TD $8.50 target price Event
We are initiating coverage of Lundin Gold with a SPECULATIVE BUY
recommendation and $8.50 target price. Our full initiation report will be published
later today.
Details
The name Lundin Gold may imply aspirations for the company to become a multimine
producer, like its base metals-analogue, Lundin Mining Corp. (LUN-T), but it is
for now focused exclusively on the development of the Fruta del Norte (FDN) gold
project in Ecuador.
The company acquired the project from Kinross Gold Corp. (K-T) for US$240 million
in cash and stock in late 2014. The senior decided against developing it due to weak
returns from sub-optimal project configuration and the rapacious taxes and royalties
at the time. Kinross had paid $1.2 billion for the project in mid-2008.
Lundin Gold negotiated more favourable fiscal terms and completed a Feasibility
Study (FS) in June on a more compact project that emphasized profitability over
production. The results included a NPV5% of US$676 million and an after-tax IRR
of 15.7% at US$1,250/oz Au.
After receiving approval for its Environmental Impact Statement October 13 and
with its Environmental License due imminently, the key catalysts are the execution
of the Exploitation Agreement (EA) and Investment Protection Agreement (IPA)
on or before January 20, 2017. This would clear the project for construction and
operations.
From an investment perspective then, while subject to speculative risk, the company
appears positioned to grow its net asset value through the optimization of the project
in an updated FS, while also relatively de-risking the project through the completion
of project permitting and financing in H1/17. We also see considerable potential for
long term exploration upside.
TD Investment Conclusion
With a path to value creation through optimization and growth and multiple expansion
through de-risking ahead of it, we are initiating coverage of Lundin Gold with a
SPECULATIVE BUY recommendation and a $8.50 target price, which is based on
1.0x NAV5% at US$1,350/oz Au.