Canaccord researchMetals and Mining -- Base Metals and Minerals
STRONG Q4/09 RESULTS; 2010
GUIDANCE RE-AFFIRMED;
REITERATING BUY RATING AND
C$6.00 TARGET
Event
Lundin reported a strong Q4/09 adjusted EPS of
.14, well above our
estimate of
.07 and consensus of
.11, primarily due to higher
volumes and stronger price realizations. The company re-affirmed its
recently issued 2010 production, cost, and capital cost guidance,
although warned that Q1/10 production would be weaker than trend.
We have also updated our model to reflect the company’s recently
revised reserve and resource statement.
Impact
Positive. Our 10% NPV has increased to C$6.47 per share or by 7.5%.
Action
We are reiterating our BUY rating and our C$6.00 12 month target. Our
C$6.00 target is based on a 2010 EV/EBITDA multiple of 5.5x. Our BUY
rating is supported by the company’s attractive relative valuation and
impressive production growth profile with Tenke. We note that political
risk uncertainty associated with Tenke remains an overhang on the
shares.
Valuation
Lundin is currently trading at a 2010E and 2011E EV/EBITDA of 4.0x
and 3.4x, and at a 31.2% discount to our revised 10% NPV of C$6.47 per
share, which compares with our mid-cap base metal producer coverage
universe average of 4.8x, 3.8x and a 2.3% premium to NPV.
Q4/09 RESULTS ABOVE EXPECTATIONS
Lundin reported Q4/09 GAAP earnings of $35.1 million or
.06 per share. However, after
excluding a $37.1 million after-tax impairment charge related to the Salave gold project in
northern Spain and a $9.9 million unrealized after-tax loss on derivative contracts, we
estimate that the company reported Q4/09 adjusted earnings of $82.1 million or
.14 per
share. The adjusted earnings markedly improved from the Q3/09 earnings of $35.9 million
or
.06 per share and the Q4/08 loss of $131.9 million or
.32 per share, due to higher
copper deliveries and significantly higher metal price realizations. The adjusted Q4/09
earnings of $82.1 million or
.14 per share were well above our estimate of $40.1 million
or
.07 per share and the First Call consensus estimate of
.11 per share, principally
due to higher than forecast copper deliveries and price realizations.
Attributable copper production (including Tenke) of 31,095 tonnes was 9.3% above our
forecast due to higher throughput, grade, and recoveries at Neves-Corvo. Production at
Tenke was in-line with expectations. Zinc production of 20,011 tonnes was more or less inline
with our forecast of 20,228 tonnes as Zinkgruven posted a solid quarter. We have
profiled the quarterly production and operating cash cost for Neves-Corvo and Zinkgruvan
in Figure 1. Nickel production of 2,324 tonnes was 55.2% above our estimates largely due
to a higher than normal mined grade at Aquablanca. We note that Neves-Corvo,
Zinkgruven, and Aquablanca all demonstrated significant operational improvement on a
sequential basis. Attributable copper deliveries of 32,006 tonnes exceeded production
levels and were 17.6% higher than forecast as inventories were temporarily drawn down
below normal levels. While zinc deliveries of 17,333 tonnes were in-line with our forecast
of 17,193 tonnes, nickel deliveries of 2,155 tonnes were 62.3% above our estimates. Cash
operating costs (excluding Tenke) of $1.22/lb of copper and
.23/lb of zinc were slightly
higher than our forecast of $1.10/lb and
.18/lb, respectively, but nickel costs of $4.31/lb
were markedly lower than our estimate of $6.28/lb.
Realized prices for copper of $3.42/lb and nickel of $8.57/lb were materially above our
forecast of $2.97/lb and $7.95/lb, respectively, which was partially offset by lower zinc
price realizations of $1.10/lb vs. our forecast of $1.19/lb. As a result of the higher copper
and nickel deliveries combined with stronger price realizations, total revenue of $256.7
million was 46.6% above our forecast of $175.1 million. Similarly, the company’s gross
margin of $157.9 million (or 61.5%) was markedly above our forecast of $107.1 million (or
61.2%).
2010 GUIDANCE RE-AFFIRMED
Lundin re-affirmed its previously issued 2010 contained production guidance of 118,500
tonnes of copper (including Tenke), 92,000 tonnes of zinc, 7,500 tonnes of nickel, and
40,000 tonnes of lead at a cash operating cost of $1.20/lb of copper at Neves-Corvo,
.30/lb of zinc at Zinkgruvan, $5.80/lb of nickel at Aguablanca and
.30/lb of zinc at
Galmoy (see Figure 2). While the company’s guidance remains unchanged, Lundin warned
that Q1/10 production would be weaker than trend due to abnormal weather conditions in
several parts of Europe which has hampered ore processing, flooding of the Aguablanca
pit, and a blocked orepass at Zinkgruvan. We also note that the company’s guidance has
not been adjusted to reflect the impact of the on-going partial industrial action at Neves-
Corvo which began on February 17 (underground mining employees are conducting a
program of 2 hour strikes per shift). The company’s previously issued capital expenditure
guidance of $250.0 million also remains unchanged. However, the capex budget does not
include funds for the possible advancement of the zinc circuit at Neves-Corvo and/or the
procurement of long lead items for the potential development of Lombador (see Project
Development Update).
PROJECT DEVELOPMENT UPDATE: TENKE EXPANSION
STUDY; LOMBADOR
At Tenke, debottlenecking and expansion feasibility studies have commenced with the aim
of potentially increasing production capacity by 50% or more. The expansion feasibility
study is anticipated to be completed by mid-2010. While the capital commitment for the
expansion remains uncertain, Lundin estimates spending in the range of $40–100 million
in 2010. While discussions with the Government of the DRC in respect of the mining
concession at Tenke continue, there was no material update. Lundin and Freeport continue
to believe that its agreements are fair, equitable, and comply with Congolese law. Contrary
to recent press reports, the company has not received any official deadline from the
Government in respect to settling the mining concession review.
The Lombador zinc project at Neves-Corvo continues to move forward. The company is
targeting start-up in 2013 utilizing existing infrastructure. A pre-feasibility study is
anticipated to be completed in Q2/10, followed by a feasibility study in early 2011.
THE BALANCE SHEET: WELL POSITIONED FOR GROWTH
At the end of 2009, Lundin had $141.6 million of cash on hand and total debt of $190.9
million, resulting in a relatively minor net debt position of $49.3 million (or
.09 per
share). That compares to the Q3/09 net debt balance of $132.2 million (or
.23 per
share). With positive free cash flow, we forecast Lundin to end 2010 with a net cash
balance of $33.7 million (or
.06 per share). We note that we forecast the Tenke capex
overrun facility ($223.5 million at the end of 2009) to be fully repaid to Freeport McMoran
by Q1/11, at which time Lundin will begin to receive its attributable share of cash flow.
RESERVE AND RESOURCE UPDATE
On February 22nd, 2010, Lundin released an updated mineral reserve and resource
estimate. While higher tonnage at all operations offset slightly lower grades, Lundin
effectively replaced its 2009 mined production at Neves-Corvo and Zinkgruven. On a
consolidated basis, Lundin had total attributable contained metal of 2.1 million tonnes of
copper, 4.9 million tonnes of zinc, 1.4 million tonnes of lead, 48,000 tonnes of nickel, 110,
000 tonnes of cobalt, and 169 million ozs of silver in the proven and probable category
(includes Lundin’s 24.75% interest in Tenke Fungurume). Including proven and probable
reserves, the company has total attributable contained metal of 3.9 million tonnes of
copper, 6.9 million tonnes of zinc, 2.0 million tonnes of lead, 75,000 tonnes of nickel, 231,
000 tonnes of cobalt, and 261 million ozs of silver in the measured and indicated category
(includes Lundin’s 24.75% interest in Tenke Fungurume).
REVISION TO ESTIMATES AND SENSITIVITIES
We have updated our estimates based on the reported results and updated mineral reserve
and resource statement. We have reduced our Q1/10 production volumes to account for
the various issues negatively impacting Lundin’s European operations. Our 2010E-2012E
revised earnings per share estimates of
.57,
.68 and
.65 compare to our previous
estimates of
.60,
.70 and
.66, respectively. Similarly, our 2010E-2012E revised
cash flow per share estimates of
.54, $1.17 and $1.05 compare to our previous
estimates of
.65,
.98 and $1.03, respectively. Our revised 10% NPV valuation is
C$6.47 per share, up 7.5% from our previous estimate of C$6.02 per share.
Lundin remains heavily weighted to copper, followed by zinc and nickel. We have profiled
the company’s forecast 2010 revenue mix by metal in Figure 3. Based on our metal price
deck, copper represents 60% of our total forecast revenue in 2010, followed by zinc at
28%, and nickel at 12%, respectively.
CONCLUSIONS
Lundin reported stronger than anticipated Q4/09 results driven by higher volumes and
price realizations. In our view, the company’s 2010 production and cost guidance looks
reasonable. However, a prolonged partial industrial action at Neves-Corvo would have a
negative impact on production. We remain particularly impressed by the very successful
and speedy ramp up at Tenke, although issues relating to the mining concession still need
to be resolved with the DRC government. With its internal house in order and its balance
sheet and liquidity concerns well behind the company, Lundin is well positioned to pursue
both internal (ie. Lombador) and external growth opportunities.
VALUATION
Lundin is currently trading at a 2010E and 2011E EV/EBITDA of 4.0x and 3.4x, and at a
31.2% discount to our revised 10% NPV of C$6.47 per share, which compares with our
mid-cap base metal producer coverage universe average of 4.8x, 3.8x and a 2.3% premium
to NPV.
RECOMMENDATION
We are reiterating our BUY rating and our C$6.00 12 month target. Our C$6.00 target is
based on a 2010 EV/EBITDA multiple of 5.5x. Our BUY rating is supported by the
company’s attractive relative valuation and impressive production growth profile with
Tenke. We note that political risk uncertainty associated with Tenke remains an overhang
on the shares.
INVESTMENT RISKS
There are risks associated with the share price achieving our target price and our financial
forecasts. Metals prices may not match our forecasts, and exchange rate fluctuations may
impact company earnings. Further, there are operating risks involved in all mining
operations. Technical, environmental, regulatory and political risks can all impact financial
estimates and valuation.