Take physic, pomp

Lundin Gold (LUG.to): The share count begins its upward climb, plus a re-visit of IKN370

In light of the news out of Lundin Gold (LUG.to) yesterday that it’s running a bought deal to raise just under $95m (gross proceeds including the over-allotment facility which will fill, be in no doubt), your author returned to read the last piece he penned on the company, in IKN370 dated June 12th that took a better and closer look at one of the mysteries of LUG.to, its total State burden it will need to pay to Ecuador in order to play mining at Fruta del Norte (FDN).
It was a long-ish note and I’m not going to re-print it all but here’s how it ended, including a price chart to that date.

“The bottom line, after having done
some real investigation into the subject rather than guesstimating, I’m still
left with having to make some educated guesses but we can say that the 29%
effective rate over LOM mentioned by CEO Hochstein may turn out to be somewhat optimistic,
but it’s not going to be far out. If I had to bet (and I don’t) I’d be careful
about making too many offset assumptions about the profit sharing to corporate
tax, then not assume that IVA rebates will be in the post quickly, but there’s
every reason to believe LUG in Ecuador will have an effective tax rate in the
low 30s %. That’s pretty competitive to peer countries and if Ecuador can offer
the stability and long-term miner-friendliness that President Correa espouses,
they’ll be fine.

However, it doesn’t take away from
the fact that even with this lower rate of tax in real terms, LUG.to at FDN has
just offered up to the market a project with economics that don’t sparkle. And
this after Ecuador reportedly made plenty of concessions to LUG during
negotiations and is taking a much softer stance towards FDI projects such as
this, which underscores just why Kinross decided to walk away in its time at
FDN when Correa was playing hardball.

When I ran the numbers earlier this
year in the NOBS report of IKN357 dated March 13th, I couldn’t help
but come to the conclusion that under the circumstances, with a key Feas Study
in the works and then the hunt for capital to build its mine afterwards, LUG.to
shares looked expensive for what they were. Since then we’ve seen gold jump,
the bull market for mining companies take off, LUG got a positive price jolt
when Porter Stansberry pumped the stock to his big list of investors and now
the FS is here. Next we have the capex raise which, if you believe the press
will start at U$820m, may be a lot higher (16) and come in two phases, first
U$120m to U$140m round of equity, then at U$700m commercial (probably debt)
facility. That’s a lot of raise for a U$445m market cap company to support and
the way in which the FS assumed a 5% discount rate isn’t helping the optics of
the raise and its real burden on the project. What we do know for sure is that
LUG is currently running on fumes and will HAVE to raise its cash soon, because
for one thing it’s part of the terms of agreement with the government of
Ecuador and for another, they’ve just taken out a $5m bridge loan with main
sponsors the Lundins to tide treasury over. And $5m isn’t going to last very
long here.

This weekend’s CAD$5.62 share price
for 101.3m shares (and that new small bridge loan) still looks expensive, sorry
and all that, it’s not for us smallfry retailers until we know how much the
bigboy financiers are going to extract for their kind patronage. I expect the
share price to continue weakening and $5.25, even under $5, looks in the cards.


That’s enough June 12th script and back here today June 28th, I can’t help reflecting that the already proven and convicted securities fraudster Porter Stansberry has been trying to make himself a new BFF in he shape of Lukas Lundin (by the way, hi Jack! Thanks for reading! How’s your work experience going under Ron? Best to your pops), what with the timing of his blatant pump call on this stock just before the period in which LUG needed to start the raising process. But on the other hand, what with gold’s rise since then I don’t think there’s much downside in this stock from here, certainly not as much as Itinerant’s rather neophyte short call on the stock late last week. People, if you’re going to short a mining stock don’t make it one that can score you 20%, make it one that has a heap of debt already on board and a serious chance of being sliced in half, or make it one that’s an empty box being held up by rah-rah noise with a real chance of going to zero. LUG isn’t either of those and what’s more, its all-star cast of names and the undoubtedly strong deposit itself will mean it’s not going to run out of friends (and using the WFT argument to short the stock at $1,300/oz gold when the WFT doesn’t even kick in until U$1,480/oz, that’s just plain silly, Sinking Alpha people). The best guess here is that LUG goes into inertia mode and fiddles round its current PPS during the capex raising and build-out stages. It’s going to be a boring stock and if you want boring you’re in the wrong sector of the market.
PS: Hey Porter! How’s that defamation suit coming along against me? Keep in touch on that one now, won’t you? But you know you can’t add anything to it from this post today, because “convicted securities fraudster” is exactly what you are, scumball.

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