The rocks underneath a mine don’t vote. Unfortunately, just about everything surrounding them does.
Brazil’s first-round presidential election produced a runoff between Flávio Bolsonaro and Luiz Inácio Lula da Silva, with the second vote scheduled for October 25.
For Canadian mining investors, the currency move deserves almost as much attention as the politics. Let’s get into why that might be, and what to watch.
Source: Getty Images
Follow the currency
Many commodities sell in U.S. dollars. Mines, however, often pay a significant portion of wages, contractors and local services in the currency where they operate. If that local currency weakens against the U.S. dollar, those expenses can become cheaper when translated back into dollars.
A stronger local currency can do the opposite. So a market-friendly election result isn’t automatically good news for a miner. Investors still need to trace the effect through actual costs, taxes, royalties and permits.
That makes Canadian miner Lundin Mining (TSX: LUN) particularly interesting for Canadians buying stocks in Canada.
More than an election trade
Lundin produces copper in Brazil and Chile, with its Chapada operation providing a direct link to Brazil. Copper demand is tied to electricity grids, construction, and electrification, just to name a few. Chapada also produces gold, giving the asset another commodity exposure.
The better reason to follow the company, however, is what it’s doing underground rather than what happens in Brasília. Lundin has approved an additional ball mill at Chapada, equipment used to grind ore before minerals are recovered. The expansion is important to unlocking the nearby Saúva project.
Company-wide second-quarter copper production reached roughly 77,000 tonnes, while free cash flow from continuing operations was US$265 million. That cash is important because growth projects eventually need somebody to pay for them.
Watching the numbers
Suppose a mine starts with US$100 of local-currency operating costs and nothing else changes.
This is only an illustration. Inflation, hedging and U.S.-dollar contracts can change the result considerably. Still, it explains why investors cheering a stronger Brazilian real should also ask what that means for Chapada’s cost base.
What’s more, there’s a recent sell-off to consider. Lundin recently traded around $34.52, roughly 24.5% below its $45.74 52-week high. That makes the stock easier to examine, although being down from a high isn’t the same as being undervalued. Copper prices could weaken, expansion spending could rise and project timelines can slip.
Weather disruptions at the company’s Chilean assets have already provided a useful reminder that geography creates operational risk in more than one form. Holding shares inside a Tax-Free Savings Account (TFSA) can shelter successful gains, but it doesn’t restore money lost through a poor project or an expensive commodity cycle.
Bottom line
Brazil’s election could move Lundin through currency, taxes and investor sentiment. I wouldn’t make any of those the main reason to own it. Chapada’s expansion provides a catalyst that lasts after the ballots are counted.
If Lundin can turn current cash flow into profitable additional copper production while controlling costs, today’s political volatility could offer a better entry point into a much longer mining story.
The rocks underneath a mine don’t vote. Unfortunately, just about everything surrounding them does.
Brazil’s first-round presidential election produced a runoff between Flávio Bolsonaro and Luiz Inácio Lula da Silva, with the second vote scheduled for October 25.
For Canadian mining investors, the currency move deserves almost as much attention as the politics. Let’s get into why that might be, and what to watch.
Source: Getty Images
Follow the currency
Many commodities sell in U.S. dollars. Mines, however, often pay a significant portion of wages, contractors and local services in the currency where they operate. If that local currency weakens against the U.S. dollar, those expenses can become cheaper when translated back into dollars.
A stronger local currency can do the opposite. So a market-friendly election result isn’t automatically good news for a miner. Investors still need to trace the effect through actual costs, taxes, royalties and permits.
That makes Canadian miner Lundin Mining (TSX: LUN) particularly interesting for Canadians buying stocks in Canada.
More than an election trade
Lundin produces copper in Brazil and Chile, with its Chapada operation providing a direct link to Brazil. Copper demand is tied to electricity grids, construction, and electrification, just to name a few. Chapada also produces gold, giving the asset another commodity exposure.
The better reason to follow the company, however, is what it’s doing underground rather than what happens in Brasília. Lundin has approved an additional ball mill at Chapada, equipment used to grind ore before minerals are recovered. The expansion is important to unlocking the nearby Saúva project.
Company-wide second-quarter copper production reached roughly 77,000 tonnes, while free cash flow from continuing operations was US$265 million. That cash is important because growth projects eventually need somebody to pay for them.
Watching the numbers
Suppose a mine starts with US$100 of local-currency operating costs and nothing else changes.
This is only an illustration. Inflation, hedging and U.S.-dollar contracts can change the result considerably. Still, it explains why investors cheering a stronger Brazilian real should also ask what that means for Chapada’s cost base.
What’s more, there’s a recent sell-off to consider. Lundin recently traded around $34.52, roughly 24.5% below its $45.74 52-week high. That makes the stock easier to examine, although being down from a high isn’t the same as being undervalued. Copper prices could weaken, expansion spending could rise and project timelines can slip.
Weather disruptions at the company’s Chilean assets have already provided a useful reminder that geography creates operational risk in more than one form. Holding shares inside a Tax-Free Savings Account (TFSA) can shelter successful gains, but it doesn’t restore money lost through a poor project or an expensive commodity cycle.
Bottom line
Brazil’s election could move Lundin through currency, taxes and investor sentiment. I wouldn’t make any of those the main reason to own it. Chapada’s expansion provides a catalyst that lasts after the ballots are counted.
If Lundin can turn current cash flow into profitable additional copper production while controlling costs, today’s political volatility could offer a better entry point into a much longer mining story.
