2008 Annual Report

December 31, 2008

Message from the President To our shareholders,

2008 has been a tumultuous year for base metal mining companies best defined by the collapse of metal prices starting in September 2008. De‐stocking in supply chains, coupled with collapsing demand, has seen base metal inventories rise, prices fall and profits contract.

Your company responded early. At the first sign of the sharp fall in metal prices, action was taken to reduce expenditure. Revised operating plans were devised with the objective of ensuring that the key operations were capable of producing free cash flow despite substantial price falls. Those that could not achieve this objective have been sold (Aljustrel), operating plans curtailed (Aguablanca) or closure plans implemented (Galmoy).

A clear focus has now emerged centered on our three core assets: the Neves‐Corvo copper/zinc mine, the Zinkgruvan zinc/lead/silver/copper mine and the Tenke copper/cobalt project operated by Freeport McMoRan.

During 2008, Neves‐Corvo and Zinkgruvan delivered good operational results with steady, low‐cost production. Capital and operating costs have been reduced, taking care not to impair future production capacity. Neves‐Corvo and Zinkgruvan, as well as the Aguablanca nickel/copper mine, are able to be free cash flow positive at the commodity price levels ruling at the end of 2008. All three mines achieved record tonnage, mined and processed, and metal production exceeded 2007 levels. In 2008, the Company produced 98,148 tonnes of copper, 167,844 tonnes of zinc, 44,799 tonnes of lead and 8,136 tonnes of nickel.

Construction of the Tenke copper/cobalt mine in the DRC progressed well during the year with first copper being produced in March 2009. This project is now undergoing final commissioning with consistent copper production. Commercial production at 115,000 tpa copper and at least 8,000 tpa cobalt is expected to be reached during the second half of 2009.

The Company’s capital structure has been assessed against the more challenging background with its commensurate sharp reductions in profit and cash flow. New equity was raised as part of the now terminated HudBay merger and the Company has recently announced a “bought deal” financing that is expected to be complete during April 2009. Together these have raised new funds in the order of $250 million, producing a more conservative capital structure and allowing the Company to face any further volatility with confidence.

Looking forward, for the survivors of this downturn, conditions are expected to materially improve once normal growth resumes. Supply constraints, exacerbated by this downturn, will see structural supply shortages emerge within the next 2 to 5 years with the potential for strong upward moves in metal prices from those ruling today.

Your Company is well capitalized and its key mining assets are long‐life and low‐cost. While we continue to generate the majority of our revenue from copper, we are fortunate to have high leverage to zinc both in terms of current production as well as the large undeveloped resources at Neves‐Corvo.

Lundin Mining remains a growth oriented base metal mining company and we look to the future with an eye on continued development.

(signed) Phil Wright President and CEO

April 16, 2009

Management’s Discussion and Analysis For the year ended December 31, 2008

This management’s discussion and analysis has been prepared as of February 25, 2009 and should be read in conjunction with the Company’s consolidated annual financial statements for the year ended December 31, 2008. Those financial statements are prepared in accordance with Canadian generally accepted accounting principles. The Company’s reporting currency is United States dollars. Reference herein of $ is to United States dollars. Reference of C$ is to Canadian dollars, reference to SEK is to Swedish krona and € refers to the Euro.

About Lundin Mining Lundin Mining Corporation (“Lundin”, “Lundin Mining” or the “Company”) is a diversified base metals mining company with operations in Portugal, Spain, Sweden and Ireland, producing copper, nickel, lead and zinc. In addition, Lundin Mining holds a development project pipeline which includes the world class Tenke Fungurume copper/cobalt project in the Democratic Republic of Congo and holds an extensive exploration portfolio and interests in international mining and exploration ventures.

Cautionary Statement on Forward‐Looking Information Certain of the statements made and information contained herein is “forward‐looking information” within the meaning of the Ontario Securities Act or “forward‐looking statements” within the meaning of Section 21E of the Securities Exchange Act of 1934 of the United States. Forward‐looking statements are subject to a variety of risks and uncertainties which could cause actual events or results to differ from those reflected in the forward‐looking statements, including, without limitation, risks and uncertainties relating to foreign currency fluctuations; risks inherent in mining including environmental hazards, industrial accidents, unusual or unexpected geological formations, ground control problems and flooding; risks associated with the estimation of mineral resources and reserves and the geology, grade and continuity of mineral deposits; the possibility that future exploration, development or mining results will not be consistent with the Company’s expectations; the potential for and effects of labour disputes or other unanticipated difficulties with or shortages of labour or interruptions in production; actual ore mined varying from estimates of grade, tonnage, dilution and metallurgical and other characteristics; the inherent uncertainty of production and cost estimates and the potential for unexpected costs and expenses, commodity price fluctuations; uncertain political and economic environments; changes in laws or policies, foreign taxation, delays or the inability to obtain necessary governmental permits; and other risks and uncertainties, including those described under Risk Factors Relating to the Company’s Business in the Company’s Annual Information Form and in each management discussion and analysis. Forward‐looking information is in addition based on various assumptions including, without limitation, the expectations and beliefs of management, the assumed long term price of copper, lead, nickel and zinc; that the Company can access financing, appropriate equipment and sufficient labour and that the political environment where the Company operates will continue to support the development and operation of mining projects. Should one or more of these risks and uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those described in forward‐looking statements. Accordingly, readers are advised not to place undue reliance on forward‐looking statements.

Table of Contents

Operating in a Global Recession ...... 3 Highlights ...... 5 Transactions with HudBay ...... 7 Financial Position and Financing ...... 8 Outlook ...... 10 Selected Quarterly and Annual Financial Information...... 11 Operating Results ...... 14 Mining Operations ...... 18 Production Overview ...... 18 Neves‐Corvo Mine ...... 19 Zinkgruvan Mine ...... 21 Aguablanca Mine ...... 22 Galmoy Mine ...... 23 Aljustrel Mine Development Project ...... 24 Storliden Mine ...... 25 Project Highlights ...... 26 Tenke Fungurume Project (Lundin 24.75%, FCX 57.75%, Gécamines 17.5%) ...... 26 Ozernoe Project (Lundin 49%, IFC Metropol 51%) ...... 27 Neves‐Corvo – Lombador Copper/Zinc and Neves Zinc Expansion Projects ...... 27 Zinkgruvan Copper Project ...... 28 Exploration Highlights ...... 28 Metal Prices, LME Inventories and Smelter Treatment and Refining Charges ...... 29 Liquidity and Financial Condition ...... 30 Changes in Accounting Policies ...... 33 Managing Risks ...... 36 Outstanding Share Data ...... 43 Non‐GAAP Performance Measures ...... 43 Management’s Report on Internal Controls ...... 45

Five Year Production Profile

200 175 150 125 Zinc tonnes

100 Copper 75 Lead 50 Thousand 25 Nickel 0 2004 2005 2006 2007 2008

Operating in a Global Recession

The economic crisis that started in the financial sector has continued to worsen and we are now in the midst of a global recession. Metal prices for Lundin’s principal products have declined to levels so low that much of global production is now uneconomic. The mining industry is undergoing massive downscaling. Capital investment in mining has dramatically declined with major new projects cancelled or delayed and producing properties are subject to shut downs and reduced production. Credit markets have become increasingly difficult and many mining companies that, just one year ago, had large cash resources to invest in mining operations are now struggling to finance day‐to‐day operations.

In response to the economic crisis, the Company has reviewed its programs for each operation and has implemented plans to ensure that costs are reduced and that each business unit will be well positioned to cope with the economic downturn and also to respond to the eventual recovery.

Lundin Mining has three key assets: • A 24.75% equity interest in the Tenke copper/cobalt project • Neves‐Corvo copper/zinc/lead mine in Portugal • Zinkgruvan zinc/lead/silver/copper mine in Sweden

In addition, it has the Aguablanca nickel/copper mine in Spain as a continuing operation. Non‐continuing operations include the Galmoy lead/zinc/silver mine, to be closed in May 2009 and the Aljustrel zinc project which was sold in February 2009.

The Tenke copper/cobalt project is expected to commence production in the second quarter of 2009 and to be one of the world’s lowest‐cost producers. Neves‐Corvo, Zinkgruvan and Aguablanca have developed plans that are expected to produce positive free cash flow1 at today’s prices.

The following measures were taken in the fourth quarter of 2008 and early 2009:

Neves‐Corvo Neves‐Corvo is primarily a copper mine and, while copper production continues at full rate: • Zinc production has been suspended. • Additional copper ore is being mined in place of zinc and the zinc facility is available to process this copper ore and to produce a copper concentrate with a positive cash return. • Expansion of the zinc processing capacity has been slowed with a significantly curtailed capital investment for 2009. • Project for the optimization of copper and zinc metal recovery from the copper tails is ongoing. Zinkgruvan • Planned increase in mined tonnage of 10%. • Underground development related to resource exploration that does not impact the five‐year production plan has been deferred. • All costs are under review. The mining plan has been increased to 990,000 tonnes, which will reduce unit production costs.

1 Free cash flow is a non‐GAAP measure defined as cash flows from operations, less sustaining capital expenditures. See page 43 of this MD&A for a discussion of non‐GAAP measures. 3

• Copper expansion is continuing as this further improves Zinkgruvan’s production flexibility and competitiveness; however copper plant construction has been slowed to defer capital expenditure. Aguablanca • Mining ore and waste tonnage has been reduced by half. Mill throughput will be maintained using ore stockpiles. • Metal output to be maintained at reduced cost per pound. • All costs under review. Galmoy • Galmoy will be closed ahead of the original planned closure date and will permanently cease production in the second quarter of 2009. • The remaining months of mining will concentrate on higher grade ore from existing mineable areas to maximize cash flows as the operation is wound down in an orderly manner. Aljustrel • The Company placed the Aljustrel Mine on care and maintenance in November 2008 and entered into an agreement to sell the mine to MTO SGPS, SA (subsequently renamed I’M SGPS). The sale closed on February 5, 2009. All regulatory approvals have been received and the Company has no further responsibility for the Aljustrel Mine.

The Company is reviewing all non‐core mining assets and will look for opportunities to realize value for those assets. Exploration activities have been scaled back and field offices closed in certain locations where activities will be limited. The Company has also reviewed the capital projects planned for 2009 and has eliminated all but essential spending.

Important projects that remain in Lundin’s short and mid‐term plans include:

i. Completion of Phase I of the Tenke Fungurume copper project (Lundin – 24.75%), designed to produce 115,000 tonnes of copper per annum and in excess of 8,000 tonnes per annum cobalt. First planned production has been moved forward and is now expected to commence in the second quarter of 2009. Lundin has met all of its funding obligations for the Phase I plant and is budgeting a 2009 contribution of approximately $40 million for working capital, exploration and expansion studies. ii. The expansion of zinc processing capability at the Neves‐Corvo mine, which will double zinc production and lower cash operating costs when production re‐commences. iii. Further delineation and development studies of the Lombador zinc‐copper deposit at the Neves‐ Corvo mine aimed at increasing copper and zinc production, lowering cash operating costs and enhancing the Company’s competitiveness. iv. The development of a copper deposit and improvement of zinc mining flexibility at Zinkgruvan. This project will continue, albeit at a slower pace than originally planned.

The 2009 operating plan incorporates significantly reduced capital expenditures ($130 million). Operating plans have been adjusted to ensure the ongoing operations will be free cash flow positive at presently prevailing prices. The Company will continue to review and refine current operating plans with additional information as it becomes available and further actions may be taken in respect of any of the Company’s mining and other assets.

Highlights

Operational Highlights

• Improvement in safety was experienced in all operations in 2008.

• All operations performed in line with or ahead of internal expectations. Neves‐Corvo, Zinkgruvan and Aguablanca achieved record tonnage, mined and processed, and metal production exceeded 2007 levels. Total production is as follows: Production Summary1 Years ended December 31 2008 2007 2006 Copper (tonnes) 98,148 97,120 24,091 Zinc (tonnes) 167,844 152,020 167,422 Lead (tonnes) 44,799 44,560 45,106 Nickel (tonnes) 8,136 3,270 ‐ Silver (ounces) 2,755,426 2,737,798 2,008,310

• Sales for the year were $835.3 million, down 21% compared to 2007 sales of $1,059.7 million, with the decline being primarily price driven. Metal prices declined significantly during the year, with zinc and lead experiencing a steady decrease and copper and nickel initially seeing increases in the first two quarters followed by pronounced decreases, most notably in the last quarter of the year.

• Operating cost performance improved in domestic currencies, however, the US dollar‐denominated cash cost per pound2 of metal produced was adversely affected by decreasing by‐product metal prices and a strengthening of the Euro. Energy and materials costs were high throughout the year, with a decline in energy costs seen only near the end of the year.

• Operating earnings3 reduced by $305.3 million from $628.5 million in 2007 to $323.2 million in 2008. Price and price adjustments accounted for approximately $290 million of this deterioration. Cost improvements at the operations were offset by the stronger US dollar, increased ARO obligations related to severance or mine closures and slightly lower sales volume. The Company continues to adjust its operations to reflect the changes in the metal price environment to ensure it remains competitive.

• Cash flow from operations for the year was $215.0 million, compared to $373.4 million for 2007.

Corporate and Financial Highlights

• Net loss for the year, was $957.1 million, or $2.41 per share. The net loss includes a non cash impairment of assets in the amount of $1,114.7 million ($1,005.5 million after tax, or $2.54 per share).

• Mid‐year, the Company announced the discovery of a new zinc‐copper deposit at its 100%‐owned Neves‐Corvo mine in southern Portugal. This new deposit has been named the Lombador East

1 All production, including Aljustrel. 2 Cash cost per pound of payable copper sold is the sum of direct cash costs and inventory changes less by‐product and profit‐based royalties. See non‐GAAP Performance Measures on page 43 of this MD&A. 3 Operating earnings is a non‐GAAP measure defined as sales, less operating costs, accretion of ARO and other provisions, selling, general and administration costs and stock‐based compensation. See page 43 of this MD&A for discussion of non‐GAAP measures. 5

deposit and contains the thickest, highest‐grade zinc intersections ever encountered at the Neves‐ Corvo mine, including 89.2 metres grading 8.43% zinc. This new deposit has the potential to be the largest combined zinc‐copper deposit yet discovered at Neves‐Corvo.

• Payments were made during the year to fund the Company’s share of Tenke project expenditures in the amount of $264.1 million. During the fourth quarter the Company satisfied its final obligations for Phase I capital funding and the 2009 cash outlays will be limited to funding of working capital, exploration and project studies.

• Responding to the dramatic fall in the zinc price, the Company suspended the mining and processing of zinc ores at Neves‐Corvo, and has temporarily increased copper ore production to optimize the copper plant throughput and make use of the zinc plant, as required, to process copper ore.

• The Company halted the development of Aljustrel in November 2008, placing it on care and maintenance and subsequently disposing of the property. The sale of the mine, which was announced in December, was completed on February 5, 2009.

• The Company announced, subsequent to year end, that the Galmoy mine would permanently cease operations in the second quarter of 2009.

• The Company made the following senior executive appointments during 2008:

Mr. Phil Wright was appointed President and CEO and joined the Board of Directors of the Company on January 16, 2008. Mr. Ted Mayers was appointed Chief Financial Officer on September 2, 2008.

Transactions with HudBay

In November, the Company announced that it had entered into a plan of arrangement (“Arrangement Agreement”) with HudBay Minerals Inc. (“HudBay”) whereby all outstanding Lundin Mining shares would be exchanged for HudBay shares and the Company would become a wholly‐owned subsidiary of HudBay. In connection with the proposed business combination, HudBay subscribed for 96,997,492 common shares in the capital of Lundin through a private placement. The shares represent approximately 19.9% of Lundin Mining's outstanding common shares after issuance. The price of the shares issued was C$1.40 per share, for aggregate gross proceeds to Lundin of C$135.8 million ($111.4 million).

On February 23, 2009, the Company announced that it has agreed to terminate the arrangement on agreed terms.

In consideration of terminating the Arrangement Agreement and in recognition of HudBay’s 19.9% ownership interest in Lundin Mining, the companies have agreed to the following terms in the termination agreement:

• As long as HudBay owns 10% or more of the outstanding common shares of Lundin Mining, HudBay shall be entitled to designate one nominee acceptable to Lundin for inclusion on the management slate of nominees for election to the Lundin Mining Board of Directors;

• As long as HudBay owns 10% or more of the outstanding common shares of Lundin Mining, HudBay shall have the right to maintain its then current level of ownership of the common shares of Lundin Mining in connection with, and as a part, of any public offering or private placement of Lundin Mining common shares by Lundin Mining; • For a period of six months following the date of the termination agreement, HudBay shall have a right of first offer in connection with any proposed sale or transfer of material assets of Lundin. This right in no ways binds Lundin to accept any offer from HudBay;

• A mutual release in respect of any and all rights in connection with or arising from the Arrangement Agreement; and • HudBay and Lundin Mining are bound by a reciprocal standstill covenant for a period of twelve months from the date of the termination agreement. In addition, HudBay will continue to be bound by the terms of the subscription agreement under which HudBay acquired its holding in Lundin Mining. The terms include restrictions on voting and limiting the amount of shares that can be disposed of in any six month period.

Financial Position and Financing

• Net debt1 at December 31, 2008 was $145.5 million, down from a net debt of $194.8 at September 30, 2008 and compared to a net cash position of $35.8 million at December 31, 2007. The increase in net debt during the year was primarily attributable to the Company’s funding obligations for the Tenke project (see page 26 of this MD&A). These cash outflows amounted to $264.1 million. The outflows in respect of Tenke were offset by inflows of $111.4 million from the private placement transaction with HudBay. • As at December 31, 2008, the Company was not in compliance with the tangible net worth covenant under its $575 million revolving line of credit facility; however, this requirement has been temporarily waived by the banking syndicate. The Company has obtained a waiver for a period up to June 5, 2009 during which it will work with the banking syndicate to establish a permanent and restructured facility. The intention is to complete this restructure well before June 5, 2009. (See page 30 for more details on the waiver). • The Company’s intention is to restructure the revolving credit facility, in conjunction with whatever other measures are required, to ensure adequate liquidity in the event that the present market volatility and depressed demand continue for the next two years. • The Company drew down on its credit facility by $86.8 million in the fourth quarter bringing the total outstanding amount on the facility to $266.7 million. A site‐remediation guarantee of $10.2 million brings the total committed under the facility to $276.9 million. • Cash on hand at December 31, 2008 was $169.7 million.

1 Net debt/(surplus) is a non‐GAAP measure defined as available unrestricted cash less financial debt, including capital leases and other debt related obligations. See page 43 of this MD&A for discussion of non‐GAAP measures. 8

Fourth Quarter Results

• Cash flow from operations for the quarter was $46.5 million, compared to $80.3 million for the corresponding quarter in 2007. • Net loss for the quarter was $728.5 million, or $1.77 per share. The net loss includes a non‐cash impairment charge in the amount of $733.7 million ($652.5 million after tax). See further information related to impairment charges on page 15 of this MD&A. • Sales during the quarter were heavily impacted by the decline in metal prices for all of the Company’s products. Sales for the quarter were $43.5 million, which included $94.3 million of negative adjustments related to the settlement of provisional sales and mark‐to‐market (“MTM”) adjustments on outstanding provisional sales of $18.1 million.

Fourth Quarter Sales Three months ended December 31, 2008 Copper Zinc Nickel Lead Sales before TC/RC ($ thousands) 20,772 22,292 12,345 9,239

Payable Metal (tonnes) 25,594 27,236 1,935 10,831

Realized prices, $ per pound 0.37 0.37 2.89 0.39 Realized prices, $ per tonne 812 818 6,380 853

Copper and nickel suffered the most pronounced declines during the quarter, with the London Metals Exchange (LME) cash price for copper declining $1.59/lb, or 55%, from $2.91/lb at September 30, 2008 to $1.32/lb at December 31, 2008 and nickel declining $2.25/lb, or 31%, from $7.15/lb to $4.90/lb. The impacts are illustrated as follows:

Three months ended December 31, 2008 ($ millions) Neves‐Corvo Aguablanca Zinkgruvan Galmoy Total Sales on Q4 shipments 80.2 27.2 29.7 18.1 155.2 and MTM Price adjustments and settlements – Q3 (53.5) (13.1) (12.1) (3.7) (82.4) shipments Treatment and refining (11.2) (5.2) (6.4) (6.5) (29.3) charges

Net sales 15.5 8.9 11.2 7.9 43.5

Outlook Production Outlook (contained metal in tonnes) 2009 Copper* 90,000

Zinc 98,000

Lead 40,000

Nickel 6,800 * Excludes tonnage included for Tenke

• Production for 2009 is expected to be lower than 2008 taking into account: Storliden and Galmoy (May 2009) mine closures; increased throughput at Zinkgruvan and slightly lower copper head‐grade at Neves‐Corvo. • First copper production from Tenke copper/cobalt project is expected in the second quarter of 2009. Construction costs to complete Phase I of the project are expected to be below Freeport's previous capital cost estimate of $1.75 billion.

• As a result of deferral of capital expenditure, the forecast for first copper ore production from the Zinkgruvan copper deposit of 2010 is under review and may be delayed. • Capital expenditures are expected to be around $130 million which includes: $70 million of sustaining capital; $20 million of new investment in existing operations relating to the Zinkgruvan copper project and the Neves‐Corvo zinc expansion; and $40 million for Tenke (covering pro rata working capital, exploration drilling, expansion studies and other minor costs). • Exploration expenditure is expected to be less than $20 million with around $10 million of this directed to expansion of copper resources at Neves‐Corvo. • Market outlook remains uncertain with an estimated 80% of zinc and over 40% of copper producers losing money after taking into account sustaining capital expenditures. Metal prices are expected to stabilize during 2009 with some potential for minor increases. The longer‐term outlook for metal prices remains strong and supply difficulties are expected once world growth resumes.

• Operating plans have been developed for Neves‐Corvo, Zinkgruvan and Aguablanca that should see them free cash flow positive at today’s prices. These will remain under active review during the year to adjust to changing circumstances.

• The Company’s funding and capital structure is expected to be finalized during the second quarter 2009.

Selected Quarterly and Annual Financial Information Year Ended December 31 2008 2007 Excluding 2008 Excluding 2007 2006 ($ millions, except key financial data) Impairment Impairment Sales 835.3 1,059.7 539.7 Operating earnings1 323.2 628.5 300.0 Net earnings (loss) before discontinued 49.0 (720.0) 350.3 0.3 151.5 operations Net (loss) earnings 48.3 (957.1) 337.7 (154.2) 151.5 Shareholders' Equity 2,603.7 3,541.8 2,128.0 Capital expenditures 274.4 189.4 151.3 Net debt/(surplus)2 145.5 (35.8) (356.0)

Key Financial Data Shareholders’ equity per share3 5.34 9.02 7.47 Basic (loss) earnings per share before 0.12 (1.82) 1.03 0.00 1.01 discontinued operations Basic (loss) earnings per share 0.12 (2.41) 1.00 (0.46) 1.01 Diluted (loss) earnings per share before 0.12 (1.82) 1.03 0.00 1.00 discontinued operations Diluted (loss) earnings per share 0.12 (2.41) 1.00 (0.46) 1.00 Equity ratio4 70% 75% 74% Shares outstanding: Basic weighted average 396,416,414 338,643,242 149,439,546 Diluted weighted average 396,416,414 338,643,242 151,152,105 End of period 487,433,771 392,489,131 284,800,065

Three months ended ($ millions, except 31‐Dec‐08 30‐Sep‐08 30‐Jun‐08 31‐Mar‐08 31‐Dec‐07 30‐Sep‐07 30‐Jun‐07 31‐Mar‐07 per share data) Sales 43.5 191.9 294.1 305.7 253.1 292.8 319.9 193.9 Impairment charges (651.5) (201.1) (152.8) ‐ (491.9) ‐ ‐ ‐ (after tax)5 Net (loss) earnings (728.5) (199.0) (108.4) 78.8 (436.6) 76.6 153.8 52.1 (Loss) earnings per (1.77) (0.51) (0.28) 0.20 (1.11) 0.20 0.54 0.18 share, basic6 (Loss) earnings per (1.77) (0.51) (0.28) 0.20 (1.11) 0.20 0.54 0.18 share, diluted6

1 Operating earnings is a non‐GAAP measure defined as sales, less operating costs, accretion of ARO and other provisions, selling, general and administration costs and stock‐based compensation. See page 43 of this MD&A for discussion of non‐GAAP measures. 2 Net debt/(surplus) is a non‐GAAP measure defined as available unrestricted cash less financial debt, including capital leases and other debt‐related obligations. See page 43 of this MD&A for discussion of non‐GAAP measures. 3 Shareholders’ equity per share is a non‐GAAP measure defined as shareholders’ equity divided by total number of shares outstanding at end of period. See page 43 of this MD&A for discussion of non‐GAAP measures. 4 Equity ratio is a non‐GAAP measure defined as shareholders’ equity divided by total assets at the end of period. See page 43 of this MD&A for discussion of non‐GAAP measures. 5 Includes impairment from discontinued operations.

6 The (loss) earnings per share are determined for each quarter. As a result of using different weighted average number of shares outstanding, the sum of the quarterly amounts may differ from the year‐to‐date amount. 11

Sales Overview

Sales Volumes by Payable Metal Total Q4 Q3 Q2 Q1 2008 2007 2008 2007 2008 2007 2008 2007 2008 2007 Copper (tonnes) Neves‐Corvo 86,748 86,180 23,104 24,648 23,087 18,764 23,051 23,869 17,506 18,899 Storliden 1,783 3,672 ‐ 791 255 522 872 1,310 656 1,049 Aguablanca1 5,905 2,685 1,490 1,249 1,477 1,436 1,669 ‐ 1,269 ‐ 94,436 92,537 24,594 26,688 24,819 20,722 25,592 25,179 19,431 19,948 Zinc (tonnes)2 Neves‐Corvo 19,166 20,927 2,977 6,016 6,434 6,168 5,750 4,079 4,005 4,664 Zinkgruvan 55,985 57,020 11,399 13,657 14,279 15,274 13,475 14,219 16,832 13,870 Storliden 5,956 11,852 ‐ 2,183 846 1,550 3,090 4,227 2,020 3,892 Galmoy 46,468 37,623 12,860 8,511 10,894 10,445 11,303 10,923 11,411 7,744 127,575 127,422 27,236 30,367 32,453 33,437 33,618 33,448 34,268 30,170 Lead (tonnes) Zinkgruvan 31,626 35,160 7,549 9,566 8,025 5,284 9,406 9,350 6,646 10,960 Galmoy 11,793 9,881 3,282 2,666 2,488 2,766 3,026 3,038 2,997 1,411 43,419 45,041 10,831 12,232 10,513 8,050 12,432 12,388 9,643 12,371 Nickel (tonnes) Aguablanca1 7,210 3,025 1,935 1,455 1,822 1,570 1,850 ‐ 1,603 ‐ 7,210 3,025 1,935 1,455 1,822 1,570 1,850 ‐ 1,603 ‐

Total sales decreased $224.4 million to $835.3 Years ended December 31 million compared with $1,059.7 million for 2007. (US$ millions) 2008 2007 Change Improved sales volume was offset by lower metals Neves‐Corvo 497.9 621.1 (20%) prices and pricing adjustments from prior period Zinkgruvan 123.5 206.1 (40%) sales. Galmoy 69.8 99.9 (30% Aguablanca 120.3 75.8 (59%) Storliden and Sales are recorded using the metal price received for 23.8 56.8 (58%) other sales that settle during the reporting period. For 835.3 1,059.7 (21%) sales that have not been settled, an estimate is used based on the month the sale is expected to settle and the forward price of the metal at the end of the reporting period. The difference between the estimate and the final price received is recognized by adjusting gross sales in the period in which the sale (finalization adjustment) is settled.

The finalization adjustment recorded for these sales depends on the actual price when the sale settles. Settlement dates typically are one to four months after shipment.

Sales volumes were in excess of the previous year’s sales volumes with the exception of lead, which was slightly lower. Sales values, however, were significantly lower due to the decrease in metal prices when compared to the previous year. The average realized prices for 2008 and 2007 are as follows:

1 Aguablanca was acquired on July 17, 2007. 2 Does not include zinc sold from Aljustrel of 14,271 tonnes. Aljustrel did not reach commercial production and, as such, any sales proceeds were applied to reduce the capital costs of development. 12

Reconciliation of realized prices Year ended December 31, 2008 Copper Zinc Nickel Lead Sales before TC/RC ($ 000s) 559,345 220,675 130,925 86,565

Payable Metal (tonnes) 94,436 127,575 7,210 43,419

Realized prices, $ per pound 2.69 0.78 8.24 0.90 Realized prices, $ per tonne 5,923 1,730 18,159 1,994

Year ended December 31, 2007 Copper Zinc Nickel Lead Sales before TC/RC ($ 000s) 662,538 379,264 76,288 130,074

Payable Metal (tonnes) 92,537 127,422 3,025 45,041

Realized prices, $ per pound 3.25 1.35 11.44 1.31 Realized prices, $ per tonne 7,160 2,976 25,219 2,888

Sales Value by Metal Copper revenues of $520.6 million (2007: $616.1 million) comprise the largest component of net metal sales. Zinc sales were $142.6 million (2007: $279.7 million) and nickel sales overtook lead during 2008 as the third highest contributor to revenues at $78.6 million (2007: $49.2 million). Nickel sales in the previous year represent only 6 months of sales, as the sales from the Aguablanca nickel mine were recorded only from the acquisition date of July 17, 2007. Lead sales were $68.2 million (2007: $105.4 million) while other metals accounted for $25.3 million (2007: $9.3 million).

2008 2007 62% Copper 58% Copper

17% Zinc 26% Zinc

8% Lead 10% Lead

10% Nickel 5% Nickel 3% Other 1% Other

Operating Results

Operating Costs Cost of mining operations were $436.6 million compared with $379.3 million for the same period in 2007. A large portion of the increase resulted from the inclusion of a full year of operating costs from the Aguablanca mine (2008: $89.0 million vs. 2007: $55.4 million). The costs in 2007 were included only from July when the mine was acquired. The remainder of the increase was due to a strong Euro exchange rate, resulting in costs being greater when expressed in US dollars and also general increases in the costs of production, particularly energy costs.

Changes in the rates of exchange between the US dollar ($) and the Euro (€) and Swedish krona (SEK) will cause results to vary. The Company’s costs are incurred in the € and SEK and will be higher when translated to $ when those currencies are strong. The € strengthened by 7% over the course of 2008. During 2008, the average exchange rates were €1.00: $1.47 and SEK1.00: $0.15, whereas during 2007 the average exchange rates were €1.00: $1.37 and SEK1.00: $0.15.

Accretion of Asset Retirement Obligations and Other Accretion of asset retirement obligation and provision for severance on mine closure totaled $25.9 million, compared to $9.1 million in 2007. At Galmoy, new severance arrangements were agreed to with the Company’s unions in late 2008 and the mine closure date was brought forward from 2011 to the second quarter of 2009. This resulted in a charge for termination benefits for Galmoy of $13.9 million during the year. Termination benefits and accretion were recorded for Aguablanca in the amount of $6.8 million in 2008 (2007: $0.4 million)

Depreciation, Depletion and Amortization Depreciation, depletion and amortization increased by $26.6 million to $202.3 million in 2008, compared with $175.7 million in 2007. This increase was primarily due to additional depreciation at the Aguablanca mine, acquired in July of 2007.

Years ended December 31 Depreciation by operation ($ millions) 2008 2007 Change

Neves‐Corvo 94.7 99.8 (5%) Zinkgruvan 20.0 18.8 6% Storliden 0.3 9.0 (97%) Galmoy 23.1 21.3 8% Aguablanca 63.4 26.3 141% Other 0.8 0.5 60% 202.3 175.7 15%

General Exploration and Project Investigation General exploration and project investigation costs increased to $38.9 million in 2008 from $35.4 million during 2007. Exploration costs broken down by country are as follows: Portugal ‐ $17.0 million, Sweden ‐ $9.2 million, Spain ‐ $9.5 million, Ireland ‐ $2.7 million. An additional $0.5 million in expenditures relating to new business development activities, including project investigation and evaluations work, were incurred in 2008.

Goodwill and long‐lived asset Impairment The Company regularly reviews its long‐lived assets and goodwill for impairment when there is reason to believe that the assets may be impaired. In light of current economic conditions, including low base metal prices, a review was conducted. The Company performs impairment tests on goodwill using the income and market approaches. The fair value of goodwill was measured as the residual of the fair value of the identifiable net assets. The fair value of goodwill is compared to the carrying value to determine the amount, if any, of impairment. In assessing the impairment of long‐lived assets, the Company tests for recoverability using a two‐step process. The first step involves the assessment of the undiscounted cash flows expected from the mining assets. If the undiscounted future cash flows are less than the carrying value of the assets, the assets are impaired. When impairment is indicated by the first step, a second step is carried out to measure the impairment using discounted cash flows to estimate the fair value. In carrying out the review of the Company’s long‐lived assets and goodwill for impairment, management is required to make a number of estimates or assumptions that include such items as future metal prices, mine life, operating costs, exchange rates and inflation rates and discount rates. As a consequence of the review, the Company recognized the following impairments:

($ millions) Galmoy Eurozinc Rio Narcea Ozernoe Total

Asset impairment 78.6 ‐ 340.4 103.8 522.8 Goodwill impairment ‐ 166.7 70.7 ‐ 237.4 Tax effect ‐ ‐ (99.5) (34.9) (134.4) Net after tax 78.6 166.7 311.6 68.9 $ 625.8 impairment

The Company also recorded impairment on the assets of Aljustrel, which is separately recorded under Loss from discontinued operations in the statement of operations. The impairment charges related to Aljustrel were $210.5 million. A future tax asset related to the Aljustrel assets was also written off in the amount of 26.0 million, bringing the total impairment charge after tax to $236.5 million.

Other Costs Other costs are as follows:

Years ended December 31 ($ millions) 2008 2007 Change

Selling, general and administrative 39.6 30.8 29% Stock‐based compensation 9.9 12.0 (18%) Other (income) and expenses (2.6) (24.7) (89%) Interest and bank charges 14.7 13.4 10% Foreign exchange loss 14.7 18.9 (22%) Loss on forward sales contracts 0.1 18.0 (99%) Loss (gain) on sale of investments 1.3 (74.3) (102%) 77.7 (5.9)

Selling, General and Administration Selling, general and administration costs were $39.6 million in 2008 compared with $30.8 million in 2007. The Company underwent restructuring during 2008, including a change in Chief Executive Officer, and closed its Stockholm and Vancouver offices. The head office of the Company was relocated from Vancouver to Toronto and a European administrative office was opened in Haywards Heath, UK. As a result, the Company incurred severance and recruitment costs as well as certain office closure costs. Selling, general and administration costs are expected to decline as the various activities and initiatives related to the reorganization have been completed. Stock‐Based Compensation Stock based compensation costs were $9.9 million in 2008 compared with $12.0 million in 2007. The decrease relates to the fact that there was a significant grant of options during the third quarter of 2007 when the stock price and associated volatility at the time, combined with the expected life of the options, resulted in a higher option value than options granted during 2008. Certain of the options granted in 2008 vest over a number of years, which has the effect of spreading the costs over the vesting period, whereas the 2007 grants vested immediately upon issue, resulting in the full charge taken during the period.

Foreign Exchange Loss Foreign exchange losses amounted to $14.7 million as compared to $18.9 million in 2007. Foreign exchange losses are primarily related to the Company’s US$ denominated debt held in Sweden and Canada. As the US$ strengthened against the SEK and the C$ during the year, foreign exchange losses resulted. The losses were partially offset by gains on the US$ receivables held in subsidiaries where the € is the functional currency. Loss on Forward Sales Contracts Gain (loss) on forward sales contracts are comprised of realized and unrealized gains and losses from marking‐to‐market the Company’s outstanding metal forward sales. The net loss on derivative contracts during 2008 was $0.1 million compared with a net loss of $18.0 million in 2007. The year over year decrease is the result of the Company unwinding its hedge portfolio, and the changes in metal prices. High metal prices during 2007, particularly for lead, resulted in large losses being recorded related to the Company’s then outstanding forward contracts. There are no remaining forward sales contracts outstanding at the end of 2008. (Loss) Gain on Sale of Investments During 2007, the Company disposed of certain of its investments and realized gains of $74.3 million. During 2008, the Company disposed of shares for proceeds of $48.9 million and realized a marginal loss of $1.3 million. Current and Future Income Taxes

Current Tax Expense (Recovery) Years ended December 31 ($ millions) 2008 2007 Change Neves‐Corvo 44.2 93.5 (49.4) Zinkgruvan 5.5 1.3 4.2 Aguablanca (0.7) 0.8 (1.5) Galmoy 1.3 1.0 0.3 Other (20.6) 39.9 (60.5) Current Tax expense (recovery) 29.7 136.5 (106.8)

Current income tax expense for 2008 was $29.7 million, compared to $136.5 million in 2007. The decrease in current income tax expense is a reflection of lower earnings reported for the year. Earnings from continuing operations before taxes and impairment expense decreased by $412.4 million, from $466.2 million in 2007 to $53.8 million in the current year.

Future Tax Expense (Recovery) Years ended December 31 ($ millions) 2008 2007 Change Neves‐Corvo (3.7) (10.5) 6.8 Zinkgruvan (3.2) (2.0) (1.2) Aguablanca (102.9) (4.8) (98.1) Galmoy 5.5 7.8 (2.3) Other (55.8) (11.0) (44.8) (160.1) (20.6) (139.6)

Future income tax recovery for 2008 was $160.1 million, compared to a recovery of $20.6 million in 2007. The increase in future tax recovery is related to asset and investment impairment charges of $904.3 million, which has partially been offset by a valuation allowance.

The corporate tax rates in the countries where the Company has mining operations range from 25% in Ireland to 30% in Spain.

Mark‐to‐Market of Available‐for‐Sale Securities The Company holds a portfolio of marketable securities consisting of junior mining companies in which it has a strategic interest. Over the course of the past year, and particularly in the latter half of the year, the value of the portfolio significantly diminished as a result of the economic downturn. Junior mining company market valuations were severely affected and the Company recognized an impairment loss of its securities in the amount of $144.1 million. The portfolio was reviewed at December 31, 2008 and it was determined that the impairment in the portfolio was likely to be other than temporary. As a result, the mark‐to‐market adjustment has been recorded in the current year’s income. Included in the current period loss is an amount of $23.6 million related to the mark‐to‐market adjustment recorded in previous years, which was previously recorded as an element of comprehensive income. An income tax recovery of $0.9 million has been recorded in relation to the charges. A valuation allowance of $11.6 million has been assessed against the future income tax asset that resulted from the recovery.

Mining Operations

Production Overview Total Q4 Q3 Q2 Q1 2008 2007 2008 2007 2008 2007 2008 2007 2008 2007 Copper (tonnes) Neves‐Corvo 89,026 90,182 23,297 25,317 22,291 20,585 20,726 20,875 22,712 23,405 Storliden 1,847 3,870 ‐ 622 264 550 903 1,500 680 1,198 Aguablanca1 7,071 3,068 1,796 1,548 1,878 1,519 1,849 ‐ 1,548 ‐ 97,944 97,120 25,093 27,487 24,433 22,654 23,478 22,375 24,940 24,603 Zinc (tonnes)2 Neves‐Corvo 22,567 24,163 2,598 6,018 6,758 5,904 7,419 6,048 5,792 6,193 Zinkgruvan 65,631 68,441 15,036 17,618 15,844 16,745 16,552 16,916 18,199 17,162 Storliden 7,007 13,944 ‐ 2,570 995 1,823 3,635 4,973 2,377 4,578 Galmoy 55,952 45,282 14,772 10,788 13,470 11,920 14,016 12,612 13,694 9,961 151,157 151,830 32,406 36,994 37,067 36,392 41,622 40,549 40,062 37,894 Lead (tonnes) Zinkgruvan 33,075 33,580 7,291 7,643 7,043 6,630 9,959 10,664 8,782 8,643 Galmoy 11,724 10,980 2,626 2,727 2,865 3,276 2,438 2,573 3,795 2,404 44,799 44,560 9,917 10,370 9,908 9,906 12,397 13,237 12,577 11,047 Nickel (tonnes) Aguablanca1 8,136 3,269 2,179 1,690 2,155 1,579 1,954 ‐ 1,848 ‐ 8,136 3,269 2,179 1,690 2,155 1,579 1,954 ‐ 1,848 ‐

Overall production targets were achieved for all metals produced. All mine operations performed to expectations with the exception of Aljustrel.

1 Full production from Aguablanca during the quarter ended September 30, 2007 for copper and nickel has been included for comparative purposes. The acquisition of Aguablanca occurred on July 17, 2007 and therefore the majority of production during the third quarter 2007 represents production under Lundin’s ownership. Pre‐acquisition production for the first two quarters, totaling 3,397 tonnes of copper and 3,802 tonnes of nickel has not been included in the 2007 comparative figures. 2 Does not include Aljustrel production: 2008‐ 16,687 tonnes zinc and 204 tonnes copper, 2007‐ 190 tonnes zinc.

Neves‐Corvo Mine Neves‐Corvo is an operating underground mine in the western part of the Iberian Pyrite Belt. The mine access is provided by one vertical 5 metre diameter shaft, hoisting ore from the 700 metre level, and a ramp from the surface. The mine has been a significant producer of copper since 1989. The copper plant has treated in excess of a maximum of 2.0 million tonnes per annum since upgrading in 2007. In 2006, the Company commenced treating zinc ores, and in January 2007, management announced that the zinc processing facility was operating at the designed production and metallurgical performance levels.

Temporary Suspension of Zinc Production The zinc ore processing facility, owing to its flexible configuration, is able to treat any of the polymetallic ores mined at Neves‐Corvo at rates of up to 0.5 million tonnes per annum. Until the fourth quarter, the facility treated zinc‐rich ores to produce a zinc concentrate of 50% zinc grade.

Given the current depressed prices for zinc, the mining and processing of zinc ores was suspended until suitable value for zinc concentrates returns to the market. In place of the zinc ore, the zinc facility is available to process additional copper ore and to produce a copper concentrate of 24% copper grade with a positive cash return.

All zinc ore stocks were treated prior to the re‐alignment of the zinc processing facility to produce additional copper concentrates. This allows Neves‐Corvo to utilize productively, resources normally assigned to zinc production until the zinc market recovers. The Company will continue to evaluate its zinc business. Market conditions allowing, Neves‐Corvo plans to double zinc production when production activities resume.

Major New Deposit at Neves‐Corvo In July 2008, the Company announced the discovery of a new zinc‐copper deposit at Neves‐Corvo. This new deposit has been named the Lombador East deposit and contains the thickest, highest‐grade zinc intersections ever encountered at the Neves‐Corvo mine, including 89.2 metres grading 8.43% zinc. High‐grade copper mineralization was also discovered in the footwall mineralization of Lombador East highlighted by 16 metres grading 3.92% copper.

An initial study, based on results from eight holes drilled into this zinc‐rich portion of the much larger Lombador massive sulphide lens, has shown that the Lombador East deposit has the potential to contain a minimum of 18 to 23 million tonnes grading 7.5 to 8.0% zinc and 2.1 to 2.2% lead. This preliminary estimate is conceptual in nature and work done to date is insufficient to define a mineral resource as defined by National Instrument 43‐101. See additional information under “Project Highlights” on page 26 of this MD&A.

Production Statistics Total Q4 Q3 Q2 Q1 2008 2007 2008 2007 2008 2007 2008 2007 2008 2007

Ore mined, 2,395,516 2,184,205 674,207 585,138 573,766 504,799 577,980 500,896 569,563 553,396 copper (tonnes) Ore mined, 407,046 399,003 34,509 101,123 106,488 98,837 138,728 105,843 127,321 94,200 zinc (tonnes) Ore milled, 2,409,966 2,180,764 675,599 577,377 550,182 539,508 588,875 524,922 595,310 538,957 copper (tonnes) Ore milled , 398,985 396,719 42,864 104,800 114,556 98,133 126,669 106,820 114,896 86,966 zinc (tonnes) Grade per tonne Copper (%) 4.3 4.8 4.0 5.0 4.7 4.5 4.1 4.6 4.4 5.0 Zinc (%) 7.3 7.8 7.7 7.3 7.6 7.9 7.5 7.3 6.6 8.8 Recovery Copper (%) 86 86 87 87 85 84 85 87 87 87 Zinc (%) 78 78 78 79 78 76 79 78 77 81 Concentrate grade Copper (%) 24.3 22.9 24.4 23.0 24.5 22.7 24.4 22.7 23.8 23.2 Zinc (%) 49.2 48.9 48.9 48.3 49.0 49.2 49.7 48.8 48.8 49.2 Production‐ tonnes

(metal contained) Copper 89,026 90,182 23,297 25,317 22,291 20,585 20,726 20,875 22,712 23,405 Zinc 22,567 24,163 2,598 6,018 6,758 5,904 7,419 6,048 5,792 6,193 Silver (oz) 926,740 852,448 232,252 216,798 233,077 211,287 218,674 201,571 242,737 222,792 Sales ($000s) 497,936 621,088 15,498 146,573 119,698 160,620 193,578 202,815 169,162 111,507 Cash cost 1.07 0.75 1.05 0.81 1.06 0.90 1.15 0.73 1.02 0.65 ($ per pound)1

Operating Earnings2 Operating earnings of $291.8 million for 2008 were $142.5 million (33%) below those of 2007. Price and price adjustments accounted for a negative $135.8 million. Operating cost improvements were more than offset by a stronger euro. Production Record production was achieved in ore mined and processed. Total ore tonnes mined and milled for the year increased by 8% and 9% respectively compared to the previous year. For the first time in the operation’s history, the mine hoisted in excess of 3.0 million tonnes of ore and waste with the final tally being 3.3 million tonnes. Mine throughput improved during the year as a result of increased productivity in stope activities, blasting practice, more focused capital development and greater capital productivity of ore handling systems. A reduction in the head grades of treated ore resulted in a marginal decrease in production. Zinc production totals were affected by the suspension of zinc production in November, as discussed above. Cash Costs Reported cash costs per pound of copper, increased by 32 cents or 43% compared to last year. Real improvements in costs have been offset by a fall in zinc price reducing the zinc by‐product credit by 20.5 cents per pound of copper sold. The strength of the Euro during 2008 also negatively affected the total cash cost by approximately 16 cents per pound of copper sold.

1 Cash cost per pound of payable copper sold is the sum of direct cash costs and inventory changes less by‐product and profit‐ based royalties. See non‐GAAP Performance Measures on page 43 of this MD&A. 2 Operating earnings is a non‐GAAP measure defined as sales, less operating costs, accretion of ARO and other provisions, selling, general and administration costs and stock‐based compensation. See page 43 of this MD&A for discussion of non‐GAAP measures. 20

Zinkgruvan Mine The Zinkgruvan property is located approximately 250 km south‐west of Stockholm, Sweden. Zinkgruvan has been producing zinc, lead and silver on a continuous basis since 1857. The operation consists of an underground mine and processing facility with associated infrastructure and a present production capacity of 900,000 tonnes of ore throughput. The mine has three shafts with current mining focused on the Burkland and Nygruvan ore bodies. One shaft is used for ore and waste handling; the other two are used for transportation of personnel and for emergency egress. Production Statistics Total Q4 Q3 Q2 Q1 2008 2007 2008 2007 2008 2007 2008 2007 2008 2007

Ore mined (tonnes) 900,387 860,240 250,638 243,265 193,953 174,214 212,156 218,065 243,640 224,696 Ore milled (tonnes) 895,024 875,556 226,167 237,945 204,096 171,453 237,114 230,768 227,647 235,390 Grade per tonne Zinc (%) 7.9 8.3 7.2 7.9 8.3 10.4 7.5 7.8 8.5 7.7 Lead (%) 4.3 4.4 3.8 3.7 4.0 4.4 4.8 5.2 4.5 4.2 Recovery Zinc (%) 93 94 93 94 94 94 93 94 94 94 Lead (%) 86 88 84 86 87 88 88 89 86 88 Concentrate grade Zinc (%) 53.2 54.0 53.5 53.4 53.4 55.4 53.0 54.1 53.0 53.0 Lead (%) 76.7 76.1 77.2 76.2 76.3 74.0 76.2 76.6 77.2 77.1 Production‐ tonnes

(metal contained) Zinc 65,631 68,441 15,036 17,618 15,844 16,745 16,552 16,916 18,199 17,162 Lead 33,075 33,580 7,291 7,643 7,043 6,630 9,959 10,664 8,782 8,643 Silver (oz) 1,694,566 1,756,074 373,769 436,795 370,932 388,276 534,193 491,989 415,672 439,014 Sales ($000s) 123,508 206,067 41,724 46,119 29,745 52,028 34,066 58,444 48,633 49,476 Cash cost 0.30 0.16 0.40 (0.03) 0.35 0.17 0.33 0.27 0.18 0.23 ($ per pound)1

Operating Earnings2 Operating earnings of $57.2 million were $92.0 million (62%) below those of 2007. Price and price adjustments accounted for a negative $75 million. Lower sales volume; increased cost, primarily energy; and a stronger euro accounted for the balance. Production Record production levels were reached for tonnes of ore mined and treated during 2008. Zinc and lead metal production is below 2007 levels, owing to lower head grades and recoveries. Cash Costs Cash costs per pound of zinc increased largely as a result of the lower lead price. Other causes included: lower lead and silver production further lowered the by‐product credit; operating costs increased 7% reflecting higher fuel and energy costs; and there was a one cent increase owing to exchange rate differences. Offsetting some of this increase in cash costs was lower treatment charges.

1 Cash cost per pound of payable zinc sold is the sum of direct cash costs and inventory changes less by‐product credits and profit‐based royalties. See non‐GAAP Performance Measures. 2 Operating earnings is a non‐GAAP measure defined as sales, less operating costs, accretion of ARO and other provisions, selling, general and administration costs and stock‐based compensation. See page 43 of this MD&A for discussion of non‐GAAP measures.

Projects The copper project remains on schedule on all three main components: ramp development, preparation for the additional crusher and ore bin at 800 levels, and the design, procurement and construction of the copper process circuit. The forecast cost in SEK is on budget.

Aguablanca Mine The Aguablanca nickel‐copper sulfide deposit is located in the province of Badajoz, 80 km by road to Seville and 140 km from a major seaport at Huelva. The Aguablanca mine was acquired by the Company in July 2007, through its purchase of Rio Narcea Gold Mines. Commercial production started in January 2005. Production Statistics Total Q4 Q3 Q21 Q11 2008 2007 2008 2007 2008 2007 2008 2007 2008 2007

Ore mined (tonnes) 1,794,089 1,707,330 480,663 420,350 461,477 438,012 444,720 421,567 407,229 427,401 Ore milled (tonnes) 1,825,212 1,668,959 492,681 406,107 475,893 433,178 451,265 422,925 405,373 406,749 Grade per tonne Nickel (%) 0.6 0.5 0.6 0.5 0.6 0.5 0.5 0.5 0.6 0.5 Copper (%) 0.4 0.4 0.4 0.4 0.4 0.4 0.4 0.4 0.4 0.5 Recovery Nickel (%) 80 76 79 77 81 77 80 76 81 74 Copper (%) 93 92 94 92 93 92 93 91 92 91 Concentrate grade Nickel (%) 7.0 7.3 7.1 7.5 7.0 7.0 6.9 7.3 7.0 7.3 Copper (%) 6.1 6.9 5.9 6.8 6.1 6.8 6.5 7.0 5.9 7.3 Production‐ tonnes

(metal contained) Nickel 8,136 6,630 2,179 1,690 2,155 1,579 1,954 1,730 1,848 1,631 Copper 7,071 6,281 1,796 1,548 1,878 1,519 1,849 1,569 1,548 1,645 Sales ($000s) 120,280 188,587 8,719 34,495 24,194 41,343 35,864 50,088 51,503 62,661 Cash cost2 5.66 7.23 5.11 7.14 5.06 8.10 5.20 6.52 7.53 9.13 ($ per pound)

Operating Earnings3 Operating earnings of $22.2 million for 2008 were in‐line with 2007, which only included five and a half months as Aguablanca was acquired in July 2007. Substantially improved sales volume and operating costs have been offset by an estimated $34.5 million in lower metal price and price adjustments.

Production The mine achieved record tonnage mined and processed. Nickel production was up 23% over 2007 and copper increased by 13% when compared to last year (the comparative production number includes production for the pre‐July 17, 2007 period when the Company did not own and operate the mine). Mill throughput in the third and fourth quarters averaged in excess of 1.9 million tonnes per annum versus the original design capacity of 1.5 million tonnes per annum.

1 Q1 and Q2, 2007 production and sales revenue is shown for comparative purposes only and does not reflect the results of the Company. The Company acquired Aguablanca on July 17, 2007. Lundin’s sales recorded in respect of Aguablanca for 2007 were $75.8 million. 2 Cash cost per pound of payable nickel sold is the sum of direct cash costs and inventory changes less by‐product credits and profit‐based royalties. See non‐GAAP Performance Measures. 3 Operating earnings is a non‐GAAP measure defined as sales, less operating costs, accretion of ARO and other provisions, selling, general and administration costs and stock‐based compensation. See page 43 of this MD&A for discussion of non‐GAAP measures. 22

Cash Costs Cash costs per pound of nickel improved over 2007 primarily as a result of a fall in treatment and refining charges ($3.18/lb) related to price participation. This was offset in part by lower contributions from copper by‐products credits (94 cents/lb) and the effect of higher stripping costs (approximately 60 cents/lb). The operating plan has been revised to incorporate reduced mine tonnage through the use of broken ore stockpiles with the objective of maintaining metal output at a reduced cost per pound and thereby achieving positive free cash flow. The operating plan and cost control initiatives will continue to be assessed throughout 2009.

Galmoy Mine The Galmoy underground zinc mine is located in south‐central Ireland in County Kilkenny and is approximately 30 km to the northwest of the city of Kilkenny. The Company has recently announced that the mine will be permanently closed in May 2009.

On January 22, 2009, the Company announced that the Galmoy mine, originally scheduled to produce until 2011, would permanently cease production during the second quarter of 2009. The Company intends to wind down the operation in an orderly fashion and, following closure, remaining rehabilitation work will be completed. Closure costs have been provided for and the cash flow effect of this closure is not expected to have any material effect on the Company as restricted cash (carried as a long‐term asset and not included in the Company's reported net cash/debt) is held to cover rehabilitation obligations.

Production Statistics Total Q4 Q3 Q2 Q1 2008 2007 2008 2007 2008 2007 2008 2007 2008 2007

Ore mined (tonnes) 494,860 453,444 115,746 134,031 131,114 111,226 119,590 115,417 128,410 92,770 Ore milled (tonnes) 496,953 446,908 122,394 125,768 112,776 104,709 131,768 122,371 130,015 94,060 Grade per tonne Zinc (%) 13.5 12.4 14.5 10.8 14.1 13.8 12.8 12.9 12.9 12.8 Lead (%) 3.5 3.4 3.3 3.3 3.8 4.1 2.9 3.1 4.1 3.5 Recovery Zinc (%) 83 82 83.1 79 85 82 83 82 82 83 Lead (%) 67 72 65.4 66 67 77 64 73 71 73 Concentrate grade Zinc (%) 52.5 52.0 52.4 52.0 51.8 52.1 53.4 52.0 52.3 51.9 Lead (%) 65.2 65.4 66.3 65.3 65.8 67.3 65.7 64.9 63.7 64.1 Production‐ tonnes

(metal contained) Zinc 55,952 45,282 14,772 10,788 13,470 11,920 14,016 12,612 13,694 9,961 Lead 11,724 10,980 2,626 2,727 2,865 3,276 2,438 2,573 3,795 2,404 Silver (oz) 134,120 129,276 20,546 60,908 27,124 26,601 27,344 23,145 59,106 19,022 Sales ($000s) 69,831 99,925 7,938 17,806 15,549 29,480 19,536 34,887 26,808 17,752 Cash cost 0.70 0.84 0.69 0.67 0.66 0.65 0.76 0.92 0.69 1.15 ($ per pound)1

1 Cash cost per pound of payable zinc sold is the sum of direct cash costs and inventory changes less by‐product credits and profit‐based royalties. See non‐GAAP Performance Measures. 23

Operating Loss (Earnings)1 An operating loss of $7.2 million was $49.3 million below the $42.1 million of operating earnings in 2007. Price and price adjustments accounted for a negative $44.5 million. The balance is accounted for by the stronger euro. Production Annual metal production exceeded last year’s as a result of higher mill throughput and head grades. The revised mining plan, resulting from the decision to close Galmoy, will focus on mining high‐grade stopes while placing backfill in indicated areas to ensure long‐term stability of the mine site. Cash Costs The cash cost per pound of payable zinc sold decreased by 17% to 70 cents/lb as compared to 2007. Falling by‐product credits (10.5 cents/lb) due to weaker lead prices and a weaker US currency were offset by higher zinc sales (reduction of 14.2 cents/lb) and lower zinc treatment charges (reduction of 15.7 cents/lb).

Aljustrel Mine Development Project The Aljustrel zinc mine was in pre‐production development for the first three quarters of 2008. In the fourth quarter it was placed on care and maintenance and has since been sold (February 2009) to MTO (I’M) SGPS, SA.

Production Statistics Total Q4 Q3 Q2 Q1 (100% of Production) 2008 2008 2008 2008 2008 Ore mined (tonnes) 884,141 95,568 328,586 224,038 234,949 Ore milled (tonnes) 1,002,379 112,331 332,762 332,760 224,526 Grade per tonne Zinc (%) 4.1 2.7 4.2 4.3 4.5 Recovery Zinc (%) 40.3 51.8 53.9 33.8 29.3 Concentrate grade Zinc (%) 46.8 46.9 46.7 46.6 47.1 Production (metal contained) Zinc (tonnes) 16,687 1,362 7,538 4,830 2,957

Aljustrel performed below expectations in the ramp‐up phase as a variety of zinc and copper ores were tested in an attempt to find a viable solution to counter the sharp fall in zinc prices. In light of the lower prices, a decision was taken to place the mine on care and maintenance prior to achieving commercial production.

Substantially all of the net assets of Aljustrel were written down in the second quarter of 2008. The Company has accrued all obligations associated with the disposal and does not expect additional material charges in 2009 related to Aljustrel.

Storliden Mine The Storliden mine is located in the Skelefte District of northern Sweden. Underground production ceased in July 2008. Rehabilitation is expected to be completed by the end of 2009.

Production Statistics Total Q4 Q3 Q2 Q1 2008 2007 2008 2007 2008 2007 2008 2007 2008 2007

Ore mined (tonnes) 154,404 276,786 ‐ 67,423 ‐ 53,365 81,854 79,100 72,550 76,818 Ore milled (tonnes) 172,106 258,905 ‐ 62,127 18,823 56,193 72,244 76,038 81,039 64,547 Grade per tonne Copper (%) 1.2 1.6 ‐ 1.1 1.6 1.1 1.4 2.1 0.9 2.0 Zinc (%) 4.4 5.9 ‐ 4.5 5.7 3.7 5.5 7.1 3.2 7.6 Recovery Copper (%) 91 91 ‐ 92 89 91 92 91 91 92 Zinc (%) 92 92 ‐ 92 93 89 92 92 91 93 Concentrate grade Copper (%) 29.1 29.0 ‐ 28.8 29.1 28.8 29.4 29.3 28.6 29.2 Zinc (%) 54.0 55.1 ‐ 55.5 54.0 56.0 54.8 54.4 52.9 54.8 Production‐ tonnes

(metal contained) Copper 1,847 3,870 ‐ 622 264 550 903 1,500 680 1,198 Zinc 7,007 13,944 ‐ 2,570 995 1,823 3,635 4,973 2,377 4,578 Sales ($000s) 23,636 56,354 ‐ 7,959 2,717 9,179 11,025 23,671 9,779 15,544 Cash cost (0.05) (0.06) ‐ 0.29 (0.12) (0.25) (0.06) (0.31) (0.11) 0.09 ($ per pound)1

The mine performed beyond its originally planned closure date, with underground production ceasing in July and milling continuing into the third quarter. The unit cash costs per pound of payable metal is traditionally low, owing to significant copper by‐product credits.

The closure of the mine commenced in October with rehabilitation expected to be complete by the end of 2009. All approvals are in place for the closure plans and closure is fully provided for.

Project Highlights

Tenke Fungurume Project (Lundin 24.75%, FCX 57.75%, Gécamines 17.5%) The Tenke Fungurume Project (Tenke) is the development of an open pit copper‐cobalt mine and associated infrastructure in the southern Katanga Province, Democratic Republic of Congo (DRC). FreePort McMoran Copper and Gold Inc. (FCX) is the operating partner, holding a 57.75% interest in the project. La Générale des Carrières et des Mines (Gécamines), the Congolese state mining company holds a 17.5% free carried interest in the project.

The project consists of multiple phases of development building towards a production objective of more than 400,000 tonnes per annum. Phase 1 of mining has scheduled production of 115,000 tonnes per annum of copper cathode and 8,000 tonnes per annum of cobalt in hydroxide based on proven and probable ore reserves approximating 120 million metric tonnes with average ore grades of 2.6% copper and 0.35% cobalt (FCX estimate under SEC guidelines, January 2009).

Construction activities are progressing well. As a result of a “copper first” development strategy, first copper cathode is expected to be produced in the second quarter of 2009. Startup of cobalt production facilities is expected to lag first copper production by between 1 and 3 months. Overall, Phase 1 is scheduled for construction completion in the third quarter 2009 including all mine, process and infrastructure facilities. Pre‐production stripping of the Kwatebala deposit is well advanced and a stockpile of high grade ore is accumulating to facilitate a rapid start up. The overall project work force is now in excess of 8,000 workers, most of which are Congolese nationals. Staff levels will reduce from this point as the project construction staff is reduced and permanent operations staff levels stabilize.

In early 2008 it was estimated that the capital costs would be approximately $1.75 billion, (approximately $1.9 billion including loans to a third party for power development), nearly double the original estimates. FCX initiated an overall review of the project status and brought in a third party to re‐assess project cost estimates and schedule. Primary reasons for overruns were escalation in the costs of construction materials and the increasing costs of attracting contractors to execute construction work in the DRC, as well as other unexpected and underestimated costs. The new cost estimates allowed for infrastructure to support a larger scale operation than the initial phase of the project, including the provision of expanded power generating capacity. This regional power infrastructure investment of more than $140 million is primarily funded through a loan to the DRC State power authority. Also included are expanded housing and support facilities for the project work force, enhancements to national roads and bridges and extended social and training initiatives.

During 2008, the Company contributed $264 million to the project in respect of Phase 1 construction. Company funding of Tenke during 2009 is estimated to be in the range of $40.0 million including Lundin’s share of working capital, exploration and on‐going studies. The Company is protected from cost overruns on the initial Phase I project capital cost, whereby FCX is required to fund certain excess cost overruns. These costs are funded by FCX through loans to the project. The loans are non‐recourse to Lundin and will be repaid from the operating cash flows of the project. It is currently expected that Phase 1 costs will be slightly below the previous estimates of $1.75 billion. A total of $1.4 billion has been spent to date.

Project exploration continues and the Company is preparing an updated resource estimate in compliance with NI 43‐101 Standards of Disclosure for Mineral Projects. Consistent with current spending restraint in the industry, additional expansion investment will be scaled back for 2009.

The Ministry of Mines, Government of the DRC initiated a review of the mining contracts in the country in 2007. FCX, as operator, has been leading discussions with the government and continues to engage in discussions with representatives of the DRC government regarding the ongoing contract review. The Company believes that the TFM agreements with the government of DRC are legally binding, that all associated issues have been dealt with fully under Congolese law and that the overall fiscal terms previously negotiated and incorporated into the Amended and Restated Mining Convention exceed the requirements of the Congolese Mining Code. Discussions are continuing in a co‐operative manner and have not delayed project development activities. However, until a resolution can be reached between the partners, the carrying value of the Company’s interest is subject to uncertainty.

Ozernoe Project (Lundin 49%, IFC Metropol 51%) The Company holds a 49% interest in the Ozernoe zinc‐lead project, located in the Republic of Buryatia in South East Siberia of the Russian Federation. The remaining 51% is owned by a subsidiary of IFC Metropol. Since acquiring its interest in 2006, the Company has attempted to further a feasibility study on the project while seeking to resolve a number of challenging issues related to project structure, timelines and funding.

During 2008, the Company experienced increasing difficulty in advancing the project and was unable to progress issues, which are critical to the determination of Company’s ongoing involvement including little progress on the feasibility study and no resolutions on project structure and management. Considering the difficulty in advancing this project, and taking into account the management structure, the Company has determined that it is not able to exercise joint control in respect of the project and accordingly proportionate consolidation of the net assets and results of operations is no longer appropriate.

The Company has recorded a charge of $103.8 million to record an impairment of the investment. A future income tax liability related to the mineral property has been applied against the impairment loss, resulting in a net impairment loss of $68.9 million related to the project. The balance of the Ozernoe investment currently recorded on the Company’s books is $50 million.

Lundin continues to assess options going forward, including whether there is local or international interest in acquiring Lundin’s stake in this project.

Neves‐Corvo – Lombador Copper/Zinc and Neves Zinc Expansion Projects In late 2007, the Company commenced a feasibility study to examine the development of the Lombador zinc deposit, which lies adjacent to existing Neves‐Corvo deposits and the related surface facilities. Shaft location studies, land acquisition, ore reserve drilling, metallurgical testwork, and project planning activities were undertaken during the year. Significant copper and zinc mineralization was regularly encountered throughout the drilling programs, affecting project development strategies.

Development studies advanced with priorities on assessing low‐cost sub‐level caving mining method and rock mechanics/geotechnical studies. An interim assessment of Lombador Project shaft/no shaft development scenarios is scheduled for the second quarter 2009.

The Neves Zinc Expansion Project is expected to double zinc production at Neves‐Corvo. Initial design and procurement planning commenced on critical path activities during 2008 but the activities have now been slowed due to the decline in prices for zinc metal. Zinc production at Neves‐Corvo has been suspended (as discussed on page 19 of this MD&A) and zinc circuits have been converted to provide additional copper processing for improved revenues.

It is planned that, when justified by prices, the zinc business will restart with output expected to double from present capacity to around 50,000 tonnes per annum of zinc metal contained in concentrates and with the potential for a further low‐cost expansion, accessing the upper reaches of the Lombador ore bodies by ramps extended from existing Neves‐Corvo underground facilities.

Zinkgruvan Copper Project In late 2007, the Company commenced the development of the Zinkgruvan copper deposit which lies adjacent to existing zinc deposits. In addition to facilitating copper production, this expansion is intended to improve zinc mining flexibility through a second underground crusher and a daylight ramp access. Construction of the daylight ramp access advanced throughout 2008 as did underground drifting in the crusher area. The underground crushing area civil/structural work is substantially complete and the design and procurement progress for the surface copper concentrator is underway.

Exploration Highlights

Portugal

Neves‐Corvo Mine Exploration (Copper, Zinc) Total drilling for the year was 36,532 metres with 38 individual targets tested. The most significant result for the year was the discovery of the Lombador East zinc‐copper deposit as announced in the third quarter.

Spain

Aguablanca Mine Exploration (Nickel, Copper) Drilling conducted during the year included successful resource definition and step‐out exploration surrounding the known deposit. Drilling of targets outside the resource area intersected low‐grade disseminated sulphides within gabbros but no concentrated sulphides at the favourable intrusive contacts.

Ossa Morena Regional Exploration, southern Spain (Nickel, Copper, PGM) A total of 4,596 metres in 16 holes was drilled in 2008. A decision was made to curtail the regional exploration program and farm out these properties. Offers of interest are being considered.

Sweden

Zinkgruvan Mine Exploration (Zinc, Lead, Silver) In the first half of the year, resource expansion drilling and underground exploration drifting was carried out, while the second half of the year focussed on compiling results from the 2008 program and integrating them into the very large historic database as part of on‐going target generation work.

Bergslagen Regional Exploration (Zinc, Lead, Silver and Copper) During the fourth quarter a total of 1,431 metres was drilled targeting areas directly north of the Zinkgruvan mine where results indicate that the Zinkgruvan mine horizon extends much farther north than previously known. Gravity surveying was also carried out on the Garpen exploration licenses covering the immediate extensions of Boliden’s Garpenberg mine; data interpretation should be completed in Q1 2009.

Ireland

Exploration drilling was significantly reduced around Galmoy during 2008. Certain regional exploration programs were carried out and near the end of the year two new prospecting licenses were acquired. Additional exploration drilling is planned for the first quarter of 2009 on key greenfields targets.

Metal Prices, LME Inventories and Smelter Treatment and Refining Charges

The average prices for copper, zinc, lead and nickel all decreased in 2008 compared to 2007.

The fall in prices is a consequence of the slow‐down of the global industrial production which in turn has had a negative impact on the demand for non‐ferrous metals. Both the construction sector and the automotive sector, together the two main users of non‐ferrous metals, have been badly hit by the credit crisis and production in both sectors have been drastically reduced. Reduced consumption has led to inventory build up and a drop in the price of all non‐ferrous metals.

Years ended December 31 (Average LME Prices) 2008 2007 Change Copper US$/pound 3.15 3.23 US$/tonne 6,952 7,126 (2%) Lead US$/pound 0.95 1.18 US$/tonne 2,085 2,595 (20%) Zinc US$/pound 0.85 1.47 US$/tonne 1,870 3,250 (42%) Nickel US$/pound 9.54 16.87 US$/tonne 21,027 37,181 (43%)

The LME inventory for zinc, copper and nickel saw a considerable increase over 2008 and ended the year 184% (zinc), 72% (copper) and 63% (nickel) higher than the January levels. However, the LME inventory for lead remained stable and ended 2008 at 45,150 mt or 325 mt lower than at the beginning of the year.

The spot treatment charges (“TC”) for zinc concentrates fell over 2008 from $310 per dmt in January to $150 per dmt in December. The decrease in the spot treatment charges is partly a function of the falling zinc price but increased exports of zinc concentrates to China has also contributed. The drastic drop in the zinc price during 2008 has forced many zinc mines, but also smelters, to close and for 2009 the Company expects an improvement in the TC in favour of the mines because of less zinc concentrates being available to the market.

The market for copper concentrates has eased during 2008 and during the last quarter of the year spot treatment and refining charges (“TC” and “RC”) exceeded the TC and RC levels of the annual and mid‐ year contracts. The financial crisis has resulted in reduced production at many smelters which in turn has caused increased availability of copper concentrates.

Lead concentrate exports to China have increased by 8% in 2008 compared to 2007. The increase in demand from China had kept the spot treatment charges for lead concentrates below the level of the annual contract throughout 2008. Since lead concentrate mainly is produced as a by‐product to zinc concentrates the price induced closures of zinc mines will also reduce the availability of lead concentrates. 29

The economic downturn has had a negative effect on the demand for steel and in particular for stainless steel, the main use of nickel. The stainless steel industry is going through a period of de‐stocking which has had an adverse effect on the demand for nickel. There have been several announcements of mine closures and postponed nickel projects during the last four months of 2008. The availability of nickel raw materials has been affected and although the market for nickel raw materials is not as homogenous as for the other base metals, there is a trend that the treatment terms are moving in favour of the mines. The Company’s nickel concentrates are sold under multi‐year contracts.

Liquidity and Financial Condition

Cash Reserves As at December 31, 2008, the Company had net debt of $145.5 million compared with net cash surplus of $35.8 million as at December 31, 2007. The Company defines net debt to be available unrestricted cash less financial debt, including capital leases and other debt related obligations.

Cash and cash equivalents increased by $38.7 million to $169.7 million as at December 31, 2008 from $131.0 million at December 31, 2007. Cash inflows consisted of operating cash flows of $215.0 million, private placement proceeds of $111.4 million and the drawdown on the credit facility in the amount of $226.3 million. Cash was used to invest in property plant and equipment in the amount of $274.4 million and to satisfy the Company’s obligations to fund its share of the Tenke Phase I capital requirements and related project expenditures in the amount of $264.1 million. A total of $14.6 million was also spent on the Company’s normal course issuer bid.

As at December 31, 2008, the Company was not in compliance with the tangible net worth covenant under its $575 million revolving line of credit facility however this requirement has been waived by the banking syndicate until June 5, 2009. The total outstanding on the facility was $266.7 million at December 31, 2008.

Tangible net worth, as defined under the facility, has reduced during the year as a result of: write‐ downs of mining assets and marketable securities stemming from the fall in metal prices; operating losses incurred in the fourth quarter; the fall in the value of the Euro and Swedish krona, in which currencies the principal mining assets are denominated, against the US Dollar, in which currency the company reports its results, resulting in a lower value of assets in US Dollar terms; and investment in Tenke, which is excluded when considering the tangible net worth under the banking covenants as the banks’ security does not include Tenke.

In return for the waiver, the Company has agreed to, with effect on February 25, 2009, and for the duration of the waiver period, certain changes in conditions including: no further drawdowns on the facility, an increase in the interest rate to 4.5% over LIBOR; restrictions on cash distributions and asset sales, an inclusion of the Company’s interest in Tenke in the security package and a general security agreement over the Company’s assets.

The intention is to restructure the facility to ensure adequate liquidity in the event that the present market volatility and depressed demand for base metals continue for the next two years. However, there is no assurance that permanent relief from the covenant will be obtained and if the facility is not restructured, the debt will be callable by the lenders. In view of this, the $266.7 million drawdown on the facility has been classified as a current liability at December 31, 2008.

In the event that the facility cannot be agreed upon with the lenders on suitable terms, management will pursue other financing arrangements which may include alternative debt facilities, equity financing, asset sales or a combination thereof.

Working Capital At December 31, 2008, there was a working capital deficiency in the amount of $215.3 million. The Company was not in compliance with its tangible net worth covenant on the $575 million facility, and as such the amount drawn at December 31, 2008 is classified as a current liability. Also contributing to the high current liabilities is an amount of $73.0 million payable to customers in settlement of sales for which provisional payments had previously been received. At December 31, 2007 there was working capital of $9.2 million.

Deferred Revenues The Company has an agreement with Silver Wheaton Minerals in respect of Zinkgruvan and an agreement with Silverstone in respect of Neves‐Corvo, to sell all future silver production at a price of $3.90 or the market price if it is less than $3.90. The Silverstone agreement is periodically adjusted for inflation. The up‐front cash payments received have been deferred and are realized on the statement of operations when the actual deliveries of silver occur.

Shareholders’ Equity Shareholders’ equity at December 31, 2008 was $2.6 billion, compared to $3.5 billion at December 31, 2007. The net impairment charges during the year of $1,005.5 million, including impairment charges for Aljustrel, were the largest factor in this reduction.

Differences that result from the translation of the Company’s Iberian and Swedish net assets into US dollars will result in increases and decreases to the Company’s translated net assets, depending on the strength of the US dollar when compared to the euro or SEK. These variances related to translation are recorded in Other Comprehensive Income. These changes amounted to a decrease in other comprehensive income of $103.4 million for the year.

Share capital increased during the year due to the private placement transaction with HudBay which resulted in proceeds of $111.4 million. The increase was offset by the Company’s purchases under the normal course issuer bid which resulted in a reduction to share capital of $14.6 million. A small amount of options was also exercised.

Contractual Obligations and Commitments Payments due by period < 1 year 1‐3 years 4‐5 years After 5 years Total Long‐term debt 305,830 1,077 718 2,876 310,501 Operating leases 2,103 3,569 256 ‐ 5,928 Other 1,143 3,493 79 ‐ 4,715 309,076 8,139 1,053 2,876 321,144 Long‐term debt Due to current covenant violation the long‐term debt is classified as current.

Off‐Balance Sheet Financing Arrangements The Company has certain protection for cost overruns relating to the development of Phase I of the Tenke copper/cobalt project. Costs above a certain level are funded by Freeport. (See page 26 of this MD&A for project details.) During the fourth quarter of 2008, capital expenditures on Phase I reached a certain threshold, beyond which the Company is not required to provide cash funding. Freeport contributes the Company’s proportionate share of project funding required by advancing amounts directly to the project on the Company’s behalf. The funding is non‐recourse to the Company and will be repaid from the operating cash flows of the project with first priority to other shareholder advances and dividends.

The Company is reviewing all capital spending commitments and examining costs at all operations. Estimates for mid‐to‐long term spending are dependent on future metal prices and expected resulting cash flows from operations.

Sensitivities Net earnings and earnings per share (EPS) are affected by certain external factors including fluctuations in metal prices and changes in exchange rates between the Euro, the Swedish Krona and the US dollar.

The following table illustrates the sensitivity of the Company’s forecasted 2009 net earnings to changes in key metal prices and foreign exchange rates:

Price on December 31, 2008 Effect on pre‐tax Change ($US/tonne) earnings Copper 2,902 +10% 7.0 Zinc 1,121 +10% 2.6 Lead 949 +10% 0.9 Nickel 10,810 +10% 1.7

Outstanding receivables (provisionally valued) as of December 31, 2008 Valued at Valued at Metal Tonnes payable $ price per tonne $ price per lb Copper 24,180 3,052 1.38 Zinc 23,079 1,128 0.51 Nickel 1,537 10,905 4.95 Lead 10,078 956 0.43

Changes in Accounting Policies

Effective for the first quarter beginning on January 1, 2008, the Company has adopted the following changes in accounting policy related to Sections 1400.08A‐08C, 1535, 3031 and 3862 of the CICA Handbook, “Going Concern”, “Capital Disclosures”, “Inventories” and “Financial Instruments – Disclosures”.

Section 1400.08A‐08C, Going Concern establishes a GAAP requirement to evaluate the appropriateness of the going concern assumption in preparing financial statements.

Section 1535, Capital Disclosures establishes standards for disclosing quantitative and qualitative information about the Company’s capital and how it is managed, thereby enabling users to evaluate the Company’s objectives, policies and processes for managing capital.

Section 3031, Inventories prescribes the accounting treatment for inventories and provides guidance on the determination of costs and its subsequent recognition as an expense, including any write‐down to net realizable value. It also provides guidance on the cost formulas that are used to assign costs to inventories.

Section 3862, Financial Instruments – Disclosures requires additional disclosure of the significance of financial instruments to the Company’s financial position and performance as well as quantitative and qualitative information that enable users to evaluate the nature and extent of risks arising from those financial instruments.

The adoption of these new handbook sections did not result in any changes to the Company’s current period earnings nor did they require any adjustment to the opening balances; rather, they provided additional disclosure in the notes to the financial statements.

International Financial Reporting Standards ("IFRS") In February 2008, the Canadian Accounting Standards Board (“AcSB”) announced that changeover for publicly‐listed companies to adopt IFRS, replacing Canada’s own GAAP, will be effective for interim and annual financial statements relating to fiscal years beginning on or after January 1, 2011. The transition date of January 1, 2011 will require the restatement, for comparative purposes, of amounts reported by the Company for the year ended December 31, 2010.

In 2008, the Company undertook an IFRS diagnostic study with a view to assessing the impact of the transition to IFRS on the Company’s accounting policies and to establish a project plan to implement IFRS. A number of key accounting areas where IFRS differs from current accounting policies and accounting alternatives in those and other key accounting areas were reviewed. Over the course of 2009, the Company will evaluate the alternatives and analyze the impact upon the implementation of IFRS.

The IFRS diagnostic study also identified key system and business process areas that will be addressed as part of the conversion project. These include: the development of an accounting policy manual that defines the Company’s IFRS accounting policies; identification of the significant financial data required from the Company’s financial systems in order to define the transition adjustments and produce IFRS financial statements on an on‐going basis; possible system modifications; and maintenance of effective disclosure controls and controls over financial reporting throughout the IFRS transition period.

Critical Accounting Estimates The application of certain accounting policies requires the Company to make estimates based on assumptions that may be undertaken at the time the accounting estimate is made. The Company has determined that the following accounting estimates are critical and could have a material effect on the financial statements of the Company if there is a change in an estimate.

Depreciation, Depletion and Amortization of Mineral Properties, Plant and Equipment Mineral properties, plant and equipment comprise a large component of the Company’s assets and as such, the depreciation, depletion and amortization of these assets has a significant effect on the Company’s financial statements. Upon commencement of commercial production, the Company amortizes the mineral property and mining equipment and other assets over the life of the mine based on the depletion of the mine’s proven and probable reserves. In the case of mining equipment or other assets, if the useful life of the asset is shorter than the life of the mine, asset is amortized over its expected useful life.

The proven and probable reserves are determined based on a professional evaluation using accepted international standards for the assessment of mineral reserves. The assessment involves the study geological, geophysical and economic data and the reliance on a number of assumptions. The estimates of the reserves may change based on additional knowledge gained subsequent to the initial assessment. This may include additional data available from continuing exploration, results from the reconciliation of actual mining production data against the original reserve estimates, or the impact of economic factors such as changes in the price of commodities or the cost of components of production.

A change in the original estimate of reserves would result in a change in the rate of depreciation and amortization of the related mining assets and could result in an impairment of the mining assets.

The effect of a change in the estimates of reserves would have a relatively greater effect on the amortization of the current mining operations at Aguablanca because of the short mine life of this operation. A short mine life results in a high rate of amortization and depreciation, and mining assets may exist at these sites that have a useful life in excess of the revised life of the related mine. The Neves‐Corvo mine in Portugal and the Zinkgruvan mine in Sweden, which have longer mine lives, would be less affected by a change in the reserve estimate.

Valuation of Mineral Properties and Exploration and Development Properties The Company carries its mineral properties at cost less a provision for impairment. The Company expenses exploration costs, which are related to specific projects, until the commercial feasibility of the project is determinable. The costs of each property and related capitalized development expenditures are amortized over the economic life of the property on a units‐of‐production basis. Costs are charged for operations when a property is abandoned or when impairment in value that is other than temporary has been determined. General exploration costs are charged to operations as incurred.

The Company undertakes a review of the carrying values of mining properties and related expenditures whenever events or changes in circumstances indicate that their carrying values may exceed their estimated net recoverable amounts determined by reference to estimated future operating results and undiscounted net cash flows. An impairment loss is recognized when the carrying value of those assets is not recoverable. In undertaking this review, management of the Company is required to make significant estimates of, amongst other things, future production and sale volumes, unit sales prices, future operating and capital costs and reclamation costs to the end of the mine’s life. These estimates are subject to various risks and uncertainties, which may ultimately have an effect on the expected recoverability of the carrying values of the mining properties and related expenditures. 34

The Company, from time to time, acquires exploration and development properties. When a number of properties are acquired in a portfolio, the Company must make a determination of the fair value attributable to each of the properties within the total portfolio. When the Company conducts further exploration on acquired properties, it may determine that certain of the properties do not support the fair values applied at the time of acquisition. If such a determination is made, the property is written down, and could have a material effect on the balance sheet and statement of earnings.

Goodwill The amount by which the purchase price of a business acquisition exceeds the fair value of identifiable assets and liabilities acquired is goodwill. Goodwill is allocated to the reporting units acquired based on management’s estimates of the fair value of each reporting unit as compared to the fair value of the assets and liabilities of the reporting unit. Estimates of fair value may be impacted by changes in base metal prices, currency exchange rates, discount rates, level of capital expenditures, interest rate, operating costs and other factors that may be different from those used in determining fair value. Changes in estimates could have a material impact on the carrying value of the goodwill.

For reporting units that have recorded goodwill, the estimated fair value of the unit is compared to its carrying value at least once each year, or when circumstances indicate that the value may have become impaired. If the carrying value exceeds the estimated or implied fair value of goodwill, which is equal to management’s estimate of potential value within the reporting unit, any excess of the carrying amount of goodwill over the estimated or implied goodwill is deducted from the carrying value of goodwill and charged to the current period earnings.

Income Taxes Future income tax assets and liabilities are determined based on differences between the financial statement carrying values of assets and liabilities and their respective income tax bases (“temporary differences”), and losses carried forward.

The determination of the ability of the Company to utilize tax loss carry‐forwards to offset future income tax payable requires management to exercise judgment and make certain assumptions about the future performance of the Company. Management is required to assess whether the Company is “more likely than not” to benefit from these prior losses and other future tax assets. Changes in economic conditions, metal prices and other factors could result in revisions to the estimates of the benefits to be realized or the timing of utilizing the losses. In the event that it is determined that certain of the losses are not likely to be utilized, a valuation reserve would have to be recorded against the recognized future tax assets through a charge to income. Conversely, where amounts that are considered not likely to be utilized to reduce future tax payable are determined to be likely to be utilized in the future, the valuation allowances against these losses would be removed by recording a future income tax recovery in the statement of operations.

As at December 31, 2008, the Company has estimated non‐capital loss carry‐forwards of approximately $331.8 million, which can be applied to reduce future income taxes payable. Non‐capital losses in Portugal, Spain and Canada will expire between 2009 and 2028. In Sweden and Ireland, non‐capital losses do not have an expiry. The Company may not be able to benefit from a portion of these loss carry‐forwards and is uncertain whether they will be utilized in the future. As such, a valuation allowance has been applied against $241.2 million of the loss carry‐forwards.

Stock‐Based Compensation The Company grants stock options to employees of the Company under its incentive stock option plan. The fair value of stock options is estimated using the Black‐Scholes option pricing model and are expensed over their vesting periods. In estimating fair value, management is required to make certain assumptions and estimates regarding such items as the life of options and forfeiture rates. Changes in the assumptions used to estimate fair value could result in materially different results.

Mine Closure Provisions The Company has obligations for site restoration and decommissioning related to its mining properties. The future obligations for mine closure activities are estimated by the Company using mine closure plans or other similar studies which outline the requirements that will be carried out to meet the obligations. Because the obligations are dependent on the laws and regulations of the countries in which the mines operate, the requirements could change as a result of amendments in the laws and regulations relating to environmental protection and other legislation affecting resource companies.

As the estimate of obligations is based on future expectations, a number of assumptions and judgments are made by management in the determination of closure provisions. The closure provisions are more uncertain the further into the future the mine closure activities are to be carried out.

The Company’s policy for recording mine closure provisions is to establish provisions for future mine closure costs at the commencement of mining operations based on the present value of the future cash flows required to satisfy the obligations. The amount of the present value of the provision is added to the cost of the related mining assets and depreciated over the life of the mine. The provision is accreted to its future value over the life of mine through a charge to operating costs.

Managing Risks Risks and Uncertainties

Metal Prices Metal prices, primarily zinc, copper and lead are key performance drivers and fluctuations in the prices of these commodities can have a dramatic effect on the results of operations. Prices fluctuate widely and are affected by numerous factors beyond the Company’s control. The prices of metals are influenced by supply and demand, exchange rates, inflation rates, changes in global economies, and political, social and other factors. The supply of metals consists of a combination of new mine production and existing stocks held by governments, producers and consumers.

If the market prices for metals fall below the Company’s full production costs and remain at such levels for any sustained period of time, the Company may, depending on hedging practices, experience losses and may determine to discontinue mining operations or development of a project or mining at one or more of its properties. If the prices drop significantly, the economic prospects of the mines and projects in which the Company has an interest could be significantly reduced or rendered uneconomic. Low metal prices will affect the Company’s liquidity, and if they persist for an extended period of time, the Company may have to look for other sources of cash flow to maintain liquidity until metal prices recover.

Credit Risk The Company is exposed to various counterparty risks. The Company is subject to credit risk through its trade receivables. The Company manages this risk through evaluation and monitoring process such as using the services of credit agencies. The Company transacts with credit worthy customers to minimize credit risk and if necessary, employ provisional payment arrangements and the use of letters of credit, where appropriate, but cannot always be assured of the solvency of its customers and at times will sell to parties whose credit worthiness is not determinable. Credit risk relating to derivative contracts arises from the possibility that a counterparty to an instrument with which the Company has an unrealized gain fails to settle the contracts.

Foreign Exchange Risk The Company’s revenue from operations is received in United States dollars while most of its operating expenses will be incurred in Euro and SEK. Accordingly, foreign currency fluctuations may adversely affect the Company’s financial position and operating results. The Company does not currently engage in foreign currency hedging activities for regularly occurring operational transactions.

Derivative Instruments The Company may, from time to time, manage exposure to fluctuations in metal prices and foreign exchange rates by entering into derivative instruments approved by the Company’s Board of Directors. The Company does not hold or issue derivative instruments for speculation or trading purposes. These derivative instruments are marked‐to‐market at the end of each period and may not necessarily be indicative of the amounts the Company might pay or receive as the contracts are settled.

Reclamation Funds and Mine Closure Costs As at December 31, 2008, the Company had $58.4 million in a number of reclamation funds that will be used to fund future site restoration and mine closure costs at the Company’s various mine sites. The Company will continue to contribute annually to these funds based on an estimate of the future site restoration and mine closure costs as detailed in the closure plans. Changes in environmental laws and regulations can create uncertainty with regards to future reclamation costs and affect the funding requirements.

The Company permanently ceased production at its Storliden mine during 2008 and will wind down mining operations at Galmoy mine during the first half of 2009. Rehabilitation programs will be completed at both mines following production shutdown. The Company also has ongoing long‐term monitoring programs in place associated with legacy mining operations previously carried on in Honduras and Spain under the ownership of a subsidiary of Rio Narcea Gold Mines Ltd., which was acquired by the Company in 2007.

Closing a mine can have significant impact on local communities and site remediation activities may not be supported by local stakeholders. The Company endeavors to mitigate this risk by reviewing and updating closure plans regularly with external stakeholders over the life of the mine and considering where post‐mining land use for mining affected areas has potential benefits to the communities.

In addition to the immediate closure activities, including ground stabilization, infrastructure demolition and removal, top soil replacement, re‐grading and re‐vegetation, closed mining operations require long‐ term surveillance and monitoring.

Site closure plans have been developed and amounts accrued in the Company’s financial statements to provide for mine closure obligations. Future remediation costs for inactive mines are estimated at the

37 end of each period, including ongoing care, maintenance and monitoring costs. Changes in estimates at inactive mines are reflected in earnings in the period an estimate is revised. Actual costs realized in satisfaction of mine closure obligations may vary materially from management’s estimates.

Competition There is competition within the mining industry for the discovery and acquisition of properties considered to have commercial potential. The Company competes with other mining companies, many of which have greater financial resources than the Company, for the acquisition of mineral claims, leases and other mineral interests as well as for the recruitment and retention of qualified employees and other personnel.

Foreign Countries and Regulatory Requirements The Company’s operations in Portugal, Sweden, Ireland and Spain are subject to various laws and environmental regulations. The implementation of new or the modification of existing laws and regulations affecting the mining and metals industry could have a material adverse impact on the Company.

The Company has significant investment in properties and projects located in developing countries, including Russia and DRC. The carrying values of these properties and the Company’s ability to advance development plans or bring the projects to production may be adversely affected by whatever political instability and legal and economic uncertainty that might exist in such countries. The risks associated to which Company’s interests in such countries may be adversely affected include: political unrest; labour disputes; invalidation of governmental orders, permits, agreements or property rights; risk of corruption including violations under U.S. and Canadian foreign corrupt practices statutes; military repression; war; civil disturbances; criminal and terrorist actions; arbitrary changes in laws, regulations, policies, taxation, price controls and exchange controls; delays in obtaining or the inability to obtain necessary permits; opposition to mining from environmental or other non‐governmental organizations; limitations on foreign ownership; limitations on the repatriation of earnings; limitations on mineral exports; and high rates of inflation and increased financing costs. These risks may limit or disrupt the Company’s projects, restrict the movement of funds or result in the deprivation of contractual rights or the taking of property by nationalization, expropriation or other means without fair compensation. Africa’s status as a developing continent may make it more difficult for the Company to obtain any required exploration, development and production financing for its projects.

There can be no assurance that industries which are deemed of national or strategic importance in countries in which the Company has operations or assets, including mineral exploration, production and development, will not be nationalized. The risk exists that further government limitations, restrictions or requirements, not presently foreseen, will be implemented. Changes in policy that alter laws regulating the mining industry could have a material adverse effect on the Company. There can be no assurance that the Company’s assets in these countries will not be subject to nationalization, requisition or confiscation, whether legitimate or not, by an authority or body.

In addition, in the event of a dispute arising from foreign operations, the Company may be subject to the exclusive jurisdiction of foreign courts or may not be successful in subjecting foreign persons to the jurisdiction of courts in Canada. The Company also may be hindered or prevented from enforcing its rights with respect to a governmental instrumentality because of the doctrine of sovereign immunity. It is not possible for the Company to accurately predict such developments or changes in laws or policy or to what extent any such developments or changes may have a material adverse effect on the Company’s operations.

Mining and Processing The Company’s business operations are subject to risks and hazards inherent in the mining industry, including, but not limited to, unanticipated variations in grade and other geological problems, water conditions, surface or underground conditions, metallurgical and other processing problems, mechanical equipment performance problems, the lack of availability of materials and equipment, the occurrence of accidents, labour force disruptions, force majeure factors, unanticipated transportation costs, and weather conditions, any of which can materially and adversely affect, among other things, the development of properties, production quantities and rates, costs and expenditures and production commencement dates.

The Company’s processing facilities are dependent upon continuous mine feed to remain in operation. Insofar as the Company’s mines may not maintain material stockpiles of ore or material in process, any significant disruption in either mine feed or processing throughput, whether due to equipment failures, adverse weather conditions, supply interruptions, labour force disruptions or other causes, may have an immediate adverse effect on results of operations of the Company.

The Company periodically reviews mining schedules, production levels and asset lives in its life of mine (“LOM”) planning for all of its operating and development properties. Significant changes in the LOM Plans can occur as a result of experience obtained in the course of carrying out mining activities, new ore discoveries, changes in mining methods and rates, process changes, investments in new equipment and technology, precious metals price assumptions, and other factors. Based on this analysis, the Company reviews its accounting estimates and in the event of an impairment, may be required to write‐ down the carrying value of a mine or mines. This complex process continues for the economic life of every mine in which the Company has an interest.

Mine Development Risks The Company’s ability to maintain, or increase, its annual production of zinc, silver, copper, nickel and other metals will be dependent in significant part on its ability to bring new mines into production and to expand existing mines. Although the Company utilizes the operating history of its existing mines to derive estimates of future operating costs and capital requirements, such estimates may differ materially from actual operating results at new mines or at expansions of existing mines. The economic feasibility analysis with respect to any individual project is based upon, among other things, the interpretation of geological data obtained from drill holes and other sampling techniques, feasibility studies (which derive estimates of cash operating costs based upon anticipated tonnage and grades of ore to be mined and processed), precious and base metals price assumptions, the configuration of the orebody, expected recovery rates of metals from the ore, comparable facility and equipment costs, anticipated climatic conditions, estimates of labour, productivity, royalty or other ownership requirements and other factors. Some of the Company’s development projects are also subject to the successful completion of final feasibility studies, issuance of necessary permits and other governmental approvals and receipt of adequate financing. Although the Company’s feasibility studies are generally completed with the Company’s knowledge of the operating history of similar ore bodies in the region, the actual operating results of its development projects may differ materially from those anticipated, and uncertainties related to operations are even greater in the case of development projects.

Environmental and Other Regulatory Requirements All phases of mining and exploration operations are subject to government regulation including regulations pertaining to environmental protection. Environmental legislation is becoming stricter, with increased fines and penalties for non‐compliance, more stringent environmental assessments of proposed projects and heightened responsibility for companies and their officers, directors and employees. There can be no assurance that possible future charges in environmental regulation will not 39 adversely affect the Company’s operations. As well, environmental hazards may exist on a property in which the Company holds an interest, which were caused by previous or existing owners or operators of the properties and of which the Company is not aware at present. Operations at the Company’s mines are subject to strict environmental and other regulatory requirements, including requirements relating to the production, handling and disposal of hazardous materials, pollution controls, health and safety and the protection of wildlife. The Company may be required to incur substantial capital expenditures in order to comply with these requirements. Any failure to comply with the requirements could result in substantial fines, delays in production, or the withdrawal of the Company’s mining licenses.

Government approvals and permits are required to be maintained in connection with the Company’s mining and exploration activities. Although the Company currently has all the required permits for its operations as currently conducted, there is no assurance that delays will not occur in connection with obtaining all necessary renewals of such permits for the existing operations or additional permits for any possible future changes to the Company’s operations, including any proposed capital improvement programs. Failure to comply with applicable laws, regulations and permitting requirements may result in enforcement actions thereunder, including orders issued by regulatory or judicial authorities causing operations to cease or be curtailed, and may include corrective measures requiring capital expenditures, installation of additional equipment, or remedial actions. Parties engaged in mining operations may be required to compensate those suffering loss or damage by reason of the mining activities and may be liable for civil or criminal fines or penalties imposed for violations of applicable laws or regulations. Amendments to current laws, regulations and permitting requirements, or more stringent application of existing laws, may have a material adverse impact on the Company resulting in increased capital expenditures or production costs, reduced levels of production at producing properties or abandonment or delays in development of properties.

Mineral Resource and Reserve Estimates The Company’s reported mineral resources and ore reserves and the reported Mineral Resources and Mineral Reserves are only estimates. No assurance can be given that the estimated Mineral Resources and Mineral Reserves will be recovered or that they will be recovered at the rates estimated. Mineral Resource and Mineral Reserve estimates are based on limited sampling, and, consequently, are uncertain because the samples may not be representative. Mineral Resource and Mineral Reserve estimates may require revision (either up or down) based on actual production experience. Market fluctuations in the price of metals, as well as increased production costs or reduced recovery rates, may render certain Mineral Resources and Mineral Reserves uneconomic and may ultimately result in a restatement of estimated resources and/or reserves. Moreover, short‐term operating factors relating to the Mineral Resources and Mineral Reserves, such as the need for sequential development of ore bodies and the processing of new or different ore grades or types, may adversely affect the Company’s profitability in any particular accounting period.

Estimation of Asset Carrying Values The Company annually undertakes a detailed review of the LOM Plans for its operating properties and an evaluation of the Company’s portfolio of development projects, exploration projects and other assets. The recoverability of the Company’s carrying values of its operating and development properties are assessed by comparing carrying values to estimated future net cash flows from each property.

Factors which may affect carrying values include, but are not limited to, metal prices, capital cost estimates, mining, processing and other operating costs, grade and metallurgical characteristics of ore, mine design and timing of production. In the event of a prolonged period of depressed prices, the Company may be required to take additional material write‐downs of its operating and development properties. 40

Funding Requirements and the Current Economic Crisis The Company does not have unlimited financial resources and there is no assurance that sufficient additional funding or financing will be available to the Company or its direct and indirect subsidiaries on acceptable terms, or at all, for further exploration or development of its properties or to fulfill its obligations under any applicable agreements. Failure to obtain such additional funding could result in the delay or indefinite postponement of the exploration and development of the Company’s properties.

In particular, the volatility and disruption in the credit and capital markets experienced in 2008 is expected to continue throughout 2009. The markets have exerted extreme downward pressure on stock prices, particularly in the mining industry, while the costs of new debt capital, when available, have markedly increased. Continuing disruption and uncertainty in the credit markets could increase the Company’s interest rates, adversely affecting its operations and financial position.

Lundin is a multinational company and relies on financial institutions worldwide to fund its corporate and project needs. Current global financial conditions have been subject to increased volatility and numerous financial institutions have either gone into bankruptcy or have had to be rescued by governmental authorities. These factors may impact the ability of the Company to obtain equity or debt financing in the future and, if obtained, on terms favourable to the Company. Continued disruptions in the capital and credit markets as a result of uncertainty, changing or increased regulation of financial institutions, reduced alternatives or failures of significant financial institutions could adversely affect the Company’s access to the liquidity needed for the business in the longer term.

The Company’s access to funds under the Revolving Credit Facility is dependent on the ability of the financial institutions that are parties to the Facility to meet their funding commitments. Those financial institutions may not be able to meet their funding requirements if they experience shortages of capital and liquidity or if they experience excessive volumes of borrowing requests within a short period of time. Moreover, the obligations of the financial institutions under the Revolving Credit Facility are several and not joint and, as a result, a funding default by one or more institutions does not need to be made up by the others. Such disruptions could require the Company to take measures to conserve cash until the markets stabilize or until alternative credit arrangements or other funding for the Company’s business needs can be arranged.

If these increased levels of volatility and market turmoil continue, the trading price of the Company’s common shares could continue to be adversely affected.

Uninsurable Risks Exploration, development and production operations on mineral properties involve numerous risks, including unexpected or unusual geological operating conditions, rock bursts, cave‐ins, fires, floods, earthquakes and other environmental occurrences, as well as political and social instability. It is not always possible to obtain insurance against all such risks and the Company may decide not to insure against certain risks because of high premiums or other reasons. Should such liabilities arise, they could reduce or eliminate any further profitability and result in increasing costs and a decline in the value of the securities of the Company. The Company does not maintain insurance against political or environmental risks.

No Assurance of Titles or Boundaries Although the Company has investigated the right to explore and exploit its various properties and obtained records from government offices with respect to all of the mineral claims comprising its properties, this should not be construed as a guarantee of title. Other parties may dispute the title to a 41 property or the property may be subject to prior unregistered agreements and transfers or land claims by aboriginal, native, or indigenous peoples. The title may be affected by undetected encumbrances or defects or governmental actions. The Company has not conducted surveys of all of its properties and the precise area and location of claims or the properties may be challenged.

Partners in the Ozernoe Project and the Tenke Fungurume Project The Company’s partner in the Ozernoe Project is IFC Metropol LLC; its partner in the Tenke Fungurume copper/cobalt project is Freeport‐McMoRan Copper & Gold Inc. There may be risks associated with either of these partners, including their financial condition, of which the Company is not aware. There is a risk for non‐payment by partners of their share of project expenditures, which would adversely affect the Company’s financial position and financial results.

Tax The Company runs its business in different countries and strives to run its business in as tax efficient a manner as possible. The tax systems in certain of these countries are complicated and subject to changes. By this reason, future negative effects on the result of the Company due to changes in tax regulations cannot be excluded. Repatriation of earnings to Canada from other countries may be subject to withholding taxes. The Company has no control over the withholding tax rates in the countries where the operations are carried out.

Employee Relations A prolonged labour disruption at any of the Company’s mining operations could have a material adverse effect on the Company’s ability to achieve its objectives with respect to such properties and its operations as a whole.

Infrastructure Mining, processing, development and exploration activities depend, to one degree or another, on adequate infrastructure. Reliable roads, bridges and power and water supplies are important determinants which affect capital and operating costs. Unusual or infrequent weather phenomena, sabotage or government or other interference in the maintenance or provision of such infrastructure could adversely affect the activities and profitability of the Company.

During recent years, the regional supply of water has been the object of political debate between the province in which Aguablanca operates and two neighbouring provinces. The Company continues to negotiate with local authorities to acquire all of the water licences required to satisfy all of its supply requirements.

Key Personnel The Company is depending on a relatively small number of key employees, the loss of any of whom could have an adverse effect on the Company. The Company does not have key person insurance on these individuals.

Share Price Volatility In recent years, the securities markets have experienced a high level of price and volume volatility, and the market price of securities of many companies, particularly those considered to be development stage companies, has experienced wide fluctuations which have not necessarily been related to the operating performance, underlying asset values or prospects of such companies. There can be no assurance that such fluctuations will not affect the price of the Company’s securities.

Outstanding Share Data As at February 25, 2009, the Company had 487,433,771 common shares issued and outstanding and 10,544,720 stock options and 306,720 stock appreciation rights outstanding under its stock‐based incentive plans.

Non‐GAAP Performance Measures

The Company uses certain performance measures in its analysis. These performance measures have no meaning within Canadian Generally Accepted Accounting Principles (“GAAP”) and, therefore, amounts presented may not be comparable to similar data presented by other mining companies. The data is intended to provide additional information and should not be considered in isolation or as a substitute for measures of performance prepared in accordance with Canadian GAAP. The following are non‐GAAP measures that the Company uses as key performance indicators. • Operating earnings “Operating earnings” is a performance measure used by the Company to assess the contribution by mining operations to the Company’s net earnings or loss. Operating earnings is defined as sales, less operating costs, accretion of ARO and other provisions, selling, general and administration costs and stock‐based compensation. The operating earnings are shown on the statement of operations as “Earnings before undernoted”. • Cash cost per pound Zinc, copper and nickel cash costs per pound are key performance measures that management uses to monitor performance. Management uses these statistics to assess how well the Company’s producing mines are performing compared to plan and to assess overall efficiency and effectiveness of the mining operations. Lundin provides cash cost information as it is a key performance indicator required by users of the Company’s financial information in order to assess the Company’s profit potential and performance relative to its peers. The cash cost figure represents the total of all cash costs directly attributable to the related mining operations after the deduction of credits in respect of by product sales and certain profit‐based royalties. Cash cost is not a GAAP measure and, although it is calculated according to accepted industry practice, the Company’s disclosed cash costs may not be directly comparable to other base metal producers. By‐product credits, are an important factor in determining the cash costs. The cost per pound experienced by the Company will be positively affected by rising prices for by‐products and adversely affected when prices for these metals are falling.

Cash costs can be reconciled to the Company’s operating costs as follows:

Reconciliation of unit cash costs of payable copper, zinc and nickel metal sold to the consolidated statements of operations Year ended December 31, 2008 Year ended December 31, 2007

Total Pounds Cost Cash Total Pounds Cost Cash Tonnes (000s) $/lb Operating Tonnes (000s) $/lb Operating Sold Costs Sold Costs (000s) (000s) Operation Neves Corvo (cu) 86,748 191,245 1.07 204,632 86,180 189,994 0.74 141,523 Zinkgruvan (zn) 55,985 123,425 0.30 37,028 57,020 125,707 0.16 20,379 Storliden (zn) 5,956 13,131 ‐ ‐ 11,852 26,129 (0.06) (1,578) Galmoy (zn) 46,468 102,443 0.70 71,710 37,623 82,944 0.84 69,292 Aguablanca (ni) 7,210 15,895 5.66 89,966 3,025 6,669 7.23 48,217 403,336 277,833 Add: Byproduct credits 163,954 209,612 Treatment costs (142,994) (163,460) Profit‐based royalties and other 12,337 55,310 Total Operating Costs 436,633 379,295

Three months ended December 31, 2008 Three months ended December 31, 2007

Total Pounds Cost Cash Total Pounds Cost Cash Tonnes (000s) $/lb Operating Tonnes (000s) $/lb Operating Sold Costs Sold Costs (000s) (000s) Operation Neves Corvo (cu) 23,104 50,935 1.05 53,482 24,648 54,339 0.81 44,126 Zinkgruvan (zn) 11,399 25,130 0.40 10,052 13,657 30,108 (0.03) (1,027) Storliden (zn) ‐ ‐ ‐ ‐ 2,183 4,813 0.29 1,407 Galmoy (zn) 12,860 28,351 0.69 19,562 8,511 18,764 0.67 12,484 Aguablanca (ni) 1,935 4,266 5.11 21,799 1,449 3,194 7.14 22,812 104,895 79,801 Add: Byproduct credits 14,524 55,208 Treatment costs (23,966) (39,350) Profit‐based royalties and other (10,649) 506 Total Operating Costs 84,804 96,165

Management’s Report on Internal Controls

Controls and Procedures Management of the Company, with the participation of the President and Chief Executive Officer and the Chief Financial Officer, is responsible for the design and operations of internal control over financial reporting. The design includes policies and procedures that: • pertain to the maintenance of records; • provide reasonable assurance that the transactions are recorded accurately and that the receipts and expenditures are made in accordance with the authorizations of management and directors; and • provide reasonable assurance in the prevention and timely detection of material unauthorized acquisition, use or disposal of the Company’s assets.

On an annual basis, management evaluates the effectiveness of disclosure controls and procedures, and internal control over financial reporting.

Disclosure controls and procedures Management evaluated the effectiveness of the Company’s disclosure controls and procedures and has concluded that they were effective as at December 31, 2008.

Internal control over financial reporting The Company’s internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and preparation of financial statements for external purposes in accordance with generally accepted accounting principles (“GAAP”). However, due to inherent limitations, internal control over financial reporting may not prevent or detect misstatements.

Management has used the Committee of Sponsoring Organizations of the Treadway Commission (‘COSO’) framework in to assess the effectiveness of the Company’s internal control over financial reporting. Management conducted an evaluation of the effectiveness of internal control over financial reporting and concluded that it was effective as at December 31, 2008.

Changes in internal control over financial reporting There have been no changes in the Company’s internal control over financial reporting during the fiscal year ended December 31, 2008 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting, except for the remediation in 2008 of the material weaknesses reported in 2007, as discussed below.

In early 2008, the Company hired a new Chief Executive Officer. To address the material weakness related to the complement of personnel with appropriate level of accounting knowledge, experience and training in the application of generally accepted accounting principles, the Chief Executive Officer hired a new finance team, including a Chief Financial Officer and Vice President, Finance (new role), both with extensive external financial reporting and mining industry experience. The increased experience and expertise of the new finance personnel have also resulted in the remediation of the material weaknesses in the areas of purchase price allocation, goodwill and asset impairment, and taxation.

Other Information Additional information regarding the Company is included in the Company’s Annual Information Form (“AIF”) and Annual Report on Form 40‐F, which are filed with the Canadian securities regulators and the United States Securities and Exchange Commission (“SEC”), respectively. A copy of the Company’s AIF is posted on the SEDAR website at www.sedar.com. A copy of the Form 40‐F can be obtained from the SEC website at www.sec.gov.

Management’s Report

The accompanying consolidated financial statements of Lundin Mining Corporation and its subsidiaries are the responsibility of management and have been approved by the Board of Directors. The financial statements include some amounts that are based on management’s best estimates, which have been made using careful judgment. The financial statements have been prepared by management in accordance with Canadian generally accepted accounting principles. Financial and operating data elsewhere in the annual report are consistent with the information contained in the financial statements.

The Board of Directors carries out its responsibility for the financial statements in this annual report principally through its audit committee, comprising outside directors. The audit committee reviews the Company’s annual consolidated financial statements and recommends their approval to the Board of Directors. The Company’s auditors have full access to the audit committee, with and without management being present. These financial statements have been audited by PricewaterhouseCoopers LLP, Chartered Accountants, and their report follows.

(Signed) Philip J. Wright (Signed) Ted Mayers

President and Chief Executive Officer Chief Financial Officer

Toronto, Ontario, Canada February 25, 2009

Management’s Report on Internal Control over Financial Reporting

Management is responsible for establishing and maintaining adequate internal control over financial reporting. A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that:

(i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company;

(ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and

(iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Due to its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of the effectiveness of internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Management has evaluated the effectiveness of the Company’s internal control over financial reporting as at December 31, 2008, based on the criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on this evaluation, management has concluded that the Company’s internal control over financial reporting is effective as at December 31, 2008.

The effectiveness of the Company's internal control over financial reporting as at December 31, 2008 has been audited by PricewaterhouseCoopers LLP, our independent auditors, as stated in their report which appears herein.

(Signed) Philip J. Wright (Signed) Ted Mayers

President and Chief Executive Officer Chief Financial Officer

Toronto, Ontario, Canada February 25, 2009

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Independent Auditors’ Report

To the Shareholders of Lundin Mining Corporation

We have completed integrated audits of Lundin Mining Corporation’s December 31, 2008 and 2007 consolidated financial statements and of its internal control over financial reporting as at December 31, 2008. Our opinions, based on our audits, are presented below.

Consolidated financial statements

We have audited the accompanying consolidated balance sheets of Lundin Mining Corporation as at December 31, 2008 and 2007 and the related consolidated statements of operations, comprehensive income (loss), changes in shareholders’ equity and cash flows for each of the years then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits of the Company’s financial statements in accordance with Canadian generally accepted auditing standards and the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform an audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit of financial statements includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. A financial statement audit also includes assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as at December 31, 2008 and 2007 and the results of its operations and its cash flows for each of the years then ended in accordance with Canadian generally accepted accounting principles.

Internal control over financial reporting

We have also audited Lundin Mining Corporation’s internal control over financial reporting as at December 31, 2008 based on criteria established in Internal Control ‐ Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.

We conducted our audit of internal control over financial reporting in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. An audit of internal control over financial reporting includes obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control, based on the assessed risk, and performing such other procedures as we consider necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable

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assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as at December 31, 2008 based on criteria established in Internal Control ‐ Integrated Framework issued by the COSO.

(Signed) PricewaterhouseCoopers LLP Chartered Accountants, Licensed Public Accountants Toronto, Ontario, Canada February 25, 2009

Comments by Auditor for US Readers on Canada‐US Reporting Difference

In the United States, reporting standards for auditors require the addition of an explanatory paragraph (following the opinion paragraph) when the consolidated financial statements are affected by conditions and events that cast substantial doubt on the company's ability to continue as a going concern, such as those described in note 2 to the consolidated financial statements. Our report to the shareholders dated February 25, 2009 is expressed in accordance with Canadian reporting standards, which do not permit a reference to such events and conditions in the auditors’ report when these are adequately disclosed in the consolidated financial statements.

(Signed) PricewaterhouseCoopers LLP Chartered Accountants, Licensed Public Accountants Toronto, Ontario, Canada February 25, 2009

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Lundin Mining Corporation CONSOLIDATED BALANCE SHEETS As at December 31, 2008 and 2007 (in thousands of US dollars) 2008 2007

ASSETS Current Cash and cash equivalents$ 169,698 $ 131,046 Accounts receivable 74,411 98,024 Inventories (Note 6) 40,081 46,791 Prepaid expenses 8,052 9,934 292,242 285,795 Reclamation funds 58,385 59,174 Mineral properties, plant and equipment (Notes 7, 10) 1,351,584 2,203,811 Investments and other assets (Note 8) 1,643,730 1,531,944 Future income tax assets (Note 11) 52,102 60,193 Goodwill (Notes 9, 10) 242,519 503,925 Assets of discontinued operations (Note 5) 63,940 65,982 $ 3,704,502 $ 4,710,824 LIABILITIES Current Accounts payable$ 151,087 $ 78,338 Accrued liabilities (Note 12) 44,353 89,660 Income taxes payable 1,648 103,526 Current portion of long term debt and capital leases (Note 13) 306,973 5,779 Deferred revenue (Note 15) 3,465 7,243 Forward sales contracts (Note 16) ‐ 10,502 507,526 295,048 Long‐term debt and capital leases (Note 13) 8,243 89,496 Other long‐term liabilities (Note 14) 16,252 5,701 Deferred revenue (Note 15) 75,665 91,098 Provision for pension obligations (Note 17) 14,359 17,074 Asset retirement obligations and other provisions (Note 18) 109,530 117,589 Future income tax liabilities (Note 11) 262,650 448,619 Liabilities of discontinued operations (Note 5) 106,553 104,393 1,100,778 1,169,018 SHAREHOLDERS' EQUITY Share capital (Note 19) 3,331,309 3,233,682 Contributed surplus 24,758 14,179 Accumulated other comprehensive income 182,074 271,301 (Deficit) Retained earnings (934,417) 22,644 2,603,724 3,541,806 $ 3,704,502 $ 4,710,824 Going concern basis of accounting (Note 2), Commitments and contingencies (Note 21) Subsequent events (Note 25) See accompanying notes to consolidated financial statements

Approved by the Board of Directors

(Signed) Lukas H. Lundin (Signed) Dale C. Peniuk Director Director

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Lundin Mining Corporation CONSOLIDATED STATEMENTS OF OPERATIONS For the years ended December 31, 2008 and 2007 (in thousands of US dollars, except for shares and per share amounts)

2008 2007

Sales $ 835,294 $ 1,059,722

Operating costs (436,633) (379,295) Accretion of asset retirement obligations and other provisions (Note 18) (25,931) (9,085) Selling, general and administration (39,556) (30,785) Stock‐based compensation (Note 19b) (9,926) (12,024) Income from continuing operations before undernoted 323,248 628,533

Depreciation, depletion and amortization (202,317) (175,692) General exploration and project investigation (38,876) (35,370) Goodwill and long‐lived asset impairment (Notes 9, 10) (760,188) (349,998) Impairment of available‐for‐sale ("AFS") securities (144,077) ‐ Other income and expenses 2,625 24,687 (Loss) gain on sale of investments (1,320) 74,330 Interest and bank charges (14,725) (13,444) Foreign exchange loss (14,726) (18,876) Loss on forward sales contracts (Note 16) (91) (17,981) (Loss) Income from continuing operations before income taxes (850,447) 116,189 Current income tax expense (Note 11) (29,677) (136,454)

Future income tax recovery (Note 11) 160,130 20,569 (Loss) Income from continuing operations for the year (719,994) 304 Loss from discontinued operations, net of income taxes (Note 5) (237,067) (154,461) Net loss$ (957,061) $ (154,157)

Basic and diluted loss per share from Continuing operations$ (1.82) $ 0.00 Discontinued operations (0.60) (0.46) Basic and diluted loss per share$ (2.41) $ (0.46)

Weighted average number of shares outstanding Basic and diluted 396,416,414 338,643,242

Going concern basis of accounting (Note 2) See accompanying notes to consolidated financial statements

- 6 -

Lundin Mining Corporation CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME For the years ended December 31, 2008 and 2007 (in thousands of US dollars) 2008 2007 Net loss $ (957,061) $ (154,157) Other comprehensive loss Change in fair value of AFS securities, net of taxes (128,793) (23,626) Recognized loss on AFS securities disposed in the year, net of taxes (263) ‐ Impairment of AFS securities, net of taxes 143,222 ‐ Cumulative foreign currency translation adjustment (103,393) 239,330 (89,227) 215,704 Comprehensive (loss) income$ (1,046,288) $ 61,547

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY For the years ended December 31, 2008 and 2007 (in thousands of US dollars, except share amounts)

Cumulative Accumulated foreign currency Other (Deficit) Number of Share Contributed translations Comprehensive Retained Shares Capital Surplus adjustments Income Earnings Total

Balance, December 31, 2006 284,800,065 $ 1,890,275 $ 8,887 $ 52,404 $ ‐ $ 176,801 $ 2,128,367 Transition adjustment ‐ ‐ (52,404) 55,597 ‐ 3,193 Exercise of stock options 1,903,173 13,936 (7,392) ‐ ‐ ‐ 6,544 Exercise of stock appreciation rights 226,160 2,830 ‐ ‐ ‐ ‐ 2,830 Shares and options issued for Tenke acquisition (Note 5b) 105,421,402 1,329,075 660 ‐ ‐ ‐ 1,329,735 Shares issued on the assumption of Tenke obligation (Note 5b) 138,400 1,745 ‐ ‐ ‐ ‐ 1,745 Stock‐based compensation ‐ ‐ 12,024 ‐ ‐ ‐ 12,024 Changes in the fair value of AFS securities ‐ ‐ ‐ ‐ (23,626) ‐ (23,626) Normal Course Issuer Bid share buyback ‐ (4,179) ‐ ‐ ‐ ‐ (4,179) Return of fractional shares (69) ‐ ‐ ‐ ‐ Net loss ‐ ‐ ‐ ‐ ‐ (154,157) (154,157) Effects of foreign currency translation ‐ ‐ ‐ ‐ 239,330 ‐ 239,330 Balance, December 31, 2007 392,489,131 $ 3,233,682 $ 14,179 $ ‐ $ 271,301 $ 22,644 $ 3,541,806 Exercise of stock options 97,848 920 (301) ‐ ‐ ‐ 619 Stock‐based compensation ‐ ‐ 10,880 ‐ ‐ ‐ 10,880 Recognized loss on AFS securities disposed in the year ‐ ‐ ‐ ‐ (263) ‐ (263) Changes in the fair value of AFS securities ‐ ‐ ‐ (128,793) ‐ (128,793) Impairment of AFS securities ‐ ‐ ‐ ‐ 143,222 ‐ 143,222 Normal Course Issuer Bid share buyback (2,150,700) (14,654) ‐ ‐ ‐ ‐ (14,654) Private placement 96,997,492 111,361 ‐ ‐ 111,361 Net loss ‐ ‐ ‐ ‐ ‐ (957,061) (957,061) Effects of foreign currency translation ‐ ‐ ‐ ‐ (103,393) ‐ (103,393)

Balance, December 31, 2008 487,433,771 $ 3,331,309 $ 24,758 $ ‐ $ 182,074 $ (934,417) $ 2,603,724 See accompanying notes to consolidated financial statements

- 7 -

Lundin Mining Corporation CONSOLIDATED STATEMENTS OF CASH FLOWS For the years ended December 31, 2008 and 2007 (in thousands of US dollars) 2008 2007

Cash provided by (used in) Operating activities Net loss $ (957,061) $ (154,157) Items not involving cash Depreciation, depletion and amortization 202,317 175,692 Goodwill and long‐lived asset impairment 970,660 543,101 Impairment of AFS securities 144,077 ‐ Recognition of deferred revenue (6,447) (4,473) Stock‐based compensation 9,926 12,024 Future income tax recovery (134,122) (71,793) Loss (gain) on sale of investments and other assets 1,320 (79,035) Accretion of asset retirement obligations 4,016 6,769 Provision for severance and closure costs 21,915 1,604 Provision for pension obligations 2,715 1,046 Unrealized foreign exchange loss 17,815 5,982 Unrealized gain on forward sales contracts ‐ (14,159) Other 5,019 (1,604) Reclamation payments (3,811) (2,018) Reclamation fund contributions (780) (16,265) Pension payments (1,378) (640) Realized loss on derivative instruments (10,503) (9,759) Changes in non‐cash working capital items (50,649) (18,872) 215,029 373,443 Financing activities Proceeds from loans 374,458 753,949 Common shares issued 111,980 7,874 Deferred revenue ‐ 42,500 Common share buyback (17,974) (726) Debt repayments (136,010) (716,744) 332,454 86,853 Investing activities Mineral properties, plant and equipment expenditures (274,446) (189,413) Investments in Tenke Fungurume (264,100) (60,900) Investments in AFS securities (4,675) (298,675) Proceeds from sale of investments and other assets 48,904 307,433 Acquisition of subsidiaries, net of cash ‐ (763,259) Proceeds from sale of subsidiary, net of cash ‐ 273,285 Other 10,024 (6,488) (484,293) (738,017) Effect of foreign exchange on cash balances (26,105) 8,758 Increase (decrease) in cash and cash equivalents during the year 37,085 (268,963) Cash and cash equivalents, beginning of year 133,207 402,170 Cash and cash equivalents, discontinued operations (594) (2,161) Cash and cash equivalents, end of year$ 169,698 $ 131,046 Supplemental cash flow information (Note 24) See accompanying notes to consolidated financial statements

- 8 - LUNDIN MINING CORPORATION Notes to consolidated financial statements For the years ended December 31, 2008 and 2007 (Tabular amounts in thousands of US dollars, except for share and per share amounts)

1. NATURE OF OPERATIONS

Lundin Mining Corporation (the “Company”) is engaged in base metal mining and related activities, including exploration, extraction and processing on properties located in Portugal, Spain, Sweden and Ireland. The Company’s major products are copper, zinc and nickel.

The Company’s principal operating mine assets include the Neves‐Corvo copper/zinc mine, located near Castro Verde, Portugal, the Zinkgruvan zinc/lead/silver mine, located approximately 200 kilometres southwest of Stockholm, Sweden, the Aguablanca nickel/copper mine in Spain, the Galmoy zinc/lead mine near Kilkenny, Ireland, and a 24.75% equity accounted interest in the Tenke Fungurume copper/cobalt project under development in the Democratic Republic of Congo (“DRC”). The Company holds exploration permits covering substantial areas in Portugal, Sweden and Ireland and financial asset holdings in companies with advanced stage mining projects.

2. GOING CONCERN BASIS OF ACCOUNTING

As at December 31, 2008, the Company was not in compliance with a financial covenant of the Company’s revolving credit facility (Note 13) and as a consequence has reclassified the $266.7 million balance on this facility from long term debt to current liabilities. The Company has obtained a waiver of the covenant from the syndicate of lending banks for a period up to June 5, 2009 during which time it is working with the banking syndicate to establish a permanent and restructured facility. Future operations are dependent on the Company’s ability to access sufficient funding to meet its obligations. The intention is to restructure the facility to ensure adequate liquidity in the event that the present market volatility and depressed demand for base metals continues for the next two years. There are, however, no assurances that these negotiations will be successful.

In the event that a positive outcome is not achieved from negotiations with the lending syndicate, management will pursue alternate debt or equity financing and/or pursue the sale of certain assets that will allow the Company to meet its obligations in the normal course of business. There are no assurances that additional financing will be raised and in the event that the Company is required to sell an asset or assets that the price obtained will support the amounts reflected in these financial statements. The impact of any adjustments arising from the sale of an asset or assets, which could be material, is not reflected in these financial statements.

Until the outcome of the above matters is known there is considerable uncertainty about the appropriateness of the going concern basis of accounting.

The accounting principles used in these consolidated financial statements are applicable to a going concern which contemplates the realization of assets and settlement of liabilities in the normal course of business as they come due. These financial statements do not reflect the adjustments to the carrying values of assets and liabilities and the reported expenses and balance sheet classifications that would be necessary if the Company were unable to realize its assets and settle its liabilities as a going concern in the normal course of operations. Such adjustments could be material.

- 9 - LUNDIN MINING CORPORATION Notes to consolidated financial statements For the years ended December 31, 2008 and 2007 (Tabular amounts in thousands of US dollars, except for share and per share amounts)

3. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The consolidated financial statements have been prepared in accordance with Canadian generally accepted accounting principles (“Canadian GAAP”). Significant differences between Canadian GAAP and United States generally accepted accounting principles (“US GAAP”) as they relate to the preparation of these consolidated financial statements are described in Note 26.

All amounts are in US dollars unless otherwise indicated. The reporting currency of the Company is US dollars.

Comparative Figures

Comparative figures have been adjusted to conform to changes in presentation in these consolidated financial statements where required.

Use of Estimates

The preparation of consolidated financial statements in accordance with Canadian GAAP requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the period. Management exercises significant judgment in the determination of the following estimates:

• the amounts of ore reserves and resources used in the evaluation of carrying values, amortization rates and the timing of cash flows, • allocation of the purchase price to fair values on the acquisition of businesses or groups of assets, • quantities and net realizable value of inventories, • contingent liabilities, • tax provisions and future income tax balances, • useful economic life of plant and equipment, • costs of asset retirement obligations and other mine closure obligations, • stock based compensation measurements, • financial and derivative instruments valuations, • assumptions used in impairment testing of all assets, • determination of reporting units and the valuation of reporting units for goodwill determination, and • valuation of mineral exploration and development properties.

Actual results could differ from estimates made by management during the preparation of these financial statements, and those differences may be material.

Significant Accounting Policies

The significant accounting policies used in these consolidated financial statements are as follows:

(a) Subsidiaries, variable interest entities, investments and interests in joint ventures

- 10 - LUNDIN MINING CORPORATION Notes to consolidated financial statements For the years ended December 31, 2008 and 2007 (Tabular amounts in thousands of US dollars, except for share and per share amounts)

Investments over which the Company holds a controlling interest are consolidated in these financial statements. The Company consolidates subsidiaries and entities that are subject to control on a basis other than ownership of a majority of the voting interests, or variable interest entities.

Investments over which the Company has the ability to exercise significant influence are accounted for by the equity method. Under this method, the investment is initially recorded at cost and adjusted thereafter to record the Company’s share of post acquisition earnings or loss of the investee as if the investee had been consolidated. The carrying value of the investment is also increased or decreased to reflect the Company’s share of capital transactions, including amounts recognized in other comprehensive income, and for accounting changes that relate to periods subsequent to the date of acquisition. When there is a loss in value of an equity accounted investment which is other than temporary, the investment is written down to recognize the loss by a charge included in net income.

Interests in joint ventures arise when the Company enters contractual agreements that provide for the sharing among two or more parties of the continuing power to determine the strategic operating, investing and financing activities of an entity. The Company proportionately consolidates its interests in joint ventures. Under the proportionate consolidation method, the Company’s pro rata share of each of the assets, liabilities, revenues and expenses subject to joint control are combined with similar items in the Company’s consolidated financial statements.

(b) Translation of foreign currencies

The accounts of self‐sustaining foreign operations are translated into US dollars at year‐end exchange rates, and revenues and expenses and cash flows are translated at the average exchange rates. Differences arising from these foreign currency translations are recorded as cumulative foreign currency translation adjustments within other comprehensive income and as accumulated other comprehensive income until they are realized by a reduction in the investment.

For integrated foreign operations, monetary assets and liabilities are translated into US dollars at year‐end exchange rates and non‐monetary assets and liabilities are translated at historical rates. Revenues, expenses and cash flows are translated at average exchange rates, except for items related to non‐monetary assets and liabilities, which are translated at historical rates. Gains or losses on translation of monetary assets and monetary liabilities are included in income.

The measurement or functional currencies of all material subsidiaries are deemed to be the local currency.

Cash and cash equivalents comprise cash on deposit with banks, and highly liquid short‐term interest bearing investments with a term to maturity at the date of purchase of 90 days or less.

- 11 - LUNDIN MINING CORPORATION Notes to consolidated financial statements For the years ended December 31, 2008 and 2007 (Tabular amounts in thousands of US dollars, except for share and per share amounts)

(d) Inventories

Ore stockpile and concentrate stockpile inventories are valued at the lower of production cost and net realizable value. Production costs include direct costs of materials and labour related directly to mining and processing activities, including production phase stripping costs, depreciation and amortization of property, plant and equipment directly involved in the related mining and production process, amortization of any stripping costs previously capitalized and directly attributable overhead costs. Materials and supplies inventories are valued at average cost less allowances for obsolescence.

(e) Mineral properties, plant and equipment

Mineral properties

Mineral properties are carried at cost less accumulated depletion and any accumulated impairment charges. Mineral property expenditures include:

i. Acquisition costs consist of payments for property rights and leases, including the estimated fair value of exploration properties acquired as part of a business acquisition or the acquisition of a group of assets.

ii. Exploration and evaluation costs incurred on an area of interest once a determination has been made that a property has potential economically recoverable resources and there is a reasonable expectation that costs can be recovered by future exploitation or sale of the property. Exploration and evaluation expenditures made prior to a determination that a property has economically recoverable resources are expensed as incurred.

iii. Development costs incurred on an area of interest once management has determined that, based on a feasibility study, a property is capable of economical commercial production as a result of having established a proven and probable reserve, are capitalized as development expenses. Development costs are directly attributable to the construction of a mine. When additional development expenditures are made on a property after commencement of production, the expenditure is deferred as mineral property expenditures when it is probable that additional economic benefit will be derived from future operations.

iv. Stripping costs represent the cost incurred to remove overburden and other waste materials to access ore. Stripping costs incurred prior to the production phase of a mine are capitalized and included as part of mineral property costs. During the production phase stripping costs, which represent a betterment of the mineral property, are capitalized. Capitalized stripping costs are amortized on a unit‐of‐production basis over the proven and probable reserves to which they relate. All other stripping costs incurred during the production phase of a property are accounted for as variable production costs and are included in the cost of inventory produced during the period in which the cost is incurred.

v. Pre‐production expenditures net of the proceeds from sales generated, if any, relating to any one area of interest are capitalized as mineral property expenditures until such time as production rates achieve sustained commercial production levels.

Once a mine has achieved commercial production, mineral property for each area of interest is depleted on a unit‐of‐production basis using proven and probable reserves.

- 12 - LUNDIN MINING CORPORATION Notes to consolidated financial statements For the years ended December 31, 2008 and 2007 (Tabular amounts in thousands of US dollars, except for share and per share amounts)

(f) Plant and equipment

Plant and equipment are carried at cost less accumulated depreciation and any accumulated impairment charges. Depreciation is recorded on a straight‐line basis over the estimated useful life of the asset, or over the estimated remaining life of the mine if shorter, as follows:

Years Buildings 20 ‐ 50 Plant and machinery 5 ‐ 20 Equipment 5

(g) Mining equipment under capital lease

Leases that transfer substantially all of the property ownership benefits and risks to the Company are accounted for as capital leases. At the time a capital lease is entered into, the asset is recorded together with the related long‐term obligation and is amortized on a straight line basis over its estimated useful life but not to exceed the life of mine. The interest portion of the lease payments are charged to income as incurred.

(h) Impairment assessment

The Company performs impairment tests on its mineral properties, including exploration and development properties, plant and equipment when events or changes in circumstances indicate that the carrying values of these assets may not be recoverable. These tests require the comparison of the expected undiscounted future cash flows derived from these assets with the carrying value of the assets. If shortfalls exist, the assets are written down to fair value, determined primarily using discounted cash flow methods.

(i) Interest capitalization

Interest and financing costs on debt or other liabilities that can be attributed to specific projects and that are incurred during the development or construction period are capitalized as a cost of the asset under development or construction.

(j) Goodwill

Acquisitions of businesses are accounted for using the purchase method of accounting whereby all identifiable assets and liabilities are recorded at their fair values as at the date of acquisition. Any excess purchase price over the aggregate fair value of net assets plus or minus the amounts recognized for future income taxes is recorded as goodwill. Goodwill is identified and allocated to reporting units by preparing estimates of the fair value of each reporting unit and comparing this amount to the fair value of the assets and liabilities and related future income tax balances of the reporting unit at the date of acquisition. Goodwill is not amortized.

Goodwill is tested annually for impairment or more frequently if current events or changes in circumstances indicate that the carrying value of the goodwill of a reporting unit may exceed its fair value. A two‐step impairment test is used to identify potential impairment in goodwill and to measure the amount of goodwill impairment, if any. In the first step, the fair value of a reporting unit is compared with its carrying value, including goodwill. When the fair value of a reporting unit exceeds its carrying amount, goodwill of the reporting unit is considered not to be impaired and the second step of the impairment test is not undertaken. When the carrying amount of a reporting unit exceeds its fair value, - 13 - LUNDIN MINING CORPORATION Notes to consolidated financial statements For the years ended December 31, 2008 and 2007 (Tabular amounts in thousands of US dollars, except for share and per share amounts)

the fair value of the reporting unit’s goodwill (determined on the same basis as the value of goodwill is determined in a business combination) is compared with its carrying amount to measure the amount of the impairment loss, if any. When the carrying amount of reporting unit goodwill exceeds the fair value of the goodwill, an impairment loss is recognized in an amount equal to the excess.

(k) Derivatives

The Company may enter into derivative instruments to mitigate exposures to commodity price and currency exchange rate fluctuations. Unless the derivative instruments qualify for hedge accounting, and management undertakes appropriate steps to designate them as such, they are designated as held‐for‐trading and recorded at their fair value with realized and unrealized gains or losses arising from changes in the fair value recorded in operations. Fair values for derivative instruments held‐for‐trading are determined using valuation techniques. The valuations use assumptions based on prevailing market conditions on the reporting date. Realized gains and losses are recorded as a component of operating cash flows.

Embedded derivatives identified in non‐derivative instrument contracts are recognized separately unless closely related to the host contract.

(l) Deferred revenue

Deferred revenue consists of payments received by the Company in consideration for future commitments to deliver silver contained in concentrate at contracted prices. As deliveries are made, the Company records a portion of the deferred revenue as sales, based on a proportionate share of deliveries made compared with the total estimated contractual commitment.

(m) Provision for pension obligations

The Company’s Zinkgruvan mine has an unfunded defined benefit pension plan. The cost of the defined benefit pension plan is determined periodically by independent actuaries. The actuarial valuation is based on the projected benefit method pro‐rated on service (which incorporates management’s best estimate of future salary levels, retirement ages of employees and other actuarial factors). Each year actuarial gains and losses are calculated and accumulated actuarial gains and losses are amortized over the estimated remaining period of services to be received.

(n) Asset retirement obligations

The Company records the fair value of its asset retirement obligation as a long‐term liability as incurred and records an increase in the carrying value of the related asset by a corresponding amount. In subsequent periods, the carrying amount of the liability is accreted by a charge to operations to reflect the passage of time and the liability is adjusted to reflect any changes in the timing of the underlying future cash flows. Charges for accretion and asset retirement obligation expenditures are recorded as operating activities.

Changes to the obligation resulting from any revisions to the timing or amount of the original estimate of undiscounted cash flows are recognized as an increase or decrease in the asset retirement obligation, and a corresponding change in the carrying amount of the related long‐lived asset. Upward revisions in the amounts of estimated cash flows are discounted using the credit‐ adjusted risk‐free rate applicable at the time of the revision. Downward revisions in the amount of - 14 - LUNDIN MINING CORPORATION Notes to consolidated financial statements For the years ended December 31, 2008 and 2007 (Tabular amounts in thousands of US dollars, except for share and per share amounts)

estimated cash flows are discounted using the historical credit‐adjusted risk‐free rate when the original liability was recognized.

(o) Revenue recognition

Revenue arising from the sale of metals contained in concentrates is recognized when title and the significant risks and rewards of ownership of the concentrates have been transferred to the customer in accordance with the agreements entered into between the Company and its customers. The Company's metals contained in concentrates are provisionally priced at the time of sale based on the prevailing market price as specified in the sales contracts. Variations between the price recorded at the time of sale and the actual final price received from the customer are caused by changes in market prices for the metals sold and result in an embedded derivative in the accounts receivable. The embedded derivative is recorded at fair value each period until final settlement occurs, with changes in fair value classified as a component of sales.

(p) Stock‐based compensation

The Company follows the fair value method with respect to stock‐based awards to directors and employees, including options, awards that are direct awards of stock that call for settlement in cash or other assets, or stock appreciation rights that call for settlement by the issuance of equity instruments. Under this approach, stock‐based payments are recognized as a compensation expense over the vesting period of the options or when the awards or rights are granted, with a corresponding credit to contributed surplus. With respect to options that vest over time, the fair value is amortized using the graded vesting attribution method and expensed on a monthly basis. When the stock options or rights are ultimately exercised, the applicable amounts of contributed surplus are transferred to share capital.

(q) Income taxes

The Company accounts for income taxes using the liability method. Under this method, future income tax assets and liabilities are determined based on differences between the financial statement carrying values of assets and liabilities and their respective income tax based values. Future income tax assets and liabilities are measured using the tax rates substantively enacted when the temporary differences are likely to reverse. The effect on future income tax assets and liabilities of a change in tax rates is included in operations in the period in which the change is substantively enacted. The amount of future income tax assets recognized is limited to the amount of the benefit that is more likely than not to be realized.

(r) Earnings (loss) per share

Basic earnings (loss) per share is calculated using the weighted average number of common shares outstanding during the year. Diluted earnings (loss) per share is calculated using the treasury stock method. In applying the treasury‐stock method, the assumed proceeds which would be received upon the exercise of outstanding stock options is used to calculate how many common shares could be purchased at the average market price during the year and cancelled. If the calculated result is dilutive, it is included in the diluted earnings (loss) per share calculation.

- 15 - LUNDIN MINING CORPORATION Notes to consolidated financial statements For the years ended December 31, 2008 and 2007 (Tabular amounts in thousands of US dollars, except for share and per share amounts)

(s) Financial instruments – recognition and measurement

The Company classified all financial assets as one of the following: held‐to‐maturity investments, loans and receivables, available‐for‐sale or held for trading. Financial assets classified as held for trading are measured at fair value with changes in fair value recognized in net income. Financial assets classified as held‐to‐maturity and loans and receivables are recorded at amortized cost using the effective interest method. Available‐for‐sale instruments are recorded at fair value with changes in fair value recognized in other comprehensive income. All financial assets are designated as held‐ for‐trading except for investments which have been designated as available‐for‐sale and accounts receivable. Long‐term debt and other long‐term liabilities which are classified as other financial liabilities are recorded at amortized cost.

The carrying values of the accounts receivables and accounts payables approximate their fair values.

All derivative instruments, including certain embedded derivatives that are separated from their host contracts, are recorded on the balance sheet at fair value and mark to market adjustments on these instruments are included in net income.

Transaction costs incurred to acquire or issue financial instruments are included in the initial carrying amount of the relevant financial instrument.

Where a financial asset classified as held‐to‐maturity or available‐for‐sale has a loss in value which is considered to be other than temporary, the loss is recognized by a charge to earnings.

(t) Adoption of new accounting standards

Effective January 1, 2008 the Company adopted the following Canadian Institute of Chartered Accountants (“CICA”) accounting standards:

i. Section 1400 – General Standards of Financial Statement Presentation

This section was amended to include a requirement that management make an assessment of an entity’s ability to continue as a going concern when preparing financial statements. Adoption of this standard did not have any material effect on the financial statements.

ii. Section 1535 – Capital Disclosures

This section establishes standards for disclosing quantitative and qualitative information about the Company’s capital and how it is managed, thereby enabling users to evaluate the Company’s objectives, policies and processes for managing capital.

iii. Section 3031 – Inventories

This section prescribes the accounting treatment for inventories and provides guidance on the determination of costs and its subsequent recognition as an expense, including any write down to net realizable value. It also provides guidance on the cost formulas that are used to assign costs to inventories. Adoption of this standard did not have any material effect on the financial statements.

- 16 - LUNDIN MINING CORPORATION Notes to consolidated financial statements For the years ended December 31, 2008 and 2007 (Tabular amounts in thousands of US dollars, except for share and per share amounts)

iv. Section 3862 and 3863 – Financial Instruments – Disclosures and Presentations

These sections replaced section 3861 – Financial Instruments – Disclosure and Presentation and require additional disclosure of the significance of financial instruments to the Company’s financial position and performance as well as quantitative and qualitative information that enable users to evaluate the nature and extent of risks arising from those financial instruments.

4. NEW ACCOUNTING PRONOUNCEMENTS

The CICA has issued new standards which may affect the financial disclosures and results of operations of the Company for interim and annual periods beginning on or after January 1, 2009. The Company will adopt the requirements on the date specified in each respective section and is considering the impact this will have on the consolidated financial statements.

Section 3064 – Goodwill and Intangible Assets This new standard replaces the former CICA 3062 – Goodwill and other intangible assets and establishes standards for the recognition, measurement and disclosure of goodwill and intangible assets. CICA 3064 is effective for interim and annual financial statements for years beginning on or after January 1, 2009.

Section 1582 Business combinations, Section 1601 consolidated financial statements and Section 1602 non‐controlling interests These sections replace the former CICA 1581, Business Combinations and CICA 1600, Consolidated Financial Statements and establish a new section for accounting for a non‐controlling interest in a subsidiary. These sections provide the Canadian equivalent to FASB Statements No. 141(R), Business Combinations and No. 160 Non‐controlling Interests in Consolidated Financial Statements. CICA 1582 is effective for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after January 1, 2011. CICA 1601 and CICA 1602 apply to interim and annual consolidated financial statements relating to years beginning on or after January 1, 2011.

International Financial Reporting Standards In February 2008, the CICA confirmed that International Financial Reporting Standards ("IFRS") will be mandatory in Canada for all publicly accountable entities for fiscal periods beginning on or after January 1, 2011. The Company is analyzing the impact of IFRS on its consolidated financial statements.

5. ACQUISITIONS AND DISPOSITIONS

(a) Pirites Alentejanas SA

On December 23, 2008, the Company announced that it had entered into an agreement of purchase and sale for the sale of its wholly‐owned subsidiary Pirites Alentejanas SA (“PA”). The transaction was completed on February 5, 2009 (Note 25). The assets, liabilities and results of operations of PA have been separately reported as discontinued operations in the balance sheets and statements of operations. Figures for 2007 have been revised to reflect this presentation.

- 17 - LUNDIN MINING CORPORATION Notes to consolidated financial statements For the years ended December 31, 2008 and 2007 (Tabular amounts in thousands of US dollars, except for share and per share amounts)

The results of the discontinued operations for the years ended December 31 were as follows:

2008 2007 General exploration and project investigation$ (2,918) $ (4) Asset impairment (210,472) (193,103) Other income and expenses (887) 104 Interest and bank charges (140) (26) Gain on sale of investments ‐ 3,644 Foreign exchange gain 245 254 Gain (loss) on forward sales contracts 3,131 (16,545) Current income tax expense (18) (9) Future income tax (expense) recovery (26,008) 51,224 Loss from discontinued operations$ (237,067) $ (154,461)

The following table details the assets and liabilities related to the discontinued operations as at December 31, 2008 and 2007:

2008 2007

Cash and cash equivalents$ 594 $ 2,161 Accounts receivable 4,405 12,849 Inventories 3,439 ‐ Prepaid expenses 345 1,364 Mineral properties, plant and equipment 55,157 29,219 Future income tax assets ‐ 20,389 Assets of discontinued operations$ 63,940 $ 65,982

Accounts payable and accrued liabilities 10,514 27,937 Accrued liabilities 15,126 1,196 Current portion of long term debt and capital leases 262 2,861 Other long‐term liabilities ‐ 128 Deferred revenue 55,157 57,780 Asset retirement obligation and other provisions 25,494 14,491 Liabilities of discontinued operations$ 106,553 $ 104,393

The disposition is not expected to have a material effect on the financial position of the Company.

(b) Tenke Mining Corp.

On July 3, 2007 the Company completed the acquisition of 100% of the issued and outstanding common shares of Tenke Mining Corp. (“Tenke”) by issuing 105.4 million common shares valued at $1,329.1 million (CAD$13.37 per share) and cash payments totaling $0.06 million to the former Tenke shareholders. The Company issued a further 0.14 million common shares at CAD$13.37 per share to satisfy an obligation resulting from a previous agreement between Tenke and one of its consultants. In addition, the Company issued 90,000 stock options valued at $0.7 million to a former Tenke director in exchange for the cancellation of Tenke stock options. The terms and conditions of these stock options remain the same as the Tenke stock options, except for the number of options issued and the respective - 18 - LUNDIN MINING CORPORATION Notes to consolidated financial statements For the years ended December 31, 2008 and 2007 (Tabular amounts in thousands of US dollars, except for share and per share amounts)

exercise price, which were adjusted according to the exchange ratio. This acquisition has been accounted for as a purchase of assets. Tenke, through its 30% interest in TF Holdings Ltd. (“TFH”), held a 24.75% interest in the Tenke Fungurume copper/cobalt project under development in the DRC.

The allocation of the purchase price is summarized as follows: Purchase price consideration Common shares issued (105.4 million shares)$ 1,329,075 Common shares issued on Tenke share issue obligation (0.14 million shares) 1,745 Stock options issued in exchange for Tenke option obligation 661 Acquisition costs 1,026 Cash 60 1,332,567 Less: Cash and cash equivalents acquired (82,436) Net purchase price 1,250,131

Net assets acquired Accounts receivable $ 160 Prepaid expenses 22 Available for‐sale‐investments 1,084 Investment in TFH (Note 8(b)(i)) 1,254,229 1,255,495 Accounts payable and accrued liabilities (377) Future income tax liabilities (4,987) Net assets acquired$ 1,250,131

The purchase consideration has been allocated to the fair value of the assets acquired and liabilities assumed based on management’s best estimates and taking into account all available information at the time of acquisition (also see Note 8 (b)(i)).

The excess of the purchase price over the carrying value has been applied to the investment in TFH.

On July 17, 2007, the Company acquired 85.5% of the issued common shares of Rio Narcea Gold Mines, Ltd. (“Rio Narcea”) in exchange for CAD$5.50 per share and 73.3% of the outstanding warrants of Rio Narcea for Cdn$1.04 per warrant. As at December 31, 2007, the Company had acquired all of the issued and outstanding shares of Rio Narcea and all of the outstanding warrants for cash payments totaling $918 million.

Concurrent with the offer to purchase Rio Narcea, the Company signed an option agreement with Red Back Mining Inc. for the sale of Rio Narcea’s Tasiast gold mine for cash consideration of $225.0 million and the assumption of $53.1 million of debt and hedging contracts. The sale was completed on August 2, 2007.

The purchase price was financed in part by an $800.0 million syndicated senior credit facility, which was reduced by the $225.0 million proceeds from the sale of the Tasiast gold mine.

- 19 - LUNDIN MINING CORPORATION Notes to consolidated financial statements For the years ended December 31, 2008 and 2007 (Tabular amounts in thousands of US dollars, except for share and per share amounts)

This acquisition has been accounted for as a business combination using the purchase method. These consolidated financial statements include Rio Narcea’s operating results commencing July 17, 2007.

Rio Narcea owns the Aguablanca nickel/copper mine and the Salave gold deposit in Spain.

The allocation of the purchase price to the identifiable assets and liabilities of Rio Narcea is summarized as follows: Purchase price Cash $ 917,981 Acquisition costs 4,257 922,238 Less: Cash and cash equivalents acquired (67,303) Net purchase price $ 854,935

Net assets acquired Restricted cash $ 9,174 Non‐cash current assets 51,060 Mineral properties, plant and equipment 562,493 Assets held‐for‐sale 278,181 Investments 69,788 Other long‐term assets 939 Future income tax assets 13,783 985,418 Current liabilities (70,057) Current portion of long‐term debt (40,586) Long‐term debt (6,009) Other long‐term liabilities (16,178) Asset retirement obligation and other mine closure costs (7,341) Future income tax liability (148,674) Non‐controlling interest (400) Net identifiable assets 696,173 Residual price allocated to goodwill 158,762 Net assets acquired $ 854,935

The purchase price has been allocated to the fair value of the assets acquired and liabilities assumed, with goodwill assigned to the Aguablanca mine, based on management’s best estimate and taking into account all available information at the time of acquisition. The fair values allocated were based in part on a valuation report prepared by an independent third party. The amount allocated to goodwill is not deductible for tax purposes.

The assets of Rio Narcea were subsequently reviewed for recoverability and impairment (Note 10).

- 20 - LUNDIN MINING CORPORATION Notes to consolidated financial statements For the years ended December 31, 2008 and 2007 (Tabular amounts in thousands of US dollars, except for share and per share amounts)

6. INVENTORIES

Inventories comprise the following: 2008 2007 Ore stock piles$ 7,337 $ 9,858 Concentrate stock piles 6,546 11,449 Materials and supplies 26,198 25,484 $ 40,081 $ 46,791

7. MINERAL PROPERTIES, PLANT AND EQUIPMENT

Mineral properties, plant and equipment consist of:

December 31, 2008 Accumulated depreciation, depletion and Cost amortization Net Exploration properties$ 104,411 $ ‐ $ 104,411 Mineral properties 1,356,513 438,868 917,645 Plant and equipment 406,248 134,925 271,323 Development properties 58,205 ‐ 58,205 $ 1,925,377 $ 573,793 $ 1,351,584

December 31, 2007 Accumulated depreciation, depletion and Cost amortization Net Exploration properties$ 281,787 $ ‐ $ 281,787 Mineral properties 1,766,981 298,775 1,468,206 Plant and equipment 421,962 73,288 348,674 Development properties 105,144 ‐ 105,144 $ 2,575,874 $ 372,063 $ 2,203,811

During the year, the Company acquired equipment through capital leases in the amount of $2.5 million (2007 ‐ $3.7 million).

In 2007, development properties included the Company’s 49% proportionate interest in the Ozernoe joint venture project which had a carrying value of $164.9 million. In 2008, the Company ceased to proportionately consolidate the interest in Ozernoe and the investment in the project is now recorded as a long‐term investment (Note 8c).

- 21 - LUNDIN MINING CORPORATION Notes to consolidated financial statements For the years ended December 31, 2008 and 2007 (Tabular amounts in thousands of US dollars, except for share and per share amounts)

On July 17, 2007, the Company completed the acquisition of Rio Narcea (Note 5c), which includes the mining assets of the Aguablanca mine. The allocation of the purchase price to mineral properties was $319.0 million and to plant and equipment $243.5 million. During 2008, the Company evaluated its long‐lived assets and determined that they were impaired (Note 10).

8. INVESTMENTS AND OTHER ASSETS

Investments include the following: 2008 2007 AFS securities (a)$ 13,953 $ 207,814 Equity investments (b) 1,577,044 1,317,367 Other assets (c) 52,733 6,763 $ 1,643,730 $ 1,531,944 a) AFS securities

Investments in AFS securities consist of marketable securities which had a fair value of $14.0 million at December 31, 2008 (December 31, 2007 ‐ $207.8 million). These investments consist of shares in publicly traded mining and exploration companies.

During the year ended December 31, 2008, the Company recognized a loss of $1.3 million (2007 – a gain of $74.3 million) from the sale of AFS securities.

Management’s assessment of the significant decline in the value of its AFS securities was deemed to be other than temporary. As such, the Company has recorded an impairment loss of $144.1 million in fiscal 2008 (2007 ‐ $NIL).

During the year, the Company received common shares valued at $0.8 million (2007 ‐ $ 3.7 million) pursuant to option agreements.

The Company does not exercise significant influence over any of the companies in which investments in available‐for‐sale securities are held, which in all cases, amounts to less than a 20% equity interest in any one company.

b) Equity investments

The Company accounts for the following investments on the equity basis. 2008 2007 Tenke Holdings Ltd. ("THL")$ 1,576,743 $ 1,314,814 Sanu Resources Ltd. ("Sanu") 301 2,553 $ 1,577,044 $ 1,317,367

(i) Tenke Holdings Ltd.

The Company holds a 30% interest in TFH which in turn holds an 82.5% interest in a Congolese subsidiary - 22 - LUNDIN MINING CORPORATION Notes to consolidated financial statements For the years ended December 31, 2008 and 2007 (Tabular amounts in thousands of US dollars, except for share and per share amounts)

company, Tenke Fungurume Mining Corp S.A.R.L (“TFM”). Freeport McMoRan Gold & Copper Inc. (“FCX”) holds the remaining 70% interest in TFH. TFM holds a 100% interest in the Tenke Fungurume copper/cobalt project (the ‘TFM Project’). The Company’s and FCX’s net interest in the TFM project is 24.75% and 57.75% respectively. La Generale des Carriers et des Mines (“Gecamines”), a DRC Government‐owned corporation owns a carried 17.5% interest. FCX is the TFM Project operator. The Company exercises significant influence over TFM. Accordingly the Company has used the equity method to account for this investment. 2008 2007 Balance, beginning of year$ 1,314,814 $ ‐ Acquisition of TFH interest ‐ 1,254,229 Advances 264,100 60,900 Share of equity loss (2,171) (315)

Balance, end of year$ 1,576,743 $ 1,314,814

In 2007, the Government of DRC initiated a review of all mining contracts in the country. FCX as operator has been leading discussion with the Government with respect of the review. The Company believes the TFM agreements with the Government are legally binding, all related issues have been duly addressed under Congolese law and the overall fiscal terms as previously negotiated and incorporated into the Congolese Mining Convention as Amended and the TFM agreement terms exceed the requirements of the Congolese Mining Code. The discussion has not delayed project development activities.

TFH is reliant in part on the Company to fund its share of on‐going operational and development financing requirements.

(ii) Sanu Resources Ltd.

The Company holds 4 million common shares of Sanu Resources Ltd (“Sanu”) and certain officers of the Company are directors and officers of Sanu. In 2008, the Company determined that the decline in the value of Sanu was significant and other than temporary. As such, an impairment loss of $1.3 million (2007 ‐ $NIL) was recorded. c) Other assets

Included in other assets is a 49% interest in the shares of Morales (Overseas) Limited (“Morales”) whose wholly owned Russian subsidiary holds a mining license covering the Ozernoe lead/zinc project located in the Republic of Buryatia, Russia. The Morales investment was accounted for as a joint venture under an agreement with IFC Metropol LLC OOO (“Metropol”), a Russian entity that holds the remaining 51% interest in Morales. During 2008, the Company ceased to have joint control over the activities of Morales. As such, proportionate consolidation method has been ceased.

Morales is reliant on the Company and Metropol to fund its on‐going operational and development financing requirements and Morales does not have the ability to transfer funds to either Metropol or the Company.

In light of current zinc prices and uncertainty regarding the intentions of the joint venture partner, the Company has no plans to advance the project at this time. The investment has been written down to an estimated fair value of $50.0 million (Note 10).

- 23 - LUNDIN MINING CORPORATION Notes to consolidated financial statements For the years ended December 31, 2008 and 2007 (Tabular amounts in thousands of US dollars, except for share and per share amounts)

9. GOODWILL

The following table summarizes changes to the carrying value of goodwill:

2008 2007 EuroZinc Rio Narcea EuroZinc Rio Narcea Goodwill, beginning of year$ 357,956 $ 145,969 $ 616,426 $ ‐ Arising from acquisitions ‐ ‐ ‐ 158,762 Impairment charges (Note 10) (166,702) (70,713) (327,658) (22,340) Effect from changes in foreign exchange rates (16,262) (7,729) 69,188 9,547 Goodwill, end of year$ 174,992 $ 67,527 $ 357,956 $ 145,969

EuroZinc: Goodwill resulted from the acquisition of EuroZinc Mining Corporation (“EuroZinc”) in 2006, which includes the mining operations of Somincor, PA and other exploration properties.

Rio Narcea: Goodwill resulted from the acquisition of Rio Narcea in 2007, which includes the mining operations of Aguablanca, the Salave gold deposit and other exploration properties.

The Company performed impairment assessments in response to the decline in the economic environment. As a result of the analysis, goodwill was determined to be impaired.

In performing the impairment tests, the Company determined the fair value of its reporting units using income and market approaches. The fair value of goodwill was measured as a residual of the fair value of the identifiable net assets. The fair value of goodwill was then compared to the carrying value in order to quantify the impairment. The assumptions used in determining the fair value are described in Note 10.

10. GOODWILL AND LONG‐LIVED ASSET IMPAIRMENT

Long‐lived assets should be tested for recoverability whenever events or changes in circumstances indicate that the carrying amounts may not be recoverable. During the years ended December 31, 2008 and 2007, the Company undertook a review of all mining assets and goodwill in light of recent economic events and associated declines in the outlook for metal prices in the near‐to‐mid term.

The Company primarily used discounted cash flows (income approach) to determine the fair value of its long‐lived assets subject to impairment. The discounting of future cash flows requires management to make estimates and use assumptions which include, but are not limited to, forecast metal prices, discount rates, operating costs, exchange and inflation rates and the estimated useful life of the assets.

For exploration properties, the Company used a market approach whereby the market prices of actual transactions involving similar assets are used to determine fair values. In addition, the Company also used an income approach that consisted of applying weighted probabilities to potential future cash flow scenarios.

- 24 - LUNDIN MINING CORPORATION Notes to consolidated financial statements For the years ended December 31, 2008 and 2007 (Tabular amounts in thousands of US dollars, except for share and per share amounts)

The following table summarizes the impairment charges for the years ended December 31, 2008 and 2007:

2008 2007 Goodwill Rio Narcea$ 70,713 $ 22,340 Eurozinc 166,702 327,658 Mineral properties Galmoy 61,405 ‐ Aguablanca 313,120 ‐ Plant and equipment Galmoy 17,165 ‐ Aguablanca 27,305 ‐ Development Ozernoe 103,778 ‐ Total goodwill and asset impairment$ 760,188 $ 349,998

The impairment charges resulted in a net tax recovery of $ 134.4 million (2007 ‐ $51.2 million).

11. FUTURE INCOME TAXES

The reconciliation of income taxes computed at Canadian statutory tax rates to the Company’s income tax expense for the years ended December 31, 2008 and 2007 is as follows: 2008 2007 Combined basic federal and provincial rates 33.5% 34.1% Income tax expense based on statutory income tax rates$ (284,030) $ 39,646 Effect of lower tax rates in foreign jurisdictions (79,815) (44,717) Tax benefits recognized on prior year losses ‐ (8,123) Non‐deductible and non‐taxable items 226,468 107,107 Other 6,924 21,972 Income tax expense (recovery)$ (130,453) $ 115,885

- 25 - LUNDIN MINING CORPORATION Notes to consolidated financial statements For the years ended December 31, 2008 and 2007 (Tabular amounts in thousands of US dollars, except for share and per share amounts)

Temporary differences and loss carry‐forwards which give rise to future income tax assets and liabilities as at December 31, 2008 and 2007 are as follows:

2008 2007 Future income tax assets Loss carry forwards$ 128,716 $ 60,904 Mineral properties, plant and equipment 36,370 ‐ Investments 12,101 ‐ Asset retirement obligations and other mine closure costs 29,554 12,320 Reserves and provisions 17,112 7,426 Share issue costs 914 4,869 Other 7,404 12,117 232,171 97,636 Valuation allowance (180,069) (37,443) Future income tax assets$ 52,102 $ 60,193 Future income tax liabilities Mineral properties, plant and equipment 19,128 110,246 Mining rights 219,068 322,858 Reserves 18,913 8,499 Other 5,541 7,016 Future income tax liabilities 262,650 448,619 Net future income tax liability$ 210,548 $ 388,426

At December 31, 2008, the Company had accumulated non‐capital losses for Irish and Swedish income tax purposes of approximately $120.9 million (2007 ‐ $112.1 million) and $90.6 million (2007 – $NIL) respectively which have an indefinite life.

Year of expiry Canada Spain Sweden Ireland Total 2009$ 2,808 $ ‐ $ ‐ $ ‐ $ 2,808 2010 2,119 ‐ ‐ ‐ 2,119 2011 7,081 ‐ ‐ ‐ 7,081 2012 8,108 ‐ ‐ ‐ 8,108 2013 and thereafter 64,250 35,954 90,570 120,874 311,648 $ 84,366 $ 35,954 $ 90,570 $ 120,874 $ 331,764

Subsequent to December 31, 2008, the Company sold its 100% interest in the Aljustrel zinc mine in Portugal, including $145.1 million of available non‐capital loss carryforwards.

- 26 - LUNDIN MINING CORPORATION Notes to consolidated financial statements For the years ended December 31, 2008 and 2007 (Tabular amounts in thousands of US dollars, except for share and per share amounts)

12. ACCRUED LIABILITIES

2008 2007

Unbilled goods and services$ 19,496 $ 31,025 Payroll obligations 12,295 6,537 Royalty payable 12,562 42,732 Share purchases and stock appreciation rights liabilities ‐ 7,535 Due from derivative contracts and investments ‐ 1,831 $ 44,353 $ 89,660

13. LONG‐TERM DEBT AND CAPITAL LEASES

2008 2007 Five‐year revolving credit facility (a)$ 266,652 $ 40,352 Somincor bonds due in 2009 (b) 38,692 39,369 Capital lease obligations (c) 4,715 5,497 Rio Narcea debt (d) 5,157 6,538 Aljustrel debt ‐ 2,516 Other ‐ 1,003 315,216 95,275 Less: current portion due within one year 306,973 5,779 $ 8,243 $ 89,496

The principal repayment obligations are scheduled as follows: Capital Debt Leases Total 2009$ 305,830 $ 1,143 $ 306,973 2010 359 1,176 1,535 2011 359 1,285 1,644 2012 359 1,032 1,391 2013 and thereafter 3,594 79 3,673 Total$ 310,501 $ 4,715 $ 315,216

Management estimates that the Company’s fair value of long‐term debt approximates its carrying value.

a) During 2007, the Company secured a five‐year $225 million non‐revolving and a $575 million revolving credit facility for general corporate purposes collateralized by shares owned by Lundin in its subsidiaries. These loan facilities were used in part to acquire 100% of the issued and outstanding shares of Rio Narcea (Note 5c). Following the purchase of Rio Narcea, the Company sold its Tasiast gold project for $225 million and retired the non‐revolving credit facility.

- 27 - LUNDIN MINING CORPORATION Notes to consolidated financial statements For the years ended December 31, 2008 and 2007 (Tabular amounts in thousands of US dollars, except for share and per share amounts)

The credit facility contains various covenants that include indebtedness, asset sales and liens, and distributions. The amount drawn on the facility bears interest at LIBOR plus a spread of 75 to 150 basis points based on the leverage ratio of the Company. As at December 31, 2008, the interest rate was LIBOR rate plus 1.125%. At December 31, 2008, the Company was not in compliance with a financial covenant defined under its $575 million revolving credit facility agreement. The covenant defines a calculation of tangible net worth and requires the Company to maintain it at a prescribed level.

The Company has obtained a waiver of the covenant that is in effect until June 5, 2009 from the banking syndicate that provided the facility. The waiver includes among other things an increase in the interest rate to 4.5% over LIBOR.

b) On December 17, 2004, the Company’s wholly owned Portuguese subsidiary, Somincor, issued 540,000 unsecured bonds with a nominal value of €50 each for a total of €27.0 million, which as at December 31, 2008 was equivalent to approximately $37.6 million. These bonds have a five‐year term with 100% of the principal repayable at maturity on December 17, 2009 and bear interest at “EURIBOR 6 months” plus 0.875%. Interest payments are due on June 17 and December 17 of each year. The rate at December 31, 2008 was 3.85%. c) Capital lease obligations relate to leases on mining, computer equipment and passenger vehicles having three or four year terms and the lease payment obligations have been discounted at rates of interest between 1.25% to 1.75% above “3 month” and “6 month” EURIBOR. d) The Rio Narcea debt of €5.5 million (approximately $7.6 million) was assumed on the acquisition of Rio Narcea and is an interest free loan extended by the Spanish Department of Trade, Industry and Commerce. It is repayable in equal annual installments of €0.5 million on December 15 of each year through 2017. The debt is recorded using an imputed interest rate of 4.3% 14. OTHER LONG‐TERM LIABILITIES

Included in other long term liabilities is a grant received by Somincor of $12.5 million (€9.0 million). The grant was provided by the Portuguese government and the European Union to promote capital investment. A portion of this grant is to be re‐paid in the range of 30%‐50% and will be determined based on the expenditures made and achievement of certain goals. The portion of the grant that is to be re‐paid may be interest free if repaid within two years from receipt of the grant. Otherwise, it will carry an interest of LIBOR plus 0.6% payable in a four year term. The fair value approximates carrying value.

15. DEFERRED REVENUE

The following table summarizes the changes in deferred revenue balance: 2008 2007

Balance, beginning of year$ 98,341 $ 64,330 Proceeds from new contracts issued during the year ‐ 31,280 Amortization on delivery of silver in concentrate (6,796) (4,473) Effect from changes in foreign exchange rates (12,415) 7,204 79,130 98,341 Less: estimated current portion 3,465 7,243 Balance, end of year$ 75,665 $ 91,098

- 28 - LUNDIN MINING CORPORATION Notes to consolidated financial statements For the years ended December 31, 2008 and 2007 (Tabular amounts in thousands of US dollars, except for share and per share amounts)

a) Silverstone Resources Corp.

On September 28, 2007, the Company entered into an agreement to sell all of its silver contained in concentrate produced from its Neves‐Corvo and Aljustrel mines in Portugal to Silverstone Resources Corp. (“Silverstone”) in consideration for cash and securities having a fair value of $89.1 million on the date of the exchange, plus a payment on delivery of silver in concentrate at a rate of the lesser of (a) $3.90 per ounce (subject to a 1% annual adjustment after three years) and (b) the then prevailing market price per ounce of silver. The agreement extends to the earlier of 50 years from the agreement date and the end of mine life for each of the Neves‐Corvo and Aljustrel mines. During the year ended December 31, 2008, the Company delivered concentrate containing 485,288 ounces (2007 ‐ 147,000 ounces) of silver in concentrate to Silverstone. The Company has determined that the embedded derivative value in the contract, related to the ability of Silverstone to pay a reduced amount for each ounce of silver contained in concentrate if, during the term of the contract, the price of silver falls below $3.90 per ounce, is not material.

The deferred revenue attributed to Aljustrel is recorded in the liabilities of the discontinued operations (Note 5a).

b) Silver Wheaton Corp.

The Company entered an agreement with Silver Wheaton Corp. (“Silver Wheaton”) to deliver a total of 40 million ounces of silver contained in concentrate from the Zinkgruvan mine in Sweden to Silver Wheaton over a 25‐year period commencing in 2004. The Company receives the lesser of: (a) $3.90 per ounce (subject to adjustment based on changes in the US consumer price inflation index) and (b) the then prevailing market price per ounce of silver in consideration for cash and securities having a fair value totaling $72.8 million.

Under terms of the agreement, if, at the end of the 25‐year period, the Company has not delivered concentrate containing the agreed 40 million ounces, the Company is required to pay $1.00 to Silver Wheaton for each ounce of silver not delivered. During 2008, the Company delivered concentrate containing 1,790,512 ounces (2007 – 1,942,000 ounces) of silver to Silver Wheaton, for an aggregated total of 7,290,512 ounces since the inception of the contract.

The Company has determined that the embedded derivative value in the contract, related to the ability of Silver Wheaton to pay a reduced amount for each ounce of silver contained in concentrate if the price of silver falls below $3.90 per ounce, is not material.

16. FORWARD SALES CONTRACTS

The Company has entered into forward sales contracts for the purpose of managing the related risks and are not for trading purposes. As at December 31, 2008, the Company had no future metal delivery commitments. The Company recognized approximately $0.1 million loss on the forward contracts during 2008 (2007 ‐ $18.0 million).

17. PROVISION FOR PENSION OBLIGATIONS

The Company has calculated its liability relating to the defined benefit plan at the Zinkgruvan mine using the projected benefit method pro‐rated on services method. Actuarial assumptions used to determine benefit obligations at December 31, 2008 and 2007 were as follows:

- 29 - LUNDIN MINING CORPORATION Notes to consolidated financial statements For the years ended December 31, 2008 and 2007 (Tabular amounts in thousands of US dollars, except for share and per share amounts)

2008 2007 Discount rate 4.5% 4.5% Rate of salary increase 2.5% 2.5% Long‐term rate of inflation 2.5% 2.5%

Information about Zinkgruvan’s defined benefit and other retirement plans as at December 31, 2008 and 2007 are as follows: 2008 2007 Accrued benefit obligation: Balance, beginning of the year$ 12,194 $ 13,383 Current service costs 761 772 Interest costs 568 509 Actuarial losses (gains) 258 (714) Benefits paid (785) (727) Effects of foreign exchange (3,072) (1,029) Balance, end of the year 9,924 12,194 Adjustments of cumulative unrecognized actuarial losses 874 167 Unrecognized actuarial (losses) gain (258) 714 Accrued benefit liability 10,540 13,075 Provision for indirect taxes on non‐vested pension obligations 2,524 2,656 Pension obligations covered by insurance policies 1,295 1,343 Total provision for pension obligations$ 14,359 $ 17,074

The defined benefit plan is unfunded and, accordingly, there are no plan assets and the Company made no contributions to the plan. The Company’s pension expense related to the defined benefit plan is as follows: 2008 2007 Current service costs$ 761 $ 772 Interest costs 568 509 Indirect taxes 322 138 Pension expense$ 1,651 $ 1,419 In addition, the Company recorded a pension expense of $1.1 million (2007 ‐ $0.6 million) relating to defined contribution plans.

- 30 - LUNDIN MINING CORPORATION Notes to consolidated financial statements For the years ended December 31, 2008 and 2007 (Tabular amounts in thousands of US dollars, except for share and per share amounts)

18. ASSET RETIREMENT OBLIGATIONS AND OTHER PROVISIONS

The asset retirement obligations and other provisions relating to the operations of Neves‐Corvo, Zinkgruvan, Storliden, Aguablanca and Galmoy mines, are as follows:

Asset Other Mine Retirement Closure Obligations Costs Total Balance, December 31, 2006$ 86,757 $ 4,836 $ 91,593 Accretion 5,057 2,273 7,330 Accruals for services ‐ 1,335 1,335 Changes in estimates 3,163 ‐ 3,163 Amounts arising from Rio Narcea acquisition 7,294 1,108 8,402 Amounts arising from disposal of Tasiast (1,000) ‐ (1,000) Effect on changes in foreign exchange rates 8,190 657 8,847 Payments (2,081) ‐ (2,081) Balance, December 31, 2007$ 107,380 $ 10,209 $ 117,589 Accretion 4,016 ‐ 4,016 Accruals for services ‐ 21,915 21,915 Changes in estimates (21,719) ‐ (21,719) Amounts arising from disposal (769) ‐ (769) Effect on changes in foreign exchange rates (6,281) (1,410) (7,691) Payments (3,811) ‐ (3,811) Balance, December 31, 2008$ 78,816 $ 30,714 $ 109,530

In 2007, as part of the allocation of the purchase price of Rio Narcea, the owner of the Aguablanca mine (Note 5c), the Company allocated $7.3 million for future site restoration and other mine closure costs. The future site restoration and mine closure costs at the Aguablanca mine were determined based on the current life of mine plan, estimated undiscounted future site restoration costs of €5.8 million for the mine using a credit‐adjusted risk‐free interest rate of 5.0%. Since acquisition, the Company made payments for site restoration costs totaling $1.8 million (2007 ‐ 2.1 million). The asset retirement obligation for the Aguablanca mine at December 31, 2008 totaled $3.5 million (December 31, 2007 ‐ $7.2 million).

The asset retirement obligation at the Neves‐Corvo mine is based on the estimated undiscounted future site restoration costs of €45.4 million and a credit‐adjusted risk‐free interest rate of 5.0%. There was a change in estimate during the year, which decreased the carrying value of the asset retirement obligation and the related asset by $21.7 million. The Company expects the payments for site restoration costs to be incurred near the end or following the closure of the Neves‐Corvo mine in 2022. For the year ended December 31, 2008, the Company recorded accretion expense of $1.6 million (2007 ‐ $3.8 million). The asset retirement obligations for the Neves‐Corvo mine was $48.2 million (2007 ‐ $70.5 million).

The asset retirement obligation at the Zinkgruvan mine at December 31, 2008 was $11.6 million (December 31, 2007 ‐$13.4 million). This was based on estimated undiscounted future site restoration costs of $37.1 million (SEK 240.1 million) and a credit‐adjusted risk‐free interest rate of 5.5%. The Company expects the future reclamation costs to be incurred subsequent to the end of the mine life.

- 31 - LUNDIN MINING CORPORATION Notes to consolidated financial statements For the years ended December 31, 2008 and 2007 (Tabular amounts in thousands of US dollars, except for share and per share amounts)

In March 2006, Zinkgruvan presented a revised closure plan to the Swedish Environmental Supreme Court (“the Supreme Court”). This closure plan for the tailings facility indicated a final closure cost of approximately $1.5 million (SEK 10 million). However, the Supreme Court upheld the original 2001 closure plan and required the Company to post a $10.2 million (SEK 80 million) bond. Zinkgruvan is currently updating the closure plan for resubmission to the Supreme Court for approval. Until such time as the new closure plan is approved, Zinkgruvan has based its estimated asset retirement obligation based on the 2001 closure plan.

The asset retirement obligation at the Galmoy mine at December 31, 2008 was $15.1 million (2007 ‐ $15.8 million), which was based on an undiscounted asset retirement obligation of €15.4 million and a credit‐adjusted risk‐free interest rate of 5.5%. Expenditures for site restoration costs are scheduled to commence from 2008 to 2011. For the year ended December 31, 2008, the Company recorded accretion expense of $0.8 million (2007 ‐ $0.8 million) and $13.9 million (2007 ‐ $1.1 million) for other mine closure costs. There was also an increase related to severance related closure costs in the amount of $21.7 million based on finalized contractual agreement with their union.

The Company estimates that its asset retirement obligations with respect to the Storliden mine are insignificant.

19. SHARE CAPITAL

All shares and stock options shown in the tables are calculated as if the three‐for‐one stock split, which was effective February 5, 2007, had occurred at January 1, 2007.

(a) Authorized and issued shares

The issued and authorized share capital consists of an unlimited number of voting common shares with no par value and one special non‐voting share with no par value of which 487,433,771 voting common shares (2007 – 392,489,131) are issued and fully‐paid.

On December 11, 2008, the Company announced the completion of a private placement, resulting in HudBay Minerals Inc. ("HudBay") subscribing for 96,997,492 common shares in the capital of the Company, representing 19.9% of the Company’s outstanding common shares after issuance, at a price of $1.40 CAD per share, for aggregate gross proceeds to the Company of approximately $135.8 CAD million.

On December 19, 2007, the Company announced a normal course issuer bid to purchase up to 19,620,139 of its previously issued common shares on the open market. To December 31, 2008, the Company purchased 2,150,700 shares for a total consideration of $18.8 million. These shares were subsequently cancelled.

(b) Stock options

The Company has an incentive stock option plan (the “Plan”) available for certain employees, directors and officers to acquire shares in the Company. At the October 19, 2006 Special Meeting of Shareholders, the shareholders of the Company approved a resolution setting the number of shares reserved under the Plan at 7,000,000. As a result of a three‐for‐one stock split of the Company's shares on February 5, 2007, the number of shares reserved under the Plan increased to 21,000,000, which is less than 10% of the number of issued and outstanding shares of the Company. The term of any options granted are fixed by the Board of Directors and may not exceed ten years from the date of grant. - 32 - LUNDIN MINING CORPORATION Notes to consolidated financial statements For the years ended December 31, 2008 and 2007 (Tabular amounts in thousands of US dollars, except for share and per share amounts)

Option pricing models require the input of highly subjective assumptions including the expected price volatility and expected life. Changes in the subjective input assumptions can materially affect the fair value estimate and therefore the existing models do not necessarily provide a reliable single measure of the fair value of the Company’s stock options granted/vested during the year.

The Company uses the fair value method of accounting for all stock‐based payments to employees, directors and officers. Under this method, the Company recorded a stock compensation expense of $9.9 million for 2008 (2007 ‐ $12.0 million) with a corresponding credit to contributed surplus. The fair value of the stock options granted at the date of the grant using the Black‐Scholes pricing model assumes risk‐free interest rates of 2.63% to 3.84% (2007 ‐ 3.9% to 4.7%) , no dividend yield, expected life of 1.5 to 4.3 years (2007 – 1.5 to 2.5 years) with an expected price volatility ranging from 47% to 69% (2007 – 36% to 43%).

The continuity of incentive stock options issued and outstanding during 2008 and 2007 is as follows:

Weighted Number of average exercise Options price (CAD$) Outstanding, December 31, 2006 3,038,266 $ 5.11 Granted during the year 4,905,760 12.55 Granted in exchange for Tenke options (Note 5b) 86,500 5.57 Expired/forfeited during the year (9,521) 9.80 Exercised during the year (1,903,177) 3.86 Outstanding, December 31, 2007 6,117,828 $ 11.84 Granted during the year 6,176,040 4.97 Expired/Forfeited during the year (1,104,000) 12.36 Exercised during the year (97,848) 6.44 Outstanding, December 31, 2008 11,092,020 $ 8.01

During the year ended December 31, 2008, the Company granted 6,176,040 incentive stock options to employees and officers at a weighted average exercise price of CAD $4.97 per share that expire between August 5, 2011 and December 31, 2013. The exercise price for each of the options granted during 2008 was based on the closing stock price on the date of grant. In 2007, the Company granted 4,905,760 incentive stock options to employees and officers at a weighted average exercise price of CAD $12.55 per share that expire between January 17, 2009 and December 5, 2012. The exercise price for each of the options granted during 2007 was based on the closing stock price on the date of grant. On the acquisition of Tenke, in 2007, the Company issued approximately 0.1 million stock options to a former Tenke director in exchange for the cancellation of Tenke stock options (Note 5b).

- 33 - LUNDIN MINING CORPORATION Notes to consolidated financial statements For the years ended December 31, 2008 and 2007 (Tabular amounts in thousands of US dollars, except for share and per share amounts)

The following table summarizes options outstanding as at December 31, 2008, as follows:

Outstanding Options Exercisable Options

Weighted Weighted Weighted Average Average Average Weighted Number of Remaining Exercise Number of Remaining Average Range of exercise Options Contractual Price Options Contractual Exercise prices (CAD$) Outstanding Life (Years) (CAD$) Exercisable Life (Years) Price (CAD$) $2.27 to $4.41 107,720 1.5 $ 2.29 107,720 1.5 $ 2.29 $4.42 to $5.80 5,091,500 3.8 4.47 476,500 2.3 4.91 $5.81 to $9.62 1,375,760 3.9 7.56 1,015,068 3.8 7.43 $9.63 to $12.73 1,075,280 2.7 10.32 975,279 2.6 10.35 $12.74 to $14.97 3,441,760 3.4 12.89 2,651,360 3.2 12.92 11,092,020 3.6 $ 8.01 5,225,927 3.1 $ 10.43

There were 306,720 stock appreciation rights issued and outstanding at December 31, 2008 at a weighted averaged exercise price of CAD $6.69. 135,360 units expire on June 8, 2010 and 171,360 units expire on May 11, 2011.

The stock appreciation rights are recorded as a current liability and are adjusted based on the Company’s closing stock price at the end of each reporting period. The liability as at December 31, 2008 was $NIL (2007 ‐ $1.0 million). For the year ended December 31, 2008, the Company also recognized a recovery of $1.0 million (2007 ‐ $1.4 million) recovery as a result of changes in the fair value of the outstanding stock appreciation rights.

All stock appreciation rights are fully vested and exercisable.

20. SEGMENTED INFORMATION

The Company is engaged in mining, exploration and development of mineral properties, primarily in Portugal, Spain, Sweden, Ireland and the DRC. The Company has reportable segments as identified by the individual mining operations at each of its operating mines as well as its significant investment in the Tenke Fungurume project. Segments are operations reviewed by the executive management. Each segment is identified based on quantitative factors whereby its revenues or assets comprise 10% or more of the total revenues or assets of the Company.

- 34 - LUNDIN MINING CORPORATION Notes to consolidated financial statements For the years ended December 31, 2008 and 2007 (Tabular amounts in thousands of US dollars, except for share and per share amounts)

Segmented Information ‐ Operational For the year ended December 31, 2008 Tenke Neves Corvo Zinkgruvan Aguablanca Galmoy Fungurume Other Total Sales $ 497,936 $ 123,508 $ 120,280 $ 69,831 $ ‐ $ 23,739 $ 835,294

Income (loss) before undernoted 291,831 57,238 22,231 (7,218) ‐ (40,834) 323,248 Depreciation and amortization (94,709) (19,967) (63,440) (23,094) ‐ (1,107) (202,317) General exploration and project investigation (18,563) 4 (9,076) (2,722) ‐ (8,519) (38,876) Goodwill and long‐lived asset impairment (166,702) ‐ (411,136) (78,572) ‐ (103,778) (760,188) Impairment of AFS securities (5,045) ‐ (63,885) ‐ ‐ (75,147) (144,077) Other income and expenses 839 1,315 (233) 1,523 (2,171) 1,352 2,625 Loss on sale of investments ‐ ‐ ‐ ‐ ‐ (1,320) (1,320) Interest and bank charges (3,834) (237) (1,216) (8) ‐ (9,430) (14,725) Foreign exchange gain (loss) 7,484 2,297 (2,190) (7) ‐ (22,310) (14,726) Gain (loss) on forward sales contracts ‐ 257 ‐ ‐ ‐ (348) (91) Income tax (expense) recovery (40,449) (2,350) 103,584 (6,825) ‐ 76,493 130,453 Net (loss) income from continuing operations $ (29,148) $ 38,557 $ (425,361) $ (116,923) $ (2,171) $ (184,948) $ (719,994) Loss from discontinued operations (237,067) ‐ ‐ ‐ ‐ ‐ (237,067) Net (loss) income $ (266,215) $ 38,557 $ (425,361) $ (116,923) $ (2,171) $ (184,948) $ (957,061)

Capital assets* $ 1,110,874 $ 158,177 $ 127,985 $ 7,327 $ 1,576,743 $ 2,380 $ 2,983,486 Total segment assets $ 1,420,353 $ 280,953 $ 235,431 $ 39,568 $ 1,576,743 $ 151,454 $ 3,704,502 Capital expenditures $ 199,716 $ 44,772 $ 7,600 $ 6,374 $ 264,100 $ 13,269 $ 535,831

For the year ended December 31, 2007 Neves Corvo Zinkgruvan Aguablanca Galmoy Tenke Other Total Sales $ 621,088 $ 206,067 $ 75,838 $ 99,925 $ ‐ $ 56,804 $ 1,059,722

Income (loss) before undernoted 434,327 149,247 20,023 42,152 ‐ (17,216) 628,533 Depreciation and amortization (99,792) (18,757) (26,318) (21,272) ‐ (9,553) (175,692) General exploration and project investigation (21,824) (3,607) (2,231) (4,108) ‐ (3,600) (35,370) Goodwill and long‐lived asset impairment (327,658) ‐ (22,340) ‐ ‐ ‐ (349,998) Other income and expenses 19,008 444 (224) 1,193 (315) 4,581 24,687 Gain on sale of investments ‐ ‐ ‐ ‐ ‐ 74,330 74,330 Interest and bank charges (3,138) (560) (644) (20) ‐ (9,082) (13,444) Foreign exchange loss (16,689) (748) ‐ (922) ‐ (517) (18,876) Gain (loss) on forward sales contracts ‐ ‐ 5,530 ‐ ‐ (23,511) (17,981) Income tax (expense) recovery (83,038) 714 3,979 (8,767) ‐ (28,773) (115,885) Net (loss) income from continuing operations $ (98,804) $ 126,733 $ (22,225) $ 8,256 $ (315) $ (13,341) $ 304 Loss from discontinued operations (154,464) ‐ ‐ ‐ ‐ ‐ (154,461) Net loss (income) $ (253,268) $ 126,733 $ (22,225) $ 8,256 $ (315) $ (13,341) $ (154,157)

Capital assets* $ 1,241,820 $ 166,613 $ 556,786 $ 107,001 $ 1,314,819 $ 160,806 $ 3,547,845 Total segment assets $ 2,242,497 $ 455,618 $ 840,175 $ 169,547 $ 1,314,819 $ (311,832) $ 4,710,824 Capital expenditures $ 147,983 $ 22,915 $ 1,149 $ 6,294 $ 60,900 $ 11,072 $ 250,313 * Capital assets consist of mineral exploration and development properties, property, plant and equipment, and investments in Tenke Fungurume. Capital assets from discontinued operations are in Neves Corvo

- 35 - LUNDIN MINING CORPORATION Notes to consolidated financial statements For the years ended December 31, 2008 and 2007 (Tabular amounts in thousands of US dollars, except for share and per share amounts)

Segmented Information ‐ Geographical For the year ended December 31, 2008 Portugal Spain Sweden Ireland DRC Other Total Sales$ 497,936 $ 120,280 $ 147,247 $ 69,831 $ ‐ $ ‐ $ 835,294

Income (loss) before undernoted 291,831 21,835 50,609 (7,218) ‐ (33,809) 323,248 Depreciation and amortization (94,827) (63,440) (20,497) (23,094) ‐ (459) (202,317) General exploration and project investigation (16,978) (9,437) (9,233) (2,722) ‐ (506) (38,876)

Goodwill and long‐lived asset impairment (166,702) (411,136) ‐ (78,572) ‐ (103,778) (760,188) Impairment of AFS securities (5,045) (63,885) ‐ ‐ ‐ (75,147) (144,077) Other income and expenses 1,351 (119) 3,301 1,523 (2,171) (1,260) 2,625 Loss on sale of investments ‐ ‐ ‐ ‐ ‐ (1,320) (1,320) Interest and bank charges (3,877) (1,234) (5,255) (8) ‐ (4,351) (14,725) Foreign exchange gain (loss) 6,325 (2,173) (6,399) (7) ‐ (12,472) (14,726) Loss on forward sales contracts ‐ ‐ (91) ‐ ‐ ‐ (91) Income tax (expense) recovery (41,160) 103,587 54,799 (6,825) ‐ 20,052 130,453 Net (loss) income from continuing operations$ (29,082) $ (426,002) $ 67,234 $ (116,923) $ (2,171) $ (213,050) $ (719,994) Loss from discontinued operations (237,067) ‐ ‐ ‐ ‐ ‐ (237,067) Net loss (income) $ (266,149) $ (426,002) $ 67,234 $ (116,923) $ (2,171) $ (213,050) $ (957,061)

Capital assets* $ 1,111,280 $ 127,985 $ 158,556 $ 7,327 $ 1,576,743 $ 1,595 $ 2,983,486 Total segment assets $ 1,421,332 $ 235,906 $ 301,582 $ 39,568 $ 1,576,743 $ 129,371 $ 3,704,502 Capital expenditures $ 199,716 $ 7,600 $ 44,772 $ 6,374 $ 264,100 $ 13,269 $ 535,831

For the year ended December 31, 2007 Portugal Spain Sweden Ireland DRC Other Total Sales$ 621,088 $ 75,838 $ 262,855 $ 99,925 $ ‐ $ 16 $ 1,059,722

Income (loss) before undernoted 434,327 20,020 156,233 42,152 ‐ (24,199) 628,533 Depreciation and amortization (99,900) (26,318) (28,024) (21,272) ‐ (178) (175,692) General exploration and project (20,684) (2,798) (7,783) (4,108) ‐ 3 (35,370) Goodwill and long‐lived asset impairment (327,658) (22,340) ‐ ‐ ‐ ‐ (349,998) Other income and expenses 19,461 (224) (2,734) 1,029 (315) 7,470 24,687 Gain on sale of investments ‐ ‐ ‐ ‐ ‐ 74,330 74,330 Interest and bank charges (3,448) (393) (8,111) (20) ‐ (1,472) (13,444) Foreign exchange (loss) gain (16,563) 1,572 2,173 (998) ‐ (5,060) (18,876) Loss on forward sales contracts ‐ 5,530 (23,511) ‐ ‐ ‐ (17,981) Income tax (expense) recovery (79,939) 3,979 (10,151) (8,767) ‐ (21,007) (115,885) Net (loss) income from continuing operations$ (94,404) $ (20,972) $ 78,092 $ 8,016 $ (315) $ 29,887 $ 304 Loss from discontinued operations (154,461) ‐ ‐ ‐ ‐ ‐ (154,461) Net (loss) income $ (248,865) $ (20,972) $ 78,092 $ 8,016 $ (315) $ 29,887 $ (154,157)

Capital assets* $ 1,213,285 $ 556,786 $ 168,966 $ 107,001 $ 1,314,819 $ 186,988 $ 3,547,845 Total segment assets $ 1,790,764 $ 840,260 $ 208,917 $ 169,547 $ 1,314,819 $ 386,517 $ 4,710,824 Capital expenditures $ 147,983 $ 1,149 $ 24,634 $ 6,294 $ 60,900 $ 9,353 $ 250,313 * Capital assets consist of mineral exploration and development properties, property, plant and equipment, and investments in Tenke Fungurume. Capital assets from discontinued operations are in Portugal

- 36 - LUNDIN MINING CORPORATION Notes to consolidated financial statements For the years ended December 31, 2008 and 2007 (Tabular amounts in thousands of US dollars, except for share and per share amounts)

21. COMMITMENTS AND CONTINGENCIES

a) The Company’s wholly‐owned subsidiary, Somincor, has entered into the following commitments:

i. Royalty payment under a fifty year concession agreement to pay the greater of 10% of net income or 0.75% of mine‐gate production revenue. Royalty cost for the year ended 2008 was $3.4 million (2007 ‐ $24.5 million);

ii. Port facilities rental payable to the port authority of Setubal and Sesimbra, Portugal for a thirty‐year period beginning in 1996 at an annual cost of $0.2 million per year;

iii. Use of the railways under a railway transport agreement for ten years expiring in November 2010 at an estimated annual cost of $4.5 million per year;

iv. Setubal bulk terminal land and use license commitments totaling approximately $0.7 million per year for the duration of the life of the terminal facilities; and

v. Computer equipment leases for the next two years in the amount of approximately $0.9 million per year.

b) A major Swedish bank issued a bank guarantee to the Swedish authorities in the amount of $10.2 million (SEK 80.0 million) relating to the future reclamation costs at the Zinkgruvan mine. The Company has agreed to indemnify the Swedish bank for this guarantee.

c) As disclosed in Note 15, under agreements with Silverstone and Silver Wheaton, the Company has agreed to deliver all future production of silver contained in concentrate produced from certain of its mines. The Silver Wheaton agreement includes a guaranteed minimum delivery of 40 million ounces of silver over the remaining 22‐year term. If at the end of the contract the Company has not met its minimum obligation, it must pay $1.00 to Silver Wheaton for each ounce of silver not delivered.

d) In August 2005, the regional Government of Asturias, Spain rejected Rio Narcea’s application for “change in land use” required to develop the Salave gold deposit. After a review of its legal options, former management of Rio Narcea commenced legal applications in local courts seeking reversal of the decision and, or monetary compensation for damages. The outcome and timing of any legal action on this matter is presently uncertain. On the acquisition of Rio Narcea, the Company fair valued the Salave property at $50.5 million (€ 36.3 million), which is included in exploration properties as presented in Note 7.

e) Upon commencement of commercial production of the Tenke Fungurume copper/cobalt project, expected to be during 2009, the Company is to make bonus transfer payments of $1.5 million to TFH. Subsequent bonus transfer payments of $3.0 million are to be made on the first and second anniversaries of commercial production.

- 37 - LUNDIN MINING CORPORATION Notes to consolidated financial statements For the years ended December 31, 2008 and 2007 (Tabular amounts in thousands of US dollars, except for share and per share amounts)

f) On February 23, 2009, the Company entered into an agreement with HudBay Minerals Inc. (“HudBay”) whereby the companies have agreed to terminate the previously announced arrangement agreement dated November 21, 2008, pursuant to which HudBay agreed to acquire all of the outstanding shares of the Company subject to the satisfaction of certain conditions. In consideration of terminating the Arrangement Agreement and in recognition of HudBay’s 19.9% ownership interest, the companies have agreed to the following terms in the termination agreement:

i. As long as HudBay owns 10% or more of the outstanding common shares of the Company, HudBay shall be entitled to designate one nominee acceptable to the Company for inclusion on the management slate of nominees for election to the Company’s board of directors; ii. As long as HudBay owns 10% or more of the outstanding common shares of the Company, HudBay shall have the right to maintain its then current level of ownership of the common shares of the Company in connection with, and as a part, of any public offering or private placement of the Company’s common shares by the Company; iii. For a period of six months following the date of the termination agreement, HudBay shall have a right of first offer in connection with any proposed sale or transfer of material assets of the Company. This right in no ways binds the Company to accept any offer from HudBay; iv. A mutual release in respect of any and all rights in connection with or arising from the Arrangement Agreement; and v. HudBay and the Company are bound by a reciprocal standstill covenant for a period of twelve months from the date of the termination agreement.

In addition, HudBay will continue to be bound by the terms of the subscription agreement under which HudBay acquired its holding in the Company. The terms include restrictions on voting and limiting the amount of shares that can be disposed of in any six month period.

g) The Company is a party to certain operating leases and contracts relating to office rent, office equipment and car leases. Future minimum payments under these agreements at December 31, 2008 are as follows:

2009$ 2,103 2010 1,315 2011 1,274 2012 980 2013 and thereafter 256

Total$ 5,928

- 38 - LUNDIN MINING CORPORATION Notes to consolidated financial statements For the years ended December 31, 2008 and 2007 (Tabular amounts in thousands of US dollars, except for share and per share amounts)

22. MANAGEMENT OF CAPITAL RISK

The Company’s objectives when managing its capital include ensuring a sufficient combination of positive operating cash flows and debt and equity financing in order to meet its ongoing capital development and exploration programs in a way that maximizes the shareholder return given the assumed risks of its operations while at the same time safeguarding the Company’s ability to continue as a going concern (Note 2). The Company considers the following items as capital: shareholders’ equity and long‐term debt.

Through the ongoing management of its capital, the Company will modify the structure of its capital based on changing economic conditions in the jurisdictions in which it operates. In doing so, the Company may issue new shares or debt, buyback issued shares or pay off any outstanding debt, or make changes to its portfolio of strategic investments. The Company’s current policy is to not pay out dividends but to reinvest its earnings in the business.

Annual budgeting is the primary tool used to manage the Company’s capital. Updates are made as necessary to both capital expenditure and operational budgets in order to adapt to changes in risk factors of proposed expenditure programs and market conditions within the mining industry.

At December 31, 2008, the Company was not in compliance with a financial covenant defined under its $575.0 million revolving credit facility agreement (Note 13a).

23. MANAGEMENT OF FINANCIAL RISK

The Company’s financial instruments are exposed to certain financial risks, including currency risk, price risk, credit risk, interest rate risk, and liquidity risk.

Currency Risk The Company is exposed to currency risk related to changes in rates of exchange between the US dollar and the local currencies of the Company’s principal operating subsidiaries. The Company’s revenues and certain debt are denominated in US dollars, while most of the Company’s operating and capital expenditures are denominated in the local currencies. A significant change in the currency exchange rates between the US dollar and foreign currencies could have an effect on the Company’s net income (loss) and on other comprehensive income.

As at December 31, 2008, the Company is exposed to currency risk through the following assets and liabilities denominated in US dollars but held by group companies that report in Euros, SEK and Canadian dollars:

US Dollar

Cash and cash equivalents$ 20,191 Other working capital items$ (3,436) AFS securities $ ‐ Long‐term debt$ (266,652)

- 39 - LUNDIN MINING CORPORATION Notes to consolidated financial statements For the years ended December 31, 2008 and 2007 (Tabular amounts in thousands of US dollars, except for share and per share amounts)

Price Risk The Company is subject to price risk associated with fluctuations in the market prices for metals. The Company may, at its election, use forward or derivative contracts to manage its exposure to changes in commodity prices, the use of which is subject to appropriate approval procedures. The Company is also subject to price risk on its derivatives profile and on the final settlement of its trade receivables. At December 31, 2008, there are no outstanding forward or derivative contracts.

The sensitivity of the Company’s financial instruments before considering the effect of increased metal prices on smelter treatment charges is as follows:

Price on Effect on December 31/08 pre‐tax earnings ($US/tonne) Change ($ millions) Copper 2,902 +10% 7.0 Zinc 1,121 +10% 2.6 Lead 949 +10% 0.9 Nickel 10,810 +10% 1.7

Concentration of Credit Risk The exposure to credit risk arises through the failure of a customer or another third party to meet its contractual obligations to the Company. The Company believes that its maximum exposure to credit risk as at December 31, 2008 is the carrying value of its trade receivables.

Concentrate produced at the Company’s Neves‐Corvo, Zinkgruvan and Galmoy mines are sold to a small number of strategic customers with whom the Company has established long‐term relationships. Limited amounts are occasionally sold to metals traders on an ad hoc basis. Production from the Aguablanca mine is sold to a trading company under a long term contract expiring in 2011. The payment terms vary and provisional payments are normally received within 2‐4 weeks of shipment, in accordance with industry practice, with final settlement up to four months following the date of shipment. Sales to metals traders are made on a cash up‐front basis. The failure of any of the Company’s strategic customers could have a material adverse effect on the Company’s financial position. For the year ended December 31, 2008, the Company derives approximately 60% of its revenue from three major customers.

Interest Rate Risk The Company’s exposure to interest rate risk arises both from the interest rate impact on its cash and cash equivalents as well as on its debt facilities. There is minimal risk that the Company would recognize any loss as a result of a decrease in the fair value of any short‐term investments included in cash and cash equivalents as they are generally held to maturity with large financial institutions. The Company does not own any asset‐backed commercial paper.

As at December 31, 2008, holding all other variables constant and considering the Company’s outstanding debt of $315.2 million, a 1% change in the interest rate would result in an approximate $3.2 million interest expense on an annualized basis.

- 40 - LUNDIN MINING CORPORATION Notes to consolidated financial statements For the years ended December 31, 2008 and 2007 (Tabular amounts in thousands of US dollars, except for share and per share amounts)

Liquidity Risk The Company currently has engaged in discussions to restructure the $575.0 million revolving credit facility (Note 13a). If the facility cannot be successfully restructured, the Company may have to sell assets or issue additional equity in order to meet its current and long term obligations.

24. SUPPLEMENTAL CASH FLOW INFORMATION

2008 2007 Changes in non‐cash working capital items consist of: Accounts receivable and other current assets$ 41,846 $ 1,091 Accounts payable and other current liabilities (92,495) (19,963) $ (50,649) $ (18,872)

Operating activities included the following cash payments Interest paid$ 11,464 $ 2,098 Income taxes paid$ 142,501 $ 82,981

25. SUBSEQUENT EVENTS

On January 23, 2009, the Company announced that its Galmoy zinc/lead/silver mine in Ireland is to permanently cease production in May 2009. The Company intends to wind down the operation in an orderly fashion and, following closure, remaining rehabilitation work will be completed. Closure costs have been provided for and the cash flow effect of this closure is not expected to have any material effect on the Company as restricted cash (carried as a long‐term asset and not included in the Company's reported net cash/debt) is held to cover rehabilitation obligations.

On February 5, 2009, the Company completed the sale of its wholly owned subsidiary Pirites Alentejanas SA. All regulatory approvals have been received and the Company has no further responsibility for the Aljustrel mine.

26. DIFFERENCES BETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES

The consolidated financial statements have been prepared in accordance with Canadian GAAP, which differ in certain material respects from those principles that the Company would have followed had its consolidated financial statements been prepared in accordance with United States (“US”) GAAP, including practices prescribed by the United States Securities and Exchange Commission (“SEC”). Set out below is a description of these material differences and the effect on these consolidated financial statements.

- 41 - LUNDIN MINING CORPORATION Notes to consolidated financial statements For the years ended December 31, 2008 and 2007 (Tabular amounts in thousands of US dollars, except for share and per share amounts)

Consolidated Balance Sheets 2008 2007

Total Assets under Canadian GAAP$ 3,704,502 $ 4,710,824 Equity investments (c)(d) 26,406 12,004 Mineral properties (a) ‐ (10,034) Future income taxes assets (d) 194 194 Total Assets under US GAAP$ 3,731,102 $ 4,712,988

Total Liabilities under Canadian GAAP$ 1,100,778 $ 1,169,018 Future income taxes (c) 3,634 1,546 Total Liabilities under US GAAP 1,104,412 1,170,564 Shareholders' Equity under Canadian GAAP 2,603,724 3,541,806 Future income tax expense (c)(d) (3,708) (1,620) Interest expense (c) 27,840 13,438 Equity loss on investments (c)(d) (1,434) (1,434) Deferred exploration, net of taxes (a) 268 (9,766) Shareholders' Equity under US GAAP 2,626,690 3,542,424 Total Liabilities and Shareholders' Equity under US GAAP$ 3,731,102 $ 4,712,988

- 42 - LUNDIN MINING CORPORATION Notes to consolidated financial statements For the years ended December 31, 2008 and 2007 (Tabular amounts in thousands of US dollars, except for share and per share amounts)

Consolidated Statements of Operations 2008 2007

Net earnings (loss) from continuing operations under Canadian GAAP$ (719,994) $ 304 Equity loss on investments (d) ‐ (1,434) Interest (c) 14,402 13,438 Deferred exploration (a) ‐ (6,927) Goodwill and asset impairment (a) 10,034 ‐ Future income taxes (c)(d) (2,088) (1,620) Net earnings (loss) from continuing operations under US GAAP$ (697,646) $ 3,761 Net loss from discontinued operations under US GAAP and Canadian GAAP (237,067) (154,461) Net loss from US GAAP$ (934,713) $ (150,700)

Basic and diluted loss per share Canadian GAAP$ (2.41) $ (0.46) US GAAP $ (2.36) $ (0.45) Basic and diluted earnings (loss) per share from continuing operations Canadian GAAP$ (1.82) $ 0.00 US GAAP $ (1.76) $ 0.01 Basic and diluted loss per share from discontinued operations US and Canadian GAAP$ (0.60) $ (0.46)

Basic and diluted weighted average number of shares outstanding 396,416,414 338,643,242

Statement of Comprehensive Income 2008 2007 Net loss under US GAAP$ (934,713) $ (150,700) Other comprehensive loss Changes in fair value of AFS securities, net of taxes (128,793) (23,626) Recognized loss on AFS securities, net of taxes (263) ‐ Impairment of AFS securities, net of taxes 143,222 ‐ Cumulative foreign currency translation adjustment (103,393) 239,330 Comprehensive income (loss) under US GAAP$ (1,023,940) $ 65,004

- 43 - LUNDIN MINING CORPORATION Notes to consolidated financial statements For the years ended December 31, 2008 and 2007 (Tabular amounts in thousands of US dollars, except for share and per share amounts)

Consolidated Statements of Cash Flows 2008 2007 Operating activities Operating activities under Canadian GAAP$ 215,029 $ 373,443 Interest (c) 19,519 13,438 Exploration expense (a) ‐ (6,927) Operating activities under US GAAP 234,548 379,954 Financing activities Financing activities under Canadian and US GAAP 332,454 86,853 Investing activities Investing activities under Canadian GAAP (484,293) (738,017) Interest (c) (19,519) (13,438) Deferred exploration (a) ‐ 6,927 Investing activities under US GAAP (503,812) (744,528) Effect of foreign exchange on cash balances (26,105) 8,758 Increase (decrease) in cash and cash equivalents under US GAAP 37,085 (268,963) Cash and cash equivalents, beginning of year under US GAAP 133,207 402,170 Cash and cash equivalents, discontinued operations (594) (2,161) Cash and cash equivalents, end of year under US GAAP$ 169,698 $ 131,046

(a) Under US GAAP and practices prescribed by the SEC, exploration expenditures relating to mineral properties, are generally considered unsupportable until determined to be economically viable, legally extractable and supported by a bankable feasibility study, are expensed as incurred. In addition, land use costs are expensed as incurred.

Under Canadian GAAP, exploration expenditures are capitalized once a determination has been made that a property has potential economically recoverable resources and there is a reasonable expectation that costs can be recovered by future exploitation or sale of the property. These costs may be deferred and amortized over the estimated life of the property following commencement of commercial production, or written‐off if the property is sold, allowed to lapse, abandoned or impaired. Exploration and evaluation expenditures made prior to a determination that a property has economically recoverable resources are written off as incurred.

During the year ended December 31, 2008, under Canadian GAAP, the Company has written down exploration expenditures that were capitalized in prior years. A US GAAP adjustment in the amount of $10.0 million (2007 ‐ $NIL) was made to long‐lived asset impairment as the write off of these capitalized expenditures under Canadian GAAP were previously expensed under US GAAP.

(b) Under US GAAP, investments in incorporated joint ventures are accounted for using the equity method. In accordance with a concession granted by the SEC, foreign private issuers may use the proportionate consolidation method for joint venture accounting if their financial statements are presented under Canadian GAAP.

(c) Under US GAAP, interest cost must be capitalized as part of the historical cost of acquiring assets that require a period of time to get them ready for intended use or while an equity investee has not commenced its - 44 - LUNDIN MINING CORPORATION Notes to consolidated financial statements For the years ended December 31, 2008 and 2007 (Tabular amounts in thousands of US dollars, except for share and per share amounts)

planned operations if the effect is material. Under Canadian GAAP, interest cost capitalization during the construction of capital assets or while an equity investee has not commenced its planned operations is acceptable but not mandatory. Under Canadian GAAP, the Company has not capitalized any interest cost.

Under US GAAP, during the year ended December 31, 2008, the Company would have capitalized interest of $19.5 million (2007 ‐ $13.4 million) in equity investments.

(d) Under US GAAP, if an investor purchases stock in an investee and is eventually able to exercise significant influence over the investee, the investor is required to retroactively apply equity accounting from the date any shares were initially acquired. Under Canadian GAAP, the investment is accounted for on the equity basis only from the date on which the investor is able to exercise significant influence. After making its initial investment in SRL (Note 8(b)(ii)) management determined that following changes in SRL management and the board of directors, the Company was able to exercise significant influence over SRL. Under US GAAP, the incremental equity loss for the year ended December 31, 2008 was $NIL (2007‐ $1.4 million), net of taxes.

(e) Effective January 1, 2007, the Company adopted the Financial Accounting Standards Board (“FASB”) Interpretation No. 48, Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109 ("FIN 48"). FIN 48 clarifies the accounting for income taxes by prescribing the minimum recognition threshold a tax position is required to meet before being recognized in the financial statements. FIN 48 also provides guidance on derecognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition. In addition, FIN 48 clearly scopes out income taxes from FASB Statement No. 5, Accounting for Contingencies. FIN 48 applies to all tax positions related to income taxes subject to FASB Statement No. 109, Accounting for Income Taxes. This includes tax positions considered to be "routine" as well as those with a high degree of uncertainty.

The provisions of FIN 48 prescribe a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The interpretation requires that the Company recognize the impact of a tax position in the financial statements if that position is more likely than not of being sustained on audit, based on the technical merits of the position. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods and disclosure. In accordance with the provisions of FIN 48, any cumulative effect resulting from the change in accounting principle is to be recorded as an adjustment to the opening balance of retained earnings (deficit). The adoption of FIN 48 did not materially impact the Company’s consolidated financial position or results of operations.

(f) Effective January 1, 2007, the Company adopted FSP No. AUG AIR‐1, “Accounting for Planned Major Maintenance Activities”. The FSP permits companies to account for planned major maintenance activities using; the direct expensing method, the built‐in overhaul method or the deferral method. The FSP was adopted on a retrospective basis. The Company has chosen the direct expensing method. The adoption of this standard did not have a material impact on the Company’s consolidated financial position or results of operations.

(g) Effective January 1, 2008, the Company adopted FASB Statement No. 157, Fair Value Measurements ("SFAS 157"). The Company also applied FSP FAS 157‐2, which allows for the delay of implementation of FAS No. 157 for certain nonfinancial assets and nonfinancial liabilities until its fiscal year beginning January 1, 2009. SFAS 157 provides enhanced guidance for using fair value to measure assets and liabilities and provides expanded disclosure about the extent to which companies measure their assets and liabilities at fair value, the information used to measure fair value, and the effect of fair value measurements on earnings. SFAS 157 applies whenever other standards require (or permit) assets or liabilities to be measured at fair value; however, it does not expand the use of fair value in any new circumstances. The adoption of this standard did not have a material impact on the Company’s consolidated financial position or results of operations. - 45 - LUNDIN MINING CORPORATION Notes to consolidated financial statements For the years ended December 31, 2008 and 2007 (Tabular amounts in thousands of US dollars, except for share and per share amounts)

(h) Effective January 1, 2008, the Company adopted, the FASB Statement No. 159 (FAS 159), The Fair Value Option for Financial Assets and Financial Liabilities. This statement expands the standards under FAS 157, Fair Value Measurement, to provide entities the one‐time election (Fair Value Option) to measure financial instruments and certain other items at fair value. The adoption of this standard did not have a material impact on the Company’s consolidated financial position or results of operations.

(i) Recent United States accounting pronouncements:

(i) In December 2007, FASB Statement No. 141(R), Business Combinations and No. 160, Non‐controlling Interests in Consolidated Financial Statements. SFAS 141(R) and 160 provide standards with respect to improving, simplifying and converging the prevailing FASB accounting and reporting standards for business combinations and non‐controlling interests in consolidated financial statements with International Accounting Standards Board (“IASB”) standards for business combinations with an acquisition date in the fiscal year beginning after December 15, 2008.

FASB 141 (R) requires an acquiring entity in a business combination to recognize all (and only) the assets acquired and liabilities assumed in the transaction; establishes the acquisition‐date fair value as the measurement objective for all assets acquired and liabilities assumed; and requires the acquirer to disclose to investors and other users all of the information they need to evaluate and understand the nature and financial effect of the business combination. FASB 160 requires all entities to report non‐ controlling (minority) interests in subsidiaries in the same way ‐ as equity in the consolidated financial statements.

(ii) In March 2008, FASB Statement No.161, “Disclosures about Derivative Instruments and Hedging Activities an amendment of FASB Statement 133”. SFAS 161 is effective for fiscal years and interim periods beginning after November 15, 2008. The adoption is not expected to have a material impact on the Company’s consolidated results of operations and financial position.

(iii) In May 2008, FASB Statement No.162, “The Hierarchy of Generally Accepted Accounting Principles” (SFAS 162). Under SFAS 162, the US GAAP hierarchy will now reside in the accounting literature established by the FASB. SFAS No. 162 identifies the sources of accounting principles and the framework for selecting the principles used in the preparation for the financial statements in conformity with US GAAP SFAS. The adoption of SFAS No 162 is not expected to have a material impact on the Company’s consolidated results of operations and financial position.

- 46 - Corporate Governance Report

Board of Directors The board of directors (the “Board”) is primarily responsible for supervising the management of the Company’s business and affairs. Its authority is determined by the provisions of the Canada Business Corporations Act and by the Company’s By‐laws. In addition, the Board’s activities are governed by a set of procedural rules which are adopted by the Board. The Board regularly reviews its guidelines and policies and, not less than annually, considers how its corporate governance practices align with guidelines established by the regulatory authorities having authority, including the Toronto Stock Exchange.

At the 2008 Annual and Special Meeting held on June 5, 2008 ten members were elected to the Company’s Board. At the Board’s meeting held on June 5, 2008 immediately following the annual and special meeting of shareholders, the directors appointed various senior officers including: Lukas H. Lundin as Chairman of the Board and Philip J. Wright as President and CEO, and also appointed William A. Rand as Lead Director.

Pursuant to the terms of the Termination Agreement between the Corporation and HudBay Minerals Inc. (“HudBay”) dated February 23, 2009, HudBay is entitled to designate one nominee for inclusion on the Company’s management slate of nominees for election to the Board of Directors, so long as HudBay beneficially owns or controls 10% or more of the outstanding common shares of the Corporation. At this time, HudBay has not to designated a nominee for election.

The Board meets as required to conduct its business, which includes the approval of the quarterly and annual audited financial statements of the Company. The Company’s Corporate Secretary, who also acts as external corporate counsel to the Company, attends at all meetings of the Board and most meetings of the Board’s Committees.

The Board’s Chairman, together with the Lead Director, is responsible for the management, development and effective performance of the Board, for monitoring the Company’s development through regular contact with the President and CEO, and for ensuring that the Board regularly receives reports concerning the development of the Company’s business and operations, including progress in respect of profits, liquidity and significant contractual matters.

At the June 5, 2008 Board meeting, the Board appointed certain directors to the Board’s four standing committees, each of which has its own charter and delegated responsibilities, as follows:

Audit Committee Human Resources and Corporate Governance Environment, Health, Safety Compensation Committee and Nominating and Community Committee Committee Dale C. Peniuk (Chair) Lukas H. Lundin (Chair) Brian D. Edgar (Chair) Colin K. Benner (Chair) William A. Rand Donald K. Charter John H. Craig Brian D. Edgar Donald K. Charter Anthony O’Reilly, Jr. Colin K. Benner Philip J. Wright David F. Mullen David F. Mullen Anthony O’Reilly, Jr.

Audit Committee The Audit Committee is comprised of three non‐executive Board members; namely: Dale C. Peniuk (Chair), Donald K. Charter and William A. Rand, each of whom is independent of the Company. The Audit Committee, which meets a minimum of four times per year, oversees the Company’s accounting and financial reporting processes, systems of internal controls and the audits of the Company’s financial statements and reviews the Company’s quarterly and annual financial statements.

Human Resources/Compensation Committee The Human Resources/Compensation Committee is comprised of four Board members, three of whom are non‐ executive Board members. The Human Resources/Compensation Committee is responsible for administering the Company’s executive compensation program, and meets not less than annually to receive information concerning, and to determine matters relating to, executive compensation. Corporate Governance and Nominating Committee The Corporate Governance and Nominating Committee is comprised of four non‐executive Board members and assists the Board in identifying qualified individuals for Board membership, develops and implements corporate governance guidelines, and reports annually to the Company’s shareholders on the Company’s system of corporate governance.

Environment, Safety, Health and Community Committee This Committee is comprised of four Board members, three of whom are non‐executive Board members, and assists the Board in the development and implementation of the Company’s environmental policies and the activities of the Corporation as they relate to the health and safety of the Company’s employees and community.

Composition of the Board of Directors (including meeting attendance)

Below are the names of the current members of the Board of Directors and the attendance record of each director for all Board and Committee meetings held during the period from January 1, 2008 and December 31, 2008:

Board Committees Corporate Health, Safety, Human Resources/ Board Audit Governance/ Environment and Compensation Nominating Community

# of Total # of # of Total # of # of Total # of # of Total # of # of Total # of meetings meetings meetings meetings meetings meetings meetings meetings meetings meetings Directors attended (1) attended (1) attended (1) attended (1) attended (1) Lukas H. Lundin 19 20 ‐ ‐ 3 3 ‐ ‐ ‐ ‐ Philip J. Wright 16 19 ‐‐‐‐‐‐ 0 1 Colin K. Benner (2) 16 16 ‐ ‐ ‐ ‐ 6 6 1 2 Donald K. Charter (2) 14 16 8 8 3 3 ‐ ‐ ‐ ‐ John H. Craig (2) 16 16 ‐ ‐ ‐ ‐ 6 6 ‐ ‐ Brian D. Edgar 20 20 ‐ ‐ ‐ ‐ 6 6 2 2 Anthony O’Reilly Jr. 18 20 ‐ ‐ 3 3 ‐ ‐ 1 2 David F. Mullen 19 20 ‐ ‐ 3 3 6 6 ‐ ‐ Dale C. Peniuk 19 20 10 10 ‐‐‐‐ ‐‐ William A. Rand 20 20 10 10 ‐‐‐‐ ‐‐ Notes: (1) Represents number of meetings the Director was eligible to attend. (2) Messrs. Benner and Charter were also directors of HudBay Minerals Ltd. and as such, had to recuse themselves from Board meetings where the proposed merger with HudBay Minerals Ltd. was considered. Mr. Craig, whose firm acted as counsel to HudBay Minerals Ltd., also had to recuse himself from Board meetings where the proposed merger was considered.

Auditors PricewaterhouseCoopers LLP has been the Corporation’s auditors since November 2006.

This Corporate Governance Report has not been subject to review by the Company’s auditors.

Annual Report Supplementary Information (amounts in US dollars, unless otherwise indicated)

Significant differences between Canadian Generally Accepted Accounting Principles (“Canadian GAAP”) and International Financial Reporting Standards (“IFRS”).

The shares of Lundin Mining trade on the Toronto Stock Exchange and Lundin Mining’s Swedish Depository Receipts trade on the OMX Nordic Exchange (“OMX”) in Stockholm. Most companies that trade on the OMX are required to report according to IFRS. However, as a Canadian company, Lundin Mining is required to report according to Canadian GAAP. The Company has reviewed the differences between Canadian GAAP and IFRS and has identified the following items which would or may have a significant impact on the financial statements of Lundin Mining.

Under IFRS 3, future costs such as restructuring charges, which are expected to occur subsequent to an acquisition, should not be provided for in the purchase price allocation. Instead, these costs should be realized in the income statement when the costs actually occur. However, under Canadian GAAP, restructuring costs that are expected to occur as a result of an acquisition should be provided for in the purchase price allocation. Restructuring costs that arose during 2007, as a result of the acquisition of Rio Narcea, in the amount of $3 million, were provided for in the purchase price allocation.

According to Canadian GAAP, impairment tests for assets should be carried out by comparing the future cash flows of the assets to their carrying values. Future cash flows are dependent on a number of assumptions, including, among other things, future metal prices, exchange rates and discount rates.

Under Canadian GAAP, when an asset is acquired other than in a business combination and the tax value is less than cost, the related future income tax liability is recognized on acquisition and added to the asset carrying value. Accordingly, under Canadian GAAP, the Company recognized future income tax liabilities of $33 million and $5 million on the Ozernoe and Tenke acquisitions. Under IAS 12, temporary tax differences on an asset purchase are not recognized.

Under Canadian GAAP, a two step process is used to determine impairment of long‐lived assets. The first step, using undiscounted cash flows, is undertaken to determine if impairment exists. If the carrying values exceed the undiscounted cash flows, the second step measures the impairment using discounted cash flows. Under IAS 36, the test for impairment is not a two step process and impairment tests are undertaken using discounted cash flows only. This analysis may result in differing outcomes. The Company recorded impairment charges of $904.3 million (excluding discontinued operations) and $350.0 million for the years ended December 31, 2008 and 2007, respectively.

Adoption of annual report

The annual report was approved by the Board of Directors on April 20, 2009. Compensation to Directors and Management

Remuneration and other compensation of Board of Directors

As resolved by the Board of Directors, the Chairman of the Board receives annual remuneration in the amount of C$200,000 (paid in monthly instalments). Each non‐executive director receives annual remuneration of C$75,000 (paid in monthly instalments) but does not receive any stock options. Non executive Board members who are also members of a Board Committee receive C$1,000 per meeting. The Chairman of the Audit Committee also receives annual remuneration of C$10,000 and the Chairman of each of the other Board Committees receives annual remuneration of C$5,000. All expenses incurred by Directors in respect of their duties are reimbursed by the Company.

No separate remuneration is paid to the President and CEO in his capacity as a Director of the Board.

Remuneration of Management

It is the responsibility of the Board of Directors to review and approve compensation policies and schemes for the Company, as recommended by the Human Resources/Compensation Committee.

The Company’s priority is to ensure that remuneration packages are sufficiently attractive to recruit, retain and motivate high performing individuals who will be instrumental in helping the Company to achieve its potential. However, the Company also recognizes that this has to be balanced with a sense of fairness, with total reward closely linked to the achievement of superior performance at both corporate and individual levels. A further important principle is that while good performance should be recognized, poor performance must be managed, not tolerated or ignored.

Executive pay packages are determined on a Total Employment Cost (“TEC”) basis and include an appropriate balance of base salary, benefits and at risk remuneration (in the form of short‐term and long‐term incentives). They are set within the context of the relevant industrial and geographic norms that the Company operates within, at a level which will make the organization competitive in its chosen mining and mineral exploration markets. Ultimately, performance based reward has to be underpinned by the Company’s ability to pay. In 2008, there have been many examples of superior and exceptional performance at personal and business level over the course of the year, within a context of unprecedented and highly challenging external market conditions in the final quarter. The board has taken the unusual step of deferring a final decision on the payment of 2008 performance related rewards for executive staff until after the Company’s financial restructuring process is complete.

During 2008, the Company’s management consisted of the President and CEO, Philip J. Wright, and the following "Other Executives": João Carrêlo (Chief Operating Officer), Ted Mayers (Chief Financial Officer), Anders Haker (former Chief Financial Officer), Paul K. Conibear (Senior VP, Projects), Neil O’Brien (Senior VP, Exploration and Business Development), Mikael Schauman (VP, Marketing), Wojtek Wodzicki (VP, Strategic Partnerships), Peter Nicoll (VP, Health, Safety, Environment and Community) and Marie Inkster (VP, Finance).

Human Resources/Compensation Committee

The Human Resources/Compensation Committee (the “HRCC”) consists of four directors, a majority of whom are independent: Messrs. Lukas H. Lundin (Chair), Donald K. Charter, David F. Mullen and Anthony O’Reilly Jr. Because Mr. Lundin, who is Chairman of the Board of Directors, is not an independent director, he abstains from any discussions or voting in respect of matters that have a direct impact on him, including decisions relating to the compensation he receives as Chairman of the Board of Directors. The Board has adopted a formal written mandate for the HRCC.

The principal purpose of the HRCC is to implement and oversee human resources and compensation policies approved by the Board of Directors of the Company. The duties and responsibilities of the committee include, without limitation, the following:

(a) to recommend to the Board human resources and compensation policies and guidelines for application to the Company; (b) to ensure that the Company has in place programs to attract and develop management of the highest calibre and a process to provide for the orderly succession of management; (c) to review and approve corporate goals and objectives relevant to the compensation of the Chief Executive Officer and, in light of those goals and objectives, to recommend to the Board the annual salary, bonus and other benefits, direct and indirect, of the Chief Executive Officer and to approve compensation for all other designated officers of the Company, after considering the recommendations of the Chief Executive Officer, all within the human resources and compensation policies and guidelines approved by the Board.

The HRCC meets regularly each year on such dates and at such locations as the Chair of the committee determines. The committee has access to such officers and employees of the Company and to such information respecting the Company and may engage independent counsel or advisors at the expense of the Company, all as it considers to be necessary or advisable in order to perform its duties and responsibilities.

Severance pay

An Executive Employment Agreement with Mr. Philip J. Wright was made as of 16th January 2008 and subsequently amended by further agreement to allow for the secondment of Mr. Wright to the UK subsidiary (collectively, “Employment Agreements”). The amendment was made in order to better serve the Corporation’s global operations by having Mr. Wright spend more time in Europe, while still retaining his executive responsibilities in Canada. Under the Employment Agreements, Mr. Wright agreed to serve the Corporation as President and Chief Executive Officer for an initial term of 2 years with the option to extend beyond that for a further 1 or 2 years (first year extension: Corporation’s option; second year extension: has to be agreed by both the Corporation and Mr. Wright).

Under the terms of his employment agreement, Mr. Philip J. Wright, is entitled to payment of salary to the date he ceases work, repatriation to Australia and an additional payment relevant to the term of his contract. This additional payment is calculated as an after‐tax payment, net of any gains under the Corporation’s short‐term and long‐term incentive plans. For the initial 2‐year term of his contract, the maximum additional payment payable to Mr. Wright is C$3,000,000 in total, before offset of any incentives and net of relevant taxes.

Retirement Benefits

In the year ended December 31, 2008, the Company provided retirement or pension benefits for the President and CEO and Other Executives in a manner which was appropriate to their personal contractual arrangements in the country in which they were based for employment purposes. For the Other Executives employed by the Company in Canada, a retirement savings plan was in place, to which the Company contributed 6% of salary, up to a maximum of C$20,000 per annum (or US$18,745). In Sweden, the Company contributed to the premium for occupational pension insurance. The Company’s annual contribution was capped at SEK360,000 and was paid throughout the year. In both country arrangements, the pension benefit covers old age pension, survivor’s pension and long‐term disability.

Mr. Carrêlo, who is employed in the UK, is not yet covered by any company‐provided pension benefit. A new contributory retirement savings plan scheme is being put in place.

Remuneration and other benefits earned during the year

Base remuneration/ Variable Other Financial Base Salary Salary Benefits Instruments Total

Chairman of the Board $ 196,364 $ ‐ $ ‐ $ ‐ $ 196,364

Other Board members 723,127 ‐ 31,129 ‐ 754,255

President and CEO 523,134 ‐ 13,358 2,260,695 2,797,187

Other Executives 2,268,296 ‐ 1,191,362 2,140,184 5,599,842 (nine individuals)

Total $3,710,921 $ ‐ $1,235,848 $4,400,880 $9,347,648

Comments on the table: • Variable Salary relates to incentive awards in respect of current year’s performance. The Board has deferred a final decision on the payment of 2008 performance related rewards for executives until after the Company’s financial restructuring process is complete. • Other Benefits shown as paid to Other Board Members relates to continuation of benefits received by one individual as part of his termination agreement as former President and CEO of the Company. • Other Benefits shown as paid to Other Executives includes $1.0 million paid to Mr. Haker upon termination of his employment on December 31, 2008 • In addition to the remuneration and other benefits shown above, $2.1 million was paid to Mr. Karl‐Axel Waplan, former President and CEO, upon termination of his employment on January 15, 2008. • Financial Instruments in the table above refers to the stock option benefits granted in 2008. For further information on the valuation of the stock options, see below.

Allocated incentive stock options

During 2008, the President and CEO and eight Other Executives were granted stock options.

As a result of the rapid growth of the Company in a short period of time, and the numerous mergers and acquisitions completed, the Company had an ad‐hoc approach to the granting of options. In addition, the past practice of large grants from time to time was not reflective of the cyclical nature of the commodity markets. Accordingly, the HRCC determined it was appropriate to revisit the policy on the granting of options. In 2008, the HRCC introduced a new structured methodology for awarding share option grants to senior executives to replace past practice. A level of option benefit for each position was determined but is to be granted on a basis that allows for future annual grants to reflect market price over time. This involved developing a rolling cycle of grant levels, coupled with a rolling 3‐year vesting following grant, which would, over a number of years, have the potential to maintain appropriate levels that are market competitive with similar organizations. A first grant under this new methodology was made in September 2008 to executives and managers who were judged to have the ability to influence aspects of the Company’s performance. These option awards were made in 3 equal tranches (2009, 2010 and 2011) with expiry dates in 3, 4, and 5 years, respectively

The fair value of the options issued under the incentive scheme program has been calculated in accordance with the Black‐Sholes options valuation model. Based on an analysis of the historic volatility for the Company’s and comparable companies’ market value, the expected volatility during the duration of the options has been estimated to be between 47‐69% based on the time of the grant. The terms for the option plan are stated in note 19(b) to the audited financial statements for the year ended December 31, 2008.

Previous Year Current year Value/Benefit Value/Benefit Number (C$) Number (C$)

Chairman of the Board ‐ $ ‐ ‐ $ ‐

Other Board members ‐ ‐ ‐ ‐

President and CEO (1) (2) ‐ ‐ 1,200,000 2,412,000

Other Executives (five/eight individuals) (3) 1,290,000 5,091,120 1,415,000 2,283,422

1,290,000 $5,091,120 2,615,000 $4,695,422 Notes: (1) Pursuant to his employment agreement, Mr. Phil Wright was granted 600,000 options at an exercise price of C$6.62 which were fully vested. Upon the adoption of the new option grant policy discussed under ‘Long‐ Term Incentives’, Mr. Wright received options under this plan on the same basis as all executives. Subsequent to the recently‐completed year end, Mr. Wright voluntarily relinquished the previously granted options. (2) Does not include 390,000 options granted to Mr. Karl‐Axel Waplan in September 2007, with an exercise price of C$12.74, a five year expiry and value of C$1,663,740. (3) Three Other Executives were granted options in 2008 under the plan with a three year expiry and therefore 325,000 of the 2,615,000 expire in 2011.

Corporate Directory (As at April 20, 2009) Officers Lukas H. Lundin, Chairman Philip J. Wright, President and Chief Executive Officer Ted Mayers, Chief Financial Officer João Carrêlo, Executive Vice President and Chief Operating Officer Neil O'Brien, Senior Vice President, Exploration and Business Development Peter Nicoll, Vice President Health, Safety, Environment and Community Mikael Schauman, Vice President, Marketing Josephine McCabe, Vice President, Human Resources Paul K. Conibear, Senior Vice, President Projects Marie Inkster, Vice President, Finance Kevin E. Hisko, Corporate Secretary

Directors Lukas H. Lundin Colin K. Benner Brian D. Edgar Dale C. Peniuk* David F. Mullen Donald K. Charter* Philip J. Wright John H. Craig William A. Rand* Anthony O'Reilly Jr. * Members of the Audit Committee

Auditors PricewaterhouseCoopers LLP, Toronto, ON, Canada

Registrar and Transfer Agent Computershare Investor Services Inc., Vancouver, BC, Canada and Toronto, ON Canada

Share Listings Toronto Stock Exchange ("LUN") OMX Nordic Exchange ("LUMI")

Corporate Head Office Operations Head Office Lundin Mining Corporation Lundin Mining AB 150 King Street West, Suite 1500 Haywards Heath P.O. Box 38 70 Oathall Road Toronto, Ontario West Sussex Canada M5H 1J9 United Kingdom RH16 3EN Telephone: +1‐416‐342‐5560 Telephone: +44 1444 411 900 Fax: +1‐416‐348‐0303 Fax: +44 1444 456 901