Soaring Tenke Costs Affect Lundin Mining and Freeport-McMoRan

Lundin Mining Corp. (LMC) was as surprised as anyone when it found out that the capital cost estimate on the mammoth Tenke Fungurume project has jumped more than 90% in just six months. The Democratic Republic of Congo-based mine is now expected to cost $1.75-billion.

Lundin, however, is fortunate in that it is largely protected from that increase. Analysts pointed out that according to the company's agreement with Freeport-McMoran Copper & Gold Inc. (FCX), Freeport has to finance Lundin's portion of any cost increase beyond 25% of the original forecast (about $815-million). Freeport would be repaid with interest from Lundin's share of Tenke's cash flow.

In a note to clients Haywood Securities analyst Kerry Smith wrote:

Lundin now has several options to fund this incremental capital. It can arrange its debt facility, use more equity, or utilize 'Bank of Freeport' to fund its share of these overruns.

Both Mr. Smith and UBS Securities analyst Brian MacArthur reduced their net asset value estimates on Lundin because of the cost increases, but only slightly. They both have price targets of C$10.50 a share, which is well above the current level.

Comments

[fxtrader07:]

i wonder how much of that strange cost escalation will be rather some large payment to the congo government as they have threatened to scrap the entire deal

2008 Apr 25 07:47 AM

[DSX Lover:]

I don't see Lundin operating as an independent company before this year is over. It is selling well below the 9.08 Book value at the end of 2007. With Cooper prices soring, and with Lundin having less than 100 million in Debt, and it will be takeover if it meets the estimates for Q1.
If FCX is going to have to pay for Lundin's part of the mine expansion, it would be cheap for FCX to takeover Lundin at a price of 1.5 to 2.0 times book and assume all of the profits of the mine. Lundin is a small company with great growth potential, selling below NAV because the previous CEO was cooking the books on recent mergers. The new CEO is almost done cleaning the mess, and if Lundin meets earnings in Q1 it will be on its way to earn 90 cents for 2008 which will put the company at an 8 P/E well below the industry average.

2008 Apr 25 10:53 AM

[Norman Lepo...:]

Interesting articles and comments. I hope DSX is right.

2008 Apr 25 11:33 AM