VANCOUVER — Lukas Lundin, chairman of the Lundin Group of Companies, sat down with The Northern Miner via Skype from Switzerland for an in-depth discussion on the current state of mining. Topics include base metal markets — with a focus on recent merger and acquisition (M&A) activity by Lundin Mining (TSX: LUN; US-OTC: LUNMF) — and the dearth of investment in the copper space.
Lukas Lundin updates progress at Lundin Gold’s (TSX: LUG; US-OTC: FTMNF) Fruta del Norte (FDN) gold mine development in Ecuador and strategies for working in other emerging mining jurisdictions.
He also delves into the state of capital markets and current M&A activity, and gives his views on uranium markets, Denison Mines (TSX: DML; NYSE-MKT: DNN) and Saskatchewan’s Athabasca basin.
The Northern Miner: What have you experienced during the market downturn?
Lukas Lundin: It’s been one of the more difficult cycles for mining, but we’ve done really well under the circumstances. We acquired Candelaria (copper-gold mine in Chile) and Eagle (nickel-copper mine in Michigan), and moved into Ecuador on the gold side and acquired FDN. It’s all about taking advantage of opportunities and applying capital intelligently. These are assets that only become available in truly tough environments.
Freeport-McMoRan (NYSE: FCX) was over-leveraged after their oil and gas investments, and had to sell Candelaria. I don’t believe they wanted to sell the mine, but they had no choice. Those are the circumstances we always want to be involved in, because you can acquire projects that wouldn’t typically be available. Some people might say it’s bold to go out and deploy significant capital in a down-market, but to me it just makes sense. Commodities aren’t going to disappear, and when you’re in the industry for a long time you become comfortable with the fact that you’re going to deal with business cycles.
TNM: Freeport and then Lundin Mining both completely divested ownership interests in the Tenke Fungurume copper-cobalt mine in the Democratic Republic of the Congo. Did Freeport’s decision to sell surprise you?
LL: No, not really. We knew that Freeport had a heavy debt load, so we were expecting that activity. We didn’t know who the buyer was, though.
When we found out it was China Molybdenum we decided it was best if we exited the situation. We really enjoyed working with Freeport, but I don’t think we wanted to work with anybody else there. After that event, however, we would like to find another copper asset if it makes sense. There’s not a lot out there right now, and that’s especially true given our focus on cost discipline. We could look at higher-cost copper assets, but we’ve been tentative — it’s going to have to be something more greenfield. We tried to acquire the Timok project in Serbia, which was a great deal, but unfortunately we lost out.
TNM: Last year there were improvements in mining markets, both in terms of equity valuations and metal prices. How are you strategically approaching today’s markets?
LL: We’re at the beginning of a new cycle, and we’re still far away from the highs we saw five or six years ago. When I look at that scenario I see a lot more room for improvement and the opportunity to participate in rising markets. For example, we’ve seen a broad underinvestment in copper for a long period, and demand isn’t going anywhere. I’m not someone who makes predictions on when exactly we’ll see that spark again, but we’re confident it’s coming, and you don’t want to miss out on what should be a strong copper-price recovery.
That being said, it’s becoming tougher to find quality projects. The real opportunity was nine months ago, but that doesn’t mean we can’t uncover potentially great deals. I’ve always worked to make sure we have strong access to capital, and that’s the key to our success in these down-markets. When other people are worried about capital markets, or access to cash, we remain in a position to make deals. You see that amongst the small group of core investors in mining that have taken advantage of some of these asset sales and acquisition opportunities in recent years.
TNM: What business cycles have you seen over the past 15 years?
LL: The biggest change over the past 10 to 15 years is the emergence of China, which is the overarching driver of commodities now in many ways. That didn’t exist in my previous business life, but there’s not much you can do about it. We’re in the commodity business, so all we can do is strive to control costs and focus on great assets. We make the effort to stay in the lowest-cost quartile. That’s a big focus of our business, and a large contingent of our peer group lost sight of that, at times, during stronger economic periods over the past decade. Even when things are going well on a broader level, it is important to watch costs, because the next down-market could be right around the corner.
Social and political issues have also come to the forefront. We strive to be responsible in our business, but the world is quite simply smaller, due to technology and related things. When we make acquisitions in jurisdictions like Ecuador, which may have been perceived as risky before, we’re putting even more due diligence into governmental and regulatory issues.
TNM: How is due diligence in Ecuador? What are your experiences so far with Lundin Gold?
LL: Fruta is a good metal deposit, and those are becoming increasingly harder to find. We talked about how the situation in Ecuador had been a bit sticky, and previous owners and the government can take a share of the blame. But we saw an opportunity, and went down to meet with the government to see if they were interested in mining investment. The response was positive. The government seems pro-business to me, and they’re keen to kick-start a new segment of the economy.
In many ways, we enter developing jurisdictions as educators, and we focus on social issues from the start. For us mining is almost secondary at this stage, because you have to introduce people to the industry and dispel some of the preconceptions, or misconceptions, about the business. People talk about the capital cost of so-called “social licence,” but the more important aspect for me is having the right people on the ground. You can invest in building schools and hospitals, but it’s really about educating and informing on many levels. Ecuador is working towards establishing that regulatory and legislative infrastructure, and I get the impression that they are legitimately interested in creating a mining industry.
TNM: You’re also assessing financing options for FDN. Where are capital markets currently?
LL: We definitely see improvements. I always like Toronto because they know the business well. New York has deep pockets, as long as you don’t get money that is too fast. Europe has always been good to us, especially Sweden and London. Things have gotten better. It was really dead six months ago, but sentiment has shifted in both energy and metals. There’s more generalist investment interest, though I don’t think it’s quite there yet. I always say, however, that when generalists come into the market, it’s time to sell.
TNM: You mentioned looking at new copper opportunities. What other commodities are interesting right now?
LL: I like the fundamentals in zinc because from where I’m standing, we’re looking at a shortage. It’s one of those metals where you tend to have one year of glory and 10 years of misery. We may be approaching one of those glory periods. I know we’ve heard about a zinc rebound for a while, but we’ve had those material shutdowns of large-scale, long-life operations recently that change the fundamentals. We’re always looking at China’s impact on zinc markets, but they tend to have smaller-scale operations that are expensive. I don’t think their impact on supply will be as pronounced this time.
In addition, uranium equities have been very, very beaten up. We’ve seen recovery, but we’ve still got quite a ways to go in terms of rebalancing those valuations. It’s one space I’m still really optimistic about, because we’ve got a lot of room for growth and market improvement.
TNM: Uranium has been a contrarian play recently. Can you elaborate on your investment thesis?
LL: It’s been a tough three to four years here for uranium, but we’ve seen a turning point with the KazAtomProm production cuts. When I started in the business 20 years ago, Kazakhstan wasn’t even a player, and that segment of supply almost came out of nowhere to become a major global production centre. Uranium is hard to understand because there seem to be unknowns on the supply side, in terms of stockpiles and things coming out of the proverbial bush to shock the market. Denison has become focused on the Athabasca basin, because you have to focus on the best deposits in the world. I’ve done uranium deals globally, but during the downturn, it became apparent that Saskatchewan is where you want to be.
TNM: How do you feel about Canada as a mining jurisdiction?
LL: Canada is a good jurisdiction, but the permitting is just so slow. It’s become quite difficult to advance through the regulatory process, and the social licence issues can be quite exhausting, in terms of time and capital. You need a lot of patience but it’s a great place to work, with a lot of knowledge about our business. If I were to give advice, I’d say it would be nice if the regulators and government could work on permitting frameworks, because the time frames can be prohibitive.