Lundin and EuroZinc merge now for gains later

Vancouver — The base metal business has long been dominated by senior companies able to withstand cyclical prices and prolonged downturns. Operating and financial clout matter in this notoriously volatile sector, which helps explain why Lundin Mining (LUN-V, LUNCF-O) and EuroZinc Mining (EZM-T, EXM-X) are consolidating now in order to create a mid-tier copper-zinc company capable of advancing large-scale development projects in the years ahead.

Lukas Lundin, chairman of Lundin Mining, described the proposed transaction as an excellent opportunity to create a larger company with a stronger balance sheet that would be better positioned to “do more transactions” and “grow much faster” than before.

The merger proposal calls for EuroZinc shares to be exchanged into shares of Lundin Mining at a ratio of 0.0952-to-1, which would result in existing EuroZinc and Lundin Mining shareholders owning about 56.7% and 43.3%, respectively, of the combined company.

The new Lundin Mining would have a market capitalization of $3.3 billion, about US$270 million in cash and investments, and long-term debt of US$43 million. Annual production would be about 450 million lbs. of contained zinc and 200 million lbs. of contained copper from four operating mines in Europe, and a fifth mine scheduled for production next year.

As is the case with most mergers, the combined company expects to boost cash flow and earnings and cut costs through operating and administrative efficiencies at existing mines. Both companies have strong operating teams and expertise and the new management team is designed to reflect their collective strengths.

Financier Lukas Lundin will be chairman of the merged entity. Colin Benner, vice-chairman and CEO of EuroZinc, will assume similar positions at Lundin Mining and remain based in Vancouver. Karl-Axel Waplan, president of Lundin, will retain his role and operating base in Stockholm, but will also assume the role of chief operating officer.

Benner said the new company would be better positioned to increase shareholder value, pursue global growth opportunities and “fill the market void in the mid-tier mining sector.”

On the operations front, Lundin brings to the table its Zinkgruvan zinc-lead-silver mine and Storliden zinc-copper mine in Sweden, and the Galmoy zinc mine in Ireland. EuroZinc’s core assets are the Neves-Corvo copper-zinc mine in Portugal, and the past-producing Aljustrel mine (also in Portugal), scheduled to resume production in the second half of 2007. The company also has a large portfolio of exploration properties in the Iberian Pyrite belt of Portugal.

Lundin has positioned itself for longer-term growth through recently executed strategic investments and alliances with companies holding large zinc or base metal projects in Russia, Eritrea, and Iran, among other places. The list includes ownership interests in four of the world’s 15 largest zinc deposits.

The most recent deal saw the company agree to pay US$125 million for a 49% stake in the Ozernoe deposit in the Russian republic of Buryatia. It’s ranked as the sixth-largest zinc project in the world, with indicated resources of 157 million tonnes grading 5.2% zinc and 1% lead at a 2% zinc cutoff grade. At the time, Waplan said the project had the capacity of “easily doubling” the company’s zinc production.

As for the EuroZinc transaction, Waplan describes it as “an exciting, powerful platform for rapid growth.” He adds that the merged company has a clear vision of where it wants to go in terms of pursuing other world-class global opportunities and advancing its “outstanding exploration portfolio.”

Shareholders of both companies will be asked to vote on the merger proposal at special meetings tentatively scheduled for Oct. 19. The merger is conditional on 66.7% approval from EuroZinc shareholders, and 50.1% approval from Lundin Mining shareholders, as well as regulatory approvals. The Lundin family holds about 19.9% of Lundin Mining and has already pledged its support for the merger, along with an institutional fund holding about 9.9% of EuroZinc shares.

Boards of both companies have received fairness opinions that support the proposal. Neither party will be allowed to solicit alternative transactions without risking a US$40-million break fee.