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Overview
Lundin Gold (OTCQX:LUGDF) is a mid-cap gold mining company listed in Canada (TSX:LUG:CA) and Sweden, which is headquartered in Vancouver, BC, Canada. The reporting currency is U.S. Dollars. The company is a single asset producer that owns the low-cost Fruta del Norte gold mine in Ecuador.
Fruta del Norte is a very impressive underground mine. It has had an annual average throughout of around 4,500 t/d lately, and the reserve grade is as high as 11.3 g/t on its 5.5Moz of gold reserves. There was a positive reserve update released a few weeks ago and the company also has around 3Moz of gold resources in all categories on top of the reserves.
Figure 1 – Source: Company Press Release
The mine was acquired in 2014, first gold was poured on the 16th of November of 2019, and commercial production was declared in February 2020.
The stock price performance since first gold pour has been very impressive, beating gold, the VanEck Gold Miners ETF (GDX), and most peers by a large margin. This is due to good operating performance that has translated to excellent cash flows.
Figure 2 – Source: Koyfin
Production & Cost
Figure 3 – Source: Quarterly Reports
The mine produced 481Koz of gold in 2023, up 1% compared to 2022, and is guiding for annual gold production around 500Koz in 2025-2026. The increase in production is expected to come from a process plant expansion project, which is expected to be completed by the end of 2024. This will increase the throughput to 5,000 t/d and improve the recovery.
Figure 4 – Source: Corporate Presentation
Fruta del Norte has, since commercial production began in 2020, had very competitive costs, where the all-in sustaining cost (“AISC”) has been in the $773/oz to $860/oz range over the last four years, which makes the mine a lower-cost producer in the industry.
AISC has increased 11% from 2020 to 2023, which is below what we have seen for most peers. The expansion project is expected to see some improvements to cash costs in 2025, but we will have to wait until 2026 to see a lower AISC due to a slightly higher sustaining capex budget in 2025.
The AISC margin was as high as $1,098/oz in 2023 based on a realized gold price of $1,958/oz. The company is for 2024 guiding for relatively flat production and costs compared to 2023. So, given where the gold price is presently trading, the company is on track for a record AISC margin and an impressive financial result in 2024.
Figure 5 – Source: Quarterly Reports
Financials
Lundin Gold has, due to solid operating performance and low operating costs, delivered excellent financial results over the last few years. We have seen total revenues gradually increase and reach $903M in 2023. Adjusted EBITDA was $526M last year and we have seen substantial amounts of free cash flow over the last few years.
Figure 6 – Source: Quarterly Reports
This has allowed the company to deleverage significantly, where the stream is now the only debt remaining on the books. Lundin Gold has the option to repay 50% of the stream on the 30th of June 2024 for $150M, which the company is expected to do. So, the financial leverage will decrease even further during the year.
Figure 7 – Source: Koyfin
Lundin Gold started to pay a dividend in 2022 and is now paying a quarterly dividend of $0.1 per quarter, which equates to a dividend yield of 3.0% using the latest share price.
There is also a large drill campaign for 2024. Some of that is conversion drilling, but most is exploration. Given Lundin Gold’s solid balance sheet and excellent cash flows, it remains to be seen what else the company will spend the capital on. So far, management has allocated the cash flow effectively.
Figure 8 – Source: Corporate Presentation
Valuation
The below chart uses the latest stock price, financials as of Q4 2023, a fully diluted share count, and estimates from Koyfin on the 16th of April 2024. Lundin Gold has a market cap and enterprise value of $4.5B.
Figure 9 – Source: Estimates from Koyfin
We can see that Lundin Gold is far from an expensive gold mining company, with a price to 2024 earnings around 13, that is dropping down towards 11 for 2025-2026.
If the gold price remains around current levels and the company can deliver on guidance, the estimates in question will be conservative, as few brokers have materially adjusted their estimates following the recent strength in the gold price.
Conclusion
Lundin Gold is a very impressive gold mining company with a quality asset that has had a reliable operating performance over the last few years. This has led the company to have a relatively clean balance sheet and is returning capital to shareholders via a quarterly dividend.
However, it is worth remembering that Lundin Gold is a single asset producer in a country with at least slightly more political risk. The latest annual mining survey from the Frazer Institute had Ecuador somewhere in the middle of the range, in terms of investment attractiveness, not far below countries like Brazil, for example. So, there is no doubt about countries where the political risk is far more extreme.
Overall, there is a lot to like about the company, but some discount is justified for a single asset producer in Ecuador. I think Lundin Gold is somewhat fairly valued, and I am neutral on the stock, but I am far more likely to revise the rating to a buy than a sell.
Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.