Lundin Sees One-Two Punch In Q3

Vancouver– Deteriorating metal prices have forced Lundin Mining (LUN-T, LMC-n) to put one mine on care and maintenance, consider closing another early, and shift production at a third to copper from zinc. And substantial goodwill losses on two recent acquisitions forced the mining house to declare US$201.1 million in write-downs for the third quarter, pushing its quarterly loss to US$199 million.

A year ago, the rapidly growing major declared a third-quarter profit of US$76.6 million. But twelve months later, Lundin, like all miners, is facing a very different reality that is seeing healthy profits swing to dramatic losses.

A US$228.2-million non-cash impairment charge (US$201.1 million after tax) was the biggest factor in Lundin’s third quarter. The impairment costs stemmed from reduced value for the Aguablanca mine, plus related goodwill arising from Lundin’s acquisition of Rio Narcea in 2007, as well as goodwill stemming from its 2006 purchase of EuroZinc Mining.

Goodwill refers to the premium one company pays when acquiring another, that is, the amount it pays for the acquisition above the net book value of the target company’s assets and liabilities. When the pur- chased company no longer carries the original purchase price, the goodwill loss is written down.

Before impairment charges, the company recorded just-positive net earnings of US$2.1 million. Operating earnings were US$68.9 million and cash flow totalled US$46.8 million. In the third quarter of 2007, those numbers came in at US$153.9 million and $155.3 million, respectively.

Metal production for the quarter was in line with or ahead of expectations, as all of Lundin’s operating mines continue at or near record production levels. Compared with the same quarter last year, copper production was up 8% to 24,430 tonnes, zinc production increased 23% to 44,610 tonnes, lead remained essentially unchanged at 9,910 tonnes, and nickel production rose 36% to 2,160 tonnes.

Wright was pleased that improved volumes, paired with lower operating costs, reduced operational costs by $50 million compared with last year’s third quarter. The savings, along with roughly $10 million in savings from the strengthening euro and Swedish krona against the U. S. dollar, certainly reduced the impact of the impairment charges.

“The things we can control are going well,” says Phil Wright, Lundin’s president and CEO. “The things we can’t control are not.”

Wright is referring primarily to the fact that those record production numbers matched up with decreased metal prices across the board. Compared with the three months prior, in the third quarter the average price for copper fell 9%, the prices of zinc and lead dropped 16%, and nickel lost 26%. Compared with prices realized in the third quarter of 2007, zinc was down 45%, lead down 38% and nickel off 37%, while copper held steady.

And the only bright side to the impairment charges is that, by reviewing all operations and changing price forecasts significantly this quarter, Lundin does not expect to face similar writedowns next quarter.

While the company’s quarterly numbers tell one story, Lundin’s new plans for its operations tell another — the story of trying to keep numerous mines and development projects going while metal prices fall all around.

One of Lundin’s mines simply cannot produce economically. The company is putting the Aljustrel zinc mine in Portugal on care and maintenance. Zinc prices have dropped nearly 70% since the company restarted operations at Aljustrel in late 2007 and 50% since the mine’s official opening in May.

“I have done more work on Aljustrel, in terms of finding a way to get this to be economic, than on any other project I can remember,” Wright says. “We’re disappointed to have to make this decision, but it’s just an impossibility to continue to operate this mine.”

Plans had positioned Aljustrel as a primary zinc project with limited copper resources to be extracted at the end of the mine’s life. Since recent exploration drilling has boosted copper reserves in the area, Lundin is now considering altering the mine plan to focus initially on copper extraction, though detailed studies indicate that the shift is not economically viable at today’s metal prices.

The mine was supposed to produce 80,000 tonnes of contained metal in concentrate annually and cost US$225 million to build. Lundin estimates preproduction losses and shutdown costs will come to US$80 million. Because of the shutdown, the company took an US$8-million charge to earnings for the third quarter and expects to take another charge in the fourth quarter of US$10-15 million.

Another of Lundin’s mines, also in Portugal, is not viable if things continue as planned. The Neves- Corvo copper-zinc mine processes polymetallic ore through two facilities: a 2-million-tonne-per-year principal copper ore mill and a 500,000-tonne-per-year zinc ore facility.

“We are fortunate in that we can use the zinc facility to process lower-grade mixed ores, primarily copper, so we will be converting the plant to treating copper shortly,” Wright says.

Lundin’s plans to expand zinc production, however, are not being sidelined. The expansion, which is to double Neves-Corvo’s zinc production, will be slowed but not cancelled.

“We are not losing confidence in zinc in the longer term,” Wright says. “Our view is that when zinc comes back, it’s going to come back with a great deal of deficiency on the supply side, which is why we will continue our expansion plans.

Wright says the plan to switch to copper leaves Neves-Corvo in “very good shape” in the present environment.

Over at Lundin’s Aguablanca nickel-copper mine in southern Spain, a revamped mine plan calls for a reduced mine output to 100,000 tonnes from 165,000 tonnes. Metal production will be maintained, however, by processing a 500,000-tonne stockpile of broken and oxide ore that the company believes will run through the concentrator well.

The plan is designed to keep Aguablanca sustainable over the next six to nine months, while the company watches metal prices and evaluates its options.

Wright expressed confidence that Lundin’s Zinkgruvan mine, in Sweden, is operating economically and that the Zinkgruvan copper expansion is proceeding on time and budget. Zinkgruvan is an underground zinc-lead-silver mine that Lundin purchased in 2004. The company is developing a second underground crusher and ramp at Zinkgruvan in order to access the adjacent copper deposit and improve mining flexibility at the main deposit. Copper production is expected in 2010.

The only change Lundin is implementing at Zinkgruvan is the deferral of underground development related to resource exploration that does not affect the five-year production plan.

As for Gamoy, Lundin’s underground zinc-lead mine in Ireland, Wright says the company is reviewing operational plans. He admits the company is contemplating closing the mine before its planned closure in 2011, but stressed that more investigation and analysis is needed before that decision can be made.

And while question marks still surround Lundin’s 25%-owned development project in the Democratic Republic of the Congo (DRC), Tenke Fungurume, Wright says the company is confident the mine will start up on time. Tenke is one of the largest undeveloped copper-cobalt deposits in the world and Lundin’s partner, Freeport-McMoran Copper & Gold (FCX-n),is currently building a mega mine. Production is scheduled for 2009.

The biggest questions around Tenke centre on increasing unrest in the war-torn country and the DRC government’s renegotiation of mining contracts, a topic about which Wright is reticent to speak.

“I think anyone who’s prepared to make forecasts as to when things will be resolved in the DRC has more courage than I have,” he says. “Things have been unpredictable to date.”

As of the end of September, Lundin held US$194.8 million in net debt and carried US$105.9 million in cash. The company’s debt load increased by US$99 million during the quarter primarily because of US$92.7-million in payment obligations towards Tenke.

At presstime Lundin traded at $1.50. The company has a 52-week traded range of $1.25-10.94 and has 390 million shares issued.