Interview with Lukas Lundin, Chairman of Lundin Mining and Lundin Gold

Argentina was a tough mining jurisdiction in the 1990s; what made Alumbrera and Veladero successful?

Lukas Lundin: It’s quite simple – the assets were very good. Bajo de Alumbrera had a high-grade part of the ore body that gave us a very quick payback. Veladero was also rich in gold, which helped us get everyone, from investors to local stakeholders, onside. Of course, there are a lot of good assets that don’t end up being developed, so we worked hard to make it happen and we had the benefit of our local expert geological team to help navigate the system. The studies, the hard work and, very importantly, a solid contract with the government are key. But all that is easier to do when you have a good asset.

Mining only accounts for around 1.5% of Argentine GDP; why did the industry not kick on from those successes?

LL: Argentina is a relatively complex mining jurisdiction. We had enormous success with Alumbrera and Veladero in the 90s, and, like so many countries around the world, Argentina has had its political and economic ups and downs since then.  But the key factor was that there weren’t that many great assets in the pipeline waiting to be developed. A lack of exploration meant that you didn’t have a huge number of discovered deposits to develop. And it takes years to move from exploration to development.  Now you have Taca Taca [a copper-gold project in the north of Argentina] and Josemaria [a copper-gold deposit that straddles the Chilean and Argentine Andes] as well as the Filo del Sol deposit [copper-gold-silver) which are big projects that can make a difference if they get turned into mines. When we talk about Argentina, we need to recognise that the conditions for mining operations vary greatly between provinces. For example, there have been discoveries in Chubut that are difficult to develop because of local barriers to mining. Whereas San Juan, which has seen the benefits of the Veladero mine, is a very attractive jurisdiction.

In the past, Argentina had been poorly managed and it is currently suffering a crisis as a result. Mining is an industry that can drive economic recovery, so hopefully we can see new federal mining regulations, with investment agreements to encourage project developers.

Lukas Lundin

In the past, Argentina had been poorly managed and it is currently suffering a crisis as a result. Mining is an industry that can drive economic recovery, so hopefully we can see new federal mining regulations, with investment agreements to encourage project developers. If you look at Josemaria, it’s a $4billion project, while Taca Taca could involve up to $6billion of investment. If you get that going it will have a massive impact in the economy – so we need to convince the national authorities of the benefits the industry could bring.

Now that Alumbrera has finished, mining has slipped down to become a very small part of the Argentine economy but it could grow to 10% of GDP. I believe that will happen – indeed I am very heavily invested in that happening.

You first invested in Latin America in 1989; how has the region’s mining developed?

LL: We like Latin America because there are plenty of great deposits and it is relatively easy to work there. We had been doing a lot of business in Africa, but we have more exposure in Latin America now because the region tends to offer better assets. However, the regional scenario is constantly evolving. For example, Chile, which has long been the star performer in Latin American mining, is getting more challenging. There is talk of changing the terms for international miners, which would make it less attractive. In Peru, another good jurisdiction, there is increasing political instability, which can scare the markets. So the traditional Latin American mining heavyweights are not looking as attractive, whereas the ‘frontier’ jurisdictions of Ecuador and Argentina are improving fast. For example, and this surprises people, labour laws are better in Argentina than in Chile.

Lundin Gold has succeeded in frontier markets with governments that would scare most investors; how?

LL: These so-called ‘scary’ governments can often be very good to deal with. With Lundin Gold we made an agreement with President Rafael Correa. We just need the opportunity to go to the country, sit with the relevant ministers and explain the benefits of responsible mining. Because once you do that, then many governments realise that it’s a win-win situation. That is especially true for populist governments because they need tax revenues to fund their social spending programmes, they want to create jobs and the hard currency export earnings give them macroeconomic stability and independence. It sounds crazy but these type of pragmatic, win-win deals sometimes work better with a populist government than a technocratic pro-business one.

Guatemala has been a graveyard for some Canadian mining projects; why do you think Lundin will do better?

LL: Bluestone Resources, which is one of the companies within the Lundin Group and publicly listed in Canada, is developing a gold mine in southern Guatemala. But even though it is an independent company, we share a lot of experience and learning within the group of  companies. And something we have learned elsewhere in Latin America is that community relations are key. The fact is, that some of the previous Canadian mining companies in Guatemala didn’t do a good job in relating to the community.

Social license is number one. It is as important as the ore body and the tax regulations, etc. You have to work very hard to get social licenses. When you buy an existing project the problem can be very serious because of misunderstanding or mistrust that might have previously built up. In Ecuador with Lundin Gold, CEO Ron Hochstein, has established excellent ties with the community. Now that’s the same thing we have to do in Guatemala.  We need to build the social license and community confidence. They are two different countries but we can analyse the success that we had in Ecuador and apply some of the lessons in Guatemala.

Private equity mining investment is gaining traction; why do you always use the public markets to develop projects?

LL: The challenge with funding mining from private equity is the scale of money you need. The capital you require to develop large projects is pretty significant. For example, Lundin Gold was a $1 billion investment, while Josemaria will cost up to $4billion. I don’t have that sort of money to fund projects and I don’t know where else to get it apart from the public markets. I understand the appeal of using private equity funds because it is longer-term capital that can ride out market cycles. So, if other people can do that, then well done to them. I guess for mid-sized projects it is more doable but it is hard to find a billion dollars of private equity money for a mining project in Ecuador - for frontier markets it is a real challenge.

What’s the Lundin thought process for making a decision whether to buy an asset?

LL: First and foremost is the geology. It has to be a great asset. Then we look at the legacy of the deposit – so if it has had problems in the past with the previous owners and the government or community. Then we look at the type of contract available – i.e. the legal requirements and security. Finally, we look at the location, which defines the amount of infrastructure you will need to build.

It’s interesting that in recent years, the legacy of an asset has climbed up that list and become more important.

You spent $1 billion on Chapada, a copper-gold mine in Brazil; what makes you comfortable investing large sums in the country?

LL: Again, it’s all about the geology. Chapada is an incredible asset and that is what first caught our attention. We had a tough negotiation with Peter Marrone [CEO of Yamana Gold the previous owner] but the result was a fair deal that we were both happy with.

Our experience in Brazil has been excellent. We have a very good management team and hardworking employees. There is a great relationship with local communities and good ties with the regional government so we are very happy to be there. You hear negative stuff about Brazil and it being tough to do business there but we have had the opposite experience. It’s a great country for mining. We haven’t had any problems with the famous ‘Custo Brasil’ despite the fact that our operation is a complex industrial process with plenty of local inputs.

We are ‘underweight’ Brazil at the moment as Chapada is the only mine that the Lundin Group of Companies has in the country. However, I can’t say now if our Brazil exposure will increase or not. That all depends on finding the right asset.

Brazilian presidential politics can be controversial; do those headlines impact your mine?

LL: No – not at all. We have been there for less than two years but while I understand that President Bolsonaro is controversial he is also pro-business. For example, his government is trying to simplify labour laws, which are very complicated.

Also, one of the most important factors is the state that you are in. Chapada is in Goias, which is a good mining state. So, we don’t worry too much about what is happening in the capital Brasilia because the most important political relationships for us are with the local governments directly around our mine. Those local politicians understand the industry, because it’s an established mining district, and also see the value of our operation.