Lundin Gold: Record Margins In Q1, But Higher Costs On Deck (TSX:LUG:CA)

We’re over three-quarters of the way in which by the Q1 Earnings Season for the Gold Miners Index (GDX) and one of many first firms to report its outcomes was Lundin Gold (OTCQX:LUGDF). We beforehand coated Lundin Gold in April 2023. Not solely did the corporate report report quarterly manufacturing in Q1 and trounce its earlier quarterly report by ~18,000 ounces, nevertheless it paid down its gold prepay facility of $208 million within the interval and nonetheless ended the quarter with one of many strongest stability sheets amongst its peer group with ~$210 million in money. In the meantime, the corporate’s margins got here at among the finest ranges sector-wide, with AISC margins of $1,308/ouncesputting it among the many highest-margin belongings globally, together with Fosterville, Olimpiada, and Blagodatnoye. Let’s take a more in-depth take a look at the Q1 outcomes beneath:

Q1 Manufacturing & Gross sales

Lundin Gold (“Lundin”) launched its Q1 outcomes earlier this month, reporting quarterly manufacturing of ~140,000 ounces of gold, a report for the corporate. This represented ~31.1% of its annual manufacturing steering midpoint, and report gross sales volumes of ~134,700 ounces, Lundin’s quarterly income additionally hit a report of $256.7 million. The unbelievable efficiency in Q1 was pushed by solely high-grade feed hitting the mill with its low-grade stockpiles exhausted and the good thing about excessive grade materials not within the plan that led to even greater processed grades. And whereas each day throughput charges have been barely beneath plan at 4,359 tonnes per day, this was greater than offset by a median head grade of 12.3 grams per tonne of gold, and higher recoveries due to an ore mixing technique that led to improved flotation recoveries.

Because the chart above exhibits, Q1 head grades have been the very best on report since Fruta Del Norte went into business manufacturing in 2020 and properly above the common reserve grade of 8.7 grams per tonne of gold within the 2022 reserve replace and the 9.7 gram per tonne head grade guided in the beginning of the 12 months. Provided that there was no change to steering, and the corporate reiterated within the interval that grades will decline because the 12 months progresses even when throughput notches as much as ~4,400 tonnes per day with the completion of the relining of the SAG and ball mills in Q1, this means that manufacturing will normalize and head again beneath 120,000 ounces per quarter for the remaining quarters of the 12 months except there are some constructive surprises from a grade reconciliation standpoint. Therefore, whereas Lundin appears to be like set to smash steering from the Q1 outcomes, coming in at excessive finish appears to be like extra seemingly (~475,000 ounces).

In the meantime, from a monetary standpoint, Lundin Gold might have reported detrimental free money move of ~$11 million within the interval (Q1 2022: ~$92 million), however this was associated to ~$129 million in curiosity and finance fees based mostly on the extinguishment of the gold prepay facility. So, if we modify for this one-time merchandise, free money move truly got here in greater year-over-year at ~$117 million, helped by the next common realized gold value ($1,952/oz), greater gross sales volumes, and restricted value creep vs. final 12 months’s ranges, making Lundin Gold distinctive on this facet vs. friends which have struggled with appreciable inflationary pressures. Lastly, working money move got here in at $144.4 million, additionally a report for the corporate relative to $127.3 million within the year-ago interval.

Prices & Margins

Taking a look at Lundin Gold’s prices and margins, its outcomes have been phenomenal, with all-in sustaining prices [AISC] coming in ~45% beneath the estimated Q1 trade common at $728/oz, and money prices coming in at $644/oz. And whereas these unit prices have been up marginally on a year-over-year foundation from $696/ouncesand $619/oz, respectively, these prices proceed to be among the many finest sector-wide. Given the assistance from a rising gold value and one of many strongest common realized gold costs sector-wide ($1,952/oz), Lundin Gold’s AISC margins got here in at $1,308/oz, a report for the corporate and among the finest AISC margin figures sector-wide, amongst Fosterville, Olimpiada, and Blagodatnoye. And regardless of powerful comps due to inflationary pressures skilled from Q1 2022 to Q1 2023 in areas like gas and a few consumables, Lundin’s AISC margins have been up over 12% year-over-year.

Nevertheless, whereas all-in sustaining prices got here in 20% beneath its steering mid-point of $905/ouncesfor FY2023, these prices will rise materially because the 12 months progresses, with sustaining capital monitoring at simply ~14.4% of the steering mid-point. The corporate famous that sustaining capital will ramp up all year long and will likely be spent on the fourth tailings dam increase (Q2 by This fall), a brand new sewage remedy plant facility, and an underground mine upkeep facility, amongst different objects. On the identical time, we should always see greater throughput mixed with 20% decrease grades, leading to a lot decrease manufacturing ranges. Therefore, I would not be stunned to see all-in sustaining prices are available nearer to $900/ouncesin Q2 and Q3, greater than offsetting the upper gold value, leading to margin compression sequentially.

That stated, whereas we are going to see some margin compression, Lundin Gold continues to be a cash-flow machine and the corporate continues to report among the finest margins sector-wide. So, this isn’t a case of a high-cost miner seeing margin compression and struggling to generate any money move, however merely a case of some normalization in grades that may translate to decrease margins within the coming quarters. To summarize, this isn’t a bearish argument by any means, it is solely a reminder that the Q1 outcomes have been abnormally robust, which is the other of many different miners that may see margins enhance because the 12 months progresses, which, for my part, supplies a extra favorable reward/threat setup.

Valuation & Technical Image

Primarily based on ~242 million absolutely diluted shares and a share value of US$12.80, Lundin Gold trades at a market cap of ~$3.1 billion and an enterprise worth of US$3.4 billion. This makes Lundin Gold one of many highest-valued single-asset gold producer within the sector by a large margin, with double the market cap of Torex Gold (OTCPK:TORXF) and Centamin (OTCPK:CELTF), and its market cap is now inside ~$1.4 billion of Evolution Mining (OTCPK:CAHPF), a bigger producer that operates out of solely Tier-1 jurisdictions (Australia, Canada). And whereas Lundin Gold deserves to commerce at a premium, on condition that its Fruta Del Norte Mine is arguably one of many top-10 finest gold belongings globally (with vital exploration upside) I’m stunned that the corporate hasn’t used its extremely valued forex to take a look at M&A to shed its single-asset producer standing, with some producers and high-grade builders buying and selling at enticing valuations.

Utilizing what I imagine to be a good a number of of 1.1x P/NAV given Lundin’s robust useful resource progress and reserve alternative and an estimated web asset worth of ~$2.85 billion, I see a good worth for the inventory of ~$3.20 billion or US$13.20. This factors to restricted upside from present ranges, and the inventory definitely does not have any margin of security baked in at present ranges. So, except one is banking on a serious discovery or considerably greater gold costs, I do not see any technique to justify paying up for the inventory above US$13.00. The truth is, if I have been lengthy the inventory, I’d use any rallies above US$14.15 as a chance to ebook extra earnings. This view is strengthened by the technical image, which exhibits that the inventory has loved a near-parabolic advance since October and is susceptible to a deeper correction.

Abstract

Lundin Gold got here out of the gate a lot stronger than its peer group in Q1, and whereas many different producers anticipate to see manufacturing and prices steadily enhance because the 12 months progresses, Lundin’s finest quarter is now out of the way in which early, with decrease manufacturing and far greater prices anticipated in Q2 by This fall. And whereas buyers can sit up for enticing shareholder returns with a minimal of $0.40 in annualized dividends this 12 months, I do not assume the present dividend justifies paying up for the inventory at present ranges. Therefore, I proceed to see much more enticing alternatives elsewhere within the sector, and I see a excessive chance of the inventory making a double prime if it have been to rally again to its Could tenth highs earlier than July.

Editor’s Word: This text discusses a number of securities that don’t commerce on a serious U.S. alternate. Please pay attention to the dangers related to these shares.