Canaccord Genuity (TSX:CF, LSE:CF) has started coverage on producer Lundin Gold (TSX:LUG) Inc, which runs and owns the Fruta del Norte (FDN) gold mine in southeast Ecuador.
Analysts noted that they liked the asset for its "substantial low-cost production, meaningful dividend, substantive exploration potential, proven management team and intriguing M&A possibilities."
As at 2015, it boasted a resource of 9.5 million ounces (Moz) grading 8.3 grams per ton (g/t). Lundin Gold (TSX:LUG) acquired it in 2014, began construction in 2017, and declared commercial production in February 2020.
WATCH: Lundin Gold continues to see success with the producing Fruta del Norte gold mine
"Last year's performance ranked FDN in the top quintile of costs/gold sales for primary gold mines globally, proving out the deposit's quality," Canaccord analysts wrote.
"We forecast annual production of 366koz at $890/oz AISC over a 14-year mine life, establishing LUG as one of the premier low-cost PM producers in the intermediate space."
The mine's low-cost production should also help sustain its "impressive" free cash flow (FCF) versus peers across all phases of the gold price cycle, they added.
"Annual FCF of ~$300M opens up a variety of avenues for management to create further value for shareholders, such as M&A to bolster LUG’s growth profile, additional dividends/share buy-backs, de-levering, or increased exploration near FDN," wrote the broker.
The miner, they suggest, could also be an "acquisition target" given its high-quality asset and Newcrest's around 32% stake.
"We see relatively low near-term geopolitical risks for LUG, with longer-term risks mitigated by its producer status, comprehensive ESG programs, and local support," they added.
Analysts also highlighted that the firm was 26% owned by the Lundin Family and backed by the Lundin Group, which has an "exceptional" track record of delivering projects and driving high returns, with companies generating an average return of 2,128% since 1995.
Lundin Gold is rated 'Buy' with a target price of C$15 a share (current price; C$11.35).
Contact the writer at giles@proactiveinvestors.com