February 18, 2022
Lundin Mining Corporation
Lining up medium term growth options
Our view: Lundin is gearing up to grow copper production over the next 3-5 years, namely an expansion at Chapada and the Josemaria project; however, the timeline, capital requirements, and execution risks could remain an overhang in the near term. Our model saw modest changes post Q4 results given 3 year guidance was unchanged, and we reiterate our Sector Perform rating and $14 target.
Key points:
Big shoes to fill: The Company announced the retirement of Board Chair Lukas Lundin who has lead the company since 1994. We do not anticipate any significant changes in strategy going forward, but the Board will need to identify a new Chair to lead the company into the next phase of growth.
Josemaria next steps: Management noted a team is traveling to Argentina to negotiate the environmental permit approval and a tax stability agreement which could be completed soon. The deal is expected to close in Q2/22 and the company plans to release a detailed go-forward plan in Q4/22. Initial capex was pegged at $3.1B in the 2020 feasibility study and management noted its own due diligence number was above that estimate, and it continues to monitor industry inflation trends (like everyone else). It will also review financing options which could include streaming and partnerships, which we believe could be a key de-risking step for the project. Josemaria can add 130kt/year copper, 300koz/year gold on average over the first 8 years with all-in cash costs of $1.55/lb (co-product).
Chapada optionality: Lundin plans to release an expansion study in Q4/22 to take annual throughput from 24Mtpa to 32Mtpa. We currently model an expansion to 32Mtpa for capex of $400m which could take copper production to 70kt starting in 2024 from 56kt in 2022. In February, Lundin announced the Sauva Copper-Gold discovery, located 15km north of Chapada based on 47 holes (>12,850 meters), the majority of which returned intersections with grades above 1.0% CuEq (vs. the reserve grade of 0.31% CuEq), and defining a shallow mineralized area of 750m by 650m. We believe this could be a stand-alone operation or trucked to Chapada. The company is also reviewing the requirement to re-locate part of the existing mill to access higher grade portions of the Chapada deposit.
Well funded: Lundin has a strong balance sheet with $620M of net cash. If it decided to raise debt, 2x our 2022 EBITDA estimate would be roughly $4.0B while we model FCF of positive-$337M (after Josemaria transaction costs and before dividend payments) in 2022 ($523M at spot).
Valuation update: Lundin is currently trading at 3.8x our 2022 EBITDA estimate and 0.96x our NAVPS estimate of C$12.55, vs. copper peers at 4.3x and 1.14x