Lundin Gold: Don’t Chase The Stock Here – Lundin Gold Inc. (OTCMKTS:FTMNF) No ratings yet.

It’s been a strong start to the year for the newest producer in the sector, Lundin Gold (OTCPK:FTMNF), with a 27% return year-to-date, and a nearly 2500 basis-point outperformance vs. the Gold Miners Index (GDX) in January alone. The company expects to begin commercial production in Q2 at their Ecuador mine and should be an industry-leading producer, with expectations for 300,000 plus ounces of gold production at all-in sustaining costs below $650/oz. This would position Lundin Gold as one the lowest-cost intermediate producer in the industry, second only to Alacer Gold (OTCPK:ALIAF) with all-in sustaining costs of $710/oz for FY-2019. While this is undoubtedly a gold producer worth tucking away in one’s portfolio, Lundin Gold is beginning to get a little overbought from a technical standpoint, more than 45% above its 200-day moving average. Therefore, while the stock likely goes higher long term, I believe investors would be wise to buy on sharp pullbacks, and not chase the stock above C$10.60.


Investors that have been following the Fruta del Norte story since Aurelian Resources are likely surprised it took this long to get this asset into production, but Lundin Gold has managed to do it, nearly 15 years after the initial discovery hole. For those unfamiliar with the story, Aurelian Resources made their Fruta del Norte discovery on April 4th, 2006, with an incredible drill intercept of 237 meters of 4.14 grams per tonne gold. The drill results only got better from there, with hole 56 hitting 204 meters of 8.40 grams per tonne gold, hole 57 intersecting 189 meters of 24.0 grams per tonne gold, and hole 58 showing 255 meters of 12.55 grams per tonne gold. To investors scanning over these results each morning, one would think the company had its drill pad set up drilling into the basement of Fort Knox. After drill hole 100 hit 250 meters of 35.2 grams per tonne gold, that was enough for Kinross Gold (KGC). Shortly after the company released its initial resource of 13.7 million ounces, Kinross swooped in and acquired the company for $1.2 billion.

(Source: Aurelian Resources)

The colossal risk in acquiring Aurelian Resources was that there was no firm mining law established in Ecuador at the time, but it was too hard to pass up the closest thing to a real-life Bre-X, minus the scandal, of course. Unfortunately, for Kinross shareholders, the reward before risk decision ended up costing them a $720 million write-down after Kinross finally gave up on the project with the Ecuadorian government demanding a 70% windfall profits tax. This was when the Lundin Family, under Fortress Minerals, scooped up the project for less than $300 million. Their bet has certainly paid off, with a government change in 2017 and the two parties willing to come to a deal to allow Fruta del Norte to move into production without a massive windfall profits tax that would strip away the profitability.

(Source: Lundin Gold Company Presentation)

Fast forward fifteen years, and Lundin Gold expects to have Fruta del Norte in production by next quarter, with average annual gold production of over 320,000 ounces at incredibly low all-in sustaining cash costs [AISC] of $621/oz. As we can see in the chart above, FY-2020 gold production is likely to come in close to 300,000 ounces, before ramping up to 400,000 ounces for two years with grades above 10 grams per tonne gold. If the company can meet these estimates, or even come in below $650/oz, this would give Lundin Gold the throne as the lowest-cost intermediate gold producer in the sector. Given the exceptionally high grades at Fruta del Norte, I believe these costs are attainable, though the first year of production can often have some hiccups.

(Source: Corporate Presentation)

Thus far, the company is off to a solid start on the production front, with 28,678 ounces of gold produced in FY-2019, and a ten-fold increase expected for FY-2020. The company has also noted that it’s making significant progress on its mine development, with 13,000 meters of development completed to date vs. expectations for 11,900, meaning that they’re over a kilometer ahead of schedule. The only real negative recently is the slight increase in expected all-in sustaining costs, mostly stemming from royalties and production taxes due to higher metals prices. However, the 5% increase in costs from $583/oz to $621/oz is negligible, as the company is working with 60% all-in cost margins using a $1,500/oz gold price.

When it comes to exploration upside at Fruta del Norte, the sky is the limit, mainly because this is arguably the most impressive discovery in the 21st century. The company is currently working on securing drill permits but has a massive 16-kilometer plus strike length south of Fruta del Norte to explore, with three drill-ready targets: Barbasco, Puente-Princesa, and Gata Salvaje. While it’s too early to assume any valuation based on greenfield targets, I would argue that the best place to make a significant gold discovery is within 10 kilometers of one the most well endowed high-grade gold deposits in the world. Therefore, an argument could be made that at least one of these deposits is likely to yield some interesting results. Given that Lundin Gold should be cash-flow positive this year, this provides some extra capital to put to work on scout drilling on their gold belt.

(Source: Company Presentation)

Two very minor issues, though not overly worrisome, are that the company’s valuation is beginning to creep up, and the company has expressed it is looking for acquisitions and is open to takeovers. We’ll tackle the valuation first, and then move on to the speculation of a potential acquisition by Lundin Gold at some point in 2020.

Beginning with valuation, we can see that Lundin Gold has $772 million in long-term debt, working capital of $125 million, and a current share count of 224.3 million shares. If we use a US$8.00 share price, this gives us a current enterprise value of $2.44 billion. I arrived at this valuation by multiplying 224.3 million shares by $8.00, and then adding in $772 million in debt, before subtracting out the $125 million in cash. Based on the current resource of 9.48 million ounces, this means that Lundin Gold is currently trading at an enterprise value per ounce of $257.00/oz, relatively fairly valued, even when considering potential exploration upside.

(Source:, Company Documents)

To put things in perspective, Kirkland Lake Gold (KL) just bought out Detour Gold (OTCPK:DRGDF) for $240.00/oz for reserves in Canada, a Tier-1 jurisdiction. Therefore, while Lundin Gold’s Fruta del Norte has costs that are projected to be 35% lower than Detour Lake at $1,000/oz~, some risk discount must be applied for the differences in jurisdictions. In summary, I believe the increased jurisdiction risk offsets the cost benefits at Fruta del Norte compared to Ontario, Canada. If we assume that Detour Lake and Fruta del Norte are somewhat apples to apple comparisons, Lundin Gold is currently trading nearly 7% above what Kirkland Lake was willing to pay for Detour Gold. It’s also worth noting that Detour Gold’s $239/oz acquisition price was based on reserves, while Lundin Gold’s current valuation is based on resources. Gold reserves are higher quality than gold resources as they are in a higher confidence category, being proven & probable vs. measured & indicated. In summary, while Lundin Gold is not expensive, it’s not cheap either here.

(Source: Author’s Table)

To add a bit of uncertainty and risk into the mix, Lundin Gold CEO Ron Hochstein noted that he’s looking at the potential for acquisitions that are accretive to shareholders. Fortunately, he made an emphasis on the word accretive, and this means that the team is likely going to be prudent if they do decide to snap up another project. Having said that, the market loves to punish suitors in takeover scenarios, and we saw this recently with Kirkland Lake Gold falling 17% in a week after acquiring Detour Gold. Therefore, regardless of how accretive an acquisition Lundin Gold stumbles upon, it could mean some short-term turbulence for the stock price if the company goes through with it. I’d prefer the company sat on its hands in terms of M&A and explored its gold belt, which likely has some of the most prospective ground in the industry, given that it’s next to a world-class discovery. If the first 50,000 to 100,000 meters of drilling turn up nothing exciting, then it makes sense to hop on the M&A bandwagon.


To summarize the fundamental story, Lundin Gold is arguably the most impressive asset going into production in 2020 and should be an absolute cash-cow for shareholders. There are some risks, however. These are that the mine operates according to plan, the company does not go out shopping for a new company at a time when it has its hands full ramping up Fruta del Norte, and the fact that the valuation is getting closer to full value here short term. Let’s take a look at the technical picture to see if we can see if it’s confirming any of the current risks:

As we can see in the chart below, Lundin Gold is currently more than 45% above its 200-day moving average (yellow line), a spot the stock has had trouble with in the past short-term. If we look back to September, the stock suffered a short-term blow from this overbought area, falling 22% over the next three months. While this wasn’t an issue for long-term investors, it made little sense to be chasing the stock at those levels. This is because patience paid off, allowing investors to scoop up the stock 20% cheaper if they just sat on their hands and waited for the stock to cool off a little. I am not implying, based on the chart above, that we have to see a 20% correction; I am merely pointing out that the stock is starting to get a little overbought.


The good news for investors is that the 200-day moving average has been one stable support level for the past year, and any pullbacks to this area are a clear opportunity to pick up more shares. Therefore, while I do not think the stock is a buy at current levels, I believe a 20% plus correction closer to the 200-day moving average would provide an excellent opportunity to pick up the stock up. Not only would a pullback of this magnitude significantly improve the stock’s valuation, but it would also bake in some margin of safety in case production doesn’t ramp up quite as planned.

Lundin Gold is arguably one of the most exciting gold producers in the sector for those that are willing to invest in Tier-3 jurisdictions. However, an overbought chart, a valuation that’s more than fair, and the risk of a potential acquisition have left the stock in a tricky spot here. This does not mean that investors should rush out and sell Lundin Gold, but it does mean that patience is likely the best course of action for those looking to add exposure. Based on this, I believe investors and traders would be wise to wait for a pullback before adding any shares, rather than paying up above C$10.60.

Disclosure: I am/we are long GLD. 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.

Additional disclosure: Disclaimer: Taylor Dart is not a Registered Investment Advisor or Financial Planner. This writing is for informational purposes only. It does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. Taylor Dart expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing.

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