Low costs at Tenke Fungurume bolster Lundin

Lundin Mining (TSX: LUN; US-OTC: LUNMF) continues to be a market darling, largely because of its position in the world-class Tenke Fungurume copper mine in the Democratic Republic of the Congo.

While the mine is operated by U.S. heavyweight Freeport-McMoRan Copper & Gold (NYSE: FCX) through its 56% stake (compared to Lundin’s 24% interest), the mine is robust enough to factor into Lundin’s upside potential.

That potential was on full display in the first-quarter production results released by Freeport. The biggest take-away was the wide margin by which the operator beat cash-cost expectations.

So while production of 109 million lb. copper and 7 million lb. cobalt by-product was in-line with expectations, cash costs of just US89¢ per lb. copper beat analysts’ estimates.

Canaccord Genuity’s analyst Gary Lampard, for one, was expecting costs of US$1.12 per lb, while Freeport’s yearly guidance was US$1.28 per lb. With the first quarter beat, Freeport lowered its annual cash-cost guidance to US$1.22 per lb.

Scotiabank analyst Orest Wowkodaw pointed out that copper sales were lower due to the timing of shipments and cautioned that the large beat on the cash-cost side was mainly due to disproportionately large cobalt credits applied against lower copper sales volumes.

Still, Wowkodaw is bullish on Lundin’s stock. 

“We estimate Tenke net cash flow attributable to Lundin of $31 million in the first quarter, and $156 million for 2014,” he wrote in a research note. “In our view, Lundin shares offer excellent exposure to copper, nickel and zinc markets at a reasonable development and balance-sheet risk profile, at a very attractive relative valuation.”

At BMO Capital Markets, Aleksandra Bukacheva attributes the improved costs to a recent acquisition.

“Significant cost improvement appears to be attributable to improved metal payability following acquisition of the Kokkola cobalt refinery in Finland in the first quarter of 2013, where no sub-segment guidance has been provided to date,” Bukacheva wrote.

The economics at Tenke could be in for another significant change if a planned expansion goes through. Freeport said it is investigating the project, but that any more capex would be contingent on not only economic and market conditions, but also the business and investment climate in the DRC.

In her Lundin models, Bukacheva is including a phase-three Tenke expansion, which would take the mine to 300,000 tonnes of copper production per year from its current 200,000 tonnes by 2018.

Bukacheva rates Lundin as an “outperform” with a $6 price target, while Wowkodaw rates Lundin as a “focus stock,” with a $7.25 target price.

On April 25 — the day the results were released — Lundin shares were off 1% to $5.62 on 2.14 million shares traded, while Freeport shares were up 8¢ to US$34.01 on 7.5 million shares traded.