May 12, 2008

Natural Resource Extraction

Soaring construction costs may imperil Lundin Mining’s Congo mine project

Richard Gilbert

staff writer

A Vancouver-based company said soaring construction costs are increasing the uncertainty around a billion dollar mining project in Central Africa.

Lundin Mining Corp. announced late last month that the cost of building the Tenke copper-cobalt project in the Democratic Republic of Congo (DRC) has almost doubled, due to spiraling construction and infrastructure expenses.

The soaring costs add to the uncertainty around the project as Lundin and operating partner Freeport McMoRan Copper and Gold Co. work with the Congolese government to resolve issues around ownership.

According to a press release, Freeport is engaged in a review of the capital cost estimates for the project, which were estimated in October 2007 to be $900 million.

When advances to a third party for the refurbishment of provincial power facilities are included, this total increases to $1 billion.

A capital cost review in April 2008 indicates estimated capital costs of about $1.75 billion, which climbs to $1.9 billion when loans to a third party for power development are included.

“We have just been advised of this overrun situation and an increase of this magnitude was not expected,” said Phil Wright, president and CEO of Lundin Mining.

“Fortunately the funding of the majority of this increase is covered by our overrun protection from Freeport and we do not expect this to have a material impact on our cash flow through to start-up. We are continuing to review the details, however, we remain extremely positive on the longer-term prospects of this project.”

The latest estimates reflect substantial industry-wide escalation in construction costs and the incremental costs to develop the project in Central Africa, where infrastructure and logistics are challenging in developing a greenfield project.

Construction activities are currently focused on concrete placement, steel tank erection, structural steel, and infrastructure development including shops, warehouses, and extensive social and regional infrastructure programs.

There are more than 2,200 construction personnel on site and project costs incurred to date are about US$475 million.

The capital cost estimates include provisions for expanded housing and support facilities for the project work force, enhancements to national roads and bridges, extended social and training initiatives.

Estimates also include expanded power generating capacity for the region and substantial amounts for infrastructure to support a larger scale operation.

This investment is estimated to be about US$175 million, the majority of which is expected to be funded through a loan to the DRC State power authority.

Lundin said that it expected its contribution to the Tenke Project to be in the range of US$150 million to US$180 million in 2008.

This is now expected to be in the range of US$180 million to US$210 million.

Freeport is responsible for funding 70 per cent of the project development cost and is also responsible for financing Lundin Mining’s share of certain project overruns.

The initial Tenke project is based on mining and processing ore reserves of about 100 million tons, with ore grades of 2.3 per cent copper and 0.3 per cent cobalt.

Annual production in the initial years of the project is expected to be about 115,000 tonnes of copper and 8,000 tonnes of cobalt.

Freeport expects initial production to begin during the second half of 2009 and expect drilling activities will enable future expansion of initial production.

Lundin Mining Corporation has operations in Portugal, Spain, Sweden and Ireland with six mines in operation producing copper, nickel, lead and zinc.

Future plans for the company include the Tenke Fungurume copper/cobalt project in the DRC and the Ozernoe zinc project in Russia.

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