One of the mining companies I have recommended for some time now for investors interested in taking advantage of a potential super cycle for specific metals, such as zinc, is Lundin Mining Corporation (TSX:LUN). I first recommended this company in early May at a level approximately 20% below what the company’s share price is trading at today. The capital appreciation Lundin has seen over the past four to five months has baked in much of the bullish sentiment linked to the zinc rally; however, as I will describe below, the rally in base metals may only just be beginning for metals such as zinc.
Industry fundamentals
Few commodities have experienced the run zinc has had in recent months. Currently trading near pre-recession highs, the industrial metal is now poised to continue to rise due to a number of issues related to supply and demand of the base metal. In addition to a number of high-profile mine closures as well as continued stimulus in key markets such as China, demand has begun to outpace supply for zinc for some time now, leading to inventories across the sector that have been reduced to lows not seen in years.
The underlying fundamental drivers for the price of zinc, therefore, have been linked to a potential “super cycle” for this commodity, leading some commodity economists to believe the rebound in zinc is likely to continue for the foreseeable future, making companies such as Lundin extremely valuable in the metals and mining sector. With a broad recovery supporting price increases combined with unique industry fundamentals for zinc, Lundin remains a solid long-term play for investors interested in gaining zinc exposure.
Lundin’s fundamentals
Taking the market-related drivers out of the equation and looking at some of the idiosyncratic drivers of companies such as Lundin, we can see that Lundin’s balance sheet has shown improvement in recent years, partially due to the increase in base metals prices over the past couple years.
Over the past five years, Lundin’s operating margin has averaged 8.4%, significantly lower than the company’s trailing 12-month operating margin of 26.9%. The company has grown free cash flows, which were negative in 2013 and 2014, to meaningful free cash flow over the past two years — numbers which are expected to continue to improve as zinc prices continue to rise.
Bottom line
From an industry standpoint as well as a company standpoint, Lundin stands out as one of the best operators in the zinc space today. For investors looking for exposure to this base metal, Lundin is a good starting point.
Stay Foolish, my friends.
