Lundin Mining Corp. (TSX:LUN, Financial) is a Toronto, Canada-headquartered base metals mining company with mineral properties in the Americas and Europe. The company is also engaged in exploration and development activities.
In addition to copper, zinc and nickel, which represent the main income source, Lundin Mining Corp. generates some income from the production and sale of gold, lead, silver and other metals.
The producing assets of the company are the 80% interest in the Candelaria mining complex in Chile, the Eagle underground mine in Michigan, the Neves-Corvo underground mine in Portugal and the Zinkgruvan underground mine in Sweden.
Lundin Mining Corp. also owns 24% interest in the Freeport Cobalt business, which includes a cobalt refinery situated in the municipality of Kokkola, in Finland. Freeport Cobalt is a large supplier of cobalt chemicals and powders for use in batteries, powder metallurgy, pigments and ceramics. The facility is also producing advanced inorganic products that are employed in the manufacturing of a wide range of applications. Companies that produce these applications are active in fast-growing end-use markets.
For full-year 2018, Lundin Mining Corp. is targeting attributable copper production of 167,000 to 174,000 tons, zinc production of 147,000 to 151,000 tons and nickel production of 15,000 to 17,000 tons.
Candelaria will supply 63.3% of the red metal, Eagle 10% and Neves-Corvo nearly 26%. Zinkgruvan will also help the total production of copper with a small 1% contribution. Nickel production will totally be made at Eagle, while 50% of zinc will arrive from Neves-Corvo and 50% from Zinkgruvan.
The company closed the third quarter of 2018 with a revenue of $379.7 million, a 37% decrease year-over-year due to lower metal prices and price adjustments and a decrease in sales volumes. Lower sales volume was principally influenced by lower-grade materials. For the same reasons, the company reported diminished attributable earnings of $7 million or one cent per share compared to $131.8 million or 18 cents per share for the prior-year quarter.
However, Lundin Mining Corp. has demonstrated resilience to lower metal prices, having produced a respectable Ebitda margin of 43.3%. The industry median was a bit higher at 51.4%.
Lundin Mining Corp. is still beating most of its competitors in margins for the last five years. In fact, Reuters.com is indicating that Lundin Mining’s Ebitd margin is 36.43% versus an industry median of 19.7% with reference to a period when copper, the main company’s commodity, plummeted to averages of $2.68, $2.16 and $2.67 per pound in 2017, 2016 and 2015. This is the proof that Lundin Mining Corp. manages to defend itself strongly in low base metals price environments. The company couldn’t be able to consistently generate operating cash flow if operational performance at the mines wasn’t excellent.
As a result, in the third quarter of 2018 the company has generated a robust cash flow of over $140 million from operations and has closed the trimester with a war chest of $1.47 billion available in cash on hand and short-term investments.
The company is also paying a 3-cent cash quarterly dividend per ordinary share and started the distribution in June 2017, when the COMEX, zinc and nickel futures were more than 3%, 8.5% and 9% lower than current valuations. The cash quarterly dividend leads to a forward dividend yield of 2.21% as of Friday.
The balance sheet is moderately leveraged with total debt-equity ratio of 29.35, much lower than the industry median of 53.69%. The business appears to be based on solid financial pillars, and the company has enough financial means to advance its mineral projects.
The company is reporting improvements in the mining rates at Candelaria while the zinc expansion project at Neves-Corvo is progressing even in the presence of an underperforming contractor.
Lundin Mining Corp. is also working on a metallic project for the development of the east side of the Eagle mine. Here, the miner is targeting the first mineral production in early 2020.
The company has budgeted a sizeable $745 million as capital expenditures for full-year 2018, but it should close with a free cash inflow because base metals prices in 2018 on average are going to be higher than in 2017. Should the company report a lower sales volume, the reduction will likely be offset by higher metals prices. Lundin Mining will invest about $80 million for exploration activities.
Considering the above, it make sense for investors in Lundin Mining Corp. to add to their position. The possibility of running strong operations is positioning the company to take the best advantage of rising base metals prices.
Wall Street is suggesting buying the stock, and analysts have established an average price target of $8.48 per share. The average target price represents a 54% upside from the share price of Canadian $5.52 per share at close Friday on the Toronto Stock Exchange.
Source of the chart: Yahoo Finance
The 52-week range is CA$4.70 to CA$9.21. The market capitalization is CA$4.05 billion.
The share price decreased 35% for the 52 weeks through Friday and is under the 200- and 100-day simple moving average lines but practically on par with the 50-SMA line.
Other indicators on the stock are saying that the 14-day Relative Strength Indicator is 46, meaning it is neither overbought nor oversold. The price-book ratio is 1.63 versus an industry median of 1.77 and the EV-Ebitda ratio is 4.32 compared to an industry median of 9.3.
Disclosure: I have no positions in any security mentioned.
