Lundin produces concentrate at Eagle

With the start of concentrate production and the completion of mill commissioning ahead of schedule and under budget at Lundin Mining’s (TSX: LUN) high-grade Eagle mine in Michigan, the company is poised to start shipments of the first saleable copper and nickel concentrates during the first half of October.

The diversified miner — with four commercially operating mines in Portugal, Sweden, Spain and Ireland — says its low-cost Eagle polymetallic mine is expected to reach full design rates in the second quarter of 2015, with total capital costs from acquisition to full completion coming in slightly below $400 million — on budget with guidance.

The Eagle mine produced its first concentrate in the second week of September, and commissioning of the mill wrapped up by Sept. 21.

Christopher Chang of Laurentian Bank Securities said he is impressed that the company developed Eagle on time and below budget “given cost pressures generally experienced across the industry,” and forecasts “significant cash-flow growth for Lundin in 2015.”

Chang says that based on a metal price forecast of US$3.25 per lb. copper and US$8.75 per lb. nickel in 2015, Lundin’s cash flow per share would be US87¢ (including from the Tenke Fungurume copper-cobalt mine in the Democratic Republic of the Congo, where Lundin holds a 24% stake), which would represent 70% growth year-on-year.

During the first three years of production Lundin expects the Eagle mine will average 23,000 tonnes nickel and 20,000 tonnes copper in concentrate.

David Charles and Patrick Racicot of Dundee Capital Markets note that assuming production in 2015 of 13,000 tonnes nickel and 10,000 tonnes copper, the mine could generate $150 million in free cash flow, which they point out is more than the $90 million in free cash flow that is expected from Tenke this year.

“Recall that the Eagle mine, being high grade and low cost, should allow Lundin to capitalize on higher nickel prices and be a significant contributor to cash flow [with US$2 per lb. cash costs providing excellent margins].”

Lundin is the Dundee analysts’ top pick in the sector, and they argue the company deserves a premium “given its strong financial condition and the lower development risk, compared to its peers.”

Daniel Greenspan of Macquarie Research says the next couple of years “are shaping up to be significant years of growth for Lundin,” and that ramping up the Eagle mine “coincides well with our bullish outlook for nickel prices.”

Greenspan argues that “strong global stainless steel production and weak nickel production ex-China have brought the global nickel market back to deficit — one which our team believes will rise in future years,” and says Macquarie foresees a more than 30% upside from current prices through mid-2015.

The analyst notes that nickel makes up 34% of his revenue estimate for Lundin next year and 41% in 2016, while zinc makes up 24% of revenue next year and 21% in 2016.

The Eagle mine in Michigan’s Upper Peninsula — on the watershed divide of Yellow Dog River and Salmon Trout River — is a high-grade magmatic sulphide deposit, with nickel and copper mineralization and minor amounts of cobalt, precious and platinum group metals. The deposit has three types of sulphide mineralization: disseminated, semi-massive and massive sulphide.

Eagle is a relatively shallow underground mine with a ramp from surface. Ore from the mine will be trucked 105 km to the Humboldt mill for processing.

Over the last year, Lundin’s shares have traded in a range of $4.02 to $6.57, and at press time changed hands at $5.69.

Dundee has a $8 target price per share; Macquarie Research, $7.50 per share; and Laurentian Bank Securities, $7.25 per share.

The company has 586,000 shares outstanding.