Lundin Loss Nears US$1B In 2008

VANCOUVER — Lundin Mining (LUN-T, LMC-N) lost almost US$1 billion in 2008 and now carries US$267 million in debt following the failure of a planned merger with HudBay Minerals (HBM-T, HBMFF-O), but the company remains steadfastly optimistic about the future.

“I’m still of the opinion that we don’t need to sell our assets,” said Lundin’s president and CEO Phil Wright in a conference call. “Whatever happens, I have no doubt that we will be able to come up with workable solutions to make sure we have adequate liquidity over the coming years.”

Lundin lost US$728.5 million in the fourth quarter, bringing its 2008 net loss to US$957 million. As Wright put it, the fourth quarter was “all about metal prices.” Since mid- 2008, the price of copper has dropped 60% and that of zinc has fallen more than 40%. Those falls forced Lundin to write down a US$576-million after-tax, non-cash impairment charge. The company also saw US$20.6 million in net losses from discontinued operations, as well as US$94.3 million in negative price adjustment from previous quarters.

The company’s US$46.5 million in cash flow from operations pales in comparison to the losses. A US$137-million injection from HudBay, which bought 19.9% of the company as the first step in the now-terminated merger deal, provided the company with some much-needed buffer, but Lundin is still carrying US$267 million in debt, held in a credit facility controlled by covenants the company has breached.

Uncertainty around the debt covenants had raised many questions of late. Those questions are now answered. Yes, Lundin has breached the covenants of its debt facility but, it does not have to pay back the amount borrowed immediately. Instead, Lundin obtained a waiver from the banking syndicate until June 5, during which time the company will work with its lenders to establish a new, restructured facility.

“We’re in a situation now where it makes sense for us and the banks to put together a restructured facility that takes into account our present balance sheet and our present projections, and puts into place sensible covenants that reflect today’s realities,” Wright said. “In today’s market, there’s no way we expect another US$575-million facility. But we expect to negotiate a facility that is far more appropriate to our operations.”

With US$167 million in the bank, Wright says the company has just enough to get through this year, provided the renegotiated credit facility covers its debt, but concedes the volatile market of late demands a conservative approach. As such, the company is hoping the new credit facility will allow Lundin to take on slightly more debt if necessary over 2009. Wright was careful to avoid commenting directly on whether Lundin is also considering an equity issue to raise funds, instead simply saying the company is looking at all of its options.

Considering changes to Lundin’s projections does seem important, as the company has made significant changes to its operations in recent months. On Jan. 22, it announced it would close the Galmoy lead-zinc mine in Ireland by May; on Dec. 23, it sold its Aljustrel zinc mine in Portugal; and in November, it suspended zinc production at its Neves-Corvo mine, also in Portugal, leaving the mine producing only copper concentrate.

In addition, the company has delayed plans to develop the copper deposit that lies adjacent to its underground zinc mine, Zinkgruvan, in Sweden. Plans had called for copper production by 2010. And at the Aguablanca nickel-copper mine in Spain, Lundin ordered workers to stop mining and limited production to stockpiled ore. Wright says the stockpiles can sustain operations until October, at which time the company will reassess its options.

Wright is confident the company’s decisions will allow it to not only weather the economic downturn, but emerge from it ready to profit.

“If an operation can’t make it at today’s prices, you can sell it, close it, alter it, or put it on care and maintenance,” he said. “We’ve done that, but we’ve taken care not to make short-term decisions that will impact our ability to profit later.

“I’m not prepared to mortgage the future to make a hero of myself now, but destroy our longer-term earning capacity,” he said.

The final key impact on Lundin’s projections is that of Tenke, the massive copper-cobalt project under development in the Democratic Republic of the Congo (DRC). Operator and 57%-owner Freeport-McMoRan Copper & Gold (FCX-N) says commissioning is imminent and it expects to produce the first copper cathodes before the middle of the year. Lundin owns 24.75% of the mine.

Wright was keen to stress that the company’s funding obligations for Tenke’s development were the other key reason the company breached its debt covenant. Lundin spent US$264.1 million on Tenke over 2008, but since Tenke is not yet a producing asset those funds are not considered part of the company’s tangible net worth. And even with that commitment, the company fell short of contributing a full 24.75% of the development costs; Freeport supplied between US$120 and US$200 million on Lundin’s behalf. That means Lundin will not see cash flow from Tenke until Freeport first recovers that loaned contribution.

With assets that are just cash-flow positive and with no expectation of cash from Tenke in 2009, Lundin is reining in its spending. The company plans just US$130 million in capital expenditures this year, which includes another US$40 million for Tenke and US$70 million in sustaining capital. The remaining US$20 million is to go towards the copper expansion at Zinkgruvan and the zinc expansion at Neves-Corvo.

Exploration spending is being held to only US$20 million, with half of that directed towards expanding the copper resources at Neves-Corvo.

Not including any possible Tenke production, Lundin expects to produce 90,000 tonnes copper, 98,000 tonnes zinc, 40,000 tonnes lead, and 6,800 tonnes nickel in 2009.

Lundin’s share price sat near 80¢ during February and that’s where it closed on Mar. 2. The company has a 52-week trading range of 69¢- $9.15 and has 487.4 million shares issued.