What a week in the metals market. On 3/16/08 I said the metals market was gettiing too high and whatch out for a consolidation. Monday the 17th the top of GLD was 100.44 which is gold at 1004.40. Then it fell apart from there.
Thursday it closed at 89.91. Silver dropped even more. The metal stocks are getting sold because they think the top is in the market. It is on a short term basis. So let's start watching for metal stock bargains to load up on for the future.
One such stock to watch is LMC.
Lundin (LMC:nyse) disappointed with a big write-off of its own, sending its shares down 11% on Wednesday. The shares are down 29% for us in a short amount of time. It’s frustrating, because I was right about a rally in base metals -- as copper hit fresh all-time highs recently -- but you wouldn’t know it, owning Lundin.
So what do we do? Do we keep it? Buy more? Or sell it? Let’s think it out…
First, we have to realize the environment we are in. The market took another beating on Wednesday, when Lundin made its announcement. Freeport, the big copper concern, also fell 11%. It was a tough week all around for commodity names. Shares of Canadian Natural (CNQ:nyse) lost 13% for the week. So let’s keep some perspective.
Secondly, the write-off is noncash. It’s not a real loss in the usual sense, because Lundin is actually profitable and generates cash flow. Basically, Lundin paid too much to acquire EuroZinc Mining and Rio Narcea Gold. Management wrote down the value of those assets on its books and took a bath of $492 million. Before those charges, Lundin actually made $55 million in the quarter, which was ahead of the consensus guess. Also for perspective, Lundin’s market cap is about $2.5 billion. Management warned about the write-down early in the year, so it’s not a total surprise, though I think the magnitude is greater than what people thought it would be.
We also have a new CEO in Phil Wright, who wants to clean up everything as quickly as possible and start with a clean slate. We still have an excellent financial condition with no net debt. We still have owner-operators, though they have to step it up and start delivering the goods. Yes, the Lundins have shown a magic touch. I don’t think they suddenly turned stupid. And they are in deep with their own money. So we know they are motivated to get it right.
It doesn’t feel right to sell Lundin here. I’m as upset about the stock as you are. But my rational brain says there is value here. My cooler head says give it some time. If copper prices stay up, Lundin will make a lot of money this year and its self-inflicted wounds won’t matter much. But Lundin has to execute.
I’m going to say pick at it as it bottoms. If you own it, I’d just hold onto what you got. If you don’t own it, you might want to think about taking a shot at it here. It looks like you’re getting a good price. Book value is $10.45.
Lundin should earn $1 per share this year. Estimates have come down based on Lundin’s own guidance on production and because the Street doesn’t believe high copper prices will stick. So the stock trades for only seven times that depressed estimate. Only a few months ago, people thought Lundin would earn $1.25. There is potential for upside surprises. All the bad news seems baked in.
It was also not long ago that the stock was nearly $15. It’s been more than cut in half from its high. I think the Lundins will figure it out and right the ship. But it’s going to take a few quarters for them to earn some credibility again with the Street. They need to start hitting their numbers. I’m betting they will.