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Neves-Corvo copper-zinc mine in Portugal, one of Lundin's projects. (HO)
Neves-Corvo copper-zinc mine in Portugal, one of Lundin's projects. (HO)

Vox

Lundin may turn out to be rich find for value hunters Add to ...

When the mining-merger game of musical chairs stopped, Lundin Mining Corp. found itself standing partnerless, and investors sent the company's shares into a dark, deep hole, 20 per cent below prior levels.

Absent takeover talk, Lundin shares are now at their lowest levels of 2011, even as copper and zinc prices have rebounded from May lows. This has created a buying opportunity for those who - if you'll pardon the pun - see light at the end of the tunnel.

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First, a reminder of the frenzied coupling and de-coupling in the mining industry this year: Lundin and Inmet said in January that they would combine in a merger of equals to create "Symterra." Within weeks, Equinox Minerals made a hostile offer of $8.10 a share for Lundin. State-owned Chinese company Minmetals then made a bid for Equinox. Barrick Gold then performed a sorting-out of sorts by taking out Equinox as Minmetals backed off.

With all that bidding swirling around, investors seemed confident that Lundin would deliver on a strategic review to sell all or parts of the company, and shares floated between $8.50 and $9. Much to the market's surprise, however, Lundin said in late May that it hadn't received any satisfactory bids and would carry on as an independent company. Shares fell to $7, and now hover around $6.50.

That, according to several analysts, is an attractive level for buying. Stifel Nicolaus analyst George Topping, in his late-May report on the "surprisingly bad news" of no deal, said "we would be aggressively buying shares of [Lundin]lower than $7.00 [a share]and accumulating anywhere below $7.50 [a share]over the next few days as the short-term money leaves." Mr. Topping's target price is $8.50.

While Lundin is widely perceived as a copper company, it's actually on track to produce more zinc than copper this year, notes Canaccord Genuity analyst Orest Wowkodaw. (Lead makes up about 15 per cent of the company's output, by weight.) Its primary operating mines are in Sweden and Portugal, and it has a 24 per cent interest in what Mr. Wowkodaw calls "the very large and high-grade" Tenke Fungurume copper-cobalt mine in the Democratic Republic of the Congo.

It was two early-stage projects that probably created the dissonance between Lundin's board and its potential bidders, speculates Kerry Smith of Haywood Securities. Lundin found a new copper deposit, which it dubbed Semblana, in an undrilled area at its Neves-Corvo mine in Portugal. In addition, Lundin believes the Lombador deposit can possibly triple zinc production at Neves-Corvo soon after Lombador's 2013 startup.

Mr. Smith says Lundin is very bullish on zinc in the long term - more bullish than its potential bidders, the company's management acknowledged on the post-merger conference call.

"As Lombador is a very large zinc resource, we expect Lundin felt the project was worth a lot more than the bidders were prepared to pay … Semblana (with no resource yet and only a modest amount of drilling so far) would get little value from the bidders," Mr. Smith said. "At the end of the day, investors have probably gained by keeping Lundin independent, while the shorter-term market players were not rewarded."

Bullish on Lundin

However, you don't have to put a big valuation - or any valuation, actually - on the Lombador and Semblana projects to suspect there's a case to buy Lundin.

RBC Dominion Securities Inc. analyst H. Fraser Phillips arrives at his target price of $7.50 a share by taking his forecast for Lundin's average earnings per share from 2011 to 2013 and multiplying it by the 12.5 multiple that is typical among its peer group.

Mr. Smith of Haywood Securities uses a blend of cash flow per share and company net asset value methods to arrive at a target price of $8.50 (which translates to 6.8 times 2012 estimated cash flow per share, versus the peer group average of 7.3 times).

And Alec Kodatsky of CIBC World Markets said in late May that price-to-net-asset-value and price-to-cash-flow averages for mining peers would translate into a Lundin stock price from $7.30 to $7.70.

Mr. Kodatsky isn't banking on Lundin being average, though, as he has a "sector outperform" rating and a target price of $9. He's optimistic about expansion opportunities at the Tenke mine in Congo and new developments at Lombador and Semblana, all of which should be the subject of company announcements in the next three to six months - announcements that are likely to elicit a much more favourable reaction than the news that a merger was off the table.

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