VANCOUVER AND TORONTO

BRENDA BOUW AND BOYD ERMAN
RTGAM



VANCOUVER AND TORONTO - Concerns are mounting that a merger between Lundin Mining Corp. and Inmet Mining Corp. is set to collapse owing to a dispute over a setback at a flagship Inmet project in Panama that is central to the deal.

Sources say Lundin chairman Lukas Lundin has been meeting with investors in New York to discuss the situation. Recent trading of the two companies' stocks suggests investors expect the "merger of equals" between Lundin and Inmet to fall apart.

The issue is around newly revealed changes to plans for the power supply at Inmet's $4.3-billion Cobre Panama copper project. The Panamanian government wants the coal-fired power plan changed to natural gas.

Lundin says the revised power plan constitutes a "material departure" from the original merger agreement, and is reviewing the impact.

Inmet, on the other hand, insists the change is not material to the timing or economics of the project. The change could delay construction of the mine, set to begin production in 2016, just as copper prices are forecast to fall as a result of new mines coming into production.

Lundin has a few options to consider before shareholders vote on the merger on April 4.

It could try to back out of the deal, invoking a "material adverse change" clause, which could mean avoiding a $120-million could spark legal action from Inmet, whose position is that the alternative power plan is not material.

Lundin, also fighting a $4.8-billion hostile cash-and-shares takeover bid from Equinox Minerals Ltd., could also leave the decision to shareholders, which recent market activity shows could result in the deal being voted down.

At Thursday's close of $7.58, Lundin shares now trade at a full $1.42 more than they are valued at under the Inmet merger plan, according to Bloomberg data.

When the deal was announced, the transaction included a small premium for Lundin shareholders of about 2.2 per cent.

Lundin and Inmet could also agree to revise the agreement, including possibly changing the share-exchange ratio, to reflect what Lundin sees as a major change to the deal. Alternatively, the two companies could agree to end the deal.

Executives at both Lundin and Inmet could not be reached for comment Thursday.

If the Lundin-Inmet merger dies, Lundin is expected to continue to fight the Equinox bid, which Lundin views as too heavily leveraged, with $3.2-billion (U.S.) of debt.

Still, Lundin investors may press the company to accept Equinox's offer.

Lundin could choose to go it alone, seek other buyers through an auction, or sell off parts of the company, which include copper, nickel and zinc assets in Europe and a coveted 25-per-cent stake in the Tenke Fungurume copper and cobalt project in the Democratic Republic of the Congo.

On Thursday, Inmet worked to maintain confidence in its Panama project by confirming that it would not be affected by a change in Panamanian law to restrict investments from foreign governments.

That recent change raised questions about Cobre Panama's investments from sovereign wealth funds in South Korea and Singapore.