Lundin Mining (TSX:LUN, Financial) (3.1% portfolio weight) – Lundin Mining operates mines that are, on average, higher quality than those of Capstone. Like Capstone, Lundin’s mines are in relatively low-risk political jurisdictions but are larger and lower cost operations than those of Capstone. As a result of being low-cost, the cash flows tend to be slightly less variable in relation to metal price movements. While we have great respect for both the management team and the board of Lundin Mining, mining is a very tough business and a variety of challenges present themselves from time to time. In the last twelve months, the company has suffered from an electrical surge causing damage to its Brazilian operations, a protracted strike at its Chilean mine and, more recently, issues surrounding grade and mill throughput in Chile. It has been a tough stretch for a company that has built a reputation as one of the industry’s best operators. The company recently announced the appointment of a new CEO who will take the helm in January as the current CEO, Marie Inkster, steps down. We have thought highly of Marie, as we had of her predecessor, but are confident that the board, including multiple family members carrying the Lundin name, continue to manage with clear eyes. Assets that are growing in value, an outstanding balance sheet, and increasing capital returns to shareholders don’t bother us either.
Finally, external to Lundin, the world has woken up to a growing scarcity of copper just as it has decided it wants to radically transform the global energy industry in a way that will place copper in extremely high demand. Mike Henry, CEO of mining major BHP, publicly stated this week that he wants “future facing commodities” such as copper, potash and nickel to comprise 50% of BHP’s revenues by the end of the decade and that he is willing to go further afield into difficult jurisdictions if necessary. The end of the decade is a mere nine years away and is probably not enough time to permit and build a new copper mine even if BHP had the resources today. It is very likely BHP and others who want to benefit from this copper cycle to a greater extent will have to purchase existing assets in order to do so. Historically, the industry has gone through waves of consolidation when supply became tight. As we examine the mining industry today, there are only a small handful of companies that would offer a company like BHP—or Barrick, Glencore and Rio Tinto, who have all announced similar agendas—a chance to move the meter in terms of copper exposure. Lundin is certainly one of them.
From the Third Avenue Value Fund (Trades, Portfolio)'s third-quarter 2021 commentary.
