Lundin Mining Corp., the best performer among Canadian base-metal companies, is betting that a cast-off from the world’s second-biggest miner will help double output.
Lundin agreed to buy the Eagle nickel and copper mine from Rio Tinto Group for $315 million in June and plans to bring it into production by the end of next year, Chief Executive Officer Paul Conibear said. Eagle is the company’s first new mine after emerging from two aborted takeovers in 2011. Conibear said he wants to boost companywide annual output to about 500,000 metric tons within five years.
“We’re back to basics to re-grow our company,” he said Sept. 13 in a telephone interview. “We’re looking at trying to increase our cash flow through producing facilities.”
Lundin plans to expand while mining companies including Rio and BHP Billiton Ltd. (BHP), the world’s largest, sell assets and reduce spending amid lower prices. Copper has slumped 11 percent this year, nickel dropped 19 percent and zinc is down 11 percent on the London Metal Exchange after growth slowed in China, the world’s largest consumer of metals.
Lundin has declined 9.2 percent this year, the smallest drop among four Canadian base-metals producers bigger than $1 billion, which have fallen an average of 15 percent amid copper’s decline. The Swedish billionaire Lundin family is the largest holder of the company’s stock, and Lukas Lundin, the family’s investment manager, is chairman.
The company is one of the few miners able to afford new assets, said Ian Parkinson, a Toronto-based analyst at GMP Securities LP. “I don’t know how many willing buyers are left to be totally honest,” he said. Now Lundin needs to show investors it can build and start up Eagle successfully, he said.
“Eagle is an imminent cash-flowing project, it’s in its final stages of construction,” Parkinson said by phone last week. “They need to execute and get that cash flow moving.”
That means selling ore. Lundin recently started talking to buyers, Conibear said. “There’s at least four nickel parties that are keenly interested and probably half a dozen on the copper side, so we’re expecting a reasonable amount of competition,” he said.
Analysts (LUN) have 17 buy, one sell and six hold recommendations on Lundin’s shares, according to data compiled by Bloomberg. Lundin has the potential to rise 19 percent in 12 months, according to the average price target of 20 estimates compiled by Bloomberg.
Lundin, which also has assets in Europe and Africa, expects production at Eagle to begin late next year. The mine in northern Michigan may produce about 23,000 tons of nickel and 20,000 tons of copper annually in its first three years, according to Lundin, boosting the company’s total metals production by as much as 16 percent from its 2013 forecast and 35 percent more than last year. Lundin also produces lead and zinc.
The company is hosting a tour of Eagle next week, when analysts will be looking to see the potential for discoveries at Eagle, said Kerry Smith, a Toronto-based analyst at Haywood Securities Inc.
“I’ll be curious to see what the geologists think is different from what Rio Tinto did,” Kerry said in a telephone interview.
Rio discovered the Eagle deposit in 2002, decided to proceed with building a mine in 2010 and was about halfway through construction at the time of the sale, Lundin said June 12 when announcing the acquisition.
“The sale of Eagle demonstrates our renewed focus and discipline in the way we allocate capital,” Rio Chief Financial Officer Chris Lynch said in a statement on the same day. “We are making good progress on a number of other potential divestments as part of our goal to achieve substantial proceeds from divesting non-core assets.”
The mine is a better fit for Lundin than it was for a large company such as Rio, Conibear said.
“They were there because the geology of the area’s quite interesting and they were looking for another Voisey’s Bay I suppose,” he said, referring to the eastern Canadian nickel deposit now owned by Rio de Janeiro-based Vale SA.
“Ultimately they didn’t find that scale,” Conibear said. “It’s a mine that’s ideal for our size as a company.”
Illtud Harri, a London-based spokesman for Rio, declined to comment on Eagle mine.
Lundin will invest $400 million to finish construction by next year, including $150 million for a mill and $50 million for road work, Conibear said.
To help pay for the acquisition and the final year of construction at Eagle, Lundin is extending the maturity of a $350 million revolving credit facility and has secured a new $250 million term loan, the company said in a Sept. 16 statement. Lundin said it had about $135 million of cash on hand.
Conibear said Lundin also expects $130 million to $150 million in income this year from its 24 percent stake in Tenke Fungurume, a mine operated by Freeport-McMoRan Copper & Gold Inc. (FCX) in the Democratic Republic of Congo.
While investing in the Congo involves a high level of political risk, Tenke is “one of the best copper mines in the world,” Smith said in a Sept. 11 note.
The Congo accounted for 57 percent of Lundin’s net income in the second quarter, according to data compiled by Bloomberg.
Conibear is keeping his options open on future acquisitions. When the company starts shopping again, Lundin is open to buying metal explorers, ready-to-build mines or getting involved in joint ventures, he said.
“It’d be pretty much the same as the criteria we set a couple years ago, which is staying in simple base metals, with copper preferred,” Conibear said.
“We’re not looking to get more assets in a post-conflict kind of country,” he said. “We want stable operations and getting things that are ready to build.”
To contact the reporter on this story: Gerrit De Vynck in Toronto at email@example.com