Lundin Mining: Attractively Priced With Long-Term Growth Potential (TSX:LUN:CA)

Overview

Lundin Mining (OTCPK:LUNMF) is a base metals mining company that is listed in both Canada (TSX:LUN:CA) and Sweden. Most of its income comes from copper. Last year, 67% of revenues came from copper, 9% from zinc, 8% from nickel, 7% from gold, 2% from lead and remaining 4% of other metals. In 2024, more than 70% of revenues are expected to come from copper.

The company is relatively geographically diversified, even though an increasing percentage of revenue now comes from Chile.

I covered Lundin Mining in March this year which was more of an overview and a multi-year perspective. This article can be found here. In this article, I wanted to focus on the most recent quarterly result and other recent developments, as Lundin Mining has seen quite a a lot of activity lately.

Lundin Mining has had a decent share price performance over the past year, where it has returned 24%, slightly outperforming the price of copper and the Global X Copper Miners ETF (COPX). That said, the share price is back nearly 30% from its peak in May earlier this year as sentiment has worsened substantially for copper miners as the price of copper has fallen from just over $5/lb to now closer to $4/lb.

Result Q2 2024

Lundin Mining reported a strong second quarter with revenue of $1,084 million, adjusted EBITDA of $461 million, adjusted earnings of $122 million and free cash flow of $233 million. The numbers were all significant increases from the previous quarter.

We have to go back to early 2022 to see a better adjusted EBITDA figure. The strong quarterly result was naturally due to the constructive prices of copper and other base metals in the second quarter.

The company has produced 168Kt of copper year to date and 80Kt in Q2, which might appear slightly low compared to the annual guidance range of 366-400Kt of copper. However, copper and other metals production will be weighted towards the second half of the year, so the company remains on track for consolidated annual guidance.

Eagle saw a slight downward revision to its annual copper guidance, which was offset by an increased Caserones annual copper guidance to 124-135Kt of production in 2024. Nickel production was revised lower, but its impact on consolidated level. the gain is very small.

When it comes to the cash cost of the main copper-producing assets, the company is doing quite well against annual guidance. Candelaria will mine higher grade ore in the second half of the year, which will improve both production and cash cost for that mine, which YTD looks to be on the high side of cash costs compared to its guidance.

Recent developments

In late June, Lundin Mining announced it would exercise its option to increase its ownership in Caserones from 51 percent to 70 percent for $350 million in cash, which will be financed through debt. The transaction has since been completed and as a result the company owns 70% of the strategic mine in Chile.

There was also a job action at Caserones for several weeks in August, which has since been resolved. This caused the mine to operate at about 50% capacity for several weeks. This often causes short-term share price weakness given the fear of future labor actions, but the impact appears to have been short-lived so far.

The main recent development for Lundin Mining is that the company has formed a 50/50 Joint Venture with BHP ( BHP ) to acquire the Filo Del Sol project from Filo Corp ( FIL:CA ) for approximately $4.1 billion. The Josemaria project will also be added to the Joint Venture, where BHP will pay $690 million upfront to Lundin Mining for 50% of that project.

Lundin Mining is expected to pay C$859 million ($620 million) in cash and up to 92.1 million shares to acquire Filo. Given BHP’s $690 million upfront payment for Josemaria, the total transaction will have a marginally positive net cash impact on Lundin Mining. This transaction is expected to close in Q1 2025 and will require several regulatory approvals and a shareholder vote at Filo.

Josemaria and Filo are both located in the Vicuña district along with Caserones. Josemaria is in Argentina and Filo is riding across the border. Lundin Mining has not yet clarified the development timelines for the Joint Venture projects and we can expect to get more clarity in the first half of 2025 after the transactions close.

The Joint Venture is expected to gradually develop Josemaria and Filo over the next decade, but I think we will see a relatively aggressive timeframe for at least Josemaria to take advantage of the positive tax rules and incentives that have recently been implemented in Argentina for projects large investments.

Evaluation and conclusion

Lundin Mining had 776.8 million shares outstanding at the end of Q2 2024, if we include the 92.1 million shares that will be issued to acquire Filo, we get a market cap of $8.0 billion using the most recent share price.

Net debt is probably around $1.3 billion today. It was $1.15 billion at the end of the second quarter, and then we include the financing to increase the ownership of Caserones, some minor cash for the joint venture transactions and some free cash flow from the end of the second quarter. This translates to an enterprise value of $9.3 billion.

If we look at Koyfin’s earnings and EBITDA estimates for the next few years and a market cap of $8.0 billion and an enterprise value of $9.3 billion, the company is trading at an EV/EBITDA of 4.2 up to 4.8 and a price/earnings ratio. around 15 for the next few years. In my view, this is far from expensive for a company that has had an excellent operating history and generated very consistent earnings over the years.

However, if we only look at short-term earnings multiples, we miss the upside from Josemaria and Filo, which will substantially increase production and earnings over time. Recent transactions would value these two projects at around $4.4 billion today, where 50% of that can be added to Lundin Mining’s net present value, if we don’t assume further upside from present value, which is relatively conservative.

So, given the relatively attractive near-term valuations for Lundin Mining and the excellent long-term growth prospects from Josemaria and Filo, I consider Lundin Mining a solid buy in the copper industry. Long-term growth prospects and the recent share price pullback have led me to revise my rating on Lundin Mining upwards.

Of course, there is substantial execution risk in developing and building new large copper mines, but a joint venture staffed by Lundin Mining and BHP is about as experienced as you can get. Another concern is that Filo is on the border between Argentina and Chile, which naturally complicates the permitting process, dealing with both countries.

There are always political risks in mining as well, where in many countries we have seen natural resource royalties rise in recent times. However, Argentina, where much of the long-term growth will come from, is in my opinion one of the favorite countries after the change of government. The government in a relatively short time not only suggested business and mining friendly rules and regulations but actually implemented them. Accordingly, I believe a premium may be warranted for its exposure in Argentina compared to a discount in the past.

Financial leverage continues to be relatively manageable, with an estimated 12-month net debt to EBITDA of 0.8, and plenty of room on the $1.75 billion line of credit. So there are no substantial leverage and liquidity issues with Lundin Mining at the moment.

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