Why Investors Shouldn't Be Surprised By Lundin Mining Corporation's (TSE:LUN) 26% Share Price Surge

Lundin Mining Corporation (TSE:LUN) shareholders are no doubt pleased to see that the share price has bounced 26% in the last month, although it is still struggling to make up recently lost ground. Looking back a bit further, it's encouraging to see the stock is up 50% in the last year.

After such a large jump in price, Lundin Mining's price-to-earnings (or "P/E") ratio of 48.2x might make it look like a strong sell right now compared to the market in Canada, where around half of the companies have P/E ratios below 15x and even P/E's below 7x are quite common. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.

With earnings that are retreating more than the market's of late, Lundin Mining has been very sluggish. It might be that many expect the dismal earnings performance to recover substantially, which has kept the P/E from collapsing. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Check out our latest analysis for Lundin Mining

Keen to find out how analysts think Lundin Mining's future stacks up against the industry? In that case, our free report is a great place to start.

How Is Lundin Mining's Growth Trending?

There's an inherent assumption that a company should far outperform the market for P/E ratios like Lundin Mining's to be considered reasonable.

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 50%. As a result, earnings from three years ago have also fallen 74% overall. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

Turning to the outlook, the next three years should generate growth of 49% per year as estimated by the analysts watching the company. With the market only predicted to deliver 10.0% per year, the company is positioned for a stronger earnings result.

With this information, we can see why Lundin Mining is trading at such a high P/E compared to the market. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

The Key Takeaway

Lundin Mining's P/E is flying high just like its stock has during the last month. Typically, we'd caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

As we suspected, our examination of Lundin Mining's analyst forecasts revealed that its superior earnings outlook is contributing to its high P/E. At this stage investors feel the potential for a deterioration in earnings isn't great enough to justify a lower P/E ratio. Unless these conditions change, they will continue to provide strong support to the share price.

Plus, you should also learn about these 2 warning signs we've spotted with Lundin Mining.

It's important to make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.