Lundin Gold: Trouncing Steering In A Sea Of Misses (TSX:LUG:CA)

It’s been a tough begin to the 12 months for the Gold Miners Index (GDX) in what’s sometimes one of the best month of the 12 months from a seasonal standpoint, with a mean return for the sector of ~2.6% in January over the previous 30 years. That is definitely disappointing for traders, particularly with the gold value registering a file seven weekly closes above the $2,000/ounceslevel. The underperformance for miners could be defined by continued unfavourable sentiment, and even Lundin Gold’s (OTCQX:LUGDF) vital beat vs. annual steering introduced in its This fall/FY2022 outcomes hasn’t helped the inventory to crawl out unfavourable territory year-to-date. The truth is, Lundin has underperformed the peer group, down 300 foundation factors year-to-date vs. the GDX. On this replace we’ll dig into the This fall outcomes, latest developments and its three-year outlook, and the place the inventory’s up to date purchase zone lies:

This fall & FY2023 Manufacturing Outcomes

Lundin Gold launched its preliminary This fall and FY2022 outcomes earlier this month, reporting quarterly manufacturing of ~99,300 ounces, an 18% decline from the year-ago interval. Nonetheless, whereas this headline quantity won’t appear that thrilling, it’s necessary to notice that Lundin was lapping powerful comps from the year-ago interval with a mean grade of 10.0 grams per tonne of gold (13% above its common reserve grade of 8.7 G/T), and one among its finest manufacturing quarters of ~121,100 ounces, along with the advantage of increased recoveries. Therefore, there was no shock that Lundin noticed decrease output year-over-year. Nonetheless, 2023 was one other blowout 12 months general with manufacturing beating the already upward revised steering midpoint of ~468,000 ounces, coming in at a brand new file of ~481,300 ounces, and smashing preliminary FY2023 steering of 450,000 ounces.

The truth is, if we take a look at how Lundin Gold has carried out the previous three years, the corporate has a close to unequalled monitor file of efficiency relative to steering, with this being just like Kirkland Lake Gold within the Swan Zone days when it constantly over-delivered on guarantees. That is evidenced by the chart above which exhibits that Lundin Gold has crushed its steering midpoint by a mean of ~37,000 ounces over the previous three years and a median of ~31,000 ounces.

So, what occurred in This fall with the decrease manufacturing?

Whereas throughput was up year-over-year to ~427,700 tonnes, grades got here in under its common reserve grade at 8.2 grams per tonne of gold and recoveries have been additionally barely under nameplate at ~88.1%. This resulted in a big decline in output vs. ~420,800 tonnes at 10.0 grams per tonne of gold and 150 foundation level increased recoveries in This fall 2022, however full-year manufacturing benefited from increased throughput and high-grade stockpiles in Q1 with a 1.1% enhance in gold manufacturing year-over-year regardless of weaker recoveries. Nonetheless, if the corporate can keep its sample of over-delivery and even carry out at half of the median beat (~15,000 ounces), Lundin ought to see manufacturing are available nearer to 490,000 ounces this 12 months which might mark one other file 12 months for the corporate.

2024 & Three-12 months Outlook

Trying on the 2024 outlook and its up to date three-year outlook, Lundin has guided for 475,000 ounces on the mid-point in 2024 at industry-leading all-in sustaining prices of $820/ouncesto $890/oz. Nonetheless, Lundin has sometimes delivered under its value steering mid-point as effectively, suggesting we’re more likely to see one other 12 months of $1,100/oz+ all-in sustaining value [AISC] margins with AISC more likely to are available at or under $850/oz. And whereas manufacturing ought to see a slight tick up year-over-year to my estimates of ~490,000 ounces, 2025/2026 manufacturing ought to transfer even increased to 500,000+ ounces each year based mostly on optimization work set to be accomplished this 12 months at a modest value of ~$36 million.

Digging into these enhancements, Lundin famous that pilot testing of Jameson Cell know-how has yielded optimistic outcomes, and the corporate expects that as a part of its development plans, it can’t solely ramp as much as 5,000 tonnes per day (~4,500 tonnes per day at the moment), however ship a 300 foundation level enchancment in recoveries by including three Jameson cells to its operation. If we assume a continuing head grade of 9.0 grams per tonne of gold and a 5,000 tonne per day throughput fee, a 3% raise in recoveries would translate to a further ~15,800 ounces of gold recovered each year or over $30 million in income each year, making this a really excessive return funding.

“Yeah, the pilot work that we did actually simulated, the three positions that we’re , placing these, Jameson cells, ones on the head finish of the flotation circuit, one form of within the center, after which one is on the finish and we tried to introduce as a lot variability into the feed as we may to actually perceive the efficiency and so the modeling work that we’ve finished and naturally Glencore (OTCPK:GLCNF) Know-how has taken the outcomes and we’re estimating that we’ll see a few 3% restoration bump as soon as these, Jameson Cells are put in. Primarily based on present schedules, the Jameson Cells are to be in place similtaneously the ramp as much as 5000 tons per day anticipated in This fall subsequent 12 months”.

– Lundin Gold, Q3 2023 Convention Name

Lastly, as introduced final 12 months, Lundin Gold has accredited an growth to five,000 tonnes per day, and has a busy 12 months of exploration on deck with plans to drill 56,000 meters (near-mine and regional drilling). This elevated manufacturing profile is predicted to go away all-in sustaining prices at industry-leading ranges under $900/ouncesin 2025, they usually may decline to as little as $800/ouncesin 2026 or over 40% under the anticipated {industry} common in FY2026 (~$1,450/oz). General, it is a vital improve from my earlier outlook that prices may rise with barely decrease manufacturing as grades normalized within the 2026 by 2029 interval, with the much less rosy outlook averted due to optimization to drive increased recoveries and throughput. In abstract, Lundin Gold ought to stay a top-5 producer from a margin standpoint with Tier-1 scale over the following a number of years, serving to to take care of a premium a number of vs. its mid-tier friends.

Current Developments

latest developments, the power within the gold value is definitely a optimistic, with the yellow steel breaking out of a large cup & deal with base to new all-time highs in This fall after a false begin in Q1 2022. This definitely advantages Lundin Gold’s common realized promoting value which ought to are available above $2,030/ouncesin Q1, up ~4% from its common realized promoting value of $1,958/ounceslast 12 months. This could profit Lundin’s margins that are anticipated to stay above 50% once more in 2024, and may ultimately translate into increased share costs for gold miners which have continued to commerce at comparatively depressed multiples in comparison with the place they’ve beforehand with gold sitting atop the $2,000/ounceslevel. Simply as importantly, that is the most important breakout amongst any asset lessons in years, and breakouts of this magnitude (if confirmed) sometimes result in multi-year uptrends.

The truth is, the final main cup-style breakout in gold occurred from 1996 to 2005, with gold marching increased for one more six years and greater than doubling within the interval. Clearly, historical past doesn’t need to repeat itself and there’s no assure that gold triples this time round (not to mention positive aspects 50%) however that is definitely one of the best that gold has regarded in years from a technical standpoint, suggesting that some publicity to the best-run gold miners is smart. Plus, whereas there’s no finish to the criticism about miners’ margins, an additional transfer increased within the gold value will surely offset almost all the value creep we’ve seen from unprecedented inflation, serving to even the extra marginal miners generate optimistic free money move and meaningfully rising the free money move yield for the GDX (on high of an already very enticing ~2.8% common dividend yield on million-ounce producers relative to previous cycles).

As for Lundin’s capital allocation and enterprise growth, the corporate has mentioned that it could take a look at M&A throughout previous calls, together with at its latest Investor Day Presentation. And, given the openness to M&A, I’m a bit of stunned that it hasn’t taken benefit of its well-priced forex to make an acquisition, particularly with it being a single-asset producer in a non Tier-1 ranked jurisdiction which may make it troublesome to take care of a double-digit free money move a number of (no matter deposit high quality). Earlier commentary expressing Lundin Gold’s openness to M&A is as follows:

“Look, we’ve simply gotta hold charging ahead and so we’re M&A alternatives, we’re clearly pushing the expansion. Even after the cost of dividends and the reimbursement of the gold pay as you go, we nonetheless retain a wholesome treasury and proceed to generate vital working money move for different worth producing actions such because the just lately expanded near-mine and regional exploration applications, future throughput expansions, additional debt discount and M&A”.

– Lundin Gold, Investor Day 2023/Q1 2023 Convention Name

“Sure, we positively are lively [on M&A front]. We’re in all probability extra lively than we’ve got been previously. The group is doing a tremendous job at web site and in search of alternatives there. Andre has the exploration group, and that’s going very well with expanded rigs going. Sure, M&A is one thing we’re positively . And the problem is, how do you add one thing that’s going to be pretty much as good pretty much as good or higher than Fruta del Norte? That’s the problem we’ve obtained. However the group is being artistic. And as we’ve all the time mentioned, as Lukas all the time pushed us and as Jack is pushing us, is you need to take a look at a variety of issues. You simply by no means know what may be the rose amongst all of the dandelions”.

– Lundin Gold, This fall 2022 Convention Name

Happily, Lundin Gold’s forex continues to be favorable, even the ratio between it and the ASA Gold and Valuable Metals Restricted Fund has declined by ~20% from 0.97 to 0.76. This continues to supply a positive surroundings for doubtlessly buying a small-cap producer or developer, particularly with builders buying and selling at their lowest multiples in years. Nonetheless, in Lundin Gold’s protection, it isn’t straightforward to seek out growth tasks or smaller producers with related high quality belongings, and there definitely aren’t that many choices with sub $900/ouncesall-in sustaining prices to permit the corporate to take care of its industry-leading margins. And whereas Osisko Mining (OTCPK:OBNNF) definitely would have met this standards (Tier-1, high-margin, mid-scale), Gold Fields (GFI) made a transfer earlier this 12 months for half the mission, and different names have already been taken off the market like Osino, Marathon, and Sabina. Therefore, whereas Lundin Gold had its decide of the litter heading into 2023, the listing has gotten a bit of smaller over the previous six months.

The final growth price noting is that Lundin enters the 12 months with a latest new discovery on its arms at Bonza Sur (1 kilometer south of Fruta del Norte), with mineralization recognized over a 700+ meter strike and as much as 500 meters depths (deepest gap: 8.8 meters at 7.44 grams per tonne of gold). The corporate additionally hit mineralization instantly south of its useful resource base at Fruta del Norte South [FDNS], and has confirmed high-grade mineralization within the north-central sector near-mine just under its indicated useful resource base with spectacular intercepts like 12.4 meters at 10.1 grams per tonne of gold, 18.7 meters at 8.32 grams per tonne of gold, and 37.9 meters at 6.49 grams per tonne of gold with this at the moment outlined as inferred assets (not within the mine plan). Therefore, with a brand new discovery south of Fruta del Norte” with gold mineralization “in the identical volcanic sequence discovered at Fruta del Norte“, and a number of new targets to be examined this 12 months, this could possibly be one of the crucial thrilling years to be a Lundin Gold shareholder from an exploration standpoint.

Valuation

Primarily based on ~244 million totally diluted shares and a share value of US$11.50, Lundin Gold trades at a market cap of ~$2.75 billion. This locations it effectively forward of different 400,000 ounce plus producers like Equinox Gold (EQX), Torex Gold (OTCPK:TORXF), and OceanaGold (OTCPK:OCANF), which may partially be attributed to Lundin’s industry-leading margins, extraordinarily excessive grades and monitor file of trouncing steering over the previous few years. Nonetheless, the present valuation leaves Lundin Gold buying and selling at a big premium to its friends with a P/NAV a number of of ~1.0x, even when it now trades at one of many decrease free money move multiples sector-wide.

Utilizing what I imagine to be truthful multiples of 1.1x P/NAV and eight.5x FY2024 money move estimates and utilizing a 65% weighting to P/NAV and 35% assigned to P/CF, I see a good worth for the inventory of US$14.50. And whereas this factors to a 24% upside, I’m in search of a minimal 35% low cost to truthful worth to justify beginning new positions in single-asset producers, particularly in the event that they don’t function in Tier-1 jurisdictions. Therefore, I don’t see almost sufficient margin of security at present ranges, and I would wish a pullback under US$9.30 to get extra within the inventory. Clearly, a pullback of this magnitude could not happen and any main new regional discovery throughout its large land package deal (~64,000 hectares within the Zamora Copper-Gold Belt) or a transfer above $2,300/ouncesgold may ship the inventory hovering to new all-time highs. Nonetheless, I want to purchase on the proper value underneath a base case assumption or go totally, and I proceed to see extra enticing bets elsewhere within the sector at the moment.

Abstract

Lundin Gold had one other phenomenal 12 months in 2023. This was evidenced by trouncing steering for a 3rd consecutive 12 months, uncovering a brand new regional discovery in Bonza Sur, and setting itself as much as keep its ~500,000 ounce manufacturing profile with optimization work deliberate this 12 months. In the meantime, the corporate has retired all of its financial institution debt which is able to contribute to increased free money move margins this 12 months, and traders can stay up for essentially the most aggressive exploration program in Fruta del Norte’s historical past subsequent 12 months. That mentioned, I want to purchase at a deep low cost to truthful worth and ideally under 0.60x P/NAV for small and mid-cap producers to make sure a margin of security. So, whereas I believe Lundin is among the finest run names sector-wide, I proceed to want names like K92 Mining (OTCQX:KNTNF) that commerce at ~0.50x P/NAV (upside case) and barely 4x FY2026 free money move estimates (~$280 million) with K92 having what I imagine to be over 80% upside to truthful worth vs. Lundin at ~25% at the moment.

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