Zinc And Base Metal Slump worst in 50 years: Lundin

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

Gold Is Gold And Going Higher

Debt unwinding propels gold higher

Wednesday, October 08, 2008
Here's Allan Robinson's At The Bell which you'll find in Thursday's newspaper:Deflation is in the air, yet gold rose yesterday to more than $900 (U.S.) an ounce.The S[amp]amp;P/TSX global gold index, which has been lagging bullion, soared 19 per cent yesterday to 267.35 points.Gold bullion, like the world's currencies and bond markets, is caught up in the massive unwinding of debt by speculative hedge funds, said Bill Belovay, a portfolio manager for BMO Precious Metals Fund, which has about $60-million (Canadian) under management.

“The gold price has risen due to the increase in the lease rates by the central banks,” said Mr. Belovay, who is both a geologist and a mineral economist.WHAT ARE LEASE RATES?Speculative hedge funds were borrowing gold at rates of interest below 1 per cent and the five-year average rate was 0.12 per cent, he said.

The funds would turn around and sell the gold and reinvest the proceeds in higher yielding securities such as European bonds. It was a part of what was known as the carry trade.However, the one-month gold lease rate has increased to 2.65 per cent as banks worry about the creditworthiness of the borrowers.

“Now comes the time that [the funds] have to repay the gold,” Mr. Belovay said. Gold is rising as funds have to buy the gold they need to return to the banks.Carry trades are no longer lucrative for hedge funds and the banks are clearly saying the gold lending window is closed. “It's a slow painful way of giving a message to the system.”But from the perspective of a long-term investing strategy, the changes under way are positive for bullion, Mr. Belovay said. The withdrawal of banks from the gold lending business to funds should result in less gold coming on the market, he said. “In looking further out, the credit crunch should eventually cause the gold price to rise because there is no capital available to start new mines, so the supply should diminish.

”The BMO Precious Metals Fund has good exposure to senior gold mining companies and potential merger and acquisition candidates sitting on gold deposits once the credit crunch eases, Mr. Belovay said. “But in the short term everything is high risk,” he said.

“The game is changing every hour, basically.”A PERFECT MARKETBut right now it looks like a perfect market for bullion. The fear over the financial crisis is enhancing it as a safe haven, the demand for gold coins by the general public is so strong it is outstripping the ability of various mints to produce them and there are even indications that central banks may be reconsidering their gold-selling strategies with an eye on increasing their exposure to gold, according to Dundee Wealth Management Inc.Strategists are also looking for the possible decoupling of gold from the U.S. dollar.

Traditionally, U.S.-dollar strength tends to correlate with weaker bullion prices.“Indeed, one day the gold market will be less slavishly tied to the dollar/euro rate, but I don't know when that day will come,” said Martin Murenbeeld, chief economist at Dundee Wealth.

“Both Europe and the U.S. are moving rapidly toward significant fiscal and monetary reflation, meaning gold should rise against both currencies, regardless of whether the dollar is up or down against the euro.”And there are signs that may be happening. “On Monday, the euro dropped against the dollar and gold rose $30 (U.S.),” he said. “We are starting to see some signs of the break. That is the key.”
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