Lundin’s Q1 results miss market expectations

Despite coming a long way in a year’s time, Lundin Mining’s (LUN-T) first quarter financial results failed to rally market support.

While Lundin earned US$38 million or 7¢ a share in the first quarter — compared to a loss of US$8.6 million, or 2¢ the year previous — it still missed the Thomson Reuters Street consensus of 13¢ a share.

UBS analyst Onno Rutten had even higher expectations for the base metal producer as he put his earnings per share estimate at 15¢.

“Copper production missed our expectation by 28% due to worse-than- expected impact of labour action at Neves-Corvo, whereas zinc production missed our expectation by 6% due to mining issues at Zinkgruvan,” Rutten wrote in his report entitled “Winning streak interrupted.”

Lundin’s president and chief executive Phil Wright addressed the discrepancy between analysts’ estimates and the company’s results.

“Analyst consensus was a larger spread than I expected given the guidance we gave,” Wright said on a conference call. “Some analysts were close but some are higher than I thought was warranted.”

Despite Wright’s arguing that the results were much in line with company guidance, the market seemed to bear out the disappointment of those analysts with loftier expectations. On April 26, the company’s shares closed at $5.36, but on April 30, a day after the financial results were released, its shares closed at $4.79.

That valuation was more in line with Rutten’s revised net asset value (NAV) for the company.

“Our NAV estimate declined by 5% to US$4.39 per share,” he wrote. “We lower our price target by 5% to $5.70.”

Rutten maintained a “neutral” rating for the company and said a labour resolution at the Neves- Corvo zinc mine in Portugal and a contract resolution at the Tenke Fungurume copper-cobalt mine in the Democratic Republic of the Congo (DRC) would be the key catalysts going forward.

On the conference call, Wright painted a picture of a company that was rebounding from the dark days after the financial meltdown of 2008, owing mainly to higher metal prices.

Indeed, despite the issues outlined by Rutten, revenue for Lundin still managed to rise to US$141.7 million from US$123.4 million — thanks largely to a near doubling of copper, zinc, lead and nickel prices.

But if Lundin is to meet its production guidance for the year, it is clear that smoother production at Neves-Corvo and Zinkgruvan will have to be secured.

At Neves-Corvo, the chief issue has been the union’s tendency to strike. About 40% of the underground miners there went on strike for two hours a day for two weeks in March. Those two hours represents roughly half of the 4.5-hour workday and therefore hurt production.

As for the position of the union, Wright explained it as: “They want more money in return for nothing, simply.”

He said the company was looking for a 15% increase in productivity in exchange for wage increases and that such an increase in productivity was very achievable.

While it continues negotiations with the union, the company is also expanding the capacity of the main shaft at the mine. The improvements will bring the shaft’s capacity up to 4.5 million tonnes of ore per year.

With work on the shaft is scheduled to get underway in June, Wright said that positive effects from the expansion will be felt in the second half of the year. That, he said, should help the mine catch up to its production targets for the year.

Wright explained that the expanded capacity on the shaft is also vital to clearing the way for the development of the adjacent Lombador copper-zinc project.

Lundin is close to completing a prefeasibility study on Lombador, with a feasibility study coming next year.

As for lower production at Zinkgruvan, Wright chalked it up to a blocked ore pass and milling being hampered by the coldest winter in Sweden in some 20 years.

When factored together, the two issues constrained production by 3,000 tonnes.

On the more positive side of production, due to steady copper output Tenke made a significant contribution to the company’s financials for the first time by adding US$17.2 million in profit.

Tenke, which is majority-owned by U.S. miner Freeport-McMoRan Copper & Gold (FCX-N), has however, not been problem-free.

The mine has had quality issues on the cobalt milling circuit. But Wright said that, while cobalt production has been somewhat volatile, he expected it to smooth out over the course of the year.

And, of course, there is the ongoing issue of resolving the DRC government’s contract review that began nearly three years ago.

“We are continuing in constructive dialogue with the government,” Paul Conibear, Lundin’s vice-president of corporate development said. “We’re cautiously optimistic that it will be resolved in a timely manner.”

The project is also being subjected to an expansion study, which aims to increase throughput by up to 50%. Wright said the study is expected to be done by mid-year.

Lundin has a 25% stake in the mine, which began producing copper in April 2009 and reached steady state production on the copper circuit in the third quarter.