The price of gold is a major headline winner right now, with the price per ounce rising far beyond all-time highs and even nearing US$4,000! However, there is an issue with gold. This tends to be a protective investment, and therefore, the price can most certainly fall back down. After all, as Warren Buffett has said, there isn’t anything that gold really does except look pretty! Which is why when it comes to investing in minerals, it can be better to invest in mining companies.
That’s why today we’re going to look at Lundin Mining (TSX:LUN). The company focuses on more basic materials, ones that are critical to our daily lives. So let’s get into why it could be a top company to consider on the TSX today.
Into earnings
First, let’s look at what’s been going on with this stock lately. In the last year, shares of LUN stock have been rising, up about 32% in the last year alone. What’s more, revenue growth has been strong, with quarterly revenue growth up almost 7% year over year and trailing 12-month revenue hitting $3.6 billion. That’s quarterly earnings growth up 88% year over year!
Furthermore, cash flow has been quite strong, with operating cash flow at $1.3 billion in the last year and levered free cash flow at $476.7 million. This is excellent cash conversion for a mere miner. What’s more, it now holds total cash at $279 million versus total debt of $655 million and net debt of $376 million. Therefore, it has a very low debt-to-equity (D/E) of 9.5% at writing!
Using the cash
With all this cash on hand, LUN is putting it to work. The mining stock has used it to fund dividends, buybacks, capital expenditures and of course mergers and acquisitions. Yet this is all while remaining a very valuable mining stock. As of writing, it trades at just 9.7 enterprise value-over-earnings before interest, taxes, depreciation and amortization (EBITDA). Meanwhile, EV-over-revenue is at 3.4, and it trades at 2 times book value and 19.5 times forward earnings.
Sure, it’s therefore not cheap, but it’s still valuable given all the cash on hand and even a dividend. And investors need to remember that the company invests in essential products. LUN mainly mines copper, and the price of copper has also been rising. After all, this product is used for electrification, and that’s used in almost literally everything. Whether it’s the renewable energy boom, electric vehicles, or just the power lines outside your home, LUN has a hand in the action.
Considerations
So there are a lot of considerations here. On the one hand, LUN doesn’t look exactly cheap right now, though it could be considered undervalued based on the rising price of copper and the demand for the product as well. This demand has been consistently reflected in the company’s strong earnings, leaving the mining stock flush with cash.
Yet the reverse is also true. If demand for copper, or that of its other metals, declines, then this could quickly reduce EBITDA and free cash flow. Therefore, its returns are highly correlated to the price of the metal. In that case, LUN will need to continue executing well, finding growth organically as well as through acquisitions, and wading through the political and regulatory waters to keep cash coming in.
Bottom line
LUN looks like a strong stock, one that’s fundamentally solid, especially when compared to other peers in the industry. It offers strong cash generation, low net leverage, and investment in an essential product. However, given its value, it could be seen as an undervalued long-term play. It’s therefore great for commodity-comfortable investors who accept the volatility that could come with the price of copper. Yet if you’re looking to invest in the commodity, this is exactly where most investors will want to begin. Though as always, make sure to speak with your financial advisor before making any purchases.
