Lundin Mining Stock: Long-Term Buy, But Headwinds Ahead (TSX:LUN:CA)

Introduction

Lundin Mining (OTCPK:LUNMF) (TSX:LUN:CA) simply reported its fourth quarter and full 12 months 2022 monetary outcomes. Outcomes have been strong. The corporate has a big pipeline of tasks beneath growth, providing leverage to future industrial commodity costs, copper specifically. Crucially, it has the pristine steadiness sheet to finance future development largely from inside money movement. The Lundin household has a monitor report of following related profitable methods, combining opportunistic development with a dedication to return capital to shareholders: Lundin Mining is paying an above common dividend (along with its buyback program), whereas on the identical time planning to virtually double its manufacturing over the present decade, after its strategic acquisition of the Josemaria mission in April 2022.

Nonetheless, the near-term future is clouded by compressing margins and a weak outlook for industrial metals. Manufacturing prices are creeping up, due to inflationary pressures associated to diesel, fundamental supplies and labor. On the identical time, the copper worth has weakened considerably in comparison with its March 2022 peak. After a rebound motivated by the Chinese language post-covid reopening commerce, copper continues to look weak within the near-term. Exercise within the Chinese language development sector has not picked up but, and appears unlikely to return rapidly to its pre-covid ranges, barring vital fiscal stimulus from the Chinese language authorities. Within the US, current information factors counsel that inflation could not have peaked but, thus giving the Federal Reserve additional house to tighten financial coverage within the coming months, rising the chances of a recession. Within the medium-term, new main sources of copper are anticipated to return on-line over the subsequent few years, in order that the copper market is projected to stay roughly balanced by way of 2026. It is just from the second half of the last decade that the rise in demand from inexperienced applied sciences and electrification is forecasted to maneuver the needle. Subsequently, with prices rising and the copper worth dealing with headwinds, margins are being eroded.

Given its development prospects, strong steadiness sheet, leverage to copper costs and cheap valuation, I proceed to contemplate Lundin Mining a long-term purchase. Nonetheless, for the explanations talked about above, warning is advisable in relation to the present state of the copper market. Commodities are sometimes heralded as an inflation hedge; whereas this could be true in the long run, it’s hardly ever a linear course of, and the legislation of provide and demand trumps another concern within the quick time period. As well as, Lundin Mining is dealing with, like different copper miners, vital inflation pressures, which can be elevating money prices and inflicting margins to contract. Thus, I don’t see a big margin of security at present costs and higher entry factors are prone to happen throughout 2023.

2022 outcomes

Lundin Mining has a worldwide portfolio of belongings targeted on copper and different industrial metals. The corporate is predominantly leveraged to copper costs, with zinc, nickel and gold additionally offering essential contributions. In 2022, copper was accountable for round 63% of whole revenues, zinc for 12%, nickel for 12%, and gold for 7%. General, the corporate produced 250 thousand tons of copper and 400 thousand tons of copper-equivalent, for a complete of over $3 billion in gross sales, of which $810 million throughout This fall, when metallic costs strengthened in contrast with the earlier quarter. Manufacturing volumes have been virtually unchanged in contrast with 2021, whereas revenues have been marginally down from $3.3 billion, primarily due to decrease copper costs.

Steering was met for all predominant metals, excluding zinc, the place it was narrowly missed. The next desk compares the precise remaining outcomes with the unique steering; it additionally gives a breakdown by mine.

Taking a look at copper manufacturing, Candelaria was modestly beneath steering, largely due to the lack of the Alcaparrosa mine. Readers will do not forget that final August the mine was closed, following the invention of an enormous sinkhole. The information acquired numerous consideration in worldwide media; nonetheless, it proved to be fairly inconsequential for the general backside line. Alcaparrosa is accountable for round 4-6 thousand tons of copper manufacturing per 12 months, round 3% of Candelaria whole manufacturing. As well as, work is continuous on the Candelaria underground growth mission, also called CUGEP. The underground growth might add round 20 thousand tons of manufacturing, or round 13% from present ranges. Neves-Corvo was additionally beneath steering, because of decrease grades and recoveries, whereas Chapada and Eagle met steering, however have been beneath its midpoint.

Turning to zinc, manufacturing was beneath steering each at Neves-Corvo and Zinkgruvan, however total 10% increased in contrast with the earlier 12 months. At Zinkgruvan, manufacturing was negatively impacted by decrease than anticipated grades and quick time period resequencing of the mine plan. Manufacturing at Neves-Corvo was 25% increased in contrast with 2021, however nonetheless beneath steering, due to delays within the “Zinc Growth Mission”, also called ZEP. Ramp up of ZEP is now monitoring nicely in accordance with the revised plan.

Gold manufacturing was near the higher finish of steering, with Chapada specifically exceeding the vary. Nickel manufacturing was additionally sturdy, close to the highest finish of the steering vary, due to strong efficiency from Eagle.

Transferring on to the manufacturing prices, the impact of inflationary pressures is kind of evident. The primary desk beneath reveals money prices per pound of metallic, damaged down by mine, in 2021 vs. 2022; the second desk reveals a comparability between guided and precise money prices for 2022.

Except for Zinkgruvan, money prices have elevated considerably. That is partly the results of decrease metallic costs, which interprets into decrease byproduct credit, but additionally of inflationary pressures. Electrical energy and diesel prices are accountable for a very powerful will increase. The price of labor can be rising: for example, Candelaria’s money prices of $1.96 per pound embody a one-off of $0.27 per pound, as the corporate reached new three-year labor agreements and paid $20 million in bonuses on the finish of This fall. Going ahead, Candelaria goes to learn from 50% electrical energy costs, ranging from January 1. Nonetheless, for 2023 money prices are projected to fall inside the vary of $1.80 to $1.95 per pound of copper, which is 25% increased in contrast with 2021.

Money prices at Chapada have been higher than anticipated due to better gold recoveries, however considerably increased than the earlier 12 months. The corporate is guiding for nonetheless increased money prices for 2023, within the vary of $2.55 to $2.75, due to decrease manufacturing and better consumable costs.

At Neves-Corvo, prices have been additionally increased than anticipated, largely due to increased electrical energy costs in Portugal, and a slower ramp up of ZEP. In 2023, money value steering is for $2.10 to $2.30 per pound of copper, benefiting from increased metallic volumes.

Eagle was additionally above goal, because of decrease by-product copper costs, mixed with inflationary pressures and decrease gross sales. In 2023, cash value steering is for $1.50 to $1.65 per pound of nickel, due to anticipated decrease manufacturing.

Zinkgruvan was the clear outperformer, with money prices of solely $0.32 per pound, due to better than anticipated copper recoveries and stronger USD/SEK change charge. In 2023, money prices are projected to rise to $0.60 to $0.65 per pound of zinc.

Metrics like money prices are fairly noisy and troublesome to extrapolate to the long run; nonetheless, inflation has completely raised the prices of manufacturing, and thus compressed margins. The general pattern may also be seen from the next plots, displaying money prices and AISC on 1 / 4 by quarter foundation.

AISC replicate sustaining capital expenditures of $640 million for 2022, largely consistent with steering. There have been additionally round $200 million in expansionary capital expenditures in 2022, associated to ZEP and development of the Josemaria mission.

General, Lundin Mining 2022 operational efficiency is passable, however lower than stellar, largely reaching manufacturing targets, however largely failing to manage prices. That is definitely the results of the inherent complexity of the tasks, which might usually result in delays and decrease recoveries, however largely of persistent inflation. The latter is a worldwide phenomenon, pushing up the worldwide value curve. That is why I argued in a current article that bodily copper could outperform producers over the subsequent decade.

A take a look at the long run

Beginning with copper, steering for 2023 is little modified from the present degree of round 250 thousand tons. Nevertheless, wanting forward, the just lately acquired Josemaria mission will add greater than 150 thousand tons per 12 months. Candelaria underground growth, or CUGEP, will add round 20 thousand tons. Lastly, there may be additionally the brand new thrilling copper-gold discovery at Sauva, close to the Chapada mine, which was introduced solely final February.

Up to date money prices for 2023 are proven in relation to different producers within the image beneath. It’s doubtless that the money curve proven doesn’t replicate current inflationary pressures. Nonetheless, with copper buying and selling round $4 per pound, Lundin Mining copper belongings are well-positioned.

The true recreation changer within the pipeline is the Josemaria mission. Initially estimated to value round $4 billion to develop, will probably be the topic of an up to date technical report, to be launched in H2 2023. In the meantime, engineering work is continuous and is roughly 40% full, after a $170 million funding in 2022. An extra $400 million in capital expenditures are deliberate for 2023.

Zinc manufacturing is forecast to extend by round 50%, to the vary of 225 thousand to 240 thousand tons by 2025. That is largely the results of the ramp-up of the ZEP mission at Neves-Corvo, and likewise an enchancment in grades from the really world-class Zinkgruvan asset in Sweden.

Then again, nickel manufacturing is forecasted to fall; nonetheless, manufacturing plans don’t embody the mineralization of the Decrease Keel zone, in addition to a big quantity of lower-grade mineralization within the Higher Keel zone, on the Eagle mine.

Gold manufacturing is projected to rise considerably over the subsequent few years. The Josemaria mission alone, specifically, will enhance gold manufacturing by round 150%.

Summarizing, Lundin Mining has a portfolio of useful belongings, in addition to an thrilling pipeline of development tasks. The corporate is making vital investments in future manufacturing, which inevitably are going to influence its free money movement metrics. For 2023, the corporate is guiding for round $1.1 billion in capital expenditures, of which 700 are for sustaining manufacturing and the remainder largely to additional advance its Josemaria mission. The corporate has a sturdy steadiness sheet to finance its technique: it’s at present in a modest web debt place of round $14 million, with liquidity of round $1.7 billion. It stays dedicated to return capital to shareholders by way of the cycle, through each buybacks and dividends.

Conclusion

Lundin Mining is a strong guess to achieve publicity to base metallic costs, copper specifically. Regardless of a troublesome 12 months, marked by macroeconomic fears, excessive volatility in metallic costs, inflationary pressures, and site-specific operational challenges, it has managed to considerably obtain its steering. The corporate is pursuing an bold technique of future development, through a wealthy pipeline of tasks, centered round its current Josemaria acquisition. With principally no debt, vital liquidity at hand, and adjusted working money movement of round $1 billion per 12 months, such a technique could be financed internally. Lundin Mining is my predominant long-term holding to capitalize on the long run copper bull market, however I stay cautious within the near-term and see higher entry factors forward, due to a challenged outlook for industrial metals.

Editor’s Notice: This text discusses a number of securities that don’t commerce on a serious U.S. change. Please pay attention to the dangers related to these shares.