Lundin shares jump following ‘spectacular’ first quarter

VANCOUVER — Lundin Mining  (TSX: LUN; US-OTC: LUNMF) has been on the acquisitions trail for the past two years, and its aggressive strategy paid off in a big way during the first quarter. The company reported record copper and nickel production, as well as record levels of operating cash flow, and looks poised to deliver on its promise of a “modest regular dividend.”

Attributable copper production for the quarter was 76,740 tonnes at average cash costs of US$1.24 per lb. The result marks a 182% year-on-year production increase, and reflects Lundin’s strategy to position the red metal as its primary profit driver.

The company also cranked out 35,750 tonnes zinc, 10,000 tonnes  nickel and 8,700 tonnes lead. Operating earnings for the quarter were US$274 million, which marks a US$231-million increase compared to the same period last year. Lundin reported net earnings to shareholders of US$71 million, or 10¢ per share, with operating cash flow totalling US$224 million.

The major year-on-year improvement in production and profits can be traced to a pair of acquisitions Lundin pulled off over the past two years. In mid-2013 the company scooped up the Eagle nickel-copper asset in northern Michigan from Rio Tinto (NYSE: RIO) for US$325 million. The mine hit commercial production last  November.

Eagle has outperformed expectations for Lundin, and beat its guidance on all fronts during the first quarter. The mine cranked out 7,300 tonnes nickel and 6,400 tonnes copper, with nickel cash costs 28% lower than expected at US$1.45 per lb., due to strong throughput, grades and recoveries.

Lundin doubled down on copper in October when it picked up an 80% stake in the large-scale Candelaria-Ojos del Salado complex in Chile from Freeport-McMoRan (NYSE: FCX) for US$1.8 billion.

Candelaria produced, on a 100% basis, 49,350 tonnes copper, 583,000 oz. silver and 27,600 oz. gold in concentrate during the quarter. Results were better than expected due to higher throughputs and good metallurgical recoveries.

One of the game changers at Candelaria has been the fractured nature of the material Lundin is milling, which is attributed to the large Lar fault that runs through the mine’s open pit. The company has also found that because of geological events, it has also seen a bump in grade near the structure.

Eagle and Candelaria accounted for 72% of Lundin’s total metal sales during the quarter, while 67% of the company’s quarterly sales were from copper.

“If you take a look year-upon-year, obviously the two new mines in the portfolio have led to a dramatic change in our copper and nickel production,” president and CEO Paul Conibear noted during a conference call. “The strategy we embarked upon in 2011 to re-establish copper as the dominant metal has been successful. We had an excellent first quarter … these are two brand-new assets for us, and we’re super pleased with the results.”

Despite a strong start to the year, Lundin only modestly boosted its 2015 guidance. The company anticipates total attributable production will range between 257,000 tonnes and 271,500 tonnes copper, 146,000 tonnes and 155,000 tonnes zinc, and 32,000 tonnes and 35,500 tonnes nickel.

Lundin also dropped its full-year cost guidance at most of its operations, though Conibear noted that the company expects costs will trend higher throughout the year. Guidance remains unchanged at Candelaria and Eagle despite the strong performance, though Conibear added that the company plans to readdress cost guidance at the new operations during the second quarter.

“We are probably conservative on Eagle and Candelaria, but these are two new assets, and we want at least six months of data before we prematurely make adjustments or change direction,” Conibear elaborated. “Each one of them has upside, but obviously, with two new assets, we need to get on top of them and try to tweak things as we move along.”

At the end of first quarter, Lundin had $355 million in cash and total debt of $983 million, which equates to a net debt position of $629 million, or 87¢ per share. Under current guidance and pricing, Lundin is on pace to generate a $700-million operating cash flow this year, and Conibear reiterated the company’s goal to recommend a “modest” dividend to its board in July.

Scotiabank analyst Orest Wowkodaw boosted his target price by 50¢ to $8 per share after the results, and called the company’s first quarter a “spectacular operating performance.”

“The [first-quarter] results contain perhaps the most impressive operating performance that we have witnessed in our ten-plus years of researching the shares,” Wowkodaw wrote on April 30. “Furthermore, we believe that the company’s updated guidance still appears overly conservative, particularly in respect to Candelaria and Eagle, and we anticipate additional upside as the year unfolds. Once again, Lundin management has underpromised and overdelivered.”

Lundin shares traded within a 52-week window of $3.68 to $6.57, and after the first-quarter results they jumped 17%, or 89¢, en route to a $6.30-per-share close at press time. 

The company has 718 million shares outstanding for a $4.1-billion market capitalization.