(Amounts are expressed in United States dollars, unless otherwise indicated)
This Management Discussion and Analysis (“MD&A”) of Lundin Mining Corporation (“Lundin Mining” or the “Company”) has been prepared as of August 10, 2007 and was restated as at February 27, 2008, as discussed below. The MD&A is intended to supplement and complement the accompanying restated, unaudited interim consolidated financial statements and notes for the three and six months ended June 30, 2007.
Please also refer to the cautionary statement of forward-looking in formation at the end of this MD&A. Additional information relating to the Company is available on the SEDAR website at www.sedar.com. All financial information in this MD&A is prepared in accordance with Canadian generally accepted accounting principles (“Canadian GAAP”), and all dollar amounts, including comparatives, are expressed in US dollars unless otherwise indicated.
Restatement
During the preparation of the consolidated financial statements for the year ended December 31, 2007, the Company identified that it had used an incorrect tax rate in the determination of current and future income taxes related to its Portuguese operations. The preferential tax rate applicable to enterprises operating in lesser developed inland regions of Portugal is applicable to a de minimus amount of income over a three year period, whereas the Company had applied this rate to all income earned in the region and to all future income tax balances arising from temporary differences related to net assets and operations in the region. The result was that the Company was found to be applying an effective tax rate which was 5% lower than required, in absolute terms. The effect of the restatement is primarily the result of restating the purchase price allocation on the acquisition of EuroZinc Mining Corporation in October 2006 as well as using the correct Portuguese tax rate on current and future income taxes from the date of acquisition. A summary of the impact of the change in tax rates on information previously reported by the Company is set out below:
(For table see attached file.)
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 $153.8 million or $0.54 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 at www.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.
(For full report see attached file.)
