JV Article: Lundin Gold is now generating significant free cash flow

Last year was an exceptional one for Lundin Gold (TSX: LUG) and its high-grade Fruta del Norte underground mine in southeastern Ecuador, 130 km northeast of Loja, the country’s fourth-largest city.

The company generated US$268 million of free cash flow in 2021 from the production of 428,514 oz. of gold at an all-in sustaining cost (AISC) of US$762 per oz., beating its guidance of 380,000 to 420,000 oz. and AISCs of US$770 to US$830 per oz., respectively.

“It’s really been almost a fairy tale type story,” Ron Hochstein, Lundin’s Gold president and CEO, says in an interview, noting that the company poured first gold in November 2019, just five years after acquiring the asset from Kinross Gold (TSX: K; NYSE: KGC) in December 2014 for about US$240 million. “It was pretty cool to go through full feasibility, basic engineering, early works and then construction and to do that on time and under budget.”

The mine commenced commercial production in February 2020, just as news that a lethal new coronavirus in China called Covid-19 was circulating the globe.

“We worked our way through that and we were actually the ones that I think had a pretty big impact on reopening the Ecuadorian economy,” Hochstein says. “We showed that we could operate within a Covid environment safely.”

Lundin Gold is poised for another big year and is already off to a strong start with record first-quarter production of 121,665 oz. gold (78,601 oz. in concentrate and 43,064 oz. of doré) at an AISC of US$696 per oz. gold sold.

It forecasts annual production in 2022 of 405,000 to 445,000 oz, at an AISC of US$860 to US$930 per ounce. “[The first quarter] was fantastic,” says Hochstein. “Our low AISC of US$696 per oz. sold was driven by lower-than-expected sustaining capital costs, which will ramp up as the year progresses. Costs are a key focus, though, and our consistently low AISC definitely plays a large role in us generating so much free cash flow.”

The Vancouver-based company has also approved its first dividend, which will consist of an annual payment of US$100 million, which equates to about 40¢ per share. The dividend will be paid half yearly, with the first payment scheduled to follow the company’s second-quarter results in August, and a second payment six months later. “We’ll begin paying a semi-annual dividend, but will definitely look at quarterly payments the following year,” Hochstein says.

“The big message to the market,” he says, “is that this US$100 million dividend is equivalent to about a 5% dividend yield, which if you look at the precious metals space is significantly higher than the average, which even for big producers is around 2% to 3%.”

Paying this dividend does not mean that the company will no longer look to grow, however, Hochstein says. With a current free cash flow yield of 15%, Lundin Gold has a lot of flexibility when it comes to deploying the significant capital left over after its dividend payments. With this cash, the company will look to accelerate repayment of its senior debt, can increase its regional and near-mine exploration programs if and when necessary, can continue to pursue M&A opportunities, and can also invest in future capital projects, such as further throughput expansion.

In addition to the dividend, Lundin Gold recently hired Andre Oliveira as its new vice-president of exploration, to focus on near-mine and regional exploration programs.

Before joining Lundin Gold in March, Oliveira spent more than 17 years at Yamana Gold (TSX: YRI; NYSE: AUY; LSE: AUY) where he held roles of senior geologist, manager, country director, and ultimately senior director for South America. Prior to Yamana he worked as an exploration geologist at AngloGold Ashanti’s (NYSE: AU; JSE: ANG) Crixas gold mine.

“He’s got a lot of experience in epithermal gold and had a great track record at Yamana,” Hochstein says. “He brings a fresh set of eyes and has had a huge impact already. He’s invigorated the team and has spent a lot of time onsite.”

“Together with Stephen Leary, who’s got so much epithermal experience and discovered Fruta del Norte, it’s a little bit of a dream team right now for epithermal gold exploration, having those two work together.”

The goal is to find buried Fruta del Norte type epithermal gold-silver systems in the Suarez pull-apart basin (Suarez Basin), which hosts Fruta del Norte.

The company has set aside US$4 million for near-mine exploration this year (a combination of underground and surface drilling as well as geophysics).  “We’re still working out the full details,” says Hochstein. “Andre put together this near-mine exploration program after he started looking at all the current prospects and targets that we have within a kilometre of Fruta del Norte. These are the types of things that if we discover something could potentially add to the existing resources and be accessed with existing infrastructure. It has real potential to add value quickly.”

Another US$14 million will be spent on regional exploration, drilling a total of 16,500 metres at its three main epithermal gold-silver regional targets: Barbasco, Puente-Princesa and El Puma.

Barbasco is an anomaly situated along the eastern margin of the Suarez Basin, about 7 km south of Fruta del Norte, and Puente-Princesa is an anomaly on the western basin margin, about the same distance from the mine site.

Last year the company drilled a total of 5,387 metres (six holes) at Barbasco and 5,749 metres (six holes) at Puente-Princesa. Drilling only intersected relatively narrow, low-grade vein mineralization, but the program was encouraging, the company says, because it confirmed that gold-bearing hydrothermal fluids circulated in the southern basin at the same time as Fruta del Norte was forming farther north.

The 2021 drill program also improved the company’s understanding of the southern basin and provided direction for this year’s program, to the south along both margins of the basin, and will target El Puma, about 8 to 10 km to the south of Fruta del Norte.

“Puma actually has a lot more surface alteration than a lot of our targets,” says Hochstein. “So what we’ve learned by drilling at Puente-Princesa is going to help us now target at Puma. There are a lot of relationships. Every hole we’re learning and improving our probability of finding another Fruta del Norte.”

“We’re very excited,” he continues. “As you know, the best place to explore is in your own backyard. And when your backyard is next to one of the best deposits ever discovered, it’s very exciting.”

Along with its regional exploration programs, Lundin Gold continues to focus on operations and cost cutting, primarily through productivity gains and debottlenecking. By the end of last year the company had increased mill throughput by 20% from 3,500 t/d to 4,200 t/d and has plans to ramp that up to 4,500 tonnes per day. “We think we can get to 4,500 t/d just by de-bottlenecking,” says Hochstein.

The company has also focused on increasing recoveries and improving its concentrate grade. About 70% of Fruta del Norte’s gold is in concentrate, and shipping costs, particularly to Europe and Canada, have jumped by as much as 130% to 150%. By increasing concentrate grade, Lundin Gold is able to reduce its shipping costs per ounce of gold. “We had a successful program in the first quarter where we improved our concentrate grades, which worked out to a bottom-line reduction of about US$20 or US$30 an ounce.”

Lundin Gold says it also benefits from operating in Ecuador, a U.S. dollar economy. “We’re not seeing the inflation impacts that other countries are experiencing,” Hochstein notes. “Ecuador was hit hard by Covid so the economy is still growing and unemployment is still high here. We’re not seeing noteworthy wage inflation and are not seeing input costs increase too materially either.”

And Hochstein points out that with the company’s ample cash flow, it could “theoretically” pay down its senior debt of about US$240 million by the end of this year or early next year.

The mining executive also says the company is not ruling out growth through acquisition to mitigate the issue of being a single asset company, but says that any acquisition needs to make sense to its shareholders, and being a Tier 1 asset, Fruta del Norte sets a very high bar.

“The challenge we’ve got is Fruta del Norte is such a great asset,” he says. “It’s so unique. It’s challenging to find something that fits.”

Lundin Gold takes its pioneering role in the country seriously and emphasizes showing all stakeholders what responsible mining practices look like.

“We see our role now as showing local communities, governments and essentially the citizens of Ecuador what responsible mining can be for this country,” he says.

At press time in Toronto, Lundin Gold’s shares were trading at $10.21 within a 52-week trading range of $8.82 and $12.93. The company has 234.7 million common shares outstanding for a market cap of about $2.4 billion.

The preceding Joint Venture Article is PROMOTED CONTENT sponsored by LUNDIN GOLD and produced in co-operation with The Northern Miner. Visit www.lundingold.com for more information.