Lundin Mining Corporation
A long and winding road to production growth in Argentina
Our view: The Josemaria project adds a meaningful growth asset which also comes with significant execution risks, and it could take several years to demonstrate the merits of the deal. Our NAVPS estimate for Lundin increases by 5% when factoring in the Josemaria project. We reiterate our Sector Perform rating and $12 price target.
Key points:
Production growth, accretive to NAVPS: We calculate a NAV of U$847M for Josemaria using a 10% discount rate, $3.50/lb copper, and $1,500/oz gold, which compares to the NPV8% of $1.5B in the September 2020 feasibility study (at $3.00 and $1,500), and we include higher opex/capex (see below). This increases our NAVPS estimate for Lundin by 5% to C$11.33 and implies 0.6x NAV for the asset, which compares to the average 0.8x of precedent transactions for pre-production assets. Josemaria has potential to increase Lundin’s copper production by 70% and gold production by 200% by 2027, and the project could be the first development in a growing copper district surrounded by Filo Mining and NGEX Resources.
But with added risks...: Josemaria’s September 2020 feasibility study had an initial capex estimate of U$3.1B and we see upside risk to this number given inflation and the scale of the development, so we have modeled initial capex of U$4.0B and also added 10% to operating cost estimates. Josemaria is relatively straightforward, but it is in a remote area in San Juan Argentina, 4,000–4,900m above sea level, and is a large-scale construction project. The Lundin family has a track record of building mines in Argentina, but Lundin Mining will need to build out its construction team.
...and a strategic pivot...: Lundin’s recent acquisitions (Chapada 2019, Candelaria 2014) have been producing mines which were acquired at a discount at a low point in the cycle. So a development project in an up market is certainly a different animal. The company noted that it has always evaluated development assets and current valuations favour pre- production projects.
...which will take time to deliver: While there is potential value to be surfaced at Josemaria and the price paid appears reasonable, it will take at least five years to get into production with permitting and construction risks. So together with recent operational challenges, it could take time to rebuild investor confidence in the strategy. Given the balance sheet strength (Pro Forma net cash position of ~$250M after cash payout to JOSE shareholders), we believe Lundin can finance Josemaria with or without a partner while maintaining the base dividend (4% yield) and also completing an expansion at Chapada (we model $400M from 2022 through 2024 to expand Chapada to 32Mtpa from 24Mtpa).