Copper Expansion And Vicuna Project Risks Will Challenge Long Term Earnings Outlook

Catalysts

About Lundin Mining

Lundin Mining is a diversified base metals producer focused primarily on copper, with additional exposure to gold, nickel and silver from operations in the Americas.

What are the underlying business or industry changes driving this perspective?

• The ambition to become a top 10 global copper producer with more than 500,000 tons of annual copper output depends on major brownfield and greenfield expansions. These projects could face cost overruns, permitting delays and technical complexity, which may compress future returns on invested capital and weigh on net margins.
• Heavy concentration of revenue in Chile and Brazil, where Candelaria, Caserones and Chapada generate the vast majority of sales, exposes the company to tightening fiscal regimes, evolving environmental rules and potential community pressures. These factors may increase operating costs and effective tax rates, reducing earnings resilience.
• The Vicuna project, despite its large copper, gold and silver resource base, requires substantial upfront capital, long lead times and new infrastructure in a high altitude jurisdiction. This raises the risk that final project economics will be less attractive than currently implied, which could dilute future free cash flow per share.
• Plans to lift underground throughput at Candelaria by 50% to 60% through in sourcing and productivity gains assume labor availability, execution discipline and stable geotechnical conditions. Any slippage in achieving these step changes would limit anticipated volume growth and margin improvement.
• Ongoing optimization at Chapada, including the Sauva expansion and potential process enhancements to capture higher gold and copper value, is increasingly reliant on maintaining favorable by product prices and currency tailwinds. Any normalization in gold prices or FX could erode the low cost profile and pressure consolidated cash costs and EBITDA margins.

Assumptions

This narrative explores a more pessimistic perspective on Lundin Mining compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts. How have these above catalysts been quantified?

• The bearish analysts are assuming Lundin Mining's revenue will decrease by 2.2% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 5.6% today to 14.7% in 3 years time.
• The bearish analysts expect earnings to reach $518.2 million (and earnings per share of $0.61) by about December 2028, up from $212.0 million today. However, there is some disagreement amongst the analysts with the more bullish ones expecting earnings as high as $1.2 billion.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 30.4x on those 2028 earnings, down from 86.0x today. This future PE is greater than the current PE for the GB Metals and Mining industry at 22.1x.
• The bearish analysts expect the number of shares outstanding to decline by 1.29% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.56%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• Global decarbonization and electrification trends continue to support structurally high long term demand for copper. Combined with Lundin Mining's progress toward becoming a top 10 copper producer with over 500,000 tons of annual copper output, this could drive sustained pricing power and volume growth, supporting revenue and EBITDA.
• The Vicuna project ranks among the largest copper, gold and silver resources globally and is advancing on schedule with extensive drilling, integrated technical studies and permitting work. It could ultimately proceed on favorable terms and add a multi decade, high grade production base that materially lifts future earnings and free cash flow.
• Disciplined capital allocation, evidenced by the $1.4 billion European asset sale, sharp reduction of net debt to about $135 million and significant undrawn credit facility, may allow the company to fund growth without excessive equity dilution. This could support return on equity and long term net margin expansion.
• Operational optimization and cost improvements at core assets, including lower consolidated C1 cash costs at $1.92 per pound, reduced cost guidance at Chapada and stable or improving production at Candelaria and Caserones, could translate into structurally higher operating leverage and support net margins and earnings even if commodity prices normalize.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The assumed bearish price target for Lundin Mining is CA$21.11, which represents up to two standard deviations below the consensus price target of CA$27.85. This valuation is based on what can be assumed as the expectations of Lundin Mining's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of CA$31.97, and the most bearish reporting a price target of just CA$19.63.
  
• In order for you to agree with the more bearish analyst cohort, you'd need to believe that by 2028, revenues will be $3.5 billion, earnings will come to $518.2 million, and it would be trading on a PE ratio of 30.4x, assuming you use a discount rate of 7.6%.
  
• Given the current share price of CA$29.3, the analyst price target of CA$21.11 is 38.8% lower. Despite analysts expecting the underlying business to improve, they seem to believe the market's expectations are too high.
  
• 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.