(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
announce its second quarter 2011 ("Q2 2011") financial and operational results.
The Company recorded a strong performance again this quarter driven by higher
average copper prices and increased production from the inclusion of the Sudbury
operations. The Company's financial statements are prepared in accordance with
International Financial Reporting Standards ("IFRS").
SECOND QUARTER AND RECENT HIGHLIGHTS:
-- Total revenues increased 76% to $298 million in the quarter compared to
$169 million in the same quarter of 2010.
-- EBITDA increased 79% to $109 million compared to $62 million in the
second quarter of 2010 ("Q2 2010").
-- Total production was 55 million pounds of copper and 27 thousand ounces
of total precious metals (TPMs). Cash costs were $2.33 per pound of
copper. Sales lagged production by 2 million pounds.
-- Earnings increased 75% to $64 million or $0.33 per share (basic)
compared to $37 million in Q2 2010 or $0.26 per share. The increased
earnings in Q2 2011 were primarily driven by a $31.9 million increase in
operating profit, due to higher average copper prices, the inclusion of
the Sudbury operations, partially offset by lower operating income at
Robinson and Franke.
-- The Company completed the private placement of $500 million aggregate
principal amount of 7.75% senior notes and ended the quarter with $1.03
billion of cash.
-- The Company entered into a definitive agreement to form a Joint Venture
("JV") with Sumitomo Metal Mining Co., Ltd. and Sumitomo Corporation
(collectively "Sumitomo") to develop the Sierra Gorda project in Chile
subject only to customary regulatory approvals. The Company will retain
a 55% interest in the JV.
-- The National Instrument 43-101 (NI 43-101) compliant Technical Reports
were filed in support of the Sierra Gorda Feasibility Study and the
Inferred Mineral Resource for the Victoria project in Sudbury, Ontario
-- As a subsequent event, the Company received approval of the
Environmental Impact Assessment ("EIA"), the master environmental
permit, for Sierra Gorda.
-- Adjusted earnings for Q2 2011 totalled $42.8 million or $0.22 per share
(basic) compared to $22.9 million or $0.16 per share (basic) for the
previous year. Unusual items included a $24.6 million gain on marketable
securities, mainly our investment in Far West Mining, partially offset
by a loss on derivatives.
Paul Blythe, President and CEO of Quadra FNX comments, "Our financial results
were driven by an increase in production from the underground and open pit mines
and a favourable copper price environment. During the quarter, we reached
significant milestones at our flagship Sierra Gorda development project in
Chile, by securing a Joint Venture partner, completing financing and,
subsequently, receiving the EIA permit. These milestones have allowed us to
commence construction activities and we remain focused on achieving production
in 2014. We have progressed the various elements required for a decision to
proceed on Victoria including stakeholder discussion, engineering studies and
permitting. With a robust cash balance of over $1 billion, and a continuing
strong copper market, we are well positioned to advance our significant growth
profile."
Operating and Financial Summary Three months ended Six months ended
In millions of US dollars (except June 30, June 30, June 30, June 30,
per share data and production data) 2011 2010 2011 2010
----------------------------------------------------------------------------
Revenues 297.8 169.1 566.6 366.6
Adjusted earnings (1) 42.8 22.9 94.7 79.9
Adjusted earnings per share (basic) $0.22 $0.16 $0.50 $0.67
EBITDA (2) 108.7 61.6 353.2 144.9
EBITDA per share (basic) $0.57 $0.44 $1.85 $1.21
Earnings for the period 63.8 36.5 231.5 91.5
Basic earnings per share $0.33 $0.26 $1.21 $0.76
Diluted earnings per share $0.33 $0.26 $1.20 $0.75
(1) Adjusted earnings is a non-IFRS financial measure and consists of net
earnings with adjustments made to exclude derivative losses, gain on
marketable securities and investments, merger costs, inventory write
down and tax related items.
(2) EBITDA is a non-IFRS financial measure which is defined as earnings
attributable to shareholders before interest expenses, income taxes,
depreciation, amortization and depletion
(3) Revenues and earnings from the former FNX operations are reported only
for the period commencing May 21, 2010, the day after the closing of the
merger with FNX Mining Ltd.
At Robinson, mud removal from the bottom of the Ruth pit was completed ahead of
schedule, allowing access across the pit bottom. Other measures to increase
flexibility, including the development of a new ramp, transfer of haul trucks
from Carlota and exploration in the Liberty pit all progressed.
Production from Morrison continued to increase during the quarter and combined
copper production from all three Sudbury operations was better than plan. The
ramp from the 4200 Level of the Morrison Deposit to the Levack #2 Shaft is
expected to reach the 3900 Level in November, after which shaft rehabilitation
work will commence. During the quarter the Company received a waiver by Vale of
its right to the MgO nickel ores. The Company has entered into negotiations to
sell this ore to another party, and mining of contact nickel ores recommenced in
order to provide a 40,000 - 50,000 tonne bulk test sample which will be used to
establish definitive payability terms.
At Franke, the transition to owner mining and maintenance is largely complete
and the ongoing recovery optimization programs continued to improve pad
performance. Following the transition to conveyor stacking at Carlota, the focus
is on evaluating the long term impact of this change on the mine plan while
optimizing recoveries and the cost structure.
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 August
9, 2011 and is intended to be read in conjunction with the accompanying
unaudited consolidated financial statements for the quarter ended June 30, 2011
and with the audited consolidated financial statements for the year ended
December 31, 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
International Financial Reporting Standards ("IFRS") and all dollar amounts are
expressed in millions of United States dollars unless otherwise indicated.
MANAGEMENT DISCUSSION AND ANALYSIS
FOR THE SECOND QUARTER ENDED JUNE 30, 2011
(Expressed in millions of U.S. dollars, except where indicated)
----------------------------------------------------------------------------
Three months Six months
ended June 30 ended June 30
2011 2010 Change 2011 2010 Change
----------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
Revenues 298 169 76% 567 367 55%
Income from mining
operations 64 32 101% 125 114 10%
EBITDA (1) 109 62 76% 353 145 144%
EBITDA per share (basic) 0.57 0.44 29% 1.85 1.21 53%
Earnings for the period 64 37 75% 232 92 153%
Earnings per share (basic) 0.33 0.26 29% 1.21 0.76 60%
Cash 1,028 325 217% 1,028 325 217%
Working capital 1,338 637 110% 1,338 637 110%
----------------------------------------------------------------------------
(1) The Company's financial statements are prepared in accordance with
International Financial Reporting Standards ("IFRS"). EBITDA is a non-IFRS
measure which is defined as earnings before interest expenses, income
taxes, depreciation, amortization and depletion.
SECOND QUARTER AND RECENT HIGHLIGHTS:
-- Total revenues increased 76% to $298 million in the quarter compared to
$169 million in the same quarter of 2010.
-- Earnings increased 75% to $64 million compared to $37 million in the
same quarter of 2010.
-- EBITDA increased 79% to $109 million from $62 million in 2010.
-- Total production for the quarter was 55 million pounds of copper and 27
thousand ounces of total precious metals (TPMs). Cash costs were $2.33
per pound of copper. Sales lagged production by 2 million pounds.
-- The Company completed the private placement of $500 million aggregate
principal amount of 7.75% senior notes and ended the quarter with $1.03
billion of cash.
-- The Company entered into an agreement to form a Joint Venture ("JV")
with Sumitomo Metal Mining Co., Ltd. and Sumitomo Corporation
(collectively "Sumitomo") to develop the Sierra Gorda project in Chile.
The Company will retain a 55% beneficial interest in the JV.
-- The Company filed National Instrument 43-101 (NI 43-101) compliant
Technical Reports in support of the Sierra Gorda Feasibility Study and
the Inferred Mineral Resource for the Victoria project in Sudbury,
Ontario.
-- As a subsequent event, the Company received approval of the
Environmental Impact Assessment ("EIA"), the master environmental
permit, for Sierra Gorda.
FINANCIAL PERFORMANCE
Earnings
The Company recorded earnings of $63.8 million or $0.33 per share (basic) for
the second quarter of 2011 (Q2 2011) compared to $36.5 million or $0.26 per
share (basic) for the second quarter of 2010 (Q2 2010). For the first six months
of 2011, earnings increased to $231.5 million compared to $91.5 million in the
same period of 2010. The increased earnings in Q2 2011 were primarily driven by
a $31.9 million increase in operating profit, due to higher average copper
prices, and the inclusion of the Sudbury operations following the merger with
FNX Mining Ltd. ("FNX") after May 20, 2010 partially offset by lower operating
income at Robinson and Franke (see "Review of Operations and Projects"). The
Company also realized an increased financing income of $24.8 million on its
investments in Far West mainly offsetting a decreased income on derivatives of
$19.6 million compared with 2010 (see "General & administrative and other
expenses"). During Q2 2011, the Company sold 53 million pounds of copper at an
average price of $4.06/lb and 28 thousand ounces of total precious metals
("TPMs") compared to 47 million pounds of copper in Q2 2010 at an average price
of $2.78/lb and 21 thousand ounces of TPMs.
Revenues
Three months ended June 30, 2011
--------------------------------------------------------------
McCreedy
Robinson Carlota Franke Morrison Podolsky West DMC Total
Copper sales
(million lbs) 22.3 5.4 6.1 10.3 6.4 2.3 52.8
--------------------------------------------------------------
(in millions
of U.S.
dollars)
Copper 91.0 22.1 25.5 42.8 26.4 9.6 - 217.4
Nickel - - - 17.9 2.8 4.3 - 25.0
Other by
product (1) 15.0 - - 5.0 3.1 4.5 - 27.6
Contract
mining - - - - - - 27.8 27.8
--------------------------------------------------------------
Total 106.0 22.1 25.5 65.7 32.3 18.4 27.8 297.8
--------------------------------------------------------------
--------------------------------------------------------------
Three months ended June 30, 2010
--------------------------------------------------------------
McCreedy
Robinson Carlota Franke Morrison Podolsky West DMC Total
Copper sales
(million lbs) 26.6 7.7 7.8 - 3.7 0.7 - 46.5
--------------------------------------------------------------
(in millions
of U.S.
dollars)
Copper 68.1 24.1 25.4 - 10.2 1.9 - 129.7
Nickel - - - - 1.9 1.4 - 3.3
Other by
product (1) 26.6 - - - 3.1 1.8 - 31.5
Contract
mining - - - - - - 4.6 4.6
--------------------------------------------------------------
Total 94.7 24.1 25.4 - 15.2 5.1 4.6 169.1
--------------------------------------------------------------
--------------------------------------------------------------
Six months ended June 30, 2011
--------------------------------------------------------------
McCreedy
Robinson Carlota Franke Morrison Podolsky West DMC Total
Copper sales
(million lbs) 40.5 9.5 13.0 18.5 11.8 3.4 - 96.7
--------------------------------------------------------------
(in millions
of U.S.
dollars)
Copper 168.4 40.0 55.6 78.0 49.4 14.2 - 405.6
Nickel - - - 38.4 6.0 6.7 - 51.1
Other by
product (1) 33.1 - - 7.7 8.5 10.3 - 59.6
Contract
mining - - - - - - 50.3 50.3
--------------------------------------------------------------
Total 201.5 40.0 55.6 124.1 63.9 31.2 50.3 566.6
--------------------------------------------------------------
--------------------------------------------------------------
Six months ended June 30, 2010
--------------------------------------------------------------
McCreedy
Robinson Carlota Franke Morrison Podolsky West DMC Total
Copper sales
(million lbs) 54.4 17.2 18.1 - 3.7 0.7 - 94.1
--------------------------------------------------------------
(in millions
of U.S.
dollars)
Copper 173.2 54.9 58.9 - 10.2 1.9 - 299.1
Nickel - - - - 1.9 1.4 - 3.3
Other by
product (1) 54.7 - - - 3.1 1.8 - 59.6
Contract
mining - - - - - - 4.6 4.6
--------------------------------------------------------------
Total 227.9 54.9 58.9 - 15.2 5.1 4.6 366.6
--------------------------------------------------------------
--------------------------------------------------------------
(1)Mainly from precious metals (gold, platinum and palladium)
Revenues, other than from contract mining, are generated by the sale of copper
concentrate, copper cathode and copper and nickel ore. For the sale of copper
concentrate and copper and nickel ore, revenues are generally recognized at the
time of delivery to a customer based on metal prices at that time; however,
under current sales contracts, final pricing for copper sold in concentrate and
copper and nickel ore is generally fixed up to six months after the time of
arrival of a shipment at the customer's port of delivery. As a result, the
Company's revenues include estimated prices for sales, based on forward copper
prices at period end, as well as pricing adjustments for sales that occurred in
the previous period, based on the difference between actual price received and
the price at period end for sales from the previous period that were not settled
in that period. The pricing of copper cathode sales is generally set in the
month of shipment or one month after the time of shipment and therefore pricing
adjustments in subsequent periods are minimal. 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; as such final
payment terms could differ from those reported. Contract mining revenues are
generated from services performed, and are based on invoices issued.
Revenues in Q2 2011 were significantly higher than the same period of 2010 due
to higher copper prices and high sales volumes with the addition of sales from
the Sudbury operations partially offset by lower sales volumes at the Robinson,
Carlota and Franke mines. Copper spot price at June 30, 2011 was $4.22/lb
compared to $2.96 at June 30, 2010. The lower sales volumes at the Carlota and
Franke mines were mainly a result of lower production (see "Review operations
and projects") while at Robinson the lower sales volumes were also a result of
lower copper and gold grades in concentrate shipped, including concentrate from
Q1 2011 shipped in Q2 2011, compared with grades shipped in Q2 2010.
Revenues in Q2 2011 at the Morrison deposit, McCreedy West and Podolsky included
non-cash revenue of $3.1 million representing the amortization of the 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 Franco Nevada (formerly Gold Wheaton).
Mine operating expenses and operating income
Three months ended June 30, 2011
----------------------------------------------------------------
Mc-
Creedy
Robinson Carlota Franke Morrison Podolsky West DMC Total
Revenues 106.0 22.1 25.5 65.7 32.3 18.4 27.8 297.8
Production
costs (74.4) (16.4) (27.6) (23.2) (16.9) (10.9) (23.5) (192.9)
AD&D (1) (7.1) (3.9) (4.1) (9.1) (8.5) (2.6) (0.9) (36.2)
Royalties
and
mineral
taxes (4.1) (1.1) - - - - - (5.2)
----------------------------------------------------------------
Operating
expense (85.6) (21.4) (31.7) (32.3) (25.4) (13.5) (24.4) (234.3)
----------------------------------------------------------------
Operating
income 20.4 0.7 (6.2) 33.4 6.9 4.9 3.4 63.5
----------------------------------------------------------------
----------------------------------------------------------------
Three months ended June 30, 2010
----------------------------------------------------------------
Mc-
Creedy
Robinson Carlota Franke Morrison Podolsky West DMC Total
Revenues 94.7 24.1 25.4 - 15.2 5.1 4.6 169.1
Production
costs (59.9) (13.4) (20.3) - (10.1) (5.9) (4.0) (113.6)
AD&D (1) (6.3) (2.7) (4.7) - (2.8) (1.1) (0.6) (18.2)
Royalties
and
mineral
taxes (4.5) (1.2) - - - - - (5.7)
----------------------------------------------------------------
Operating
expense (70.7) (17.3) (25.0) - (12.9) (7.0) (4.6) (137.5)
----------------------------------------------------------------
Operating
income 24.0 6.8 0.4 - 2.3 (1.9) 0.0 31.6
----------------------------------------------------------------
----------------------------------------------------------------
Six month ended June 30, 2011
----------------------------------------------------------------
Mc-
Creedy
Robinson Carlota Franke Morrison Podolsky West DMC Total
Revenues 201.5 40.0 55.6 124.1 63.9 31.2 50.3 566.6
Production
costs (128.9) (29.1) (52.3) (43.3) (34.0) (22.1) (41.7) (351.4)
Inventory
write down - (11.0) - - - - - (11.0)
AD&D (3) (11.7) (7.7) (7.7) (18.3) (16.1) (5.1) (1.7) (68.3)
Royalties
and
mineral
taxes (9.0) (2.0) - - - - - (11.0)
----------------------------------------------------------------
Operating
expenses (149.6) (49.8) (60.0) (61.6) (50.1) (27.2) (43.4) (441.7)
----------------------------------------------------------------
Operating
income 51.9 (9.8) (4.4) 62.5 13.8 4.0 6.9 124.9
----------------------------------------------------------------
----------------------------------------------------------------
Six month ended June 30, 2010
------------------------------------------------------------------
Mc-
Robinson Carlota Franke Morrison Podolsky Creedy DMC Total
West
Revenues 227.9 54.9 58.9 - 15.2 5.1 4.6 366.6
Production
costs (119.3) (28.5) (40.8) - (10.1) (5.9) (4.0) (208.6)
AD&D (3) (11.9) (5.5) (8.2) - (2.8) (1.1) (0.6) (30.1)
Royalties
and
mineral
taxes (11.1) (2.8) - - - - - (13.9)
------------------------------------------------------------------
Operating
expenses (142.3) (36.8) (49.0) - (12.9) (7.0) (4.6) (252.6)
------------------------------------------------------------------
Operating
income 85.6 18.1 9.9 - 2.3 (1.9) 0.0 114.0
------------------------------------------------------------------
------------------------------------------------------------------
(1)Amortization, depletion and depreciation
Production costs in Q2 2011 were higher than the same period of 2010 due mainly
to the contribution from the Morrison deposit, Podolsky and McCreedy West mines
after the merger with FNX on May 20, 2010, and the higher operating costs
related to transition items at Robinson and Franke and concentrate shipment
timing at Robinson (see "Review of Operations and Projects"). Amortization,
depletion and depreciation ("AD&D") were higher in Q2 2011 than Q2 2010, mainly
due to additional AD&D expenses from the Sudbury operations after the merger.
Operating income increased in Q2 2011 compared to Q2 2010 primarily due to the
inclusion of production from the Sudbury operations after the merger with FNX on
May 20, 2011 and particularly from the Morrison deposit, which commenced
commercial production in September 2010. The operating income was slightly
offset by lower operating income from Carlota, Franke and Robinson which were
impacted by lower production and higher operating costs (see "Review of
Operations and Projects").
General & administrative and other expenses
General and administrative expenses for Q2 2011 were $12.6 million compared to
$8.6 million for Q2 2010. The general and administrative expenses in Q2 2011
reflect the Company's increased activity level and payroll as a result of the
merger with FNX on May 20, 2010 and the extra activities with Sierra Gorda and
Victoria.
In Q2 2011, the Company recognized a loss of $1.1 million on derivatives
compared to a gain of $18.5 million in the same quarter of 2010. The gain in
2010 was mainly due to the decrease in the fair value of the Company's issued
and outstanding warrants, which are treated as derivative liabilities under IFRS
(see "Conversion to IFRS"). For the first six months of 2011, the Company
recorded a gain on derivatives of $12.2 million compared to $11.1 million in the
same period of 2010. The gain for both years was mainly due to the decrease in
the fair value of the Company's issued and outstanding warrants.
Finance income in Q2 2011 of $24.8 million primarily resulted from the net gain
on the Company's investment in Far West Mining recorded in the quarter (see
"Liquidity and Capital Resources").
REVIEW OF OPERATIONS AND PROJECTS
SAFETY AND ENVIRONMENTAL
Safety Performance
The Company's Total Recordable Injury Rate ("TRIR") for the quarter was 2.69.
The TRIR for underground mines was 4.8 compared to a 5.9 for Ontario mines. The
TRIR for open pit mines was 0.59 compared to a national average rate of 1.19 for
U.S. surface mines.
Safety highlights included Zero Harm at the McCreedy West mine in Sudbury where
no injuries requiring any form of medical attention at all occurred during the
first half of 2011, and the underground mines as a group, reached two million
employee hours without a Lost Time Injury in May 2011.
Environmental Performance
There were no significant environmental incidents in Q2 2011 at any of the
Company's operations or development projects.
PRODUCTION SUMMARY
(iii)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 quarter and six months ended June 30, 2011 from the Company's
operating mines is summarized as follows:
Three months ended Six months ended
June 30, 2011 June 30, 2011
--------------------------------------------------------------------
Copper production (Mlbs)
Robinson (2) 21.2 41.2
Carlota (3) 6.2 10.4
Franke (3) 8.3 15.5
Morrison deposit (4) 10.3 18.5
Podolsky (4) 6.4 11.8
McCreedy West (4) 2.3 3.4
----------------------------------------
54.7 100.8
----------------------------------------
Nickel production (Mlbs)
Morrison deposit (4) 1.7 3.3
Podolsky (4) 0.3 0.5
McCreedy West (4) 0.4 0.6
----------------------------------------
2.4 4.4
----------------------------------------
TPM (1) (kozs)
Robinson (2) 7.1 12.6
Morrison deposit (4) 8.2 14.0
Podolsky (4) 5.9 12.5
McCreedy West (4) 6.4 13.6
----------------------------------------
27.6 52.7
----------------------------------------
--------------------------------------------------------------------
(1) Total precious metal, including gold, platinum and palladium
(2) Payable metals produced in concentrate
(3) Produced in cathode
(4) Shipped payable metal
U.S OPERATIONS
Robinson (Nevada)
----------------------------------------------------------------------------
Three months ended Six months ended
June 30 June 30
2011 2010 2011 2010
----------------------------------------------------------------------------
Copper production payable (Mlbs) 21.2 22.7 41.2 53.4
Gold production payable (kozs) 7.1 14.7 12.6 40.8
----------------------------------------------------------------------------
Ore mined (Mt) 3.1 4.0 6.3 7.1
Waste mined (Mt) 11.3 12.1 22.0 21.9
Ore milled (Mt) 3.2 3.6 6.6 6.9
----------------------------------------------------------------------------
Copper grade (%) 0.43 0.40 0.42 0.64
Gold grade (g/t) 0.17 0.20 0.17 0.31
----------------------------------------------------------------------------
Copper recovery (%) 73.0 73.5 71.3 63.6
Gold recovery (%) 44.2 66.3 36.9 73.0
----------------------------------------------------------------------------
Cash cost per pound of copper
produced ($/lb) $2.78 $1.67 $2.64 $1.37
Capital expenditure $28.9 $6.0 $49.8 $13.1
Production costs of goods sold $74.4 $59.9 $128.9 $119.3
----------------------------------------------------------------------------
Operating income $20.4 $24.0 $51.9 $85.6
----------------------------------------------------------------------------
Copper production in Q2 2011 was lower than in the same quarter of 2011 due to
lower tonnage milled as a result of scheduled shutdowns, ore grinding
characteristics and use of stockpiled ore while geotechnical issues were
resolved in the pit. The latter also affected mill head grades.
Gold production in Q2 2011 was lower compared to Q2 2010 due to lower head
grades and associated recoveries in the Ruth pit compared to the Veteran pit,
resulting in a $12 million decline in by product revenues. The removal of "mud"
(accumulated tailings and pit wall debris from earlier operations) from the
bottom of the pit was completed in June, ahead of schedule.
Robinson production costs and capital expenditures
The Q2 2011 operating costs were $14 million higher than Q2 2010 mainly because
of higher mine operating costs (largely fuel and tires), scheduled maintenance
combined with an inventory change totaling approximately $4 million.
The cash cost per pound of payable copper produced is a non-IFRS term and for
Robinson consists of onsite and offsite costs, less by- product revenue, divided
by the pounds of payable copper produced in the period (see "Non-IFRS Financial
Measures"). The cash cost of payable copper produced was $2.78/lb in Q2 2011
compared to $1.67/lb in the same quarter of 2010. The increased unit cost in the
current quarter is due primarily to a combination of higher production costs and
lower by-product revenues.
Capital expenditures during the quarter primarily related to Ruth pit
development work which included $6.0 million for the pit mud removal, $8.5
million for Liberty pit exploration, and $5.0 million for the Ruth secondary
access ramp.
Robinson Outlook
The completion of the removal of mud from the bottom of the Ruth pit is expected
to significantly increase operational flexibility and allow access to the higher
grade ore at the bottom of the pit. Additionally, operating flexibility will be
provided by the construction of a new secondary access ramp into the pit,
scheduled for completion in the third quarter, and transfer of four trucks from
the Carlota operation to Robinson. The new ramp will also allow mining out the
north ramp, where additional higher grade ore is available. Overall, 2011
production at Robinson is still expected to be back-end weighted contributing
between 105 and 120 million pounds of payable copper. Due to lower grades and
recoveries in the first half of the year payable gold production is now expected
to total approximately 25 to 30 thousand ounces, approximately 20 thousand
ounces below previous expectations.
A two part exploration program has commenced in the Liberty pit, focusing on the
potential for easily accessible reserves and resources that will improve short
term flexibility and on increasing the life of mine reserve.
Capital investment for the remainder of the year is now expected to total $33
million, including $11 million for the new secondary ramp, $7 million for
dewatering, $5 million for exploration, mainly in the Liberty pit, $7 million
for equipment and tailings impoundment, and $3 million for housing. In addition,
bonding was increased by $5.6 million.
Carlota (Arizona)
----------------------------------------------------------------------------
Three months ended Six months ended
June 30 June 30
2011 2010 2011 2010
----------------------------------------------------------------------------
Copper cathode production (Mlbs) 6.2 7.4 10.4 15.6
----------------------------------------------------------------------------
Ore mined (Mt) 1.5 1.6 2.3 2.6
Waste mined (Mt) 4.4 6.0 9.7 11.0
Ore placed (Mt) 1.5 1.6 2.3 2.6
----------------------------------------------------------------------------
Total copper grade (%) 0.44 0.39 0.42 0.37
----------------------------------------------------------------------------
Cash cost per pound of copper
sold ($/lb) $3.24 $1.89 $3.27 $1.82
Capital expenditure $0.5 $6.7 $4.9 $12.0
Production costs of goods sold $16.4 $13.4 $29.1 $28.5
----------------------------------------------------------------------------
Operating (loss) income $0.7 $6.8 -$9.8 $18.1
----------------------------------------------------------------------------
Total tonnes mined in Q2 2011 were 22% lower than the same quarter of 2010
mainly due to a planned reduction in waste stripping. Copper production in Q2
2011 was lower than the same quarter of 2010 as a result of continuing slower
leaching kinetics in the sulphide ore that was stacked in the second half of
2010.
During Q2 2011, the Company completed the transition from truck dumping to
conveyor stacking. Initial results indicate that this change is having a
positive impact on percolation rates in oxide ore, with rates increasing from 4
l/hr/m2 to the planned rate of 6 l/hr/m2 on a consistent basis. The Company also
prepared a sulphide test pad ahead of next years' expected sulphide ore
production. Preliminary sampling indicates that percolation in sulphide ores are
also significantly improved.
Carlota production cost and capital expenditures
Production costs for Q2 2011 increased mainly due to increased fuel and acid
prices, conveyor stacking costs and the increased cost of planned component
replacements. As the Carlota mine is a heap leach operation ore stacked in one
period effects production in many future periods thus the grade of ore placed in
a quarter does not correspond to production in the quarter. The cash cost per
pound of payable copper increased from $1.89/lb to $2.82/lb mainly due to the
decreased production.
Capital expenditures for Q2 2011 primarily related to the completion of the
Phase 2 leach pad construction.
Carlota Outlook
Carlota will continue with conveyor stacking using a contractor until a full
analysis of the impact of this change on the recoveries has been completed. A
full assessment of recoveries will only be possible once leaching of the first
conveyor stacked lifts is completed in Q3 2011. In the interim, the Company has
decreased the mining rate in order to better align the operations cost structure
with the current production base and four trucks were transferred from Carlota
to the Robinson operation in July 2011. The Company also expects the medium term
production benefits of conveyor stacking to offset the higher ore handling
costs, and have an overall positive impact on the operation's overall cost
structure.
Based on performance to date, 2011 cathode production at Carlota is expected to
be in the lower half of the previously revised range of 20 to 30 million pounds.
Capital costs for the remainder of 2011 are expected to total $4 million, plus
an additional $10 million for the environmental bond.
CHILE OPERATIONS
Franke
----------------------------------------------------------------------------
Three months ended Six months ended
June 30 June 30
2011 2010 2011 2010
----------------------------------------------------------------------------
Copper cathode production (Mlbs) 8.3 10.4 15.5 19.3
----------------------------------------------------------------------------
Ore mined (Mt) 0.8 1.0 1.3 2.0
Waste mined (Mt) 0.7 1.0 1.2 2.0
Ore placed (Mt) 0.8 0.8 1.3 1.6
----------------------------------------------------------------------------
Copper grade (%) 0.82 0.86 0.79 0.88
----------------------------------------------------------------------------
Cash cost per pound of copper
sold ($/lb) $4.49 $2.60 $4.01 $2.25
Capital expenditure $6.1 $6.2 $19.7 $8.5
Production costs of goods sold $27.6 $20.3 $52.3 $40.8
----------------------------------------------------------------------------
Operating loss/income -$6.2 $0.4 -$4.4 $9.9
----------------------------------------------------------------------------
Copper cathode production for Q2 2011 was lower than the same quarter of 2010
due to lower mine volumes and the mining of lower grade stockpile ore during the
transition to owner mining. Recovery optimization initiatives continued during
the quarter and new techniques, including custom leach solution application
rates and acid cures, were developed. These initiatives will be implemented
going forward on an ore-type by ore-type basis.
The balance of the mining equipment required was delivered and all operating and
maintenance crews were in place by the end of June. Prior to June, rental and
leased equipment was partially utilized at the mine.
Franke production costs and capital expenditures
Production costs at Franke are mainly driven by onsite costs, sales volumes and
projected recoveries from the leach pads. Onsite costs in Q2 2011 were higher
than Q2 2010 due to higher acid and power costs, as well as a result of the
transition to owner mining and maintenance as both contractors and owner
personnel were concurrently on site. The operation continues to run at below its
design throughput rate until the replacement stacker is in place.
The Franke operation utilizes on-off leach pads, and at the end of each quarter
the Company reconciles the copper recovered from leach pads that have completed
their leach cycle where the spent ore has been removed. Each quarter an
adjustment is made and charged, or credited, through production costs. In Q2
2011 an $11 million increase in cost of sales was made related to the low grade
stockpile ore which was placed on the pads in the Q4 2010 and Q1 2011. As a
result, an adjustment has been made to inventory. This change is not expected to
have a material impact on inventory values going forward.
Capital expenditures at Franke of $6 million in the second quarter primarily
related to the purchase of mining equipment in the transition to full owner
mining.
Franke Operations Outlook
The transition to owner mining and maintenance was substantially completed
during Q2 2011 and the workforce was expanded to include additional mine
operations and maintenance personnel. Stockpiles of ore were adequate to operate
the processing plant and mine volumes have since increased as planned. The
existing ore stacker continues to operate at a rate of 85-90% of its nameplate
stacking capacity, and the delivery of new stacking equipment remains scheduled
for the fourth quarter of 2011.
As noted above, recovery optimization initiatives for individual ore types have
continued and include adjustments to the lift height, crush size, and solution
application rates. Additional leach pad space is currently in design and under
consideration. Copper production is expected to ramp up in the fourth quarter,
benefiting from the transition to owner mining, improving recoveries and
additional stacking capacity. 2011 copper cathode production is expected to be
in the lower end of the previously guided range of 35 to 45 million pounds.
Capital costs for the remainder of 2011 are expected to total $7 million. Major
capital expenditures in the second half of 2011 include additional dust control
on the processing equipment, and the construction of additional leach pads.
Infill drilling of the nearby China deposit has been completed and engineering
evaluations have begun with a view to adding China to the mine plan.
CANADIAN OPERATIONS
Note: Production statistics in the following tables are reported for all
historical periods, including the period prior to the merger of Quadra and
FNX on May 20, 2010.
Morrison deposit
Three months ended Six months ended
June 30 June 30
2011 2010 2011 2010
----------------------------------------------------------------------------
Copper ore sold (kt) (1) 52.2 20.0 102.2 32.7
Copper grade (%) 10.1 9.1 - 7.8
Nickel ore sold (kt) (1) 6.0 4.4 10.3 10.0
Nickel grade (%) 3.5 2.5 - 3.0
----------------------------------------------------------------------------
Copper sold - payable (Mlbs) 10.3 3.3 18.5 4.9
Nickel sold - payable (Mlbs) 1.7 0.9 3.3 1.8
Gold sold - payable (kozs) 1.2 0.3 2.4 0.3
Platinum sold - payable (kozs) 2.3 0.5 3.6 0.7
Palladium sold - payable (kozs) 4.7 1.1 8.0 1.7
----------------------------------------------------------------------------
Cash cost per pound of copper
sold ($/lb) (2) $0.23 - -$0.02 -
Capital expenditure (2) $8.5 - $14.6 -
Production costs of goods sold
(2) $23.2 - $43.3 -
----------------------------------------------------------------------------
Operating income (2) $33.4 - $62.5 -
----------------------------------------------------------------------------
(1) Converted to metric tonnes from short tons
(2) Morrison was in pre-production stage in Q2 2010 and production costs
were capitalized. Q2 2010 performance is not comparable. The Morrison
deposit commenced commercial operations on September 1, 2010
The Morrison deposit commenced commercial production in September 2010 and as no
results were recorded for Q2 2010, comparison here is made against Q1 2011.
Total payable copper sold in Q2 2011 was 26% higher than in Q1 2011, with nickel
production increasing 6% and TPMs increasing by 40%. The Company continued the
use of selective mining methods at higher production rates with narrow vein
areas yielding higher grades, and the rock mass continuing to remain very
competent. The backfill plant that was commissioned in the first quarter was
ramped up to match the mining rate.
During Q2 2011 the Company developed 314 meters of access ramp towards the
Levack # 2 Shaft so that at the quarter end, the ramp was 42% complete. Once
completed, this ramp will be used to rehabilitate the #2 Shaft and will
ultimately be the main haulage drift for future mining, and provide additional
ventilation capacity to the Morrison deposit.
Morrison production costs and capital expenditures
Production costs for Q2 2011 were $3 million higher than in Q1 2011 mainly from
the increased usage of hydraulic backfill, but with the increased copper
production and TPMs the operating profit increased from $29 million to $33
million.
The cash cost per pound of payable copper increased from negative $0.33/lb in Q1
2011 to $0.23/lb in Q2 2011. This increase is mainly the result of lower nickel
by product credits due to lower nickel prices in Q2 2011 and higher volumes of
hydraulic backfill Capital spending of $8.5 million in Q2 2011 was mainly for
development work and equipment purchases.
Morrison deposit outlook
The improved production results achieved in Q2 2011 are expected to continue
through the year. As a result, the Company now expects 2011 payable copper
production from Morrison to be in the high end of the previously stated 30 to 40
million pounds guidance range. In addition, TPM production is expected to
increase by approximately 5 thousand ounces to approximately 25 to 30 thousand
ounces and payable nickel production is expected to total 6 million pounds.
The ramp from the 3900 Level of the Morrison deposit to the #2 Shaft is expected
to reach the 3600 Level in November, after which shaft rehabilitation will
commence. The scope of the shaft rehabilitation work remains uncertain and the
current estimated date for completion is now mid 2012. The production rate from
Morrison is therefore expected to remain at current levels until the
rehabilitation efforts are completed.
In 2011, onsite and offsite costs at Morrison are expected to be in the $80 to
$85 million range, increasing from the previously expected range of $70 to $80
million. The increase in cost expectations is associated with higher mine
tonnage volumes and additional backfill costs. As a result of the change in the
shaft rehabilitation program, 2011 capital expenditures expectations are now
expected to total $40 million, $10 million below the amount previously
announced. As a result capital costs for the remainder of 2011 are expected to
total $25 million.
Podolsky
----------------------------------------------------------------------------
Three months ended Six months ended
June 30 June 30
2011 2010 2011 2010
----------------------------------------------------------------------------
Copper ore sold (kt) (1) 91.0 128.9 190.3 200.2
Copper grade (%) 3.6 3.7 3.4 3.3
----------------------------------------------------------------------------
Copper sold - payable (Mlbs) 6.4 8.6 11.8 11.8
Nickel sold - payable (Mlbs) 0.3 0.6 0.5 0.9
Gold sold - payable (kozs) 1.0 1.9 2.0 2.8
Platinum sold - payable (kozs) 2.3 4.9 5.0 7.1
Palladium sold - payable (kozs) 2.7 4.7 5.6 6.8
----------------------------------------------------------------------------
Cash cost per pound of copper sold
($/lb) (2) $1.67 $1.58 $1.74 $1.58
Capital expenditure (2) $3.8 $1.2 $7.8 $1.2
Production costs of goods sold (2) $16.9 $10.1 $34.0 $10.1
----------------------------------------------------------------------------
Operating income (2) $6.9 $2.3 $13.8 $2.3
----------------------------------------------------------------------------
(1) Converted to metric tonnes from short tons
(2) 2010 data represents the period after May 20, 2010, the day of the
merger with FNX, which is not comparable to the current quarter.
In Q2 2011, Podolsky continued its consistent performance contributing 6.4
million pounds of payable copper, 6.0 thousand ounces of payable TPMs and 0.3
million pounds of payable nickel. Underground development, backfill, ore
production and diamond drilling, in support of metal production, were on or
better than expectations.
Podolsky production costs and capital expenditures
The cash cost per payable pound of copper in Q2 2011 was $0.13/lb lower than
that of Q1 2011 primarily due to increase copper production in the current
quarter resulting in higher operating income. Capital expenditures in Q2 2011
totalled $3.8 million and related to development work, and diamond drilling.
Podolsky outlook
The Company expects 2011 production from Podolsky to be in the upper end of the
previously stated 18 to 21 million pounds of payable copper, 20 to 25 thousand
ounces of payable TPMs and approximately 1 million pounds of payable nickel. In
2011 increased focus is being placed on exploration with the aim of expanding
the existing resource and reserve base. The 2011 onsite and offsite costs are
expected to be in line with 2010. Capital expenditures are expected to be in
line with 2010 and primarily relate to mobile equipment, mine infrastructure and
additional development work.
McCreedy West
----------------------------------------------------------------------------
Three months ended Six months ended
June 30 June 30
2011 2010 2011 2010
----------------------------------------------------------------------------
Copper ore sold (kt) (1) 78.0 67.50 152.9 134.8
Copper grade (%) 1.6 1.1 1.3 1.1
----------------------------------------------------------------------------
Copper sold - payable (Mlbs) 2.3 1.4 3.4 3.0
Nickel sold - payable (Mlbs) 0.4 0.4 0.6 0.9
Gold sold - payable (kozs) 0.9 1.25 1.5 2.4
Platinum sold - payable (kozs) 2.4 2.63 5.2 5.1
Palladium sold - payable (kozs) 3.1 4.60 6.9 9.0
----------------------------------------------------------------------------
Cash cost per pound of copper sold
($/lb) (2) $1.39 $4.34 $2.41 $4.34
Capital expenditure (2) $3.8 $1.5 $7.5 $1.5
Production costs of goods sold $10.9 $5.9 $22.1 $5.9
----------------------------------------------------------------------------
Operating Income (loss) (2) $4.9 -$1.9 $4.0 -$1.9
----------------------------------------------------------------------------
(1) Converted to metric tonnes from short tons
(2) 2010 dollar data represents the period after May 20, 2010, the day of
the merger with FNX, which is not comparable to the current quarter.
During Q2 2011, ore production from the PM zone and the 700 Complex footwall ore
bodies exceeded the same period in 2010 due to higher productivity. Copper
production in Q2 2011 significantly exceeded that in Q2 2010 primarily as a
result of increased grade mined but also due to increased ore mined. During the
quarter the Company reached an agreement with Vale, whereby Vale waived its
right to the high-magnesium oxide (MgO) nickel ores from McCreedy West for a
period of three years. The Company has subsequently entered into negotiations
for the sale of this ore to another party.
McCreedy West production costs and capital expenditures
Production and processing costs for McCreedy West in Q2 2011 were above plan due
to a combination of higher tonnage and better copper grades during Q2 2011. As a
result, cash cost per payable pound of copper reduced to $1.39/lb in Q2 2011
from $4.55/lb in Q1 2011.
Capital costs are for development and the replacement underground haulage trucks.
McCreedy West outlook
Following the waiver by Vale of its right to the MgO nickel ores, the Company
has entered into negotiations for the sale of this ore to another party. Mining
of contact nickel ores recommenced during Q2 2011 in order to provide a 40,000 -
50,000 tonne bulk test sample which will be used to establish definitive
payability terms. A definitive decision on the re-start of contact nickel
capacity remains dependent on these terms.
In 2011 payable copper production expectations remain in the 5 to 6 million
pound range, while annual nickel production volumes remains dependent on the
contact nickel re-start. In 2011, onsite and offsite costs at McCreedy West are
expected to be in line with 2010. Capital expenditures are primarily related to
mobile equipment, mine infrastructure and development work. The pilot plant for
electromagnetic/optical sorting ("Ore Sorter project") has been commissioned on
the McCreedy West site and an evaluation programme has commenced.
PROJECTS UNDER DEVELOPMENT
Sierra Gorda Project
In the first half of 2011 the Company expended $72.8 million on the project,
including security deposit and progress payments for mining equipment. During Q2
2011, the Company announced the results of a positive feasibility study (the
"Feasibility Study") which confirms a robust, large-scale, low cost mine. Based
on the Feasibility Study results, Board of Directors approved proceeding.
Highlights from the Feasibility Study include:
-- Initial throughput rate 110,000 tonnes per day ("tpd"), with expansion
after three years to 190,000 tpd
-- Production from current sulphide reserves averaging 483 million pounds
of copper, 25 million pounds of molybdenum and 64 thousand ounces of
gold per annum over a 20 year mine life. Molybdenum production is
estimated at 54 million pounds per annum during the first three years of
operation
-- Expected life of mine cash cost of $1.15 per pound of Cu, with $0.56 per
pound of Cu in the first five years (net of by-product credits)(1)
-- 20 year mine life based on current sulphide resources, with upside
potential to process an additional 237 million tonnes of oxide resources
(1) Assuming $2.50 Cu. $12/lb Mo and $1,000/oz Au
The Company also entered into a definitive agreement to form a JointVenture
("JV") with Sumitomo to develop the project. Quadra FNX will retain a 55%
beneficial interest in the JV. Highlights of the JV agreement include:
-- Quadra FNX and Sumitomo to form 55%/45% JV to develop the Sierra Gorda
project in Chile, closing subject only to normal anti-trust approval,
applied for in July 2011
-- Sumitomo to contribute the next $724 million of JV equity after closing
-- Sumitomo will also arrange a minimum $1.0 billion project financing non-
recourse to Quadra FNX or, if not available, to provide to the project
$800 million loan non-recourse to Quadra FNX
-- The Company is to provide its proportional share of the remaining JV
funding requirements estimated at approximately $650 million through
cash on hand and its proceeds from the issuance of debt. During June
2011, the Company issued, through private placement, $500 million
aggregate principal amount of 7.75% senior unsecured notes ("Notes") due
2019. The proceeds from the Notes will be partially used to fund the
Company's share of Sierra Gorda funding.
The NI 43-101compliant Technical Report dated June 8, 2011 in support of the May
16, 2011 Sierra Gorda Feasibility Study was filed on SEDAR during the quarter.
The Sierra Gorda NI 43-101Technical Report was prepared by Pincock, Allen & Holt
("PAH") under the direction of Leonel Lopez, C.P.G., a Qualified Person for the
purposes of National Instrument 43-101. The Sierra Gorda resource was estimated
by Mine Development Associates under the direction of Steven Ristorcelli, C.P.G,
a Qualified Person for the purposes of NI 43-101.
During Q2 2011, Fluor Corporation was awarded the Engineering, Procurement and
Construction Management contract for the process facilities. Orders were placed
for major and long lead time process equipment with no major price or delivery
deviations from the Feasibility Study.
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
The Estudio de Impacto Ambiental (EIA - or Environmental Impact Assessment) was
approved by the regulatory authorities on July 6, 2011.
The Company is continuing to advance all aspects of project development as
called for by the schedule, including detailed engineering, key equipment
selection, ordering and manufacturing, hiring of key operating staff,
negotiations of Build-Own-Operate contracts and site predevelopment. Over the
next quarter the Company will commence with ground work activities including the
construction of a 6,000 person camp and related facilities. The delivery of
mining equipment ordered in 2010 is on schedule to allow commencement of
pre-stripping in 2012.
The total capital cost for Sierra Gorda is predicted to be $2,877 million
including contingency but excluding working capital. The JV partners are using
$3.0 billion for overall cash purposes. The project is expected to start
production and become cashflow positive in 2014.
Capital commitments and capital expenditure by year over the construction period
based on the JV budget is scheduled as:
Expenditure
2011 (balance of year) $253 million
2012 $1,448 million
2013 $1,001 million
2014 $80 million
Assuming the JV obtains anti-trust approval, and the project develops in
accordance with budget, the Company shall be required to advance approximately
$650 million of the amount that includes estimated working capital and interest
over the construction period.
Victoria Project
During Q2 2011, the Company filed the NI 43-101compliant Technical Report dated
June 3, 2011 in support of the April 19, 2011 Inferred Mineral Resource
announcement for the Victoria Project on SEDAR. The Victoria 43-101 Technical
Report was prepared under the direction of Catharine Farrow Ph.D., P. Geo.,
Chief Technology Officer, and John Everest, M.Sc., P.Geo., Manager - Sudbury
Exploration for Quadra FNX, the designated Qualified Persons pursuant to NI
43-101.
The Company has initiated an engineering study for the Victoria advanced
exploration project which is targeted to be completed by the end of the year.
The study considers sinking two concurrent shafts, one for production, and a
second for ventilation, secondary egress, and lateral development which will be
used to establish definition diamond drill platforms and facilitate the
extraction of bulk sample(s) for metallurgical/commercial testwork. Concurrent
with this, the Company has continued First Nation and other stakeholder
consultation, and the preparation and submission of required permits.
Victoria Project Outlook
Exploration focus at the Victoria property has transitioned to step-out drilling
of Zone 4 and the exploration for satellite orebodies that could impact the size
of future production infrastructure. This exploration approach will continue for
the remainder of 2011.
The ongoing engineering study and First Nations consultations are expected to
form part of the project's Closure Plan, which will serve as the basis for the
final permits. The Company has also engaged with Vale, who has the right and
obligation to buy the production and a back-in right to acquire 51% of the
project by bringing Victoria into production. All of these activities are
required before a decision can be made to proceed with shaft sinking.
DMC MINING SERVICES
DMC Mining Services continued to report no medical aid or lost time accidents to
the end of the first half of the year. Work volume continues to grow in Canada
and the United States with the total contract work to be completed now exceeding
$470 million.
DMC Engineers are working diligently on the shaft for BHP Billiton's Jansen
Project in Saskatchewan where ground freezing will commence in August. Revenue
for the quarter was $27.8 million and for the first half of the year was $50.3
million. Operating income for the quarter was $3.4 million and $6.9 million for
the period to the end of June 2011. DMC is on target to meet or exceed all
budget expectations for the year.
2011 OUTLOOK AND GUIDANCE SUMMARY
For 2011, the Company expects consolidated payable copper production of 240
million pounds +/- 10% plus approximately 100 thousand ounces of payable TPMs,
approximately 15 thousand ounces lower than previous expectations, mainly due to
lower gold production from Robinson. The Company also expects approximately 8 to
10 million pounds of payable nickel production, although values are dependent on
the timing of the potential nickel re-start. The table below outlines a guidance
range for each of the operations.
------------------------------------------------------
Payable Copper (Mlbs)
------------------------------------------------------
Low High
Robinson 105 120
Morrison 30 40
Franke 35 45
Carlota 20 30
Podolsky 18 21
McCreedy West 5 6
------------------------------------------------------
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 2011, the Company had cash and cash equivalents of $1,028 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 $76.6 million. During the first six months of 2011 the
Company sold all of its 56,464,126 of common shares of Gold Wheaton to
Franco-Nevada for total cash proceeds of $295 million or C$5.20 per share. The
proceeds included top-up cash received when Franco-Nevada successfully acquired
the remaining shares of Gold Wheaton effective March 14, 2011.
During the second quarter the Company generated $72.1 million in operating cash
flow. The Company generated cash flow from operating activities of $109.4
million for the first six months of 2011 compared to $80.2 million for the same
period of 2010. The increase in operating cash flow is largely driven by the
higher copper prices.
At June 30, 2011, the Company had working capital of $1,338.1 million as
compared to $759.8 million at December 31, 2010. The increase in working capital
in 2011 is primarily the result of the increase in cash and cash equivalent from
the proceeds of the issue of the senior notes and the sale of Gold Wheaton
shares. At June 30, 2011, accounts receivable and revenues include approximately
31.2 million pounds of copper that has been provisionally valued at $4.22/lb.
The final pricing for these provisionally priced sales is expected to occur
between July and November 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 third quarter of 2011.
During June 2011, the Company issued, through private placement, $500 million
aggregate principal amount of 7.75% senior unsecured notes ("Notes") due 2019.
These Notes contain certain covenants that limit the Company's ability and the
ability of certain subsidiaries to, incur additional indebtedness and issue
preferred stock; create liens; make restricted payments; create or permit to
exist restrictions on the ability of the Company or certain subsidiaries to make
certain payments and distributions; engage in amalgamations, mergers or
consolidations; make certain dispositions and transfers of assets; and engage in
transactions with affiliates.
The Company may redeem, prior to June 15, 2014, up to 35% of the Notes with the
net proceeds of certain equity offerings at a redemption price equal to 107.75%
of the principal amount plus accrued interest. Prior to June 15, 2015, the
Company may redeem the Notes in whole or in part at 100.0% of their principal
amount, plus accrued interest, and amount equal to the greater of 1.0% of the
principal amount of the note to be redeemed and the excess, if any, of the
present value of the June 15, 2015 redemption price plus required interest
payments through June 15, 2015 over the principal amount of the note.
The Company may redeem the Notes at any time on or after June 15, 2015 at the
redemption prices and periods set forth below, plus accrued and unpaid interest:
June 15, 2015 103.875%
June 15, 2016 101.938%
June 15, 2017 and thereafter 100.000%
Upon specified change of control events, each holder of a note will have the
right to require the Group to purchase all or a portion of the Notes at a
purchase price in cash equal to 101% of the principal amount, plus accrued
interest to the date of purchase. At June 30, 2011 no mandatory principal
repayments are required in the next five years.
Capital spending in the first six months of 2011 was $186 million for operations
and projects, which included $22 million of capitalized Ruth pit mud removal
costs.
During the first six months of 2011, the Company purchased additional copper put
options under the price protection program at a cost of $3.0 million. In
addition, the Company exercised the Far West warrants with a total exercise
price of $14.9 million. This resulted in the Company acquiring additional shares
in Far West which were then converted, along with the originally held Far West
shares, to cash of $11.4 million and Capstone Mining Corp. ("Capstone") shares
after Far West was acquired by Capstone.
Liquidity Outlook
The Company's future profitability and cash position is highly dependent on the
price of copper and precious metals 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 JV is budgeted to spend $253 million in the second
half of 2011 to progress the Sierra Gorda project with the funding structure
laid out in the JV agreement (see "Sierra Gorda Project"). (In addition, the
Company expects to spend approximately $185 million on capital expenditures and
$16 million on environmental bond at its six operating mines. At current metal
prices, the Company expects that it will be able to fund the 2011 capital
requirements for all of its mines and projects from existing cash on hand and
internally generated funds.
Commitments and contractual obligations
Less
than 1-2 2-3 3-4 4-5 After Total
1 year years years years years 5 years
----------------------------------------------------------------------------
Reclamation
liabilities $ 0.8 $ 0.8 $ 0.8 $ 0.8 $ 0.8 $ 73.9 $ 77.9
Franke Mine supply
contracts 8.0 15.8 15.3 12.7 10.4 51.1 113.3
Robinson Mine power
supply contract 4.6 9.2 - - - - 13.8
Sierra Gorda project
equipment and
contracts 304.5 - - - - - 304.5
Minimum lease
payments (capital
and operating) 7.8 9.2 6.4 2.9 0.7 - 27.1
----------------------------------------------------------------------------
Total $ 325.7 $ 35.0 $ 22.5 $ 16.4 $ 11.9 $ 125.0 $ 536.6
----------------------------------------------------------------------------
Reclamation liabilities
The Company has estimated total future reclamation costs of $77.9 million
(undiscounted), which primarily relate to the closure of the Robinson, Carlota
and Franke mines and the Sudbury operations. The accounting carrying value of
this liability is $68.8 million at June 30, 2011 based on the estimated
discounted future payments. To secure a portion of the closure costs related to
Robinson, Carlota and Sudbury operations, the Company has posted environmental
bonds and held cash in a reclamation trust totalling $72.2 million as at June
30, 2011. 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. Closure plans for the McCreedy West and Levack operations
are governed by arrangements between the Ontario Government and Vale and between
Vale and the Company.
Franke Mine supply 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 be $8.8 million plus service
charges per annum over the term of the contact which expires in 2012.
Sierra Gorda project equipment and contracts
As of June 30, 2011, the Company has made contract commitments at Sierra Gorda
project of $87.5. In addition, purchase orders for mining equipment (including
shovels, drills and trucks) and infrastructure of $217.0 have been made.
MARKET TRENDS AND FUNDAMENTALS
Copper prices averaged $4.15/lb in the second quarter, 5% lower than first
quarter average of $4.37/lb mainly due to macroeconomic concerns surrounding the
Eurozone and USA fiscal situations and concerns over monetary tightening in
China dampening demand. Looking forward, the Company believes that copper market
fundamentals will remain strong; supported by continued mine supply
underperformance due to falling ore grades, strikes, aging large mines, project
delays and difficulty in funding large high cost technically challenging
projects. In the short term, from a demand perspective, the Company recognizes
that sustained high oil and food prices pose increased inflationary threats in
both emerging market countries and Organization for Economic Cooperation and
Development ("OECD") countries. In the long term, continued urbanization of
emerging market countries such as China and continued gradual growth in OECD
economies will provide a positive back drop for copper demand.
The following graph shows the spot price of copper from 2006 to July 29, 2011 as
published by the London Metal Exchange
("LME").
To view the LME Copper Spot Price graph, please visit the following link:
http://media3.marketwire.com/docs/quxlcht.pdf
At June 30, 2011, the closing spot price was $4.22/lb. At July 29, 2011, the
closing spot price was $4.41/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 2011, excluding the impact of changes in fair
value of copper put options:
----------------------------------------------------------------------------
Copper price Impact on the after tax earnings (excluding derivatives)
----------------------------------------------------------------------------
+ $0.20/lb 26.7
----------------------------------------------------------------------------
- $0.20/lb (26.7)
----------------------------------------------------------------------------
The Company has a floor price protection program in place for a portion of its
anticipated copper sales from April to December 2011. During the first six
months of 2011, the Company purchased additional copper put options for 106
million pounds of copper at an average strike price of $2.70/lb at a cost of
$3.0 million. A total of 80 million pounds of copper put options expired
unexercised.
At June 30, 2011, the Company had 121 million pounds of copper puts outstanding
with an average strike price of $2.70/lb. The expiry dates of these put options
are between July and December 2011.
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 2011:
------------------------------------------------------------
Copper price Cash flows from copper put options
------------------------------------------------------------
$1.50/lb 145.2
------------------------------------------------------------
$2.00/lb 84.7
------------------------------------------------------------
$2.50/lb 24.2
------------------------------------------------------------
$3.00/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. During
Q2 2011, the Company settled 2.7 million gallons of NYMEX heating oil contracts
resulting in a cash receipt of $2.1 million to the Company, which has been
recorded in cost of sales on the statement of earnings.
At June 30, 2011, the Company had 2.7 million gallons of NYMEX heating oil
futures contracts outstanding with an average strike price of $2.24/gallon. The
expiry dates of these NYMEX heating oil futures contracts are between July and
December 2011. As a result of a review of risks to the Company the diesel price
protection program was curtailed as of December 2010 and the existing contracts
will be allowed to run out.
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 FNX 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 a court dismissed the plaintiff's appeal in
another case. In another case an arbitrator found that the contracts were 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 and in
one of these appeals the court recently decided in favour of MQCL.
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 Company sells all the ore produced from its Sudbury operations to a
single processor. That processor is required to pay for ore shipped and sold
based on the metals which the processor is able to recover from the various ores
delivered. This varies depending on the metallurgical and mineralogical
composition as well as mining grades of nickel, copper, cobalt, platinum,
palladium, gold and silver for each ore. This is determined by the processor via
metallurgical and mineralogical testing of the various ores. There are several
different payable metals terms with the processor for the various ores from the
Company's Sudbury mines in order to reflect the differences in the metal
recoveries.
Interim processing terms (i.e. treatment and refining charges) and interim
payable metals terms have been established by the processor for the Sudbury
operations. The company is currently discussing final commercial terms with the
processor. There is a possibility that once final terms have been agreed that
revised terms may be applied to ore shipped in prior periods. The Company
cannot, at this time, determine the amount, if any, of such adjustment.
Depending on the outcome of the negotiations of final payable metals and
processing terms, a material increase or decrease in payable metals and/or
processing costs may need 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 six month period of 2011, the Company incurred
legal fees of $0.8 million with that entity (June 30, 2010: $0.8 million), all
of which were at normal business terms.
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 higher of total discounted cash flows expected
from its use and disposal ("value in use") or fair value less costs to sell.
Discounted 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, reclamation costs and discount rate.
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 June 30,
2011.
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.
Site Closure and Reclamation Provision
Due to uncertainties concerning environmental remediation, the ultimate cost to
the Company of future site restoration could differ from the amounts provided.
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.
Financial Instruments
Financial instruments are designated as loans and receivables, available for
sale and "fair value through profit and loss". Financial instruments are
recorded in the balance sheet as either an asset or liability with changes in
fair value recognized in the consolidated comprehensive income. The estimate of
fair value of all financial instruments is based on quoted market prices or, in
their absence, third-party market indications and forecasts. The estimated fair
value of financial assets and liabilities is subject to measurement uncertainty.
Deferred Income Tax Assets
Management believes that uncertainty exists regarding the realization of certain
deferred tax assets and therefore a valuation allowance has been recorded as of
June 30, 2011. At June 30, 2011 the Company had additional available U.S.
Alternative Minimum Tax Credits of $5.7 million, which have not been recognized
due to the uncertainty of realization. The Company also has not recognized the
benefit of certain non-capital losses. However, the Company has recognized a net
current deferred 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 deferred tax assets which have
been recognized.
OUTSTANDING SHARE DATA
The Company had 191,211,627 common shares issued and outstanding at June 30,
2011. As of August 9, 2011, the Company had 191,358,503 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. There have been no changes in internal control
over financial reporting during the quarter ended June 30, 2011 that have
materially affected, or are reasonably likely to materially affect internal
control over financial reporting.
CONVERSION TO INTERNATIONAL FINANCIAL REPORTING STANDARDS ("IFRS")
Effective January 1, 2011 Canadian publicly listed companies were required to
prepare financial statements in accordance with IFRS for interim and annual
periods. The three months ended March 31, 2011 is the Company's first reporting
period under IFRS.
The IFRS project team has completed the conversion implementation.
Post-implementation will continue in future periods. The following outlines the
IFRS transitional impacts and the on-going impact of IFRS on the Company's
financial results.
Significant accounting impacts of conversion to IFRS
As a result of the accounting policy differences on conversion from Canadian
GAAP to IFRS, the Company recorded a reduction in the shareholders' equity of
approximately $28 million as at January 1, 2010. The following table summarizes
the adjustments t o Shareholders' Equity on adoption of IFRS on January 1, 2010,
and at June 30, 2010 and December 31, 2010 for comparative purposes:
----------------------------------------------------------------------------
----------------------------------------------------------------------------
January 1, June 30, December 31,
2010 2010 2010
----------------------------------------------------------------------------
Equity under Canadian GAAP 1,005.4 2,072.3 2,195.0
Site closure and reclamation
provisions (19.1) (20.5) (23.5)
Impairment of long-lived assets - - (152.5)
Financial instruments (11.0) (17.8) (42.3)
Deferred income taxes 2.3 3.3 40.9
----------------------------------------------------------------------------
Total IFRS adjustments to
equity (27.8) (35.0) (177.4)
----------------------------------------------------------------------------
Equity under IFRS 977.6 2,037.3 2,017.6
----------------------------------------------------------------------------
----------------------------------------------------------------------------
In transition to IFRS, the Company recorded an increase in earnings of
approximately $14.9 million and $14.1 million for the three months ended June
30, 2010 and six months ended June 30, 2010, respectively. For the year ended
December 31, 2010, a reduction in earnings of approximately $128.3 million as a
result of applying IFRS standards. The following table summarizes the
adjustments to previous reported Canadian GAAP earnings for the three and six
months ended June 30, 2010 and the year ended December 31, 2010 under IFRS:
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Three month Six month
period ended period ended Year ended
June 30, June 30, December 31,
2010 2010 2010
----------------------------------------------------------------------------
Earnings under Canadian GAAP 21.6 77.4 172.5
Site closure and reclamation
provisions (1.1) (1.5) (4.3)
Impairment of long-lived assets - - (152.5)
Financial instruments 15.0 14.6 (10.1)
Deferred income taxes 1.0 1.0 38.6
----------------------------------------------------------------------------
Total IFRS adjustments to earnings 14.9 14.1 (128.3)
----------------------------------------------------------------------------
Earnings under IFRS 36.5 91.5 44.2
----------------------------------------------------------------------------
----------------------------------------------------------------------------
The transition to IFRS has resulted in numerous comprehensive income
presentation changes in the financial statements, most significantly on the
consolidated statement of comprehensive income. The changes to the balance sheet
relate only to the further break-out of balances on the face of the balance
sheet including provisions and deferred income taxes. The following is a summary
of the significant changes to the Company's consolidated statement of
comprehensive income:
-- Expenses by function - the Company's statement of earnings presents
expenses by function. Accordingly, depreciation and amortization is no
longer presented as a separate item on the statement of comprehensive
income but is included in cost of sales.
-- Finance expense - under IFRS, finance expense includes interest on debt,
accretion expense for site closure and reclamation and other provisions.
-- Finance income - finance income under IFRS includes interest income and
gain on marketable securities.
The above changes are reclassifications within the statement of comprehensive
income so there is no net impact to the Company's earnings as a result of these
changes.
Business Activities
The impact of the IFRS conversion project on our compensation arrangements has
been assessed. Such arrangements are calculated based on financial information
disclosed in the financial statements. The project team continues to work with
the human resources department to ensure that all compensation arrangements are
amended for the applicable IFRS changes in accordance with compensation
policies. There is no significant impact to existing compensation arrangements
due to the IFRS conversion project. The Company's budgeting and forecasting
models have been amended to reflect the IFRS changes in accounting policies,
reclassifications, and measurements of applicable financial statement line
items.
Controls and Procedures
The conversion to IFRS does not have a significant impact on the Company's
internal controls (including information technology systems), and accounting
processes. However, the extent of change in accounting framework has required
the Company to update its internal controls, disclosure controls and procedures
to ensure they are appropriately designed and operated effectively for reporting
under IFRS. These include: training/communication - to ensure IFRS knowledge is
transferred from subject matter experts to the entire organization;
documentation - to ensure corporate accounting policies are updated for IFRS,
and transitional analysis and decisions are adequately supported; and review -
to ensure segregation of duties in the review and approval of IFRS information
from preparer to management, and ultimately by the Audit Committee. As a result
of these incremental internal control enhancements, the impact of the conversion
from Canadian GAAP to IFRS on the Company's risk management or other business
activities are reduced.
Ongoing Activities
The completion of the Implementation and commencement of Post-Implementation
phases will involve continuous monitoring of the changes implemented to date to
ensure completeness and accuracy of our IFRS financial reporting. In particular,
there may be additional new or revised IFRSs or IFRICs in relation to
consolidation, joint ventures, financial instruments, hedge accounting,
discontinued operations, leases, employee benefits, revenue recognition and
stripping costs in the production phase of a surface mine. The Company also
notes that the International Accounting Standards Board is currently working on
an extractive industries project, which could significantly impact the Company's
financial statements primarily in the areas of capitalization of exploration
costs and disclosures. There are processes in place to ensure that potential
changes are monitored and evaluated. The impact of any new IFRSs and IFRIC
Interpretations will be evaluated as they are drafted and published.
SUMMARY OF QUARTERLY OPERATING RESULTS
The following table summarizes the financial and operating results of the most
recent eight quarters (unaudited):
----------------------------------------------------------------------------
SUMMARY OF QUARTERLY FINANCIAL RESULTS
2009
2011 2011 2010 (ii)
----------------------------------------------------------------------------
Q2 Q1 Q4 Q3 Q2 Q1 Q4 Q3
Revenues (i)
Robinson
Robinson 106 95 132 130 95 133 136 74
Carlota 22 18 30 22 24 31 19 17
Franke 26 30 41 41 25 34 21 -
Podolsky 32 32 48 28 15 - - -
Levack Complex (1) 84 71 63 26 5 - - -
DMC 28 23 18 12 5 - - -
-------------------------------------------------------
Revenues - Total 298 269 332 259 169 197 176 91
Operating income 63.5 61.4 112.0 66.6 31.5 82.4 63.4 31.6
Earnings (loss)
before income taxes 71.3 211.2 (79.1) 28.9 39.1 68.3 45.6 21.2
Earnings (loss) 63.8 167.7 (67.0) 19.6 36.5 55.0 46.5 14.7
Basic earnings (loss)
per share $0.33 $0.88 -$0.35 $0.10 $0.26 $0.55 $0.47 $0.16
Diluted earnings
(loss) per share $0.33 $0.85 -$0.35 $0.10 $0.21 $0.54 $0.46 $0.15
----------------------------------------------------------------------------
(1) Including Morrison deposit commercial production revenues
(i) See "Financial Performance - Revenues" section for description of
payments process.
(ii) 2009 quarterly results are recorded in accordance with Canadian GAAP
----------------------------------------------------------------------------
SUMMARY OF QUARTERLY OPERATING RESULTS
----------------------------------------------------------------------------
2011 2010 2009
----------------------------------------------------------------------------
Q2 Q1 Q4 Q3 Q2 Q1 Q4 Q3
Robinson
Cu produced payable
(Mlbs) 21.2 19.9 25.4 25.4 22.7 30.7 28.2 32.2
Ore milled (Mt) 3.2 3.4 3.5 3.3 3.6 3.3 3,630.0 3.6
Au production
payable (kozs) 7.1 5.5 14.9 14.5 14.7 26.0 24.4 20.5
Cu grade (%) 0.43 0.41 0.46 0.49 0.40 0.59 0.59 0.75
Au grade (g/t) 0.17 0.18 0.26 0.25 0.20 0.31 0.31 0.26
Cu recovery (%) 73.0 69.5 75.4 75.3 73.5 72.2 65.9 57.4
Au recovery (%) 44.2 30.4 53.3 58.2 66.3 78.1 73.1 71.4
Cu sales (Mlbs) 22.3 18.2 24.7 28.5 26.6 27.8 31.7 21.1
Average final
settlement price $4.13 $4.39 $3.79 $3.19 $3.19 $3.37 $3.02 $2.42
($/lb)
Cash cost per pound
of payable copper $2.78 $2.49 $1.89 $1.66 $1.67 $1.14 $1.53 $1.11
produced ($/lb)
Carlota
Cu production (Mlbs) 6.2 4.2 6.6 7.3 7.4 8.2 8.0 6.6
Ore placed (Mt) 1.5 0.8 1.5 2.3 1.6 1.0 1.6 1.4
Total Cu grade (%) 0.44 0.39 0.7 0.77 0.39 0.35 0.61 0.45
Cu sales (Mlbs) 5.4 4.1 7.7 6.6 7.7 9.5 6.4 6.5
Average realized
price ($/lb) $4.06 $4.37 $3.88 $3.29 $3.13 $3.25 $3.01 $2.63
Cash cost per pound
of copper sold $3.24 $3.37 $1.84 $1.74 $1.89 $1.76 $1.61 $1.88
($/lb)
Franke
Cu production (Mlbs) 8.3 7.2 7.8 10.1 10.4 8.9 9.4 4.1
Ore placed (Mt) 0.8 0.5 0.7 0.9 0.8 0.8 0.8 0.5
Total Cu grade (%) 0.82 0.75 0.86 0.77 0.86 0.91 0.85 0.80
Cu sales (Mlbs) 6.1 6.9 10.3 12.8 7.8 10.3 6.9 -
Average realized
price ($/lb) $4.15 $4.38 $3.97 $3.23 $3.24 $3.25 $3.03 -
Cash cost per pound
of copper sold $4.49 $3.57 $2.60 $2.60 $2.60 $1.99 $2.07 -
($/lb)
Morrison
Cu ore sold (kt) (1) 52.2 50.0 39.7 29.3 20.0 12.7 3.1 -
Cu grade (%) 10.1 8.4 9.5 11.2 9.1 5.8 8.2 -
Payable Cu sold
(Mlbs) 10.3 8.2 7.1 6.3 3.5 1.6 0.7 -
Payable Ni sold
(Mlbs) 1.7 1.6 1.5 1.2 0.9 0.9 0.3 -
Payable TPM sold
(kozs) (2) 8.2 5.8 4.1 3.0 1.9 0.9 0.8 -
Average realized
price ($/lb) $4.14 $4.27 $4.37 $3.67 $2.89 $3.49 $3.17 -
Cash cost per pound
of copper sold $0.23 -$0.33 -$0.34 -$0.04 -$2.70 -$7.39 $0.36 -
($/lb)
Podolsky
Cu ore sold (kt) (1) 91.0 99.2 118.0 97.2 128.9 71.3 167.5 6.2
Cu grade (%) 3.6 3.1 3.7 3.2 3.7 2.6 4.2 3.5
Payable Cu sold
(Mlbs) 6.4 5.4 8.1 5.4 8.6 3.2 13.0 0.4
Payable Ni sold
(Mlbs) 0.3 0.2 0.4 0.3 0.6 0.3 0.8 0.03
Payable TPM sold
(kozs) (2) 5.9 6.6 10.6 5.4 11.5 5.3 15.1 0.9
Average realized
price ($/lb) $4.14 $4.28 $4.36 $3.82 $2.88 $3.63 $3.17 $3.32
Cash cost per pound
of copper sold $1.67 $1.80 $0.74 $1.67 $1.07 $1.69 $1.16 $1.17
($/lb)
McCreedy West
Cu ore sold (kt) (1) 78.0 74.9 76.1 72.6 67.5 67.3 154.5 2.3
Cu grade (%) 1.6 1.0 0.8 0.8 1.1 1.1 1.1 0.8
Payable Cu sold
(Mlbs) 2.3 1.1 1.1 1.2 1.2 1.3 3.3 0.03
Payable Ni sold
(Mlbs) 0.4 0.2 0.2 0.2 0.2 0.2 0.6 0.01
Payable TPM sold
(kozs) (2) 6.4 7.2 8.3 8.1 8.3 7.7 18.8 0.1
Average realized
price ($/lb) $4.12 $4.27 $4.46 $3.69 $2.84 $3.25 $3.17 $30.92
Cash cost per pound
of copper sold $1.39 $4.55 $1.55 $2.83 $3.15 $1.23 $1.77 -$5.46
($/lb)
----------------------------------------------------------------------------
(1) Converted into metric tonne from original short ton
(2) Total precious metal, including gold, platinum and palladium
(3) Production and operating statistics in this table are reported for
historical periods for all of the Company s mines, including periods prior
to the merger of Quadra and FNX on May 20, 2010
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.
NON-IFRS FINANCIAL MEASURES
The cash cost per pound of copper, and onsite costs and offsite costs are
non-IFRS financial measures that do not have a standardized meaning under IFRS,
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, 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
comprehensive income, is different than the costs of production because of
changes in inventory levels. The following table shows a reconciliation of these
non-IFRS financial measures to the consolidated statements of operations:
Three months ended
June 30, 2011
--------------------------------------------------------------
Car-
Rob- lota Mor- Pod- Mc-
inson (2) Franke rison olsky Creedy Total
West
Production
costs of
goods sold 74.4 16.4 27.6 23.2 16.9 10.9 169.4
Adjustment for
change in
inventory (3.4) - - - - - (3.4)
Royalties 3.2 1.1 - - - - 4.3
--------------------------------------------------------------
Total cash
cost 74.2 17.5 27.6 23.2 16.9 10.9 170.3
By-product
revenues (15.1) - - (20.8) (6.2) (7.7) (49.8)
59.1 17.5 27.6 2.4 10.7 3.2 120.5
Copper
produced /
sold (million
lbs) 21.2 5.4 6.1 10.3 6.4 2.3 51.8
--------------------------------------------------------------
Cash cost per
pound of
copper
(US$/lb)(1) $ 2.78 $ 3.24 $ 4.49 $ 0.23 $ 1.67 $ 1.39 $ 2.33
--------------------------------------------------------------
--------------------------------------------------------------
Three months ended
June 30, 2010
--------------------------------------------------------------
Mor- Pod-
Rob- Car- rison olsky Mc-
inson lota Franke (3) (3) Creedy Total
West (3)
Production
costs of
goods sold 59.9 13.4 20.3 - 10.1 5.9 109.6
Adjustment for
change in
inventory 1.2 - - - - - 1.2
Royalties 3.5 1.2 - - - - 4.7
--------------------------------------------------------------
Total cash
cost 64.6 14.6 20.3 - 10.1 5.9 115.5
By-product
revenues (26.8) - - - (4.2) (2.9) (33.9)
--------------------------------------------------------------
37.8 14.6 20.3 - 5.9 3.0 81.6
Copper
produced /
sold (million
lbs) 22.7 7.7 7.8 - 3.7 0.7 42.6
--------------------------------------------------------------
Cash cost per
pound of
copper
(US$/lb)(1) $ 1.67 $ 1.89 $ 2.60 $ - $ 1.58 $ 4.34 $ 1.92
--------------------------------------------------------------
--------------------------------------------------------------
Six months ended
June 30, 2011
--------------------------------------------------------------
Car-
Rob- lota Mor- Pod- Mc-
inson (2) Franke rion olsky Creedy Total
West
Production
costs of
goods sold 128.9 29.1 52.3 43.3 34.0 22.1 309.7
Adjustment for
change in
inventory 6.7 - - - - - 6.7
Royalties 6.2 2.0 - - - - 8.2
--------------------------------------------------------------
Total cash
cost 141.8 31.1 52.3 43.3 34.0 22.1 324.6
By-product
revenues (33.1) - - (43.7) (13.5) (13.9) (104.2)
108.7 31.1 52.3 (0.4) 20.5 8.2 220.4
Copper
produced /
sold (million
lbs) 41.2 9.5 13.0 18.5 11.8 3.4 97.4
--------------------------------------------------------------
Cash cost per
pound of
copper
(US$/lb) (1) $ 2.64 $ 3.27 $ 4.01 $ (0.02) $ 1.74 $ 2.41 $ 2.26
--------------------------------------------------------------
--------------------------------------------------------------
Six months ended
June 30, 2010
--------------------------------------------------------------
Mor- Pod-
Rob- Car- rison olsky Mc-
inson lota Franke (3) (3) Creedy Total
West (3)
Production
costs of
goods sold 119.3 28.5 40.8 - 10.1 5.9 204.6
Adjustment for
change in
inventory 2.8 - - - - - 2.8
Royalties 7.1 2.8 - - - - 9.9
--------------------------------------------------------------
Total cash
cost 129.3 31.3 40.8 - 10.1 5.9 217.3
By-product
revenues (56.3) - - - (4.2) (2.9) (63.4)
--------------------------------------------------------------
73.0 31.3 40.8 - 5.9 3.0 154.0
Copper
produced /
sold (million
lbs) 53.4 17.2 18.1 - 3.7 0.7 93.1
--------------------------------------------------------------
Cash cost per
pound of
copper
(US$/lb) (1) $ 1.37 $ 1.82 $ 2.25 $ - $ 1.58 $ 4.34 $ 1.65
--------------------------------------------------------------
--------------------------------------------------------------
(1) Robinson cash cost per pound of copper produced is based on payable
copper
(2) Carlota cash cost per pound of copper sold does not include the amount
of inventory write down.
(3) For the period after May 20, 2010, the day after the merger with FNX.
Three months ended Three months ended
June 30, 2011 June 30, 2010
------------------------ ------------------------
Robinson Carlota Franke Robinson Carlota Franke
Production costs of goods
sold 74.4 16.4 27.6 59.9 13.4 20.3
Adjustment for change in
inventory (3.4) 6.9 5.9 1.2 10.2 5.3
Royalties 3.2 1.1 - 3.5 1.2 -
------------------------ ------------------------
Total onsite and offsite
costs 74.2 24.4 33.5 64.6 24.8 25.6
------------------------ ------------------------
Six months ended Six months ended
June 30, 2011 June 30, 2010
------------------------ ------------------------
Robinson Carlota Franke Robinson Carlota Franke
Production costs of goods
sold 128.9 29.1 52.3 119.3 28.5 40.8
Adjustment for change in
inventory 6.7 19.6 12.4 2.8 19.6 6.0
Royalties 6.2 2.0 - 7.1 2.8 -
------------------------ ------------------------
Total onsite and offsite
costs 141.8 50.7 64.7 129.2 50.9 46.8
------------------------ ------------------------
Note: onsite and offsite costs at Morrison, Podolsky and McCreedy West equal
to production costs of goods sold as inventory movement at these mines is
minimal.
Cash flow from operating activities (before working capital changes) is also not
a defined term under IFRS, 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-IFRS 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, inventory write down (reversal), 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 Three
months months
ended ended
June 30, June 30,
2011 2010
-------- --------
(All amounts in millions of United States
dollars except per share amounts)
Net earnings - IFRS 63.8 36.5
Adjusting items:
Loss (gain) on derivatives 1.1 (18.5)
(Gain) loss on marketable securities (24.6) 5.7
Transaction costs for FNX merger - 5.3
Accounting gains from investment in Gold Wheaton - (10.1)
Tax impact of the above items 2.5 4.0
---------- --------
(21.0) (13.6)
---------- --------
Net earnings - Adjusted 42.8 22.9
---------- --------
---------- --------
Weighted-average number of shares outstanding -basic 190.9 139.8
Earnings per share - adjusted $ 0.22 $ 0.16
Six months ended Six months ended
June 30, 2011 June 30, 2010
------------------- -----------------
(All amounts in millions of United
States dollars except per share
amounts)
Net earnings - IFRS 231.5 91.5
Adjusting items:
Gain on derivatives (12.2) (11.1)
Gain on marketable securities (34.2) -
Transaction costs for FNX merger - 7.0
Accounting gains from investment in
Gold Wheaton (133.9) (10.1)
Inventory write down at Carlota 11.0 -
Tax impact of the above items 32.5 2.6
------------------- -----------------
(136.8) (11.6)
------------------- -----------------
Net earnings - Adjusted 94.7 79.9
------------------- -----------------
------------------- -----------------
Weighted-average number of shares
outstanding -basic 190.7 119.8
Earnings per share - adjusted $ 0.50 $ 0.67
August 9, 2011
FORWARD-LOOKING INFORMATION
This Press Release, that incorporates 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:
-- Fluctuations in metal prices;
-- The ability to expand or replace depleted reserves and the possible
recalculation or reduction of the reserves and resources;
-- The need to attract and retain qualified personnel;
-- Dewatering at the Robinson Mine in 2012 and beyond;
-- The successful development of the Sierra Gorda Project, a large project
with significant capital expenditure, permitting and infrastructure
requirements;
-- Regulatory approvals of the Sierra Gorda joint venture;
-- Inherent risks associated with joint ventures;
-- The ongoing litigation and potential future litigation at the Sierra
Gorda Project;
-- Actual capital costs, operating costs and expenditures, production
schedules and economic returns from the Company's mining projects;
-- Production estimates which may be materially different from actual
mineral recoveries;
-- Underground mining at the Levack Mine including reserves replacement and
delay in shaft rehabilitation;
-- Geotechnical issues at all properties; specifically pit slope stability
at open pit operations and structural issues at the underground mines;
-- The mineralogy and block model assumptions at all mines and projects;
-- The leaching rate and recoveries achievable at the Carlota Mine due to
the high content of fines within the ore and other processing factors;
-- The leaching rate and recoveries at the Franke Mine;
-- Transition to owner mining at the Franke Mine;
-- Updated equipment for the Franke Mine may be not be available;
-- The Vale offtake agreement, including the risk of potential adjustment
to final payable metal and processing cost terms;
-- The Vale buy back right, including Vale's right to acquire an interest
in the Victoria Project;
-- Potential challenges to title to the properties;
-- The dependence on transportation facilities and infrastructure;
-- Labour relations;
-- A temporary shutdown of any of our operations;
-- The actual costs of reclamation;
-- The impact of the availability and cost of key operating supplies and
services;
-- Increased energy prices;
-- The issuance of $500 million unsecured notes;
-- The acquisition and integration of businesses and assets;
-- Inherent hazards and risks associated with mining operations;
-- Inherent uncertainties associated with mineral exploration;
-- The mining industry is competitive;
-- Being subject to government regulation, including changes in regulation;
-- Being subject to extensive environmental laws and regulations, including
change in regulation;
-- Need for governmental licenses and permits;
-- Derivative contracts and exposure to the credit risk of counter-parties;
-- The shareholder rights plan;
-- Taxation;
-- Dividends;
-- Political and country risk;
-- Conflicts of interest;
-- Fluctuations in foreign currency exchange rates; and
-- Global financial conditions.
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.
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