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Lundin could sell Russian zinc mine

Ownership uncertainties raise concerns

ANDY HOFFMAN

00:00 EDT Friday, June 06, 2008

TORONTO -- When it comes to risk-taking, the Lundin family has few rivals.

By going where others won't, including hot spots such as Iran, Sudan, Congo, apartheid-era South Africa and Syria, in search of mineral resources, they have built a mining and gas empire.

But according to the new president and chief executive officer of the Vancouver family's flagship Lundin Mining Corp., the politics of Russia may be too hot to handle, even for the fearless Lundins.

Phil Wright signalled yesterday that Lundin is considering selling its 49-per-cent interest in the massive Ozernoe zinc project in Russia, in part, because of new legislation restricting foreign ownership of mineral deposits.

"We have slowed things right down and I think Russia has challenges," Mr. Wright said in an interview after the firm's annual meeting in Toronto.

Russia has some of the largest untapped mining deposits in the world but uncertainties surrounding ownership have frightened away many foreign investors who fear the nationalization of the country's oil and gas assets could be repeated in the mining sector.

Legislation preventing foreign firms from controlling "strategic" mineral deposits is making its way through the Duma, Russia's parliament.

"I'm finding it very challenging to see that we should be committing more funds to Russia than we have done," Mr. Wright, who took over the top job at Lundin five months ago, told shareholders.

Lundin purchased its stake in Ozernoe in 2006 for $125-million (U.S.) from its Russian partner IFC Metropol, which holds the remaining 51 per cent. Under the terms of the deal, Lundin is responsible for the mining operations, including project development, construction and operation of the mine. Estimates forecast capital spending of $400-million.

A feasibility study for Ozernoe, which is believed to contain 157 million tonnes of ore at a grade of 5.2 per cent zinc and 1 per cent lead, has yet to be completed.

Until recently, the Lundins cited Ozernoe as a key pillar in its ambitious growth plans. Just last year, chairman Lukas Lundin, who inherited the reins of the resource empire from his late father, Adolf, suggested the Russian mine would help double zinc output.

"We are an unbelievable growth story, with our stuff in Russia - it's the fifth-largest zinc deposit in the world," he said at the time.

The about-face on Russia does not mean the Lundins have become risk-averse.

Mr. Wright highlighted the company's 25-per-cent interest in the Tenke Fungurume copper project in the Democratic Republic of Congo. The Lundins have been trying to develop it for more than a decade, but a bloody civil war, and lately, a government review of mining licences has kept the project from production. Mr. Wright said he expects Tenke's mining licence to remain largely unchanged.

With the bulk of its operations in Europe, Mr. Wright said Lundin, which has seen its shares drop 40 per cent in the past year, could acquire targets in more challenging locations. "We've got very stable cash flow coming out of extremely stable jurisdictions. We can probably take on a little bit more risk given that stability," he said.

LUNDIN MINING (LUN) Close: $7.79, up 9¢