Lundin Mining (TSX: LUN) recently upped its copper production guidance from the three-year guidance it set just 12 months ago. With the stock roughly flat since its announcement, it’s possible that the market hasn’t fully digested the long-term upside of this update.
Let’s take a look at Lundin’s current business model and ascertain whether there’s multi-year profit potential from its upgraded guidance.
A simple strategy well executed
Lundin’s strategy is to “operate, upgrade and grow a base metal portfolio that provides leading returns for our shareholders throughout the cycle.” While this seems generic, it’s actually quite different from many competitors. For example, Hudbay Minerals is in the middle of a proxy war with a private equity company due to its focus on growth versus increased shareholder value.
While its performance has been volatile, shareholders have benefited from buying and holding Lundin stock over the long term. In 2003, shares were just $0.50. That means investors have experienced a 1,000% return over a 15-year holding period, healthily outpacing the TSX.
Lundin’s strategy of choice has been to focus on copper mines with competitive cost positions. They’ve stuck with low-legal-risk jurisdictions while remaining in the few regions it knows well. While these tight criteria hasn’t allowed it to grow its asset base as fast as other competitors, it has retained and increased shareholder wealth better. Lower-risk operations have also allowed it to maintain a more flexible balance sheet with less debt than most competitors — an important advantage during a down cycle.
Growth you can count on
Lundin has a proven history of generating strong margins throughout all of its properties throughout the cycle. With a disciplined approach, future growth will likely continue to accrue shareholder value. This is not always the case.
There are countless examples of mining companies that grew production over a decade or more, all while experiencing net negative shareholder wealth creation. With the stock roughly flat since Lundin boosted its production guidance, it’s likely that the market is skeptical about Lundin’s ability to execute, but it shouldn’t be.
From 2018 through 2021, copper production should grow at a 7% annual rate. Zinc output should grow by a total 55% by 2021. Nickel production, a much smaller contributor to revenue, should remain roughly flat. With $1.4 billion in liquidity — more than half of which consists of cash — Lundin should have no problem realizing these production gains.
Looking at Lundin’s historical success, there’s no reason to believe Lundin won’t be able to capitalize on this growth.
For example, with its $220 million mine fleet reinvestment, Lundin should experience roughly 20% IRR. Its $80 million investment for the Candelaria Mill optimization project is also expected to generate 20% IRR.
Put your money behind this management team
In a testament to management’s commitment to preserving and growing shareholder value, one only needs to look at its recent involvement with Nevsun Resources. Lundin made five attempts to buy Nevsun, offering around $1.4 billion, all of which were rejected. In September, China’s Zijin Mining successfully offered $1.86 billion, at which point Lundin dropped out of the race.
This type of discipline is rare for mining companies, and Lundin’s dedication to it has resulted in outsized long-term returns. Expect that run to continue in 2019 and beyond.
