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Deal's likely end puts Lundin under gun

ANDY HOFFMAN

00:00 EST Tuesday, January 27, 2009

TORONTO -- If the financial pressures at Lundin Mining Corp. are as bad as some industry experts suggest, company chairman Lukas Lundin certainly wasn't letting on yesterday.

The scion of the Lundin family resource empire was all smiles as he left a meeting in Toronto where shareholders voted more than 99 per cent in favour of a takeover offer from HudBay Minerals Inc.

Mr. Lundin's confident grin belied the fact that the mining deal, worth about $688-million yesterday, is all but dead in its current form. A surprise ruling Friday by the Ontario Securities Commission, ordering HudBay to give its shareholders a vote on the contentious and highly dilutive all-stock transaction, took care of that.

If given a chance to vote, HudBay shareholders are widely expected to reject the transaction. Unless Mr. Lundin and his chief executive officer, Phil Wright, are able to renegotiate a new deal with terms that are acceptable to HudBay's disgruntled investors, Lundin will have to go it alone amid a devastating crash in metal prices.

Some analysts think that could have dire consequences for the Toronto company and force it into the hands of another buyer. UBS Securities' Onno Rutten predicts that despite a $136-million cash injection by HudBay through a private placement, a standalone Lundin "will run out of cash by Q2/09."

While Lundin currently has access to more than $380-million from a credit facility, Mr. Rutten told clients in a report the firm is in danger of contravening certain conditions of the loan agreement if metal prices don't rebound dramatically. "We believe that Lundin could be in breach of a trailing debt-to-EBITDA (earnings before interest, taxes, depreciation and amortization) covenant by mid-2009; a standalone future could therefore prove challenging," said the analyst, who cut the stock to sell from hold and reduced his stock price target to 90 cents from $1.50.

Mr. Lundin declined to answer questions yesterday, while Mr. Wright wouldn't say what the company, which has copper, zinc, nickel, silver and lead mining operations in Europe and Africa, plans to do if the HudBay deal fails.

"We've only just received this news. We've been working towards a consummation of this deal with HudBay. When I've had a chance to talk with counsel, talk with my board and talk with HudBay, I'll give some more thought to those issues," Mr. Wright said.

While HudBay shares have gained 30 per cent in the two trading sessions since the OSC ruling, Lundin's stock has skidded 20 per cent. When the deal was originally announced in November, Mr. Wright conceded Lundin had "liquidity issues and solvency issues," and needed cash in the short term.

Canaccord Adams analyst Orest Wowkodaw calculates that Lundin had $134-million (U.S.) in cash and $239.5-million of debt at the end of 2008. In a report to clients yesterday, Mr. Wowkodaw said Lundin could run out of cash by the fourth quarter of this year and will need to access approximately $50-million in additional financing to maintain a reasonable amount of working capital.

"Without another source of funding, we forecast that Lundin is likely to run into significant balance-sheet stress by the end of the year. The situation could get materially worse if the company violates covenants on its existing credit facility," he said.

However, TD Newcrest analyst Greg Barnes said in a report that he expects Lundin "has sufficient loan facilities to ride out the depressed metal environment over the next year with additional cost and expenditure reductions."

CIBC World Markets analyst Cliff Hale-Sanders said Lundin offers "good value" as a standalone. He increased his target price on Lundin to $2 (Canadian) from $1.45 and now rates the stock a buy.

LUNDIN MINING (LUN)

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