Chris Chang of Laurentian Bank Securities has initiated coverage of Lundin Mining (TSX: LUN) with a buy rating and a target price of $5.50 per share and argues the company is well positioned to capitalize on the weak commodity price environment through M&A deals in the medium term, once it digests its July acquisition from Rio Tinto (NYSE: RIO) of the Eagle nickel-copper-cobalt-PGM project in the state of Michigan.
“Given the theme of on-going non-core asset divestitures by some of the major global producers, we believe Lundin could potentially acquire higher quality advanced stage or producing assets at reasonable valuations,” the mining analyst writes, adding that the mid-tier producer also “could look to acquire development stage projects for future growth given the extremely depressed valuations that the junior mining sector currently trades at.” Of the companies Lundin might have an interest in after Eagle is fully developed and ramped-up to its design levels, Chang lists NGex Resources (TSX: NGQ), Lumina Copper (TSXV: LUM) and Candente Copper (TSX: DNT).
Lundin certainly has a balance sheet strong enough to carry out acquisitions in the medium term, he argues, noting that its assets “are relatively low-cost producers” that “should be able to generate strong cash flows in a weak metal price environment,” and forecasts that the company’s total operating cash flow will grow by 13% to US$337 million, or 58¢ per share, in 2014. He also expects that once Eagle starts production in 2015, total operating cash flow will grow by 51% to US$509 million, or 87¢ per share.
At the end of the second quarter, Lundin had cash of US$230 million, or 39¢ per share, and US$9 million in debt and according to his calculations the company will end the year with a cash balance of US$173 million and total debt of US$350 million, for a net debt balance of about US$177 million. Chang believes the company will end 2014 with a net debt balance of US$287 million before returning to a net cash position of US$90 million at the close of 2015.
Lundin’s metal comes from its wholly owned Neves-Corvo copper-zinc-lead-silver underground mine in southern Portugal about 220 km southeast of Lisbon; Zinkgruvan, a zinc-lead-copper-silver operation in Sweden about 250 km southwest of Stockholm; Aguablanca, a nickel-copper open pit mine in southern Spain about 100 km north of Seville; and its 24% stake in Tenke Fungurume, a copper-cobalt open pit operation in the Democratic Republic of Congo’s Katanga province about 175 km northwest of Lumbumbashi. It also owns a 24% stake in a cobalt chemical factory in Finland and a 100% stake in the underground Eagle project in the United States. According to Chang’s calculations, Lundin is the second- and third-largest zinc and copper producer, respectively, on the Toronto Stock Exchange.
Chang anticipates that this year consolidated attributable production will reach 113,613 tonnes of copper, 124,484 tonnes of zinc, 6,288 tonnes of nickel, and 36,212 tonnes of lead at average operating cash costs of US$1.57 per lb. copper, US40¢ per lb. zinc, US$4.87 per lb. nickel.
In 2014 Change says Lundin should produce 111,184 tonnes of attributable copper, 144,742 tonnes of zinc, 1,660 tonnes of nickel and 35,280 tonnes of lead at average operating cash costs of US$1.52 per lb. copper, US$35¢ per lb. zinc and US$4.16 per lb. nickel.
In 2015 attributable copper production should grow by 16% with the start-up of Eagle, and again in 2017 and 2021, as the third and fourth phases of the Tenke expansion are completed. Production growth for zinc will be 17% in 2015 and 7% in 2016, he reasons, with the ramp up of Neves-Corvo to an expanded 1.0 million tonne per year capacity. As for nickel, after Aguablanca closes in 2015, production of the metal will resume from Eagle.
The company has a market cap of about $2.8 billion and the Lundin family is its largest shareholder with 12%. IG Investment Management owns 3.6%; Blackrock 3.4%, and JP Morgan 2.2%.
At press time in Toronto Lundin was trading at $4.56 per share within a 52-week range of $3.68-$5.54.
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