about the Caserones deal as Lundin Mining's own Josemaria project is located across the border from Caserones. As an aside, we are also paying close attention to NGEx Minerals ( NGXXF ) in this context. We strongly believe that this strategic position in the Vicuna belt has the potential to develop into a world-class camp and lift Lundin Mining to the next level in the long-term.

Shares were trading for C$8.27 a piece at the time of writing, which computes to just 0.9xNAV. That's a long way down from the 1.6xNAV the market was applying to the company at the start of 2021, and in fact, it's getting close to the lower bound of the trading range over the past 7 years during which we have maintained our charts (the light blue bar in the chart below illustrates the NAV multiple at the time of writing).

We view Lundin Mining as one of our two favorite vehicles to gain exposure to copper due to the quality of the company's portfolio, the depth of operational talent, and the exciting potential of the company's strategic position in the Vacuna belt. The Lundin Mining Corporation valuation at the time of writing was already attractive, and we are prepared to call BUY on Lundin Mining for investors that share our long-term bullish view on copper. A copper price dip might pull the share price lower in the short term, so easing into a position might be called for at the present point in time.

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