Overlooked Metals Stocks: Lundin (LMC)

Stock Tickers: LMC, ZEUS, AA, AL, X, MT, FCX

When you look at the large metals companies such as US Steel (X-NYSE), Alcoa (AA-NYSE), Rio Tinto (RTP-NYSE), Alcan (AL-NYSE), Arcelor Mittal (MT-NYSE), Freeport McMoRan (FCX-NYSE) and many other giants in the metals sector either in the midst of a merger or rumored to be in a merger, it just makes you wonder if there are many much smaller companies that have been overlooked.  These all have to be evaluated on their own outside of any merger hopes, but there are still some interesting names.

We are running 4 or 5 niche-oriented stocks in the metals sectors and this is the first of the series. Gone are the days that these can be found at 6-times earnings, so the "cheap" term has to be thought of in the light that we are in a metals world driven by foreign demand and further driven by merger speculation.  We are only focusing on companies that have niche businesses or operations that make them seem attractive or cheap on their own merits.

One company that fits the bill is Lundin Mining Corp. (LMC-NYSE).  This is a $3.6 Billion market cap stock, so it is hard to call it a stealth play or one that has been entirely overlooked.  But Lundin is still one that the bulk of the investor population does not know or at least does not follow.  It is essentially a recombined company of the EuroZinc that was purchased last year and of several roll-ups.  It has its registered offices in Canada but operational headquarters in Sweden (and family owned control in Switzerland).  Lundin is not bound by many of the same limitations and geographic restrictions as American companies and it hardly has much Wall Street following.

Its main operations are copper, zinc, and lead, and those of course create other side and byproducts.  This is one that is still acquiring companies and it is soon to get more nickel exposure.  It is currently in an agreement with Canadian listed base metals producer Rio Narcea Gold Mines, Ltd. and in a separate agreement with Tenke Mining Corp. to merge. Rio Narcea will contribute to cash flow from its Aguablanca nickel mine in Spain. Tenke offers a highly promising project in the medium to longer term through its holding in the Tenke Fungurume project, which is one of the largest high-grade undeveloped copper-cobalt deposits in the world, with a planned production start-up in late 2008.

The company turned in lower than expected results and this actually allows us to evaluate it with less rose-colored glasses and on a more conservative basis.  It turned in revenues of $193.9 million in dollar terms and net earnings of $53.7 million, or $0.19 EPS.  It also is somewhat thin volume with usually about 1 million shares per day.

Lundin has a large project coming on this year in Portugal and another in 2008 in Congo.  It operates in Sweden, Portugal, Ireland, Russia, Spain, and elsewhere. What is more likely instead of this company being acquired is that the company keeps growing by smaller accretive acquisitions where it can make them.  The company is also under a Lundin Family consortium in Switzerland, so this would not be a company that an outside could easily just go out and make a hostile tender for.  It is under new leadership from inside the company and it has not been without operational deaths and accidents. 

Any buyer of Lundin Mining stock better be comfortable with somewhat of a lack of transparency and be willing to risk a “sum of the parts” out 12 to 24 months after the real results and constitution are known about all of the projects that are coming on-line over the next year.  This is not one where speculators should be hoping that someone comes along to just acquire it. That isn’t likely, or at least not right now with some unknown project values, and not at current prices.  The data is also still outstanding as far as who owns what percentage of the company because not all of the SEC filings from institutional buyers have been made fresh and up to date yet. 

This one has been kept somewhat quiet and has more reserved holders because of the aggressive acquisitions and limited “new-co” history.  Jim Cramer has noted this one before at lower and higher prices, but outside of my following the name for a few months and whatever Cramer will say here and there, this one is very under-followed by Wall Street.  We fully understand that this one is not as straight forward on the financials or what the exact value will be 12 months out, but we are willing to venture forth on the company’s prospects.  Sometimes you have to ride the fringes to look for opportunities.  Lundin looks like an opportunity and is definitely on the fringes.

Stay tuned, because we’ll be following up on this one periodically.  Yesterday we noted Olympic Steel (ZEUS-NASDAQ) as the first stock of this feature.

Jon C. Ogg
May 11, 2007

Jon Ogg can be reached at [email protected]; he does not own securities in the companies he covers.