Known for his own aggressive strategy, could Mr. Lukas Lundin and his Lundin Mining Corporation (LMC) become the next prey in the recent consolidation game? This question is not so rhetorical in the industry after such turmoil in the market. The recent sell offs have shaved 26%, or more than 1 billion USD, in Lundin Mining's market cap in a matter of just a few weeks. With a solid cash position and a diversified asset base consisting of primary producing mines in stable Europe coupled with an explosive growth rate, Lundin is becoming a very attractive acquisition target.
Based on conversations with the company's VP and CEO Mr. Andres Haker, Lundin Mining does not have any exposure to Assets Backed Commercial Paper. As of the latest reported date, the company has 390 million dollars invested in short term investments with the majority outside of Canada; all these investments are considered liquid. In addition, Lundin has not experienced any problems with their withdrawals.
With the latest acquisitions of Tenke Mining and Rio Narcea (RNO), Lunding Mining became an emerging mid-tier producer with a Zinc, Copper, Lead and Nickel portfolio, with a majority of their mines in Europe. This portfolio of assets is spiced with Silver; 25% in one of the developing world's biggest Copper and Cobalt mine in the Congo, and 49% in Ozernoe, one of the biggest zinc deposits in Russia. Add to this basket investments in a few promising juniors and record earnings last quarter.
Lundin has, according to Reuters data, an ultra conservative Long Term Debt to Equity ratio of 0.02, and when compared the 0.38 industry standard and the 0.61 ratio of the S&P 500, this is a prize with the recent market conditions. The financial strength of Lundin measured in quick ratio is almost double that of the industry level at 2.87. At yesterday's opening quote of $10.81, Lundin was trading at P/E=8.55 vs the industry's 12.14 and 19.52 of the S&P 500. The growth after these acquisitions is also really impressive: 183.3% in sales and 303.3% in earnings!
The business model is supported by a healthy Gross Margin of 67.3% and Operating Margin of 44.1%, which are 52% and 26% above industry averages respectively. Lundin Mining's growth story combined with it's solid financial foundation should benefit in the case of a "fly to quality" investor mentality. With demand shifting to China, India, and other developing economies, Lundin's customers are not exposed to the vast risks of the credit subprime collapse. According to a recent report by BHP Billiton, the falling US dollar will support a commodities boom. As suggested by industry insiders in Canada, smart money is still waiting on the sidelines, and in the event that some of this smart money finds out the full Lundin Mining story, the company will be poised to benefit enormously.
Another intriguing aspect to consider: with their recent stockpiles of cash mostly unaffected by exposure to commercial paper, industry majors will start their move in the consolidation game once the dust settles. Take for example, Freeport-MacMoRan Copper and Gold (FCX) with a 2.0 billion cash position. FCX is already holding a majority position in Tenke's Fungurume Copper/Cobalt deposit in Congo, which is promising to become one of the biggest mines in the world starting operations in 2008. Lundin Mining, with the Lundin family holding just under 20%, will become very attractive target. Lundin recently increased his Trust's position by 1 million shares at Cad 13.2. With insiders buying and the industry spotlight shiningg, Lundin is becoming one of the interesting commodity plays for institutional and retail investors.
Desjardins' take over price of CAD 25.00 for Lundin Mining based on spring acquisitions' value looks like a dream now, but time is flying fast and such bargains do not last forever.Disclosure: Author has a long position in LMC
LMC 1-yr chart