Sweden’s shrewd scion

SITE VISIT

STOCKHOLM, SWEDEN — Lukas Lundin is clear about where he wants to take Lundin Mining (LUN-T, LMC-N).

The chairman of Lundin and progeny of resource legend Adolf Lundin is set to build the next big global mining company by zeroing in on producing or near-producing mines.

Lundin has orchestrated a string of such acquisitions that, in just four years, have transformed the company from relative obscurity into an international force.

The run of purchases included a $1.8-billion takeover of EuroZinc Mining with its portfolio of Portuguese zinc projects, and more recently the nearly $1-billion acquisition of Toronto-based Rio Narcea Gold Mines and its Aguablanca nickel and copper mines in Spain.

Fittingly, the push towards greater economies of scale coincided with a name change in 2004, when South Atlantic Ventures be-diversified came Lundin Mining — thus riveting the family name to the business of mining in the most explicit way.

And on a cool afternoon in southern Sweden, sitting with Lukas Lundin, the power, the pull and the responsibility of the Lundin name is evident, as the daily newspapers herald Lundin’s return to the country as the corporate approximation of a royal homecoming.

Such a homecoming refers not just to Lukas Lundin’s physical presence in Sweden but, perhaps more pointedly, to the Lundin company’s presence here since it acquired the massive Zinkgruvan mine — which hitherto, had been held by foreigners over its entire history.

And what a history. Lukas Lundin’s return to Sweden is on the occasion of the mine’s 150th anniversary, and it still has more to give. Indeed, it’s the future potential of the mine, purchased in 2004, that inspired Lundin to make it the first producing mine in the company’s portfolio, triggering the national fervor of the Swedes.

So while Lundin Mining is being heralded in Canadian mining circles as the company that has the best chance to fill the void left by the disappearances of Falcon-bridge and Inco, Lundin only came to reside in Canada as a 31-year-old in 1989.

Sitting in the back room of a refurbished barn on a countryside estate just twenty minutes from Zinkgruvan, Lundin wears the broad smile of a man glad to be among relatives again.

In such a setting, he is sanguine about recent bumps in the commodity market.

A firm believer in the supercycle theory — which postulates that the emerging middle classes in China and India will mean strong demand and consequently high metal prices for the coming years — Lundin sees the recent volatility as nothing more than a buying opportunity.

In addition, he says, the industry’s recent past will play a part in its future.

“It has been so underinvested for the last twenty years, it’s unbelievable,” he says. “There hasn’t been much money in the business. . . I think it’s going to take a while to correct that imbalance. It could be another five to ten years just because prices were low for so long.”

That long-term view is combined with a shrewd eye for the numbers.

“We try to find projects that make economic sense even when prices are down,” he says, while conceding that sustained higher prices are making such a mission more difficult to follow.

But one proven way to find value is to take on more risk. And the willingness to do so is a trait steeped deep in the bones of the Lundin clan.

After leaving Royal Dutch Shell in the late 1960s to fund his own oil and mining ventures, Adolf Lundin quickly realized that the only way to find the big deposits was to go where the big companies weren’t.

The giants of the oil industry had already gobbled up deposits in the developed world, so Adolf set out for the countries where others feared to tread, honing his diplomatic and negotiating skills along the way.

His legacy is felt not only in his son’s approach to risk — “if you wait long enough and do the right things on the ground, then eventually you can mine it,” he says — but also in Lundin Mining’s portfolio.

The massive Tenke Fungurume copper and cobalt deposit in the Democratic Republic of the Congo –one of the world’s largest undeveloped copper deposits — is 25% owned by Lundin Mining, thanks to Adolf’s astute vision.

Adolf originally made a deal for the project with state miner Gcamines back in 1997, only to have the deal scrapped and then resigned by then-President Mobutu Sese Seko.

Shortly after that, rebel fighters ousted Sese Seko and he fled into exile. Force majeure was declared at the project in 1999 as the country tried to pull itself out of a bloody war.

Another deal was finalized for Tenke Fungurume only last year — but that, too, would seem to be in question with the recent announcement from the Congolese Minister of Mines that all mining contracts in the country need to be renegotiated.

The famous Lundin patience may be tested yet again.

Along with risk tolerance, Lukas embodies another trait common to great builders of wealth — a contrarian mindset.

“You have to be able to go against what everyone else is doing,” he says.

And tying that philosophy to the current state of affairs, where his supercycle belief butts up against those who say commodities prices are a bubble ready to burst, he adds, “I’m hoping a lot of people think differently so I can continue to buy things.”

He’s learned the lesson over the span of an already impressive career for a man in just his late 40s.

Lundin came to Vancouver from Sweden in 1989 to try to salvage what he could of the falling stock market value of two of his father’s mining companies: Musto Explorations and Eastmaque Mining. The son found a white knight to buy half of Eastmaque, saving the company from collapse and then rejuvenated Musto by heading down to Argentina where the company made two great finds: Alumbrera and Veladero.

Alumbrera was sold to Rio Algom for $500 million, while Veladero would wind its way into Barrick Gold’s (ABX-T, ABX-N) portfolio after being sold to Homestake Mining in 1999 for $300 million. Veladero went into production in 2006 and has an reserve of 11.4 million oz gold.

Still lots to give

Lundin acquired the Zinkgruvan mine in 2004, some 147 years after it began producing zinc, lead and silver. But being long of tooth doesn’t mean its number is about to be called.

The mine had a banner year in 2006, with production and financial returns at all-time highs. The mine produced 140,000 tonnes of zinc concentrate and 43,000 tonnes of lead concentrate that year.

While final numbers for 2007 are not yet in, judging from third-quarter results, it was shaping into another stellar year with 638,000 tonnes of ore milled at average grades of 8.5% zinc, 4.6% lead and 87 grams per tonne silver, and recovery rates of 94% for zinc, 88% for lead and 75% for silver.

As to the question of just how much more the mine can produce, history has shown Zinkgruvan hazardous to underestimate.

One hundred years ago, Svante Wibel, the site’s manager at the time, said there was enough ore to last for another 20 years. By 1986, site manager Sven Sollenberg held the same conservative attitude, pegging the remaining mine life at 10 to 15 years.

Current manager Stefan Romedahl is conscious of his predecessors’ poor predictive powers, and at the 150th anniversary celebration is careful not to make the same mistake.

“I think the mine will have another fifty years of production,” he tells the crowd of miners and executives — but he hedges the bold prediction with a hearty chuckle.

Predictions aside, the company is working to get hard numbers on just how much ore is left. It has a new life-of-mine business plan in effect that aims to increase life-of-mine and total asset value by switching the emphasis from mining zinc to copper.

The mine is currently slated to turn out between 800,000 and 900,000 tonnes of ore into 2019, after which throughput will fall off quickly. Ore is mined using panel s
toping techniques and cement stabilizing backfill.

Current proven and probable reserves of zinc and lead combined total roughly 8.6 million tonnes, with another 1.8 million tonnes of measured and indicated resources and 7.8 million inferred tonnes.

There are roughly 2.5 million tonnes of copper in the indicated category and another 1 million inferred tonnes.

Beyond the good size of the orebody, a key driver to the mine’s success is the low cost of production. Zinkgruvan ranks in the lowest cash cost quartile among global zinc mines.

And costs are trending downward. For the first nine months of 2007, Lundin reported that cash costs fell 56% to US22 per lb. compared with US50 per lb. for same period in 2006.

The decrease was credited to higher lead sales, lower treatment charges and improved productivity, all of which managed to offset rising costs of consumables.

And exploration at the site continues. In 2006, an exploration pro- gram hit upon a deep northwestern extension of the orebody. Highlights include intersects of 8.4 metres grading 12.7% zinc, 6.8% lead and 136 grams silver per tonne from 1,050 metres depth and 6.2 metres grading 14.3% zinc, 4.8% lead and 110 grams silver per tonne from 800 metres.

Zinkgruvan began its storied existence when one of the largest zinc producers of the time, Belgian-based Socit des Mines et Fondries de Zinc de la Vieille Montagne — or Vieille Montagne — put it into production in 1857.

Zinc production at the mine coincided with increased uses for the metal as an alloy with copper to make brass, for white paint, and for zinc sheets which were used for bowls, baths and roofing sheets.

Up until the 1880s, demand was easily met as zinc grades at the mine were in excess of 40%; in 1870, the mine accounted for 5% of the world’s zinc production. Zinkgruvan is still one of the largest underground zinc mines in Sweden and is ranked 30th in size in the world.

Vieille Montagne held on to it for 138 years before selling it to Australian-based North Resources for $185 million, but after Rio Tinto (RTP-N, RIO-L) bought North in 2001, it decided the mine didn’t fit its portfolio.

Lundin Mining paid US$101 million for the mine in 2004, just as zinc prices began their record-breaking march upwards.

And while North and Rio saw to modernizing the mill from 1998 to 2004, Lundin has added its own touches.

Although one might expect the surrounding community to have grown accustomed to the sounds of milling by now, Lundin spent $5.9 million rebuilding the above-ground crusher to cut down on noise.

That’s just the sort of attention to detail that keeps them anxiously waiting for the boss’s next visit home.