(All figures, except per share amounts, are in $US thousands unless otherwise
stated or unless context requires otherwise)
Quadra FNX Mining Ltd. (the "Company" or "Quadra FNX") (TSX:QUX) is pleased to
provide its third quarter 2010 financial and operational results. The third
quarter of 2010 marked the first full quarter for the combined Quadra FNX and
the strong financial performance reflects the increased production as a result
of the merger, as well as the stronger copper price.
THIRD QUARTER HIGHLIGHTS:
-- Total revenues increased 186% to $259.1 million in the quarter compared
with $90.7 million in 2009. These record quarterly revenues were
generated from the sale of 56.8 million pounds of copper and 33,500
ounces of total precious metals (TPM's)
-- On September 1, 2010 the company commenced commercial production at the
Morrison deposit in Sudbury, which generated operating income of $3.1
million for the month of September.
-- The Robinson Mine generated operating income for the quarter of $46.0
million compared with $24.1 million for the same quarter in 2009, an
increase of 92%. Operating income this year from Robinson totals $131.1
million. Previously identified potential problems with historical
workings at Robinson have been resolved.
-- Net earnings of $37.2 million or $0.20 per share (basic) for the three
months ended September 30, 2010 compared to earnings of $14.7 million or
$0.15 per share (basic) for the three months ended September 30, 2009.
-- Adjusted earnings, which exclude the impact of derivative gains, gains
and losses on marketable securities and investments, merger costs and
related tax adjustments, were $42.0 million or $0.22 per share (basic).
-- EBITDA was $76.6 million or $0.41 per share compared with $27.3 million
or $0.28 per share in 2009.
-- On-going exploration at the Victoria property in the Sudbury basin has
expanded and added significant confidence in the Zone 4 sulphide
mineralized system which was first discovered in May 2010.
-- Work progressed on the Sierra Gorda feasibility study and the Company
continued discussions with potential financial partners.
-- The Company continues to make significant progress on the integration of
the former Quadra and FNX teams at both the corporate and mine site
level.
-- The Company ended the third quarter of 2010 with $323 million of cash on
hand.
As reported in the Press Release dated October 18, 2010, the US operations had a
mixed quarter. At Robinson, production rebounded versus the second quarter and
confirmatory drilling indicates that the historic underground workings below the
Ruth pit are not expected to have any further impact on the remainder of 2010 or
any impact on 2011 or on the reserve base. The operations team has now completed
the generation of a block model for the mine that reflects the extensive
metallurgical program over the last two years, improving the ability to predict
production going forward. Production at Carlota remained largely flat and
technical studies are ongoing as how to deal with the fines in the ore body,
which are affecting percolation. It has now been concluded that these are not a
local effect but occur throughout the ore body and planned programmes include
material stacking strategies, processing options and leaching strategies. A
review of the pit slope in the area of the Kelly fault has also indicated that a
change in the pit wall angle may be necessary, and that increased stripping may
be required. The economic and reserve implications of this potential change are
currently being studied and will be published once finalized. On the positive
side, the Company has developed a new ore genesis model which improves our
understanding of the fines issue and supports exploration potential at depth. An
initial drill program will be following this up in the fourth quarter.
Operating and Financial
Summary Three months ended Nine months ended
In millions of US dollars
(except per share data and September September September September
production data) 30, 2010 30, 2009 30, 2010 30, 2009
----------------------------------------------------------------------------
Revenues 259.1 90.7 625.8 302.5
Adjusted earnings (1) 42.0 21.4 120.1 66.6
Adjusted earnings per share
(basic) $ 0.22 $ 0.22 $ 0.84 $ 0.77
EBITDA (2) 80.6 27.3 208.9 66.5
EBITDA per share (basic) $ 0.43 $ 0.28 $ 1.46 $ 0.77
Earnings for the period 37.2 14.7 114.6 34.0
Basic earnings per share $ 0.20 $ 0.15 $ 0.80 $ 0.39
Diluted earnings per share $ 0.19 $ 0.15 $ 0.79 $ 0.39
1) Adjusted earnings is a non-GAAP financial measure and consists of net
earnings with adjustments make to exclude derivative losses, gain on
marketable securities and investments, merger costs, and adjustments of
prior year taxes.
2) EBITDA is a non-GAAP financial measure which is defined as operating
income less general and administrative costs and excluding accretion of
assets retirement obligations, amortization, depletion and depreciation
and inventory write down.
The Canadian operations reached a significant milestone when commercial
production was declared at Morrison on September 1, 2010. The ramp up of
Morrison is on schedule and the concept of selective mining continues with a
focus on ore quality versus tonnes mined. Podolsky struggled with adverse ground
conditions, but production is expected to rebound in the fourth quarter as the
high grade stope initially planned for the third quarter is brought into
production. McCreedy West met production tonnage and copper grade goals in the
third quarter and production for the year is expected to be on target. The
Company continues to investigate the restart of nickel production at the Sudbury
operations. Key considerations in making this decision include the processing
terms from Vale, nickel prices and infrastructure capabilities.
In Chile, third quarter production at the Franke mine was similar to the second
quarter as a result of variable recoveries, despite success with the changes to
the leach pad height on some of the pads leached. Adjustments to the leach
parameters at Franke, particularly the leach solution strategies, will continue
as well as adjustments to the crush size going forward.
During the quarter, significant advancements were made on the Sierra Gorda and
Victoria development projects, and it was announced that ongoing drilling at the
Victoria property had expanded and added considerable confidence to Zone 4,
which has now been delineated over a vertical length of over 3,000 feet,
yielding grades significantly higher than are typical in the Sudbury camp.
Studies are currently being initiated to support a decision on an advanced
underground exploration program and work is processing on environment permitting
and with First Nations negotiations.
Partnership discussions and the technical work for the ongoing Financing Study
on Sierra Gorda continued through the quarter. The Financing Study is still
targeted to be completed by the end of the first quarter of next year, with the
Feasibility Study to follow. The base case for project has increased in scope
and the development plan now envisions a plus 25 year operation processing
111ktpd of sulphide ore at start-up, expanding to 190ktpd at the end of the
fourth year. The Scoping Study released in mid-2009 had a more modest throughput
of 111ktpd and an initial capital cost of $1.7 billion. For the purposes of
discussions with potential partners, the Company is assuming a capital cost of
between $2 1/2 billion and $2 3/4 billion for the larger scale project. An
updated capital cost estimate is being prepared as part of the Financing Study.
The target date for the commencement of development remains the third quarter of
2011, with production targeted in the first half of 2014.
Paul Blythe, President & CEO comments; "We continue to make significant progress
on the integration of the former Quadra and FNX teams at both the corporate and
mine site level. We have a robust balance sheet of approximately$600 million in
cash and marketable securities at today's prices. There is an experienced team
in place that is driving forward on resolving our technical issues and our
organic growth projects at Sierra Gorda and Victoria. We are now stronger and
have more capacity to deal with our much larger asset base."
A summary of the financial statements together with the Management Discussion
and Analysis ("MD&A") are provided below. The complete financial statements and
the MD&A will be available at www.quadrafnx.com and www.sedar.com.
This Management Discussion and Analysis ("MD&A") of Quadra FNX Mining Ltd. and
its subsidiaries ("Quadra FNX" or the "Company") has been prepared as at
November 9, 2010 and is intended to be read in conjunction with the accompanying
unaudited consolidated financial statements for the three and nine month periods
ended September 30, 2010. This MD&A contains 'forward looking information' and
reference to the cautionary statement at the end of this MD&A is advised.
Additional information relating to the Company, including its Annual Information
Form, is available on the SEDAR website at www.sedar.com. The Company is a
reporting issuer in all provinces and territories of Canada and its common
shares are traded on the Toronto Stock Exchange under the symbol: QUX. All
financial information in this MD&A is prepared in accordance with the Canadian
Generally Accepted Accounting Principles and all dollar amounts are expressed in
millions of United States dollars unless otherwise indicated.
----------------------------------------------------------------------------
Three months ended Nine months ended
September 30 September 30
2010 2009 Change 2010 2009 Change
----------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
(All amounts in millions of United States dollars
except per share amounts)
Revenues 259.1 90.7 186% 625.8 302.5 107%
Operating income 66.5 31.6 111% 179.8 101.9 76%
EBITDA (1) 80.6 27.3 195% 208.9 66.5 214%
EBITDA per share (basic) 0.43 0.28 55% 1.46 0.77 90%
Earnings for the period 37.2 14.7 153% 114.6 34.0 237%
Earnings per share
(basic) 0.20 0.15 33% 0.80 0.39 105%
Cash 323.0 85.5 278% 323.0 85.5 278%
Working capital 544.5 205.0 166% 544.5 205.0 166%
----------------------------------------------------------------------------
(1) EBITDA is a non-GAAP measure which is defined as earnings attributable
to shareholders before interest expenses, income taxes, depreciation,
amortization and accretion.
DESCRIPTION OF BUSINESS AND NATURE OF OPERATIONS
On May 20, 2010, Quadra Mining Ltd. ("Quadra") completed a merger with FNX
Mining Company Inc. ("FNX") and the combined company was named Quadra FNX Mining
Ltd. ("Quadra FNX" or the "Company") (see section below "Merger of Quadra and
FNX").
Quadra FNX is a mining company that owns and operates six mines producing copper
as well as nickel and precious metals. Before the merger Quadra owned three open
pit mines, the Robinson copper mine in Nevada and two heap leach SX/EW copper
mines - the Carlota mine in Arizona and the Franke mine in Chile. As a result of
the merger with FNX in the second quarter of 2010, the Company now owns and
operates three underground mines the McCreedy West mine and the Levack mine
which includes the Morrison deposit together known as the Levack Complex as well
as the Podolsky mine all located in Canada's Sudbury mining district. The
Company also owns the Sierra Gorda project, an advanced copper-molybdenum
project in northern Chile, and the Victoria project in Sudbury. Quadra FNX's
strategic plan is based on growing to a sustainable production rate in excess of
500 million pounds of copper per year from diverse operations and with a
pipeline of development projects for long term sustainability and growth. The
immediate focus is on integration of the two companies and optimisation of the
various projects and operations that are ramping up.
MERGER OF QUADRA AND FNX
On May 20, 2010, Quadra and FNX completed a merger of the two companies. The
merger was structured as a court-approved plan of arrangement (the
"Transaction") under the Business Corporations Act (Ontario) pursuant to which
Quadra acquired all of the issued and outstanding common shares of FNX. Under
the terms of the Transaction, former shareholders of FNX received 0.87 common
shares of Quadra and $0.0001 for each common share of FNX. Outstanding options
and warrants to acquire FNX shares were converted into options and warrants to
acquire Quadra shares, adjusted in accordance with the same exchange ratio. A
total of 88.9 million common shares were issued to former FNX shareholders, and
options and warrants to acquire 2.9 million and 6.5 million common shares,
respectively were issued on conversion of FNX options and warrants.
Upon completion of the merger, existing Quadra and FNX shareholders owned
approximately 52% and 48% of the combined company, respectively, on a fully
diluted basis. The acquisition is accounted for as a business combination, and
Quadra is considered to be the acquirer for accounting purposes. The total
purchase consideration for accounting purposes is $980.2 million, based on the
fair value of the issued common shares and other consideration as of May 20,
2010, the closing date of the merger. FNX's assets and liabilities have been
re-measured at their individual fair values at the closing date of the merger
and FNX's financial results have been consolidated commencing from May 21, 2010.
FINANCIAL PERFORMANCE
Earnings
The Company recorded earnings of $37.2 million or $ 0.20 per share (basic) for
the three months ended September 30, 2010, compared to $14.7 million or $0.15
per share (basic) in the same quarter of 2009. The increased earnings in the
third quarter of 2010 were primarily a result of higher average copper prices in
the current year, and the increased earnings contribution from Franke, as well
as the profits from the Sudbury operations following the merger with FNX. Third
quarter 2010 earnings were also impacted by an $8.5 million accounting loss on
derivatives, a $2.6 million foreign exchange loss and a $6.7 million unrealized
gain on held for trading marketable securities (see "General & administrative
and other expenses").
In the third quarter of 2010, the Company sold a total of 56.8 million pounds of
copper at an average realized price of $3.52/lb compared to 27.6 million pounds
at an average realized price of $2.65/lb in the third quarter of 2009.
Earnings for the first nine months of 2010 were $114.6 million or $0.80 per
share (basic) compared to $34.0 million or $0.39 per share (basic) for the same
period in 2009. The increase in earnings in 2010 is primarily due to higher
copper prices in the current year, the earnings contribution from Franke which
commenced operations in the second half of 2009, as well as the earnings
contributed from the Sudbury operations following the merger with FNX and lower
derivative losses in the current year.
Operating Income
Operating income for the three and nine months ended September 30, 2010 and 2009
was as follows:
Three Three Nine Nine
months months months months
ended ended ended ended
September September September September
30, 2010 30, 2009 30, 2010 30, 2009
----------------------------------------------
(All amounts in millions of
U.S. dollars)
Robinson 46.0 24.1 131.1 90.7
Carlota 8.0 7.5 25.8 11.2
Franke 1.5 - 11.3 -
Levack Complex, excluding
Morrison (0.2) - (2.1) -
Morrison (1) 3.1 - 3.1 -
Podolsky 7.1 - 9.4 -
DMC Mining Services ("DMC") 1.0 - 1.2 -
----------------------------------------------
Operating income 66.5 31.6 179.8 101.9
----------------------------------------------
----------------------------------------------
(1) For the period after September 1, 2010, the day of commencement of
commercial production
Note: For accounting purposes, the financial results of the Levack Complex,
Podolsky, Morrison and DMC have been consolidated commencing from May 21, 2010,
the day after the closing date of the merger of Quadra and FNX.
Operating income increased in the third quarter and the first nine months of
2010 primarily due to higher average copper prices and increased revenues from
Franke which did not commence operations until the second half of 2009. The
Company's Sudbury operations also had a positive impact on the third quarter of
2010 operating income. These factors were partially offset by higher onsite
costs at Robinson and Carlota (see "Review of Operations and Projects").
To view the tables for Revenues in the three months ended September 30, 2010 and
September 30, 2009 and the nine months ended September 30, 2010, please visit
the following link: http://media3.marketwire.com/docs/qux1110tables1.pdf.
Note: For accounting purposes, the financial results of the Levack Complex,
Morrison, Podolsky, and DMC have been consolidated commencing from May 21, 2010,
the day after the closing date of the merger of Quadra and FNX.
To view the table for Revenues in the nine months ended September 30, 2009,
please visit the following link:
http://media3.marketwire.com/docs/qux1110tables2.pdf.
(1) Represents total revenues from sale of copper divided by pounds sold
(2) Excluding the Morrison deposit
(3) For the period after September 1, 2010, the day of commencement of
commercial production
(4) Total precious metal, including gold, platinum and palladium
Robinson revenues
At Robinson, revenues are generated by the sale of copper and gold in
concentrates. Revenues are generally recognized at the time of delivery to a
customer based on metal prices at that time, however, under Robinson's current
sales contracts, which follow normal industry practice, final pricing for copper
sold in concentrate is generally set at up to three months after the time of
arrival of a shipment at the customer's port of delivery. As a result,
Robinson's quarterly revenues include estimated prices for sales, based on
forward copper prices at quarter end, as well as pricing adjustments for sales
that occurred in previous quarters, based on the actual price received and the
price at quarter end for sales from previous quarters that were not settled in
the quarter.
In the quarter ended September 30, 2010, revenues from concentrate sales at
Robinson were higher than the third quarter of 2009 due to higher sales volumes
and copper prices. In the third quarter of 2010, copper prices increased from
$2.96/lb at June 30, 2010 to $3.65/lb at September 30, 2010 resulting in
positive pricing adjustments of $1.9 million related to the settlement of sales
from the second quarter of 2010. In addition, the Company recorded a positive
price adjustment of $6.5 million related to the third quarter shipments from
Robinson which were revalued using the copper price of $3.65/lb at September 30,
2010.
For the first nine months of 2010, revenues from concentrate sales at Robinson
were higher than the same period in 2009 due to significantly higher copper
prices. During the nine month period of 2010, the copper price continued to
recover, resulting in positive price adjustments in the period.
At June 30, 2010, receivables included 10.4 million pounds of copper which has
been provisionally valued at $2.96/lb. During the third quarter of 2010, these
receivables were settled at an average final price of $3.19/lb. In the third
quarter of 2010, Robinson shipped approximately 28.9 million pounds of copper at
an average provisional price of $3.16/lb, of which 16.1 million pounds were
settled during the quarter with an average final price of $3.44/lb. At September
30, 2010, receivables include 12.8 million pounds of copper which has been
provisionally valued at $3.65/lb.
Carlota and Franke revenues
Revenues from Carlota and Franke are generated by the sale of copper cathodes.
The pricing of copper cathode sales is generally set within one month from the
time of shipment or one month after the time of shipment and therefore pricing
adjustments in subsequent periods are minimal.
In the third quarter of 2010, revenues from cathode sales at Carlota were higher
than the same quarter of 2009 due to higher average copper prices in the current
quarter. In the first nine months of 2010, revenues from cathode sales at
Carlota were also higher than the same period of 2009 due to higher sales
volumes and higher average copper prices in the current year. The increased
sales volumes were a result of higher cathode production as Carlota continues to
ramp up production.
In the third quarter of 2010, Franke recorded revenues of $41.4 million from the
sale of 12.8 million pounds of copper cathode. In the first nine months of 2010,
revenues from Franke were $100.3 million from the sale of 30.9 million pounds of
copper cathode. Franke did not have any sales in the first nine months of 2009.
Levack Complex and Podolsky revenues
At the Levack Complex and Podolsky, revenues are generated by the sale of copper
and nickel ores to Vale in Sudbury, Ontario for processing. The quantity of
payable metal contained in the delivered ores is based on assay grades and, when
final assays are not yet available at the end of a month, on estimated grades.
Revenues are initially recognized using provisional prices at the time ore is
delivered to and accepted by the third party processor. Final pricing and
payment for the metals in the copper and nickel ores shipped to Vale are
generally set between three to six months after the delivery. As a result, the
Levack Complex and Podolsky's quarterly revenues include estimated prices for
sales, based on metal prices at quarter end, as well as pricing adjustments for
sales that occurred in previous quarters, based on the actual price received and
the price at quarter end for sales from previous quarters.
For the third quarter of 2010, the Levack Complex, excluding Morrison recorded
revenues of $11.8 million, including positive price adjustments of $1.8 million
related to prior quarter sales. Morrison reached commercial production on
September 1, 2010 generating revenues of $13.9 million in the third quarter of
2010. Revenues generated by Podolsky in the same period were $28.1 million,
including positive price adjustments of $1.9 million related to prior quarter
sales. Average realized copper prices were higher than the Company's other mines
due to positive price adjustments for prior quarter shipments as a result of the
increased copper prices. At September 30, 2010, receivables include 6.1 million
pounds of copper sold from the Levack Complex (including Morrison) and Podolsky
which have been provisionally valued at $3.65/lb.
Third quarter revenues at the Levack Complex (including Morrison) and Podolsky
also include non-cash revenue of $5.3 million for the amortization of a deferred
revenue liability related to the Company's obligation to sell 50% of the gold,
platinum and palladium contained in ore mined and shipped from certain deposits
to Gold Wheaton Gold Corp. ("Gold Wheaton"). Pursuant to an agreement with Gold
Wheaton dated July 15, 2008, the Company receives a cash payment equal to the
lower of $400 per gold equivalent ounce (subject to a 1.0% annual inflationary
adjustment commencing July 1, 2011) and the prevailing market price per ounce of
gold, for each gold equivalent ounce sold to Gold Wheaton.
For the period of May 21 to September 30, 2010, the Levack Complex, excluding
Morrison recorded revenues of $15.8 million. The Morrison deposit reached
commercial production on September 1, 2010 and contributed revenues of $15.2
million in the period. Revenues generated by Podolsky in the same period were
$43.3 million.
DMC revenues
DMC provides contract mining services in Canada, the United States and Mexico.
Contract revenue is earned primarily based on units of production and recognized
at the time that service has been performed. Revenues from DMC totalled $12.1
million for the third quarter of 2010. Since the merger closing date of May 20,
2010, DMC has recorded revenues of $16.7 million.
Operating expenses
Three months ended
September 30, 2010
-------------------------------------------------------------
Levack
Complex Morrison
Robinson Carlota Franke (1) (2) Podolsky DMC Total
(in millions of
U.S. dollars)
Cost of sales 70.3 10.4 33.3 9.2 5.1 15.0 10.2 153.5
Amortization,
depletion,
depreciation
and accretion 7.1 2.3 6.6 2.8 5.8 6.1 0.8 31.5
Royalties and
mineral taxes 6.5 1.1 - - - - 7.6
-------------------------------------------------------------
Operating
expenses 83.9 13.8 39.9 12.0 10.9 21.1 11.0 192.6
-------------------------------------------------------------
-------------------------------------------------------------
Three months ended
September 30, 2009
--------------------------------------------------------------
Levack
Complex Morrison
Robinson Carlota Franke (1) (2) Podolsky DMC Total
(in millions
of U.S.
dollars)
Cost of sales 41.3 11.3 - - - - - 52.6
Start-up
inventory
adjustment - (4.3) - - - - - (4.3)
Amortization,
depletion,
depreciation
and accretion 4.2 1.7 - - - - - 5.9
Royalties and
mineral taxes 4.1 0.9 - - - - - 5.0
--------------------------------------------------------------
Operating
expenses 49.6 9.6 - - - - - 59.2
--------------------------------------------------------------
--------------------------------------------------------------
Nine months ended
September 30, 2010
--------------------------------------------------------------
Levack
Complex Morrison
Robinson Carlota Franke (1) (2) Podolsky DMC Total
(in millions
of U.S.
dollars)
Cost of sales 189.6 39.0 74.1 14.4 5.8 25.1 14.2 362.2
Amortization,
depletion,
depreciation
and accretion 19.5 8.0 14.9 3.3 6.3 8.9 1.4 62.3
Royalties and
mineral taxes 17.6 3.9 - - - - - 21.5
--------------------------------------------------------------
Operating
expenses 226.7 50.8 89.0 17.7 12.1 34.0 15.6 446.0
--------------------------------------------------------------
--------------------------------------------------------------
Note: For accounting purposes, the financial results of the Levack Complex,
Morrison, Podolsky, and DMC have been consolidated commencing from May 21, 2010,
the date after the closing date of the merger of Quadra and FNX.
Nine months ended
September 30, 2009
-------------------------------------------------------------
Levack
Complex Morrison
Robinson Carlota Franke (1) (2) Podolsky DMC Total
(in millions of
U.S. dollars)
Cost of sales 143.6 34.5 - - - - - 178.1
Start-up
inventory
(reversal)
adjustment - (9.7) - - - - - (9.7)
Amortization,
depletion,
depreciation
and accretion 15.5 3.7 - - - - - 19.2
Royalties and
mineral taxes 10.8 2.2 - - - - - 13.0
-------------------------------------------------------------
Operating
expenses 169.9 30.7 - - - - - 200.6
-------------------------------------------------------------
(1) Excluding the Morrison deposit
(2) The Morrison deposit reached commercial production as of September 1,
2010
Robinson
Cost of sales at Robinson were higher in the third quarter of 2010 as a result
of the higher onsite costs (see "Review of Operations and Projects") as well as
higher concentrate sales volumes in the current quarter. Cost of sales in the
third quarter of 2009 were reduced by an accounting adjustment to capitalize
$7.0 million of stripping costs at Robinson related to the new Ruth pit area. No
stripping costs were capitalized in the third quarter of 2010. Cost of sales for
the first nine months of 2010 were higher than the same period of 2009 due to
higher concentrate sales volumes and higher onsite costs (see "Review of
Operations and Projects").
Amortization, depletion, depreciation and accretion were higher in the three and
nine month periods ended September 30, 2010 than the same periods of 2009,
mainly due to the amortization of stripping costs that were capitalized during
2009 and higher concentrate sales volumes.
Royalties and mineral taxes in the third quarter and for the first nine months
of 2010 were higher than the same periods of 2009, mainly due to the higher
copper prices and sales volumes in the current year.
Carlota
Cost of sales at Carlota was slightly lower in the third quarter of 2010 than
the same quarter of 2009. Higher cost of sales in the third quarter of 2009 was
a result of the reversal of start-up inventory adjustment during the year. Cost
of sales for the first nine months of 2010 was higher than the same period of
2009 due mainly to higher onsite costs in the current year and higher sales
volume (see "Review of Operations and Projects"). Operating expenses in the
first nine months of 2009 also included a reversal of a start-up inventory
adjustment of $9.7 million due to the increase in copper prices and the
resulting increase in the net realizable value of the inventory.
Amortization, depletion, depreciation and accretion were higher in the three and
nine month periods ended September 30, 2010 mainly due to the higher sales
volumes in the current year.
Royalties and mineral taxes for the three and nine month periods ended September
30, 2010 were higher than the same periods of 2009 mainly due the higher sales
volumes and higher copper prices in the current year.
Franke
Franke recorded cost of sales of $33.3 million and amortization, depletion and
depreciation of $6.6 million in the third quarter of 2010. Franke was still in
the construction phase in the third quarter of 2009, and therefore did not have
any production or cost of sales in the comparative period.
Levack Complex, Morrison, Podolsky and DMC
The cost of sales and amortization, depletion, depreciation and accretion
reported for the Levack Complex, Morrison, Podolsky and DMC reflect the expenses
incurred between May 21, 2010 (the date immediately following the closing date
of the merger with FNX) and September 30, 2010.
General & administrative and other expenses
General and administrative expenses for the third quarter of 2010 were $10.6
million compared to $4.8 million for the same quarter of 2009. The increase in
general and administrative expenses in the current quarter was mainly due to
$3.5 million of severance payments related to the merger with FNX. For the first
nine months of 2010, general and administrative expenses were $24.0 million
compared to $12.4 million for the same period of 2009. The increased general and
administrative expenses reflect the Company's increased activity level and
payroll costs in the current year as a result of the merger with FNX, as well as
costs associated with the non-binding MOU that was negotiated with SGID during
the first quarter of 2010. Stock-based compensation expenses for the third
quarter were $2.9 million compared to $1.2 million for the same quarter of 2009.
For the first nine months of 2010, stock-based compensation expenses increased
to $6.3 million compared to $4.8 million in the same period of 2009. The
increase in stock-based compensation expenses was due to additional grants of
stock options and restricted share units in the current year.
The Company recognized a loss on derivatives of $8.5 million for the third
quarter of 2010. These derivative losses primarily relate to a reduction in the
fair value of the copper put options and an increase in Franke long-term supply
contracts derivative liabilities as a result of increased copper prices. For the
first nine months of 2010, the Company recognized a loss of $12.0 million on
derivatives primarily due to the decrease in fair value of the copper put
options as well as the increase in derivative liabilities associated with the
Franke long-term supply contracts. The loss on derivatives for the third quarter
and the first nine months of 2009 of $13.8 million and $39.8 million
respectively related to a decline in value of copper puts and collars.
Foreign exchange losses of $2.6 million and $0.8 million respectively were
recognized in the three and nine month periods ended September 30, 2010, and
primarily relate to the translation of future income tax liabilities denominated
in Canadian dollars. The Company expensed transaction costs for the merger with
FNX of $0.2 million and $7.2 million for the three and nine month periods ended
September 30, 2010, respectively.
In the third quarter of 2010, the Company recorded net interest and other income
of $4.7 million compared to net interest and other income of $8.0 million in the
same quarter of 2009. Other income in the current quarter was as a result of the
unrealized gain from the increase in fair value of held for trading marketable
securities. Other income in the same period of 2009 primarily related to a
realized gain on sale of marketable securities.
The Company recorded income tax expense of $11.0 million in the third quarter of
2010, compared to $6.5 million in the same quarter of 2009. For the first nine
months of 2010, the Company recorded income tax expense of $29.2 million
compared to $12.5 million in the same period of 2009. The tax expense for the
first nine months of 2010 has been recorded based on an estimated annual
effective tax rate of 22.8% (2009 - 24%). The decrease in effective tax rate in
2010 is mainly due to the utilization of U.S. Alternative Minimum Tax credits
which were earned in prior years and the earnings from the Franke mine in Chile
which has a lower statutory tax rate. Tax expense in the first nine months of
2010 also included a $2.3 million future income tax recovery related to the gain
on marketable securities which has been recorded in other comprehensive income.
REVIEW OF OPERATIONS AND PROJECTS
Note: Production and operating statistics in this section are reported for
historical periods for all of the Company's mines, including periods prior to
the merger of Quadra and FNX. For accounting purposes, the financial results of
the Sudbury Operations have been consolidated commencing from May 21, 2010, the
date immediately following the closing date of the merger of Quadra and FNX.
Production for the three and nine months ended September 30, 2010 from the
Company's operating mines is summarized as follows:
Three months Nine months
ended ended
September 30, September 30,
2010 2010
--------------- -------------
Copper production (million lbs)
Robinson (3) 26.7 82.4
Carlota (4) 7.3 22.9
Franke (4) 10.1 29.4
Levack Complex, excluding Morrison (5) 1.2 3.7
Morrison deposit (2) (5) 6.3 11.4
Podolsky (5) 5.4 17.2
--------------- -------------
56.9 166.9
Nickel production (million lbs)
Levack Complex, excluding Morrison (5) 0.2 0.6
Morrison deposit (2) (5) 0.8 2.6
Podolsky (5) 0.3 1.2
--------------- -------------
1.3 4.4
TPM (1) (thousand ozs)
Robinson (3) 15.3 57.3
Levack Complex, excluding Morrison (5) 8.1 24.1
Morrison deposit (2) (5) 3.0 5.7
Podolsky (5) 5.4 22.2
--------------- -------------
31.8 109.3
(1) Total precious metal, including gold, platinum and palladium
(2) Including pre-production ore
(3) Produced in concentrate
(4) Produced in cathode
(5) Shipped payable metal
ROBINSON MINE (NEVADA)
Three Three Nine Nine
months months months months
ended ended ended ended
September September September September
30, 30, 30, 30,
2010 2009 2010 2009
-------------------------- --------------------------
(All amounts in millions of U.S.
dollars unless otherwise
indicated)
Copper in concentrate
production (million
lbs) 26.7 33.6 82.4 93.2
Gold in concentrate
production (thousand
ozs) 15.3 21.1 57.3 73.8
Waste mined (thousand
tonnes) 13,228 12,138 35,117 32,123
Ore mined (thousand
tonnes) 3,644 4,360 10,736 11,628
Ore milled (thousand
tonnes) 3,299 3,555 10,231 10,126
Copper grade (%) 0.49 0.75 0.50 0.66
Gold grade (g/t) 0.25 0.26 0.25 0.31
Copper recovery 75.3% 57.4% 73.5% 63.0%
Gold recovery 58.2% 71.4% 68.5% 73.0%
Onsite costs $ 59.0 $ 49.4 $ 165.1 $ 146.1
Offsite costs $ 9.9 $ 11.1 $ 33.0 $ 33.9
-------------------------- --------------------------
Total onsite and
offsite costs $ 68.9 $ 60.5 $ 198.1 $ 180.0
Cash cost per pound
of copper produced
(US$/lb) $ 1.58 $ 1.27 $ 1.40 $ 1.17
Capital expenditure $ 13.6 $ 6.8 $ 26.8 $ 13.8
There has been extensive mining at Robinson for over 100 years and the operation
periodically deals with historical workings and work commenced by BHP Billiton
and continued by Quadra FNX has endeavoured to define the size and location of
these historical workings as part of the resource estimate process. The
evaluation of these workings is based on a combination of historical records and
definition drilling and during the quarter the Company continued confirmatory
drilling at the bottom of the Ruth pit. Based on the evaluation of historical
information and drill results to date, the Company does not expect the
underground workings in the Ruth pit to have further impact in 2010 or going
forward.
In the third quarter of 2010, Robinson processed ore from both the Ruth and
Veteran pits, producing 26.7 million pounds of copper and 15,300 ounces of gold
in concentrate. Head grades in the Ruth pit improved from the levels achieved in
the second quarter; however this was partially offset by lower throughput
resulting from harder and more abrasive ore encountered at the bottom of the
Veteran pit.
As anticipated in 2010 mine plan, total material mined in the third quarter of
2010 was slightly higher than in 2009. Copper production in the third quarter of
2010 was lower than in 2009 due to lower head grade and milling rates, partially
offset by higher copper recoveries. Copper recoveries in 2010 benefited from the
additional flotation capacity that was installed in the fourth quarter of 2009.
In addition, new contractual terms with concentrate customers provided Robinson
more flexibility with respect to concentrate grade.
Gold production in the third quarter of 2010 was lower compared to the same
quarter of 2009 due to lower head grades in the Ruth pit area which in turn led
to lower gold recoveries as expected.
Robinson Operating and Capital Costs
Operating costs are comprised of onsite and offsite costs (see "Non-GAAP
Financial Measures"). Onsite costs include all stripping costs and are primarily
driven by the volume of waste and ore moved, payroll costs, supplies and
equipment maintenance costs and royalties. Onsite costs in the third quarter of
2010 were $9.6 million higher than the same quarter of 2009, primarily due to
increased diesel fuel costs of $2.7 million caused by increased diesel fuel
usage, increased plant and mobile equipment maintenance of $2.7 million due to
scheduled engine replacements, $2.7 million related to removal of mud from the
Ruth pit and increased royalty cost of $1.0 million due to increase in metal
prices and sales volumes. Onsite costs for the first nine months of 2010 were
$19.0 million higher than the same period of 2009 primarily due to increased
diesel costs of $3.7 million caused by increased price and consumption,
increased royalties of $3.7 million due to an elevated copper price and $6.0
million in truck replacement parts as well $3.5 million related to removal of
mud from the Ruth pit.
Offsite costs are primarily driven by smelting and refining charges, the volume
of concentrate transported, and rail and ocean freight rates. Offsite costs in
the third quarter were $1.2 million lower than the same quarter of 2009 due
primarily to lower ocean freight rates partially offset by higher sales volumes.
Offsite costs in the first nine months of 2010 were generally in line with the
same periods of 2009.
The cash cost per pound of copper produced was $1.58 in the third quarter of
2010 as compared to $1.27 in the same quarter of 2009. The cash cost per pound
of copper produced for the first nine months of 2010 was $1.40 compared to $1.17
in the same period of 2009. The increased unit cost in the first nine months of
2010 is due to lower copper production and higher onsite costs. The cash cost
per pound of copper produced is a non-GAAP term and consists of onsite costs
(including all stripping costs), and offsite costs, less by-product revenue,
divided by the pounds of copper produced in the period (see "Non-GAAP Financial
Measures").
Capital expenditures at Robinson in the third quarter of 2010 were primarily
related to Ruth pit development and exploration as well as metallurgical
definition drilling in the Ruth pit.
Robinson Outlook
The results from the metallurgical drill program carried out over the last two
years have been used to create a new recovery model within the block model. This
is expected to improve the planning and ability to forecast going forward.
However, the complex nature of the Robinson ore body will continue to cause
metal production variations from quarter to quarter for the duration of the mine
life.
Mining of the Veteran pit is expected to be completed in the fourth quarter of
2010, after which all mining will occur from the Ruth area. In the fourth
quarter Robinson is expected to mine higher grades and softer material from the
Ruth pit, offsetting the impact of an unscheduled three day mill shut down to
repair a faulty conveyor belt in October. The Company expects that 2010 copper
production from Robinson will be at the lower end of the previously stated range
of 115-125 million pounds of copper, while gold production is expected to
achieve the target of 75,000 ounces.
In the bottom of the Ruth pit, there is approximately 3.4 million cubic yards of
mixed tailings from historic gold operations and slide debris from the
historical pit walls. This material is a mixture of fined grained and larger
rocks that contains significant moisture (Ruth pit mud). During the third
quarter the Company engaged a new specialized contractor to continue the removal
of the material. The removal of this material by mid-2011 is critical in order
to allow mining to advance deeper in the Ruth pit.
The dewatering of the Ruth pit also remains a focus going forward. This will be
critical for mining at the bottom of the Ruth pit in 2012. While the dewatering
is ramping up to 13,000 U.S. gallon per minute ("US GPM") from the current 9,000
US GPM by year end, the Company have decided to increase the dewatering capacity
to the limit of permitting at 18,000 US GPM by installing the necessary
additional wells and pumps.
Onsite costs are expected to increase in 2010 compared to 2009 primarily as a
result of expected increases in tonnage mined and milled as well as an increase
in future royalty expenses due to anticipated higher copper prices. Capital
costs for the remainder of 2010 are expected to be approximately $9 million
primarily on Ruth pit development and exploration.
CARLOTA MINE (ARIZONA)
Three Three Nine Nine
months months months months
ended ended ended ended
September September September September
30, 30, 30, 30,
2010 2009 2010 2009
------------------------ ------------------------
(All amounts in millions of U.S.
dollars unless otherwise indicated)
Copper cathode production
(million lbs) 7.3 6.6 22.9 20.0
Waste mined (thousand
tonnes) 4,688 4,689 15,676 14,204
Ore mined (thousand
tonnes) 2,253 1,427 4,857 4,483
Ore placed (thousand
tonnes) 2,253 1,427 4,857 4,484
Total copper grade (%) 0.77 0.45 0.56 0.36
Onsite costs $ 21.4 $ 17.8 $ 72.3 $ 54.6
Cash cost per pound of $
copper sold (US$/lb) (1) 1.74 $ 1.88 $ 1.80 $ 1.85
Capital expenditure $ 5.4 $ 6.6 $ 17.3 $ 17.2
(1) Company changed its calculation method of cash costs per pound for its
heap leach operations to conform with industry standards (see "Non-
GAAP" Financial Measures").
Total tonnes mined in the third quarter of 2010 at Carlota were higher than the
same quarter of 2009 due to the increase of the haulage fleet. Ore tonnes mined
during the third quarter of 2010 were higher than the same quarter of 2009 as
access to ore in the Cactus pit was re-established after the storm event in
early 2010. Copper production in the third quarter of 2010 was higher than the
same quarter of 2009 as a result of leaching higher grade ore placed in the
fourth quarter of 2009.
Carlota Operating and Capital Costs
Carlota's onsite operating costs are mainly driven by the volume of waste and
ore moved, payroll costs, supplies, process reagents, fuel, electricity,
equipment maintenance costs, and royalties. Onsite costs in the third quarter of
2010 were $3.7 million higher than the same quarter of 2009 due primarily to
mine equipment leases of $0.6 million, diesel fuel of $1.0 million, ferric
sulphate of $0.4 million and outside services of $1.2 million related to
remediation activities following the storm event, and a $0.4 million increase in
royalty expenses due to the increased copper prices and sales volumes. Onsite
costs in the first nine months of 2010 were $17.7 million higher than the same
period of 2009, primarily due to a $3.5 million increase in maintenance repairs
to the mine equipment, a $1.7 million increase in mine equipment leases, a $3.7
million increase in diesel fuel, a $3.7 million increase in ferric sulphate, a
$2.6 million increase in outside services related to remediation activities
following the storm event and a $1.3 million increase in royalty expenses due to
increased copper prices and sales volumes.
Capital expenditures at Carlota in the third quarter of 2010 were primarily
related to construction of the Leach Pad Phase 2 and Pinto Creek diversion
channel as well as to additional water control measures.
Carlota Outlook
The Company has evaluated the impact of the January storm event and the
subsequent unusually wet winter and spring weather, which resulted in water
levels well above normal for Arizona, and concluded that it will not be possible
to recover the production losses that resulted from these events. On June 19,
2010 the Company announced that it expected to produce approximately 35 million
pounds of cathode at Carlota in 2010, as a result of the following:
-- The remaining impact of storm water volume within the leach pad on the
grade of the pregnant-leach-solution ("PLS").
-- A lower than expected percolation rate due to the presence of higher
than expected percentage of fines in the ore and slower than expected
leaching rates for both sulfide and oxide ores.
As expected ore grades and volumes have improved during the third quarter.
However, due to the slower leaching kinetics of the sulfide (chalcocite) ores
being placed on the pad and the continued lower percolation rate of 5 1/hr/m2
(versus 6 1/hr/m2 outlined in the Feasibility Study), copper production in the
fourth quarter is expected to be similar to the levels achieved in the third
quarter.
Since the rain event, the operation has consumed most of the excess storm water
through evaporation and the saturation of fresh ore from the mine, but solution
levels remained higher than normal for most of the third quarter of 2010.
It is now believed that the fines causing the reduced percolation rate at
Carlota will be pervasive throughout the ore body. A broad range of studies to
establish the optimum course forward are ongoing and include changes to blending
techniques, additional processing measures, alternative irrigation strategies,
the evaluation of alternative stacking methods and potential reductions in leach
pad lift height. The Company currently has a significant amount of recoverable
copper stacked on the Carlota leach pads. The existence of fines is affecting
the recovery of copper from these pads. Studies are ongoing to determine the
best way to deal with this issue, which may entail the removal and restacking of
ore to fully recover the predicted quantities of recoverable copper, an
alternative that may not be economically viable. The Company will be reviewing
these alternatives in the coming months.
The Quadra FNX exploration group has developed a new ore genesis model for the
Carlota ore body which implies further exploration potential at depth. Initial
drilling at the periphery of the Carlota pit has intersected copper
mineralization, supporting the validity of the new exploration model. Additional
drilling, targeting mineralization below the Carlota ore body, will be initiated
in the fourth quarter 2010.
As operations have progressed the pit wall stability has been regularly reviewed
by an independent consultant who is now of the view that the slope in the area
of the Kelly fault will have to be decreased implying that increased stripping
may be required. The economic and reserve implications are being evaluated and
will be published upon completion.
Onsite costs in 2010 are expected to be higher than in the prior year due to
additional costs to recover from the rain event early in the year, increased
costs for equipment leases, maintenance activities, diesel fuel and reagents.
Capital expenditures for the remainder of 2010 are expected to be $10 million,
primarily related to the planned leach pad expansion and updated reclamation
bonding.
FRANKE MINE (CHILE)
Three Three Nine Nine
months months months months
ended ended ended ended
September September September September
30, 30, 30, 30,
2010 2009 2010 2009
------------------------ -----------------------
(All amounts in millions of U.S. dollars
unless otherwise indicated)
Copper cathode production
(million lbs) 10.1 4.1 29.4 4.1
Waste mined (Tonnes 000's) 1,292 1,528 3,369 1,528.0
Ore mined (Tonnes 000's) 969 - 2,955 -
Ore placed (Tonnes 000's) 941 552 2,501 552.0
Copper grade (%) 0.77 0.80 0.83 0.80
Onsite and offsite costs $ 24.9 $ - $ 72.7 $ -
Cash cost per pound of
copper sold (US$/lb) (1) $ 2.60 $ - $ 2.40 $ -
Capital expenditure $ 9.6 $ - $ 18.1 $ -
(1) Company changed its calculation method of cash costs per pound for its
heap leach operations to conform with industry standards (see "Non-
GAAP" Financial Measures").
A total of 10.1million pounds of copper cathode was produced at Franke during
the third quarter of 2010. Franke was in the pre-production phase in the first
nine months of 2009 with 4.1 million pounds of pre-production copper cathode
produced.
Since the second quarter, the stacker system throughput rate has improved and
third quarter 2010 production was an operations-to-date record. However,
production at Franke was impacted by lower-than-expected leach recovery during
the quarter.
Franke Operating and Capital Costs
Franke's operating costs are mainly driven by the volume of waste and ore moved
by the mining contractor, acid costs, payroll costs, fuel, electricity and
equipment maintenance costs. Onsite costs in the third quarter of 2010 were
higher than expected due mainly to higher ore tonnes placed on the leach pads.
Capital expenditures at Franke in the third quarter of 2010 were primarily
related to the construction of stockpile covers to control dust emissions, leach
pad construction, and acid tank construction.
Franke Outlook
On June 19, 2010, the Company announced that Franke's 2010 copper production was
expected to be approximately 45 million pounds. The reasons for this decrease in
guidance were:
-- The ore to leach pad stacker system throughput was previously estimated
at approx.10,500tpd, but is now expected to continue to perform at
8,500tpd until December - a shortfall of 20%.
-- Leach recoveries were lower than expected as a result of sub-optimal
leach parameters.
As previously disclosed, the Company has been adjusting the leach operating
parameters, including reducing the lift height and increasing solution
application rates. These changes have been proven beneficial and will continue
along with other optimizations. Specifically, attention is now focused on acid
addition and cures as well as optimizing the crush size for the ore, based on an
increasing understanding of the liberation characteristics of the ore. Improved
copper recovery is expected with these initiatives. Additional leach pad space
was constructed in the third quarter to accommodate the lower heap heights.
In late November, Franke will assemble and commission the stacking equipment
ordered in July. The new equipment is expected to improve plant utilization and
bring the production rate to design.
The block model at Franke was extensively revised during the month, taking into
account a full geological model and the knowledge gained to date. This will
significantly improve short term predictability and long term planning.
Franke's acid supply has been fully contracted for the remainder of 2010 with
half of the required quantity contracted at a price dependent on copper price
and the remainder at market terms. Major capital expenditures for the remainder
of 2010 are expected to total $8 million and are related to completing the
stockpile covers to control dust and to completing the acid storage tank.
LEVACK COMPLEX (excluding Morrison) (SUDBURY, CANADA)
Three Three Nine Nine
months months months months
ended ended ended ended
September September September September
30, 30, 30, 30,
2010 2009 2010 2009
---------------------- ----------------------
(All amounts in millions of U.S. dollars
unless otherwise indicated)
Copper ore sold (thousand
tonnes) (1) 72.6 2.3 207.3 99.0
Copper grade (%) 0.9 0.8 1.0 1.3
Copper sold - payable (million
lbs) 1.2 - 3.7 2.6
Nickel sold - payable (million
lbs) 0.2 - 0.6 1.3
Gold sold - payable (thousand
ozs) 0.9 (0.2) 3.3 1.6
Platinum sold - payable
(thousand ozs) 2.7 0.1 7.7 4.2
Palladium sold - payable
(thousand ozs) 4.5 0.1 13.1 6.4
Total onsite and offsite costs
(2) $ 9.2 - $ 20.2 -
Cash cost per pound of copper
sold (US$/lb) (2) $ 2.83 - $ 3.73 -
Capital expenditure (2) $ 2.9 - $ 4.4 -
(1) Converted to metric tonnes from short tons
(2) For the period since the May 21, 2010, the date after the merger of
Quadra and FNX
Note: Production statistics in the above table are reported for all historical
periods, including the period prior to the merger of Quadra and FNX on May 20,
2010. There were no shipments in third quarter of 2009 due to a Vale planned
shut down and subsequent strike. Shipments commenced at the end of September
2009.
The Levack Complex is comprised of two adjacent mining operations, McCreedy West
and Levack, which includes the Morrison deposit (which is discussed separately
in the following section).
McCreedy West met production tonnage and copper grade goals in the third quarter
of 2010. Production for the year is expected to be on target.
Levack Complex Outlook
Quadra FNX continues to investigate restarting nickel production at its Levack
Complex. Key considerations in this decision include the processing terms from
Vale Inco, nickel prices and infrastructure capabilities.
MORRISON DEPOSIT (SUDBURY, CANADA)
Three Three Nine Nine
months months months months
ended ended ended ended
September September September September
30, 30, 30, 30,
2010 2009 2010 2009
------------------------- -----------------------
(All amounts in millions of U.S.
dollars unless otherwise indicated)
Copper ore sold (thousand
tonnes) (1) 29.3 - 62.1 -
Copper grade (%) 11.2 - 9.4 -
Nickel ore sold (thousand
tonnes) (1) 4.5 14.5 6.9
Nickel grade (%) 2.4 2.8 1.8
Copper sold - payable
(million lbs) 6.3 - 11.4 0.2
Nickel sold - payable
(million lbs) 0.8 - 2.6 0.3
Gold sold - payable
(thousand ozs) 0.4 - 0.7 -
Platinum sold - payable
(thousand ozs) 0.8 - 1.4 52
Palladium sold - payable
(thousand ozs) 1.9 - 3.5 157
Total onsite and offsite
costs (2) $ 5.1 - $ 5.8 -
Cash cost per pound of
copper sold (US$/lb) (2) $ (0.04) - $ (0.08) -
Capital expenditure (2)
(3) $ 14.7 - $ 18.4 -
The Morrison deposit includes four successive zones MD1 (previously called the
Rob's deposit) though MD4. In the first two months of the third quarter of 2010,
pre-production revenues from MD2 and MD3 was generated and recorded as a credit
to the development cost of the Morrison deposit. The above table includes
pre-production and commercial production ore.
(1) Converted to metric tonnes from short tons
(2) For the period since the May 21, 2010, the day immediately after the
merger of Quadra and FNX
(3) Excluding pre-production revenue credits
Note: Production statistics in the above table are reported for all historical
periods, including the period prior to the merger of Quadra and FNX on May 20,
2010. There were no shipments in third quarter of 2009 due to a Vale planned
shut down and subsequent strike. Shipments commenced at the end of September
2009.
The Morrison deposit represents a high grade footwall deposit located in the
lower part of the Levack mine. Commercial production commenced from the Morrison
deposit on September 1, 2010.
Ore quality continues to be a priority at the Morrison deposit. Selective mining
methods have been adopted and the mine design and production plan continues to
be governed by this approach. Ramp and lateral development including drill
platforms remains on schedule and now extend to below 4000 feet in elevation.
During the third quarter of 2010, access was also established to the
neighbouring Craig Mine owned by Xstrata.
Morrison Outlook
Copper production from the Morrison deposit in 2010 is expected to be at or
ahead of expectations, albeit at lower tonnage due to the selective mining
methods.
As previously disclosed, the debris encountered at the bottom of the #2 Shaft
and inflows of water from adjacent mining properties are delaying the
rehabilitation of the 3600 level loading pocket and related infrastructure.
Additional haul truck capacity and increased ventilation from Xstrata's Craig
Mine will allow continued improvement in the underground mining rate until the
#2 Shaft is fully serviceable at the end of 2011. The development of the ramp
and delineation drilling is also expected to continue through 2011.
PODOLSKY (SUDBURY, CANADA)
Three Three Nine Nine
months months months months
ended ended ended ended
September September September September
30, 30, 30, 30,
2010 2009 2010 2009
----------------------- ---------------------
(All amounts in millions of U.S. dollars
unless otherwise indicated)
Copper ore sold (thousand
tonnes) (1) 97.2 6.2 297.4 148.0
Copper grade (%) 3.2 3.5 3.3 5.5
Copper sold - payable (million
lbs) 5.4 0.4 17.2 15.2
Nickel sold - payable (million
lbs) 0.3 0.03 1.2 1.1
Gold sold - payable (thousand
ozs) 0.9 0.6 3.8 2.4
Platinum sold - payable
(thousand ozs) 2.0 0.2 9.1 4.7
Palladium sold - payable
(thousand ozs) 2.5 0.2 9.3 5.5
Total onsite and offsite costs
(2) $ 15.0 - $ 25.1 -
Cash cost per pound of copper
sold (US$/lb) (2) $ 1.67 - $ 1.64 -
Capital expenditure (2) $ 2.7 - $ 3.9 -
(1) Converted into metric tonnes from original short tons
(2) For the period since the May 21, 2010, the date immediately after the
merger of Quadra and FNX
Note: Production statistics in the above table are reported for all historical
periods, including the period prior to the merger of Quadra and FNX on May 20,
2010. There were no shipments in third quarter of 2009 due to a Vale planned
shut down and subsequent strike. Shipments commenced at the end of September
2009.
Podolsky's third quarter of 2010 copper production was below expectations due to
adverse ground conditions around the access to a high grade secondary panel. An
additional 500 feet of operating development was required to access the area and
this development was completed in the third quarter of 2010.
Podolsky Operating and Capital Costs
Podolsky's total operating costs were higher in the third quarter of 2010
primarily due to increased operating development and higher than planned
maintenance costs. Capital expenditures in the third quarter and first nine
months of 2010 were lower than budget due to development resources being
allocated to operating and some deferrals.
Podolsky Outlook
The high grade stopping panel that was initially planned for the third quarter
has been brought on line and the Company expects Podolsky to meet its 2010
production objectives during the fourth quarter.
SIERRA GORDA (CHILE)
In late 2009, the Company commenced the studies required to advance the Sierra
Gorda project towards production. Through to the end of the third quarter of
2010, the Company incurred costs of $49.1 million on the project, including $4.6
million of land option costs.
The principal activities have been those required to support a development
decision and project financing and include infill and condemnation drilling,
geological modeling and reserve calculation, metallurgical and process test
work, infrastructure studies, permitting, as well as engineering studies to
establish capital and operating costs . A number of engineering and construction
companies are involved in the ongoing Financing Study, including SNC Lavalin,
Fluor and Chilean construction companies.
The Environmental Impact Study ("EIS") was submitted to the regulatory
authorities of Chile on May 31, 2010 and was accepted as containing all
necessary elements on June 7, 2010. Since then, there has been a normal course
interchange of questions and clarifications with regulators with no substantive
issues. Based on other projects in Chile, the permitting timeframe is expected
to be approximately 12 months.
To ensure maximum optionality, orders for key mining equipment have been placed
in advance of completing the ongoing Financing Study. Orders were previously
placed for two electric shovels and two drills with a total commitment of $52
million. A non refundable deposit of $4.1 million has been paid on this
equipment. An order was placed for the initial truck fleet in October as a
subsequent event. No payments are due in 2010.
The Sierra Gorda project is subject to several lawsuits that have been filed in
Chilean courts against the Company's wholly-owned Chilean subsidiary (see
section below "Contingencies").
Sierra Gorda Outlook
Total costs associated with Sierra Gorda in 2010 are expected to be $53 million
including option payments. Additional land acquisition negotiations are ongoing
and are not included in this estimate. Such acquisitions are not essential to
the project, which has legal title to all the land required, but could provide
optionality going forward.
Two study documents are contemplated, a Financing Study, designed to provide all
information required by potential partners and others in connection with
financing the project and a feasibility study that will also be a 43-101
compliant Technical Report.
Partnership discussions and the technical work for the ongoing Financing Study
on Sierra Gorda continued through the quarter. The Financing Study is still
targeted to be completed by the end of the first quarter of next year, with the
Feasibility Study to follow. The base case for project has increased in scope
and the development plan now envisions a plus 25 year operation processing
111ktpd of sulphide ore at start-up, expanding to 190ktpd at the end of the
fourth year. The Scoping Study released in mid-2009 had a more modest throughput
of 111ktpd and an initial capital cost of $1.7 billion. For the purposes of
discussions with potential partners, the Company is assuming a capital cost of
between $2 1/2 billion and $2 3/4 billion for the larger scale project. An
updated capital cost estimate is being prepared as part of the Financing Study.
The target date for the commencement of development remains the third quarter of
2011, with production targeted in the first half of 2014.
In addition to the base case sulphide milling operation column test work and
associated engineering are ongoing in order to evaluate the merits of an oxide
heap leach operation.
Partnering discussions continued through the quarter, supported by CIBC who are
acting as advisors to the company in the matter. Interested parties have been to
site and have ongoing access to an electronic data room.
VICTORIA (SUDBURY, CANADA)
Throughout the third quarter of 2010, the Victoria property continued to be the
primary focus for the Sudbury exploration team. At the end of the quarter five
diamond drill rigs were focused on the Ni-Cu-PGM sulphide mineralization below
3,000 feet depth. To date four different sulphide-mineralized zones have been
intersected to a depth of approximately 6,050 feet within the west end of Ethel
Lake segment of the Worthington Offset. All drill holes are subject to BH-UTEM4
surveys to further delineate the sulphide-mineralized system.
During the third quarter of 2010 the focus of drilling was on the well-developed
sulphide mineralization between 3500 and 5800 feet, with the goal of continuing
to define the sulphide and metal distribution within this part of the Victoria
Zone 4 deposit. Interpretation of diamond drill results to date has identified
Zone 4 as the most intensely mineralized portion of the Ethel Lake segment.
A news release dated September 7, 2010, summarized significant intersections
from Zone 4 that had been returned from the date of the previous news release of
May 10, 2010. These new intersections included 624 feet of 1.9% Cu, 1.7% Ni and
4.1 g/t Pt+Pd+Au intersection in diamond drill hole FNX1186G, 308 feet of 2.1%
Cu, 3.1% Ni and 5.1 g/t Pt+Pd+Au intersected in FNX1195C, and 71 feet of 4.1%
Cu, 2.0% Ni and 60.1 g/t Pt+Pd+Au in FNX1200.
Victoria Outlook
As a result of these intersections, management is of the opinion that Zone 4
will warrant initiation of an advanced underground exploration program. Studies
are currently being initiated to facilitate such a program. In addition, work is
also progressing on environmental permitting and consultations with First
Nations and other community stakeholders.
SUDBURY EXPLORATION PROPERTIES
Beside Victoria, the Company has an interest in four exploration properties:
Kirkwood, Falconbridge Footwall, Foy Offset, and Other Properties. The
Falconbridge Footwall and Foy Offset properties are pursuant to a joint venture
agreement (the "Falconbridge Joint Venture") with Xstrata Nickel.
As at June 30, 2010, the Company and Xstrata Nickel held an 80% and 20% interest
(2009 - 79% and 21%), respectively, in the Falconbridge Joint Venture, with $0.4
million spent on the Falconbridge Footwall to the end of September 30, 2010.
Xstrata Nickel has declined to participate in the 2010 work program. The Company
is the operator of the Falconbridge Joint Venture. FNX holds between a 30% and
100% interest in the mineral exploration properties included in the Other
Properties.
All of the Company's Sudbury mineral exploration properties are at the
exploration stage and there can be no assurance that commercially viable mineral
deposits or reserves exist therein.
DMC MINING SERVICES
DMC had revenues of $12.1 million for the quarter ended September 30, 2010.
Contract work during the quarter, and in hand, is centered primarily with
clients who mine gold or potash. As in the second quarter of 2010, the
division's engineering department continues to work on several projects. In
addition, DMC is advancing several trade off- studies and design projects, for
existing clients, engineering work related to a an Interim Agreement signed
during the third quarter has begun.
DMC is currently in an advanced stage of negotiation with a major mining company
for a multi-year shaft sinking and construction contract. In anticipation of
signing a definitive contract in the fourth quarter of 2010 for this project,
DMC has signed an Interim Agreement that allowed it to begin certain engineering
and preparatory work in the latter part of the third quarter. This work is
reflected in improved third quarter revenues along with several new Raise Boring
and Development contracts starting during the quarter. No other significant
contracts are scheduled for completion before the end of the fourth quarter and
the division's revenues and contract backlog is expected to increase through the
year end.
The division has had no change in its annual safety performance statistics when
comparing the second and third quarters of 2010. With continued strong focus
this performance is expected to remain through the remainder of the year.
SAFETY AND ENVIRONMENTAL
The Company's US operations continued their excellent safety performance with a
Total Incident Rate ("TIR") of 0.74, compared to TIR of 1.22 for US surface
metal mines. Employees and contractors at the Sudbury operations experienced a
TIR of 4.6 compared to a TIR of 4.8 for all Ontario mines. Employees of DMC
Mining Services experienced a TIR of 1.9 compared to a TIR of 3.7 for all
Ontario mine contractors. Employees and contractors at Franke experienced a TIR
of 3.7.
MANAGEMENT CHANGES
Mr. Don MacDonald was appointed as Chief Financial Officer effective August 16,
2010 and Mr. Michael Winship appointed as Chief Operating Officer on September
3, 2010.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 2010, the Company had cash and cash equivalents of $323.0
million. These amounts are comprised of cash deposits and highly liquid
investments that are readily convertible to cash. The counter parties include
banks, governments and government agencies. The Company also held marketable
securities with a total fair value of $58.5 million. During the third quarter of
2010, the Company converted the C$50 million note receivable from Gold Wheaton
into common shares of Gold Wheaton, increasing its ownership in Gold Wheaton to
34.5% with a fair market value of $173.4 million at September 30, 2010.
In connection with the merger with FNX, the Company increased cash and cash
equivalents by $197.8 million. The Company generated cash flow from operating
activities of $138.4 million for the nine month period ended September 30, 2010
compared to $19.1 million in the same period of 2009. The increase in operating
cash flow is largely driven by the increased copper price, as well as higher
sales volumes due to the operation of Franke and the merger with FNX.
At September 30, 2010, the Company had working capital of $544.5 million as
compared to $217.5 million at December 31, 2009. The increase in working capital
during the first nine months of 2010 is primarily the result of the merger with
FNX combined with operating cash flow net of capital expenditures. At September
30, 2010, accounts receivable and revenues include approximately 18.9 million
pounds of copper that has been provisionally valued at $3.65/lb. The final
pricing for these provisionally priced sales is expected to occur between
October 2010 and February 2011. Changes in the price of copper from the amounts
used to calculate the provisional values will impact the Company's revenues and
working capital position in the fourth quarter of 2010.
Capital spending in the first nine months of 2010 was $121.2 million for
operations and projects. An additional $6.0 million was paid to increase
environmental bonding at Robinson.
During the first nine months of 2010 the Company settled 19.8 million pounds of
Franke copper collars and paid $21.2 million to the counter parties. This
completes the collar program for Franke. In addition, the Company purchased
additional copper put options under the price protection program at a cost of
$7.4 million.
In the first quarter of 2010, the Franke project finance facility was increased
by $12.5 million and during the nine month period, the Company repaid $6.4
million as prescribed by the terms of the facility.
During the first nine months of 2010, the Company entered into new operating
lease agreements for loading equipment for deployment at Carlota with a value of
$15 million.
Liquidity Outlook
The Company's future profitability and cash position is highly dependent on the
price of copper and gold and to a lesser extent nickel. Future changes in the
price of copper will also impact the final settlement price of provisionally
priced sales. The Company has purchased copper put options to protect a minimum
floor price for a portion of its future copper production (see "Financial
Instruments").
The Company is planning to spend $48 million in 2010 to complete the Sierra
Gorda Financing Study and may incur other expenses at Sierra Gorda including
land, water rights, equipment deposits, litigation expenses and mineral claim
acquisitions. In addition, the Company expects to spend $21 million on Sudbury
exploration properties and $45 million on the development of the Morrison
deposit in 2010 (including the amount incurred by FNX prior to the merger) and
has capital requirements at each of the five operating mines. The Franke project
loan facility has semi-annual payment represents in an amount equal to 67% of
Excess Cashflow from the Franke Mine, as defined in the agreement. The Company
made the decision to repay the loan early in the fourth quarter with no penalty.
At current metal prices, the Company expects that it will be able to fund the
2010 capital requirements for all of its mines and projects, including the
Sierra Gorda Financing Study, from existing cash on hand and internally
generated funds.
Based on ongoing work, the Company is using $2.5 billion as the funding
requirement in discussions with potential partners with the objective of
arranging the financing for the project. The partnering arrangement is likely to
include the sale of up to 50% of the project to a partner.
Commitments and contractual obligations
Payment Due By Period
----------------------------------------------------------------------------
(in millions of U.S.
dollars) Less than 1-2 2-3 3-4 4-5 After Total
1 year years years years years 5 years
----------------------------------------------------------------------------
Project debt facility 42.7 - - - - - 42.7
Reclamation
liabilities 0.4 0.3 1.2 3.2 7.6 97.3 110.0
Franke Mine contracts 17.9 23.4 23.0 17.2 14.8 51.3 147.6
Robinson Mine power
supply contract 6.9 9.2 9.2 - - - 25.3
Minimum lease payments
(capital and
operating) 8.0 14.2 8.2 6.3 3.5 0.9 41.1
----------------------------------------------------------------------------
Total 75.9 47.1 41.6 26.7 25.9 149.5 366.7
----------------------------------------------------------------------------
Project debt facility
On May 14, 2009, Quadra signed an agreement with a syndicate of lenders in which
the lenders provided a $37.5 million secured project debt facility to a
wholly-owned Chilean subsidiary of the Company. In January 2010, the Company
drew down an additional $12.5 million in connection with an increase in the
project debt facility from $37.5 million to $50.0 million and made scheduled
principal payments of $6.4 million. The Company made the decision to repay the
loan early in the fourth quarter with no penalty.
Reclamation liabilities
The Company has estimated total future reclamation costs of $110.0 million
(undiscounted), which primarily relate to the closure of the Robinson, Carlota
and Franke mines and the Sudbury operations. The Company has estimated the fair
value of this liability to be $40.8 million at September 30, 2010 based on the
estimated discounted future payments. To secure a portion of the closure costs
related to Robinson and Carlota, the Company has posted environmental bonds and
held cash in a reclamation trust totalling $57.6 million as at September 30,
2010. The Company revises the reclamation plan and cost estimate for Robinson
annually as required by the US Bureau of Land Management and adjusts the amount
of the bond accordingly. The reclamation plan and cost estimate for Carlota is
updated every five years as required by the regulator and the amount of the bond
is adjusted accordingly. There is currently no environmental bonding in place at
Franke. A closure plan for Podolsky has been submitted to the Ontario Government
resulting in a bonding requirement of $4.0 million. Closure plans for the
McCreedy and Levack operations are governed by arrangements between the Ontario
Government and Vale and between Vale and the Company. Under the latter
agreement, the Company has placed $2.5 million in trust with Vale.
Franke Mine contracts
The Company has a long-term supply contract for sulphuric acid for use in the
copper extraction process at Franke. The minimum commitment under the contract
is estimated to be $4.1 million per annum subject to adjustment based on the
prevailing copper prices over the term of the contract which expires in 2022.
The Company is committed to purchase 150,000 tonnes of sulfuric acid per annum
at a base price of $27/tonne. The base price for acid in the contract is
increased by $2.50/tonne for each $0.10/lb that the copper price exceeds
$1.10/lb.
Franke also has a long-term supply contract for industrial water. The minimum
commitment under the contract is estimated to be approximately $1.1 million per
annum subject to adjustment based on the prevailing copper prices over the term
of the contract which expires in 2020. The copper price adjustment requires, on
an annualized basis, that approximately an additional $120 be paid for each
$0.15/lb that the copper price exceeds a base price of $1.50/lb.
The Company has also entered into various supply and other contracts for
operation and development of Franke.
Robinson Mine power supply contract
Robinson has a three year supply contract for electricity. The minimum
commitment under the contract is estimated to $8.8 million plus service charges
per annum over the term of the contact which expires in 2012.
MARKET TRENDS AND FUNDAMENTALS
Between 2006 and mid 2008, the growing demand for copper, particularly in China,
coupled with an inability of the copper industry to increase supply due to a
lack of immediate development projects, together with a weakening U.S. dollar
led to a substantial increase in the copper price. The subsequent global credit
and consumer confidence crises and the resulting global economic downturn led to
a collapse in the price of copper, which reached a low of $1.26/lb in December
2008, before recovering to $3.65/lb at the end of September 30, 2010. The sharp
rebound in the price of copper was due to a significant tightening in the global
supply of copper scrap and continued strong Chinese demand. The Company believes
that, copper fundamentals will remain robust as continued growth in Chinese
copper demand coupled with increased rest-of-world copper demand arising from
the recovery in the global economy, will drive global copper demand ahead of the
growth in both scrap and primary mine supply.
The following graph shows the inventory level, as published by the London Metal
Exchange ("LME"), of copper and the spot price of copper from 2006 to October
29, 2010.
To view the graph for LME Copper Price & Inventory, please visit the following
link: http://media3.marketwire.com/docs/qux1110graph1.pdf.
At September 30, 2010, the closing spot price was $3.65/lb. At October 29, 2010,
the closing spot price was $3.73/lb. The reference price of copper metal is
determined by trading on the LME, where the price is set in U.S. dollars at the
end of each business day.
FINANCIAL INSTRUMENTS AND OTHER INSTRUMENTS
The Company's revenues and cash flows are subject to fluctuations in the market
price of copper and gold. In addition, there is a time lag between the time of
initial payment on shipment and final pricing, and changes in the price of
copper and gold during this period impact the Company's revenues and working
capital position.
The following table summarizes the impact of the changes in copper price on the
Company's after tax earnings for the remainder of 2010, excluding the impact of
changes in fair value of copper put options:
----------------------------------------------------------------------------
Impact on the after tax earnings (excluding derivatives)
Copper price (in millions of U.S. dollars)
----------------------------------------------------------------------------
+ $0.20/lb 15.2
----------------------------------------------------------------------------
- $0.20/lb (15.2)
----------------------------------------------------------------------------
The Company has a floor price protection program for a portion of its
anticipated copper sales from Robinson and Carlota through March 2011. During
the first nine months of 2010, a total of 135 million pounds of copper put
options expired unexercised. In addition, the Company purchased additional
copper put options for 118 million pounds of copper at a cost of $7.4 million.
At September 30, 2010, the Company had 47 million pounds of copper puts
outstanding with an average strike price of $2.44/lb (December 31, 2009 - 64
million pounds). The expiry dates of these put options are between October 2010
and March 2011.
Under the terms of the Franke project loan facility, the Company was required to
enter into a copper price protection program in order to establish a minimum
floor price for a portion of anticipated copper sales from Franke. During the
nine months ended September 30, 2010, the Company settled all of the remaining
19.8 million pounds of copper collar contracts with cash payments of $18.6
million. At September 30, 2010, 7.5 million lbs of Franke put options remain
outstanding with a strike price of $1.79/lb. The expiry dates of these put
options are between October and December 2010.
Under the terms of these contracts, if the average LME cash price for the month
is less than the strike price of the put option the Company will receive the
difference in price between the average LME cash price and the strike price for
the contracted number of pounds. The counter parties consist of several
international financial institutions. The Company monitors its counter party
exposures and does not believe there are any credit or collection issues at the
current time. The change in fair value of these instruments is recorded as a
derivative gain or loss on the statement of earnings.
The following table summarizes the impact of different copper prices on the
Company's cash flows from copper put options in the remainder of 2010:
----------------------------------------------------------------------------
Cash flows from copper put options
Copper price (in millions of U.S. dollars)
----------------------------------------------------------------------------
$1.50/lb 46.7
----------------------------------------------------------------------------
$2.00/lb 20.9
----------------------------------------------------------------------------
$2.50/lb -
----------------------------------------------------------------------------
The Company has entered into NYMEX heating oil futures contracts and collar
contracts in order to manage the price risk associated with diesel fuel. In the
first nine months of 2010, the Company settled 8.2 million gallons of NYMEX
heating oil contracts. These settlements resulted in cash payments to the
Company of $0.3 million in the first half of 2010, which have been recorded in
cost of sales on the statement of earnings. During the first nine months of
2010, the Company had entered into a total of 8.1 million gallons of NYMEX
heating oil futures at no cost.
At September 30, 2010, the Company had 10.8 million gallons of NYMEX heating oil
futures contracts outstanding with an average strike price of $2.25/gallon
(December 31, 2009 - 10.9 million gallons). The expiry dates of these NYMEX
heating oil futures contracts are between October 2010 and September 2011.
CONTINGENCIES
(a) The Company was originally served with four lawsuits that were filed in
Chilean Courts against the Company's wholly-owned Chilean subsidiary, Minera
Quadra Chile Limitada ("MQCL"). These lawsuits seek to invalidate certain of the
option agreements under which the Company acquired mining tenements that
comprise a significant part of the Sierra Gorda project. MQCL is aware that the
same plaintiffs are attempting to initiate additional lawsuits seeking to
declare null and void the option agreements relating to the mineral properties
that are already the subject of the first case. Based on advice of Chilean
counsel, Quadra believes that the option agreements are valid and that the
lawsuits are without merit.
The plaintiffs in the lawsuits are or were shareholders in the "sociedades
legales mineras" ("SLM") or legal mining companies that owned certain of the
mining tenements that were optioned to the Company in 2004. The Company believes
it fully complied with the terms of all option agreements and the plaintiffs
accepted all option payments until April 2008.
In 2009 the company has settled one case for an immaterial sum and recently a
court dismissed the plaintiffs appeal in another case. In another case an
arbitrator found that the contracts were perfectly valid and in a further case
the court ruled in favour of MQCL and awarded MQCL costs. The plaintiffs are
appealing or attempting to appeal certain decisions.
Although the Company believes, based on advice from Chilean counsel, that the
disputed option agreements are valid and that the legal claims are without
merit, the outcome is uncertain. These lawsuits are subject to the procedural
and substantive laws of Chile and the allegations are based on the actions of
the SLM management, in respect of which MQCL has no direct knowledge. MQCL is
vigorously defending these lawsuits; however, there is no assurance that it will
be successful.
(b) The payable metals the processor is required to pay for ore shipped and sold
by FNX are determined based on the metal which the processor is able to recover
from the various ore deposits. This will vary depending on the particular
metallurgical composition of each ore deposit as determined by metallurgical
testing of the various ore deposits. There are several different final payable
metals terms with Vale Inco for the various ore deposits at the Levack Complex
to reflect the differences in the metallurgical composition of the ore deposits.
Interim processing costs terms and interim payable metals terms, based on
preliminary metallurgical testing, have been established by Vale for the Levack
and Podolsky mines. Once final payable metals and processing costs terms are
determined, it is expected that they may be applied to ore shipped from Levack
in prior periods. The Company cannot, at this time, determine the amount, if
any, of such adjustment. Depending on the outcome of the final payable metals
and costs terms there may be a material increase or decrease in payable metals
and/or processing costs to be recorded.
(c) In the normal course of business DMC enters into agreements that contain
indemnification commitments and may contain features that meet the expanded
definition of guarantees. The terms of these indemnification agreements will
vary based on the contract and typically do not provide for a limit on the
maximum potential liability. The Company has not made any payments under such
indemnifications and no amounts have been accrued in the financial statements
with respect to these indemnification commitments.
(d) The Company is subject to other lawsuits from time to time which are not
disclosed on the grounds that they are not believed to be material.
TRANSACTIONS WITH RELATED PARTIES
One of the directors of the Company is a partner of an affiliate of Blake,
Cassels & Graydon LLP. During the nine months ended September 30, 2010, the
Company incurred legal fees of $1.3 million with that entity (nine months ended
September 30, 2009: $0.5 million), all of which were at normal business terms.
As a result of the merger with FNX, Gold Wheaton became a significantly
influenced investee and thus became a related party. All transactions conducted
with Gold Wheaton are at normal business terms. Sales to Gold Wheaton for the
period ended September 30, 2010 totaled $4.9 million, and accounts receivable at
September 30, 2010 from Gold Wheaton was $11.5 million.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
In preparing financial statements management has to make estimates and
assumptions that affect the reported amounts of assets, liabilities, revenues
and expenses. Based on historical experience, current conditions and expert
advice, management makes assumptions that are believed to be reasonable under
the circumstances. These estimates and assumptions form the basis for judgments
about the carrying value of assets and liabilities and reported amounts for
revenues and expenses. Different assumptions would result in different estimates
and actual results may differ materially from results based on these estimates.
These estimates and assumptions are also affected by management's application of
accounting policies. Critical accounting policies and estimates are those that
affect the consolidated financial statements materially and involve a
significant level of judgment by management.
Mineral Properties
Mineral property development costs, including exploration, mine construction,
and stripping costs, are capitalized until production is achieved, and are then
amortized over the remaining life of the mine based on proven and probable
reserves. The determination of the extent of reserves is a complex task in which
a number of estimates and assumptions are made. These involve the use of
geological sampling and models as well as estimates of future costs. New
knowledge derived from further exploration and development of the ore body may
also affect reserve estimates. In addition the determination of economic
reserves depends on assumptions on long-term commodity prices and in some cases
exchange rates.
The carrying value of mineral properties is reviewed regularly and whenever
events or changes in circumstances indicate that the carrying value of an asset
may not be recoverable. An impairment loss is recognized for a mineral property
if its carrying value exceeds the total undiscounted cash flows expected from
its use and disposal. Undiscounted cash flows for mineral properties are
estimated based on a number of assumptions including management's view of
long-term commodity prices, proven and probable reserves, estimated value beyond
proven and probable reserves, and estimates of future operating, capital, and
reclamation costs. Based on management's view of future metal prices and cost
assumptions, the carrying value of the Company's mineral properties was not
impaired at September 30, 2010.
Leach Pad Inventory
Leach pad inventory is comprised of ore that has been extracted from the mine
and placed on the heap leach pad for further processing. Costs are removed from
leach pad inventory as cathode copper is produced, based on the average cost per
recoverable pound of copper in process. The quantity of recoverable copper in
process is an engineering estimate which is based on the expected grade and
recovery of copper from the ore placed on the leach pad. The nature of the
leaching process inherently limits the ability to precisely monitor inventory
levels. However, the estimate of recoverable copper placed on the leach pad is
reconciled to actual copper production, and the engineering estimates will be
refined based on actual results over time.
Revenue Recognition
Sales are recognized and revenues are recorded at market prices when title
transfers and the rights and obligations of ownership pass to the customer. The
majority of the Company's product is sold under pricing arrangements where final
prices are determined by quoted market prices in a period subsequent to the date
of sale. For sales of Robinson's concentrates and Sudbury's copper and nickel
ores, final pricing is generally determined three to six months after the date
of sale. For the sales of copper cathode, final pricing is generally determined
in the month or the subsequent month after the date of sale. The Company
estimates provisional pricing for its product based on forward prices for the
expected date of the final settlement. Subsequent variations in price are
recognized as revenue adjustments as they occur until the price is finalized. As
a result, revenues include estimated prices for sales in that period as well as
pricing adjustments for sales that occurred in the previous period. These types
of adjustments can have a material impact on revenues.
Asset Retirement Obligations, Reclamation and Mine Closure
Due to uncertainties concerning environmental remediation, the ultimate cost to
the Company of future site restoration could differ from the amounts provided.
In 2009 and in previous years the Company has revised its estimate of the timing
and amount of closure costs at its mines, which resulted in adjustments to the
liability recorded in the Company's financial statements. The estimate of the
total liability for future site restoration costs is subject to change based on
cost inflation, amendments to laws and regulations and may also change as new
information concerning the Company's operations becomes available. The Company
is not able to determine the impact on its financial position, if any, of
environmental laws and regulations that may be enacted in the future.
Future Income Tax Assets
Management believes that uncertainty exists regarding the realization of certain
future tax assets and therefore a valuation allowance has been recorded as of
September 30, 2010. At September 30, 2010 the Company had additional available
U.S. Alternative Minimum Tax Credits of $8.0 million, which have not been
recognized due to the uncertainty of realization. The Company also has not
recognized the benefit of the tax basis of Carlota and Franke in excess of the
acquisition price, and certain non-capital losses. However, the Company has
recognized a net current future income tax asset for other temporary differences
created between the tax and accounting basis of assets and liabilities in the
United States, Chile and the Company's Sudbury operations. Management estimates
that, using long term copper prices in line with its mine plan estimates, the
future taxable income will be sufficient to utilize the future tax assets which
have been recognized.
OUTSTANDING SHARE DATA
The Company had 189,568,480 common shares issued and outstanding common shares
at September 30, 2010. As of November 9, 2010 the Company had 189,701,512 common
shares issued and outstanding.
INTERNAL CONTROL OVER FINANCIAL REPORTING
The Company's management is responsible for establishing and maintaining
adequate internal control over financial reporting. Any system of internal
control over financial reporting, no matter how well designed, has inherent
limitations. Therefore, even those systems determined to be effective can
provide only reasonable assurance with respect to financial statement
preparation and presentation.
On May 20, 2010, the Company completed a merger with FNX. As a result, FNX is a
business that the Company has acquired not more than 365 days before the last
day of the period covered by the interim filings. Management believes that the
internal controls and procedures of FNX have a material effect on its financial
reporting internal controls. The Company is reviewing FNX's processes and
controls and will be expanding its internal control over financial reporting
scope to include FNX over the next fiscal year. The Company will exclude FNX
from its disclosure controls and procedures and internal controls over financial
reporting assessments for the year ended December 31, 2010, as permitted by NI
52-109 and applicable rules relating to business acquisitions.
Other than as described above, there have been no changes in internal control
over financial reporting during the quarter ended September 30, 2010 that have
materially affected, or are reasonably likely to materially affect internal
control over financial reporting.
CONVERSION TO INTERNATIONAL FINANCIAL REPORTING STANDARDS ("IFRS")
Canadian publicly listed companies will be required to prepare financial
statements in accordance with IFRS for interim and annual periods beginning on
or after January 1, 2011. Quadra's reporting under IFRS will commence in the
first quarter of 2011.
The Company has appointed a project manager to lead the conversion to IFRS. The
project manager is working with other members of the finance group to execute
the implementation plan. The project planning is substantially completed and
included an initial diagnostic review of significant IFRS differences that was
completed by the Company's external auditors. Based on the work done so far, the
Company does not expect that the conversion to IFRS will have a significant
impact on its accounting processes and internal controls (including information
technology systems). The Company will be updating its disclosure controls and
procedures to ensure they are appropriate for reporting under IFRS. In addition,
the Company does not expect the conversion to IFRS to have a significant impact
on its risk management or other business activities.
Significant accounting impacts of conversion to IFRS
The Company has not yet completed its assessment of all accounting policy
differences that may arise on conversion to IFRS. The following is a summary of
the key accounting policy differences that have been identified to date. The
Company has not yet quantified the impact of these differences on its
consolidated financial statements.
Property, Plant & Equipment - IFRS requires that the Company identify the
different components of its fixed assets and record amortization based on the
useful lives of each component. The Company has reviewed the depreciation of its
existing property, plant & equipment and does not expect any material
differences between IFRS and the Company's current depreciation policies.
In addition, based on the current IFRS guidance, the Company does not expect its
current accounting policies for stripping costs and exploration costs to be
impacted by the conversion to IFRS.
Business Combinations - IFRS 1 "First time adoption of International Financial
Reporting Standards" provides an exemption that allows companies transitioning
to IFRS not to restate business combinations entered into prior to the date of
transition. The Company plans to use this exemption and will not be restating
the accounting for any of its previous acquisitions.
Asset Retirement Obligations - IFRS will require the Company to re-measure its
asset retirement obligations on a quarterly basis using a current discount rate,
which may result in some variability in both the carrying value of the liability
and the income statement. The Company plans to use an IFRS 1 exemption and will
not comply with IFRIC 1 "Changes in Existing Decommissioning, Restoration and
Similar Liabilities" for changes in such liabilities that occurred before the
date of transition.
Impairment - International Accounting Standard (IAS) 36, "Impairment of Assets",
uses a one-step approach for both testing for and measurement of impairment,
with asset carrying values compared directly with the higher of fair value less
costs to sell and value in use (which uses discounted future cash flows). This
may potentially result in more write-downs where carrying values of assets were
previously supported under Canadian GAAP on an undiscounted cash flow basis, but
could not be supported on a discounted cash flow basis. IFRS also has the
requirement under IAS 36 to reverse any previous impairment losses where
circumstances have changed such that the impairments have been reduced. Canadian
GAAP prohibits reversal of impairment losses.
A number of other differences between Canadian GAAP and IFRS have been
identified, but not yet assessed by the Company, including the accounting for
income taxes, financial instruments and disclosure requirements. These
differences may have a material impact on the Company's financial statements. In
addition, the Company has not yet assessed the impact of IFRS differences that
may arise as a result of the merger with FNX. A more detailed review of the
impact of IFRS on the Company's consolidated financial statements is in progress
and will be completed during 2010.
SUMMARY OF QUARTERLY RESULTS
The following table summarizes the financial results of the most recent eight
quarters (unaudited):
To view the Summary of Quarterly Financial Results table, please visit the
following link: http://media3.marketwire.com/docs/qux1110tables3.pdf.
(i) Revenues from sales of Robinson's concentrate are recognized at the time of
delivery which is generally upon loading of a ship at the port of Vancouver,
Washington. Due to the timing of shipments, the amount of product sold in a
quarter may differ from quarterly production volumes at Robinson. Revenues are
initially recognized based on metal prices at the time of shipment; however,
final pricing is not determined until a future period. Price adjustments are
recorded at each quarter-end prior to final settlement. Copper sales volumes are
reported based on the volume of pounds actually paid for by the customer
(payable pounds). Payable pounds at Robinson are generally 3-5% lower than the
metal volume actually delivered, and the amount of the deduction varies
depending on concentrate grade. Revenues from sales of Sudbury copper and nickel
ores are recognized based on the payable metals that are estimates based on
metallurgical testing and interim payment terms, neither of which is binding,
final payment terms could differ from those reported.
The quarterly performance of Robinson varies as a result of changes in head
grade, metal recovery and waste stripping requirements. Due to the complex
nature of the Robinson ore body, volatility in metal prices, and industry cost
pressures the results have varied from quarter to quarter, and this is expected
to continue in the future.
Total assets and total liabilities increased in the second quarter of 2010 as a
result of the Company's merger with FNX. In the second quarter of 2009, the
Company completed the acquisition of Centenario and, as a result, increased its
total assets by $262 million and its total liabilities by $195 million.
The decline in the cash balance in the fourth quarter of 2008 is due to the
decline in copper prices, and the resulting impact of settlement of provisional
price adjustments. In the fourth quarter of 2008, the Company also recorded a
$96 million write down related to the impairment of the Malmbjerg mineral
property.
The following table summarizes the operating results of the most recent eight
quarters (unaudited):
To view the Summary of Quarterly Operating Results table, please visit the
following link: http://media3.marketwire.com/docs/qux1110tables4.pdf.
NON-GAAP FINANCIAL MEASURES
The cash cost per pound of copper, and onsite costs and offsite costs are
non-GAAP financial measures that do not have a standardized meaning under
Canadian Generally Accepted Accounting Principles ("GAAP"), and as a result may
not be comparable to similar measures presented by other companies. Management
uses these statistics to monitor operating costs and profitability. Onsite costs
include mining costs (including all pre-stripping costs), equipment operating
lease costs, mill costs, mine site general and administration costs,
environmental costs and royalties. Offsite costs include the costs of
transportation, smelting and refining of concentrate, and treatment costs for
ores. By-product revenues from the Sudbury Operations reflect the actual cash
price earned from sales of precious metals to Gold Wheaton. Costs of sales, as
reported on the statement of operations, is different that the costs of
production because of changes in concentrate inventory levels. The following
table shows a reconciliation of these non-GAAP financial measures to the
consolidated statements of operations:
To view the table of Reconciliation of Non-GAAP Financial Measures to the
Consolidated Statements of Operations, please visit the following link:
http://media3.marketwire.com/docs/qux1110tables5.pdf.
Cashflow from operating activities (before working capital changes) is also not
a defined term under GAAP, and consists of cash provided from operating
activities less net changes in non-cash working capital.
Adjusted earnings and adjusted earnings per share are non-GAAP measures which
determine the performance of the Company, excluding certain impacts which the
Company believes are either non-recurring, or recurring, but of a nature which
are not reflective of the Company's underlying performance, such as the impact
of gain and loss on derivatives, gains and losses from marketable securities and
investments, merger costs, and adjustments of prior year taxes. Management
believes that these measures provide investors with ability to better evaluate
underlying performance. The following table provides a reconciliation of
earnings to adjusted earnings for the periods presented:
Three months Three months
ended ended
September 30, September 30,
2010 2009
-------------- --------------
(All amounts in millions of United
States dollars except per share
amounts)
Net earnings - GAAP 37.2 14.7
Adjusting items:
Loss on derivatives 8.5 13.8
Gain on marketable securities (7.8) (8.1)
Transaction costs for FNX merger 0.2 -
Accounting gains from investment in
Gold Wheaton 1.3 -
Foreign exchange loss on translation
of future income tax liabilities 7.9 -
Tax impact of the above items (4.7) (1.2)
Taxes in respect of prior years (0.6) 2.2
-------------- --------------
4.8 6.7
-------------- --------------
Net earnings - Adjusted 42.0 21.4
-------------- --------------
-------------- --------------
Weighted-average number of shares
outstanding -basic 189.0 99.2
Earnings per share - adjusted $ 0.22 $ 0.22
Nine months Nine months
ended ended
September 30, September 30,
2010 2009
-------------- --------------
(All amounts in millions of United
States dollars except per share
amounts)
Net earnings - GAAP 114.6 34.0
Adjusting items:
Loss on derivatives 12.0 39.8
Gain on marketable securities (7.4) (0.8)
Transaction costs for FNX merger 7.2 -
Accounting gains from investment in
Gold Wheaton (8.8) -
Foreign exchange loss on translation
of future income tax liabilities 8.7 -
Tax impact of the above items (5.6) (8.6)
Taxes in respect of prior years (0.6) 2.2
-------------- --------------
5.5 32.6
-------------- --------------
Net earnings - Adjusted 120.1 66.6
-------------- --------------
-------------- --------------
Weighted-average number of shares
outstanding -basic 143.1 86.7
Earnings per share - adjusted $ 0.84 $ 0.77
November 9, 2010
FORWARD-LOOKING INFORMATION
This Press Release, that also comprises the MD&A, contains "forward-looking
information" that is based on Quadra FNX's expectations, estimates and
projections as of the dates as of which those statements were made. This
forward-looking information includes, among other things, statements with
respect to the Company's business strategy, plans, outlook, financing plans,
long-term growth in cash flow, earnings per share and shareholder value,
projections, targets and expectations as to reserves, resources, results of
exploration (including targets) and related expenses, property acquisitions,
mine development, mine operations, mine production costs, drilling activity,
sampling and other data, estimating grade levels, future recovery levels, future
production levels, capital costs, costs savings, cash and total costs of
production of copper, gold and other minerals, expenditures for environmental
matters, projected life of Quadra FNX's mines, reclamation and other post
closure obligations and estimated future expenditures for those matters,
completion dates for the various development stages of mines, availability of
water for milling and mining, future copper, gold, molybdenum and other mineral
prices (including the long-term estimated prices used in calculating Quadra
FNX's mineral reserves), end-use demand for copper, currency exchange rates,
debt reductions, use of future tax assets, timing of expected sales and final
pricing of concentrate sales, the percentage of anticipated production covered
by option contracts or agreements, anticipated outcome of litigation and
anticipated impact of converting to IFRS,. Generally, this forward-looking
information can be identified by the use of forward-looking terminology such as
"outlook", "anticipate", "project", "target", "believe", "estimate", "expect",
"intend", "should", "scheduled", "will", "plan" and similar expressions.
Forward-looking information is subject to known and unknown risks, uncertainties
and other factors that may cause Quadra FNX's actual results, level of activity,
performance or achievements to be materially different from those expressed or
implied by such forward-looking information, and developed based on assumptions
about such risks, uncertainties and other factors set out herein, including but
not limited to:
-- risks associated with the mineralogy and block model assumptions at all
mines and projects including, in particular the complex Robinson mine;
-- uncertainties related to the extent to which historical mining
activities at Robinson have removed mineral material expected to be
present;
-- uncertainties related to the impact of the recent storm event at the
Carlota Mine and uncertainty relating to the leaching rate achieved at
Carlota;
-- risks related to maintaining current operating parameters at Podolsky;
-- uncertainties related to actual capital costs, operating costs,
production schedules and economic returns associated with the ramp- up
of the Morrison deposit;
-- risks associated with Quadra FNX's off-take agreement with Vale Inco,
including the risk of potential adjustment to final payable metal and
processing cost terms;
-- uncertainties relating to availability of updated equipment for Franke
and the leach recovery rate achieved at Franke;
-- uncertainties related to the construction quality and structural design
at Franke;
-- risks associated with the development of the Sierra Gorda project, a
large project with significant capital expenditure, permitting and
infrastructure requirements;
-- risks relating to the preliminary nature of the testwork underlying the
scoping study described in the Sierra Gorda Technical Report;
-- risks associating with ongoing litigation at Sierra Gorda and with
potential future litigation at Sierra Gorda and other projects;
-- risks relating to Quadra FNX's ability to find a suitable partner or
obtain project financing for Sierra Gorda;
-- uncertainties related to the amount of funding required to achieve full
production levels at Franke and Carlota and at the Morrison deposit;
-- uncertainties related to Quadra FNX's ability to expand or replace
depleted reserves;
-- uncertainties related to the possible recalculation or reduction of the
Company's mineral reserves and resources;
-- risks that Quadra FNX's title to its property could be challenged,
including potential challenges from First Nations with respect to the
Sudbury operations;
-- risks associated with Quadra FNX's dependence on transportation
facilities and infrastructure;
-- risks related to Quadra FNX's shareholder rights plan;
-- risk related to derivative contracts and exposure to the credit risk of
counterparties;
-- risks associated with taxation;
-- conflicts of interest;
-- risks associated with fluctuations in costs of operating supplies and
other inputs;
-- uncertainties related to actual capital costs, operating costs and
expenditures, production schedules and economic returns from the
Company's mining projects;
-- inherent hazards and risks associated with mining operations;
-- inherent uncertainties associated with mineral exploration;
-- risks associated with Quadra FNX being subject to government regulation,
including changes in regulation;
-- risks associated with Quadra FNX being subject to extensive
environmental laws and regulations, including change in regulation;
-- risks associated with Quadra FNX's need for governmental license and
permits;
-- political and country risk;
-- Quadra FNX's need to attract and retain qualified personnel;
-- risks related to the need for reclamation activities on Quadra FNX's
properties, including the nature of reclamation required and uncertainty
of costs estimates related thereto;
-- risk of water shortages and risks associated with competition for water;
-- increases in off-site transportation and concentrate processing costs;
-- risks related to the stability of mine pit walls;
-- uncertainties related to fluctuations in copper and other metal prices;
-- uncertainties related to the current global financial conditions; and
-- uncertainties related to fluctuation in foreign currency exchange rates.
A discussion of these and other factors that may affect Quadra FNX's actual
results, performance, achievements or financial position is contained in the
filings by Quadra FNX with the Canadian provincial securities regulatory
authorities, including Quadra FNX's Annual Information Form and the Annual
Information Form filed by FNX prior to the merger between Quadra and FNX.
Forward- looking statements are based on assumptions management believes to be
reasonable, including but not limited to the continued operation of Quadra FNX's
mining operations, no material adverse change in the market price of
commodities, that the mining operations will operate in accordance with Quadra
FNX's public statements and achieve its stated production outcomes, and such
other assumptions and factors as set out herein. Although Quadra FNX has
attempted to identify important factors that could cause actual results to
differ materially from those contained in forward-looking statements, there may
be other factors that cause results not to be as anticipated, estimated or
intended. There can be no assurance that forward-looking statements will prove
to be accurate. Accordingly, readers should not place undue reliance on
forward-looking statements. Quadra FNX disclaims any intent or obligations to
update or revise publicly any forward-looking statements whether as a result of
new information, estimates or options, future events or results or otherwise,
unless required to do so by law.
Slater Mining Corporation (TSXV:SLM)
Gráfica de Acción Histórica
De May 2024 a Jun 2024
Slater Mining Corporation (TSXV:SLM)
Gráfica de Acción Histórica
De Jun 2023 a Jun 2024
