Quadra Mining Ltd. Announces Strong 2010 First Quarter Financial Results
VANCOUVER, BRITISH COLUMBIA -- (Marketwire) -- 05/13/10 -- (All figures, except per share amounts, are in $ US thousands unless otherwise stated or unless context requires otherwise)
Quadra Mining Ltd. (the 'Company' or 'Quadra') (TSX: QUA) announces net earnings of $55.6 million or $0.56 per share (basic) for the three months ended March 31, 2010 compared to $26.7 million or $0.40 per share (basic) for the three months ended March 31, 2009. Earnings in the quarter benefited from strong copper prices as well as increasing sales volumes from the Carlota and Franke Mines. Adjusted earnings, which exclude the impact of derivative losses, gains on marketable securities and tax adjustments, were $55.7 million or $0.56 per share (basic) for the three months ended March 31, 2010 compared to $33.8 million or $0.51 per share (basic) for the same period in the previous year. Operating cash flow before working capital of $72.1 million or $0.72 per share in the first quarter 2010 compares to $55.0 million or $0.83 per share in the same period of 2009. During the first quarter 2010, Quadra recorded revenues of $192.9 million from the sale of 47.6 million pounds of copper and 23,928 ounces of gold.
Operating and Financial Summary
US $ 000s (except per share data and Three months ended
production data) March 31, 2010 March 31, 2009
---------------------------------------------------------------------------
Revenues 192,912 106,316
Copper produced (million lbs) 49.1 43.3
Copper sales (million lbs) 47.6 40.4
Gold produced (ounces) 26,846 34,646
Gold sales (ounces) 23,928 30,258
Adjusted earnings (1) 55,670 33,791
Adjusted earnings per share (basic) $ 0.56 $ 0.51
Earnings for the period 55,647 26,655
Basic earnings per share $ 0.56 $ 0.40
Diluted earnings per share $ 0.55 $ 0.40
Cash flow from operations before working
capital (2) 72,075 55,011
Cash flow from operations before working
capital - per share $ 0.72 $ 0.83
Net changes in non-cash working capital (16,150) (27,194)
Cash flow from operating activities 55,925 27,817
1. Adjusted earnings is a non-GAAP financial measure and consists of net
earnings with adjustments made to exclude derivative losses, gains on
marketable securities and the tax impact of these items. See
reconciliation of adjusted earnings in section below 'Non-GAAP Financial
Measures'.
2. Cash flow from operations before working capital is a non-GAAP financial
measure and consists of cash provided from operating activities less net
changes in non-cash working capital.
Paul Blythe, President and CEO of Quadra comments, 'Our strong financial results for the first quarter of 2010 were a result of the improved copper price, which increased from $3.33 per pound on December 31, 2009 to $3.56 at quarter end as well as increasing sales volumes and revenues from the Carlota and Franke Mines, which continue to ramp up production. The Robinson Mine had another strong quarter generating approximately 60% of our overall revenues and 75% of our operating income.'
'As previously announced, (see Press Release: April 20, 2010) while Robinson performed as planned, weather events at Carlota combined with leach recovery and earthquake issues at Franke, challenged site personnel during the quarter. At Carlota, the rainfall events and resulting impact on access to ore and on solution chemistry is expected to continue to affect production in the second quarter. The mine has done an excellent job of managing the stormwater, while meeting the requirements of the environmental permits. Stripping continued throughout the quarter and ore mining recommenced at the end of the quarter. The mine plan going forward has been revised and allows for increased metal production for the balance of the year. At Franke, the recovery issue is not atypical for a heap leach operation and a number of measures have been put in place to improve copper recovery, including reducing heap height, increasing leach solution application rates and acid cure additions, ore blending and crush size optimization. Construction has begun on two additional leach pads earlier than originally scheduled to ensure that there is adequate leach capacity going forward and these changes are expected to have a beneficial effect on copper production in the third and fourth quarters. The major setback as a result of the earthquakes in Chile was damage to an electrowinning transformer, with repairs expected by July.'
Paul Blythe, concludes: 'We continue to move forward on the two transformative transactions previously announced, namely the proposed merger with FNX Mining, with shareholder votes to be held next week on May 19th, 2010, and the formation of the Strategic Joint Venture with State Grid International Development Limited, where negotiations are advancing on the definitive agreement. The culmination of these transactions will establish a new, mid-cap copper mining company with five existing mining operations in low political risk jurisdictions and a company that has the full spectrum of skill sets required to provide further growth, both organically within the Sudbury basin and at Sierra Gorda, as well as the financial strength and critical mass to continue further consolidation.'
The Annual and Special Meeting of the shareholders of Quadra Mining Ltd. is to be held on Wednesday, May 19th, 2010 at 10:00 am (ET) at The Fairmont Royal York, 100 Front Street West, Toronto, Ontario in the British Columbia Room.
A summary of the financial statements together with the Management Discussion and Analysis ('MD&A') are provided below. The complete financial statements and the MD&A will be available at www.quadramining.com and www.sedar.com.
The following Management Discussion and Analysis ('MD&A') of Quadra Mining Ltd. and its subsidiaries ('Quadra' or the 'Company') has been prepared as at May 12, 2010 and is intended to be read in conjunction with the accompanying unaudited consolidated financial statements for the three month period ended March 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: QUA.
All financial information in this MD&A is prepared in accordance with the Canadian Generally Accepted Accounting Principles and all dollar amounts are expressed in thousands of United States dollars unless otherwise indicated.
FIRST QUARTER HIGHLIGHTS:
-- For the first quarter of 2010, the Company recorded earnings of $55.6
million or $0.56 per share (basic) compared to earnings of $26.7 million
or $0.40 per share (basic) in the first quarter of 2009.
-- Adjusted earnings(i) were $55.7 million or $0.56 per share (basic) after
making adjustments to exclude the loss on derivatives and gains on
marketable securities and the tax effects of these items.
-- Total revenues from the Company's three operating mines were $192.9
million for the first quarter of 2010 compared to $106.3 million for the
first quarter of 2009.
-- The Company produced 49.1 million pounds of copper and 26,846 ounces of
gold from its three operating assets for the first quarter of 2010
compared to 43.3 million pounds of copper and 34,649 ounces of gold for
the same quarter of 2009 . Carlota's first quarter copper production was
impacted by a series of storm events and production at the Franke Mine
was impacted by earthquake activity and lower initial leach recoveries.
-- The cash cost per pound of copper produced(i) for the Robinson Mine was
$1.10 per pound in the first quarter of 2010 compared to $0.80 in the
same quarter of 2009. The cash cost per pound of copper produced(i) for
the Company's three operating mines was $1.70 per pound in the first
quarter of 2010.
-- Cash flow from operating activities (before working capital changes)(i)
was $72.1 million or $0.72 per share (basic) compared to $55.0 million
or $0.83 per share (basic) for the first quarter of 2009.
-- Robinson and Carlota continue to achieve excellent safety records with a
combined Total Incidence Rate of 0.38 in the first quarter of 2010
compared to the U.S. average of 1.47 for open pit metal mines. At
Franke, Quadra employees had no lost time accidents, but regrettably a
maintenance contract worker was fatally injured.
-- The Company executed a non-binding memorandum of understanding ('MOU')
with State Grid International Development, a wholly owned subsidiary of
State Grid Corporation of China for the formation of a joint venture
(the 'Strategic JV'). The intent of the Strategic JV is to operate the
Franke Mine and to finance and develop Quadra's Sierra Gorda project and
seek to acquire other copper production assets, initially in Chile (see
'Memorandum of Understanding with State Grid').
-- On April 30 and May 4, 2010, the Company received positive legal rulings
on two of the three outstanding lawsuits related to the Sierra Gorda
project (see 'Contingencies').
-- On March 23, 2010, the Company entered into a definitive agreement with
FNX Mining Company Inc. ('FNX') to merge the two companies to create a
new leading intermediate copper producer. The proposed merger is subject
to approval by Quadra and FNX shareholders, and regulatory approvals.
The Company will issue approximately 88,876,000 common shares in
exchange for FNX common shares and reserve approximately 9,441,563
Quadra shares for issuance on the exercise of converted FNX options and
warrants. (see 'Proposed Merger of Quadra and FNX').
-- The Company ended the first quarter of 2010 with $156.8 million of cash
on hand.
(i) See 'Non-GAAP Financial Measures' below for additional information.
FINANCIAL PERFORMANCE
Earnings
The Company recorded earnings of $55.6 million or $0.56 per share (basic) for the three months ended March 31, 2010, compared to earnings of $26.7 million or $0.40 per share (basic) in the same quarter of 2009. The increased earnings in the first quarter of 2010 were primarily a result of stronger copper prices in the current quarter, and also due to higher sales volumes from the Franke Mine which commenced operations in the second half of 2009. In the first quarter of 2010, the Company sold a total of 47.6 million pounds of copper at an average settlement price of $3.32/lb. compared to 40.4 million pounds at an average settlement price of $1.56/lb. in the first quarter of 2009.
Operating Income
Operating income for the quarter ended March 31, 2010 and 2009 was as
follows:
Three months ended Three months ended
March 31, 2010 March 31, 2009
----------------------------------------
Robinson 61,169 42,004
Carlota 11,149 4,240
Franke 9,456 -
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Operating income 81,774 46,244
----------------------------------------
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Operating income increased in the first quarter of 2010 primarily due to higher average copper prices and higher sales volumes in 2010 (see 'Revenues') partially offset by higher onsite costs (see 'Review of Operations and Projects'). The 2009 first quarter operating income includes a reversal of $5.3 million leach pad inventory write down at Carlota.
Visit the following link to view 'Revenues' table:
http://media3.marketwire.com/docs/quatable1.pdf
Robinson revenues
At the Robinson Mine, revenues are generated by the sale of copper in concentrates. Revenues are generally recognized at the time of delivery to a customer based on metal prices at that time, however, under Robinson's current sales contracts, which follow normal industry practice, final pricing for copper sold in concentrate is generally set at least three months after the time of arrival of a shipment at the customer's port of delivery. As a result, Robinson's quarterly revenues include estimated prices for sales, based on forward copper prices at quarter end, as well as pricing adjustments for sales that occurred in previous quarters, based on the actual price received and the price at quarter end for sales from previous quarters that were not settled in the quarter.
In the quarter ended March 31, 2010, revenues from concentrate sales at the Robinson Mine were higher than the first quarter of 2009 due to significantly higher copper prices offset by lower sales volumes. The lower sales volumes in the first quarter of 2010 were a result of lower copper and gold production in the current quarter (see 'Review of Operations and Projects'). In the first quarter of 2010, copper prices increased from $3.33/lb at December 31, 2009 to $3.55/lb at March 31, 2010 resulting in positive pricing adjustments of $1.2 million related to the fourth quarter of 2009 sales. In addition, the Company recorded a positive price adjustment of $11.6 million related to the first quarter shipments from Robinson which were revalued using the copper price at March 31, 2010 of $3.56.
At December 31, 2009, receivables include 20 million pounds of copper which has been provisionally valued at $3.34 per pound. During the first quarter of 2010, these receivables were settled at an average final price of $3.37 per pound. In the first quarter of 2010, Robinson shipped approximately 29.1 million pounds of copper at an average provisional price of $3.17 per pound. At March 31, 2010, receivables include 29.4 million pounds of copper which has been provisionally valued at $3.56 per pound.
Carlota revenues
At the Carlota Mine, revenues are generated by the sale of copper cathodes. The pricing of copper cathode sales is generally set in the month of shipment and therefore pricing adjustments in subsequent periods are minimal.
In the first quarter of 2010, revenues from cathode sales at the Carlota Mine were higher than the same quarter of 2009 due to higher sales volumes and higher average copper prices in the current quarter. The increased sales volumes were a result of higher cathode production as the Carlota Mine continues to ramp up production.
Franke revenues
At the Franke Mine, revenues are generated by the sale of copper cathodes. Under Franke's current sales contracts, final pricing for copper sold is generally set one month after the time of shipment. As a result, Franke's quarterly revenues include estimated prices for sales, based on forward copper prices at quarter end, as well as pricing adjustments for sales that occurred in previous quarters, based on the actual price received.
In the first quarter of 2010, Franke recorded revenues of $33.5 million from the sale of 10.3 million pounds of copper cathode. Franke did not have any production or sales in the first quarter of 2009.
To view 'Operating expenses' table, please visit the following link:
http://media3.marketwire.com/docs/quatable2.pdf
Robinson
Cost of sales at Robinson were higher in the first quarter of 2010 than the same quarter of 2009 as a result of the higher onsite costs in the current quarter (see 'Review of Operations and Projects'). Cost of sales in the first quarter of 2009 was also impacted by an accounting adjustment to capitalize $8.5 million of stripping costs at Robinson related to the new Ruth pit area. No stripping costs were capitalized in the first quarter of 2010.
Amortization, depletion, depreciation and accretion were higher in the first quarter of 2010 than the same quarter of 2009, mainly due to the amortization of stripping costs that were capitalized during 2009.
Royalties and mineral taxes in for the first quarter of 2010 were significantly higher than the same quarter of 2009 mainly due to the higher copper prices in the first quarter of 2010.
Carlota
Cost of sales at Carlota were higher in the first quarter of 2010 than the same quarter of 2009 as a result of the higher sales volumes and increased onsite costs in the current year (see 'Review of Operations and Projects'). Operating expenses in the first quarter of 2009 also included a reversal of a start-up inventory adjustment of $5.3 million due to the increase in copper prices and the resulting increase in the net realizable value of the inventory.
Amortization, depletion, depreciation and accretion were higher in the first quarter of 2010 than the same quarter of 2009 mainly due to the higher sales volumes in the current quarter.
Royalties and mineral taxes in for the first quarter of 2010 were significantly higher than the same quarter of 2009 mainly due the higher sales volumes and higher copper prices in the first quarter of 2010.
Franke
The Franke Mine recorded cost of sales of $20.0 million and amortization, depletion and depreciation of $3.6 million in the first quarter of 2010. Franke did not have any production or cost of sales in the first quarter of 2009.
General & administrative and other expenses
General and administrative expenses for the first quarter of 2010 were $6.6 million compared to $3.5 million for the same quarter of 2009, reflecting the increased activity level and payroll costs in the current year, as well as costs associated with the non-binding MOU that was agreed with State Grid International Development during the first quarter of 2010. Stock-based compensation expense for the first quarter of 2010 was $1.6 million which was in line with the first quarter of 2009.
The Company recognized a loss on derivatives of $7.1 million during the first quarter of 2010 due to the decrease in the fair value of the copper put options purchased in the quarter as well as an increase in the liability associated with the Franke copper collars, both of which were a result of the increasing copper price. The loss on derivatives for the first quarter of 2009 of $8.8 million related to a decline in value of copper put options.
In the first quarter of 2010, the Company recorded net interest and other income of $2.6 million compared to $0.1 million in same quarter of 2009. This increase in other income is primarily related to unrealized gains on marketable securities that arose in the first quarter of 2010, partially offset by the transaction costs for the proposed merger with FNX.
The Company recorded an income tax expense of $13.3 million in the first quarter of 2010, compared to $6.2 million in the same quarter of 2009. The tax expense for the first three months of 2010 has been recorded based on an estimated annual effective tax rate of 21% (2009 - 24%). The decrease in effective tax rate in 2010 is mainly due to the utilization of U.S. Alternative Minimum Tax credits which were earned in prior years and the operation of the Franke Mine in Chile which has a lower statutory tax rate. Tax expense in the first quarter of 2010 also included a $1.1 million future income tax recovery related to the gain on marketable securities which has been recorded in other comprehensive income.
REVIEW OF OPERATIONS AND PROJECTS
Production for the first quarter of 2010 and 2009 from the Company's three
operating mines is summarized as follows:
Three months ended Three months ended
March 31, 2010 March 31, 2009
------------------ ------------------
Copper production (Million lbs)
Robinson Mine 32.0 36.7
Carlota Mine 8.2 6.6
Franke Mine 8.9 -
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49.1 43.3
Gold production (ozs)
Robinson Mine 26,846 34,649
ROBINSON MINE (NEVADA)
Three months ended Three months ended
March 31, 2010 March 31, 2009
------------------ ------------------
Copper production (Million lbs) 32.0 36.7
Gold production (ozs) 26,846 34,649
Waste mined (Tonnes 000's) 9,759 8,379
Ore mined (Tonnes 000's) 3,127 3,493
Ore milled (Tonnes 000's) 3,302 3,407
Copper grade (%) 0.59 0.65
Gold grade (g/t) 0.31 0.42
Copper recovery 72.2% 75.4%
Gold recovery 78.1% 75.4%
Onsite costs $ 51,974 $ 44,878
Offsite costs $ 12,604 $ 12,791
----------------------------------------
Total onsite and offsite costs $ 64,578 $ 57,669
Cash cost per pound of copper
produced $ 1.10 $ 0.80
Capital expenditure $ 7,129 $ 3,136
Total ore and waste mined in the first quarter of 2010 were slightly higher than in 2009 due to the development of, and transition to, the mining areas on the eastern side of the property (the Ruth and Wedge pits) in accordance with the mine plan. Copper and gold production were lower for the first quarter of 2010 than for the same quarter of 2009 due to lower feed grades for both copper and gold. Copper recovery was lower in the first quarter of 2010 than in the first quarter of 2009 due to higher oxide copper content in the ore.
Robinson Operating and Capital Costs
Operating costs are comprised of onsite and offsite costs (see 'Non-GAAP Financial Measures'). Onsite costs include all stripping costs and are primarily driven by the volume of waste and ore moved, payroll costs, supplies and equipment maintenance costs, and royalties. Onsite costs in the first quarter of 2010 were $7.0 million higher than the same quarter of 2009, primarily due to a $2.6 million increase in diesel fuel consumption, a $1.7 million increase in royalty payments due to higher metal prices, and $2.1 million in truck replacement parts.
Offsite costs are primarily driven by smelting and refining charges, the volume of concentrate transported, and rail and ocean freight rates. Offsite costs in the first quarter of 2010 were generally in line with the same quarter of 2009.
The cash cost per pound of copper produced was $1.10 in the first quarter of 2010 as compared to $0.80 in same quarter of 2009. The increased unit cost in the current year is due to lower copper production, higher onsite costs, and lower gold by-product revenues. The cash cost per pound of copper produced is a non-GAAP term and consists of onsite costs (including all stripping costs), and offsite costs, less by-product revenue, divided by the pounds of copper produced in the period (see 'Non-GAAP Financial Measures').
Capital expenditures at Robinson in the first quarter of 2010 were primarily related to planned dewatering and hydrology and increased exploration expenses.
Robinson Outlook
In 2010, mining will continue in both the Veteran Pit and Ruth Pit areas. In order to better define the metallurgical variability of the ore in the upper levels of Ruth, a detailed definition drill program is being carried out to collect samples for metallurgical testing and provide a higher density of drilling for resource estimation.
The complex nature of the Robinson ore body will continue to cause metal production variations from quarter to quarter indefinitely. Additional flotation capacity was installed in the fourth quarter of 2009 and contracts were negotiated with concentrate customers that give Robinson more flexibility with respect to concentrate grade. Both measures are expected to help mitigate metallurgical challenges in 2010.
Onsite costs are expected to increase in 2010 over 2009 primarily as a result of expected increases in tonnage mined and milled as well as an increase in future royalty expenses due to anticipated higher copper prices. Capital costs are expected to be $30 million primarily on Ruth Pit development, and updated reclamation bonding.
CARLOTA MINE (ARIZONA)
Three months ended Three months ended
March 31, 2010 March 31, 2009
----------------- -----------------
Copper cathode production
(Million lbs) 8.2 6.6
Waste mined (Tonnes 000's) 5,023 4,518
Ore mined (Tonnes 000's) 989 1,731
Ore placed (Tonnes 000's) 989 1,732
Copper grade (%) 0.20 0.30
--------------------------------------
Onsite costs $ 26,081 $ 18,032
Cash cost per pound of copper
produced $ 3.19 $ 2.74
Capital expenditure $ 5,199 $ 2,836
Total tonnes mined in the first quarter of 2010 at Carlota were lower than the same quarter of 2009 due to the impact of a series of storm events, including a one in three hundred year storm in January, where seven inches of rain fell in a 24-hour period. The resulting cumulated water limited access to ore in the main pit and severely disrupted the chemistry of the heap leach operation. A water storage area was excavated during the quarter and storm water was being pumped from the pit at the end of the quarter. An alternative access into the pit was excavated and ore deliveries to the pad will recommence towards the end of the second quarter of 2010. Copper production in the first quarter of 2010 was higher than the same quarter of 2009 as leaching of ore stacked in fourth quarter of 2009 continued.
Carlota Operating and Capital Costs
Carlota's onsite operating costs are mainly driven by the volume of waste and ore moved, payroll costs, supplies, process reagents, fuel, electricity, equipment maintenance costs, and royalties. Onsite costs in the first quarter of 2010 were $8.0 million higher than the same quarter of 2009 due to a $2.9 million increase in maintenance repairs to the mine equipment, $1.1 million in corrective actions related to the storm recovery project, $1.6 million for increased use of ferric sulphate in the leach operation, a $1.5 million increase in royalty expenses due to increased revenues and $0.3 million in increased lease costs for new leased mine loading equipment.
Capital expenditures at the Carlota Mine in the first quarter of 2010 were primarily related to continuing work on the Pinto Creek Diversion Channel and initiation of construction on the Phase 2 leach pad.
Carlota Outlook
As noted, the rainfall events caused significant upsets to solution chemistry and have impacted the mine plan. Second quarter copper production is also expected to be negatively affected. However, the mine plan for the balance of the year has been revised and calls for increased metal production for the balance of the year. This assumes more normal rainfall levels going forward.
Onsite costs in 2010 are expected to be higher than the prior year due to increased forecasted mine production of 28 million tonnes in 2010 compared to 25 million tonnes in 2009. There will be additional onsite costs incurred to recover from the early 2010 rain events and the additional costs are currently estimated to be approximately $5 million. Capital expenditures for 2010 are expected to be $21 million, primarily related to the planned leach pad expansion and updated reclamation bonding. Total capital expenditures are lower than previously forecast due to the leasing of mine equipment which was originally forecast to be purchased.
FRANKE MINE (CHILE)
Three months ended
March 31, 2010
---------------------
Copper cathode production (Million lbs) 8.9
Waste mined (Tonnes 000's) 1,087
Ore mined (Tonnes 000's) 1,044
Ore placed (Tonnes 000's) 761
Copper grade (%) 0.91
---------------------
Onsite costs $ 22,216
Cash cost per pound of copper produced $ 2.49
Capital expenditure $ 2,358
A total of 8.9 million pounds of copper cathode was produced at Franke during the first quarter of 2010. Mine and process production was from the Franke orebody. There was no production from Franke in the first quarter of 2009, as the mine was still under construction.
Production at the Franke Mine was impacted by leach recovery and by collateral issues arising from a series of major earthquakes. Ore placed on the leach pads was not completely leached leading to lower copper recoveries. This is considered a ramp up tuning issue, and a number of adjustments have been put in place to resolve the issue, including reducing heap height, increasing leach solution application rates and acid cure additions, ore blending and crush size optimization. A second factor has been the ore sources which include historical stockpiles and ore from the fringes of the orebody which is considered atypical . The crushing systems are now performing at the design rates and are delivering planned quantities of ore to the heaps. There was a significant earthquake in Chile during the first quarter and subsequently, the reliability of the power supply was affected. During one of the outages, a transformer on one of the rectifiers was lost reducing the plating capacity to 70% of design capacity. The repaired transformer is expected to be operational in July 2010.
Franke Operating and Capital Costs
Franke's operating costs are mainly driven by the volume of waste and ore moved by the mining contractor, acid costs, payroll costs, fuel, electricity and equipment maintenance costs. Onsite costs in the first quarter of 2010 were in line with the Company's expectations for copper placed on the leach pads. Capital expenditures at the Franke Mine in the first quarter of 2010 were primarily related to leach pad construction, acid tank construction, and improvements to the crushing systems.
Franke Outlook
Franke is still ramping up production. As noted above, a number of measures have been put in place to improve copper recovery in the lower zone of the leach pad. Construction has begun on two additional leach pads earlier than originally scheduled to ensure that there is adequate leach capacity going forward. These changes are expected to have a beneficial effect on copper production in the third and fourth quarters.
One of the remaining design issues at Franke is dust control across the crushing plant. Construction is now underway on covers for the fine ore and coarse ore stockpiles.
Franke's acid supply has been substantially contracted in advance for 2010 with half of the required quantity contracted for at a price dependent on copper price and the remainder at a fixed price. Average acid costs for 2010 are expected to be in the $80-$90 per tonne range based on current copper price.
SIERRA GORDA (CHILE)
In late 2009 the Company approved a budget of approximately $40 million for 2010 to advance the Sierra Gorda project. During the first quarter of 2010, the Company incurred costs of $14.8 million on the project. The principal activities were infill and condemnation drilling, metallurgical and process test work and the commencement of the actual study required to support a development decision and project financing. The engineering and preparation of the pre-feasibility study was awarded to SNC-Lavalin Inc., who subsequently mobilized. Their work is being supported by a number of other consultants and by Quadra management. The Environmental Impact Study ('EIS') is being prepared by Golder Associates and expected to be submitted to the regulatory authorities in the second quarter.
The objective of the infill drilling program is to increase the amount of measured and indicated resources to the confidence level required for pre-feasibility and feasibility studies while the condemnation drilling will ensure facility and infrastructure placements outside the zones of potential economic mineralization. During the first quarter, nine diamond drill rigs were committed to the project and approximately 40,000 meters of core drilling has been completed since the start of the program. This drilling has provided samples for metallurgical and advanced engineering test work. Results from these programs are being used to optimize the process flow sheet and for trade-off studies that are being incorporated into the study. Project designs and economics in the Scoping Study were based on mining and processing Sierra Gorda sulphide mineralization only; the significant measured and indicated oxide resources were assumed to be waste. Oxide column test work and associated engineering are in progress to evaluate the merits of this significant resource.
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 study is scheduled to be completed in December 2010. Resource drilling will be cut off around mid-year to allow final resource modeling and mine planning to be completed. Trade-off studies to optimize plant designs are continuing and engineering design activities are ramping up to meet the schedule. A historical review of other projects in Chile shows that the permitting process, currently considered to be the critical path, has taken anywhere from 9 to 15 months to complete. Based on this, the earliest date for the commencement of development is the fourth quarter of 2011. To ensure maximum optionality the delivery situation for key equipment is being assessed with a view to placing orders as required for key mobile and other equipment in advance of completing the study. An order has already been placed for two electric shovels.
MALMBJERG MOLYBDENUM PROJECT (GREENLAND)
In May 2009, the Company received the exploitation license for the project. While there have been no significant expenditures at Malmbjerg during the first quarter of 2010, the Company has continued to advance environmental baseline studies and commitments associated with the Environmental Statement Impact Analysis.
Malmbjerg Outlook
Additional development activities at Malmbjerg have been suspended. Quadra is continuing the search for a partner or partners to advance the project through to production.
MEMORANDUM OF UNDERSTANDING WITH STATE GRID
In March 2010, Quadra executed a non-binding MOU with State Grid International Development ('SGID'), a wholly owned subsidiary of State Grid Corporation of China, the largest Chinese utility company and a major end user of copper for the formation of a joint venture (the 'Strategic JV'). The intent of the Strategic JV is to operate the Franke Mine and to finance and develop Quadra s Sierra Gorda project and seek to acquire other copper production assets, initially in Chile. The parties will be entitled to their proportionate share of the concentrate or cathode production of the Strategic JV on arms-length terms. Quadra will be responsible for supervising day-to-day operations of the Strategic JV under the oversight and direction of a Board of Directors of the JV consisting of an equal number of representatives from both parties. SGID will lead the efforts of the Strategic JV to arrange the necessary project financing with a target of not less than a 60:40 debt equity ratio, subject to a bankable feasibility study and other conditions.
A definitive agreement will be negotiated covering the structure, terms and conditions of the joint venture. Quadra will contribute the Sierra Gorda project and the Franke Mine, representing $900 million in assets, and SGID will contribute capital to each gain a 50% equity interest in the Strategic JV. Thereafter each party can contribute 50% of any further equity requirement to maintain its interest.
The MOU is non-binding except in certain limited respects but establishes the basis for the negotiation of definitive Strategic JV agreements. Execution of definitive agreements is subject to a number of conditions for the benefit of both parties and common to agreements of this nature, including further due diligence and the applicable regulatory and government approvals. Both parties are working towards execution of definitive agreements by late in the second quarter of 2010.
In addition, as part of the MOU, SGID and Quadra have completed a private placement pursuant to which SGID subscribed for 10,945,997 subscription receipts of Quadra at a price of CDN$13.91 each, being the market price of Quadra common shares on the date the Company applied for TSX approval during the course of negotiations, for aggregate subscription proceeds of approximately CDN$152.3 million. Each subscription receipt entitles SGID at no additional cost and without further action by SGID, to receive one common share of Quadra upon closing of the Strategic JV. The subscription proceeds are being held by an escrow agent and, upon issuance of the common shares, would be released to Quadra. Under the MOU, a SGID nominee will be invited to join the Board of Quadra.
PROPOSED MERGER OF QUADRA AND FNX
On March 23, 2010, the Company and FNX entered into a definitive agreement to merge the two companies. Under the terms of the transaction, which is structured as a plan of arrangement, each FNX common share would be exchanged for 0.87 of the Company common share and $0.0001. The merger is subject to the satisfaction of a number of conditions, including the Company and FNX shareholder approval and regulatory approvals. The shareholder votes to approve the transaction are scheduled for May 19, 2010.
Under the terms of the Agreement, all outstanding options of FNX (whether vested or unvested) will be exchanged for Quadra stock options, adjusted based on the same exchange ratio. All outstanding warrants of FNX will be exercisable for common shares of Quadra, adjusted based on the same exchange ratio. Assuming no issuance of additional FNX shares, the Company will issue approximately 88,876,000 common shares in exchange for FNX common shares and reserve approximately 9,441,563 Quadra shares for issuance on the exercise of converted FNX options and warrants.
LIQUIDITY AND CAPITAL RESOURCES
The Company generated cash flow from operating activities of $55.9 million for the three month period ended March 31, 2010 compared to $27.8 million in the first quarter of 2009. The increase in operating cash flow is largely driven by the increased copper price as well as higher sales volumes due to the operation of the Franke mine.
Capital spending in the first quarter of 2010 was $22.9 million for operations and projects. An additional $5.9 million was paid to increase environmental bonding at the Robinson Mine.
On May 14, 2009 Quadra signed an agreement with a syndicate of lenders in which the lenders provided a $37.5 million secured project debt facility to a wholly-owned Chilean subsidiary of the Company. In the first quarter of 2010, the project finance facility was increased by $12.5 million, to a total of $50 million, without any additional hedging requirements. The facility now consists of an amortizing $42.5 million project finance facility and a $7.5 million working capital facility bearing interest at LIBOR plus 5.75% and 6.75%, respectively.
During the quarter ended March 31, 2010 the Company settled 9.9 million pounds of Franke copper collars and paid $11.1 million to the counter parties. In addition, the Company purchased additional copper put options under the price protection program at a cost of $3.3 million.
During the quarter ended March 31, 2010 the Company entered into new operating lease agreements for loading equipment for deployment at Carlota with a value of $15 million.
At March 31, 2010, the Company had cash and cash equivalents of $156.8 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.
At March 31, 2010, the Company had working capital of $262.4 million as compared to $217.3 million at December 31, 2009. The increase in working capital during the first quarter of 2010 is primarily the result of operating cash flow net of capital expenditures. At March 31, 2010, accounts receivable and revenues include approximately 29.4 million pounds of copper that has been provisionally valued at $3.56 per pound. The final pricing for these provisionally priced sales is expected to occur between April 2010 and June 2010. 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 first and second quarters of 2010. On May 12, 2010 the copper price was $3.21/lb.
Liquidity Outlook
The Company s future profitability and cash position is highly dependent on the price of copper and gold. 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, and the Company also has copper collar contracts which cap the copper sales price at $2.16/lb for 9.9 million pounds of copper from the Franke Mine during the second quarter of 2010 (see 'Financial Instruments').
The Company is planning to spend $40 million before the end of 2010 to complete the Sierra Gorda study and may incur other expenses at Sierra Gorda including land, water rights, equipment deposits, litigation expenses and mineral claim acquisitions. In 2010, the Company expects total capital expenditures of approximately $61 million at its three operating mines. The Franke project loan facility has scheduled principal repayments of $6.9 million in 2010 and additional semi-annual payments are required in an amount equal to 67% of Excess Cashflow from the Franke Mine, as defined in the agreement. Based on the current copper price and the projected Excess Cash Flow from the Franke Mine, it is expected that the Company will repay the balance of the facility in the next 12 months.
At current metal prices, the Company expects that it would be able to fund the Sierra Gorda study, and capital expenditures at operating mines, from existing cash on hand and internally generated funds. In the event of a decline in metal prices, the Company may require external financing to complete the Sierra Gorda pre-feasibility study and maintain an appropriate minimum cash balance.
Based on the results of the scoping study, development of the Sierra Gorda project will require a total capital cost in the range of $1.7 billion and total costs in the range of $2.0 billion. The Company has been in discussions with potential partners with the objective of putting in place the financing for the project. In March 2010, the Company executed a non-binding MOU to form a Strategic JV with SGID (see section above 'Memorandum of Understanding with State Grid'). SGID will lead the efforts of the Strategic JV to arrange the necessary project financing with a target of not less than a 60:40 debt equity ratio, subject to a bankable feasibility study and other conditions. The proposed arrangement with SGID and the contemplated financing are expected to be sufficient to fund the development of Sierra Gorda based on the scoping study.
Commitments and contractual obligations
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Payment Due By Period
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Less
($000's) than 1-2 2-3 3-4 4-5 After Total
1 year years years years years 5 years
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Project debt
facility 37,500 12,500 - - - - 50,000
Reclamation
liabilities 389 279 1,197 3,164 7,551 90,887 103,467
Franke Mine
contracts 20,895 27,649 27,576 21,807 19,575 92,793 210,295
Robinson Mine power
supply contract 6,865 9,166 9,179 - - - 25,210
Minimum lease
payments (capital
and operating) 15,079 11,355 5,540 3,697 1,659 - 37,330
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Total 80,728 60,949 43,492 28,668 28,785 183,680 426,302
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Project debt facility
On May 14, 2009 Quadra signed an agreement with a syndicate of lenders in which the lenders provided a $37.5 million secured project debt facility to a wholly-owned Chilean subsidiary of the Company. In January 2010, the Company drew down an additional $12.5 million in connection with an increase in the project debt facility from $37.5 million to $50.0 million (see 'Liquidity and Capital Resources').
Reclamation liabilities
The Company has estimated total future reclamation costs of $103.5 million (undiscounted), which primarily relate to the closure of the Robinson, Carlota and Franke Mines. The Company has estimated the fair value of this liability to be $51.3 million at March 31, 2010 based on the estimated discounted future payments. To secure a portion of the closure costs related to the Robinson and Carlota Mines, the Company has posted environmental bonds and held cash in a reclamation trust totalling $65.6 million as at March 31, 2010. The Company revises the reclamation plan and cost estimate for the Robinson Mine annually as required by US Bureau of Land Management and adjusts the amount of the bond accordingly. The reclamation plan and cost estimate for the Carlota Mine 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 the Franke Mine.
Franke Mine contracts
The Company has a long-term supply contract for sulphuric acid for use in the copper extraction process at the Franke Mine. 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.
The Franke Mine 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 the Franke Mine.
Robinson Mine power supply contract
The Robinson Mine has a three year supply contract for electricity. The minimum commitment under the contract is estimated to $8.8 million plus service charges per annum over the term of the contact which expires in 2012.
MARKET TRENDS AND FUNDAMENTALS
Between 2006 and mid 2008, the growing demand for copper, particularly in China, coupled with an inability of the copper industry to increase supply due to a lack of immediate development projects, together with a weakening U.S. dollar led to a substantial increase in the copper price. The subsequent global credit and consumer confidence crises and the resulting global economic downturn led to a collapse in the price of copper, which reached a low of $1.26 per pound in December 2008, before recovering to $3.55 per pound at the end of March 2010. The sharp rebound in the price of copper was due to a significant tightening in the global supply of copper scrap and continued strong Chinese demand. The Company believes that, copper fundamentals will remain robust as continued growth in Chinese copper demand coupled with increased rest-of-world copper demand arising from the recovery in the global economy, will drive global copper demand ahead of the growth in both scrap and primary mine supply.
The following graph shows the inventory level, as published by the London Metal Exchange ('LME'), of copper and the spot price of copper from 2006 to April 30, 2010.
To view graph of 'LME Copper Price & Inventory', please visit the following link:
http://media3.marketwire.com/docs/quagraph1.pdf
At March 31, 2010 the closing spot price was $3.55 per pound. At May 12, 2010, the closing spot price was $3.21 per pound. 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 2010, excluding the impact of changes in fair value of copper put options:
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Impact on the after tax earnings
Copper price (excluding derivatives)
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$0.20/lb 32,114
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- $0.20/lb (32,114)
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The Company has a floor price protection program for a portion of its anticipated copper sales through September 2010. During the first quarter of 2010, a total of 41.7 million pounds of copper put options expired unexercised. In addition, the Company purchased additional copper put options for 56 million pounds of copper at a cost of $3.3 million. At March 31, 2010, the Company had 78.3 million pounds of copper puts outstanding with an average strike price of $2.26/lb (December 31, 2009 - 64 million pounds). The expiry dates of these put options are between April and September 2010.
Under the terms of the Franke project loan facility, the Company was required to enter into a copper price protection program in order to establish a minimum floor price for a portion of anticipated copper sales from the Franke Mine. During the three months ended March 31, 2010, the Company settled 9.9 million pounds of copper collar contracts with cash payments of $11.1 million. At March 31, 2010 the fair values of put and collar instruments outstanding are as follows:
Pounds
Expiry (millions) Instrument Floor price Cap price Fair value
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April 2010 to
June 2010 9.9 Collar $ 1.79 $ 2.16 (18,008)
July 2010 to
December 2010 15.0 Put $ 1.79 2
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Total 24.9 (18,006)
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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 or the floor price of the collar, the Company will receive the difference in price for the contracted number of pounds. If the average LME cash price for the month is higher than the cap price of the collar, the Company will pay the difference in 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 and collars in the remainder of 2010:
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Cash flows from copper put
Copper price options and collars for 2010
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$1.50/lb 66,729
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$2.00/lb 20,358
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$2.50/lb (3,366)
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$3.00/lb (8,316)
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$3.50/lb (13,266)
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$4.00/lb (18,216)
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The Company has entered into NYMEX heating oil futures contracts and collar contracts in order to manage the price risk associated with diesel fuel. In the first quarter of 2010, the Company settled 2.8 million gallons of NYMEX heating oil contracts. These settlements resulted in cash payments to the Company of $0.1 million in the first quarter of 2010, which have been recorded in cost of sales on the statement of earnings. During the first quarter of 2010, the Company had entered into a total of 2.7 million gallons of NYMEX heating oil futures at no cost.
At March 31, 2010 the following NYMEX heating oil futures contracts remain outstanding (December 31, 2009 - 10.9 million gallons):
Gallons Fair
Expiry (millions) Contract value
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April to
December
2010 7.5 Futures, strike price $2.13/gallon 926
April 2010 0.6 Collars, cap $2.00/gallon; floor $1.7/gallon 114
January to
March 2011 2.7 Futures, strike price $2.26/gallon 185
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Total 10.8 1,225
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CONTINGENCIES
(a) The Company has been 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 were served on August 13, 2007, April 2, 2008, June 20, 2008 and July 10, 2008 and seek to invalidate certain of the 10 option agreements under which the Company acquired mining tenements that comprise a significant part of the Sierra Gorda project. Based on advice of Chilean counsel, Quadra believes that the option agreements are valid and that the lawsuits are without merit. MQCL settled one of the four lawsuits in the second quarter of 2009 for less than $0.5 million.
The plaintiffs in the remaining three 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 10 option agreements and the plaintiffs accepted all option payments until April 2007. In the first two lawsuits, the plaintiffs are requesting that the option agreements be declared null and void. The plaintiffs in these cases are claiming that the SLMs were not authorized to sell the mining tenements under the option agreements. In the third lawsuit, the plaintiffs argue that if either of the first two lawsuits are successful then further option agreements are invalid by virtue of the fact that the option agreements were intended to be exercised in either all or none of the cases. The Court referred this matter to arbitration and the Company has applied for a declaration from the arbitrator that the third lawsuit is without merit.
On April 30, 2010 the arbitrator in the third case found that MQCL had fully complied with all its contractual obligations and that the option agreements at issue in this case are valid. The decision by the arbitrator cannot be appealed.
On May 4, 2010 the court ruled in favour of MQCL in the first case and awarded the Company costs. The plaintiffs have a right to appeal this decision.
Although the Company believes, based on advice from Chilean counsel, that the remaining 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. Furthermore, should the lawsuits not be resolved on a timely basis, the project financing for the Sierra Gorda project could be delayed.
In the unlikely event that MQCL loses one or both of the first two lawsuits, based on advice from Chilean counsel the precise legal situation is unclear in that:
-- The SLMs were dissolved automatically under Chilean law when the mining
tenements that are the subject of the lawsuits were sold to the Company.
These SLMs would somehow have to be recreated. Based on advice from
Chilean counsel, there is no Chilean precedent for this.
-- Before the title to the mining tenements that are the subject of the
lawsuits are transferred back to the SLMs, Quadra should be entitled to
be reimbursed all amounts paid to the plaintiffs and other shareholders
under the option agreements.
-- The mining tenements that are the subject of the lawsuits comprise an
important part of the Company's current plan for the development of the
Sierra Gorda project. Given Quadra's other landholdings in the area, the
Company believes that it would be very difficult for the plaintiffs in
the lawsuits to be able to economically exploit the mining tenements
that are the subject of the lawsuits.
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. However, none of the Company or any of its subsidiaries has of the date hereof been served with any additional legal actions.
(b) 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 three months ended March 31, 2010 the Company incurred legal fees of $0.5 million with that entity (three months ended March 31, 2009: $0.1 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 estimate s 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 de