Slump worst in 50 years: Lundin
ANDY HOFFMAN
Wednesday, October 08, 2008
As the scion of the Lundin family resources empire, Lukas Lundin has both prospered and suffered through plenty of commodity sector booms and busts. Yet in all his years as a mining executive and financier he has never seen anything like this.
"I'm very surprised. This is the worst correction we have had in the last 50 years," Mr. Lundin said in an interview this week.
Just two weeks ago, the chairman of Lundin Mining Corp. and the head of the Lundin Group of Companies, still believed that the commodities boom cycle was intact. Despite a looming recession in the United States he had faith in the theory of "de-coupling," believing that the U.S. was no longer the key to commodities demand and that Europe and Asia would be able to escape the downturn.
That has all changed now as the deepening global financial crisis has led to a savage selloff of mining stocks and nose-diving commodity prices. The S&P TSX Metals and Mining Index has lost a stunning 23 per cent of its value in a week and more than 38 per cent over the past month.
Mr. Lundin is suddenly among the legions of resource investors who have resigned themselves to the notion that America's toxic debt contagion will crimp global economic growth and cut demand for commodities.
"I thought there was a decoupling in the world between us and the U.S., but I think now we've all been dragged in to the same crap," he said.
Born in Sweden and now residing in Vancouver, Mr. Lundin grew up in the commodities business. His late father, Adolf Lundin, compiled a fortune by following his own personal motto, "No guts, no glory," and taking a chance on oil and mining concessions in troubled places such as Sudan, Iran and The Democratic Republic of Congo.
Lukas put his stamp on the family empire recently by pulling off a series of aggressive acquisitions during the height of the commodity boom. But now some of the mining assets that Lundin Mining acquired are proving less profitable than hoped because of operational troubles and falling metal prices.
Lundin Mining shares have lost nearly a third of their value in a week and almost 50 per cent in a month.
Meanwhile, the price of copper plunged as much as 7 per cent Wednesday on the London Metals Exchange, hitting a 20-month low of $5,227 (U.S.) a tonne, or about $2.37 a pound. The metal later recovered slightly to close at $5,240, down from $5,625 on Tuesday. As recently as July, copper was changing hands at an all-time high of more than $4 a pound.
The price of zinc, one of Lundin Mining's key production metals, has skidded to three-year lows of about 65 cents a pound and the company is now considering cutting production from high-cost operations such as its Galmoy mine in Ireland.
"We are okay at this price, but if they go much lower we are going to have to start doing some cuts," he said, adding that the company is reviewing costs at all of its mines.
"We're cutting costs and we are making sure that operations are at least cash flow positive. If not, we will shut them down," he said.
The company is also considering revamping its troubled Aljustrel zinc mine in Portugal as a copper-focused operation. A decision could come within two weeks.
As for the Lundin Group's stable of junior exploration firms, access to outside sources of capital has all but dried up. A Lundin family trust recently had to lend one of the companies, Africa Oil Corp., $6-million to help fund day to day operations.
"The smaller companies, they are finished right now," Mr. Lundin said, adding that "the exploration game is going to be the last one to come back. That's a very tough business."
Bay Street analysts have also begun slashing commodity price assumptions and stock price targets to reflect the mining sector's new reality.
On Monday, UBS Securities analysts Brian MacArthur and Onno Rutten cut 2009 metal price assumptions by an average of 30 per cent. The target price for Lundin's shares was reduced by 59 per cent to $3.50 (Canadian).
Scotia Capital followed suit Wednesday, sharply cutting 2009 metal price assumptions and stock targets.
The new forecasts "reflect our view that the global credit crisis is likely to result in a more severe cyclical downturn than we were already forecasting," analysts Lawrence Smith and Alex Terentiew said in a report.
Scotia cut 2009 copper price assumptions by 31 per cent to $2.25 (U.S.) a pound from $3.25.
The Lundin share target price was cut to $2.75 from $6 (Canadian), a reduction of 54 per cent.
When commodities do come back, they will "come back strong," Mr. Lundin said. But he was hard pressed to predict when the recovery will take hold.
"I don't know if it's six months, two years or 21/2 years, but we are definitely not out of the woods," he said.
© Copyright The Globe and Mail