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High Quality Asset And Overbaked Perception of Risk Leaves This Junior Gold Miner Heavily Undervalued

Caiman Valores profile picture
Caiman Valores


  • Recent events have reduced much of the risk associated with the Fruta del Norte project.
  • The degree of perceived risk is overbaked leaving Lundin Gold undervalued.
  • Lundin Gold's market cap is significantly less than what the Fruta del Norte mine is worth once it enters production.

All figures contained in this article are in U.S. dollars unless otherwise noted.

Gold is whipsawing wildly because investors are reacting sharply to every piece of news whether it be good or bad that has the potential to affect markets. While it has pulled back sharply in recent days because of growing optimism over the strength of the economy, rising geopolitical and economic uncertainty means that its outlook remains positive.

While I am not an enthusiastic fan of gold as an investment, there are some very interesting prospective mining investments that have the potential to deliver outsized returns for investors. My top pick at this time is a gold mining project I have been monitoring for some time, the Fruta del Norte operations owned by Lundin Gold Inc. (FTMNF).

Over the last year, it is down by almost 11%, providing investors with a handy entry point. Notably, it has fared better than the majority of junior gold miners as represented by the VanEck Vectors Junior Gold Miners ETF (GDXJ) which is down by 34% over that period.

Source: Yahoo Finance.

I expect Lundin Gold to significantly outperform that ETF over the medium to long term.

Nevertheless, regardless of this performance, Lundin Gold in the past has attracted considerable attention for all the wrong reasons. This primarily stems from the fact that the project is located in Ecuador which is viewed as an extremely high-risk jurisdiction.

There have, however, been several recent economic and political events which, when combined with the solid underlying fundamentals for the project, make it a very attractive investment despite the perceived high degree of risk.

What is Fruta del Norte?

Fruta del Norte is one of the world’s most recent and largest gold discoveries located in the impoverished South American nation of Ecuador on the south-eastern

This article was written by

Caiman Valores profile picture
Investment specialist natural resources & precious metals. Focus on geopolitical & economic risk. Emphasis on Latin America. MBL USyd MA Pol Sci UNSW.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in FTMNF over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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Comments (8)

Thanks for the great article. A quick question on the $5.96 share price based on the NPV5. Shouldn't debt be deducted from the NPV5 first (I assume this is based on the project's free cash flows)? This should result in a lower share price. Thanks and sorry if I missed something
Caiman Valores profile picture
Spencer than you for taking the time to read and comment. The debt is included in the pre-operational capital costs, i.e. to fund the construction of the mine, which have been deducted from the NPV5 to arrive at the price of $5.96 per share.
Thanks that would be the debt borrowed to pay for the pre production capital. How about the cash flows to be returned to the bank for interest and principal repayment? I think those may need to be deducted to arrive at the share price? Thanks and sorry if I missed somethingg
Caiman Valores profile picture
Spencer please see the section on valuation and the assumptions. Those are meant to be read in conjunction with the base case and will answer your questions.
john galt III profile picture
I don't trust Ecuador's government. They could raise taxes or royalties and/or confiscate this mine in "the name of the people". I hope Lundin is bribing (La Mordida) the right people and keeps bribing them..
Caiman Valores profile picture
John, for the reasons explained in the article that will more than likely never occur, please see the section on decreasing risk. Ecuador also does not have a history of nationalizing assets like other jurisdictions such as Bolvia or Venezuela.

Lundin would certainly not be bribing the Ecuadorean government nor is there any need to do so given the favourable terms that they have secured. While Ecuador certainly does have its issues with corruption and opaque regulatory and legal systems the risk is not as high as many pundits believe.

As for 'la mordida' that literally translates to 'the bite' and if you said that in Ecuador in relation to paying a bribe people would look at you quite strangely because it only colloquially means a bribe in Mexcio and other parts of Central America.
TopDoggie profile picture
Thanks for the article. It will be interesting as they further explore the property.
Caiman Valores profile picture
TopDoggie thank you for taking the time to read and comment. Lundin have proven themselves to be astute investors and the asset will certainly deliver solid returns. The property offers considerable exploration upside so once the mine development is complete it will be interesting to see what additional exploration delivers.
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