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By John Helmer in Moscow

Lundin looks set for replacement on the Ozernoye base metals project.

Lundin Mining Corporation (ticker LMC:US) is adamant that it will say nothing at all about its two-year old zinc and lead project in Russia, one of the largest in the world.

Speculation that Lundin, a Canadian listed and Swedish controlled polymetallic miner, may be contemplating a voluntary exit from the Ozernoye, in the southeast Siberian region of Buryatia, was encouraged by a red-light paragraph in the company’s annual report for 2007, issued this past March. “The Company has initiated a review of whether evolving investment terms, license amendment progress, and local issues meet the Company’s criteria for ongoing involvement.”

On June 6, shortly before the company moved its headquarters from Vancouver to Toronto, a Toronto newspaper warned that “Lundin could sell Russian zinc mine.” On June 10, a Moscow newspaper reported more accurately – since there is no mine, only drilling, proving and feasibility works – that Lundin was considering the sale of its 49% interest in the project, while its 51% Russian partner, East Siberian Metals(MBC), a subsidiary of the Moscow-based Metropol investment group, is thinking of a new Russian partner. Metropol is controlled by Mikhail Slipenchuk.

At stake is an ore-body reported by Soviet assessments at 157 million tonnes, with an estimated 8 million tonnes of zinc, 1.5 million tonnes of lead, and 6,000 tonnes of silver. In its First-Quarter 2008 report to shareholders, Lundin estimated the value of its assets in Russia at $168.5 million. That is up modestly from the same period of 2007; and up 35% from the acquisition price paid in 2006.

Lundin values its total assets at $5.1 billion, and thus the Russian share amounts to just 3.3%. Lundin’s operating mine in Portugal is the company’s most important asset, comprising 42% of the declared value. The Tenke Fungurume copper-cobalt project in the Democratic Republic of Congo is the next biggest asset value, making 27% of the Lundin total.

The latest quarterly report published by Lundin discloses that in the three months to March 31, it spent $10.1 million on “general exploration and project investigation”, almost double the amount spent the year before. However, the regional breakdown of this spending showed that Portugal and Sweden absorbed most of the money; there was no number for Russia. According to the company’s annual report, at Ozernoye Lundin has been doing drilling for ore reserves and for water; constructing a camp site for miners; improving local infrastructure; and employing international consultants to study reserves, environmental impacts, and mine plans. Environmental issues are sensitive ones, because the deposit – to be mined as an open pit – is 200 kilometres east of the nature conservancy zone of Lake Baikal.

When Lundin announced its buy-in at Ozernoye, it reported agreement on payment of consideration of $125 million. This has been broken down as follows: a $2 million down-payment during negotiations between May and November 2006; $113 million paid on deal closing; from which $10 million was applied to costs incurred for a bankable feasibility study. A balance of $10 million would not be payable until the project has gone into commercial production. Lundin and Metropol have also agreed to an adjustment of the buy-in price “based on recoverable zinc metal from the JORC Code resources confirmed by the bankable feasibility study.”

The project aim, the company said, is “to facilitate the objective of full production at Ozernoye in 2012.” The production estimates and build-up to capacity in four years’ time are not disclosed in company documents. They are sensitive numbers, because of the requirements in the licenses for Ozernoye. A Lundin report acknowledges that it is obliged to undertake “renegotiation of certain milestones contained within the original mineral license. These milestones need to be extended and while there is no indication that such extensions will not be given, there is no guarantee that these extensions will be granted.”

A year ago, the domestic news agency Interfax reported that the mining licence watchdog Rosprirodnadzor was planning to conduct checks of licence compliance at Ozernoye, and of other licences held by Lundin’s partner, Metropol’s MBC. The initiative came from Rosprirodnadzor deputy head, Oleg Mitvol.

Mitvol has been the scourge of international miners operating in Russia, accusing some of delaying the required mine investment, while boosting their foreign listed share prices. But Lundin’s share price has been dropping steadily since it hit a high of $14.40 on July 23, 2007. While the downward trajectory has largely followed the international market price for zinc, Lundin’s share price accelerated into a dive since mid-May. It is currently at $5.09, 4% below last week’s finish. This is despite the announcement on July 17 of a new zinc deposit at Neves-Corvo in Portugal.

A senior Russian government official confirmed that Lundin and Metropol have licence problems at Ozernoye. According to the official, who asked not to be identified by name, environmental compliance at the Ozernoye licence area is significantly better than at the nearby Kholoninskoye deposit, which MBC-Metrol controls, but in which Lundin has no involvement. Mining there is banned by the federal government, because it lies in the Lake Baikal protection zone. The official told Mineweb that licence compliance at Ozernoye is unsatisfactory, and mine development targets have not been met.

Metropol was asked to clarify the position. According to a company source, Lundin has already informed MBC-Metropol that it wants to leave the project. MBC is now considering substituting Lundin’s 49% equity stake with a Russian combination known as Rusinvestpartner. This in turn is a newly composed alliance of the Renova group, owned by Victor Vekselberg, and Russian Technologies, a powerful state metals and minerals holding, directed by Sergei Chemezov. Renova’s mining experience is limited to a small gold and alluvial platinum operation in the Russian Fareast; bauxite mining when Vekselberg owned Siberian Ural Aluminium (SUAL, now merged with Rusal); and a manganese deposit development in the Kalahari region of South Africa. Chemezov’s exposure to mining is principally through the takeover of VSMPO, Russia’s leading titanium and magnesium producer.

MBC told Mineweb that if Lundin exits as the technical operator of Ozernoye, “it could easily be substituted with Rusinvestpartner, as the latter has all the technical abilities and experience.”

Vekselberg’s spokesman, Andrei Shtorkh, declined to say what Renova’s intention is for Ozernoye, and what investment into zinc and lead mining Vekselberg is contemplating.

Vekselberg and Chemezov can afford the $168.5 million minimum asking price Lundin may have put on the table. But there is no telling that they are eager to part with the money before they have resolved the licence problems that are pending. Lobbying by Vekselberg and Chemezov on Slipenchuk’s behalf for highly toxic zinc and lead mining at Kholodninskoye against the federal government ban is also a sensitive matter about which no-one is eager to make public remarks for the time being.

Phil Wright, an Australian, was appointed CEO of Lundin on January 16, this year. Through the company spokesman, Sophia Shane, he was asked to clarify expenditures at Ozernoye to date. He was also asked to respond to the licence compliance claims, and to the Russian reports that Lundin has decided to leave the Ozernoye project. Shane said she had not seen the Russian news “and I have no comment on it”. Regarding Lundin’s intentions, Wright did not respond. Shane told Mineweb: “We are unable to provide a comment at this time.”

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