Lundin the real winner in decision to develop Tenke Fungurume

Commentary

Chalk it up as another win for Lukas Lundin and his stable of mining companies.

By committing to kickstart the massive Tenke Fungurume copper-cobalt deposit, Phelps Dodge (PD-N) has shown once again that if the prize is big enough, it will get developed — even if it is located in Central Africa’s war-ravaged Democratic Republic of the Congo (DRC).

This, of course, is not news to Lundin and his family, which have staked out a hard-won reputation for going into politically risky regions ahead of the competition, gaining a piece of the action, and then selling out when conditions become more favourable.

Twelve years ago, when it wasn’t fashionable to develop mines in Argentina, Lundin group company, International Musto, accepted an unsolicited offer for a 50% interest in its Baja de la Alumbrera project, one of the best copper deposits in South America.

A year later, in 1995, the company was swallowed in a US$510-million takeover by North Ltd. of Australia and Rio Algom, which committed to spending US$1 billion to bring the mine into production.

That was the year that another Lundin company, Tenke Mining (TNK-T, TNKDF-O), turned its attention to the DRC, grabbing a stake in Tenke Fungurume and holding on through a bloody war that claimed the lives of 4 million people, sparking a humanitarian crisis that UN officials says is far from being resolved.

The company’s patience paid off last week, when Phelps Dodge said it would team with Tenke Mining to invest US$650 million to develop the site as soon as previous arrangements with a local electricity supplier are approved by the DRC government.

The decision to proceed was announced on the day that Joseph Kabila took office as the DRC’s first democratically elected president in four decades, pledging to combat the corruption and violence that have crippled his resource-rich African nation.

But those who see the investment as an endorsement of the new government are likely missing the point.

For, as the Lundin family has known all along, projects the size of Tenke Fungurume just don’t come along every day.

When they do, they are bound to attract major mining companies, which are increasingly looking beyond traditional boundaries in search of new supplies of copper and zinc.

When production starts at the end of 2008, Tenke Fungurume will emerge as an engine for industrial growth in a country that desperately needs it, delivering US$100 million a year in royalties and duties to be split between the provincial and federal governments.

During the construction phase, it will create work for at least 2,500 people and 1,100 full-time jobs, as well as another 5,000 in surrounding communities in Katanga province, where the mining concessions are located.

If everything goes according to plan, the mine will generate 115,000 tonnes of copper cathode and 8,000 tonnes of cobalt annually during the initial years of production.

But as talks with project financiers begin, the huge project is already attracting the attention of another U.S. company, Freeport-McMoRan Copper & Gold (FCX-N), which has launched a US$26-billion takeover bid for Phelps Dodge.

If the bid succeeds, Freeport is expected to take a more aggressive approach to Tenke Fungurume, pushing the production rate to 400,000 tonnes annually.

With that kind of wealth at stake, analysts say it was only a matter of time before the project got developed, either by Phelps Dodge or someone else.

Last week, Phelps CEO Steve Whisler described Tenke Fungurume as a major building block for the future of his company.

But Whisler is clearly not betting the firm on a country that is still being described by UN peacekeeping forces as a one of the world’s worst humanitarian catastrophes.

A company like Phelps Dodge will have no trouble coming up with the US$455 million it needs to cover its 70% share of capital costs. (Tenke Mining is responsible for the remainder.)

Meanwhile, as development proceeds in the DRC, Lukas Lundin continues to venture where others fear to tread, even setting his sights on Iran, and a very large zinc deposit.

The risks associated with that strategy became apparent last week when a state-owned Iranian firm moved to terminate certain agreements with Lundin Mining’s (LUN-V, LMC-X) 20%-owned affiliate Union Resources of Australia.

Union’s main asset has been a 38% stake in the massive Mehdiabad project, which is estimated to host a 394-million-tonne resource, averaging 4.2% zinc, and 1.6% lead and 36 grams silver per tonne.

But in spite of the uncertainty surrounding Union’s status in Iran, it seems certain that — like Tenke Fungurume — a resource of those dimensions will be extracted eventually. It’s just a matter of time.