Exhibit 99.3

Management's Report

The accompanying consolidated financial statements of Lundin
Mining Corporation and its subsidiaries, and all information in the annual
report 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.

In fulfilling their responsibilities, management of the
Company and its subsidiaries has developed and continue to maintain systems of
internal accounting controls that are appropriate in the circumstances. Although
no cost effective system of internal controls will prevent or detect all errors
and irregularities, these systems are designed to provide reasonable assurance
that assets are safeguarded from loss or unauthorized use, transactions are
properly recorded and the financial records are reliable for preparing 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 management and 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) Colin
    K. Benner                  | (Signed) Anders
    Haker
|--------------------------------------------- | -------------------------
|                                              |                          
|Colin K. Benner                               | Anders Haker             
|Vice-Chairman and Chief
    Executive Officer | Chief Financial Officer  
|                                              |                          
|Vancouver, BC, Canada                         |                          
|March 31, 2007                                |                          

---

Auditors' ReportTo the Shareholders of Lundin Mining CorporationWe have audited the consolidated balance sheet of Lundin
Mining Corporation as at December 31, 2006 and the consolidated statements of
operations, shareholders' equity and cash flows for the year ended December 31,
2006. 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 audit.
We conducted our audit in accordance with Canadian generally
accepted auditing standards. Those standards require that we plan and perform an
audit to obtain reasonable assurance whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation.In our opinion, these financial statements present fairly, in
all material respects, the financial position of the Company as at December 31,
2006 and the results of its operations and its cash flows for the year ended
December 31, 2006 in accordance with Canadian generally accepted accounting
principles.
The consolidated financial statements as at December 31,
2005, and for the year then ended, prior to the restatement for US GAAP (as
described in Note 20) and the change in identified operating segments (as
described in Note 17) were audited by other auditors who expressed an opinion
without reservation on those statements in their report dated February 14, 2006
(except as to Note 9 which is as of March 1, 2006 and Note 20 which is as of
October 12, 2006). We have audited the restatements in the December 31, 2005
consolidated financial statements and in our opinion, such adjustments, in all
material respects, are appropriate and have been properly applied.(Signed) PricewaterhouseCoopers LLPChartered AccountantsVancouver, BC, Canada 
March 31, 2007

Comments by Auditors for U.S. Readers on Canada  U.S. Reporting Difference

In the United States, reporting standards for auditors
require the addition of an explanatory paragraph (following the opinion
paragraph) when there is a change in accounting principles that has a material
effect on the comparability of the Company's financial statements, such as a
restatement as described in Note 20 to the financial statements. Our report to
the shareholders dated March 31, 2007, is expressed in accordance with the
Canadian reporting standards which do not require a reference to such a change
in accounting principles or a restatement in the auditors' report when they are
properly accounted for and adequately disclosed in the financial statements.

(Signed) PricewaterhouseCoopers LLP

Chartered AccountantsVancouver, BC, Canada 
March 31, 2007



---



|Lundin Mining Corporation                                         |   |           |   |         
|----------------------------------------------------------------- | - | --------- | - | --------
|CONSOLIDATED BALANCE SHEETS                                       |   |           |   |         
|As at December 31, 2006 and
    2005                              |   |           |   |         
|(in thousands of US dollars)                                      |   |           |   |         
|                                                                  |   | 2006      |   | 2005    
|ASSETS                                                            |   |           |   |         
|Current                                                           |   |           |   |         
|Cash and cash equivalents                                         | $ | 402,170   | $ | 74,409  
|Accounts receivable                                               |   | 96,435    |   | 20,231  
|Inventories - Note 6                                              |   | 24,723    |   | 9,609   
|Prepaid expenses                                                  |   | 3,125     |   | 1,340   
|                                                                  |   |           |   |         
|                                                                  |   | 526,453   |   | 105,589 
|Long-term receivables                                             |   | 971       |   | 589     
|Reclamation fund                                                  |   | 31,710    |   | 4,532   
|Investments - Note 5                                              |   | 25,882    |   | 3,349   
|Mineral properties, plant and
    equipment - Notes 4 and 7       |   | 1,710,041 |   | 288,217 
|Deferred financing costs and
    other assets                     |   | 4,835     |   | 1,785   
|Future income tax assets -
    Note 13                            |   | 12,149    |   | 2,753   
|Goodwill - Note 4                                                 |   | 517,559   |   | -       
|                                                                  | $ | 2,829,600 | $ | 406,814 
|                                                                  |   |           |   |         
|LIABILITIES                                                       |   |           |   |         
|Current                                                           |   |           |   |         
|Accounts payables                                                 | $ | 41,845    | $ | 10,453  
|Accrued liabilities - Note 15                                     |   | 104,923   |   | 15,369  
|Income taxes payable                                              |   | 80,530    |   | 13,434  
|Current portion of long term debt and capital
    leases - Note 8 |   | 3,284     |   | -       
|Current portion of deferred revenue - Note 9                      |   | 3,264     |   | 2,509   
|                                                                  |   | 233,846   |   | 41,765  
|Long-term debt and capital
    leases - Note 8                    |   | 42,851    |   | 1,547   
|Deferred revenue - Note 9                                         |   | 61,066    |   | 55,667  
|Provision for pension
    obligations - Note 10                   |   | 15,470    |   | 12,111  
|Asset retirement obligations and other
    provisions - Note 11   |   | 95,867    |   | 16,093  
|Future income tax liabilities - Note 13                           |   | 250,732   |   | 34,488  
|Non-controlling interest                                          |   | -         |   | 627     
|                                                                  |   | 699,832   |   | 162,298 
|                                                                  |   |           |   |         
|SHAREHOLDERS' EQUITY                                              |   |           |   |         
|Share capital - Note 12                                           |   | 1,890,275 |   | 243,305 
|Contributed surplus                                               |   | 8,887     |   | 1,357   
|Cumulative translation
    adjustments                            |   | 52,404    |   | (25,399)
|Retained earnings                                                 |   | 178,202   |   | 25,253  
|                                                                  |   | 2,129,768 |   | 244,516 
|                                                                  |   |           |   |         
|                                                                  | $ | 2,829,600 | $ | 406,814 

|                                                                |            
|--------------------------------------------------------------- | -----------
|Commitments and
    Contingencies - Note 19                     |            
|APPROVED BY
    THE BOARD                                       |            
|                                                                |            
|(Signed) Lukas H. Lundin                                        |            
|Lukas H. Lundin                                                 | Dale Peniuk
|                                                                |            
|See accompanying
    notes to consolidated financial statements

---



|Lundin Mining Corporation                                                 |   |             |   |            
|------------------------------------------------------------------------- | - | ----------- | - | -----------
|CONSOLIDATED
    STATEMENTS OF OPERATIONS                                 |   |             |   |            
|For the years ended
    December 31, 2006 and 2005                        |   |             |   |            
|(in
    thousands of US dollars, except for shares and per share amounts) |   |            
|                                                                          |   |             |   |            
|                                                                          |   | 2006        |   | 2005       
|                                                                          |   |             |   |            
|Sales                                                                     | $ | 539,729     | $ | 192,073    
|Cost of sales                                                             |   | (219,088)   |   | (98,710)   
|Accretion of asset
    retirement obligations                             |   | (1,284)     |   | -          
|Depreciation, depletion and
    amortization                              |   | (74,991)    |   | (51,999)   
|                                                                          |   | 244,366     |   | 41,364     
|                                                                          |   |             |   |            
|Expenses                                                                  |   |             |   |            
|General exploration and project investigation                             |   | (9,857)     |   | (7,146)    
|Selling, general and administration                                       |   | (17,051)    |   | (9,773)    
|Stock-based compensation - Note 12(b)                                     |   | (2,381)     |   | (1,090)    
|Foreign exchange gains (losses)                                           |   | (16,907)    |   | 4,041      
|Gains (losses) on derivative instruments                                  |   | 420         |   | (2,095)    
|Interest and other income and expenses                                    |   | 8,321       |   | 1,465      
|Interest and bank charges                                                 |   | (1,646)     |   | (511)      
|                                                                          |   | (39,101)    |   | (15,109)   
|                                                                          |   |             |   |            
|Earnings before
    undernoted items                                      |   | 205,265     |   | 26,255     
|Gain on sale of
    investments                                           |   | 9           |   | 17,810     
|Non-controlling interest                                                  |   | (183)       |   | (811)      
|Earnings before income taxes                                              |   | 205,091     |   | 43,254     
|Current income taxes                                                      |   | (50,291)    |   | (14,060)   
|Future income tax (expense) recovery                                      |   | (1,851)     |   | 769        
|Net earnings for the year                                                 | $ | 152,949     | $ | 29,963     
|                                                                          |   |             |   |            
|Basic earnings per
    share                                              | $ | 1.02        | $ | 0.26       
|Diluted earnings per
    share - Note 12(c)                               | $ | 1.01        | $ | 0.26       
|                                                                          |   |             |   |            
|Basic weighted average
    number of shares outstanding                   |   | 149,439,546 |   | 115,249,458
|Diluted weighted
    average number of shares outstanding                 |   | 151,152,105 |   | 115,975,563
|                                                                          |   |             |   |            
|See accompanying notes to consolidated financial statements              

---



|Lundin Mining Corporation                                     
|--------------------------------------------------------------
|CONSOLIDATED STATEMENTS OF CHANGES
    IN SHAREHOLDERS' EQUITY
|(in thousands of US dollars,
    except for number of shares) 

|                                       |             |   |           |   |             |   | Cumulative  |   |          |   |          
|-------------------------------------- | ----------- | - | --------- | - | ----------- | - | ----------- | - | -------- | - | ---------
|                                       | Number of   |   | Share     |   | Contributed |   | Translation |   | Retained |   |          
|                                       | Shares      |   | Capital   |   | Surplus     |   | Adjustments |   | Earnings |   | Total    
|                                       |             |   |           |   |             |   |             |   |          |   |          
|Balance,
    December 31, 2004         | 100,257,813 | $ | 170,278   | $ | 855         | $ | (75)        | $ | (4,710)  | $ | 166,348  
|Exercise
    of stock options          | 810,000     |   | 1,365     |   | -           |   | -           |   | -        |   | 1,365    
|Transfer
    of contributed surplus on |             |   |           |   |             |   |             |   |          |   |          
|exercise
    of stock options          | -           |   | 588       |   | (588)       |   | -           |   | -        |   | -        
|Shares
    issued for acquisitions     | 21,013,680  |   | 71,074    |   | -           |   | -           |   | -        |   | 71,074   
|Stock-based compensation               | -           |   | -         |   | 1,090       |   | -           |   | -        |   | 1,090    
|Net
    earnings for the year          | -           |   |           |   | -           |   | -           |   | 29,963   |   | 29,963   
|Effects of
    foreign currency        |             |   |           |   |             |   |             |   |          |   |          
|translation                            | -           |   |           |   | -           |   | (25,324)    |   | -        |   | (25,324) 
|                                       |             |   |           |   |             |   |             |   |          |   |          
|Balance,
    December 31, 2005         | 122,081,493 |   | 243,305   |   | 1,357       |   | (25,399)    |   | 25,253   |   | 244,516  
|Exercise
    of stock options          | 1,643,784   |   | 6,320     |   | -           |   | -           |   | -        |   | 6,320    
|Exercise
    of stock appreciation     |             |   |           |   |             |   |             |   |          |   |          
|rights                                 | 240,240     |   | 1,824     |   | -           |   | -           |   | -        |   | 1,824    
|Transfer
    of contributed surplus on |             |   |           |   |             |   |             |   |          |   |          
|exercise
    of stock options          | -           |   | 6,088     |   | (6,088)     |   | -           |   | -        |   | -        
|Shares
    issued and options          |             |   |           |   |             |   |             |   |          |   |          
|granted
    for EuroZinc acquisition   | 160,834,548 |   | 1,632,738 |   | 12,127      |   | -           |   | -        |   | 1,644,865
|Stock-based compensation               | -           |   | -         |   | 1,491       |   | -           |   | -        |   | 1,491    
|Net
    earnings for the year          | -           |   | -         |   | -           |   | -           |   | 152,949  |   | 152,949  
|Effects of
    foreign currency        |             |   |           |   |             |   |             |   |          |   |          
|translation                            | -           |   | -         |   | -           |   | 77,803      |   | -        |   | 77,803   
|                                       |             |   |           |   |             |   |             |   |          |   |          
|Balance, December 31, 2006             | 284,800,065 | $ | 1,890,275 | $ | 8,887       | $ | 52,404      | $ | 178,202  | $ | 2,129,768
|                                       |             |   |           |   |             |   |             |   |          |   |          
|                                       |             |   |           |   |             |   |             |   |          |   |          

|See accompanying notes to consolidated financial statements
|-----------------------------------------------------------

---



|Lundin Mining Corporation                                            |   |           |   |         
|-------------------------------------------------------------------- | - | --------- | - | --------
|CONSOLIDATED
    STATEMENTS OF CASH FLOWS                            |   |           |   |         
|For the years ended
    December 31, 2006 and 2005                   |   |           |   |         
|(in thousands of US
    dollars)                                     |   |           |   |         
|                                                                     |   | 2006      |   | 2005    
|                                                                     |   |           |   |         
|Operating
    activities                                             |   |           |   |         
|Net earnings for the
    year                                        | $ | 152,949   | $ | 29,963  
|Items not involving
    cash                                         |   |           |   |         
|Amortization of deferred revenue                                     |   | (3,093)   |   | (3,083) 
|Depreciation, depletion and amortization                             |   | 74,991    |   | 51,999  
|Stock-based compensation                                             |   | 2,381     |   | 1,090   
|Gain on sale of assets                                               |   | (9)       |   | (17,810)
|Future income tax expense (recovery)                                 |   | 1,851     |   | (769)   
|Non-controlling interest                                             |   | 183       |   | 811     
|Provision for pensions                                               |   | 1,333     |   | 91      
|Interest accretion and other                                         |   | 835       |   | -       
|Unrealized loss (gain) on derivative instruments                     |   | (26,354)  |   | 1,941   
|Unrealized foreign exchange losses                                   |   | 11,351    |   | -       
|                                                                     |   | 216,418   |   | 64,233  
|Changes in non-cash working capital
    items - Note 16              |   | 30,803    |   | 2,432   
|Cash flow from operating activities                                  |   | 247,221   |   | 66,665  
|                                                                     |   |           |   |         
|Financing
    activities                                             |   |           |   |         
|Common shares issued                                                 |   | 6,320     |   | 1,365   
|Proceeds from loans and other long-term
    obligations              |   | 1,068     |   | 23,018  
|Repayment of debt                                                    |   | (3,504)   |   | (40,514)
|                                                                     |   | 3,884     |   | (16,131)
|                                                                     |   |           |   |         
|Investing
    activities                                             |   |           |   |         
|Acquisition of net assets of subsidiaries, net of
    cash           |   | -         |   | (70,849)
|Acquistion of cash of subsidiary, net of
    acquisition costs       |   | 234,284   |   | -       
|Mineral property, plant and equipment
    expenditures               |   | (151,349) |   | (17,957)
|Investments                                                          |   | (20,696)  |   | (4,294) 
|Proceeds from sale of investments and other
    assets               |   | 1,599     |   | 37,080  
|                                                                     |   | 63,838    |   | (56,020)
|                                                                     |   |           |   |         
|Effect of foreign
    exchange on cash balances                      |   | 12,818    |   | (6,785) 
|                                                                     |   |           |   |         
|Increase (decrease) in
    cash and cash equivalents during the year |   | 327,761   |   | (12,271)
|Cash and cash equivalents, beginning
    of year                     |   | 74,409    |   | 86,680  
|Cash and cash equivalents, end of year                               | $ | 402,170   | $ | 74,409  
|                                                                     |   |           |   |         
|Supplemental cash
    flow information - Note 16                     |   |           |   |         
|                                                                     |   |           |   |         
|See accompanying notes to consolidated financial statements         

---



|LUNDIN MINING CORPORATION                                                                              |       
|------------------------------------------------------------------------------------------------------ | ------
|Notes to consolidated
    financial statements                                                         |       
|For the years ended
    December 31, 2006 and 2005                                                     |       
|(Tabular amounts are in thousands of
    US dollars, except for price per share and per share amounts) | Page 1

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, Sweden and Ireland. The Company's major products
are copper and zinc.

The main assets of the Company are 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 and the Galmoy
zinc/lead mine in Ireland. The Company also owns the Storliden zinc/copper mine
in the Skellefte District of northern Sweden, the Aljustrel zinc mine under
development in Portugal, and is a 49% joint venture partner with IFC Metropol ("Metropol")
in the Ozernoe zinc/lead project in Russia. The Company holds exploration
permits covering substantial areas in Portugal, Sweden and Ireland and strategic
investments in companies with advance stage projects.

2. SIGNIFICANT ACCOUNTING POLICIES

The consolidated financial statements have been prepared in accordance with
accounting principles generally accepted in Canada that require management to
make assumptions and estimates that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities as at the date
of the financial statements and reported amounts of revenues and expenses during
the reporting period.

Significant estimates used in the preparation of these consolidated financial
statements include, amongst other things, the final revenue settlements to be
received, ore reserve determinations, estimated net realizable value of
inventories, contingent liabilities, tax provisions and future income tax
balances, expected economic lives of plant and equipment, anticipated costs of
asset retirement obligations including the reclamation of mine sites and the
provision for pensions, valuation of options derivative instruments and their
respective fair values and the assessment of impairment in value of long lived
assets, intangibles and goodwill. Actual results could differ from these
estimates. Significant differences from United States generally accepted
accounting principles are disclosed in Note 20.

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

(a)    Basis of
consolidation

The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiaries. Significant inter-company balances and
transactions have been eliminated on consolidation. Investments over which the
Company has the ability to exercise significant influence are accounted for by
the equity method. Under this method, the Company includes in its consolidated
statements of operations its share of the net earnings or losses of equity
investments. Other investments not subject to significant influence are
accounted for at cost. Activities conducted through a joint venture are
accounted for using the proportionate consolidation method.

(b)   Translation of
foreign currencies

The accounts of self-sustaining foreign operations are translated at year-end
exchange rates, and revenues and expenses are translated at the average exchange
rates. Differences arising from these foreign currency translations are recorded
in shareholders' equity as a cumulative translation adjustment until they are
realized by a reduction in the investment.



---



|LUNDIN MINING
    CORPORATION                                                                          |       
|------------------------------------------------------------------------------------------------------ | ------
|Notes to consolidated
    financial statements                                                         |       
|For the years ended
    December 31, 2006 and 2005                                                     |       
|(Tabular amounts are in thousands of
    US dollars, except for price per share and per share amounts) | Page 2

For integrated foreign operations, monetary assets and liabilities are
translated 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 charged to
earnings.

(c)    Cash and cash
equivalents

The Company considers cash and cash equivalents to be cash on deposit and highly
liquid short-term interest bearing securities with maturities at the date of
purchase of       three months or less.

(d)    Inventories

Materials and supplies have been valued at weighted average cost less allowances
for obsolescence. Ore stockpile and concentratestockpile inventories have been
valued at the lower of production cost and net realizable value. Production
costs include mining costs, milling costs, service on ground, direct labour and
mine-site overhead expenses.

(e)    Mineral
properties, plant and equipment

Mineral properties

The Company records its interest in mineral properties at cost and mineral
properties include mineral property development and preproduction costs, less
accumulated depletion and depreciation. Drilling activities on producing mines
and properties with feasibility studies are capitalized. Exploration costs are
charged to operations in the period incurred until such time as it has been
determined that a property has economically recoverable reserves, in which case,
subsequent exploration costs are capitalized.

Upon commencement of production, mineral properties and deferred costs relating
to mines are amortized over the estimated life of the proven and probable
reserves to which they relate, calculated on a unit-of-production basis.

Plant and equipment

Plant and equipment are recorded at cost and depreciated over the estimated life
of the related assets calculated on a unit of production or straight-line basis,
as appropriate.

Depreciation of plant and equipment is provided on a straight-line basis over
the estimated economic life of the assets as follows:

|                     | Years           
|-------------------- | ----------------
|Buildings, mine-site | Life of
    mine
|Buildings, other     | 20 - 50         
|Plant and machinery  | 5 - 20          
|Equipment            | 5               



---



|LUNDIN MINING CORPORATION                                                                              |       
|------------------------------------------------------------------------------------------------------ | ------
|Notes to consolidated
    financial statements                                                         |       
|For the years ended
    December 31, 2006 and 2005                                                     |       
|(Tabular amounts are in thousands of
    US dollars, except for price per share and per share amounts) | Page 3

Mining equipment under capital lease

Leases that transfer substantially all of the benefits and risks of ownership of
property to the Company are accounted for as capital leases. At the time the
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 earnings as incurred.

Impairment assessment

The Company performs impairment tests on its mineral properties, plant and
equipment when events or changes in circumstances indicate that their carrying
values of assets may not be recoverable. These tests compare the expected
undiscounted future cash flows from these assets to their carrying value. If
shortfalls exist, the assets are written down to fair value.

(f)    
Goodwill

Acquisitions are accounted for using the purchase method whereby the assets and
liabilities are recorded at their fair values as at the date of acquisition and
any excess purchase price over the fair value is recorded as goodwill. Goodwill
is identified and allocated to the 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 of the reporting unit. Goodwill is not amortized.

The Company evaluates, at least on an annual basis, the carrying amount of the
goodwill in order to determine whether current events or changes in
circumstances indicate that such carrying amounts may no longer be recoverable.
This is accomplished by comparing the fair value of the Company's reporting unit
to the carrying amount. If the carrying amount exceeds fair value, the Company
will charge this excess amount to operations. Assumptions used in the fair value
estimates are subject to significant risks and uncertainties.

The following table summarizes changes to the goodwill carrying value:

| | Goodwill, December 31, 2005                       | $ | -      
| | ------------------------------------------------- | - | -------
| | Residual purchase price
    allocated to goodwill |   | 501,247
| | Effect from changes in foreign exchange rates     |   | 16,312 
| | Goodwill, December 31, 2006                       | $ | 517,559

(g)    Derivatives

The Company has determined that its derivative instruments do not qualify for
hedge accounting and therefore records the derivatives at their fair value with
gains or losses arising from changes in their fair value being recorded in
operations.

(h)    Deferred
revenue

The Company received an upfront payment in relation to the Silver Wheaton
agreement (Note 9). The upfront payment, which is accounted for as deferred
revenue, is recognized as sales revenue on the basis of the proportion of the
settlements during the period to expected total settlements, equivalent to
approximately $1.82 per ounce of silver. Arrangement fees for the Silver Wheaton
agreement are amortized to operations on the same basis as the deferred revenue.

---



|LUNDIN MINING CORPORATION                                                                              |       
|------------------------------------------------------------------------------------------------------ | ------
|Notes to consolidated
    financial statements                                                         |       
|For the years ended
    December 31, 2006 and 2005                                                     |       
|(Tabular amounts are in thousands of
    US dollars, except for price per share and per share amounts) | Page 4

(i)    
Provision for pension obligations

The Company's Zinkgruvan mine has a defined benefit pension plan, which is
unfunded. 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). For each year actuarial gains and losses are calculated.
Accumulated actuarial gains and losses are amortized over the estimated
remaining period of services.

(j)    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.

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

(k)    Revenue
recognition

Revenue arising from the sale of metal 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 metal concentrates are
provisionally priced at the time of sale based on the prevailing market price as
specified in the sales contracts. Any subsequent variations in the prices are
recognized as revenue adjustments until the settlement date and the price is
finalized.

(l)    
Stock-based compensation

The Company follows the Canadian Institute of Chartered Accountants Handbook
Section 3870, "Stock-Based Compensation and Other Stock Based Payments" to
account for stock-based compensation expense using the fair value method with
respect to stock-based payments to directors and employees, including 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 standard, 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.

Stock appreciation rights that call for settlement by cash are initially
recorded as a liability with a corresponding charge to compensation expense, or
are deferred, if they were issued as a result of a business combination. These
rights are re-measured at the end of each period with a corresponding charge to
compensation expense.

---



|LUNDIN MINING CORPORATION                                                                              |       
|------------------------------------------------------------------------------------------------------ | ------
|Notes to consolidated
    financial statements                                                         |       
|For the years ended
    December 31, 2006 and 2005                                                     |       
|(Tabular amounts are in thousands of
    US dollars, except for price per share and per share amounts) | Page 5

(m)    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 bases ("temporary differences").
Future income tax assets and liabilities are measured using the tax rates
expected to be in effect 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 enacted or
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.

(n)    
Earnings per share

Basic earnings per share are calculated using the weighted average number of
common shares outstanding during the year. In calculating diluted earnings per
share, the treasury stock method is used with respect to outstanding stock
options and warrants to be included in the weighted average number of common
shares outstanding, if dilutive. In applying the treasury-stock method, the
assumed proceeds upon the exercise of outstanding stock options and warrants is
used to purchase common shares at the average market price during the year.

For the purpose of calculating the earnings per share amounts the years ended
December 31, 2006 and 2005 the Company has adjusted the weighted average number
of shares outstanding as if the three-for-one stock split, effective February 5,
2007, had occurred at January 1, 2005.

(o)    Variable
Interest Entities (VIE)

The Company adopted the accounting guideline which requires the consolidation of VIEs by the primary beneficiaries in 2005. The primary beneficiary is the
enterprise that will also absorb or receive the majority of the VIE's expected
losses, expected residual returns, or both. A VIE is an entity where (a) its
equity investment at risk is insufficient to permit the entity to finance its
activities with additional subordinated support from others and/or where certain
essential characteristics of a controlling financial interest are not met, and
(b) it does not meet specified exemption criteria. The adoption of the
accounting of this accounting guideline relating to VIEs did not have a material
effect on the Company.

(p)   Certain comparative
figures have been reclassified to conform to current year's presentation.

3. NEW
ACCOUNTING STANDARDS

In January 2005, the CICA issued three new standards relating to financial
instruments intended to increase harmonization with US GAAP and International
Financial Reporting Standards. These standards are applicable for fiscal years
beginning on or after October 1, 2006. The Company will adopt these standards
beginning on January 1, 2007.

Financial Instruments  Recognition and Measurement, Section 3855

This standard prescribes when a financial asset, financial liability, or
non-financial derivative is to be recognized on the balance sheet and whether
fair value or cost-based measures are used. This standard also specifies how
financial instrument gains and losses are to be presented.

Derivative contracts and embedded derivatives in non-derivative contracts are to
be recorded on the balance sheet at their respective fair values, with any
mark-to-market adjustments included in net income.

---



|LUNDIN MINING CORPORATION                                                                              |       
|------------------------------------------------------------------------------------------------------ | ------
|Notes to consolidated
    financial statements                                                         |       
|For the years ended
    December 31, 2006 and 2005                                                     |       
|(Tabular amounts are in thousands of
    US dollars, except for price per share and per share amounts) | Page 6

Hedges, Section 3865

This standard is applicable when a
company chooses to designate a hedging relationship for accounting purposes. It
builds on the existing AcG-13 "Hedging Relationships" and Section 1650 "Foreign
Currency Translation", by specifying how hedge accounting is applied and what
disclosures are necessary when it is applied.

Comprehensive Income, Section 1530

This new standard requires the
presentation of comprehensive income and its components. Other comprehensive
income includes holding gains and losses on certain investments that are
classified either as held-to-maturity, held-for-trading or available-for-sale,
gain and losses on certain derivative instruments and foreign currency gains and
losses relating to self-sustaining foreign operations, all of which are not
included in the calculation of net earnings until they are realized.

The Company is still evaluating the effects of the
adoption of these standards.

4. BUSINESS ACQUISITIONS

(a)   EuroZinc Mining
Corporation

On October 31, 2006 the Company completed the acquisition of 100% of the issued
and outstanding common shares of EuroZinc Mining Corporation ("EuroZinc") by
issuing 160.8 million common shares (post-split) valued at CAD$11.36 (average
closing price of the Company's shares on the Toronto Stock Exchange the two days
before, the day of, and two days after August 21, 2006, the date of
announcement) per share and cash payments totaling $0.05 million to the former
EuroZinc shareholders. In addition, the Company issued 2.3 million stock options
and 1.5 million stock appreciation rights ("SARs") to the former EuroZinc
employees in exchange for the cancellation of the EuroZinc stock options. The
terms and conditions of these stock options and stock appreciation rights remain
the same as the EuroZinc stock options, except for the number of options issued
and their respective exercise prices, which were adjusted according to the
exchange ratio.

This acquisition has been accounted for under the purchase method. These
consolidated financial statements include EuroZinc's results for the two months
ended December 31, 2006.

The preliminary allocation of the purchase price of the shares of EuroZinc is
summarized in the following table.

| | Purchase price                                                                  |   |          
| | ------------------------------------------------------------------------------- | - | ---------
| | Common shares issued (160.8 million shares)                                     | $ | 1,632,738
| | Stock options issued in exchange for EuroZinc
    options (2.3 million options) |   | 12,127   
| | Stock appreciation rights (1.5 million SARs)                                    |   | 10,595   
| | Acquisition costs                                                               |   | 12,852   
| | Cash                                                                            |   | 50       
| |                                                                                 |   | 1,668,362
| | Less:                                                                           |   |          
| | Cash and cash equivalents acquired                                              |   | (243,649)
| |                                                                                 |   |          
| | Net purchase price                                                              | $ | 1,424,713
| |                                                                                 |   |          
| | Net assets acquired                                                             |   |          



---



|LUNDIN MINING
    CORPORATION                                                                          |       
|------------------------------------------------------------------------------------------------------ | ------
|Notes to consolidated
    financial statements                                                         |       
|For the years ended
    December 31, 2006 and 2005                                                     |       
|(Tabular amounts are in thousands of
    US dollars, except for price per share and per share amounts) | Page 7

| |                                               |   |          
| | --------------------------------------------- | - | ---------
| | Restricted cash                               | $ | 4,007    
| | Non-cash current assets                       |   | 104,053  
| | Mineral properties                            |   | 922,614  
| | Plant and equipment                           |   | 321,895  
| | Other long-term assets                        |   | 24,139   
| |                                               |   | 1,376,708
| | Current liabilities                           |   | (138,785)
| | Other liabilities                             |   | (69,247) 
| | Reclamation and closure cost obligations      |   | (66,893) 
| | Future income tax liabilities                 |   | (178,317)
| | Net identifiable assets                       |   | 923,466  
| |                                               |   |          
| | Residual purchase price allocated to goodwill |   | 501,247  
| |                                               |   |          
| | Net assets acquired                           | $ | 1,424,713

The purchase consideration has been
allocated to the fair value of the assets acquired and liabilities assumed, with
goodwill assigned to specific reporting units, based on management's best
estimates and taking into account all available information at the time of
acquisition as well as additional information. The fair values allocated to the
assets and liabilities were based in part on an independent valuation report
dated March 28, 2007 but may still be subject to change as the Company finalizes
its allocation and the analysis of the nature of goodwill. This process was
performed in accordance with recent accounting pronouncements relating to
"Mining Assets and Business Combinations" (CICA Emerging Issues Committee
Abstract 152). The amount allocated to goodwill is not deductible for tax
purposes.

(b)   North Atlantic
Natural Resources AB ("NAN")

On December 30, 2004 the Company
acquired all of Boliden Mineral AB's ("Boliden") 11,537,000 shares in NAN,
representing 36.9% of the outstanding shares and votes. The consideration paid
was 2,176,800 common shares issued valued at CAD$10.40 per share for total
consideration of CAD$23 million (approximately $18.7 million).

Prior to the acquisition of Boliden's
NAN shares, the Company had held 11,580,000 shares in NAN, representing 37.1% of
the shares and votes. Following the acquisition, the Company held 23,117,000
shares in NAN, representing 74.0% of the shares and votes. In February 2005, a
public offer (the "Offer") in line with the Swedish Industry and Commerce Stock
Exchange Committee's (Näringslivets Börskommitté (NBK)) mandatory bid rules was
made to the NAN shareholders to acquire the remaining shares that the Company
did not already own. Shareholders holding 7,367,854 shares, representing 23.6%
of the total number of shares and votes of NAN, accepted the Offer. With the
additional shares purchased as a result of the Offer, Lundin Mining, held
30,484,854 shares in NAN, representing 97.6% of the total number of shares and
votes. As consideration for the 23.6% of the shares, the Company issued an
additional 1,383,321 common shares valued at CAD$13.25 per share, being the
average closing price of the Company's shares on the Toronto Stock Exchange the
two days before, the day of, and two days after the date of announcement.

As of December 31, 2006, Lundin
Mining owned 31,240,710 shares in NAN which equals 100% of the outstanding
shares. The remaining 2.4% of the shares were obtained through the Swedish
corporate procedures for compulsory purchase during the second quarter of 2006.
In order to achieve ownership of these shares Lundin Mining has provided the
trustee in the arbitration proceedings with a bank guarantee in the amount of
$2.0 million. The final purchase price per share was set at SEK 13.10 ($1.80)
plus interest by the arbitration board and was paid in December 2006.

---



|LUNDIN MINING
    CORPORATION                                                                          |       
|------------------------------------------------------------------------------------------------------ | ------
|Notes to consolidated
    financial statements                                                         |       
|For the years ended
    December 31, 2006 and 2005                                                     |       
|(Tabular amounts are in thousands of
    US dollars, except for price per share and per share amounts) | Page 8

The acquisition of the outstanding shares has been accounted for using the
purchase method. 
The allocation of the fair value of the net assets acquired is as follows:

| |                                                  |   |        
| | ------------------------------------------------ | - | -------
| | Purchase price:                                  |   |        
| | Consideration paid in shares                     | $ | 33,420 
| | Consideration paid in cash                       |   | 1,457  
| | Acquisition costs                                |   | 2,614  
| |                                                  |   | 37,491 
| | Less: cash acquired                              |   | (5,195)
| | Net purchase price                               | $ | 32,296 
| |                                                  |   |        
| | Net assets acquired:                             |   |        
| |                                                  |   |        
| | Non-cash current assets less current liabilities | $ | 2,822  
| | Mining properties                                |   | 43,478 
| | Property, plant and equipment                    |   | 198    
| | Future income tax liabilities                    |   | (6,471)
| | Other provisions                                 |   | (300)  
| | Sub-total                                        |   | 39,727 
| | Less: Carrying value of prior investment in NAN  |   | (7,431)
| | Net assets acquired                              | $ | 32,296 

(c)

On March 3, 2005 the Board of Lundin Mining and the Board of ARCON announced
that they had reached an agreement in principle on the terms of a recommended
merger of the two companies.

Lundin Mining offered (the "Merger Offer") to acquire all of the issued and
outstanding shares of ARCON in exchange for $36.2198 cash (the "cash component")
and 3.2196 Lundin Mining Swedish Depository Receipts ("SDRs") (the "share
component") for every 100 ARCON Shares.

The cash component represented a value of approximately $65.3 million and the
share component represented a value of approximately $56.3 million from the
issuance of 5,621,239 common shares at a price of CAD$12.53 ($10.02) per share,
being the average closing price of the Company's shares on the Toronto Stock
Exchange the two days before, the day of, and two days after the date of
announcement. The combined value of the offer was $121.6 million.

On April 12, 2005 the Directors of Lundin Mining announced that all of the
conditions of the Merger Offer had been satisfied or waived and, accordingly,
the Merger Offer was declared unconditional in all respects. ARCON was
consolidated in the financial statements of Lundin Mining as of May 1, 2005.

---



|LUNDIN MINING CORPORATION                                                                              |       
|------------------------------------------------------------------------------------------------------ | ------
|Notes to consolidated
    financial statements                                                         |       
|For the years ended
    December 31, 2006 and 2005                                                     |       
|(Tabular amounts are in thousands of
    US dollars, except for price per share and per share amounts) | Page 9

The acquisition of ARCON has been accounted for using
the purchase method. The allocation of the fair value of the net assets acquired
is as follows:

| |                                        |               
| | -------------------------------------- | --------------
| | Purchase price:                        |               
| | Cash paid                              | $ 65,277      
| | Common shares issued                   | 56,347        
| | Acquisition costs                      | 5,347         
| |                                        | 126,971       
| | Less cash acquired                     | (2,251)       
| |                                        |               
| | Net purchase price                     | $ 124,720     
| |                                        |               
| | Net assets acquired:                   |               
| | Net non-cash operating working capital | $
    (15,030)
| | Mining properties                      | 135,657       
| | Plant and equipment                    | 17,773        
| | Other long-term receivables            | 3,930         
| | Other long-term liabilities            | (9,492)       
| | Other provisions                       | (8,118)       
| |                                        |               
| | Net assets acquired                    | $ 124,720     

5. INVESTMENTS

Investments consist of marketable securities which had a market value of $30.7
million at December 31, 2006 (December 31, 2005 - $9.2 million).

6. INVENTORIES

Inventories comprise of the following:

| |                         |   | 2006   |   | 2005 
| | ----------------------- | - | ------ | - | -----
| | Ore stock piles         | $ | 4,522  | $ | 2,021
| | Concentrate stock piles |   | 9,305  |   | 3,982
| | Materials and supplies  |   | 10,896 |   | 3,606
| |                         | $ | 24,723 | $ | 9,609



---



|LUNDIN MINING CORPORATION                                                                              |        
|------------------------------------------------------------------------------------------------------ | -------
|Notes to consolidated
    financial statements                                                         |        
|For the years ended
    December 31, 2006 and 2005                                                     |        
|(Tabular amounts are in thousands of
    US dollars, except for price per share and per share amounts) | Page 10

7. MINERAL PROPERTIES, PLANT AND EQUIPMENT

Property, plant and equipment consist of:

| |                         | 2006 | 2005     
| | ----------------------- | ---- | ---------
| |                         |      |          
| |                         |      | Cost     
| | Mineral properties      | $    | 1,470,393
| | Plant and
    equipment |      | 360,646  
| | Development             |      | 35,135   
| |                         |      |          
| |                         | $    | 1,866,174

On October 31, 2006, the Company
completed the acquisition of EuroZinc (Note 4(a)), which includes the mining
assets of both the Neves-Corvo and Aljustrel mines. The allocation of the
purchase price to mineral properties was $922.6 million and to plant and
equipment was $321.9 million.

On November 17, 2006, the Company
completed the acquisition of a 49% interest in the Ozernoe project, a major
zinc/lead deposit located in the Republic of Buryatia in the Russian Federation
for cash consideration of $125 million, of which $115 million has been paid and
the remaining $10 million is payable after the project commences commercial
production. The final purchase price is subject to an adjustment based on
recoverable zinc metal from the JORC Code resources to be confirmed by the
bankable feasibility study, which is being prepared. A joint venture company ("JVC")
has been formed and is held 49% by the Company and 51% by Metropol. The JVC will
develop the Ozernoe Zinc deposit and operate the mine. The Company is
responsible for arranging project financing in an amount equal to 60% of the
cash required to put the project into commercial production, with the remaining
40% contributed as equity by the Company and Metropol on a pro rata basis. The
Company accounts for its interest in the Ozernoe project using the proportionate
consolidation method of accounting. Non mineral property joint venture assets
and liabilities are not significant at December 31, 2006.

8. LONG-TERM DEBT

Long-term debt consists of:

| |                                                                |   | December 31 | December 31
| | -------------------------------------------------------------- | - | ----------- | -----------
| |                                                                |   | 2006        |            
| |                                                                |   |             |            
| | Somincor
    bonds - 2005 to 2009 (a)                          | $ | 35,689      | $          
| | Capital
    lease obligations (b)                              |   | 6,866       |            
| | Deferred
    employee housing sales                            |   | 239         |            
| | Investment
    incentive loan (c)                              |   | 1,061       |            
| | Aljustrel debt (d)                                             |   | 2,280       |            
| | Total                                                          |   | 46,135      |            
| | Less:
    current portion of long-term debt and capital leases |   | (3,284)     |            
| |                                                                | $ | 42,851      | $          



---



|LUNDIN MINING CORPORATION                                                                              |        
|------------------------------------------------------------------------------------------------------ | -------
|Notes to consolidated
    financial statements                                                         |        
|For the years ended
    December 31, 2006 and 2005                                                     |        
|(Tabular amounts are in thousands of
    US dollars, except for price per share and per share amounts) | Page 11

The payment
obligations over the next five years are expected to be:

| |       |   |        |   |        |   |       |   |       
| | ----- | - | ------ | - | ------ | - | ----- | - | ------
| |       |   | Debt   |   | Leases |   | Other |   | Total 
| | 2007  | $ | -      | $ | 2,842  | $ | 442   | $ | 3,284 
| | 2008  |   | -      |   | 2,518  |   | 3,138 |   | 5,656 
| | 2009  |   | 35,689 |   | 1,065  |   | -     |   | 36,754
| | 2010  |   | -      |   | 360    |   | -     |   | 360   
| | 2011  |   | -      |   | 81     |   | -     |   | 81    
| | Total |   | 35,689 |   | 6,866  |   | 3,580 |   | 46,135

a)    
On December 17, 2004, the Company's wholly-owned subsidiary, Somincor, issued
540,000 unsecured bonds with a nominal value of 50 each for a total of
27,000,000, which is equivalent to $35,689,000. 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;

b)    
Capital lease obligations relate to mining and computer equipment and passenger
vehicles with three or four year terms and bear interest at between 1.25% to
1.75% above "3 month" and "6 month" EURIBOR;

c)    
The European Union ("EU") established special investment programs to promote the
development of some countries within the EU. The Neves-Corvo mine is located in
one of these regions in Portugal which qualified for investment incentives.
Between 2001 and 2002 Somincor incurred approximately $20,000,000 of eligible
expenditures resulting in a non-refundable grant of $800,000 and an
interest-free loan of $4,565,000. The remaining balance of the interest-free
loan is repayable in three installments of $200,000 (151,000) and one final payout of
$461,000 (349,000) on July 30, 2008; and

d)    
The Aljustrel debt of $2,280,000 (1,725,000) was assumed on the
acquisition of EuroZinc and represents the balance owing to the vendor of the
Aljustrel mine. It is due and payable on November 14, 2008.

9. DEFERRED REVENUE

On December 8, 2004, the Company
entered into an agreement with Silver Wheaton Corp. ("Silver Wheaton") whereby
the Company agreed to sell all of its silver contained in concentrate from the
Zinkgruvan mine in Sweden to Silver Wheaton in consideration for an upfront cash
payment of $50 million (CAD$60.6 million), 6 million (post-consolidation) Silver
Wheaton shares and 30 million Silver Wheaton share purchase warrants with an
aggregate fair value of $22.8 million, plus a per ounce payment at a price equal
to the lesser of (a) US$3.90 (subject to a consumer price adjustment after three
years) and (b) the then prevailing market price per ounce of silver.

---



|LUNDIN MINING CORPORATION                                                                              |        
|------------------------------------------------------------------------------------------------------ | -------
|Notes to consolidated
    financial statements                                                         |        
|For the years ended
    December 31, 2006 and 2005                                                     |        
|(Tabular amounts are in thousands of
    US dollars, except for price per share and per share amounts) | Page 12

The following table summarizes the changes in deferred revenue balance:

| |                                                   |   | 2006    |   | 2005    
| | ------------------------------------------------- | - | ------- | - | --------
| | Balance, beginning of
    year                    | $ | 58,176  | $ | 72,315  
| | Amortization                                      |   | (3,093) |   | (3,083) 
| | Effect from changes in
    foreign exchange rates |   | 9,247   |   | (11,056)
| | Balance, end of year                              |   | 64,330  |   | 58,176  
| | Less: current portion
    of deferred revenue     |   | (3,264) |   | (2,509) 
| |                                                   | $ | 61,066  | $ | 55,667  

The Company has agreed that the
agreement will result in a minimum 40 million ounces of silver concentrate being
sold to Silver Wheaton over a 25-year period. If at the end of the 25-year
period, the Company has not delivered concentrate containing the agreed 40
million ounces, the Company will pay to Silver Wheaton US$1.00 per ounce of
silver not delivered. During 2006, the Company delivered concentrate containing
1,671,000 ounces (2005  1,887,000 ounces) of silver to Silver Wheaton, for an
aggregated total of concentrate containing 3,811,000 ounces since the inception
of the contract.

10.    PROVISION FOR PENSIONS

The Company has calculated its
liability relating to the defined benefit plan at the Zinkgruvan mine using the
Projected Unit Credit Method. Actuarial assumptions used to determine benefit
obligations at December 31, 2006 and 2005 were as follows:

|                            | 2006  | 2005 
|--------------------------- | ----- | -----
|Discount rate               | 4.00% | 5.50%
|Rate of salary increase     | 2.50% | 3.00%
|Long-term rate of inflation | 2.50% | 3.00%

Information about Zinkgruvan's defined benefit and
other retirement plans as at December 31, 2006 and 2005 is as follows:

---



|LUNDIN MINING CORPORATION                                                                              |        
|------------------------------------------------------------------------------------------------------ | -------
|Notes to consolidated
    financial statements                                                         |        
|For the years ended
    December 31, 2006 and 2005                                                     |        
|(Tabular amounts are in thousands of
    US dollars, except for price per share and per share amounts) | Page 13

| |                                                                                                                                                                                                                                 |   |         |   |       
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | - | ------- | - | ------
| |                                                                                                                                                                                                                                 |   | 2006    |   | 2005  
| | Accrued benefit obligation:                                                                                                                                                                                                     |   |         |   |       
| | Balance,
    beginning of the year                                                                                                                                                                                              | $ | 12,728  | $ | 11,598
| | Current
    service costs                                                                                                                                                                                                       |   | 684     |   | 537   
| | Interest
    costs                                                                                                                                                                                                              |   | 499     |   | 533   
| | Actuarial
    (gains) losses                                                                                                                                                                                                    |   | (2,066) |   | 862   
| | Benefits
    paid                                                                                                                                                                                                               |   | (505)   |   | (425) 
| | Effects of foreign exchange                                                                                                                                                                                                     |   | 2,043   |   | (377) 
| | Balance, end of the year                                                                                                                                                                                                        |   | 13,383  |   | 12,728
| | Adjustments of cumulated unrecognized actuarials losses                                                                                                                                                                         |   | 958     |   | -     
| | Unrecognized actuarial gains                                                                                                                                                                                                    |   | 158     |   | (862) 
| | Accrued benefit liability                                                                                                                                                                                                       |   | 14,499  |   | 11,866
| | Provision
    for indirect taxes on non-vested pension obligations                                                                                                                                                              |   | 325     |   | 237   
| | Pension obligations covered by
    insurance policies                                                                                                                                                                           |   | 646     |   | 8     
| | Total provision for pension
    obligations                                                                                                                                                                                     | $ | 15,470  | $ | 12,111
| |                                                                                                                                                                                                                                 |   |         |   |       
| |                                                                                                                                                                                                                                 |   |         |   |       
| | 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:
| |                                                                                                                                                                                                                                 |   |         |   |       
| |                                                                                                                                                                                                                                 |   | 2006    |   | 2005  
| | Current
    service costs                                                                                                                                                                                                       | $ | 684     | $ | 537   
| | Interest
    costs                                                                                                                                                                                                              |   | 499     |   | 533   
| | Actuarial
    losses                                                                                                                                                                                                            |   | 42      |   | -     
| | Indirect taxes                                                                                                                                                                                                                  |   | 266     |   | 252   
| | Pension expense                                                                                                                                                                                                                 | $ | 1,491   | $ | 1,322 
| |                                                                                                                                                                                                                                 |   |         |   |       
| |                                                                                                                                                                                                                                 |   |         |   |       
| | In
    addition, the Company recorded a pension expense of $791,000 (December 31,
    2005 - $1,498,000) relating to defined contribution plans.                                                                               
| |                                                                                                                                                                                                                                

---



|LUNDIN MINING CORPORATION                                                                              |        
|------------------------------------------------------------------------------------------------------ | -------
|Notes to consolidated
    financial statements                                                         |        
|For the years ended
    December 31, 2006 and 2005                                                     |        
|(Tabular amounts are in thousands of
    US dollars, except for price per share and per share amounts) | Page 14

11.   ASSET RETIREMENT OBLIGATION AND
OTHER PROVISIONS

The asset retirement obligations and other provisions relate to the
operations of Neves-Corvo, Zinkgruvan, Storliden, Aljustrel and Galmoy mines, as
follows:

| | Asset Retirement Obligation                                                       |   |        
| | --------------------------------------------------------------------------------- | - | -------
| | Balance, December 31, 2004                                                        | $ | 11,137 
| | Amounts arising on acquisition of
    mineral property interest                   |   | 6,186  
| | Change in estimate                                                                |   | 76     
| | Other provisions                                                                  |   | 426    
| | Effect of foreign exchange                                                        |   | (1,732)
| |                                                                                   |   |        
| | Balance, December 31, 2005                                                        |   | 16,093 
| | Amounts arising on acquisition of
    EuroZinc - (Note 4 (a))                     |   | 62,562 
| | Accretion                                                                         |   | 1,284  
| | Change in estimate                                                                |   | 8,773  
| | Other provisions                                                                  |   | (381)  
| | Effect of foreign exchange                                                        |   | 2,700  
| |                                                                                   |   |        
| | Balance, December 31, 2006                                                        |   | 91,031 
| |                                                                                   |   |        
| | Other Mine Closure Obligations                                                    |   |        
| |                                                                                   |   |        
| | Balance, December 31, 2005                                                        |   | -      
| | Severence indemnity amounts arising on
    acquisition of EuroZinc - (Note 4 (a)) |   | 4,331  
| | Provisions during the period                                                      |   | 350    
| | Effect of foreign exchange                                                        |   | 155    
| |                                                                                   |   |        
| | Balance, December 31, 2006                                                        |   | 4,836  
| |                                                                                   |   |        
| |                                                                                   |   |        
| | Total                                                                             | $ | 95,867 

On October 31, 2006, the Company
acquired EuroZinc, the owner of the Neves-Corvo and Aljustrel mines in Southern
Portugal. As part of the allocation of the purchase price, the Company allocated
$62.6 million for future site restoration and mine closure costs and $4.3
million to severance indemnity. The future site restoration and mine closure
costs were determined based on the current life of mine plan, estimated
undiscounted future site restoration costs of 100.5 million for the Neves-Corvo
mine and 5.3 million for the Aljustrel mine and a credit-adjusted risk-free
interest rate of 5.0%. 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 two months ended December 31, 2006, the Company recorded
accretion expense of $0.5 million. The asset retirement obligations for the
Neves-Corvo and Aljustrel mines at December 31, 2006 totaled $65.1 million.

The asset retirement obligation at
the Zinkgruvan mine at December 31, 2006 was $11.7 million (December 31, 2005 -
$8.2 million). This was based on estimated undiscounted future site restoration
costs of $30.7 million (SEK211.3 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.

In March 2006 Zinkgruvan presented a
revised closure plan to the Swedish Environmental Supreme Court. This closure
plan for the tailings facility indicated a final closure cost of approximately
$1.4 million (SEK10 million). However, the Supreme Court upheld the original
2001 closure plan and required the Company to post a $10.9 million (SEK 80
million) bond. Zinkgruvan is currently updating the closure plan for
resubmission to the Swedish Environmental Court for approval. Until such time as
the new closure plan is approved, Zinkgruvan has based its estimated asset
retirement obligation at December 31, 2006 of $11.7 million on the 2001 closure
plan.

---



|LUNDIN MINING CORPORATION                                                                              |        
|------------------------------------------------------------------------------------------------------ | -------
|Notes to consolidated
    financial statements                                                         |        
|For the years ended
    December 31, 2006 and 2005                                                     |        
|(Tabular amounts are in thousands of
    US dollars, except for price per share and per share amounts) | Page 15

The asset retirement obligation at
the Galmoy mine at December 31, 2006 was $13.4 million (December 31, 2005 - $6.1
million), which was based on an undiscounted asset retirement obligation of 15
million and a credit-adjusted risk-free interest rate of 5.5%. Expenditures for
site restoration costs are scheduled to commence from 2007 to 2021. For the year
ended December 31, 2006, the Company recorded accretion expense of $0.8 million
(2005 - $Nil).

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

There are other provisions totaling
$0.4 million relating to obligations to land owners close to the existing mining
operations regarding future rights in exploration.

12.   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, 2005.

(a)   
The authorized and issued share capital is as follows:

Authorized  unlimited number of
common shares with no par value and one special share with no par value.

(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 was 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 will be fixed by the Board of Directors and may not exceed 10
years from the date of grant.

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 $2.4 million for 2006 (2005 - $1.1 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 assume risk-free interest rates
of 3.9% to 4.1%, no dividend yield, expected life of 0.5 to 2.0 years and
expected price volatility of 36% to 43%.

The continuity of incentive stock
options issued and outstanding during 2006 and 2005 is as follows:

---



|LUNDIN MINING CORPORATION                                                                              |        
|------------------------------------------------------------------------------------------------------ | -------
|Notes to consolidated
    financial statements                                                         |        
|For the years ended
    December 31, 2006 and 2005                                                     |        
|(Tabular amounts are in thousands of
    US dollars, except for price per share and per share amounts) | Page 16

| |                                                            |             |   |                 
| | ---------------------------------------------------------- | ----------- | - | ----------------
| |                                                            |             |   | Weighted average
| |                                                            | Number of   |   | exercise price  
| |                                                            | Options     |   | (CAD$)          
| | Outstanding, December 31, 2004                             | 1,117,500   | $ | 2.14            
| | Granted
    during the year                                | 1,695,000   |   | 4.00            
| | Exercised during the year                                  | (810,000)   |   | 1.99            
| | Oustanding, December 31, 2005                              | 2,002,500   |   | 3.76            
| | Granted
    during the year                                | 360,000     |   | 10.23           
| | Granted in
    exchange for EuroZinc options - (Note 4(a)) | 2,319,549   |   | 5.41            
| | Exercised
    during the year                              | (1,643,783) |   | 3.61            
| | Outstanding, December 31, 2006                             | 3,038,266   | $ | 5.11            

During the twelve months ended
December 31, 2006, the Company granted 360,000 incentive stock options to
employees and officers at a weighted average price of CAD$10.23 and expiring
between February 14, 2008 and October 10, 2011. In addition, the Company granted
2,319,549 incentive options to the former EuroZinc employees, officers and
directors on the same EuroZinc terms as the exchange ratio pursuant to the
acquisition of EuroZinc (Note 4(a)).

| |                                 |        |               | Weighted     |               |   | Weighted
| | ------------------------------- | ------ | ------------- | ------------ | ------------- | - | --------
| |                                 |        |               | Average      |               |   | Average 
| |                                 | Year   | Number
    of | Remaining    | Number
    of |   | Exericse
| |                                 | of     | Options       | Contractual  | Options       |   | Price   
| | Range of exercise prices (CAD$) | Expiry | Outstanding   | Life (Years) | Exercisable   |   | (CAD$)  
| | $0.38 - $4.22                   | 2007   | 795,000       | 0.6          | 795,000       | $ | 3.92    
| | $7.39 - $12.49                  | 2008   | 330,000       | 1.4          | 330,000       |   | 9.92    
| | $2.10 - $2.31                   | 2009   | 17,424        | 2.7          | 17,424        |   | 2.10    
| | $2.28 - $3.33                   | 2010   | 995,062       | 3.5          | 662,814       |   | 2.57    
| | $4.41 - $10.15                  | 2011   | 900,780       | 4.4          | 439,059       |   | 9.61    
| |                                 |        | 3,038,266     | 3.0          | 2,244,297     | $ | 5.81    

(c)     Diluted
earnings per share

| | (in thousands, except for share
    amounts)      |   | 2006    |   | 2005   
| | ------------------------------------------------- | - | ------- | - | -------
| |                                                   |   |         |   |        
| | Earnings available to
    common shareholders     | $ | 152,949 | $ | 29,963 
| | Divided by:                                       |   |         |   |        
| | Weighted average
    shares outstanding - basic   |   | 149,439 |   | 115,248
| | Incremental shares                                |   | 1,713   |   | 729    
| | Weighted average
    shares outstanding - diluted |   | 151,152 |   | 115,977
| |                                                   |   |         |   |        
| | Basic earnings per share                          | $ | 1.02    | $ | 0.26   
| | Diluted earnings per share                        | $ | 1.01    | $ | 0.26   

(d)    Stock
Appreciation Rights

In connection with the October 31, 2006 acquisition
of EuroZinc (Note 4(a)), the Company issued stock appreciation rights to certain
former EuroZinc employees in exchange for the cancellation of their stock
options. The terms of the newly issued stock appreciation rights were the same
as those of the cancelled options, with the exception of the number of shares
and the exercise prices, which were adjusted for the share exchange ratio of the
EuroZinc acquisition.

---



|LUNDIN MINING CORPORATION                                                                              |        
|------------------------------------------------------------------------------------------------------ | -------
|Notes to consolidated
    financial statements                                                         |        
|For the years ended
    December 31, 2006 and 2005                                                     |        
|(Tabular amounts are in thousands of
    US dollars, except for price per share and per share amounts) | Page 17

The continuity of stock appreciation rights issued
and outstanding is as follows:

| |                                                            |              |   | Weighted
| | ---------------------------------------------------------- | ------------ | - | --------
| |                                                            | Number of    |   | average 
| |                                                            | stock        |   | exercise
| |                                                            | appreciation |   | price   
| |                                                            | rights       |   | (CAD$)  
| |                                                            |              |   |         
| | Oustanding, December
    31, 2005                          | -            |   | -       
| | Granted in exchange
    for EuroZinc options - Note (4(a)) | 1,461,321    | $ | 5.26    
| | Exercised during the
    year                              | (240,240)    |   | 5.21    
| | Outstanding, December 31, 2006                             | 1,221,081    | $ | 5.27    

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, 2006 was $9.2 million (December 31, 2005 - $Nil).

All stock appreciation rights are
fully vested and exercisable.

| |                                |               |   | Weighted
| | ------------------------------ | ------------- | - | --------
| |                                | Number
    of |   | average 
| |                                | stock         |   | exercise
| |                                | appreciation  |   | price   
| | Expiry date                    | rights        |   | (CAD$)  
| |                                |               |   |         
| | December 24, 2009              | 285,600       | $ | 2.31    
| | June 8, 2010                   | 135,360       |   | 2.31    
| | July 5, 2010                   | 290,361       |   | 2.28    
| | May 4, 2011                    | 338,400       |   | 9.03    
| | May 11, 2011                   | 171,360       |   | 10.15   
| | Outstanding, December 31, 2006 | 1,221,081     | $ | 5.27    

13.    INCOME TAXES

The reconciliation of income taxes computed at the
Canadian statutory tax rates to the Company's income tax expense for the years
ended December 31, 2006 and 2005 is as follows:

| |                                                              |   | 2006     |   | 2005   
| | ------------------------------------------------------------ | - | -------- | - | -------
| | Combined basic federal and provincial
    rates              |   | 34.12%   |   | 35.60% 
| |                                                              |   |          |   |        
| | Income tax expense
    based on statutory income tax rates   | $ | 70,040   | $ | 15,687 
| | Effect of lower tax
    rates in foreign jurisdictions       |   | (23,487) |   | (2,972)
| | Tax benefits
    recognized on prior year losses             |   | 1,323    |   | (3,882)
| | Tax benefits not
    recognized on current year gains/losses |   | -        |   | 3,410  
| | Non-deductible and
    non-taxable items                     |   | 3,159    |   | -      
| | Other                                                        |   | 1,107    |   | 1,048  
| |                                                              |   |          |   |        
| | Income tax expense                                           | $ | 52,142   | $ | 13,291 



---



|LUNDIN MINING CORPORATION                                                                              |        
|------------------------------------------------------------------------------------------------------ | -------
|Notes to consolidated
    financial statements                                                         |        
|For the years ended
    December 31, 2006 and 2005                                                     |        
|(Tabular amounts are in thousands of
    US dollars, except for price per share and per share amounts) | Page 18

Temporary differences and loss carry-forwards which give rise to future
income tax assets and liabilities as at December 31, 2006 and 2005 are as
follows:

| | Future income tax assets:                                                                  |   | 2006    |   | 2005   
| | ------------------------------------------------------------------------------------------ | - | ------- | - | -------
| | Canadian tax loss carryforwards                                                            | $ | 7,056   | $ | 3,591  
| | Irish tax loss
    carryforwards                                                           |   | 33,543  |   | 32,719 
| | Portugal tax loss
    carryforwards                                                        |   | 2,020   |   | -      
| | Provision for pensions                                                                     |   | -       |   | 3,180  
| | Working capital                                                                            |   | 3,678   |   | -      
| | Other                                                                                      |   | 2,548   |   | 1,624  
| | Asset retirement obligations                                                               |   | 5,312   |   | -      
| |                                                                                            |   | 54,157  |   | 41,114 
| | Valuation allowance                                                                        |   | (9,221) |   | (5,642)
| | Future income tax assets                                                                   |   | 44,936  |   | 35,472 
| |                                                                                            |   |         |   |        
| | Future income tax
    liabilities                                                          |   |         |   |        
| | Tax-allocation reserve                                                                     |   | 7,644   |   | 5,746  
| | Derivatives                                                                                |   | 2,030   |   | -      
| | Mining properties, plant and equipment                                                     |   | 273,845 |   | 61,461 
| |                                                                                            |   | 283,519 |   | 67,207 
| |                                                                                            |   |         |   |        
| | Net future income tax liability                                                            | $ | 238,583 | $ | 31,735 
| |                                                                                            |   |         |   |        
| | After taking into
    account the right of offset these balances are presented as follows: |   |         |   |        
| | Net future income tax
    asset                                                            | $ | 12,149  | $ | 2,753  
| | Net future income tax liability                                                            |   | 250,732 |   | 34,488 
| |                                                                                            | $ | 238,583 | $ | 31,735 

At December 31, 2006, the Company had
accumulated non-capital losses for Canadian income tax purposes of approximately
$23.6 million which will expire between 2007 and 2026 and accumulated
non-capital losses for Irish tax purposes of approximately $134.2 million which
have an indefinite life.

The transaction that occurred on
October 31, 2006 gave rise to the acquisition of control of Lundin Mining
Corporation by EuroZinc Mining Corporation for Canadian tax purposes and would
result in a restriction to the utilization of the non-capital losses incurred up
to the taxation year ended October 31, 2006.

The Company also has, through its subsidiaries, other
tax losses and other deductions carried forward, the amounts for which tax
benefits have been recognized in the financial statements.

---



|LUNDIN MINING CORPORATION                                                                              |        
|------------------------------------------------------------------------------------------------------ | -------
|Notes to consolidated
    financial statements                                                         |        
|For the years ended
    December 31, 2006 and 2005                                                     |        
|(Tabular amounts are in thousands of
    US dollars, except for price per share and per share amounts) | Page 19

14.   RELATED PARTY TRANSACTIONS

For the year ended December 31, 2006, the Company
paid $190,000 (2005  $175,000) for rent, accounting and administrative services
to a company owned by the Chairman of the Company. As at December 31, 2006, the
Company had a $Nil balance (2005  $Nil) owing to this related party.

Related party transactions are
measured at their exchange amount in these consolidated financial statements,
which is the amount of consideration received as established and agreed upon by
the Company and the aforementioned related party.

15.   ACCRUED LIABILITIES

|                                                                                                                                                                                                                                                     |                                                                                       |   | 2006      |   | 2005   
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------- | - | --------- | - | -------
|                                                                                                                                                                                                                                                     | Royalty payable                                                                       | $ | 21,298    | $ | -      
|                                                                                                                                                                                                                                                     | Advances on metal
    concentrates                                                    |   | 15,582    |   | -      
|                                                                                                                                                                                                                                                     | Stock appreciation
    rights liability                                               |   | 9,222     |   | -      
|                                                                                                                                                                                                                                                     | Derivative related
    liability                                                      |   | 14,815    |   | 1,941  
|                                                                                                                                                                                                                                                     | Put premium obligation                                                                |   | 9,476     |   | -      
|                                                                                                                                                                                                                                                     | Unbilled goods and services and
    payroll obligations                               |   | 34,530    |   | 13,428 
|                                                                                                                                                                                                                                                     |                                                                                       |   |           |   |        
|                                                                                                                                                                                                                                                     |                                                                                       | $ | 104,923   | $ | 15,369 
|                                                                                                                                                                                                                                                     |                                                                                       |   |           |   |        
|Derivative related liability
    includes the fair value of outstanding derivative contracts plus accrued
    amounts for contracts settling on or before December 31, 2006, but paid
    subsequent to year-end.
    16.   SUPPLEMENTAL INFORMATION
|                                                                                                                                                                                                                                                     |                                                                                       |   | 2006      |   | 2005   
|                                                                                                                                                                                                                                                     | Changes in non-cash
    working capital items consists of:                            |   |           |   |        
|                                                                                                                                                                                                                                                     | Accounts receivable
    and other current assets                                      | $ | 28,139    | $ | (4,542)
|                                                                                                                                                                                                                                                     | Accounts payable and
    other current liabilities                                    |   | 2,664     |   | 6,974  
|                                                                                                                                                                                                                                                     |                                                                                       | $ | 30,803    | $ | 2,432  
|                                                                                                                                                                                                                                                     |                                                                                       |   |           |   |        
|                                                                                                                                                                                                                                                     | Non-cash financing
    and investing activities                                       |   |           |   |        
|                                                                                                                                                                                                                                                     | Common shares issued
    for acquisition of NAN/ARCON                                 | $ | -         | $ | 71,074 
|                                                                                                                                                                                                                                                     | Common shares issued
    for acquisition of EuroZinc                                  |   | 1,632,738 |   | -      
|                                                                                                                                                                                                                                                     | Stock options and
    stock appreciation rights issued on acquisition of
    EuroZinc |   | 22,722    |   | -      
|                                                                                                                                                                                                                                                     | Equipment acquired
    through capital lease                                          |   | -         |   | 1,547  
|                                                                                                                                                                                                                                                     |                                                                                       | $ | 1,655,460 | $ | 72,621 
|                                                                                                                                                                                                                                                     |                                                                                       |   |           |   |        
|                                                                                                                                                                                                                                                     | Operating
    activities included the following cash payments                         |   |           |   |        
|                                                                                                                                                                                                                                                     | Interest paid                                                                         | $ | 3,392     | $ | 417    
|                                                                                                                                                                                                                                                     | Income taxes paid                                                                     | $ | 22,232    | $ | 3,219  
|                                                                                                                                                                                                                                                     |                                                                                       |   |           |   |        

---



|LUNDIN MINING CORPORATION                                                                              |        
|------------------------------------------------------------------------------------------------------ | -------
|Notes to consolidated
    financial statements                                                         |        
|For the years ended
    December 31, 2006 and 2005                                                     |        
|(Tabular amounts are in thousands of
    US dollars, except for price per share and per share amounts) | Page 20

17.   SEGMENTED INFORMATION

The Company is currently engaged in
mining, exploration and development of mineral properties, primarily in
Portugal, Sweden and Ireland.

The Company has five reportable
segments as identified by the individual mining operations at each of its four
operating mines as well as its significant joint venture with Metropol. In 2005,
the Company identified one operating segment; consequently, the information
presented below has been restated to present the comparative information as at
and for the year ended December 31, 2005. 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.

Operating segmented information is as
follows:

| | As at or for the year ended December
    31, 2006
| | -------------------------------------------------
| |                                                  
| | Sales                                            
| | Operating profit                                 
| | Capital expenditures                             
| | Goodwill                                         
| | Total Assets                                     
| |                                                  
| | As at or for the year ended December
    31, 2005
| |                                                  
| | Sales                                            
| | Operating profit                                 
| | Capital expenditures                             
| | Total Assets                                     
| |                                                  
| | As at or for the year ended December
    31, 2006
| |                                                  
| |                                                  
| | Sales                                            
| | Goodwill                                         
| | Mineral properties, plant and
    equipment      
| |                                                  
| | As at or for the year ended December
    31, 2005
| |                                                  
| | Sales                                            
| | Mineral properties, plant and
    equipment      
| |                                                  

---



|LUNDIN MINING CORPORATION                                                                              |        
|------------------------------------------------------------------------------------------------------ | -------
|Notes to consolidated
    financial statements                                                         |        
|For the years ended
    December 31, 2006 and 2005                                                     |        
|(Tabular amounts are in thousands of
    US dollars, except for price per share and per share amounts) | Page 21

18.   FINANCIAL INSTRUMENTS

(a)    Financial risk

The various derivative contracts
include forward sales and calls and put options for the purpose of managing
these risks and are not for trading purposes.

The following table summarizes the
outstanding derivatives contracts of the Company as at December 31, 2006, of
which all of the foreign exchange and a large portion of the metals contracts
were assumed on the acquisition of EuroZinc on October 31, 2006 (Note 4 (a)).
Note that in addition to those contracts summarized in the table, the Company is
also a party to several structured derivatives deals. Based on the nature of
these individual contracts, they cannot be presented in a tabular format, and
are therefore described in detail below the table.

| |                           |   |         |   |        |   | 2009 -  |   |        
| | ------------------------- | - | ------- | - | ------ | - | ------- | - | -------
| |                           |   | 2007    |   | 2008   |   | 2011*   |   | Total  
| |                           |   |         |   |        |   |         |   |        
| | Copper                    |   |         |   |        |   |         |   |        
| | Puts (tonnes)             |   | 52,704  |   | -      |   | -       |   | 52,704 
| | Average price (US$/Ib)    | $ | 0.85    |   | -      |   | -       | $ | 0.85   
| |                           |   |         |   |        |   |         |   |        
| | Calls (tonnes)            |   | 9,900   |   | -      |   | -       |   | 9,900  
| | Average price (US$/Ib)    | $ | 4.00    |   | -      |   | -       | $ | 4.00   
| |                           |   |         |   |        |   |         |   |        
| | Forward sales (tonnes)    |   | 8,600   |   | -      |   | -       |   | 8,600  
| | Average price (US$/Ib)    | $ | 2.97    |   | -      |   | -       | $ | 2.97   
| |                           |   |         |   |        |   |         |   |        
| | Silver                    |   |         |   |        |   |         |   |        
| | Forward sales (ounces)    |   | 39,852  |   | 95,460 |   | 284,532 |   | 419,844
| | Average price (US$/ounce) | $ | 11.60   | $ | 11.60  | $ | 11.60   | $ | 11.60  
| |                           |   |         |   |        |   |         |   |        
| | Lead                      |   |         |   |        |   |         |   |        
| | Forward sales (tonnes)    |   | 2,250   |   | 4,500  |   | -       |   | 6,750  
| | Average price (US$/lb)    | $ | 0.54    | $ | 0.54   |   | -       | $ | 0.54   
| |                           |   |         |   |        |   |         |   |        
| | Zinc                      |   |         |   |        |   |         |   |        
| | Forward sales (tonnes)    |   | 1,200   |   | 2,400  |   | -       |   | 3,600  
| | Average price (US$/lb)    | $ | 1.22    | $ | 1.22   |   | -       | $ | 1.22   
| |                           |   |         |   |        |   |         |   |        
| | US Currency               |   |         |   |        |   |         |   |        
| | Forward sales             | $ | 192,000 |   | -      |   | -       |   | 192,000
| | Average US$/EUR           |   | 1.2907  |   | -      |   | -       | $ | 1.2907 
| |                           |   |         |   |        |   |         |   |        

*Between 2009 and 2011, silver forward sales are
117,072 oz, 114,720 oz, and 52,740 oz respectively, all at $11.60/oz.

In addition to the derivative contracts noted in the
table above, the Company is also a party to the following structured derivatives
as at December 31, 2006:

- 

---



|LUNDIN MINING CORPORATION                                                                              |        
|------------------------------------------------------------------------------------------------------ | -------
|Notes to consolidated
    financial statements                                                         |        
|For the years ended
    December 31, 2006 and 2005                                                     |        
|(Tabular amounts are in thousands of
    US dollars, except for price per share and per share amounts) | Page 22

i.      
to sell between US$5.0 million and US$7.5 million and buy Euro dollars at prices
between US$1.2025 and US$1.3000 per 1.00, on a monthly basis from April to
August 2007;

ii.     
to sell US$1.0 million and buy Euro dollars at prices between US$1.1800 and
US$1.3000 per 1.00, on a monthly basis from April to August 2007;

iii.   
to sell US$4.0 million and buy Euro dollars at US$1.2850 per 1.00, on a monthly
basis from April to June 2007, and to sell US$2.0 million and buy Euro dollars
at US$1.2850 per 1.00, on a monthly basis from July to December 2007, with a
floor of US$1.2000 per 1.00;

iv.   
to sell between US$2.0 million and US$4.0 million and buy Euro dollars at prices
between US$1.2640 and US$1.2980 per 1.00, on a monthly basis from April to
September 2007;and

v.    
to sell between US$3.5 million and US$7.0 million and buy Euro dollars at prices
between US$1.2410 and US$1.2900 per 1.00, on a monthly basis from April to
December 2007.

- 

vi.   
on a monthly basis between January and December 2007, the Company has a
contingent right (triggered if LME spot is below $0.46/lb) to sell 600 tonnes at
$0.46/lb or a contingent obligation (triggered if LME spot is at or above
$0.59/lb) to sell 600 tonnes at $0.54/lb; and

vii.   
on a monthly basis between January and December 2007, the Company has a
contingent right (triggered if LME spot is below $0.52/lb) to sell 600 tonnes at
$0.52/lb or a contingent obligation (triggered if LME spot is at or above
$0.64/lb) to sell 600 tonnes at $0.59/lb.

The net derivative liability on the
mark-to-market valuation of all the outstanding derivatives and financial
instruments as at December 31, 2006 was $2.9 million (December 31, 2005 - $2.0
million). For the year ended December 31, 2006, the Company recorded a net gain
of $0.4 million on derivative instruments consisting of a $27.6 million realized
loss from the settlement of derivative contracts, offset by a unrealized
mark-to-market adjustment to earnings of $28.0 million (2005 - $2.0 million
loss) from the outstanding derivative contracts.

(b)   
Fair values

The fair value of cash and cash
equivalents, accounts receivable, accounts payable, other current liabilities
and the amounts due from and to related parties is estimated to approximate
their carrying values due to the immediate or short-term maturity of these
financial instruments. Management also believes that the fair value of long-term
debt approximates its carrying value.

19.   COMMITMENTS AND CONTINGENCIES

The Company's wholly-owned
subsidiary, Somincor, which was acquired as part of the EuroZinc acquisition on
October 31, 2006, has entered into the following commitments:

(a)   
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
two months ended December 31, 2006 was $0.9 million;

(b)   The
port authority of Setubal and Sesimbra, Portugal for the use of the port
facilities for a thirty-year period beginning in 1996 at an annual cost of $0.1
million per year;

(c)  
Railway transport agreement for ten years expiring in November 2010 at an
estimated annual cost of $4.5 million per year;

(d)  
Setubal bulk terminal land and use license commitments totaling approximately
$0.4 million per year for the duration of the life of the terminal facilities;
and

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

---



|LUNDIN MINING CORPORATION                                                                              |        
|------------------------------------------------------------------------------------------------------ | -------
|Notes to consolidated
    financial statements                                                         |        
|For the years ended
    December 31, 2006 and 2005                                                     |        
|(Tabular amounts are in thousands of
    US dollars, except for price per share and per share amounts) | Page 23

During 2006, a major Swedish bank
issued a bank guarantee to the Swedish authorities in the amount of $10.9
million (SEK 80 million) relating to the future reclamation costs at the
Zinkgruvan mine. The Company has agreed to indemnify the Swedish bank for this
guarantee.

The Company has agreed to deliver all
future production of silver contained in concentrate ("contained silver") from
the Zinkgruvan mine to Silver Wheaton, with delivery guarantees of a minimum 40
million ounces of contained silver over a 25-year period. If at the end of this
period the Company has not delivered the minimum 40 million ounces of contained
silver, the Company will be obligated to pay Silver Wheaton $1.00 per each ounce
of contained silver not delivered.

The Storliden mine is being operated
pursuant to an operating agreement between Boliden Mineral AB ("Boliden") and
the Company, whereby Boliden is the main contractor of the mine. Ore is
processed at a Boliden mill and after all operating costs are paid, the
remaining cash flow is shared two-thirds by the Company and one-third by Boliden.
Boliden charges an operator's fee to the Storliden mine at cost plus 15%. There
is also a 1.5% annual royalty based on the Net Smelter Revenue.

The Company is 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, 2006 are
as follows:

2007
      $
      1,4732008
      
      1,2152009
      
      1,1152010
      
      1,0302011
      
      966Total
      $
      5,799


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

The consolidated financial statements
have been prepared in accordance with Canadian generally accepted accounting
principles ("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 generally
accepted accounting principles ("US GAAP") and practices prescribed by the
United States Securities and Exchange Commission ("SEC") in applying US GAAP
material measurement differences to these consolidated financial statements.

Had the Company followed US GAAP, certain items on
the consolidated statements of operations, and the consolidated balance sheets
would have been reported as follows:

---



|LUNDIN MINING CORPORATION                                                                              |        
|------------------------------------------------------------------------------------------------------ | -------
|Notes to consolidated
    financial statements                                                         |        
|For the years ended
    December 31, 2006 and 2005                                                     |        
|(Tabular amounts are in thousands of
    US dollars, except for price per share and per share amounts) | Page 24

| |                                                                         |                   
| | ----------------------------------------------------------------------- | ------------------
| |                                                                         | As at December 31,
| | Consolidated Balance Sheets                                             |                   
| |                                                                         |                   
| |                                                                         |                   
| |                                                                         |                   
| | Total Assets -
    Canadian GAAP basis                                  | $                 
| | Investments (a)                                                         |                   
| | Deferred exploration (d)                                                |                   
| | Total Assets under US GAAP                                              | $                 
| |                                                                         |                   
| | Total Liabilities
    under Canadian GAAP                               | $                 
| | Future income taxes (a)                                                 |                   
| | Total Liabilities under US GAAP                                         |                   
| |                                                                         |                   
| | Shareholders' Equity
    under Canadian GAAP                            |                   
| | Unrealized gain on available for sale investments
    (a), net of taxes |                   
| | Deferred exploration (d)                                                |                   
| |                                                                         |                   
| |                                                                         |                   
| | Total Liabilities and Shareholders'
    Equity under US GAAP            | $                 



---



|LUNDIN MINING CORPORATION                                                                              |        
|------------------------------------------------------------------------------------------------------ | -------
|Notes to consolidated
    financial statements                                                         |        
|For the years ended
    December 31, 2006 and 2005                                                     |        
|(Tabular amounts are in thousands of
    US dollars, except for price per share and per share amounts) | Page 25

| |                                                                          |                         
| | ------------------------------------------------------------------------ | ------------------------
| |                                                                          | Years ended December 31,
| | Consolidated Statements of Operations                                    |                         
| |                                                                          |                         
| | Net earnings under Canadian GAAP                                         | $                       
| | Deferred exploration (d)                                                 |                         
| | Net earnings under US GAAP                                               |                         
| |                                                                          |                         
| | Basic earnings per share, US GAAP                                        | $                       
| | Diluted earnings per share, US GAAP                                      | $                       
| |                                                                          |                         
| | Net earnings under US GAAP                                               |                         
| | Other comprehensive income                                               |                         
| | Unrealized gains on available for sale
    investments (a), net of taxes |                         
| | Foreign currency translation adjustments (b)                             |                         
| | Comprehensive income under US GAAP                                       | $                       
| |                                                                          |                         
| |                                                                          | Years ended Decembr 31, 
| | Consolidated Statements of Cash Flows                                    |                         
| |                                                                          |                         
| | Operating activities                                                     |                         
| | Operating activities under Canadian GAAP                                 | $                       
| | Deferred exploration (d)                                                 |                         
| | Operating activities under US GAAP                                       |                         
| |                                                                          |                         
| | Financing activities                                                     |                         
| | Financing activities under Canadian and US GAAP                          |                         
| |                                                                          |                         
| | Investing activities                                                     |                         
| | Investing activities under Canadian GAAP                                 |                         
| | Deferred exploration (d)                                                 |                         
| | Investing activities under US GAAP                                       |                         
| |                                                                          |                         
| | Effect of foreign exchange on cash balances                              |                         
| |                                                                          |                         
| | Increase (decrease) in cash and cash
    equivalent under US GAAP        |                         
| | Cash and cash equivalent, beginning of year
    under US GAAP            |                         

(a)   
The Company's investments in public companies are classified as
available-for-sale investments under FASB Statement No. 115, Accounting for Certain Investments in Debt and Equity Securities.

Under US GAAP, these investments are
recorded at fair value on the balance sheet with changes in the fair value
recorded as other comprehensive income, net of applicable income taxes. The $3.2
million (2005 - $1.2 million) unrealized gain, net of taxes, relates to
investments in shares of various public companies valued at $30.7 million, while
the 2005 unrealized gain relates to shares in Union Resources Ltd. valued at
$5.8 million.

---



|LUNDIN MINING CORPORATION                                                                              |        
|------------------------------------------------------------------------------------------------------ | -------
|Notes to consolidated
    financial statements                                                         |        
|For the years ended
    December 31, 2006 and 2005                                                     |        
|(Tabular amounts are in thousands of
    US dollars, except for price per share and per share amounts) | Page 26

(b)  
Under US GAAP, cumulative translation adjustments are included as a component of
other comprehensive income. Under Canadian GAAP, cumulative translation
adjustments are presented as a separate line item within shareholders' equity.

(c)  
Under US GAAP, the Company had previously determined that the Silver Wheaton
agreement (Note 9) was a non-financial derivative instrument under FASB
Statement No. 133, Accounting for Derivative Instruments and Hedging
Activities. A non-financial derivative is required to be recorded at fair
value. Upon further review of the agreement, the Company subsequently determined
it did not meet the definition of a non-financial derivative as the silver
contained in concentrate that is sold under this contract was not readily
convertible into cash. The Company considers the embedded derivatives identified
within the contract to have a non-significant fair value at December 31, 2005
and 2006.

The Company became aware of this
difference during the preparation of the annual 2006 consolidated financial
statements. The impact of this restatement on the December 31, 2005 balance
sheet was to decrease total assets by $3.4 million, decrease total liabilities
by $12.0 million and increase shareholders' equity by $8.6 million. The impact
on the statement of operations was to increase net earnings for the year ended
December 31, 2005 under US GAAP by $8.6 million and increase earnings and
diluted earnings per share by $0.08.

(d)    Under US GAAP
and practices prescribed by the SEC, exploration expenditures relating to
mineral properties, for which commercial feasibility has not yet been
established, are expensed as incurred. In addition, land use costs are expensed as incurred.
Under Canadian GAAP, 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.
During the year ended December 31, 2006, the Company deferred mineral property
expenditures totaling $2.8 million (December 31, 2005), net of taxes, at the
Ozernoe Russian project.

(e)    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.

(f)    Recent United
States accounting pronouncements:

(i)    In July
2006, FASB issued 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.

FIN 48 is effective for fiscal years beginning after
December 15, 2006. Differences between the amounts recognized in the statements
of financial position prior to the adoption of FIN 48 and the amounts reported
after adoption should be accounted for as a cumulative-effect adjustment to the
beginning balance of retained earnings. The cumulative effect adjustment would
not apply to those items that would not have been recognized in earnings, such
as the effect of adopting FIN 48 on tax positions related to business
combinations. The interpretation is effective by the beginning of the first
annual period beginning after December 15, 2006, with early adoption permitted.
The Company is presently evaluating the impact of this interpretation on the
Company's consolidated financial statements.

---



|LUNDIN MINING CORPORATION                                                                              |        
|------------------------------------------------------------------------------------------------------ | -------
|Notes to consolidated
    financial statements                                                         |        
|For the years ended
    December 31, 2006 and 2005                                                     |        
|(Tabular amounts are in thousands of
    US dollars, except for price per share and per share amounts) | Page 27

(ii)   
In September 2006, the FASB issued FASB Statement No. 157, Fair Value
Measurements("SFAS 157"). 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. SFAS 157 is effective for
fiscal years beginning after November 15, 2007, and interim periods within those
fiscal years, and early adoption is permitted. The Company is presently
evaluating the impact of this standard on the Company's consolidated financial
statements.

(iii)  
In September 2006, the FASB issued FASB Statement No. 158, Employers'
Accounting for Defined Benefit Pension and Other Postretirement Plans, an
amendment of FASB Statements No. 87, 88, 106 and 132(R)("SFAS 158"). SFAS
158 represents the completion of the first phase in the FASB's postretirement
benefits accounting project and requires an entity to: recognize in its
statement of financial position an asset for a defined benefit postretirement
plan's overfunded status or a liability for a plan's underfunded status; measure
a defined benefit postretirement plan's assets and obligations that determine
its funded status as of the end of the employer's fiscal year, and; recognize
changes in the funded status of a defined benefit postretirement plan in
comprehensive income in the year in which the changes occur.

SFAS 158 does not change the amount
of net periodic benefit cost included in net income or address the various
measurement issues associated with postretirement benefit plan accounting. The
requirement to recognize the funded status of a defined benefit postretirement
plan and the disclosure requirements are effective for fiscal years ending after
December 15, 2006 and the requirement to measure plan assets and benefit
obligations as of the date of the employer's fiscal year-end statement of
financial position is effective for fiscal years ending after December 15, 2008.
Earlier application of the recognition or measurement date provisions is
encouraged; however, early application must be for all of an employer's benefit
plans. The effect of the application of this standard on the accumulated other
comprehensive income as at December 31, 2006, was not significant and the
Company is presently evaluating the impact of the remainder of this standard on
the Company's consolidated financial statements.

(iv)   In
September 2006, the FASB issued FSP No. AUG AIR-1, "Accounting for Planned Major
Maintenance Activities". The FSP permits companies to account for planned major
maintenance activities using either the direct expensing method, the built-in
overhaul method or the deferral method. The FSP will be effective for the
Company December 1, 2007 and is to be adopted on a retrospective basis. The
Company is currently assessing the alternative accounting treatments available
under the FSP.

---