News
Lundin Mining 2007 Second Quarter Results
August 14, 2007
VANCOUVER, BRITISH COLUMBIA–(Marketwire - Aug. 14, 2007) - Lundin Mining Corporation (TSX:LUN)(AMEX:LMC)(OMX:LUMI) - (all amounts are in US Dollars unless otherwise stated) -
Company Comments
Karl-Axel Waplan, President and CEO of the Company commented: “A solid performance in most of our operations and rising metals prices during the spring led to record net earnings. Meanwhile, the growth strategy continues. We recently closed the acquisition of Tenke Mining Corp., which adds a highly promising, world class copper/cobalt project, Tenke Fungurume, in the Democratic Republic of Congo to our asset portfolio. We have also broadened our commodity mix into nickel with the acquisition of Rio Narcea Gold Mines, Ltd. Rio Narcea’s main asset is the Spanish nickel-copper mine Aguablanca, which will contribute to our cash flow beginning in the third quarter of this year. Growth will also continue, through the development of internal projects, the optimization of our operating mines and as well through the possible acquisition of performing assets. We are confident that we have the ability to continue to generate strong cash flow going forward, both from our existing operations and our mine development projects as they go into production. We continue to believe the global metals markets will remain strong for years to come.”
Highlights
- On June 29, 2007 the Company increased its offer for the shares and warrants of Rio Narcea Gold Mines, Ltd. (“Rio Narcea”) and on August 10, 2007 the company announced a final extension of the amended offer to August 20, 2007. Effective as at August 14, 2007, 91.7% of the outstanding shares (fully diluted) have been tendered to the amended offer. Following the August 20 expiry of the offer, the Company will undertake a compulsory acquisition transaction under the Canada Business Corporations Act to take up the balance of the shares. The acquisition of Rio Narcea adds the Aguablanca copper-nickel mine to Lundin Mining’s assets which will be consolidated during the third quarter. The planned sale of Rio Narcea’s Tasiast gold mine for $225 million was completed in early August.
- The acquisition of Tenke Mining Corp. was completed in early July following the approval by the shareholders’ of both companies. Tenke’s main asset is a 24.75% holding in the Tenke Fungurume project in the Democratic Republic of Congo, which is one of the largest and highest grade, undeveloped copper-cobalt deposits in the world. Work is in progress to develop the deposit into a low-cost open-pit mine and start-up is planned for in the fourth quarter of 2008 or early 2009. Freeport McMoRan Copper & Gold Inc. holds 57.75% interest in Tenke-Fungurume and is the operator of the project.
- Prices for copper, zinc and lead during the second quarter were 29%, 6% and 22% higher than in the first quarter of 2007. The Company believes that the prices for these metals will remain at current levels for the balance of 2007.
- Processed ore for the Group was 17% greater in the second quarter of 2007 as compared with the same period in 2006. While head grades for most operations were lower than in the second quarter of 2006, increased ore throughput partially compensated for the potential shortfall in copper and zinc production while lead and silver metal production were up 18% and 6%, respectively, for the same comparable period in 2006.
- Exploration drilling at the Neves-Corvo mine encountered very encouraging results, adding to the outline and size of a large, continuous zone of high-grade zinc and lead mineralization within the giant Lombador sulfide deposit. Assays were received for ten drill holes, including drill hole NF22A that intersected 55 metres of mineralization of 8.51% zinc and 2.47% lead. Hole ND20A-1 intersected 35 metres of 9.44% zinc and 3.16% lead. Subsequent to the second quarter, drill hole NF34 intersected a true thickness of 95 metres of massive sulphide mineralization, including a 67.2 metre interval of 8.03% zinc, 2.93% lead and 0.31% copper, and also included a 21 metre interval of 11.13% zinc and 3.99% lead (silver assays are pending). This intersection is a step-out of 270 metres from the intersection in drill hole NF22A. The intersection in drill hole NF34 leaves the zone completely open for expansion down-dip and along strike at depth. This hole is in an area that is not included in any resource category and clearly illustrates the potential to expand the Neves-Corvo resource base. In addition to the zinc mineralization, drill hole NF34 intersected a 16 metre wide separate zone of stockwork copper mineralization of 3.92% copper and included a 4 metre section of 8.72% copper.
- Negotiations with the local unions at the Galmoy mine continue and on the 4th of August SIPTU members voted to reject the Labour Court recommendations for a new agreement. The TEEU members have been in an official dispute with the mine since mid-June.
- Production start-up at the Aljustrel zinc-lead-silver mine will be delayed due to the late delivery of some equipment for the ore processing facilities. Production of concentrates is scheduled to commence in the latter half of the fourth quarter 2007 and not, as previously planned, during September.
- An Agreement was entered into with Silverstone Resources Corp. for the Company to deliver its silver production from the Neves-Corvo and Aljustrel mines to Silverstone, subject to regulatory approval and certain other conditions. The approximate value of the agreement is $87.1 million.
MANAGEMENT’S DISCUSSIONS AND ANALYSIS
(Amounts are expressed in United States dollars, unless otherwise indicated)
THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 2007 and 2006
This Management’s Discussion and Analysis (“MD&A”) of Lundin Mining Corporation (“Lundin Mining” or the “Company”) has been prepared for the three months and six months ended June 30, 2007 and is dated August 10, 2007. It is intended to supplement and complement the accompanying unaudited interim consolidated financial statements and notes for the second quarter ended June 30, 2007.
Please also refer to the cautionary statement of forward-looking information at the end of the MD&A. Additional information relating to the Company is available on the SEDAR website at www.sedar.com. All the financial information in this MD&A has been prepared in accordance with Canadian generally accepted accounting principles (“Canadian GAAP”) and all dollar amounts in the tables are expressed in thousands of US dollars, unless otherwise noted.
Overview
Lundin Mining is a Canadian-based international mining company that owns and operates the Zinkgruvan zinc/lead/silver mine in Sweden, the Galmoy zinc/lead mine in Ireland, and the Neves-Corvo copper/zinc mine in Portugal. Additionally, the Company owns the Storliden copper/zinc mine in Sweden, which is operated by Boliden AB, as well as the Aljustrel zinc/lead/silver mine in Portugal, which is under development and scheduled to begin production in the fourth quarter. The Company also has a 49% interest in the Ozernoe project in Russia, one of the largest undeveloped zinc/lead projects in the world and a 24.75% interest in Tenke Fungurume, a major copper-cobalt project in the Democratic Republic of Congo (“DRC”). As well, the Company recently acquired the Aguablanca mine, a producing copper-nickel mine in Spain, which was part of the acquisition of Rio Narcea Gold Mines, Ltd.
Recent Developments and Highlights
Record Earnings
Record net earnings of $159.9 million or $0.56 per share on sales of $319.9 million for the second quarter ended June 30, 2007 compared with net earnings of $37.2 million on sales of $112.9 million for the same period in 2006. Record sales and earnings for the period were driven by high metal prices, stable production in most operations, earnings from the Neves-Corvo copper/zinc mine acquired in the fourth quarter of 2006 and a $50.4 million gain from the divesture of marketable securities during the second quarter.
Increased Offer for Rio Narcea Gold Mines, Ltd. (“Rio Narcea”)
Subsequent to the April 4, 2007 announcement that the Company had entered into a definitive support agreement to which the Company offered Cdn$5.00 per common share and Cdn$1.04 per warrant to acquire all the outstanding shares and warrants of Rio Narcea by way of a take-over bid, the Company increased its cash offer on June 29, 2007 to Cdn$5.50 per common share and Cdn$1.04 per warrant for a purchase price of approximately $864.4 million (Cdn$916.3 million) for 100% of the issued and outstanding shares and warrants of Rio Narcea. This increased offer originally expired on July 16, 2007 and has been extended to August 10, 2007 with a final extension to August 20, 2007. On August 10, the Company announced that 146,356,544 shares and 16,982,220 warrants representing approximately 85.2% of the fully diluted outstanding shares of Rio Narcea have been tendered to the Company. An $800 million syndicated senior credit facility had been previously arranged and is available for general corporate purposes. This facility will be reduced to $575 million once the proceeds from the sale of Tasiast to Red Back Mining Inc. (“Red Back”) have been applied to the credit facility.
Concurrent with the offer to purchase Rio Narcea and contingent upon the success of the takeover bid, Red back signed an option agreement with Lundin Mining to acquire Rio Narcea’s Tasiast gold mine from the Company in consideration for $225 million in cash and assumption of $52.9 million in debt related to the Tasiast gold mine. The sale of Tasiast gold mine closed on August 2, 2007 and the proceeds have been used to pay down the credit facility.
For further information regarding the Rio Narcea transaction, please refer to the April 4, 2007 news release issued by the Company. Additionally, the Offeror’s circular dated April 20, 2007 can be found on the Company’s website atwww.lundinmining.com.
Completed the Acquisition of Tenke Mining Corp. (“Tenke”)
On July 3, 2007, the Company completed the acquisition of Tenke whereby the Company issued 105,421,402 common shares to the Tenke shareholders valued at $1.3 billion. The Company has approximately 391.8 million common shares issued and outstanding immediately following the Tenke acquisition with the existing Lundin Mining and Tenke shareholders owing approximately 73% and 27% respectively of the combined company, Lundin Mining. Tenke holds a 24.75% interest in Tenke Fungurume, a world class copper-cobalt property being developed in the DRC. The remaining interest in Tenke Fungurume is held by Freeport-McMoRan Copper & Gold Inc., which holds 57.75% and is the operator of the project and Gecamines, a DRC government agency which holds the remaining 17.5% of the project.
For further information regarding the Tenke transaction, please refer to the April 11, 2007 news release issued by the Company.
Additional Investment in Sunridge Gold Corp. (“Sunridge”)
On May 10, 2007, the Company announced it was making a further Cdn$6.8 million investment in Sunridge through a 3 million unit non-brokered private placement at Cdn$2.25 per unit. Each unit consists of one common share and one-third of one common share purchase warrant. Each whole warrant entitles the Company to purchase one additional common share at Cdn$2.60 for a period of twelve months from the closing of the private placement. This investment increases Lundin Mining’s equity interest to 19.6% of Sunridge.
Sunridge is a publicly-traded mining company which owns a 100% interest in the Asmara Project in Eritrea in an emerging Volcanic Massive Sulphide district on which there are at least four copper/zinc/gold deposits and the Gupo Gold deposit.
On May 22, 2007, Sunridge received final TSX Venture Exchange acceptance with respect to the closing of this private placement.
Sold Silver Production to Silverstone Resources Corp. (“Silverstone”)
On June 7, 2007, the Company has entered into an agreement with Silverstone to deliver silver production from its Neves-Corvo and Aljustrel mines, subject to regulatory approval and certain other conditions. Under this agreement, the Company will receive an upfront cash payment of $42.5 million, 15.4 million Silverstone common shares and 4,256,250 Silverstone special warrants which are convertible into Silverstone common shares at no additional cost. The common share and special warrant are valued at C$2.42 each. The approximate value of the agreement is $87.1 million.
The special warrants may be exercisable into one Silverstone common share at any time provided that the common shares issued to the Company would not result in the Company owning 20% or more of the issued and outstanding common shares immediately after giving effect to such issuances or that shareholders of Silverstone pass a resolution at a meeting of the Silverstone shareholders approving any exercise that would result in Lundin Mining owning 20% or more of the issued and outstanding shares of Silverstone.
Upon delivery of silver production to Silverstone, the Company will receive the lower of $3.90 per ounce of silver, which is subject to a 1% annual inflationary adjustment after three years and yearly, thereafter, or then prevailing market price per ounce of silver.
Silverstone is a silver mining company that derives 100% of its revenue from silver production and has a 90% interest in four advanced silver-gold projects in Mexico.
Gain of $50.4 million From Sale of Investment
The Company sold an investment during the second quarter 2007 that had been purchased as a strategic investment during the year for proceeds of $118.5 million and recognized a gain of $50.4 million in the quarter.
Summary of Operations
Results of Operations
Summary
Net earnings for the three months ended June 30, 2007 were $159.9 million or $0.56 per share on sales of $319.9 million compared to net earnings of $37.2 million or $0.30 per share on sales of $112.9 million or the same period in 2006. Higher earnings and sales for the second quarter were due to higher metal prices, the addition of the Neves-Corvo operating results, which was added in the fourth quarter of 2006 and a $50.4 million gain from the sale of marketable securities. Cash flow from operations was $150.1 million or $0.52 per share as compared with $54.4 million or $0.45 per share for the same period in 2006.
Net earnings for the six months ended June 30, 2007 were $213.6 million or $0.75 per share on sales of $513.9 million as compared with sales and net earnings of $204.7 million and $58.6 million, respectively, for the same period in 2006. Cash flow from operations for the first half of 2007 was $160.7 million or $0.56 per share as compared with $77.1 million or $0.63 per share for the same period in 2006.
Sales
Total sales increased 183% or $207.0 million in the second quarter to $319.9 million as compared with $112.9 million for the same period in 2006. This increase was due primarily to higher metal prices and the EuroZinc merger (effective November 1, 2006), which contributed $200.3 million in sales for the second quarter of 2007. Sales were lower at Galmoy due to a 15% decrease in production.
Year-to-date, total sales were $513.9 million in 2007 as compared with $204.7 million for the same period in 2006.
Cost of Sales
Cost of sales increased 139% or $53.5 million in the second quarter to $92.0 million compared with cost of sales of $38.5 million for the same period in 2006. This increase was primarily due to the costs associated with the increased sales added from the Neves-Corvo copper-zinc mine, weakening of the US dollar against the foreign currencies that the Company transacts in.
Year-to-date, cost of sales were $160.2 million as compared with $74.3 million for the same period in 2006.
Accretion of Asset Retirement Obligations
Accretion of asset retirement obligation during the second quarter was $1.1 million compared to $Nil for the same period in 2006. The increase was due primarily to the addition of the Neves-Corvo and Aljustrel mines acquired in the fourth quarter of 2006 and the commencement of provisions beginning in 2007 for future site restoration costs at both the Galmoy and Zinkgruvan mines.
Year-to-date, accretion of asset retirement obligations were $2.3 million compared to $Nil for same period in 2006.
Depreciation, Depletion and Amortization
Depreciation, depletion and amortization increased 172% or $22.7 million to $35.9 million for the second quarter 2007 as compared with $13.2 million for the same period in 2006. This increase was due primarily to the addition of the Neves-Corvo mine, which contributed approximately $22.7 million of depreciation, depletion and amortization from the Neves-Corvo mine. The depreciation, depletion and amortization on the mining assets from the Neves-Corvo mine were based on the new fair values allocated to each of the respective mining assets acquired and are in accordance with CICA Handbook Section 1581 “Business Combinations”.
Year-to-date, depreciation, depletion and amortization were $71.8 million as compared with $27.3 million for same period in 2006. The amount of depreciation, depletion and amortization were consistent with the first quarter 2007.
General Exploration and Project Investigation
General exploration and project investigation costs increased 276% or $5.8 million to $7.9 million in the second quarter 2007 compared to $2.1 million during the same period in 2006. A significant portion of this increase relates to continued drilling and exploration activities at the Company’s Portuguese mining concessions and higher exploration activities in Sweden and Ireland. Please refer to the exploration activities section for further detail.
Year-to-date, exploration and project investigation costs totaled $13.1 million as compared with $3.7 million for the same period in 2006. The Company spent $7.1 million on exploration in Portugal, $4.4 million in Sweden and $1.6 million in Ireland.
Selling, General and Administration
Selling, general and administration costs were $7.2 million in the second quarter 2007 as compared with $2.7 million during the same period in 2006. This increase was due primarily to the costs associated with the Sarbanes Oxley (“SOX”) compliance project, higher travel costs, costs associated with the stock split as well as the additional personnel and administrative costs associated with the EuroZinc merger. The Company expects SOX spending to be maintained at the current level in the third quarter, as the audit of the internal controls at each of the mine sites begin and decrease significantly in the fourth quarter, when the final testing for SOX compliancy is complete.
Year-to-date, selling, general and administration costs were $12.6 million as compared with $5.0 million for the same period in 2006.
Foreign Exchange Losses
Foreign exchange losses increased significantly in the second quarter 2007 to $9.0 million as compared with a loss of $1.7 million for the same period in 2006. Foreign exchange losses were due primarily to the holding of significant US denominated cash and trade accounts receivable balances at the Company’s Neves-Corvo mine where the functional currency is the Euro. The US currency declined against all major currencies during the second quarter.
Year-to-date, foreign exchange losses totaled $11.8 million compared with $2.8 million for the same period in 2006.
Losses on Derivative Instruments
Losses on derivative instruments are comprised of realized and unrealized gains and losses from marking-to-market the Company’s outstanding forward sales, foreign exchange, puts and call options contracts. These contracts were a hedge on a portion of the Company’s metal production to cover the Company’s Euro and SEK denominated operating and capital expenditures for the next twelve months. The net loss on derivative contracts during the second quarter was $27.7 million compared with a net loss of $3.9 million for the same period in 2006 and is comprised of a realized loss of $3.8 million and an unrealized mark-to-market loss of $23.9 million.
During the second quarter of 2007, the Company entered into forward contracts for the delivery of 1,000 tonnes per month of lead at an average price of $0.83 per pound for a period of 12 months ending on June 30, 2008. These new hedges combined with the existing lead contracts resulted in an unrealized loss of $17.7 million for the second quarter, while foreign exchange contracts accounted for $2.4 million of the unrealized losses. These losses are included as part of the $27.7 million loss for the second quarter 2007.
Year-to-date, losses on derivative instruments totaled $33.2 million compared with $9.9 million for the same period in 2006.
Current Income Taxes
Current income tax provision increased $34.5 million to $49.6 million for the second quarter 2007 compared with $15.1 million for the same period in 2006. A significant portion of the income tax provision related to earnings from the Neves-Corvo mine and the $50.4 million gain from the sale of marketable securities. The income tax provision on this gain was offset by the recognition of $8.0 million of future tax benefits from loss carryforwards that were not previously recognized.
Future Income Tax Recovery
Future income recovery for the second quarter of 2007 was $15.5 million compared with $1.1 million for the same period in 2006. This increase was due primarily to the utilization of $8 million of unrecognized tax benefits from loss carryforwards for the $50.4 million gain from the sale of marketable securities.
Year-to-date, the future income tax recovery was $11.9 million compared with $0.3 million for the same period in 2006.
Operations
Neves-Corvo Mine
Ownership
The Company merged with EuroZinc Mining, which was the 100% owner of the Neves-Corvo mine, on October 31, 2006 and the EuroZinc operating results were consolidated into the financial statements of the Company from November 1, 2006.
In order to provide comparable data, the 2006 production figures and financial data are presented for the three and six months ended June 30, 2006. However, results from the Neves-Corvo operation have only been included in the Company’s operating results from November 1, 2006.
Production
A total of 596,906 tonnes were mined in the second quarter, an increase of 105,349 tonnes or 21% increase over the same period in 2006. This increase was due primarily to mining of zinc ore, which contributed 105,843 tonnes to the total tonnes mined. Mining of zinc ore did not commence until the third quarter of 2006. Production of contained copper was 20,875 tonnes in the second quarter 2007, a 6% decrease compared to the same period in 2006. The decrease in copper production in the second quarter was due to the slightly lower ore head grade, in accordance with the mine sequencing plan, and recovery. However, production of copper in the first half of 2007 was 7% greater than in the first half of 2006 due to an overall improvement in grade and ore throughput. Production of contained zinc was 6,048 tonnes in the second quarter.
The Company expects the copper and zinc ore head grades to improve for the remainder of the year in accordance with mine sequencing programs and also process improvements to continue in the zinc plant.
The cash cost of payable copper metal sold during the second quarter 2007 decreased 13% to $0.73 per pound compared to the same period in 2006. This decrease was due primarily to $15.5 million of zinc sales in the current quarter that were treated as by-product credits for this calculation and was partially offset by higher labour costs as more workers were hired for the zinc project in the plant and underground. The 2006 cash costs were higher for the corresponding period in 2007 as zinc production commenced in the third quarter of 2006. Zinc production commenced in the third quarter of 2006. The planned annual mine maintenance is scheduled for the third quarter of 2007.
Zinkgruvan Mine
Production
A total of 218,065 tonnes of ore were mined during the second quarter 2007, which represented a 13.8% increase over the same period in 2006. Ore milled during the quarter totalled 230,768 tonnes were 27,066 tonnes or 13.3% greater than the same period in 2006.
The zinc head grades decreased to 7.8% in the second quarter compared with 11.9% in the second quarter 2006 due primarily to the processing of zinc from the high grade Nygruvan zone in 2006 and was in accordance with the sequencing plan in the mine. Lead grades improved to 5.2% during the second quarter 2007 from 4.5% in the corresponding period 2006. Management expects zinc and lead grades to improve in the third quarter due to changes to the mining sequence plan.
Mining and milling in the third quarter will be affected by a planned ten-day shutdown of the plant for annual maintenance.
The cash cost per pound of payable zinc sold during the sold in the second quarter decreased to $0.27 per pound compared with $0.59 for the same in period in 2006. This decrease was due primarily to $19.0 million of lead sales in the quarter which are treated as by-product credits for the purpose of the cash cost calculation. For the six months ended June 30, 2007, the cash cost per pound of payable zinc sold decreased to $0.25 per pound as compared with $0.48 per pound for the same period in 2006. This decrease is due to significantly higher lead sales in 2007 compared with 2006.
Storliden Mine
Production
Ore mined during the second quarter 2007 was 79,100 tonnes, which represented a 14% decrease from the same period in 2006. Mill throughput during the second quarter 2007 was 76,038 tonnes, an increase of 12,341 tonnes or 19% as compared with the same period in 2006. Production of contained copper was 1,500 tonnes and of contained zinc of 4,973 tonnes.
The cash cost per pound of payable zinc sold was a negative $0.31 per pound for the second quarter 2007 compared to a negative $0.32 per pound for the same period in 2006. Copper and zinc head grades were significantly lower this quarter as compared with the same quarter in 2006.
The closure of the mine is currently scheduled for the fourth quarter 2007 and management is preparing an optimal closure plan. Total costs for the closure of the operations are expected to be less than $400,000, the obligation for which has already been provided for.
Galmoy Mine
Production
Ore mined during the second quarter 2007 was 115,417 tonnes or 15% lower than ore mined during the same period in 2006. The decrease was due primarily to poor capacity from the longhole drilling rigs, changes to stope sequencing as a result of challenges experienced with the backfill program and ongoing negotiations with the two local unions for wage increases. The changes to the stope sequencing however did help to increase the zinc head grade to 12.9% from 10.8%, from the previous year. A second longhole rig was brought into production to increase the metres of longhole drilled underground. Also, during the quarter, mining commenced in the CW South ore body after delays to backfill set backs experienced in the second half of 2006. A team of in-house and external consultants is making a concerted effort to identify a means by which backfill setting rates can be accelerated.
Negotiations with the local unions at the Galmoy mine continue and on the 4th of August SIPTU members voted to reject the Labour Court recommendations for a new agreement. The TEEU members have been in an official dispute with the mine since mid-June.
Ore milled during the second quarter 2007 improved 30% over the first quarter of 2007 to 122,371 tonnes but was still 16% lower than in the same period in 2006. Zinc recovery for the second quarter 2007 was slightly higher compared to the same quarter in 2006 due primarily to a higher head grade. Improvements were made quarter over quarter in the recovery of lead as a result of the installation of a new flotation cell commissioned in the first quarter of 2007.
The cash cost per pound of payable zinc sold was $0.92 per pound for the second quarter 2007 compared to $1.14 per pound for the same period in 2006. This decrease was due to higher by-product credits from lead but was partially offset by higher operating costs as a result of low productivity compared with the same quarter in 2006.
Mine Development and Project Highlights
Ozernoe
Work to secure the various contractors and consulting firms to complete the bankable feasibility study continued. Hatch Engineering was awarded the contract for the feasibility study. At site, the Company added personnel to the Ozernoe management team to manage the project and to ensure compliance with the mining licence agreement.
During the second quarter, the Company continue to delineate the deposit. Phase 1 in-fill drilling program (IDP) was completed. The start-up of the Phase 2 in-fill drilling program will depend to a large degree on the completion of phase 1 assay results. Assay and other analytical work analysis are currently underway. Efforts are being made to export the samples out of Russia to speed up the process. It is anticipated that the phase 2 drill program will start in late September or early October, as planned.
During the quarter a great deal of effort was spent on defining the oxide mineralization potential. At the end of May the final core hole was drilled to provide a better understanding of the non-homogeneous mineralogically complex material. A contract was awarded to CIS from Australia to assist in the modelling and analysis of the oxide data. Further study would be required and the St. Petersburg Institute was also brought in to continue this study.
Plans were developed using Buryat Geomonitoring to locate suitable potable and industrial water sources, which is key to develop the project. The initial phase of drilling to find potable water will consist of cored and reamed holes each tested for water quality and quantity close to camp facilities under construction. A second phase has been scheduled to locate an industrial water supply and will most likely involve a second drill contractor due to the slow nature of the reaming work and the onset of winter.
Site work, in addition to the drilling, is underway to develop permanent camp facilities and other basic infrastructure required to develop the resource. Other project activity during the quarter included the bridge and power line construction projects.
Aljustrel
In the past few months the Company has been confronted with an ever-increasing struggle with the compliance of delivery dates by contractors/suppliers. Significant efforts have been made by management and suppliers to avoid delivery date slippage, however critical equipment such as the ceramic media cyclones, which utilize centrifugal force to accelerate the settling rate of particles in the classification stage, are going to be delayed.
Recent information from the supplier indicates a six week delay in delivery. In the light of this information and in an effort to avoid the risk of being inaccurate in further plans, management believes a more accurate, albeit conservative estimate, will be for the production of concentrates from the Aljustrel ore processing plant to commence in the latter half of the fourth quarter 2007 and not, as previously planned, during September.
The Moinho mine is in a position to supply ore to the mill at present. The underground development crews have thus far generated a zinc ore stockpile of approximately 60,000 tonnes for processing at the Aljustrel mill. As well year to date, an additional 19,000 tonnes of copper ore and 36,000 tonnes of zinc ore was sent to Neves-Corvo of which 3,200 tonnes of copper ore and 5,700 tonnes of zinc ore, respectively were processed.
Exploration Highlights, Second Quarter 2007
Portugal
Neves-Corvo Near-Mine Exploration (copper-zinc)
During the quarter, a total of 9,135 m of exploration drilling was carried out near the Neves-Corvo Mine in 14 drill holes. Efforts were focused on the delineation and definition of the world-class Lombador Zinc Deposit at the mine. Assays received for six drill holes during the quarter include the thickest high-grade zinc intersection yet encountered with drill hole NF22A intersecting 55 metres of mineralization that contains 8.51% zinc and 2.47% lead and hole ND20A-1 intersecting a 35 metre section grading 9.44% zinc and 3.16% lead. These two mineralized intercepts are separated by a down-dip distance of 425 metre. These results build on the success noted last quarter and continue to outline a large, continuous zone of high-grade zinc and lead mineralization within the Lombador sulfide lens. The deposit remains open down-dip of this intersection in drill hole NF22A. Second quarter drill result highlights for the Lombador South Deposit are listed below.
Lombador Drilling Highlights
Subsequent to the second quarter, assay results were received for drill hole NF34 (results included in table above). This hole was very successful in expanding the Lombador South zinc deposit well below NF22A. Drill hole NF34 intersected a 95 metre thick interval of massive sulphide mineralization (true thickness is equal to drilled thickness in this hole) which included a 67.2 meter section of high-grade zinc mineralization from 1151.8 metres to 1219.0 metres. This wide zone returned 8.03% zinc, 2.93% lead and 0.31% copper, and included a 21 metre interval grading 11.13% zinc and 3.99% lead. Silver assays are pending.
This intersection is located 590 metres down-dip of the intersection in hole ND20A-1, and 270 metres from the intersection in NF22A. The intersection in NF34 leaves the zone completely open for expansion down-dip and along strike at depth. It should be noted that this hole tested an area which is not included in any resource category, and clearly illustrates the potential that exists to continue to expand the Neves Corvo resource base.
In addition to the zinc mineralization, hole NF34 intersected a 16 metre wide zone of stockwork copper mineralization with a grade of 3.92% copper from 1243 metres to 1259 metres. This zone included a 4 metre section of 8.72% copper. Additional drilling is required to fully assess the significance of this copper zone, however it demonstrates that there is also potential for substantial additions to the copper resource at Neves Corvo.
Aljustrel Near-Mine Exploration (copper-zinc)
Exploration on the Aljustrel Mine Lease began this quarter with 5,901 metres completed in 11 drill holes. The initial objective of the drill program is to complete step-out and infill drilling within the Feitais Deposit and to conduct infill drilling at Estacao deposit. A new copper-rich zone has been encountered above the main massive sulphide lens at Feitais; assay results are pending. This drilling has additionally expanded the Feitais deposit beyond the current Inferred Resource.
Portugal Greenfields Exploration (copper-zinc)
Exploration drilling outside of the mine leases totaled 1,633 metres in 4 drill holes within the Mertola and Castro Verde concessions. Drilling at the Chanca prospect, located within the Mertola concession near the Spanish border, has been completed with a total of six diamond drill holes. The drilling confirmed the presence of a large zone of copper-bearing stockwork hosted by strongly altered felsic volcanics, but unfortunately the ore horizon appears to be faulted out.
Two contractors, Crone Geophysics and Geognosia, conducted orientation transient electromagnetic (TEM) surveys over the Neves-Corvo orebodies using two different high-temperature SQUID magnetic field sensors. The results prove that these high-technology sensors achieve lower noise and thus deeper depths of investigation than conventional coil systems used in the past. Characterization of the known orebodies will continue in July and will be used to prioritize regional exploration targets for drill-testing. The start of the Bell Geospace airborne gravity gradiometer (AGG) survey over the Neves-Corvo and Aljustrel orebodies has been delayed until August due to high demand for the system in North America.
Spain
Toral Project (zinc-lead-silver)
Exploration drilling commenced in the second quarter at the advanced staged Toral Zn-Pb-Ag project in northwest Spain with two drill holes completed and a third hole in progress. At total of 1,154 metres was drilled during the quarter with complete assays results pending. However, the results are so far consistent with results of the historical drilling with relatively narrow but continuous zones of commonly high-grade zinc-lead-silver sulphides being intersected at the target contact horizon. More detailed results will be released during the third quarter. The objective of this initial drilling is to test for up-dip and down-dip extensions of the historical resource mineralization.
Ireland
Galmoy near-mine exploration (zinc-lead)
A total of 1,918 m of drilling was completed near the mine within 18 drill holes and an additional 5,658 m of exploration drilling were completed in 60 drill holes in the Galmoy area this quarter. The focus of exploration is to locate any near-mine mineralization that can be incorporated into the current mine plan for the Galmoy Mine. The highlight of the quarter is the continued delineation of the newly discovered M-Zone mineralization that is located within 200 metres of the CW orebody in the vicinity of the mill at an approximate depth of 100 m below the surface. Two drill rigs have so far completed sixteen contiguous drill holes that intersected high-grade zinc mineralization including GY-729 which returned assays of 44.38% zinc, 5.64% lead and 4.97 g/t silver over a true thickness of 4.03 metres. This intercept represents some of the highest grade zinc-lead-silver mineralization ever encountered at Galmoy. Additional significant drill results are listed below (as noted in the June 12th press release). The zone remains open to the north, southeast and to the west.
Galmoy M Zone Drilling Highlights
Sweden
Zinkgruvan near-mine exploration (zinc-lead-silver)
A total of 7 holes were drilled totaling 1,595 m for the near-mine exploration program at Zinkgruvan. Drill testing of the deep Dalby zone, which is down-dip of the western-most part of the Zinkgruvan Mine, was begun late in the quarter. The rimming of Dalby hole DDH2549 was completed and the first of four deviation holes has reached a depth of 930 m below surface, which is 170 metres short of the target depth. Further to the north of the mine DDH2782 (on-going at end of the second quarter) encountered the ore-hosting package at a hole depth of 760 metres. Only weak mineralization was noted but the discovery of mineralization more than one kilometer from the mine is encouraging. A detailed structural study of the mine geology is revealing new target areas for drill-testing.
Bergslagen District (zinc-lead-silver)
During the quarter 1,202 m were drilled in 8 holes within several project areas in this district. At the Ervingsberg target (8 km northwest of the Zinkgruvan Mine), one hole encountered a 1.1 m thick zone of rich sphalerite banding at a depth of 52.9 m. The zone is open to the east and south and warrants additional drilling.
Skellefte District (copper-zinc)
Exploration drilling at the Copperstone project was hampered this quarter by overburden problems. A total of 2,856 metres was drilled in 17 holes during the quarter, mostly on testing geophysical targets. No significant mineralization was encountered. A comprehensive review of the Skellefte district programme is nearing completion that will include exit strategies for those projects that no longer fit into the company’s growing strategic objectives. At the advanced Norrliden project, a seven hole, in-fill drilling program was completed (1086 metres) and work has begun to upgrade the resources to reserves. A test mining plan has been presented to the authorities.
Metal prices and smelter treatment and refining charges
During the second quarter 2007 the prices for copper, zinc and lead increased 29%, 6% and 22%, respectively, compared with the first quarter 2007. The inventory levels of copper and zinc on the London Metal Exchange (“LME”) decreased during the second quarter 2007 compared with the first quarter 2007. At the end of the second quarter 2007, the LME stocks of copper were 114,700 tonnes (Q1: 178,075 tonnes) and zinc at 73,000 tonnes (Q1: 106,275 tonnes). In the case of copper the decrease in inventories was a result of continued high imports into China and in the case of zinc the decrease is due to reduced exports from China. During the second quarter the LME inventories for both lead and nickel increased. The lead inventories ended the second quarter 2007 at 45,075 tonnes (Q1: 33,250 tonnes) and nickel at 8,910 tonnes (Q1: 5,418 tonnes). The increase of the lead inventories was a result of very high exports of lead from China during April and May. In June exports from China dropped as a function of the introduction of an export tax on lead metal. During the second quarter 2007 producer de-stocking of stainless steel has led to a reduced the demand for nickel resulting in increased inventories.
The spot treatment charges (“TC”) for zinc concentrates continued to increase during the second quarter 2007 and have reached the level of the terms of the 2007 annual contracts of $300 per dry metric tonne (“dmt”) based on a zinc price of $3,500 per metric tonne (“mt”).
The mid year TC negotiations for copper concentrates settled at a TC level of approximately $50 per dmt and a refining charge (“RC”) of $0.05 per payable pound of copper contained and without any price participation (“PP”) which provided the smelters with an increase of the RC when the copper price increased. During the second quarter of 2007 spot TC’s and RC’s have fallen to $20 per dmt and $0.02 per lb respectively.
The spot T/C for lead concentrates increased significantly during the second quarter 2007. At the end of the quarter the spot T/C in China was approximately $200 per dmt of concentrates flat to be compared with $45 per dmt flat at the end of the first quarter 2007. The introduction by China of a 10% export tax on refined lead, effective June 1, 2007, explains this major increase. The export tax has made custom smelting of imported lead concentrates in China uneconomical at low a T/Cs and the Chinese smelters now require a much higher T/C to produce. During the second half of June there were several announcements by the Chinese lead smelters of cutbacks in production as a result of the export tax and the low T/Cs.
Outlook
Demand for copper and zinc in China continues to be strong. The introduction in China of an export tax on lead metal should reduce the availability of lead metal to the world market. These market conditions could translate into reduced LME inventories for these metals. The Company is optimistic that the prices for copper, zinc and lead will remain at current levels for the balance of 2007.
De-stocking by the producers of stainless steel could lead to a reduction in demand for nickel and a further correction to the nickel price may occur.
It should be noted that the price of silver for silver produced in concentrate from Zinkgruvan going forward has been fixed by the 2004 silver transaction with Silver Wheaton whereby Zinkgruvan receives $3.90 per ounce or the market price if the market price of silver is less than $3.90 per ounce. The up-front cash payment received from Silver Wheaton in December 2004 has been deferred on the balance sheet and is realized on the statement of operations when the actual deliveries of silver occur.
During the second quarter 2007, which is subject to regulatory approvals and other conditions before the transaction can be completed, the Company entered into an agreement with Silverstone Resources to which the Company will sell all its all future silver production from the Neves-Corvo and Aljustrel mines at a fixed price of the lesser of the prevailing silver price at time of delivery or $3.90 per ounce of silver deliver, subject to inflation adjustment. The Company expects this transaction to be completed in the third quarter 2007. When the transaction closes, the upfront cash payments, common shares and special warrants received, collectively, valued at $87.1 million will be deferred and amortized over the life of the silver deliveries.
Currencies
Liquidity and Capital Resources
Cash Resources
The Company has cash and cash equivalent of $388.2 million as at June 30, 2007 compared with $402.2 million as at December 31, 2006 and $317.4 million at the end of the first quarter 2007. Cash and cash equivalent increased $70.8 million from the first quarter 2007. This increase was due primarily to strong earnings, $118.5 million proceeds from the sale of investments and offset by an investment of $149.5 million in marketable securities.
As at June 30, 2007, the Company had working capital of $382.1 million compared to working capital of $302.9 million as at March 31, 2007 and $292.6 million as at December 31, 2006. The increase in working capital from the first quarter is due primarily to a $70.8 million increase in cash and cash equivalents and a $26.3 million increase in trade accounts receivables, and offset by higher current liabilities.
Shareholders’ equity at June 30, 2007 was $2,427.8 million, an increase of $207.3 million from the first quarter 2007. This increase was due primarily from $159.9 million in earnings for the quarter, $15.6 million increase in the fair value of available for sale securities and $36.3 million increase in cumulative translation adjustment as a result of a significant weaker US dollar against the Canadian dollar, Euro and Swedish Kronor where the Company’s assets are held.
Management believes the Company’s financial position as at June 30, 2007, together with the cash flow from operations, are more than sufficient to support the Company’s operating and capital requirements on an ongoing basis.
During the second quarter 2007 the Company arranged an $800 million five-year revolving credit facility for general corporate purposes but will be reduced to $575 million, once the proceeds from the sale of the Tasiast gold mine to Red back has been applied to the facility. On July 17, 2007, the Company drew down $650 million from the credit facility and $129.9 million from its own cash for payment of approximately 85.2% of the fully diluted issued and outstanding shares of Rio Narcea tendered to the Company in accordance with the Rio Narcea takeover bid. The Company extended the offer to purchase the remaining Rio Narcea shares that it does not already own to August 20, 2007. The Company expects that there will be sufficient shares tendered to the Company to bring its ownership of Rio Narcea to 90%, which will allow the Company to issue a notice to the remaining Rio Narcea shareholders and effectively give the Company a 100% ownership in Rio Narcea. The Company has sufficient cash resources to complete the purchase of the remaining issued and outstanding shares and warrants of Rio Narcea.
The Company enters into derivative contracts for the purpose of managing risks and are not for trading purposes. During the second quarter the Company entered into lead forward contracts for the delivery of 1,000 tonnes of lead per month at a price of $0.83 per pound for the period July 2007 to June 2008. Due to the substantial rise in the lead price, when these contracts were marked-to-market as at June 30, 2007, this resulted in an unrealized loss of $9.1 million. As at June 30, 2007, the liability on marking-to-market the outstanding derivative contracts were $31.9 million of which $5.6 million is classified as a current liability. Please refer to the notes to the unaudited second quarter 2007 consolidated financial statements for full detail of outstanding hedge positions.
Critical Accounting Estimates
The Company’s accounting policies are described in Note 2 of the annual consolidated financial statements for the year ended December 31, 2006. For a complete discussion of those policies deemed most critical by the Company, refer to the Company’s 2006 annual MD&A, available on the SEDAR website, www.sedar.com.
Changes in accounting policies
Effective for the first quarter beginning on January 1, 2007, the Company has adopted Sections 1530 and 3855 of the CICA Handbook, “Comprehensive Income” and “Financial Instruments - Recognition and Measurement”. Section 1530, Comprehensive Income is the net change in a company’s net assets that results from transactions, events and circumstances from sources other than the Company’s shareholders and includes items that would not normally be included in net earnings such as cumulative translation adjustments resulting from the translation of foreign denominated financial statements to US dollars using the current rate method and unrealized gains or losses on available-for-sale securities. Section 3855, Financial Instruments - Recognition and Measurement requires that all financial assets, except those classified as held to maturity, and derivative financial instruments, must be measured at fair value. All financial liabilities must be measured at fair value when they are classified as held for trading; otherwise, they are measured at cost.
The adoption of Sections 1530 and 3855 resulted in changes to the Company’s current period’s earnings as well as required an adjustment to the opening balances for retained earnings and total assets.
The cumulative translation adjustment and unrealized gain on available-for-sale securities as at December 31, 2006 were $52.4 million and $3.2 million respectively. The aggregate of these amounts has been reported as a transition adjustment during the first quarter to the opening balance of Accumulated Other Comprehensive Income in the Interim Consolidated Statements of Changes in Shareholders’ Equity.
The cumulative translation adjustment and changes in the fair value of available-for-sale securities for the three months ended June 30, 2007 was $36.3 million and $15.6 million net of tax, respectively, and are reported in the current period as other comprehensive income. Additionally, during the second quarter 2007 the Company disposed of certain available-for-sale securities resulting in a decrease to accumulated other comprehensive income of $9.9 million net of tax.
Risks and Uncertainties
The operations of Lundin Mining involve certain significant risks, including but not limited to credit risk, foreign exchange risk, and derivative risk. For a complete discussion of the aforementioned risks, refer to the Company’s 2006 annual MD&A, available on the SEDAR website, www.sedar.com
Reclamation Fund
As at June 30, 2007, the Company had $45.7 million in a number of reclamation funds that will be used to fund future site restoration and mine closure costs at the Company’s various mine sites. The Company will continue to contribute annually to these funds based on an estimate of the future site restoration and mine closure costs as detailed in the closure plans. Changes in environmental laws and regulations can create uncertainty with regards to future reclamation costs and affect the funding requirements.
Outstanding share data
As at July 31, 2007, the Company had 392,030,087 common shares issued and outstanding and 1,984,774 stock options and 306,720 stock appreciation rights outstanding under its stock-based incentive plans.
Non-GAAP Performance Measures
Zinc and copper cash production cost (US$/pound) are key performance measures that management uses to monitor performance. Management uses these statistics to assess how well the Company’s producing mines are performing compared to plan and to assess overall efficiency and effectiveness of the mining operations. These performance measures have no meaning within Canadian Generally Accepted Accounting Principles (“GAAP”) and, therefore, amounts presented may not be comparable to similar data presented by other mining companies. The data is intended to provide additional information and should not be considered in isolation or as a substitute for measures of performance prepared in accordance with Canadian GAAP.
Management’s Report on Internal Control over Financial Reporting
The Company’s management is responsible for establishing and maintaining adequate internal controls over financial reporting. Any system of internal control over financial reporting, no matter how well designed, has inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.
There have been no changes in the Company’s internal control over financial reporting during the three and six months ended June 30, 2007 that have materially affected, or are reasonably likely to materially affect, internal control over financial reporting.
CAUTIONARY STATEMENT ON FORWARD-LOOKING INFORMATION
Certain of the statements made and information contained herein is “forward-looking information” within the meaning of the Ontario Securities Act or “forward-looking statements” within the meaning of Section 21E of the Securities Exchange Act of 1934 of the United States. Forward-looking statements are subject to a variety of risks and uncertainties which could cause actual events or results to differ from those reflected in the forward-looking statements, including, without limitation, risks and uncertainties relating to foreign currency fluctuations; risks inherent in mining including environmental hazards, industrial accidents, unusual or unexpected geological formations, ground control problems and flooding; risks associated with the estimation of mineral resources and reserves and the geology, grade and continuity of mineral deposits; the possibility that future exploration, development or mining results will not be consistent with the Company’s expectations; the potential for and effects of labour disputes or other unanticipated difficulties with or shortages of labour or interruptions in production; actual ore mined varying from estimates of grade, tonnage, dilution and metallurgical and other characteristics; the inherent uncertainty of production and cost estimates and the potential for unexpected costs and expenses, commodity price fluctuations; uncertain political and economic environments; changes in laws or policies, foreign taxation, delays or the inability to obtain necessary governmental permits; and other risks and uncertainties, including those described under Risk Factors Relating to the Company’s Business in the Company’s Annual Information Form and in each management discussion and analysis. Forward-looking information is in addition based on various assumptions including, without limitation, the expectations and beliefs of management, the assumed long term price of copper and zinc; that the Company can access financing, appropriate equipment and sufficient labour and that the political environment within Portugal will continue to support the development and operation of mining projects. Should one or more of these risks and uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those described in forward-looking statements. Accordingly, readers are advised not to place undue reliance on forward-looking statements.
Other Information
Additional information regarding the Company is included in the Company’s Annual Information Form (“AIF”) and Annual Report on Form 40-F, which are filed with the Canadian securities regulators and the United States Securities and Exchange Commission (“SEC”), respectively. A copy of the Company’s AIF is posted on the SEDAR website at www.sedar.com. A copy of the Form 40-F can be obtained from the SEC website at www.sec.gov.
1. BASIS OF PRESENTATION
The unaudited interim consolidated financial statements of Lundin Mining Corporation (the “Company” or “Lundin Mining”) are prepared in accordance with Canadian generally accepted accounting principles using the same accounting policies and methods of application as those disclosed in Note 2 to the Company’s consolidated financial statements for the year ended December 31, 2006, except as discussed in Note 2 below.
These interim consolidated financial statements do not contain all of the information required by Canadian generally accepted accounting principles for annual financial statements and therefore should be read in conjunction with the Company’s 2006 audited consolidated financial statements.
These unaudited interim consolidated financial statements reflect all normal and recurring adjustments which are, in the opinion of management, necessary for a fair presentation of the respective interim periods presented.
Certain of the 2006 figures have been reclassified to conform to the 2007 presentation.
2. ACCOUNTING POLICIES
Effective January 1, 2007 the Company has adopted the following CICA accounting standards:
a) Section 1530 - Comprehensive Income
Comprehensive income is the change in the Company’s net assets that results from transactions, events and circumstances from sources other than the Company’s shareholders and includes items that would not normally be included in the net earnings such as cumulative translation adjustments resulting from the translation of foreign denominated financial statements to US dollars using the current rate method and unrealized gains or losses on available-for-sale securities.
b) Section 3855 - Financial Instruments - Recognition and Measurement
This standard requires that all financial assets, except those classified as held to maturity but including derivative financial instruments, must be measured at fair value. All financial liabilities must be measured at fair value when they are classified as held for trading; otherwise, they are measured at cost.
c) Transitional Provisions
The adoption of Sections 1530 and 3855 resulted in changes to the Company’s current period’s earnings as well as required an adjustment to the opening balances for retained earnings and total assets.
The cumulative translation adjustment and unrealized gain on available-for-sale securities as at December 31, 2006 were $52.4 million and $3.2 million respectively. The aggregate of these amounts has been reported as a transition adjustment during the current period to the opening balance of Accumulated Other Comprehensive Income in the Interim Consolidated Statements of Changes in Shareholders’ Equity.
The cumulative translation adjustment and unrealized gain on available-for-sale securities for the six months ended June 30, 2007 were $55.9 million and $14.0 million, net of tax, respectively, and are reported in the current period as other comprehensive income.
3. BUSINESS ACQUISITIONS
EuroZinc Mining Corporation
On October 31, 2006 the Company completed the acquisition of 100% of the issued and outstanding common shares of EuroZinc Mining Corporation (“EuroZinc”) by issuing 160.8 million common shares (post-split) valued at CAD$11.36 (average closing price of the Company’s shares on the Toronto Stock Exchange the two days before, the day of, and two days after August 21, 2006, the date of announcement) per share and cash payments totaling $0.05 million to the former EuroZinc shareholders. In addition, the Company issued 2.3 million stock options and 1.5 million stock appreciation rights (“SARs”) to the former EuroZinc employees in exchange for the cancellation of the EuroZinc stock options. The terms and conditions of these stock options and stock appreciation rights remain the same as the EuroZinc stock options, except for the number of options issued and their respective exercise prices, which were adjusted according to the exchange ratio. This acquisition has been accounted for under the purchase method.
The allocation of the purchase price of the shares of EuroZinc is summarized in the following table.
The purchase consideration has been allocated to the fair value of the assets acquired and liabilities assumed, with goodwill assigned to specific reporting units, based on management’s best estimates and taking into account all available information at the time of acquisition as well as additional information. The fair values allocated to the assets and liabilities were based in part on an independent valuation report dated March 28, 2007. This process was performed in accordance with recent accounting pronouncements relating to “Mining Assets and Business Combinations” (CICA Emerging Issues Committee Abstract 152). The amount allocated to goodwill is not deductible for tax purposes.
4. INVESTMENTS
The Company invests in common shares of mining and exploration companies, which are designated at the time of purchase to be available-for-sale securities. These shares are fair valued at the end of each reporting period with a corresponding adjustment to Other Comprehensive Income, a component of shareholders’ equity.
For the six months ended June 30, 2007, the Company recorded a $24.0 million (three months ended June 30, 2007 - $15.6 million) increase in market value of its investment in available-for-sale securities.
For the six months ended June 30, 2007, the Company acquired shares in various mining and exploration companies, which one investment was sold during the second quarter for a gain of $50.4 million on proceeds of $109.1 million. The Company also invested $140.8 million in shares of a mining company, which had a market value of $153.6 million as at June 30, 2007. These shares were subsequently sold for a gain of $26.8 million, which will be recognized in the third quarter 2007 (Note 13c).
The Company does not have any significant influence and holds less than 20% equity interest on any of the companies that the Company invests in.
5. INVENTORIES
Inventories consist of:
6. MINERAL PROPERTIES, PLANT AND EQUIPMENT
Mineral properties, plant and equipment consist of:
During the six months ended June 30, 2007, the Company spent $83.7 million on capital equipment, mine development and related infrastructure, of which $45 million was spent at Aljustrel, $20 million at Neves-Corvo and the balance at Zinkgruvan, Storliden and Ozernoe.
7. LONG-TERM DEBT AND CAPITAL LEASES
Long-term debt and capital leases consist of:
Management believes that the fair value of long-term debt approximates its carrying value.
8. COMMITMENT
During the second quarter ended June 30, 2007, the Company entered into an agreement with Silverstone Resources Corporation (“Silverstone”) to deliver silver production from its Neves-Corvo and Aljustrel mines, subject to regulatory approval and certain other conditions. Upon closing of this agreement, which is expected to be on or before September 15, 2007, the Company will receive an upfront cash payment of $42.5 million, 15.4 million Silverstone common shares and 4,256,250 Silverstone special warrants which are convertible into Silverstone common shares at no additional cost. The common share and special warrant are valued at CAD$2.42 each. The approximate total value of the agreement is $87.1 million (“Transaction Value”).
The special warrants may be exercisable into one Silverstone common share at any time provided that the common shares issued to the Company would not result in the Company owning 20% or more of the issued and outstanding common shares immediately after giving effect to such issuances or that shareholders of Silverstone pass a resolution at a meeting of the Silverstone shareholders approving any exercise that would result in Lundin Mining owning 20% or more of the issued and outstanding shares of Silverstone.
Upon delivery of silver production to Silverstone, the Company will receive the lower of $3.90 per ounce of silver, which is subject to a 1% annual inflationary adjustment after three years and yearly, thereafter, or then prevailing market price per ounce of silver.
Upon closing of the transaction, the Company will record the Transaction Value as deferred revenue, which will be amortized over the life of the silver deliveries.
9. ASSET RETIREMENT OBLIGATIONS AND OTHER PROVISIONS
The asset retirement obligations and other provisions relate to the operations of Neves-Corvo, Zinkgruvan, Storliden, Aljustrel and Galmoy mines. The following is a reconciliation of changes in the provision during the period:
10. SHARE CAPITAL
All shares, stock options and stock appreciation rights shown in the tables below are calculated as though the three-for-one stock split, which was effective February 5, 2007, had occurred at December 31, 2006.
(a) The authorized and issued share capital is as follows:
Authorized - unlimited number of common shares with no par value and one special share with no par value.
Issued and outstanding:
(b) Stock options
The Company uses the fair value method of accounting for all stock-based payments to employees, directors and officers. Under this method, the Company recorded a stock-based compensation expense of $1.6 million during the six months ended June 30, 2007 (2006 - $0.8 million). The fair value of the stock options granted during the quarter, as measured at the date of the grant using the Black-Scholes option pricing model, assumes a risk-free interest rate of between 4.21% and 4.74%, no dividend yield, expected life 1.5 years and expected price volatility of between 51% and 53%.
Incentive stock options issued, exercised and outstanding for the six months ended June 30, 2007 is as follows:
During the six months ended June 30, 2007, the Company granted 538,560 incentive stock options to employees and officers at a weighted average price of CAD$13.45 per share that expire between January 17, 2009 and June 17, 2009. The following table summarizes options outstanding as at June 30, 2007, as follows:
(c) Stock Appreciation Rights
In connection with the October 31, 2006 acquisition of EuroZinc (Note 3), the Company issued stock appreciation rights to certain former EuroZinc employees in exchange for the cancellation of their stock options. The terms of the newly issued stock appreciation rights were the same as those of the cancelled options, with the exception of the number of shares and the exercise prices, which were adjusted for the share exchange ratio of the EuroZinc acquisition. Holders of stock appreciation rights have the right to elect to receive either shares in the Company or a cash payout equal to the excess of the fair market value of the shares over the exercise price on the date of exercise. All stock appreciation rights are fully vested and exercisable.
Stock appreciation rights issued, exercised and outstanding is as follows:
The stock appreciation rights are recorded as a current liability and are adjusted based on the Company’s closing stock price at the end of each reporting period. The liability as at June 30, 2007 was $2.5 million (December 31, 2006 - $9.2 million).
The following table summarizes the June 30, 2007 outstanding stock appreciation rights:
10. SEGMENTED INFORMATION
The Company is currently engaged in mining, exploration and development of mineral properties, primarily in Portugal, Sweden and Ireland.
Operating segmented information is as follows:
Geographic segmented information is as follows:
11. FINANCIAL INSTRUMENTS
The Company has entered into various derivative contracts, including forward sales, calls and put options and foreign exchange for the purpose of managing financial risks and are not for trading purposes.
The following table and notes summarize the outstanding derivatives contracts of the Company as at June 30, 2007:
In addition to the derivative contracts noted in the table above, the Company is also a party to the following structured derivatives as at June 30, 2007:
- multiple structured foreign exchange contracts with various counterparties having the following terms:
i. to sell between US$5.0 million and US$7.5 million and buy Euro dollars at prices between US$1.2025 and US$1.3000 per EUR1.00, on a monthly basis from July to August 2007;
ii. to sell US$1.0 million and buy Euro dollars at prices between US$1.1800 and US$1.3000 per EUR1.00, on a monthly basis from July to August 2007;
iii. to sell US$4.0 million and buy Euro dollars at US$1.2850 per EUR1.00, on a monthly basis from April to June 2007, and to sell US$2.0 million and buy Euro dollars at US$1.2850 per EUR1.00, on a monthly basis from July to December 2007, with a floor of US$1.2000 per EUR1.00;
iv. to sell between US$2.0 million and US$4.0 million and buy Euro dollars at prices between US$1.2640 and US$1.2980 per EUR1.00, on a monthly basis from July to September 2007; and
v. to sell between US$3.5 million and US$7.0 million and buy Euro dollars at prices between US$1.2410 and US$1.2900 per EUR1.00, on a monthly basis from July to December 2007.
- two structured lead put contracts with a counterparty having the following terms:
vi. on a monthly basis between July and December 2007, the Company has a contingent right (triggered if LME spot is below $0.46/lb) to sell 600 tonnes at $0.46/lb or a contingent obligation (triggered if LME spot is at or above $0.59/lb) to sell 600 tonnes at $0.54/lb; and
vii. on a monthly basis between July and December 2007, the Company has a contingent right (triggered if LME spot is below $0.52/lb) to sell 600 tonnes at $0.52/lb or a contingent obligation (triggered if LME spot is at or above $0.64/lb) to sell 600 tonnes at $0.59/lb.
During the second quarter ended June 30, 2007, the Company entered into copper and lead forward contracts to sell 1,000 tonnes per month of copper at a price of $3.44 per pound for the periods of June to December 2007 and 1,000 tonnes per month of lead at a price of $0.83 per pound for the periods July 2007 to June 2008, respectively. These contracts are included in the above summary table of outstanding derivatives contracts.
The net derivative liability of all the outstanding derivatives as at June 30, 2007 was $31.9 million (December 31, 2006 - $2.9 million). For the six-month period ended June 30, 2007, the Company recorded a net loss of $33.2 million on derivative instruments consisting of a $3.0 million realized loss from the settlement of derivative contracts and a $30.2 million unrealized loss related to the marking-to-market the outstanding derivative contracts.
12. SUBSEQUENT EVENTS
Subsequent to June 30, 2007:
(a) Extends bid for Rio Narcea Gold Mines, Ltd. (“Rio Narcea”)
Following the April 4, 2007 announcement that the Company had entered into a definitive support agreement with Rio Narcea to acquire all of the outstanding common shares and share purchase warrants by way of a take-over bid for CAD$5.00 cash per share and CAD$1.04 cash per warrant, the Company increased its cash offer (the “New Offer”) for the common shares to CAD$5.50 per common share. This New Offer expired on July 16, 2007 but was extended until August 20, 2007.
As at August 9, 2007, a total of 146,356,544 common shares and 16,982,220 share purchase warrants were tendered to the Company, representing 86.2% of the total common shares outstanding and 76.9% share purchase warrants outstanding. Once 90% of the common shares are tendered to the Company before the expiry date, a notice will be issued to the remaining Rio Narcea shareholders to tender their shares to the Company within 20 days following the delivery of the notice. This notice will, in effect, give the Company 100% ownership in Rio Narcea.
In conjunction with the purchase of Rio Narcea, the Company entered into an option agreement to sell Rio Narcea’s Tasiast gold mine to Red Back Mining Inc., a company with two common directors, for $225 million in cash and assumption of $42.5 million of debt related to the Tasiast gold mine. In early August 2007, Red Back exercised the option to purchase the Tasiast gold mine and the proceeds were used to reduce the balance of the credit facility to acquire Rio Narcea.
(b) Tenke Mining Corp. (“Tenke”)
On July 3, 2007, the Company completed the acquisition of Tenke whereby the Company issued 105,421,402 common shares to the Tenke shareholders with a fair valued of $1.3 billion. The Company has approximately 391.8 million common shares issued and outstanding immediately following the Tenke acquisition with the existing Lundin Mining and Tenke shareholders owing approximately 73% and 27% respectively of the combined company, Lundin Mining. Tenke holds a 24.75% interest in Tenke Fungurume, a world class copper-cobalt property being developed in the Democratic Republic Congo (“DRC”). The remaining interest in Tenke Fungurume is held by Freeport McMoRan Copper & Gold Inc., which holds 57.75% and is the operator of the project and Gecamines, a DRC government agency and the holder of the remaining 17.5% of the project.
(c) Gain on sale investments
Received proceeds of $171.3 million from the sale of shares in a mining company and will recognize a gain of $26.8 million in the third quarter.
SUPPLEMENTARY INFORMATION
Significant differences between Canadian Generally Accepted Accounting Principles (“Canadian GAAP”) and International Financial Reporting Standards (“IFRS”)/ International Accounting Standards (“IAS”).
The shares of Lundin Mining trade on the Toronto Stock Exchange and AMEX, and Lundin Mining’s Swedish Depository Receipts trade on the OMX Nordic Exchange (“OMX”) in Stockholm. Most companies that trade on the SSE are required to report according to IFRS/IAS. However, as a Canadian company, Lundin Mining is required to report according to Canadian GAAP. The Company has reviewed the differences between Canadian GAAP and IFRS/IAS and has identified the following items which would or may have a significant impact on the financial statements of Lundin Mining.
According to IFRS 3, future costs such as restructuring items, which are expected to occur subsequent to an acquisition, should not be provided for in the purchase price allocation. Instead, these costs should be realized in the income statement when the costs actually occur. However, according to Canadian GAAP, restructuring costs that are expected to occur as a result of an acquisition should be provided for in the purchase price allocation. Restructuring costs that arose during 2006, as a result of the merger with EuroZinc, in the amount of $7.0 million, have been provided for in the purchase price allocation.
According to Canadian GAAP, impairment test of assets should be carried out by comparing the future cash flows of the assets to their carrying values. Future cash flows are dependent on a number of assumptions, including, among other things, future metal prices, exchange rates and discount rates. According to Canadian GAAP, future cash flows should be based on undiscounted values. Lundin Mining believes that the future cash flows from the Company’s assets exceed their carrying values and, accordingly, no write downs are necessary. According to IAS 36, the future cash flows would be based on discounted values. Under IFRS, no impairment charge would be required.
According to Canadian GAAP, when an asset is acquired other than in a business combination and the tax basis is less than its cost, then the cost of future income taxes recognized at the time of acquisition is added to the cost of the asset. However, according to IAS 12, temporary tax differences arising on the initial recognition of an asset on a purchase of an asset in other than a business combination are not permitted. In connection with the acquisition of the Ozernoe project, the Company recognized a future income tax liability of $34.9 million under Canadian GAAP.
OTHER SUPPLEMENTARY INFORMATION
Three Three Six Six
months months months months
ended ended ended ended
Millions of US$, except per June 30, June 30, June 30, June 30,
share data 2007 2006 2007 2006
--------------------------------------------------------------------------
Sales 319.9 112.9 513.9 204.7
EBITDA(i) 210.2 68.9 322.5 119.1
Net earnings(ii) 159.9 37.2 213.6 58.6
Basic earnings per share(iii) 0.56 0.30 0.75 0.48
Diluted earnings per share(iii) 0.56 0.30 0.74 0.48
Cash provided by operations 150.1 54.4 160.7 77.1
(i) Non GAAP measure
(ii) Net earnings include a $50.4 million gain from the divesture of
marketable securities in the second quarter 2007
(iii) All figures related to shares and per share data are calculated as
if the three-for-one stock split, effective February 5, 2007,
occurred at the beginning of the first period presented.
Company Comments
Karl-Axel Waplan, President and CEO of the Company commented: “A solid performance in most of our operations and rising metals prices during the spring led to record net earnings. Meanwhile, the growth strategy continues. We recently closed the acquisition of Tenke Mining Corp., which adds a highly promising, world class copper/cobalt project, Tenke Fungurume, in the Democratic Republic of Congo to our asset portfolio. We have also broadened our commodity mix into nickel with the acquisition of Rio Narcea Gold Mines, Ltd. Rio Narcea’s main asset is the Spanish nickel-copper mine Aguablanca, which will contribute to our cash flow beginning in the third quarter of this year. Growth will also continue, through the development of internal projects, the optimization of our operating mines and as well through the possible acquisition of performing assets. We are confident that we have the ability to continue to generate strong cash flow going forward, both from our existing operations and our mine development projects as they go into production. We continue to believe the global metals markets will remain strong for years to come.”
Highlights
- On June 29, 2007 the Company increased its offer for the shares and warrants of Rio Narcea Gold Mines, Ltd. (“Rio Narcea”) and on August 10, 2007 the company announced a final extension of the amended offer to August 20, 2007. Effective as at August 14, 2007, 91.7% of the outstanding shares (fully diluted) have been tendered to the amended offer. Following the August 20 expiry of the offer, the Company will undertake a compulsory acquisition transaction under the Canada Business Corporations Act to take up the balance of the shares. The acquisition of Rio Narcea adds the Aguablanca copper-nickel mine to Lundin Mining’s assets which will be consolidated during the third quarter. The planned sale of Rio Narcea’s Tasiast gold mine for $225 million was completed in early August.
- The acquisition of Tenke Mining Corp. was completed in early July following the approval by the shareholders’ of both companies. Tenke’s main asset is a 24.75% holding in the Tenke Fungurume project in the Democratic Republic of Congo, which is one of the largest and highest grade, undeveloped copper-cobalt deposits in the world. Work is in progress to develop the deposit into a low-cost open-pit mine and start-up is planned for in the fourth quarter of 2008 or early 2009. Freeport McMoRan Copper & Gold Inc. holds 57.75% interest in Tenke-Fungurume and is the operator of the project.
- Prices for copper, zinc and lead during the second quarter were 29%, 6% and 22% higher than in the first quarter of 2007. The Company believes that the prices for these metals will remain at current levels for the balance of 2007.
- Processed ore for the Group was 17% greater in the second quarter of 2007 as compared with the same period in 2006. While head grades for most operations were lower than in the second quarter of 2006, increased ore throughput partially compensated for the potential shortfall in copper and zinc production while lead and silver metal production were up 18% and 6%, respectively, for the same comparable period in 2006.
- Exploration drilling at the Neves-Corvo mine encountered very encouraging results, adding to the outline and size of a large, continuous zone of high-grade zinc and lead mineralization within the giant Lombador sulfide deposit. Assays were received for ten drill holes, including drill hole NF22A that intersected 55 metres of mineralization of 8.51% zinc and 2.47% lead. Hole ND20A-1 intersected 35 metres of 9.44% zinc and 3.16% lead. Subsequent to the second quarter, drill hole NF34 intersected a true thickness of 95 metres of massive sulphide mineralization, including a 67.2 metre interval of 8.03% zinc, 2.93% lead and 0.31% copper, and also included a 21 metre interval of 11.13% zinc and 3.99% lead (silver assays are pending). This intersection is a step-out of 270 metres from the intersection in drill hole NF22A. The intersection in drill hole NF34 leaves the zone completely open for expansion down-dip and along strike at depth. This hole is in an area that is not included in any resource category and clearly illustrates the potential to expand the Neves-Corvo resource base. In addition to the zinc mineralization, drill hole NF34 intersected a 16 metre wide separate zone of stockwork copper mineralization of 3.92% copper and included a 4 metre section of 8.72% copper.
- Negotiations with the local unions at the Galmoy mine continue and on the 4th of August SIPTU members voted to reject the Labour Court recommendations for a new agreement. The TEEU members have been in an official dispute with the mine since mid-June.
- Production start-up at the Aljustrel zinc-lead-silver mine will be delayed due to the late delivery of some equipment for the ore processing facilities. Production of concentrates is scheduled to commence in the latter half of the fourth quarter 2007 and not, as previously planned, during September.
- An Agreement was entered into with Silverstone Resources Corp. for the Company to deliver its silver production from the Neves-Corvo and Aljustrel mines to Silverstone, subject to regulatory approval and certain other conditions. The approximate value of the agreement is $87.1 million.
Selected Financial Information
Three Three Six Six
months months months months
ended ended ended ended
June 30, June 30, June 30, June 30,
2007 2006 2007 2006
--------------------------------------------------------------------------
Sales $ 319,935 $ 112,918 $ 513,855 $ 204,716
Cost of sales (91,980) (38,504) (160,208) (74,342)
Accretion of asset
retirement obligation (1,148) - (2,268) -
Exploration and
project investigation (7,912) (2,083) (13,143) (3,652)
Administration and
other expenses (8,736) (3,480) (15,689) (7,608)
----------------------------------------------
EBITDA(i) 210,159 68,851 322,547 119,114
Depreciation of
fixed assets (13,221) (4,473) (27,032) (9,401)
Amortization of
mining rights (22,654) (8,753) (44,721) (17,862)
----------------------------------------------
EBIT(i) 174,284 55,625 250,794 91,851
Losses on derivative
instruments(ii) (27,658) (3,924) (33,182) (9,901)
Gain on sale of
investments 50,438 - 50,438 -
Net interest and other
financial items (3,134) (551) (2,735) (1,325)
----------------------------------------------
EBT(i) 193,930 51,150 265,315 80,625
Tax and non-controlling
interest (34,022) (13,989) (51,699) (22,003)
----------------------------------------------
Net earnings for
the period $ 159,908 $ 37,161 $ 213,616 $ 58,622
----------------------------------------------
----------------------------------------------
Operating Cash Flow $ 150,122 $ 54,415 $ 160,693 $ 77,119
Capital Expenditures $ 44,208 $ 8,283 $ 77,196 $ 13,159
(i) Non GAAP measures
(ii) Includes realized and unrealized result on derivatives
Key Financial Data(i)
Three Three Six Six
months months months months
ended ended ended ended
June 30, June 30, June 30, June 30,
2007 2006 2007 2006
--------------------------------------------------
Shareholders equity/
share, US$(ii) $ 8.48 $ 2.59 $ 8.48 $ 2.59
Basic earnings/
share, US$ $ 0.56 $ 0.30 $ 0.75 $ 0.48
Diluted
earnings/share, US$ $ 0.56 $ 0.30 $ 0.74 $ 0.48
Dividends Nil Nil Nil Nil
Equity ratio 77.9% 62.5% 77.9% 62.5%
Basic weighted
average no. of
shares
outstanding 286,292,724 122,222,136 286,165,926 122,151,816
Diluted weighted
average no. of
shares outstanding 287,158,131 123,482,016 286,875,485 123,283,002
Number of shares
outstanding
at period end 286,356,233 122,283,993 286,356,233 122,283,993
All figures related to shares and per share data are calculated as if the
three-for-one stock split, effective February 5, 2007, occurred at the
beginning of the first period presented.
(i) Shareholders' equity per share is defined as shareholders' equity
divided by total number of shares outstanding at end of period.
(ii) Shareholders' equity per share is defined as shareholders' equity
divided by total number of shares outstanding at the end of the
period.
MANAGEMENT’S DISCUSSIONS AND ANALYSIS
(Amounts are expressed in United States dollars, unless otherwise indicated)
THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 2007 and 2006
This Management’s Discussion and Analysis (“MD&A”) of Lundin Mining Corporation (“Lundin Mining” or the “Company”) has been prepared for the three months and six months ended June 30, 2007 and is dated August 10, 2007. It is intended to supplement and complement the accompanying unaudited interim consolidated financial statements and notes for the second quarter ended June 30, 2007.
Please also refer to the cautionary statement of forward-looking information at the end of the MD&A. Additional information relating to the Company is available on the SEDAR website at www.sedar.com. All the financial information in this MD&A has been prepared in accordance with Canadian generally accepted accounting principles (“Canadian GAAP”) and all dollar amounts in the tables are expressed in thousands of US dollars, unless otherwise noted.
Overview
Lundin Mining is a Canadian-based international mining company that owns and operates the Zinkgruvan zinc/lead/silver mine in Sweden, the Galmoy zinc/lead mine in Ireland, and the Neves-Corvo copper/zinc mine in Portugal. Additionally, the Company owns the Storliden copper/zinc mine in Sweden, which is operated by Boliden AB, as well as the Aljustrel zinc/lead/silver mine in Portugal, which is under development and scheduled to begin production in the fourth quarter. The Company also has a 49% interest in the Ozernoe project in Russia, one of the largest undeveloped zinc/lead projects in the world and a 24.75% interest in Tenke Fungurume, a major copper-cobalt project in the Democratic Republic of Congo (“DRC”). As well, the Company recently acquired the Aguablanca mine, a producing copper-nickel mine in Spain, which was part of the acquisition of Rio Narcea Gold Mines, Ltd.
Recent Developments and Highlights
Record Earnings
Record net earnings of $159.9 million or $0.56 per share on sales of $319.9 million for the second quarter ended June 30, 2007 compared with net earnings of $37.2 million on sales of $112.9 million for the same period in 2006. Record sales and earnings for the period were driven by high metal prices, stable production in most operations, earnings from the Neves-Corvo copper/zinc mine acquired in the fourth quarter of 2006 and a $50.4 million gain from the divesture of marketable securities during the second quarter.
Increased Offer for Rio Narcea Gold Mines, Ltd. (“Rio Narcea”)
Subsequent to the April 4, 2007 announcement that the Company had entered into a definitive support agreement to which the Company offered Cdn$5.00 per common share and Cdn$1.04 per warrant to acquire all the outstanding shares and warrants of Rio Narcea by way of a take-over bid, the Company increased its cash offer on June 29, 2007 to Cdn$5.50 per common share and Cdn$1.04 per warrant for a purchase price of approximately $864.4 million (Cdn$916.3 million) for 100% of the issued and outstanding shares and warrants of Rio Narcea. This increased offer originally expired on July 16, 2007 and has been extended to August 10, 2007 with a final extension to August 20, 2007. On August 10, the Company announced that 146,356,544 shares and 16,982,220 warrants representing approximately 85.2% of the fully diluted outstanding shares of Rio Narcea have been tendered to the Company. An $800 million syndicated senior credit facility had been previously arranged and is available for general corporate purposes. This facility will be reduced to $575 million once the proceeds from the sale of Tasiast to Red Back Mining Inc. (“Red Back”) have been applied to the credit facility.
Concurrent with the offer to purchase Rio Narcea and contingent upon the success of the takeover bid, Red back signed an option agreement with Lundin Mining to acquire Rio Narcea’s Tasiast gold mine from the Company in consideration for $225 million in cash and assumption of $52.9 million in debt related to the Tasiast gold mine. The sale of Tasiast gold mine closed on August 2, 2007 and the proceeds have been used to pay down the credit facility.
For further information regarding the Rio Narcea transaction, please refer to the April 4, 2007 news release issued by the Company. Additionally, the Offeror’s circular dated April 20, 2007 can be found on the Company’s website atwww.lundinmining.com.
Completed the Acquisition of Tenke Mining Corp. (“Tenke”)
On July 3, 2007, the Company completed the acquisition of Tenke whereby the Company issued 105,421,402 common shares to the Tenke shareholders valued at $1.3 billion. The Company has approximately 391.8 million common shares issued and outstanding immediately following the Tenke acquisition with the existing Lundin Mining and Tenke shareholders owing approximately 73% and 27% respectively of the combined company, Lundin Mining. Tenke holds a 24.75% interest in Tenke Fungurume, a world class copper-cobalt property being developed in the DRC. The remaining interest in Tenke Fungurume is held by Freeport-McMoRan Copper & Gold Inc., which holds 57.75% and is the operator of the project and Gecamines, a DRC government agency which holds the remaining 17.5% of the project.
For further information regarding the Tenke transaction, please refer to the April 11, 2007 news release issued by the Company.
Additional Investment in Sunridge Gold Corp. (“Sunridge”)
On May 10, 2007, the Company announced it was making a further Cdn$6.8 million investment in Sunridge through a 3 million unit non-brokered private placement at Cdn$2.25 per unit. Each unit consists of one common share and one-third of one common share purchase warrant. Each whole warrant entitles the Company to purchase one additional common share at Cdn$2.60 for a period of twelve months from the closing of the private placement. This investment increases Lundin Mining’s equity interest to 19.6% of Sunridge.
Sunridge is a publicly-traded mining company which owns a 100% interest in the Asmara Project in Eritrea in an emerging Volcanic Massive Sulphide district on which there are at least four copper/zinc/gold deposits and the Gupo Gold deposit.
On May 22, 2007, Sunridge received final TSX Venture Exchange acceptance with respect to the closing of this private placement.
Sold Silver Production to Silverstone Resources Corp. (“Silverstone”)
On June 7, 2007, the Company has entered into an agreement with Silverstone to deliver silver production from its Neves-Corvo and Aljustrel mines, subject to regulatory approval and certain other conditions. Under this agreement, the Company will receive an upfront cash payment of $42.5 million, 15.4 million Silverstone common shares and 4,256,250 Silverstone special warrants which are convertible into Silverstone common shares at no additional cost. The common share and special warrant are valued at C$2.42 each. The approximate value of the agreement is $87.1 million.
The special warrants may be exercisable into one Silverstone common share at any time provided that the common shares issued to the Company would not result in the Company owning 20% or more of the issued and outstanding common shares immediately after giving effect to such issuances or that shareholders of Silverstone pass a resolution at a meeting of the Silverstone shareholders approving any exercise that would result in Lundin Mining owning 20% or more of the issued and outstanding shares of Silverstone.
Upon delivery of silver production to Silverstone, the Company will receive the lower of $3.90 per ounce of silver, which is subject to a 1% annual inflationary adjustment after three years and yearly, thereafter, or then prevailing market price per ounce of silver.
Silverstone is a silver mining company that derives 100% of its revenue from silver production and has a 90% interest in four advanced silver-gold projects in Mexico.
Gain of $50.4 million From Sale of Investment
The Company sold an investment during the second quarter 2007 that had been purchased as a strategic investment during the year for proceeds of $118.5 million and recognized a gain of $50.4 million in the quarter.
Summary of Operations
Metal Produced(i)
Three months ended Six months ended
June 30, June 30,
2007 2006 2007 2006
--------------------------------------------------------------------------
Zinc (tonnes) Neves-Corvo 6,048 - 12,241 -
Zinkgruvan 16,916 22,828 34,078 40,785
Storliden 4,973 5,678 9,551 13,876
Galmoy 12,612 12,615 22,573 29,832
--------------------------------------------------------
Total 40,549 41,121 78,443 84,493
Copper (tonnes) Neves-Corvo 20,875 22,116 44,280 41,377
Storliden 1,500 2,200 2,698 5,453
--------------------------------------------------------
Total 22,375 24,316 46,978 46,830
Lead (tonnes) Zinkgruvan 10,664 8,031 19,307 15,824
Galmoy 2,573 2,640 4,977 7,081
--------------------------------------------------------
Total 13,237 10,671 24,284 22,905
Silver (ounces) Neves-Corvo 201,571 182,720 424,363 341,313
Zinkgruvan 491,989 439,223 931,003 852,756
Galmoy 23,145 21,931 42,167 74,596
--------------------------------------------------------
Total 716,705 643,874 1,397,533 1,268,665
--------------------------------------------------------------------------
(i) 100% of 2006 metal production at Neves-Corvo is included for
comparative purposes only. This does not, however, represent Lundin
Mining's actual ownership during the period. EuroZinc Mining (owner of
Neves-Corvo) completed a merger with Lundin Mining in October 2006.
Metal Sold and Payable(i)
Three months ended Six months ended
June 30, June 30,
2007 2006 2007 2006
--------------------------------------------------------------------------
Zinc (tonnes) Neves-Corvo 4,079 - 8,743 -
Zinkgruvan 14,219 21,003 28,089 38,605
Storliden 4,227 4,825 8,119 11,793
Galmoy 10,923 9,101 18,667 23,945
--------------------------------------------------------
Total 33,448 34,929 63,618 74,343
Copper (tonnes) Neves-Corvo 23,869 20,836 42,768 38,398
Storliden 1,310 1,904 2,359 4,723
--------------------------------------------------------
Total 25,179 22,740 45,127 43,121
Lead (tonnes) Zinkgruvan 9,350 7,769 20,310 15,678
Galmoy 3,038 2,816 4,449 7,528
--------------------------------------------------------
Total 12,388 10,585 24,759 23,206
Silver (ounces) Neves-Corvo 152,215 115,933 276,920 210,075
Zinkgruvan 375,685 373,297 979,065 845,920
Galmoy 22,894 21,931 28,107 74,596
--------------------------------------------------------
Total 550,794 511,161 1,284,092 1,130,591
--------------------------------------------------------------------------
(i) 100% of 2006 metal sold at Neves-Corvo is included in the above table
for comparative purposes only. This does not, however, represent
Lundin Mining's actual ownership during this period. EuroZinc Mining
(owner of Neves-Corvo) completed a merger with Lundin Mining in
October 2006.
Selected Quarterly Financial Information
Three months ended 30-Jun-07 31-Mar-07 31-Dec-06 30-Sep-06
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Sales $ 319,935 $ 193,920 $ 236,072 $ 98,941
Net earnings 159,908 53,708 63,590 30,737
Earnings per share, basic(i) 0.56 0.19 0.28 0.25
Earnigns per share, diluted(i) $ 0.56 $ 0.19 $ 0.27 $ 0.25
Three months ended 30-Jun-06 31-Mar-06 31-Dec-05 30-Sep-05
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Sales $ 112,918 $ 91,798 $ 63,820 $ 48,683
Net earnings 37,161 21,461 14,221 9,637
Earnings per share, basic(i) 0.30 0.18 0.12 0.08
Earnigns per share, diluted(i) $ 0.30 $ 0.17 $ 0.12 $ 0.08
(i) The net income per share (basic and diluted) is determined separately
for each quarter. Consequently, the sum of the quarterly amounts may
differ from the year to date amount disclosed in the unaudited interim
consolidated financial statements as a result of using different
weighted average numbers of shares outstanding. All share related
information (i.e. net income per share) are calculated as if the
three-for-one stock split, which was effective February 5, 2007, had
occurred at the beginning of the earliest period presented.
Results of Operations
Summary
Net earnings for the three months ended June 30, 2007 were $159.9 million or $0.56 per share on sales of $319.9 million compared to net earnings of $37.2 million or $0.30 per share on sales of $112.9 million or the same period in 2006. Higher earnings and sales for the second quarter were due to higher metal prices, the addition of the Neves-Corvo operating results, which was added in the fourth quarter of 2006 and a $50.4 million gain from the sale of marketable securities. Cash flow from operations was $150.1 million or $0.52 per share as compared with $54.4 million or $0.45 per share for the same period in 2006.
Net earnings for the six months ended June 30, 2007 were $213.6 million or $0.75 per share on sales of $513.9 million as compared with sales and net earnings of $204.7 million and $58.6 million, respectively, for the same period in 2006. Cash flow from operations for the first half of 2007 was $160.7 million or $0.56 per share as compared with $77.1 million or $0.63 per share for the same period in 2006.
Sales
Total sales increased 183% or $207.0 million in the second quarter to $319.9 million as compared with $112.9 million for the same period in 2006. This increase was due primarily to higher metal prices and the EuroZinc merger (effective November 1, 2006), which contributed $200.3 million in sales for the second quarter of 2007. Sales were lower at Galmoy due to a 15% decrease in production.
Year-to-date, total sales were $513.9 million in 2007 as compared with $204.7 million for the same period in 2006.
Cost of Sales
Cost of sales increased 139% or $53.5 million in the second quarter to $92.0 million compared with cost of sales of $38.5 million for the same period in 2006. This increase was primarily due to the costs associated with the increased sales added from the Neves-Corvo copper-zinc mine, weakening of the US dollar against the foreign currencies that the Company transacts in.
Year-to-date, cost of sales were $160.2 million as compared with $74.3 million for the same period in 2006.
Accretion of Asset Retirement Obligations
Accretion of asset retirement obligation during the second quarter was $1.1 million compared to $Nil for the same period in 2006. The increase was due primarily to the addition of the Neves-Corvo and Aljustrel mines acquired in the fourth quarter of 2006 and the commencement of provisions beginning in 2007 for future site restoration costs at both the Galmoy and Zinkgruvan mines.
Year-to-date, accretion of asset retirement obligations were $2.3 million compared to $Nil for same period in 2006.
Depreciation, Depletion and Amortization
Depreciation, depletion and amortization increased 172% or $22.7 million to $35.9 million for the second quarter 2007 as compared with $13.2 million for the same period in 2006. This increase was due primarily to the addition of the Neves-Corvo mine, which contributed approximately $22.7 million of depreciation, depletion and amortization from the Neves-Corvo mine. The depreciation, depletion and amortization on the mining assets from the Neves-Corvo mine were based on the new fair values allocated to each of the respective mining assets acquired and are in accordance with CICA Handbook Section 1581 “Business Combinations”.
Year-to-date, depreciation, depletion and amortization were $71.8 million as compared with $27.3 million for same period in 2006. The amount of depreciation, depletion and amortization were consistent with the first quarter 2007.
General Exploration and Project Investigation
General exploration and project investigation costs increased 276% or $5.8 million to $7.9 million in the second quarter 2007 compared to $2.1 million during the same period in 2006. A significant portion of this increase relates to continued drilling and exploration activities at the Company’s Portuguese mining concessions and higher exploration activities in Sweden and Ireland. Please refer to the exploration activities section for further detail.
Year-to-date, exploration and project investigation costs totaled $13.1 million as compared with $3.7 million for the same period in 2006. The Company spent $7.1 million on exploration in Portugal, $4.4 million in Sweden and $1.6 million in Ireland.
Selling, General and Administration
Selling, general and administration costs were $7.2 million in the second quarter 2007 as compared with $2.7 million during the same period in 2006. This increase was due primarily to the costs associated with the Sarbanes Oxley (“SOX”) compliance project, higher travel costs, costs associated with the stock split as well as the additional personnel and administrative costs associated with the EuroZinc merger. The Company expects SOX spending to be maintained at the current level in the third quarter, as the audit of the internal controls at each of the mine sites begin and decrease significantly in the fourth quarter, when the final testing for SOX compliancy is complete.
Year-to-date, selling, general and administration costs were $12.6 million as compared with $5.0 million for the same period in 2006.
Foreign Exchange Losses
Foreign exchange losses increased significantly in the second quarter 2007 to $9.0 million as compared with a loss of $1.7 million for the same period in 2006. Foreign exchange losses were due primarily to the holding of significant US denominated cash and trade accounts receivable balances at the Company’s Neves-Corvo mine where the functional currency is the Euro. The US currency declined against all major currencies during the second quarter.
Year-to-date, foreign exchange losses totaled $11.8 million compared with $2.8 million for the same period in 2006.
Losses on Derivative Instruments
Losses on derivative instruments are comprised of realized and unrealized gains and losses from marking-to-market the Company’s outstanding forward sales, foreign exchange, puts and call options contracts. These contracts were a hedge on a portion of the Company’s metal production to cover the Company’s Euro and SEK denominated operating and capital expenditures for the next twelve months. The net loss on derivative contracts during the second quarter was $27.7 million compared with a net loss of $3.9 million for the same period in 2006 and is comprised of a realized loss of $3.8 million and an unrealized mark-to-market loss of $23.9 million.
During the second quarter of 2007, the Company entered into forward contracts for the delivery of 1,000 tonnes per month of lead at an average price of $0.83 per pound for a period of 12 months ending on June 30, 2008. These new hedges combined with the existing lead contracts resulted in an unrealized loss of $17.7 million for the second quarter, while foreign exchange contracts accounted for $2.4 million of the unrealized losses. These losses are included as part of the $27.7 million loss for the second quarter 2007.
Year-to-date, losses on derivative instruments totaled $33.2 million compared with $9.9 million for the same period in 2006.
Current Income Taxes
Current income tax provision increased $34.5 million to $49.6 million for the second quarter 2007 compared with $15.1 million for the same period in 2006. A significant portion of the income tax provision related to earnings from the Neves-Corvo mine and the $50.4 million gain from the sale of marketable securities. The income tax provision on this gain was offset by the recognition of $8.0 million of future tax benefits from loss carryforwards that were not previously recognized.
Future Income Tax Recovery
Future income recovery for the second quarter of 2007 was $15.5 million compared with $1.1 million for the same period in 2006. This increase was due primarily to the utilization of $8 million of unrecognized tax benefits from loss carryforwards for the $50.4 million gain from the sale of marketable securities.
Year-to-date, the future income tax recovery was $11.9 million compared with $0.3 million for the same period in 2006.
Operations
Neves-Corvo Mine
--------------------------------------------------------------------------
Three months ended Six months ended
June 30, June 30,
(100% OF PRODUCTION) 2007 2006 2007 2006
--------------------------------------------------------------------------
Ore mined (tonnes - includes
copper and zinc plants) 596,906 491,557 1,254,336 982,597
Ore milled (tonnes - includes
copper and zinc plants) 631,742 492,300 1,257,665 1,009,810
--------------------------------------------------------------------------
Grade per tonne
Copper (%) 4.6 5.0 4.8 4.6
Zinc (%) 7.3 - 8.0 -
--------------------------------------------------------------------------
Recoveries
Copper (%) 87 89 87 89
Zinc (%) 78 - 80 -
--------------------------------------------------------------------------
Production (metal contained)
Copper (tonnes) 20,875 22,116 44,280 41,377
Zinc (tonnes) 6,048 - 12,241 -
Silver (ounces) 201,571 182,720 424,363 341,131
Sales(i) $ 202,815 $ 168,487 $ 313,895 $ 257,398
(ii)Cash cost per pound of
payable copper sold $ 0.73 $ 0.84 $ 0.70 $ 0.84
--------------------------------------------------------------------------
(i) The 2006 comparative figures were from EuroZinc's second quarter 2006
Management's Discussion and Analysis
(ii) Cash cost per pound of payable copper sold is the sum of direct cash
costs and inventory changes less by-product credits and profit-based
royalties.
Ownership
The Company merged with EuroZinc Mining, which was the 100% owner of the Neves-Corvo mine, on October 31, 2006 and the EuroZinc operating results were consolidated into the financial statements of the Company from November 1, 2006.
In order to provide comparable data, the 2006 production figures and financial data are presented for the three and six months ended June 30, 2006. However, results from the Neves-Corvo operation have only been included in the Company’s operating results from November 1, 2006.
Production
A total of 596,906 tonnes were mined in the second quarter, an increase of 105,349 tonnes or 21% increase over the same period in 2006. This increase was due primarily to mining of zinc ore, which contributed 105,843 tonnes to the total tonnes mined. Mining of zinc ore did not commence until the third quarter of 2006. Production of contained copper was 20,875 tonnes in the second quarter 2007, a 6% decrease compared to the same period in 2006. The decrease in copper production in the second quarter was due to the slightly lower ore head grade, in accordance with the mine sequencing plan, and recovery. However, production of copper in the first half of 2007 was 7% greater than in the first half of 2006 due to an overall improvement in grade and ore throughput. Production of contained zinc was 6,048 tonnes in the second quarter.
The Company expects the copper and zinc ore head grades to improve for the remainder of the year in accordance with mine sequencing programs and also process improvements to continue in the zinc plant.
The cash cost of payable copper metal sold during the second quarter 2007 decreased 13% to $0.73 per pound compared to the same period in 2006. This decrease was due primarily to $15.5 million of zinc sales in the current quarter that were treated as by-product credits for this calculation and was partially offset by higher labour costs as more workers were hired for the zinc project in the plant and underground. The 2006 cash costs were higher for the corresponding period in 2007 as zinc production commenced in the third quarter of 2006. Zinc production commenced in the third quarter of 2006. The planned annual mine maintenance is scheduled for the third quarter of 2007.
Zinkgruvan Mine
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Three months ended Six months ended
June 30, June 30,
(100% OF PRODUCTION) 2007 2006 2007 2006
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Ore mined (tonnes) 218,065 191,621 442,761 364,297
Ore milled (tonnes) 230,768 203,702 466,158 373,467
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Grades per tonne
Zinc (%) 7.8 11.9 7.8 11.6
Lead (%) 5.2 4.5 4.8 4.8
Silver (g/t) 89 92 84 97
--------------------------------------------------------------------------
Recoveries
Zinc (%) 94 94 94 94
Lead (%) 89 87.0 89 88.0
Silver (g/t) 75 73 74 73
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Production (metal contained)
Zinc (tonnes) 16,916 22,828 34,078 40,785
Lead (tonnes) 10,664 8,031 19,307 15,824
Silver (oz) 491,989 439,223 931,003 852,756
Sales $ 58,444 $ 61,153 $ 107,920 $ 99,783
(i)Cash cost per pound
of payable zinc sold $ 0.27 $ 0.59 $ 0.25 $ 0.48
--------------------------------------------------------------------------
(i) Cash cost per pound of payable zinc sold is the sum of direct cash
costs and inventory changes less by-product credits and revenue-based
royalties.
Production
A total of 218,065 tonnes of ore were mined during the second quarter 2007, which represented a 13.8% increase over the same period in 2006. Ore milled during the quarter totalled 230,768 tonnes were 27,066 tonnes or 13.3% greater than the same period in 2006.
The zinc head grades decreased to 7.8% in the second quarter compared with 11.9% in the second quarter 2006 due primarily to the processing of zinc from the high grade Nygruvan zone in 2006 and was in accordance with the sequencing plan in the mine. Lead grades improved to 5.2% during the second quarter 2007 from 4.5% in the corresponding period 2006. Management expects zinc and lead grades to improve in the third quarter due to changes to the mining sequence plan.
Mining and milling in the third quarter will be affected by a planned ten-day shutdown of the plant for annual maintenance.
The cash cost per pound of payable zinc sold during the sold in the second quarter decreased to $0.27 per pound compared with $0.59 for the same in period in 2006. This decrease was due primarily to $19.0 million of lead sales in the quarter which are treated as by-product credits for the purpose of the cash cost calculation. For the six months ended June 30, 2007, the cash cost per pound of payable zinc sold decreased to $0.25 per pound as compared with $0.48 per pound for the same period in 2006. This decrease is due to significantly higher lead sales in 2007 compared with 2006.
Storliden Mine
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Three months ended Six months ended
June 30, June 30,
(100% OF PRODUCTION) 2007 2006 2007 2006
--------------------------------------------------------------------------
Ore mined (tonnes) 79,100 92,400 155,998 172,800
Ore milled (tonnes) 76,038 63,711 140,585 161,808
--------------------------------------------------------------------------
Grades per tonne
Copper (%) 2.1 3.9 2.1 3.8
Zinc (%) 7.1 9.8 7.4 9.4
--------------------------------------------------------------------------
Recoveries
Copper (%) 91 92 92 92
Zinc (%) 92 92 93 91
--------------------------------------------------------------------------
Production (metal contained)
Copper (tonnes) 1,500 2,200 2,698 5,453
Zinc (tonnes) 4,973 5,678.0 9,551 13,876.0
Sales $ 23,671 $ 32,038 $ 39,215 $ 58,030
(i)Cash cost per pound of
payable zinc sold $ (0.31) $ (0.32) $ (0.12) $ (0.26)
--------------------------------------------------------------------------
(i) Cash cost per pound of payable zinc sold is the sum of direct cash
costs and inventory changes less by-product credits and revenue-based
royalties.
Production
Ore mined during the second quarter 2007 was 79,100 tonnes, which represented a 14% decrease from the same period in 2006. Mill throughput during the second quarter 2007 was 76,038 tonnes, an increase of 12,341 tonnes or 19% as compared with the same period in 2006. Production of contained copper was 1,500 tonnes and of contained zinc of 4,973 tonnes.
The cash cost per pound of payable zinc sold was a negative $0.31 per pound for the second quarter 2007 compared to a negative $0.32 per pound for the same period in 2006. Copper and zinc head grades were significantly lower this quarter as compared with the same quarter in 2006.
The closure of the mine is currently scheduled for the fourth quarter 2007 and management is preparing an optimal closure plan. Total costs for the closure of the operations are expected to be less than $400,000, the obligation for which has already been provided for.
Galmoy Mine
--------------------------------------------------------------------------
Three months ended Six months ended
June 30, June 30,
2007 2006 2007 2006
--------------------------------------------------------------------------
Ore mined (tonnes) 115,417 135,901 208,187 289,218
Ore milled (tonnes) 122,371 145,828 216,431 301,881
--------------------------------------------------------------------------
Grades per tonne
Zinc (%) 12.9 10.8 12.9 12.0
Lead (%) 3.1 2.9 3.3 3.6
--------------------------------------------------------------------------
Recoveries
Zinc (%) 82 80 82 82
Lead (%) 73 62 73 65
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Production (metal contained)
Zinc (tonnes) 12,612 12,615 22,573 29,832
Lead (tonnes) 2,573 2,640 4,977 7,081
Sales $ 34,887 $ 20,875 $ 52,639 $ 48,619
Cash cost per pound of
payable zinc sold(i) $ 0.92 $ 1.14 $ 1.02 $ 0.82
--------------------------------------------------------------------------
(i) Cash cost per pound of payable zinc sold is the sum of direct cash
costs and inventory changes less by-product credits and profit-based
royalties.
Production
Ore mined during the second quarter 2007 was 115,417 tonnes or 15% lower than ore mined during the same period in 2006. The decrease was due primarily to poor capacity from the longhole drilling rigs, changes to stope sequencing as a result of challenges experienced with the backfill program and ongoing negotiations with the two local unions for wage increases. The changes to the stope sequencing however did help to increase the zinc head grade to 12.9% from 10.8%, from the previous year. A second longhole rig was brought into production to increase the metres of longhole drilled underground. Also, during the quarter, mining commenced in the CW South ore body after delays to backfill set backs experienced in the second half of 2006. A team of in-house and external consultants is making a concerted effort to identify a means by which backfill setting rates can be accelerated.
Negotiations with the local unions at the Galmoy mine continue and on the 4th of August SIPTU members voted to reject the Labour Court recommendations for a new agreement. The TEEU members have been in an official dispute with the mine since mid-June.
Ore milled during the second quarter 2007 improved 30% over the first quarter of 2007 to 122,371 tonnes but was still 16% lower than in the same period in 2006. Zinc recovery for the second quarter 2007 was slightly higher compared to the same quarter in 2006 due primarily to a higher head grade. Improvements were made quarter over quarter in the recovery of lead as a result of the installation of a new flotation cell commissioned in the first quarter of 2007.
The cash cost per pound of payable zinc sold was $0.92 per pound for the second quarter 2007 compared to $1.14 per pound for the same period in 2006. This decrease was due to higher by-product credits from lead but was partially offset by higher operating costs as a result of low productivity compared with the same quarter in 2006.
Mine Development and Project Highlights
Ozernoe
Work to secure the various contractors and consulting firms to complete the bankable feasibility study continued. Hatch Engineering was awarded the contract for the feasibility study. At site, the Company added personnel to the Ozernoe management team to manage the project and to ensure compliance with the mining licence agreement.
During the second quarter, the Company continue to delineate the deposit. Phase 1 in-fill drilling program (IDP) was completed. The start-up of the Phase 2 in-fill drilling program will depend to a large degree on the completion of phase 1 assay results. Assay and other analytical work analysis are currently underway. Efforts are being made to export the samples out of Russia to speed up the process. It is anticipated that the phase 2 drill program will start in late September or early October, as planned.
During the quarter a great deal of effort was spent on defining the oxide mineralization potential. At the end of May the final core hole was drilled to provide a better understanding of the non-homogeneous mineralogically complex material. A contract was awarded to CIS from Australia to assist in the modelling and analysis of the oxide data. Further study would be required and the St. Petersburg Institute was also brought in to continue this study.
Plans were developed using Buryat Geomonitoring to locate suitable potable and industrial water sources, which is key to develop the project. The initial phase of drilling to find potable water will consist of cored and reamed holes each tested for water quality and quantity close to camp facilities under construction. A second phase has been scheduled to locate an industrial water supply and will most likely involve a second drill contractor due to the slow nature of the reaming work and the onset of winter.
Site work, in addition to the drilling, is underway to develop permanent camp facilities and other basic infrastructure required to develop the resource. Other project activity during the quarter included the bridge and power line construction projects.
Aljustrel
In the past few months the Company has been confronted with an ever-increasing struggle with the compliance of delivery dates by contractors/suppliers. Significant efforts have been made by management and suppliers to avoid delivery date slippage, however critical equipment such as the ceramic media cyclones, which utilize centrifugal force to accelerate the settling rate of particles in the classification stage, are going to be delayed.
Recent information from the supplier indicates a six week delay in delivery. In the light of this information and in an effort to avoid the risk of being inaccurate in further plans, management believes a more accurate, albeit conservative estimate, will be for the production of concentrates from the Aljustrel ore processing plant to commence in the latter half of the fourth quarter 2007 and not, as previously planned, during September.
The Moinho mine is in a position to supply ore to the mill at present. The underground development crews have thus far generated a zinc ore stockpile of approximately 60,000 tonnes for processing at the Aljustrel mill. As well year to date, an additional 19,000 tonnes of copper ore and 36,000 tonnes of zinc ore was sent to Neves-Corvo of which 3,200 tonnes of copper ore and 5,700 tonnes of zinc ore, respectively were processed.
Exploration Highlights, Second Quarter 2007
Portugal
Neves-Corvo Near-Mine Exploration (copper-zinc)
During the quarter, a total of 9,135 m of exploration drilling was carried out near the Neves-Corvo Mine in 14 drill holes. Efforts were focused on the delineation and definition of the world-class Lombador Zinc Deposit at the mine. Assays received for six drill holes during the quarter include the thickest high-grade zinc intersection yet encountered with drill hole NF22A intersecting 55 metres of mineralization that contains 8.51% zinc and 2.47% lead and hole ND20A-1 intersecting a 35 metre section grading 9.44% zinc and 3.16% lead. These two mineralized intercepts are separated by a down-dip distance of 425 metre. These results build on the success noted last quarter and continue to outline a large, continuous zone of high-grade zinc and lead mineralization within the Lombador sulfide lens. The deposit remains open down-dip of this intersection in drill hole NF22A. Second quarter drill result highlights for the Lombador South Deposit are listed below.
Lombador Drilling Highlights
Est.
Drill True
hole From To Interval Width Cu Pb Zn
----------------------------------------------------------------------
(m) (m) (m) (m) % % %
NF34 1151.8 1219.0 67.2 67.2 0.31 2.93 8.03
Incl. 1168.0 1189.0 21.0 21.0 0.29 3.99 11.13
Plus 1243.0 1259.0 16.0 16.0 3.92 0.10 0.32
Incl. 1251.5 1255.5 4.0 4.0 8.72 0.15 0.31
NF22A 911.0 966.0 55.0 53.0 0.35 2.47 8.51
Incl. 922.0 950.0 28.0 27.0 0.29 3.96 11.07
ND20A-1 696.0 731.0 35.0 34.0 0.35 3.16 9.44
NE18C-3 747.0 777.0 30.0 28.0 0.46 2.51 8.11
Incl. 766.0 776.0 10.0 9.3 0.35 4.46 12.90
ND20A 658.0 666.0 8.0 8.0 0.20 0.80 6.81
Plus 738.0 752.0 14.0 14.0 0.30 1.76 9.82
NG22 927.5 944.0 16.5 16.5 0.45 1.24 8.68
Subsequent to the second quarter, assay results were received for drill hole NF34 (results included in table above). This hole was very successful in expanding the Lombador South zinc deposit well below NF22A. Drill hole NF34 intersected a 95 metre thick interval of massive sulphide mineralization (true thickness is equal to drilled thickness in this hole) which included a 67.2 meter section of high-grade zinc mineralization from 1151.8 metres to 1219.0 metres. This wide zone returned 8.03% zinc, 2.93% lead and 0.31% copper, and included a 21 metre interval grading 11.13% zinc and 3.99% lead. Silver assays are pending.
This intersection is located 590 metres down-dip of the intersection in hole ND20A-1, and 270 metres from the intersection in NF22A. The intersection in NF34 leaves the zone completely open for expansion down-dip and along strike at depth. It should be noted that this hole tested an area which is not included in any resource category, and clearly illustrates the potential that exists to continue to expand the Neves Corvo resource base.
In addition to the zinc mineralization, hole NF34 intersected a 16 metre wide zone of stockwork copper mineralization with a grade of 3.92% copper from 1243 metres to 1259 metres. This zone included a 4 metre section of 8.72% copper. Additional drilling is required to fully assess the significance of this copper zone, however it demonstrates that there is also potential for substantial additions to the copper resource at Neves Corvo.
Aljustrel Near-Mine Exploration (copper-zinc)
Exploration on the Aljustrel Mine Lease began this quarter with 5,901 metres completed in 11 drill holes. The initial objective of the drill program is to complete step-out and infill drilling within the Feitais Deposit and to conduct infill drilling at Estacao deposit. A new copper-rich zone has been encountered above the main massive sulphide lens at Feitais; assay results are pending. This drilling has additionally expanded the Feitais deposit beyond the current Inferred Resource.
Portugal Greenfields Exploration (copper-zinc)
Exploration drilling outside of the mine leases totaled 1,633 metres in 4 drill holes within the Mertola and Castro Verde concessions. Drilling at the Chanca prospect, located within the Mertola concession near the Spanish border, has been completed with a total of six diamond drill holes. The drilling confirmed the presence of a large zone of copper-bearing stockwork hosted by strongly altered felsic volcanics, but unfortunately the ore horizon appears to be faulted out.
Two contractors, Crone Geophysics and Geognosia, conducted orientation transient electromagnetic (TEM) surveys over the Neves-Corvo orebodies using two different high-temperature SQUID magnetic field sensors. The results prove that these high-technology sensors achieve lower noise and thus deeper depths of investigation than conventional coil systems used in the past. Characterization of the known orebodies will continue in July and will be used to prioritize regional exploration targets for drill-testing. The start of the Bell Geospace airborne gravity gradiometer (AGG) survey over the Neves-Corvo and Aljustrel orebodies has been delayed until August due to high demand for the system in North America.
Spain
Toral Project (zinc-lead-silver)
Exploration drilling commenced in the second quarter at the advanced staged Toral Zn-Pb-Ag project in northwest Spain with two drill holes completed and a third hole in progress. At total of 1,154 metres was drilled during the quarter with complete assays results pending. However, the results are so far consistent with results of the historical drilling with relatively narrow but continuous zones of commonly high-grade zinc-lead-silver sulphides being intersected at the target contact horizon. More detailed results will be released during the third quarter. The objective of this initial drilling is to test for up-dip and down-dip extensions of the historical resource mineralization.
Ireland
Galmoy near-mine exploration (zinc-lead)
A total of 1,918 m of drilling was completed near the mine within 18 drill holes and an additional 5,658 m of exploration drilling were completed in 60 drill holes in the Galmoy area this quarter. The focus of exploration is to locate any near-mine mineralization that can be incorporated into the current mine plan for the Galmoy Mine. The highlight of the quarter is the continued delineation of the newly discovered M-Zone mineralization that is located within 200 metres of the CW orebody in the vicinity of the mill at an approximate depth of 100 m below the surface. Two drill rigs have so far completed sixteen contiguous drill holes that intersected high-grade zinc mineralization including GY-729 which returned assays of 44.38% zinc, 5.64% lead and 4.97 g/t silver over a true thickness of 4.03 metres. This intercept represents some of the highest grade zinc-lead-silver mineralization ever encountered at Galmoy. Additional significant drill results are listed below (as noted in the June 12th press release). The zone remains open to the north, southeast and to the west.
Galmoy M Zone Drilling Highlights
Est.
Drill True
hole From To Interval Width Zn Pb Ag
----------------------------------------------------------------------
(m) (m) (m) (m) % % g/t
GY-722 81.6 88.0 6.4 6.09 10.78 0.59 2.33
GY-724 86.0 90.3 4.3 4.30 14.25 2.02 4.39
GY-729 91.3 95.7 4.4 4.03 44.38 5.64 4.97
GY-737 89.0 94.4 5.4 5.32 18.69 2.42 5.59
GY-740 94.0 102.5 8.5 7.57 11.69 5.87 5.45
Sweden
Zinkgruvan near-mine exploration (zinc-lead-silver)
A total of 7 holes were drilled totaling 1,595 m for the near-mine exploration program at Zinkgruvan. Drill testing of the deep Dalby zone, which is down-dip of the western-most part of the Zinkgruvan Mine, was begun late in the quarter. The rimming of Dalby hole DDH2549 was completed and the first of four deviation holes has reached a depth of 930 m below surface, which is 170 metres short of the target depth. Further to the north of the mine DDH2782 (on-going at end of the second quarter) encountered the ore-hosting package at a hole depth of 760 metres. Only weak mineralization was noted but the discovery of mineralization more than one kilometer from the mine is encouraging. A detailed structural study of the mine geology is revealing new target areas for drill-testing.
Bergslagen District (zinc-lead-silver)
During the quarter 1,202 m were drilled in 8 holes within several project areas in this district. At the Ervingsberg target (8 km northwest of the Zinkgruvan Mine), one hole encountered a 1.1 m thick zone of rich sphalerite banding at a depth of 52.9 m. The zone is open to the east and south and warrants additional drilling.
Skellefte District (copper-zinc)
Exploration drilling at the Copperstone project was hampered this quarter by overburden problems. A total of 2,856 metres was drilled in 17 holes during the quarter, mostly on testing geophysical targets. No significant mineralization was encountered. A comprehensive review of the Skellefte district programme is nearing completion that will include exit strategies for those projects that no longer fit into the company’s growing strategic objectives. At the advanced Norrliden project, a seven hole, in-fill drilling program was completed (1086 metres) and work has begun to upgrade the resources to reserves. A test mining plan has been presented to the authorities.
Metal prices and smelter treatment and refining charges
During the second quarter 2007 the prices for copper, zinc and lead increased 29%, 6% and 22%, respectively, compared with the first quarter 2007. The inventory levels of copper and zinc on the London Metal Exchange (“LME”) decreased during the second quarter 2007 compared with the first quarter 2007. At the end of the second quarter 2007, the LME stocks of copper were 114,700 tonnes (Q1: 178,075 tonnes) and zinc at 73,000 tonnes (Q1: 106,275 tonnes). In the case of copper the decrease in inventories was a result of continued high imports into China and in the case of zinc the decrease is due to reduced exports from China. During the second quarter the LME inventories for both lead and nickel increased. The lead inventories ended the second quarter 2007 at 45,075 tonnes (Q1: 33,250 tonnes) and nickel at 8,910 tonnes (Q1: 5,418 tonnes). The increase of the lead inventories was a result of very high exports of lead from China during April and May. In June exports from China dropped as a function of the introduction of an export tax on lead metal. During the second quarter 2007 producer de-stocking of stainless steel has led to a reduced the demand for nickel resulting in increased inventories.
Three months ended Six months ended
June 30, Change June 30, Change
(Average) 2007 2006 % 2007 2006 %
--------------------------------------------------------------------------
Zinc US$/pound 1.66 1.49 11% 1.61 1.26 29%
US$/tonne 3,663 3,292 11% 3,559 2,767 29%
Lead US$/pound 0.99 0.50 98% 0.90 0.53 69%
US$/tonne 2,175 1,100 98% 1,980 1,171 69%
Copper US$/pound 3.47 3.27 6% 3.08 2.76 12%
US$/tonne 7,640 7,211 6% 6,786 6,075 12%
Nickel US$/pound 21.80 3.27 567% 20.30 2.76 635%
US$/tonne 48,055 19,924 141% 44,748 17,367 158%
Silver US$/ounce 13.33 12.29 8% 13.32 10.99 21%
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The spot treatment charges (“TC”) for zinc concentrates continued to increase during the second quarter 2007 and have reached the level of the terms of the 2007 annual contracts of $300 per dry metric tonne (“dmt”) based on a zinc price of $3,500 per metric tonne (“mt”).
The mid year TC negotiations for copper concentrates settled at a TC level of approximately $50 per dmt and a refining charge (“RC”) of $0.05 per payable pound of copper contained and without any price participation (“PP”) which provided the smelters with an increase of the RC when the copper price increased. During the second quarter of 2007 spot TC’s and RC’s have fallen to $20 per dmt and $0.02 per lb respectively.
The spot T/C for lead concentrates increased significantly during the second quarter 2007. At the end of the quarter the spot T/C in China was approximately $200 per dmt of concentrates flat to be compared with $45 per dmt flat at the end of the first quarter 2007. The introduction by China of a 10% export tax on refined lead, effective June 1, 2007, explains this major increase. The export tax has made custom smelting of imported lead concentrates in China uneconomical at low a T/Cs and the Chinese smelters now require a much higher T/C to produce. During the second half of June there were several announcements by the Chinese lead smelters of cutbacks in production as a result of the export tax and the low T/Cs.
Outlook
Demand for copper and zinc in China continues to be strong. The introduction in China of an export tax on lead metal should reduce the availability of lead metal to the world market. These market conditions could translate into reduced LME inventories for these metals. The Company is optimistic that the prices for copper, zinc and lead will remain at current levels for the balance of 2007.
De-stocking by the producers of stainless steel could lead to a reduction in demand for nickel and a further correction to the nickel price may occur.
It should be noted that the price of silver for silver produced in concentrate from Zinkgruvan going forward has been fixed by the 2004 silver transaction with Silver Wheaton whereby Zinkgruvan receives $3.90 per ounce or the market price if the market price of silver is less than $3.90 per ounce. The up-front cash payment received from Silver Wheaton in December 2004 has been deferred on the balance sheet and is realized on the statement of operations when the actual deliveries of silver occur.
During the second quarter 2007, which is subject to regulatory approvals and other conditions before the transaction can be completed, the Company entered into an agreement with Silverstone Resources to which the Company will sell all its all future silver production from the Neves-Corvo and Aljustrel mines at a fixed price of the lesser of the prevailing silver price at time of delivery or $3.90 per ounce of silver deliver, subject to inflation adjustment. The Company expects this transaction to be completed in the third quarter 2007. When the transaction closes, the upfront cash payments, common shares and special warrants received, collectively, valued at $87.1 million will be deferred and amortized over the life of the silver deliveries.
Currencies
Three months ended Six months ended
June 30, Change June 30, Change
(Average) 2007 2006 % 2007 2006 %
--------------------------------------------------------------------------
SEK/US$ 6.87 7.40 -7% 6.94 7.59 -9%
SEK/Cdn$ 6.26 6.59 -5% 6.12 6.66 -8%
Cdn$/US$ 1.10 1.12 -2% 1.14 1.14 0%
US$/Euro 1.35 1.26 -7% 1.33 1.23 -8%
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Liquidity and Capital Resources
Cash Resources
The Company has cash and cash equivalent of $388.2 million as at June 30, 2007 compared with $402.2 million as at December 31, 2006 and $317.4 million at the end of the first quarter 2007. Cash and cash equivalent increased $70.8 million from the first quarter 2007. This increase was due primarily to strong earnings, $118.5 million proceeds from the sale of investments and offset by an investment of $149.5 million in marketable securities.
As at June 30, 2007, the Company had working capital of $382.1 million compared to working capital of $302.9 million as at March 31, 2007 and $292.6 million as at December 31, 2006. The increase in working capital from the first quarter is due primarily to a $70.8 million increase in cash and cash equivalents and a $26.3 million increase in trade accounts receivables, and offset by higher current liabilities.
Shareholders’ equity at June 30, 2007 was $2,427.8 million, an increase of $207.3 million from the first quarter 2007. This increase was due primarily from $159.9 million in earnings for the quarter, $15.6 million increase in the fair value of available for sale securities and $36.3 million increase in cumulative translation adjustment as a result of a significant weaker US dollar against the Canadian dollar, Euro and Swedish Kronor where the Company’s assets are held.
Management believes the Company’s financial position as at June 30, 2007, together with the cash flow from operations, are more than sufficient to support the Company’s operating and capital requirements on an ongoing basis.
During the second quarter 2007 the Company arranged an $800 million five-year revolving credit facility for general corporate purposes but will be reduced to $575 million, once the proceeds from the sale of the Tasiast gold mine to Red back has been applied to the facility. On July 17, 2007, the Company drew down $650 million from the credit facility and $129.9 million from its own cash for payment of approximately 85.2% of the fully diluted issued and outstanding shares of Rio Narcea tendered to the Company in accordance with the Rio Narcea takeover bid. The Company extended the offer to purchase the remaining Rio Narcea shares that it does not already own to August 20, 2007. The Company expects that there will be sufficient shares tendered to the Company to bring its ownership of Rio Narcea to 90%, which will allow the Company to issue a notice to the remaining Rio Narcea shareholders and effectively give the Company a 100% ownership in Rio Narcea. The Company has sufficient cash resources to complete the purchase of the remaining issued and outstanding shares and warrants of Rio Narcea.
The Company enters into derivative contracts for the purpose of managing risks and are not for trading purposes. During the second quarter the Company entered into lead forward contracts for the delivery of 1,000 tonnes of lead per month at a price of $0.83 per pound for the period July 2007 to June 2008. Due to the substantial rise in the lead price, when these contracts were marked-to-market as at June 30, 2007, this resulted in an unrealized loss of $9.1 million. As at June 30, 2007, the liability on marking-to-market the outstanding derivative contracts were $31.9 million of which $5.6 million is classified as a current liability. Please refer to the notes to the unaudited second quarter 2007 consolidated financial statements for full detail of outstanding hedge positions.
Critical Accounting Estimates
The Company’s accounting policies are described in Note 2 of the annual consolidated financial statements for the year ended December 31, 2006. For a complete discussion of those policies deemed most critical by the Company, refer to the Company’s 2006 annual MD&A, available on the SEDAR website, www.sedar.com.
Changes in accounting policies
Effective for the first quarter beginning on January 1, 2007, the Company has adopted Sections 1530 and 3855 of the CICA Handbook, “Comprehensive Income” and “Financial Instruments - Recognition and Measurement”. Section 1530, Comprehensive Income is the net change in a company’s net assets that results from transactions, events and circumstances from sources other than the Company’s shareholders and includes items that would not normally be included in net earnings such as cumulative translation adjustments resulting from the translation of foreign denominated financial statements to US dollars using the current rate method and unrealized gains or losses on available-for-sale securities. Section 3855, Financial Instruments - Recognition and Measurement requires that all financial assets, except those classified as held to maturity, and derivative financial instruments, must be measured at fair value. All financial liabilities must be measured at fair value when they are classified as held for trading; otherwise, they are measured at cost.
The adoption of Sections 1530 and 3855 resulted in changes to the Company’s current period’s earnings as well as required an adjustment to the opening balances for retained earnings and total assets.
The cumulative translation adjustment and unrealized gain on available-for-sale securities as at December 31, 2006 were $52.4 million and $3.2 million respectively. The aggregate of these amounts has been reported as a transition adjustment during the first quarter to the opening balance of Accumulated Other Comprehensive Income in the Interim Consolidated Statements of Changes in Shareholders’ Equity.
The cumulative translation adjustment and changes in the fair value of available-for-sale securities for the three months ended June 30, 2007 was $36.3 million and $15.6 million net of tax, respectively, and are reported in the current period as other comprehensive income. Additionally, during the second quarter 2007 the Company disposed of certain available-for-sale securities resulting in a decrease to accumulated other comprehensive income of $9.9 million net of tax.
Risks and Uncertainties
The operations of Lundin Mining involve certain significant risks, including but not limited to credit risk, foreign exchange risk, and derivative risk. For a complete discussion of the aforementioned risks, refer to the Company’s 2006 annual MD&A, available on the SEDAR website, www.sedar.com
Reclamation Fund
As at June 30, 2007, the Company had $45.7 million in a number of reclamation funds that will be used to fund future site restoration and mine closure costs at the Company’s various mine sites. The Company will continue to contribute annually to these funds based on an estimate of the future site restoration and mine closure costs as detailed in the closure plans. Changes in environmental laws and regulations can create uncertainty with regards to future reclamation costs and affect the funding requirements.
Outstanding share data
As at July 31, 2007, the Company had 392,030,087 common shares issued and outstanding and 1,984,774 stock options and 306,720 stock appreciation rights outstanding under its stock-based incentive plans.
Non-GAAP Performance Measures
Zinc and copper cash production cost (US$/pound) are key performance measures that management uses to monitor performance. Management uses these statistics to assess how well the Company’s producing mines are performing compared to plan and to assess overall efficiency and effectiveness of the mining operations. These performance measures have no meaning within Canadian Generally Accepted Accounting Principles (“GAAP”) and, therefore, amounts presented may not be comparable to similar data presented by other mining companies. The data is intended to provide additional information and should not be considered in isolation or as a substitute for measures of performance prepared in accordance with Canadian GAAP.
Reconciliation of unit cash costs of payable copper and zinc metal sold
to the consolidated statements of operations
Thousands of US dollars, except zinc and copper cash production cost
per pound
Three months ended June 30
----------------------------------------------------
Zinkgruvan Storliden Galmoy
Zinc 2007 2006 2007 2006 2007 2006
--------------------------------------------------------------------------
Operating expenses,
excluding
depreciation $14,493 $12,014 $10,909 $13,289 $16,519 $13,173
Treatment charges for
zinc 12,717 23,801 2,069 5,273 12,935 11,947
By-product credits (18,752) (8,640) (10,009) (14,427) (7,202) (2,274)
Other items affecting
cash production costs - - (5,889) (7,494) - -
--------------------------------------------------------------------------
Total $ 8,458 $27,175 (2,920) $(3,359) $22,252 $22,846
Zinc metal payable
(tonnes) 14,219 21,003 4,227 4,825 10,923 9,101
Zinc metal payable
(000's pounds) 31,347 46,304 9,319 10,637 24,081 20,064
--------------------------------------------------------------------------
Zinc cash production
cost per pound
payable metal
sold(i) $ 0.27 $ 0.59 $ (0.31) $ (0.32) $ 0.92 $ 1.14
--------------------------------------------------------------------------
(i) of which
treatment charges
for zinc comprise $ 0.41 $ 0.51 $ 0.22 $ 0.50 $ 0.54 $ 0.60
Six months ended June 30
----------------------------------------------------
Zinkgruvan Storliden Galmoy
Zinc 2007 2006 2007 2006 2007 2006
--------------------------------------------------------------------------
Operating expenses,
excluding
depreciation $27,870 $22,425 $18,597 $25,961 $29,269 $25,975
Treatment charges for
zinc 26,472 37,272 5,833 10,043 22,027 23,564
By-product credits (38,721) (19,213) (16,822) (28,248) (9,382) (6,062)
Other items affecting
cash production costs - - (9,739) (14,563) - -
--------------------------------------------------------------------------
Total $15,621 $40,484 (2,131) $(6,807) $41,914 $43,477
Zinc metal payable
(tonnes) 28,089 38,605 8,119 11,793 18,667 23,945
Zinc metal payable
(000's pounds) 61,926 85,109 17,899 25,999 41,154 52,790
--------------------------------------------------------------------------
Zinc cash production
cost per pound
payable metal
sold(i) $ 0.25 $ 0.48 (0.12) $ (0.26) $ 1.02 $ 0.82
--------------------------------------------------------------------------
(i) of which
treatment charges
for zinc comprise $ 0.43 $ 0.44 0.33 $ 0.39 $ 0.54 $ 0.45
Three months ended Six months ended
June 30 June 30
----------------------------------------
Neves-Corvo Neves-Corvo
Copper 2007 2006 2007 2006
--------------------------------------------------------------------------
Operating expenses, excluding
depreciation $ 51,125 $ 26,800 $ 84,938 $ 49,500
Treatment charges for copper 13,185 13,400 24,724 24,600
By-product credits (15,488) (1,700) (27,665) (2,600)
Other items affecting cash
production costs (10,399) - (16,378) -
--------------------------------------------------------------------------
Total $ 38,423 $ 31,667 $ 65,619 $ 61,790
Copper metal payable (tonnes) 23,869 20,836 42,768 38,398
Copper metal payable (000's
pounds) 52,622 45,935 94,287 84,653
--------------------------------------------------------------------------
Copper cash production cost per
pound payable metal sold(i) $ 0.73 $ 0.84 $ 0.70 $ 0.84
--------------------------------------------------------------------------
(i) of which treatment charges
for copper comprise $ 0.25 $ 0.29 $ 0.26 $ 0.29
Management’s Report on Internal Control over Financial Reporting
The Company’s management is responsible for establishing and maintaining adequate internal controls over financial reporting. Any system of internal control over financial reporting, no matter how well designed, has inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.
There have been no changes in the Company’s internal control over financial reporting during the three and six months ended June 30, 2007 that have materially affected, or are reasonably likely to materially affect, internal control over financial reporting.
CAUTIONARY STATEMENT ON FORWARD-LOOKING INFORMATION
Certain of the statements made and information contained herein is “forward-looking information” within the meaning of the Ontario Securities Act or “forward-looking statements” within the meaning of Section 21E of the Securities Exchange Act of 1934 of the United States. Forward-looking statements are subject to a variety of risks and uncertainties which could cause actual events or results to differ from those reflected in the forward-looking statements, including, without limitation, risks and uncertainties relating to foreign currency fluctuations; risks inherent in mining including environmental hazards, industrial accidents, unusual or unexpected geological formations, ground control problems and flooding; risks associated with the estimation of mineral resources and reserves and the geology, grade and continuity of mineral deposits; the possibility that future exploration, development or mining results will not be consistent with the Company’s expectations; the potential for and effects of labour disputes or other unanticipated difficulties with or shortages of labour or interruptions in production; actual ore mined varying from estimates of grade, tonnage, dilution and metallurgical and other characteristics; the inherent uncertainty of production and cost estimates and the potential for unexpected costs and expenses, commodity price fluctuations; uncertain political and economic environments; changes in laws or policies, foreign taxation, delays or the inability to obtain necessary governmental permits; and other risks and uncertainties, including those described under Risk Factors Relating to the Company’s Business in the Company’s Annual Information Form and in each management discussion and analysis. Forward-looking information is in addition based on various assumptions including, without limitation, the expectations and beliefs of management, the assumed long term price of copper and zinc; that the Company can access financing, appropriate equipment and sufficient labour and that the political environment within Portugal will continue to support the development and operation of mining projects. Should one or more of these risks and uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those described in forward-looking statements. Accordingly, readers are advised not to place undue reliance on forward-looking statements.
Other Information
Additional information regarding the Company is included in the Company’s Annual Information Form (“AIF”) and Annual Report on Form 40-F, which are filed with the Canadian securities regulators and the United States Securities and Exchange Commission (“SEC”), respectively. A copy of the Company’s AIF is posted on the SEDAR website at www.sedar.com. A copy of the Form 40-F can be obtained from the SEC website at www.sec.gov.
LUNDIN MINING CORPORATION
INTERIM CONSOLIDATED BALANCE SHEETS
(in thousands of US dollars)
June 30, December 31,
2007 2006
--------------------------------------------------------------------------
(Unaudited)
ASSETS
Current
Cash and cash equivalents $ 388,210 $ 402,170
Accounts receivable 156,656 96,435
Inventories (Note 5) 23,823 24,723
Prepaid expenses 4,862 3,125
--------------------------------------------------------------------------
573,551 526,453
Long-term receivables 969 971
Reclamation fund 45,685 31,710
Investments (Note 4) 193,995 25,882
Mineral properties, plant and
equipment (Note 6) 1,749,866 1,710,041
Other assets 8,024 4,835
Future income tax assets 12,259 12,149
Goodwill 530,583 517,559
--------------------------------------------------------------------------
$ 3,114,932 $ 2,829,600
--------------------------------------------------------------------------
--------------------------------------------------------------------------
LIABILITIES
Current
Accounts payable $ 50,050 $ 41,845
Accrued liabilities 81,131 104,923
Income taxes payable 52,884 80,530
Current portion of long term debt and
capital leases (Note 7) 3,058 3,284
Current portion of deferred revenue 4,376 3,264
--------------------------------------------------------------------------
191,499 233,846
Long-term debt and capital leases (Note 7) 44,674 39,951
Derivative instruments liability (Note 12) 26,306 2,900
Deferred revenue 59,069 61,066
Provision for pension obligations 15,298 15,470
Asset retirement obligations and
other provisions (Note 9) 100,770 95,867
Future income tax liabilities 249,537 250,732
--------------------------------------------------------------------------
687,153 699,832
--------------------------------------------------------------------------
SHAREHOLDERS' EQUITY
Share capital (Note 10 (a)) 1,904,615 1,890,275
Contributed surplus 5,863 8,887
Cumulative translation adjustment (Note 2) - 52,404
Accumulated other
comprehensive income (Note 2) 125,483 -
Retained earnings (Note 2) 391,818 178,202
--------------------------------------------------------------------------
2,427,779 2,129,768
--------------------------------------------------------------------------
$ 3,114,932 $ 2,829,600
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Commitment (Note 8)
Subsequent events (Note 13)
APPROVED BY THE BOARD
(Signed) Lukas H. Lundin (Signed) Dale C. Peniuk
------------------------ -----------------------
Lukas H. Lundin Dale C. Peniuk
See accompanying notes to consolidated financial statements.
LUNDIN MINING CORPORATION
INTERIM CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited, in thousands of US dollars, except for shares and
per share amounts)
Three months ended Six months ended
June 30, June 30,
2007 2006 2007 2006
--------------------------------------------------------------------------
Sales $ 319,935 $ 112,918 $ 513,855 $ 204,716
Cost of sales (91,980) (38,504) (160,208) (74,342)
Accretion of asset
retirement
obligations (1,148) - (2,268) -
Depreciation,
depletion and
amortization (35,875) (13,226) (71,753) (27,263)
--------------------------------------------------------------------------
190,932 61,188 279,626 103,111
Expenses
General exploration
and project
investigation (7,912) (2,083) (13,143) (3,652)
Selling, general
and administration (7,181) (2,723) (12,614) (5,036)
Stock-based
compensation (1,555) (757) (3,075) (2,572)
Foreign exchange
losses (9,043) (1,725) (11,763) (2,802)
Losses on derivative
instruments (27,658) (3,924) (33,182) (9,901)
Interest income and
other income 6,742 1,183 10,771 1,627
Interest and
bank charges (833) (9) (1,743) (150)
--------------------------------------------------------------------------
(47,440) (10,038) (64,749) (22,486)
--------------------------------------------------------------------------
Earnings before
undernoted items 143,492 51,150 214,877 80,625
Gain on sale of
investments (Note 4) 50,438 - 50,438 -
Non-controlling interest - - - (173)
--------------------------------------------------------------------------
Earnings before
income taxes 193,930 51,150 265,315 80,452
Current income taxes (49,551) (15,103) (63,572) (22,121)
Future income
tax recovery 15,529 1,114 11,873 291
--------------------------------------------------------------------------
Net earnings for
the period $ 159,908 $ 37,161 $ 213,616 $ 58,622
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Basic earnings
per share $ 0.56 $ 0.30 $ 0.75 $ 0.48
Diluted earnings
per share $ 0.56 $ 0.30 $ 0.74 $ 0.48
Basic weighted average
number of shares
outstanding 286,292,724 122,222,142 286,165,926 122,151,816
Diluted weighted
average number of
shares outstanding 287,158,131 123,482,016 286,875,485 123,283,002
See accompanying notes to consolidated financial statements.
LUNDIN MINING CORPORATION
INTERIM CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
(Unaudited, in thousands of US dollars)
Three months ended Six months ended
June 30, June 30,
2007 2006 2007 2006
--------------------------------------------------------------------------
Net earnings
for the period $ 159,908 $ 37,161 $ 213,616 $ 58,622
Other comprehensive
income
Change in fair value
of available for
sale securities,
net of taxes 15,611 - 23,968 -
Fair value of
available for
sale securities
sold during
the period (9,945) - (9,945) -
Cumulative
translation
adjustment 36,261 - 55,863 -
--------------------------------------------------------------------------
41,927 - 69,886 -
--------------------------------------------------------------------------
Comprehensive
income for
the period $ 201,835 $ 37,161 $ 283,502 $ 58,622
--------------------------------------------------------------------------
--------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
LUNDIN MINING CORPORATION
INTERIM CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(Unaudited, in thousands of US dollars)
Cumu- Accumu-
lative lated
Trans- Other
Contri- lation Compreh-
Share buted Adjust- ensive Retained
Capital Surplus ment Income Earnings Total
--------------------------------------------------------------------------
Balance,
December 31,
2006 $1,890,275 $8,887 $52,404 $ - $178,202 $2,129,768
Stock-based
compensation - 1,520 - - - 1,520
Exercise of
stock options 3,104 - - - - 3,104
Exercise of
stock appre-
ciation
rights 1,206 - - - - 1,206
Transfer of
contributed
surplus on
exercise of
stock
options 2,862 (2,862) - - - -
Transition
adjustments
(Note 2(c)) - - (52,404) 55,597 - 3,193
Translation
adjustment
for the
period - - 19,602 - 19,602
Unrealized
gains
during
period on
available-
for-sale
investments - - - 8,357 - 8,357
Net earnings
for the
period - - - 53,708 53,708
--------------------------------------------------------------------------
Balance,
March 31,
2007 1,897,447 7,545 - 83,556 231,910 2,220,458
Stock-based
compensation - 1,551 - - - 1,551
Exercise of
stock options 1,474 - - - - 1,474
Transfer of
fair value
of exercised
stock
appreciation
rights 2,461 - - - - 2,461
Transfer of
contributed
surplus on
exercise
of stock
options 3,233 (3,233) - - - -
Translation
adjustment
for the
period - - - 36,261 - 36,261
Changes in
fair value
of
available-
for-sale
securities - - - 15,611 - 15,611
Sale of
available-
for-sale
securities - - - (9,945) - (9,945)
Net
earnings
for the
period - - - - 159,908 159,908
--------------------------------------------------------------------------
Balance,
June 30,
2007 $1,904,615 $ 5,863 $ - $125,483 $391,818 $2,427,779
--------------------------------------------------------------------------
--------------------------------------------------------------------------
See accompanying notes to consolidated financial statements
LUNDIN MINING CORPORATION
INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, in thousands of US dollars)
Three months ended Six months ended
June 30, June 30,
2007 2006 2007 2006
--------------------------------------------------------------------------
Operating
activities
Net earnings
for the period $ 159,908 $ 37,161 $ 213,617 $ 58,622
Items not
involving cash
Amortization of
deferred revenue (849) (656) (1,956) (1,438)
Depreciation,
depletion and
amortization 35,875 13,226 71,753 27,263
Stock-based
compensation
(Note 9(b)) 1,555 203 3,075 446
Loss (gain) on sale
of investments and
other assets (50,438) - (50,438) 82
Future income
tax expense (15,529) (1,114) (11,873) (294)
Provision for
pensions (136) - 85 -
Interest accretion
and other 3,122 673 7,351 892
Unrealized loss
on derivative
instruments 23,088 - 30,183 -
Unrealized foreign
exchange losses (381) - 3,410 -
--------------------------------------------------------------------------
156,215 49,493 265,207 85,573
Changes in
non-cash working
capital items (6,093) 4,922 (104,514) (8,454)
--------------------------------------------------------------------------
Cash flow from
operating activities 150,122 54,415 160,693 77,119
--------------------------------------------------------------------------
Financing activities
Common shares issued 1,466 661 5,776 661
Put premium payments (3,888) - (7,777) -
Repayment of debt
and capital leases (730) (73) (1,836) (73)
--------------------------------------------------------------------------
(3,152) 588 (3,837) 588
--------------------------------------------------------------------------
Investing activities
Mineral property,
plant and equipment
expenditures (44,208) (8,283) (77,196) (13,159)
Investments in
marketable securities (149,537) (10,511) (207,967) (15,120)
Contributions to
reclamation fund (13,104) - (13,104) -
Other assets (3,996) - (3,996) -
Proceeds from sale
of investments and
other assets 118,492 132 118,496 132
--------------------------------------------------------------------------
(92,353) (18,662) (183,767) (28,147)
--------------------------------------------------------------------------
Effect of foreign
exchange on
cash balances 16,200 5,826 12,951 7,513
--------------------------------------------------------------------------
Increase (decrease)
in cash and cash
equivalents during
the period 70,817 42,167 (13,960) 57,073
Cash and cash
equivalents,
beginning of period 317,393 89,315 402,170 74,409
--------------------------------------------------------------------------
Cash and cash
equivalents,
end of period $ 388,210 $ 131,482 $ 388,210 $ 131,482
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Supplemental
Information
Changes in
non-cash working
capital items
consist of:
Accounts receivable
and other current
assets $ (25,749) $ (15,200) $ (63,909) $ (26,229)
Accounts payable
and other current
liabilities 19,656 20,122 (40,605) 17,775
-----------------------------------------------------
(6,093) 4,922 (104,514) (8,454)
Operating activities
included the
following cash
payments
Interest paid $ 492 $ - $ 911 $ 11
Income taxes paid $ 37,519 $ 108 $ 79,079 $ 13,333
LUNDIN MINING CORPORATION
Notes to interim consolidated financial statements
For the three and six months ended June 30, 2007
(Unaudited - Tabular amounts are in thousands of US dollars, except for
price per share and per share amounts)
1. BASIS OF PRESENTATION
The unaudited interim consolidated financial statements of Lundin Mining Corporation (the “Company” or “Lundin Mining”) are prepared in accordance with Canadian generally accepted accounting principles using the same accounting policies and methods of application as those disclosed in Note 2 to the Company’s consolidated financial statements for the year ended December 31, 2006, except as discussed in Note 2 below.
These interim consolidated financial statements do not contain all of the information required by Canadian generally accepted accounting principles for annual financial statements and therefore should be read in conjunction with the Company’s 2006 audited consolidated financial statements.
These unaudited interim consolidated financial statements reflect all normal and recurring adjustments which are, in the opinion of management, necessary for a fair presentation of the respective interim periods presented.
Certain of the 2006 figures have been reclassified to conform to the 2007 presentation.
2. ACCOUNTING POLICIES
Effective January 1, 2007 the Company has adopted the following CICA accounting standards:
a) Section 1530 - Comprehensive Income
Comprehensive income is the change in the Company’s net assets that results from transactions, events and circumstances from sources other than the Company’s shareholders and includes items that would not normally be included in the net earnings such as cumulative translation adjustments resulting from the translation of foreign denominated financial statements to US dollars using the current rate method and unrealized gains or losses on available-for-sale securities.
b) Section 3855 - Financial Instruments - Recognition and Measurement
This standard requires that all financial assets, except those classified as held to maturity but including derivative financial instruments, must be measured at fair value. All financial liabilities must be measured at fair value when they are classified as held for trading; otherwise, they are measured at cost.
c) Transitional Provisions
The adoption of Sections 1530 and 3855 resulted in changes to the Company’s current period’s earnings as well as required an adjustment to the opening balances for retained earnings and total assets.
The cumulative translation adjustment and unrealized gain on available-for-sale securities as at December 31, 2006 were $52.4 million and $3.2 million respectively. The aggregate of these amounts has been reported as a transition adjustment during the current period to the opening balance of Accumulated Other Comprehensive Income in the Interim Consolidated Statements of Changes in Shareholders’ Equity.
The cumulative translation adjustment and unrealized gain on available-for-sale securities for the six months ended June 30, 2007 were $55.9 million and $14.0 million, net of tax, respectively, and are reported in the current period as other comprehensive income.
3. BUSINESS ACQUISITIONS
EuroZinc Mining Corporation
On October 31, 2006 the Company completed the acquisition of 100% of the issued and outstanding common shares of EuroZinc Mining Corporation (“EuroZinc”) by issuing 160.8 million common shares (post-split) valued at CAD$11.36 (average closing price of the Company’s shares on the Toronto Stock Exchange the two days before, the day of, and two days after August 21, 2006, the date of announcement) per share and cash payments totaling $0.05 million to the former EuroZinc shareholders. In addition, the Company issued 2.3 million stock options and 1.5 million stock appreciation rights (“SARs”) to the former EuroZinc employees in exchange for the cancellation of the EuroZinc stock options. The terms and conditions of these stock options and stock appreciation rights remain the same as the EuroZinc stock options, except for the number of options issued and their respective exercise prices, which were adjusted according to the exchange ratio. This acquisition has been accounted for under the purchase method.
The allocation of the purchase price of the shares of EuroZinc is summarized in the following table.
Purchase price
Common shares issued (160.8 million shares) $ 1,632,738
Stock options issued in exchange for EuroZinc options
(2.3 million options) 12,127
Stock appreciation rights (1.5 million SARs) 10,595
Acquisition costs 12,852
Cash 50
--------------------------------------------------------------------------
1,668,362
Less:
Cash and cash equivalents acquired (243,649)
--------------------------------------------------------------------------
Net purchase price $ 1,424,713
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Net assets acquired
Restricted cash $ 4,007
Non-cash current assets 104,053
Mineral properties 922,614
Plant and equipment 321,895
Other long-term assets 24,139
--------------------------------------------------------------------------
1,376,708
Current liabilities (138,785)
Other liabilities (69,247)
Reclamation and closure cost obligations (66,893)
Future income tax liabilities (178,317)
--------------------------------------------------------------------------
Net identifiable assets 923,466
Residual purchase price allocated to goodwill 501,247
--------------------------------------------------------------------------
Net assets acquired $ 1,424,713
--------------------------------------------------------------------------
--------------------------------------------------------------------------
The purchase consideration has been allocated to the fair value of the assets acquired and liabilities assumed, with goodwill assigned to specific reporting units, based on management’s best estimates and taking into account all available information at the time of acquisition as well as additional information. The fair values allocated to the assets and liabilities were based in part on an independent valuation report dated March 28, 2007. This process was performed in accordance with recent accounting pronouncements relating to “Mining Assets and Business Combinations” (CICA Emerging Issues Committee Abstract 152). The amount allocated to goodwill is not deductible for tax purposes.
4. INVESTMENTS
The Company invests in common shares of mining and exploration companies, which are designated at the time of purchase to be available-for-sale securities. These shares are fair valued at the end of each reporting period with a corresponding adjustment to Other Comprehensive Income, a component of shareholders’ equity.
For the six months ended June 30, 2007, the Company recorded a $24.0 million (three months ended June 30, 2007 - $15.6 million) increase in market value of its investment in available-for-sale securities.
For the six months ended June 30, 2007, the Company acquired shares in various mining and exploration companies, which one investment was sold during the second quarter for a gain of $50.4 million on proceeds of $109.1 million. The Company also invested $140.8 million in shares of a mining company, which had a market value of $153.6 million as at June 30, 2007. These shares were subsequently sold for a gain of $26.8 million, which will be recognized in the third quarter 2007 (Note 13c).
The Company does not have any significant influence and holds less than 20% equity interest on any of the companies that the Company invests in.
5. INVENTORIES
Inventories consist of:
June 30, December 31,
2007 2006
----------------------------------------------------
Ore stock piles $ 4,059 $ 4,522
Concentrate stock piles 8,564 9,305
Materials and supplies 11,200 10,896
----------------------------------------------------
$ 23,823 $ 24,723
----------------------------------------------------
----------------------------------------------------
6. MINERAL PROPERTIES, PLANT AND EQUIPMENT
Mineral properties, plant and equipment consist of:
June 30, 2007 December 31, 2006
-------------------------------- --------------------------------
Accum- Accum-
ulated ulated
Cost Depletion Net Cost Depletion Net
------------------------------------------ --------------------------------
Mineral
prop-
erties $1,511,272 $ 186,148 $1,325,124 $1,470,393 $ 128,478 $1,341,915
Plant and
equipment 393,966 46,059 347,907 360,646 27,655 332,991
Development 76,835 - 76,835 35,135 - 35,135
------------------------------------------ --------------------------------
$1,982,073 $ 232,207 $1,749,866 $1,866,174 $ 156,133 $1,710,041
------------------------------------------ --------------------------------
------------------------------------------ --------------------------------
During the six months ended June 30, 2007, the Company spent $83.7 million on capital equipment, mine development and related infrastructure, of which $45 million was spent at Aljustrel, $20 million at Neves-Corvo and the balance at Zinkgruvan, Storliden and Ozernoe.
7. LONG-TERM DEBT AND CAPITAL LEASES
Long-term debt and capital leases consist of:
June 30, December 31,
2007 2006
--------------------------------------------------------------------------
Somincor bonds $ 36,434 $ 35,689
Capital lease obligations 5,405 6,866
Deferred employee housing sales 243 239
Investment incentive loan 879 1,061
Other long term obligations 2,443 -
Aljustrel debt 2,328 2,280
--------------------------------------------------------------------------
Total 47,732 46,135
Less: current portion of long-term debt and
capital leases (3,058) (3,284)
--------------------------------------------------------------------------
$ 44,674 $ 42,851
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Management believes that the fair value of long-term debt approximates its carrying value.
8. COMMITMENT
During the second quarter ended June 30, 2007, the Company entered into an agreement with Silverstone Resources Corporation (“Silverstone”) to deliver silver production from its Neves-Corvo and Aljustrel mines, subject to regulatory approval and certain other conditions. Upon closing of this agreement, which is expected to be on or before September 15, 2007, the Company will receive an upfront cash payment of $42.5 million, 15.4 million Silverstone common shares and 4,256,250 Silverstone special warrants which are convertible into Silverstone common shares at no additional cost. The common share and special warrant are valued at CAD$2.42 each. The approximate total value of the agreement is $87.1 million (“Transaction Value”).
The special warrants may be exercisable into one Silverstone common share at any time provided that the common shares issued to the Company would not result in the Company owning 20% or more of the issued and outstanding common shares immediately after giving effect to such issuances or that shareholders of Silverstone pass a resolution at a meeting of the Silverstone shareholders approving any exercise that would result in Lundin Mining owning 20% or more of the issued and outstanding shares of Silverstone.
Upon delivery of silver production to Silverstone, the Company will receive the lower of $3.90 per ounce of silver, which is subject to a 1% annual inflationary adjustment after three years and yearly, thereafter, or then prevailing market price per ounce of silver.
Upon closing of the transaction, the Company will record the Transaction Value as deferred revenue, which will be amortized over the life of the silver deliveries.
9. ASSET RETIREMENT OBLIGATIONS AND OTHER PROVISIONS
The asset retirement obligations and other provisions relate to the operations of Neves-Corvo, Zinkgruvan, Storliden, Aljustrel and Galmoy mines. The following is a reconciliation of changes in the provision during the period:
Asset Retirement Obligations Balance, December 31, 2006 $ 91,031 Accretion during the period 2,268 Effect from changes in foreign exchange rates 1,740 -------------------------------------------------------------------------- Balance, June 30, 2007 95,039 -------------------------------------------------------------------------- Other Mine Closure Obligations Balance, December 31, 2006 4,836 Provisions during the period 781 Effect from changes in foreign exchange rates 114 -------------------------------------------------------------------------- Balance, June 30, 2007 5,731 -------------------------------------------------------------------------- Total $ 100,770 -------------------------------------------------------------------------- --------------------------------------------------------------------------
10. SHARE CAPITAL
All shares, stock options and stock appreciation rights shown in the tables below are calculated as though the three-for-one stock split, which was effective February 5, 2007, had occurred at December 31, 2006.
(a) The authorized and issued share capital is as follows:
Authorized - unlimited number of common shares with no par value and one special share with no par value.
Issued and outstanding:
Number of
shares Amounts
--------------------------------------------------------------------------
Balance, December 31, 2006 284,800,065 $ 1,890,275
Exercise of stock options 1,087,653 3,104
Exercise of stock appreciation rights 150,000 1,206
Transfer of contributed surplus on exercise
of stock options - 2,862
--------------------------------------------------------------------------
Balance, March 31, 2007 286,037,718 1,897,447
Exercise of stock options 318,584 1,474
Transfer of fair value of exercised stock
appreciation rights - 2,461
Return of fractional shares (69) -
Transfer of contributed surplus on exercise
of stock options - 3,233
--------------------------------------------------------------------------
Balance, June 30, 2007 286,356,233 $ 1,904,615
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--------------------------------------------------------------------------
(b) Stock options
The Company uses the fair value method of accounting for all stock-based payments to employees, directors and officers. Under this method, the Company recorded a stock-based compensation expense of $1.6 million during the six months ended June 30, 2007 (2006 - $0.8 million). The fair value of the stock options granted during the quarter, as measured at the date of the grant using the Black-Scholes option pricing model, assumes a risk-free interest rate of between 4.21% and 4.74%, no dividend yield, expected life 1.5 years and expected price volatility of between 51% and 53%.
Incentive stock options issued, exercised and outstanding for the six months ended June 30, 2007 is as follows:
Weighted average
Number of exercise price
Options (CAD$)
--------------------------------------------------------------------------
Outstanding, December 31, 2006 3,038,266 $ 5.87
Granted during the year 538,560 13.45
Cancelled during the year (9,520) 9.80
Exercised during the year (1,406,238) 3.82
--------------------------------------------------------------------------
Outstanding, June 30, 2007 2,161,068 $ 9.08
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--------------------------------------------------------------------------
During the six months ended June 30, 2007, the Company granted 538,560 incentive stock options to employees and officers at a weighted average price of CAD$13.45 per share that expire between January 17, 2009 and June 17, 2009. The following table summarizes options outstanding as at June 30, 2007, as follows:
Weighted
Average
Remaining Weighted
Contra Average
Year Number of -ctual Number of Exercise
Range of exercise of Options Life Options Price
prices (CAD$) Expiry Outstanding (Years) Exercisable (CAD$)
--------------------------------------------------------------------------
$ 4.09 - $4.22 2007 112,500 0.3 112,500 $ 4.18
$ 7.39 - $12.49 2008 330,000 1.0 330,000 10.49
$ 2.10 - $14.97 2009 538,560 1.7 538,560 13.45
$ 2.28 - $3.33 2010 401,750 3.0 112,336 2.35
$ 9.14 - $10.15 2011 778,258 4.1 368,900 9.63
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2,161,068 2.6 1,462,296 $ 9.08
--------------------------------------------------------------------------
--------------------------------------------------------------------------
(c) Stock Appreciation Rights
In connection with the October 31, 2006 acquisition of EuroZinc (Note 3), the Company issued stock appreciation rights to certain former EuroZinc employees in exchange for the cancellation of their stock options. The terms of the newly issued stock appreciation rights were the same as those of the cancelled options, with the exception of the number of shares and the exercise prices, which were adjusted for the share exchange ratio of the EuroZinc acquisition. Holders of stock appreciation rights have the right to elect to receive either shares in the Company or a cash payout equal to the excess of the fair market value of the shares over the exercise price on the date of exercise. All stock appreciation rights are fully vested and exercisable.
Stock appreciation rights issued, exercised and outstanding is as follows:
Number of Weighted
stock average
appreciation exercise price
rights (CAD$)
--------------------------------------------------------------------------
Oustanding, December 31, 2006 1,221,080 $ 5.27
Exercised during the period for shares (150,000) 9.03
Exercised during the period for cash (688,200) 4.14
--------------------------------------------------------------------------
Outstanding, June 30, 2007 382,880 $ 5.81
--------------------------------------------------------------------------
--------------------------------------------------------------------------
The stock appreciation rights are recorded as a current liability and are adjusted based on the Company’s closing stock price at the end of each reporting period. The liability as at June 30, 2007 was $2.5 million (December 31, 2006 - $9.2 million).
The following table summarizes the June 30, 2007 outstanding stock appreciation rights:
Number of Weighted
stock average
appreciation exercise price
Expiry date rights (CAD$)
--------------------------------------------------------------------------
June 8, 2010 135,360 $ 2.31
July 5, 2010 76,160 2.28
May 11, 2011 171,360 10.15
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Outstanding, June 30, 2007 382,880 $ 5.81
--------------------------------------------------------------------------
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10. SEGMENTED INFORMATION
The Company is currently engaged in mining, exploration and development of mineral properties, primarily in Portugal, Sweden and Ireland.
Operating segmented information is as follows:
Three months ended Six months ended
June 30, June 30,
2007 2006 2007 2006
--------------------------------------------------------------------------
Sales
Neves-Corvo $ 202,388 $ - $ 313,895 $ -
Zinkgruvan 58,444 60,182 107,920 98,206
Galmoy 34,887 20,820 52,639 48,768
Storliden 23,672 32,037 39,216 57,821
Other 544 (121) 185 (79)
--------------------------------------------------------------------------
$ 319,935 $ 112,918 $ 513,855 $ 204,716
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Three months ended Six months ended
June 30, June 30,
2007 2006 2007 2006
--------------------------------------------------------------------------
Operating profit
Neves-Corvo $ 127,537 $ - $ 181,464 $ -
Zinkgruvan 40,228 43,856 70,008 67,678
Galmoy 13,442 2,208 14,052 11,370
Storliden 9,499 15,326 14,247 24,275
Other 226 (202) (145) (212)
--------------------------------------------------------------------------
$ 190,932 $ 61,188 $ 279,626 $ 103,111
--------------------------------------------------------------------------
--------------------------------------------------------------------------
June 30, December 31,
2007 2006
------------------------------------------------
Total assets
Neves-Corvo(i) $ 2,398,949 $ 2,152,939
Zinkgruvan 496,299 437,570
Galmoy 161,491 175,527
Storliden 59,118 107,082
Ozernoe 155,307 150,292
Other and Intercorporate
adjustments (156,232) (193,810)
------------------------------------------------
$ 3,114,932 $ 2,829,600
------------------------------------------------
------------------------------------------------
(i) Neves-Corvo figures include the assets for the Aljustrel zinc mine
under development in Portugal.
Geographic segmented information is as follows:
Three months ended Six months ended
June 30, June 30,
2007 2006 2007 2006
--------------------------------------------------------------------------
Sales
Portugal $ 202,388 $ - $ 313,895 $ -
Sweden 82,116 92,219 147,136 156,027
Ireland 34,887 20,820 52,639 48,768
Other 544 (121) 185 (79)
--------------------------------------------------------------------------
$ 319,935 $ 112,918 $ 513,855 $ 204,716
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Three months ended Six months ended
June 30, June 30,
2007 2006 2007 2006
--------------------------------------------------------------------------
Operating profit
Portugal $ 127,537 $ - $ 181,464 $ -
Sweden 49,727 15,326 84,255 91,953
Ireland 13,442 2,208 14,052 11,370
Other 226 (202) (145) (212)
--------------------------------------------------------------------------
$ 190,932 $ 17,332 $ 279,626 $ 103,111
--------------------------------------------------------------------------
--------------------------------------------------------------------------
June 30, December 31,
2007 2006
------------------------------------------------
Total assets
Portugal $ 2,398,949 $ 2,152,939
Sweden 555,417 544,652
Ireland 161,491 175,527
Russia 155,307 150,292
Intercorporate
adjustments (156,232) (193,810)
------------------------------------------------
$ 3,114,932 $ 2,829,600
------------------------------------------------
------------------------------------------------
11. FINANCIAL INSTRUMENTS
The Company has entered into various derivative contracts, including forward sales, calls and put options and foreign exchange for the purpose of managing financial risks and are not for trading purposes.
The following table and notes summarize the outstanding derivatives contracts of the Company as at June 30, 2007:
2009 -
2007 2008 2011(i) Total
--------------------------------------------------------------------------
Copper
Puts (tonnes) 17,568 - - 17,568
Average price (US$/lb) $ 0.82 - - $ 0.82
Calls (tonnes) 4,950 - - 4,950
Average price (US$/lb) $ 4.00 - - $ 4.00
Forward sales (tonnes) 10,200 - - 10,200
Average price (US$/lb) $ 3.26 - - $ 3.26
Silver
Forward sales (ounces) 39,852 95,460 284,532 419,844
Average price (US$/ounce) $ 11.60 $ 11.60 $ 11.60 $ 11.60
Lead
Forward sales (tonnes) 8,250 10,500 - 18,750
Average price (US$/lb) $ 0.75 $ 0.71 - $ 0.73
Zinc
Forward sales (tonnes) 1,200 2,400 - 3,600
Average price (US$/lb) $ 1.22 $ 1.22 - $ 1.22
US Currency
Forward sales $ 48,000 - - 48,000
Average US$/EUR 1.2883 - - $ 1.2883
--------------------------------------------------------------------------
(i) Between 2009 and 2011, silver forward sales are 117,072 oz, 114,720 oz,
and 52,740 oz respectively, all at $11.60/oz.
In addition to the derivative contracts noted in the table above, the Company is also a party to the following structured derivatives as at June 30, 2007:
- multiple structured foreign exchange contracts with various counterparties having the following terms:
i. to sell between US$5.0 million and US$7.5 million and buy Euro dollars at prices between US$1.2025 and US$1.3000 per EUR1.00, on a monthly basis from July to August 2007;
ii. to sell US$1.0 million and buy Euro dollars at prices between US$1.1800 and US$1.3000 per EUR1.00, on a monthly basis from July to August 2007;
iii. to sell US$4.0 million and buy Euro dollars at US$1.2850 per EUR1.00, on a monthly basis from April to June 2007, and to sell US$2.0 million and buy Euro dollars at US$1.2850 per EUR1.00, on a monthly basis from July to December 2007, with a floor of US$1.2000 per EUR1.00;
iv. to sell between US$2.0 million and US$4.0 million and buy Euro dollars at prices between US$1.2640 and US$1.2980 per EUR1.00, on a monthly basis from July to September 2007; and
v. to sell between US$3.5 million and US$7.0 million and buy Euro dollars at prices between US$1.2410 and US$1.2900 per EUR1.00, on a monthly basis from July to December 2007.
- two structured lead put contracts with a counterparty having the following terms:
vi. on a monthly basis between July and December 2007, the Company has a contingent right (triggered if LME spot is below $0.46/lb) to sell 600 tonnes at $0.46/lb or a contingent obligation (triggered if LME spot is at or above $0.59/lb) to sell 600 tonnes at $0.54/lb; and
vii. on a monthly basis between July and December 2007, the Company has a contingent right (triggered if LME spot is below $0.52/lb) to sell 600 tonnes at $0.52/lb or a contingent obligation (triggered if LME spot is at or above $0.64/lb) to sell 600 tonnes at $0.59/lb.
During the second quarter ended June 30, 2007, the Company entered into copper and lead forward contracts to sell 1,000 tonnes per month of copper at a price of $3.44 per pound for the periods of June to December 2007 and 1,000 tonnes per month of lead at a price of $0.83 per pound for the periods July 2007 to June 2008, respectively. These contracts are included in the above summary table of outstanding derivatives contracts.
The net derivative liability of all the outstanding derivatives as at June 30, 2007 was $31.9 million (December 31, 2006 - $2.9 million). For the six-month period ended June 30, 2007, the Company recorded a net loss of $33.2 million on derivative instruments consisting of a $3.0 million realized loss from the settlement of derivative contracts and a $30.2 million unrealized loss related to the marking-to-market the outstanding derivative contracts.
12. SUBSEQUENT EVENTS
Subsequent to June 30, 2007:
(a) Extends bid for Rio Narcea Gold Mines, Ltd. (“Rio Narcea”)
Following the April 4, 2007 announcement that the Company had entered into a definitive support agreement with Rio Narcea to acquire all of the outstanding common shares and share purchase warrants by way of a take-over bid for CAD$5.00 cash per share and CAD$1.04 cash per warrant, the Company increased its cash offer (the “New Offer”) for the common shares to CAD$5.50 per common share. This New Offer expired on July 16, 2007 but was extended until August 20, 2007.
As at August 9, 2007, a total of 146,356,544 common shares and 16,982,220 share purchase warrants were tendered to the Company, representing 86.2% of the total common shares outstanding and 76.9% share purchase warrants outstanding. Once 90% of the common shares are tendered to the Company before the expiry date, a notice will be issued to the remaining Rio Narcea shareholders to tender their shares to the Company within 20 days following the delivery of the notice. This notice will, in effect, give the Company 100% ownership in Rio Narcea.
In conjunction with the purchase of Rio Narcea, the Company entered into an option agreement to sell Rio Narcea’s Tasiast gold mine to Red Back Mining Inc., a company with two common directors, for $225 million in cash and assumption of $42.5 million of debt related to the Tasiast gold mine. In early August 2007, Red Back exercised the option to purchase the Tasiast gold mine and the proceeds were used to reduce the balance of the credit facility to acquire Rio Narcea.
(b) Tenke Mining Corp. (“Tenke”)
On July 3, 2007, the Company completed the acquisition of Tenke whereby the Company issued 105,421,402 common shares to the Tenke shareholders with a fair valued of $1.3 billion. The Company has approximately 391.8 million common shares issued and outstanding immediately following the Tenke acquisition with the existing Lundin Mining and Tenke shareholders owing approximately 73% and 27% respectively of the combined company, Lundin Mining. Tenke holds a 24.75% interest in Tenke Fungurume, a world class copper-cobalt property being developed in the Democratic Republic Congo (“DRC”). The remaining interest in Tenke Fungurume is held by Freeport McMoRan Copper & Gold Inc., which holds 57.75% and is the operator of the project and Gecamines, a DRC government agency and the holder of the remaining 17.5% of the project.
(c) Gain on sale investments
Received proceeds of $171.3 million from the sale of shares in a mining company and will recognize a gain of $26.8 million in the third quarter.
SUPPLEMENTARY INFORMATION
Significant differences between Canadian Generally Accepted Accounting Principles (“Canadian GAAP”) and International Financial Reporting Standards (“IFRS”)/ International Accounting Standards (“IAS”).
The shares of Lundin Mining trade on the Toronto Stock Exchange and AMEX, and Lundin Mining’s Swedish Depository Receipts trade on the OMX Nordic Exchange (“OMX”) in Stockholm. Most companies that trade on the SSE are required to report according to IFRS/IAS. However, as a Canadian company, Lundin Mining is required to report according to Canadian GAAP. The Company has reviewed the differences between Canadian GAAP and IFRS/IAS and has identified the following items which would or may have a significant impact on the financial statements of Lundin Mining.
According to IFRS 3, future costs such as restructuring items, which are expected to occur subsequent to an acquisition, should not be provided for in the purchase price allocation. Instead, these costs should be realized in the income statement when the costs actually occur. However, according to Canadian GAAP, restructuring costs that are expected to occur as a result of an acquisition should be provided for in the purchase price allocation. Restructuring costs that arose during 2006, as a result of the merger with EuroZinc, in the amount of $7.0 million, have been provided for in the purchase price allocation.
According to Canadian GAAP, impairment test of assets should be carried out by comparing the future cash flows of the assets to their carrying values. Future cash flows are dependent on a number of assumptions, including, among other things, future metal prices, exchange rates and discount rates. According to Canadian GAAP, future cash flows should be based on undiscounted values. Lundin Mining believes that the future cash flows from the Company’s assets exceed their carrying values and, accordingly, no write downs are necessary. According to IAS 36, the future cash flows would be based on discounted values. Under IFRS, no impairment charge would be required.
According to Canadian GAAP, when an asset is acquired other than in a business combination and the tax basis is less than its cost, then the cost of future income taxes recognized at the time of acquisition is added to the cost of the asset. However, according to IAS 12, temporary tax differences arising on the initial recognition of an asset on a purchase of an asset in other than a business combination are not permitted. In connection with the acquisition of the Ozernoe project, the Company recognized a future income tax liability of $34.9 million under Canadian GAAP.
OTHER SUPPLEMENTARY INFORMATION
1. List of directors and officers at August 14, 2007:
(a) Directors:
Lukas H. Lundin, Chairman
Colin K. Benner, Vice Chairman
Karl-Axel Waplan
Brian D. Edgar
Dale C. Peniuk
David F. Mullen
Donald K. Charter
John H. Craig
William A. Rand
Tony O'Reilly Jnr.
(b) Officers:
Lukas H. Lundin, Chairman
Colin K. Benner, Vice Chairman
Karl-Axel Waplan, President and Chief Executive Officer
Anders Haker, Vice President and Chief Financial Officer
Joao Carrelo, Executive Vice President and Chief Operating Officer
Neil O'Brien, Senior Vice President of Exploration and
Business Development
Paul Conibear, Senior Vice President Projects
Manfred Lindvall, Vice President Environment, Health and Safety
Mikael Schauman, Vice President Marketing
Wojtek Wodzicki, Vice President of Strategic Partnerships
Kevin Hisko, Corporate Secretary
2. Financial information
The report for the third quarter 2007 will be published on or before
November 15, 2007.
3. Other information
Address (Vancouver office):
Lundin Mining Corporation
Suite 2101 - 885 West Georgia Street
Vancouver B.C. V6C 3E8
Canada
Telephone: +1 604 681 1337
Fax: +1 604 681 1339
Address (Sweden office):
Lundin Mining AB
Hovslagargatan 5
SE-111 48 Stockholm
Sweden
Telephone: +46 8 550 560 00
Fax: +46 8 550 560 01
Website: www.lundinmining.com.
The corporate number of the Company is 306723-8.
FOR FURTHER INFORMATION PLEASE CONTACT:
Lundin Mining Corporation
Karl-Axel Waplan
President and CEO
+46-705-10 42 39
Email: ka.waplan@lundinmining.com
or
Lundin Mining Corporation
Anders Haker
Vice President and CFO
+46-708-10 85 59
Email: anders.haker@lundinmining.com
or
Lundin Mining Corporation
Catarina Ihre
Manager, Investor Relations
+46-706-07 92 63
Email: catarina.ihre@lundinmining.com
or
Lundin Mining Corporation
Sophia Shane
Investor Relations, North America
(604) 689-7842
Email: sophias@namdo.com
Website: www.lundinmining.com
