Plant Expansion And New Jameson Cells Will Improve Gold Recovery Rates

Key Takeaways

• Exploration and plant upgrades could enhance production efficiency and boost future revenues through higher reserves and improved recovery rates.
  
• Strong financial position with free cash flow and no debt allows for growth investments or shareholder returns, potentially increasing future earnings.
  
• Increased operational costs from power challenges and fluctuating gold prices could strain margins and affect profitability, despite potential reserve gains from exploration.

Catalysts

Operates as a mining company in Canada.

• The process plant expansion, scheduled for completion by year-end, is expected to increase throughput to 5,000 tonnes per day and improve gold recoveries by approximately 3%. This would likely enhance revenue due to higher production and efficiency.
  
• Exploration activities, including conversion and near-mine drilling, have identified potential new high-grade mineralized zones that could be converted from resources to reserves. The expected resource update in Q1 2025, if positive, could lead to increased future revenues and earnings as new reserves are brought into production.
  
• Installation of new Jameson cells in the flotation circuit aims to improve gold recoveries, particularly for sulfide-associated gold, which can enhance future revenue and operating efficiency.
  
• The ongoing regional exploration programs have targeted new epithermal discoveries, indicating potential future growth in mineral reserves, which could significantly impact long-term revenue and earnings growth if successful.
  
• Lundin Gold's financial status, with robust free cash flow generation and a debt-free balance sheet, provides opportunities for increased investment in growth projects or shareholder returns, potentially boosting future earnings and dividends.

Lundin Gold Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Lundin Gold's revenue will grow by 4.3% annually over the next 3 years.
• Analysts assume that profit margins will increase from 29.6% today to 61.9% in 3 years time.
• Analysts expect earnings to reach $732.1 million (and earnings per share of $3.08) by about February 2028, up from $308.0 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 11.1x on those 2028 earnings, down from 20.5x today. This future PE is lower than the current PE for the CA Metals and Mining industry at 12.9x.
• Analysts expect the number of shares outstanding to grow by 0.79% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.99%, as per the Simply Wall St company report.

Lundin Gold Future Earnings Per Share Growth

Risks

• The increased royalties and accrued profit sharing due to higher gold prices could impact cash operating costs and AISC, potentially affecting profit margins and net income if gold prices fluctuate.
  
• Dependence on national grid electricity and the need for costly diesel generators due to drought-induced power cuts in Ecuador may lead to increased operational costs, impacting net margins.
  
• Sustaining capital expenditures have increased, largely due to power generation needs, which could limit cash flow available for future investments or shareholder returns and might press margins if not offset by gold prices.
  
• The company's reliance on gold price assumptions of $1,900 per ounce for cost and production guidance poses a risk, as market gold prices fluctuate, potentially affecting revenues and profitability.
  
• The exploration programs, while showing potential for additional reserves, require significant investment ($44 million for 2024), and delays or unsuccessful results could impact future production capacity and earnings projections.

Valuation

• The analysts have a consensus price target of CA$38.188 for Lundin Gold based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of CA$49.75, and the most bearish reporting a price target of just CA$30.5.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $1.2 billion, earnings will come to $732.1 million, and it would be trading on a PE ratio of 11.1x, assuming you use a discount rate of 7.0%.
  
• Given the current share price of CA$37.31, the analyst price target of CA$38.19 is 2.3% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.