On May 15, 2008 Lundin Mining announced its Q1/08 financial and operating results.
Company Profile (from Reuters)
Lundin Mining Corporation (Lundin Mining), incorporated on September 9, 1994, is a Canada-based international mining company that owns the Neves-Corvo copper/zinc/silver mine and the Aljustrel zinc/lead/silver mine in Portugal; the Zinkgruvan zinc/lead/silver mine in Sweden; the Galmoy zinc/lead/silver mine in Ireland; the Aguablanca nickel/copper mine in Spain, and the Storliden, copper/zinc mine in Sweden. The Company operates all its mines with the exception of the Storliden mine, which is operated under contract with Boliden AB. The Company also holds a 24.75% equity interest in the Tenke Fungurume Project, a copper/cobalt project under development in the Democratic Republic of Congo (DRC) and a 49% interest in the Ozernoe Project in eastern Russia, an undeveloped zinc/lead project. On July 3, 2007, the Company acquired Tenke Mining Corporation (Tenke). As of August 20, 2007, the Company had acquired 93.1% of Rio Narcea Gold Mines, Ltd. (RNG). The Company owns, indirectly a 100% of Zinkgruvan Mining AB (Zinkgruvan), which operates the Zinkgruvan mine; 100% of North Atlantic Natural Resources AB (NAN), which engages in mining and mineral exploration activities in Sweden and owns the Storliden mine; 100% of Galmoy Mines Ltd. (Galmoy), an Irish mining and exploration company, the main asset of which is the Galmoy mine located in County Kilkenny, Ireland; 100% of Sociedade Mineira de Neves-Corvo, S.A. (Somincor), a Portuguese mining and exploration company, the main asset of which is the Neves-Corvo mine in Portugal; 99.99% of Pirites Alentejanas, S.A. (PA), a Portuguese holding company that holds the Aljustrel mining license and operating permits, and the assets of the Aljustrel mine, and 100% of RNG, a Spanish mining and exploration company, the main asset of which is the Aguablanca mine located in Spain. It owns a 24.75% equity interest in Tenke Fungurume Mining Corp. SARL, which is the owner of the Tenke Fungurume copper/cobalt deposits located in Katanga Province in the DRC, and a 49% equity interest in Morales (Overseas) Ltd. (Morales), a Cyprus joint venture company. Morales was formed to develop the Ozernoe zinc/lead deposit located in the Republic of Buryatia, in the Russian Federation, and to operate any resulting mine. The Company has a 100% interest in several ongoing exploration projects in Sweden, Ireland, Portugal and Spain.
Click here to view previous coverage of Lundin Mining (LUN: TSX, LMC: NYSE) from March 21, 2008
Takeaways From The Event
Responding to Lundin Mining’s earnings, RBC Capital Markets analyst H. Fraser Phillips writes “Lundin reported adjusted Q1/08 EPS of $0.13 versus $0.24 in Q4/07 and $0.20 in Q1/07. Reported fully diluted EPS of $0.20 included provisional pricing gains of $0.09/sh and foreign exchange and derivative losses totaling ($0.02)/sh. Our estimate was $0.19 and consensus was $0.23. The variance with our estimate was primarily due to timing of metal shipments and sales at quarter end. Q1 Metal production was in line with expectations, with the exception of a small shortfall in zinc production due to a delay in equipment installation at the Aljustrel mine. A delay in the start-up of the Aljustrel mine may reduce Lundin's 2008 planned zinc production from 202,000 tonnes to 195,000 tonnes. Aljustrel accounts for 9% of our NAV, and we view this potential delay as being immaterial to Lundin. Copper nickel and nickel production guidance for 2008 remain unchanged. Lundin expects lower metal sales experienced in Q1 to be recovered over the balance of the year. Management indicated on its conference call that it will likely provide an updated reserve & resource statement for Aguablanca by mid-year and for Neves Corvo and Aljustrel later on in 2008.
In summing up his investment thesis for Lundin Mining, Fraser Phillips opines “Lundin provides investors with exposure to copper, zinc, nickel, lead and cobalt and offers above-average potential for the following reasons: 1) Based on previously announced projects at existing operations, we forecast that Lundin will achieve a 20% CAGR in EPS at flat metal prices for the 3 years to 2010. And Tenke offers excellent longer term upside potential. 2) The shares have underperformed the mining group and are trading at a discount to the peers. We believe this discount reflects investor concern over corporate strategy and licensing in the DRC. 3) We believe that at current valuations investors are compensated for the risks around the DRC and strategy.”
Another analyst who covers Lundin Mining is Cliff Hale-Sanders of CIBC World Markets and he writes “Overall in Q1, the company produced 24,940 tonnes of copper, 43,019 tonnes of zinc, 12,577 tonnes of lead, and 1,848 tonnes of nickel. Copper production was higher than we projected mainly due to higher-than-expected ore grades from Neves Corvo and higher throughput from Storliden. We had forecasted a lower ore grade at Neves Corvo as the mine moves into a lower grade area according to the mine plan. Judging from the annual copper production guidance, we could see the ore grades coming down to what we are modeling for the rest of the year. Zinc production was lower than expected mainly due to the delays at the Aljustrel mine offset by strong performance from Galmoy. The zinc circuit at Aljustrel is now in operation and expected to improve progressively over the rest of 2008. Zinc production at Galmoy was very strong with higher ore grades and higher recoveries. Also, the industrial actions disturbing last year’s operation at Galmoy seem to be behind the company. The company’s other mines operated in line with expectations. As expected, operating costs increased modestly quarter over quarter with noticeably higher unit cash cost recorded in Neves Corvo on lower ore grades in line with mine plan. Unit cash cost at Zinkgruvan went up mainly due to lower by-product credit as lead prices retreated from record levels in 2007. This was, however, offset by lower unit cash cost recorded at Storliden, where higher by-product credits from copper sales pushed the cost per pound into negative territory. However, SG&A expenses jumped significantly to $11.1 million from $5.4 million in Q1/07 due to office closures in relation to the re-organization of corporate offices. Going forward, the company expects additional re-organization costs will be recorded in the later part of 2008 totaling close to $20 million for the year. Overall, the company appears to be managing the recent cost issues seen in the industry quite well despite the currency impact on its European operations.”
Hale-Sanders “ view[s] Lundin as one of the least expensive names in our coverage universe given the market’s attitude towards valuing the Tenke project. While we believe some discount is likely warranted, given that the Tenke project, post assumed expansions, accounts for 36% of our C$13.53 NAV estimate. That said, given our positive outlook for copper prices to remains high for the next several years and a likely positive resolution to the issues in the DRC, we view this discount as excessive. Our Sector Outperformer recommendation and price target of C$11.50 remain unchanged. Higher targets are possible as developments in the DRC support a lower discount.” Hale-Sanders has a C$11.50 price target on Lundin Mining and a Sector Outperformer rating. His target represents “a discount to our NAV of C$13.53 (up from C$12.90) per share reflecting a more conservative value for the higher risk profile of assets under development in Africa and Russia. The price target reflects a multiple of about 5.5x our 2009 cash flow estimate, which is at a modest discount to our group average target multiple of 6.0x, due to the risk to our forecasts.”
Lastly, Kerry Smith of Haywood Securities writes “Exploration in Q1/08 was focused primarily on the Lombador deposit at Neves-Corvo, where the Company has been aggressively expanding the orebody with step-outs of 100+ metres. Highlights from recent drilling include 30 metres grading 8% zinc, and 51.4 metres grading 5.4% zinc and 1.8% lead. Most recently, a hole intercepted 89 metres grading 8.4% zinc, including a higher grade interval of 61 metres at 10% zinc. With large step-outs intersecting good grades, tonnage will build fast on this deposit, and the Company expects that a new estimate at the end of Q3/08 will significantly increase the overall resource. At Aguablanca, in total four drill rigs are currently operating, focused on both infill drilling of the Deep Body, and step-out exploration drilling at depth and along strike of the Deep Body. One particular intercept, located 200 metres from the nearest known mineralization, intersected 21 metres grading 0.52% nickel, including 5.5 metres grading 1.27% nickel. The most recent resource at Aguablanca was based only on drilling completed up to mid-2007, when the Company acquired the asset, and does not include any drilling completed in H2/07 or the 2,209 metres completed in Q1/08. As a result, Lundin expects a significant increase in resources when it releases a revised estimate by mid-year. Although drilling was focused primarily at Neves-Corvo, some was carried out at Aljustrel on the current copper resource, and in Q2/08 further drilling of this resource will be a priority. A revised resource estimate on the copper resource at Aljustrel is expected to be completed in Q3 to Q4.”
Smith has Sector Outperform rating on Lundin Mining and a $10.00/sh target price which is based on “a 25% weighting and a 6.0x multiple to our revised 2008E CFPS of US$1.10, plus a 75% weighting and a 1.3x multiple to our after-tax corporate NAV10%to12% of $8.50 per fully diluted share. The Company’s peer group of base metals producers current trades at 5.5x to 8.7x 2008E CFPS and at 0.6x to 1.5x NAV.”
Investment Risks
Without limitations, some of the risks include reserves and resource risk, development risks, permitting risks, off-take agreements, commodity price risks, geo-political risks, exchange rates, weather related impacts etc.
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