Inmet Announces Second Quarter Earnings
TORONTO, CANADA -- (Marketwire) -- 07/27/10 -- All amounts in Canadian dollars unless indicated otherwise
Inmet (TSX: IMN) announces second quarter earnings.
Second quarter highlights
-- Foreign exchange losses reduce earnings
Inmet announces second quarter earnings of $0.86 per share compared with
earnings of $1.37 per share in the second quarter of 2009. Our net
income this quarter was $39 million lower ($0.69 per share) than the
same quarter last year because of foreign exchange. We recognized
foreign exchanges losses of $21 million this quarter on the repatriation
of cash from Cayeli and Pyhasalmi. In the same quarter of 2009, we
recognized foreign exchange gains of $18 million mainly from revaluing
Las Cruces' US dollar denominated debt under its credit facility.
-- Consistent earnings from operations
Earnings from operations were $87 million compared to $85 million last
year, even though Troilus contributed $10 million less. Higher copper
and zinc prices increased our operating earnings by $11 million compared
to the same quarter of 2009.
-- Strong performance at Cayeli and Pyhasalmi
Cayeli milled 295,000 tonnes this quarter, and Pyhasalmi milled 355,000
tonnes. Both operations remain on target to meet their annual throughput
objectives.
-- Higher zinc production and lower gold production
Zinc production was higher this quarter because grades at Cayeli were
higher. Gold production was significantly lower because Troilus
concluded operations during the quarter.
-- Las Cruces progressing on commissioning plan
While we have achieved increasing productivity rates, a number of
equipment failures and operational issues delayed the ramp-up of the
plant and limited our ability to operate continuously. As a result, we
produced 6,600 tonnes of copper cathode during the quarter compared to a
target of 12,400 tonnes. We believe we have identified the key
bottlenecks to production and we continue to take steps to significantly
increase our operating reliability. We will continue with the rigorous
implementation of the ramp up plan to achieve our goal of full
production by the end of the year and we are encouraged by the
capability that the plant has demonstrated in recent months.
-- Troilus concludes operations
After reaching the milestone of producing 2 million ounces of gold on
June 16th, Troilus concluded 13 years of operations at the end of June
after depletion of all remaining surface ore stockpiles. We would like
to thank all of the employees of Troilus for their tremendous dedication
and contributions as well as the Cree community for its support of this
project.
Key financial data
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June 30 six months ended June 30
2010 2009 change 2010 2009 change
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FINANCIAL HIGHLIGHTS
(thousands, except per
share amounts)
Sales
Gross sales $ 215,051 $ 213,042 +1% $ 466,610 $ 452,194 +3%
Net income
Net income $ 48,436 $ 66,528 -27% $ 128,307 $ 117,855 +9%
Net income per share $ 0.86 $ 1.37 -37% $ 2.29 $ 2.43 -6%
Cash flow
Cash flow provided by
operating activities $ 80,289 $ 90,596 -11% $ 171,866 $ 107,693 +60%
Cash flow provided by
operating activities
per share (1) $ 1.43 $ 1.86 -23% $ 3.06 $ 2.22 +38%
Capital spending (2) $ 11,014 $ 86,263 -87% $ 32,835 $ 181,122 -82%
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OPERATING HIGHLIGHTS
Production(3)
Copper (tonnes) 22,500 19,200 +17% 43,700 39,300 +11%
Zinc (tonnes) 20,600 17,500 +18% 39,300 32,800 +20%
Gold (ounces) 36,700 50,600 -27% 76,900 129,400 -41%
Pyrite (tonnes) 137,700 132,200 +4% 335,200 323,000 +4%
Copper cash cost (US $
per pound) (4) $ 0.47 $ 0.52 -10% $ 0.43 $ 0.55 -22%
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as at June as at December
30 31
FINANCIAL CONDITION 2010 2009
Current ratio 3.9 to 1 4.2 to 1
Gross debt to total equity (5) 1% 1%
Net working capital balance (millions) $ 502 $ 609
Cash balance including long-term bonds
(millions) $ 757 $ 634
Shareholders' equity (millions) $ 2,269 $ 2,238
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(1) Cash flow provided by operating activities divided by average shares
outstanding for the period.
(2) For the six months ended June 30, 2010, this includes capital spending
of $41 million at Cobre Panama and $29 million at Las Cruces reduced by
positive cash flow from pre-operating costs net of revenues and working
capital changes at Las Cruces of $53 million. For the six months ended June
30, 2009, this includes $119 million of capital spending at Las Cruces
(mainly for construction).
(3) Inmet's share.
(4) Copper cash cost per pound is a non-GAAP measure - see Supplementary
financial information on pages 31 to 33.
(5) Gross debt includes long-term debt and the current portion of long-term
debt, less the non-recourse note owing from Las Cruces to its non-
controlling shareholder.
Second quarter press release
Where to find it
Our financial results 4
Key changes in 2010 4
Understanding our performance 5
Earnings from operations 7
Corporate costs 11
Results of our operations 13
Cayeli 14
Las Cruces 16
Pyhasalmi 17
Troilus 20
Ok Tedi 22
Status of our development project 24
Cobre Panama 24
Managing our liquidity 25
Financial condition 28
Accounting changes 29
Supplementary financial information 31
In this press release, Inmet means Inmet Mining Corporation and we, us and our mean Inmet and/or its subsidiaries and joint ventures. This quarter refers to the three months ended June 30, 2010. Revised objective is as of July 27, 2010.
Forward looking information
Securities regulators encourage companies to disclose forward-looking information to help investors understand a company's future prospects. This press release contains statements about our future financial condition, results of operations and business.
These are 'forward-looking' because we have used what we know and expect today to make a statement about the future. Forward-looking statements usually include words such as may, expect, anticipate, believe or other similar words. We believe the expectations reflected in these forward-looking statements are reasonable. However, actual events and results could be substantially different because of the risks and uncertainties associated with our business or events that happen after the date of this press release. You should not place undue reliance on forward-looking statements. As a general policy, we do not update forward-looking statements except as required by securities laws and regulations.
Our financial results
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(thousands, except
per share
amounts) 2010 2009 change 2010 2009 change
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EARNINGS FROM
OPERATIONS (1)
Cayeli $ 24,472 $ 22,185 +10% $ 61,568 $ 37,086 +66%
Pyhasalmi 22,309 11,783 +89% 45,166 18,326 +146%
Troilus 6,252 16,032 -61% 17,299 70,516 -75%
Ok Tedi 33,905 35,530 -5% 74,873 53,115 +41%
Other (69) (508) -86% (1,011) (992) +2%
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86,869 85,022 +2% 197,895 178,051 +11%
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DEVELOPMENT AND
EXPLORATION
Corporate
development and
exploration (2,524) (2,727) -7% (5,303) (5,959) -11%
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CORPORATE COSTS
General and
administration (6,288) (4,785) +31% (11,798) (8,909) +32%
Investment and
other income (18,370) 16,466 -212% (18,448) 5,263 -451%
Asset impairment - - - - (6,419) -100%
Stand-by costs - - - (6,753) - +100%
Interest expense (421) (493) -15% (873) (985) -11%
Income and capital
taxes (15,249) (24,177) -37% (35,394) (43,192) -18%
Non-controlling not
interest 4,419 (2,778) -259% 8,981 5 meaningful
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(35,909) (15,767) +128% (64,285) (54,237) +19%
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Net income $ 48,436 $ 66,528 -27% $128,307 $117,855 +9%
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Basic net income
per share $ 0.86 $ 1.37 -37% $ 2.29 $ 2.43 -6%
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Diluted net income
per share $ 0.86 $ 1.36 -37% $ 2.28 $ 2.42 -6%
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Weighted average
shares
outstanding 56,107 48,712 +15% 56,107 48,498 +16%
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(1) Gross sales less smelter processing charges and freight, cost of sales,
depreciation and provisions for mine reclamation.
Key changes in 2010
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three
months six months
ended June ended June see
(millions) 30 30 page
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EARNINGS FROM OPERATIONS
Sales
Higher copper and zinc prices denominated
in Canadian dollars $ 11 $ 67 7
Higher (lower) sales volumes (3) 1
Costs
(Higher) lower smelter processing charges
and freight 3 (1) 9
Lower operating costs, including costs that
vary with income and cash flows 4 9 10
Lower operating earnings at Troilus (10) (53) 8
Other (3) (3)
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Higher earnings from operations, compared
to 2009 $ 2 $ 20
CORPORATE COSTS
Foreign exchange changes (39) (31) 11
Asset impairment in 2009 - 6 11
Lower income taxes 9 8
Non-controlling interest change 7 9
Stand-by costs - (6) 11
Other 3 4
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Higher (lower) net income, compared to 2009 ($18) $ 10
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Understanding our performance
Metal prices
The table below shows the average metal prices we realized in US dollars and Canadian dollars (the prices we realize include finalization adjustments - see Gross sales on page 7).
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2010 2009 change 2010 2009 change
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US dollar metal prices
Copper (per pound) $ 2.86 $ 2.22 +29% $ 3.12 $ 2.14 +46%
Zinc (per pound) $ 0.81 $ 0.69 +17% $ 0.91 $ 0.60 +52%
Gold (per ounce) $ 1,208 $ 900 +34% $ 1,140 $ 932 +22%
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Canadian dollar metal
prices
Copper (per pound) $ 2.94 $ 2.60 +13% $ 3.23 $ 2.58 +25%
Zinc (per pound) $ 0.83 $ 0.81 +2% $ 0.94 $ 0.72 +31%
Gold (per ounce) $ 1,242 $ 1,050 +18% $ 1,179 $ 1,124 +5%
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Copper
Copper prices declined steadily this quarter, following the volatility of the first quarter of 2010. London Metals Exchange (LME) cash prices went down to US $2.88 per pound on July 1 - a drop of 19 percent from the peak of US $3.57 per pound at the beginning of the quarter. However, we believe that downward potential in the third quarter is limited by the strong supply side fundamentals and increasing consumption in industrialized countries. LME inventories dropped by 12 percent (63,000 tonnes) during the quarter, reflecting the pick-up in demand from countries other than China, as well as the continued strength in Chinese imports.
Zinc
Zinc has performed poorly during the first half of the year, and prices have been volatile. It is believed that high prices in 2009 encouraged zinc supply and resulted in a surplus of refined zinc in 2010, as the continuing rise in exchange stocks in the last six months has demonstrated. LME zinc stocks increased to 616,000 tonnes from 489,000 tonnes in January. The price of zinc followed other metals and fell to US $0.72 per pound - the lowest it has been since July 2009.
Gold
This quarter, the price of gold rose for the seventh consecutive quarter - the best performance in the last two and a half years. Prices have risen by 11 percent since the beginning of April - a period in which all base metals and other precious metals were significantly down - and on June 28, hit an all-time high of US $1,259 per ounce.
Pyrite
Sulphur and pyrite prices were down during the second quarter. In the first quarter of the year, sulphur prices had risen because demand for fertilizer was expected to be strong, and data indicated that production would be low. The price of sulphur is expected to continue to go down in the second half of the year because the seasonally high consumption period in China is finished.
Exchange rates
Exchange rates affect our revenue and earnings. The table below shows the average exchange rates we realized this quarter and for the year to June compared to 2009.
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three months ended
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2010 2009 change 2010 2009 change
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Exchange rates
1 US$ to C$ $ 1.03 $ 1.17 -12% $ 1.03 $ 1.21 -15%
1 euro to C$ $ 1.31 $ 1.59 -18% $ 1.37 $ 1.61 -15%
1 euro to US$ $ 1.28 $ 1.36 -6% $ 1.33 $ 1.33 -
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Our sales are affected by the conversion of US dollar revenue to Canadian dollars. Compared to the same quarter last year, the value of the Canadian dollar appreciated 12 percent relative to the US dollar, and 18 percent relative to the euro.
Our earnings are affected by changes in foreign currency exchange rates when
we:
-- translate the results of our operations from their functional currency
(US dollars or euros) to Canadian dollars
-- revalue US dollars and euros that we hold in cash in Canada
-- translate US dollar sales at Troilus to Canadian dollars.
Treatment charges down for copper
Treatment charges are one component of smelter processing charges. We also pay smelters for content losses and price participation.
The table below shows the average charges we realized this quarter and year to date. We finalized our contract terms with zinc smelters this quarter. While treatment charges for zinc concentrates are higher than last year, price participation is lower. Results this quarter include adjustments we've made to first quarter charges, which were at 2009 rates.
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three months ended June 30 six months ended June 30
(US$) 2010 2009 change 2010 2009 change
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Treatment charges
Copper (per dry
metric tonne of
concentrate) US $52 US $66 -21% US $56 US $67 -16%
Zinc (per dry
metric tonne of
concentrate) US $284 US $131 +117% US $247 US $192 +29%
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Price participation
Copper (per pound) US $0.01 US $0.03 -67% US $0.01 US $0.03 -67%
Zinc (per pound) US ($0.11) US $0.05 -320% US ($0.02) US $0.01 -300%
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Freight charges
Copper (per dry
metric tonne of
concentrate) US $67 US $34 +97% US $68 US $30 +127%
Zinc (per dry
metric tonne of
concentrate) US $35 US $28 +25% US $32 US $26 +23%
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Statutory tax rates remain consistent
The table below shows the statutory tax rates for each of our taxable operating mines.
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2010 2009 Change
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Statutory tax rates
Cayeli 24% 24% -
Pyhasalmi 26% 26% -
Ok Tedi 37% 37% -
Las Cruces 30% 30% -
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Earnings from operations
Earnings from operations include:
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June 30 six months ended June 30
(thousands) 2010 2009 change 2010 2009 change
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Gross sales $215,051 $213,042 +1% $ 466,610 $ 452,194 +3%
Smelter processing
charges and freight (36,794) (40,589) -9% (81,123) (81,129) -
Cost of sales:
Direct production
costs (67,507) (71,935) -6% (139,059) (150,354) -8%
Inventory changes (2,825) 2,222 +227% (10,400) (1,673) +522%
Provisions for
mine
rehabilitation
and other non-
cash charges (2,105) (4,114) -49% (3,958) (11,704) -66%
Depreciation (18,951) (13,604) +39% (34,175) (29,283) +17%
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Earnings from
operations $ 86,869 $ 85,022 +2% $ 197,895 $ 178,051 +11%
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Gross sales were marginally higher
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three months ended June 30 six months ended June 30
(thousands) 2010 2009 change 2010 2009 change
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Gross sales by
operation
Cayeli $ 68,026 $ 63,711 +7% $ 150,432 $ 123,732 +22%
Pyhasalmi 44,006 43,001 +2% 95,446 76,982 +24%
Troilus 27,723 37,407 -26% 62,177 124,397 -50%
Ok Tedi (1) 75,296 68,923 +9% 158,555 127,083 +25%
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$ 215,051 $ 213,042 +1% $ 466,610 $ 452,194 +3%
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Gross sales by
metal
Copper $ 111,329 $ 105,260 +6% $ 253,927 $ 209,999 +21%
Zinc 39,598 33,028 +20% 86,271 60,052 +44%
Gold 50,520 55,711 -9% 99,860 148,725 -33%
Other 13,604 19,043 -29% 26,552 33,418 -20%
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$ 215,051 $ 213,042 +1% $ 466,610 $ 452,194 +3%
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(1) Our 18 percent share of Ok Tedi's sales.
Key components of the change in sales: higher copper prices, lower sales
volumes at Troilus
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(millions) ended June 30 ended June 30
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Higher copper prices, denominated in
Canadian dollars $ 10 $ 48
Higher zinc prices, denominated in
Canadian dollars 1 20
Higher gold prices, denominated in
Canadian dollars 3 4
Changes in other metal prices (4) (8)
Lower gross sales from Troilus (10) (62)
Higher sales volumes at our other mines 2 12
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Higher gross sales, compared to 2009 $ 2 $ 14
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We record sales that settle during the reporting period using the metal price on the day they settle. For sales that have not settled, we use an estimate based on the month we expect the sale to settle and the forward price of the metal at the end of the reporting period. We recognize the difference between our estimate and the final price by adjusting our gross sales in the period when we settle the sale (finalization adjustment).
In the second quarter, we recorded $9 million in negative finalization adjustments from first quarter sales.
At the end of this quarter, the following sales had not been settled:
-- 23 million pounds of copper provisionally priced at US $2.95 per pound
-- 10 million pounds of zinc provisionally priced at US $0.81 per pound.
The finalization adjustment we record for these sales will depend on the actual price we receive when they settle, which can be up to five months from the time we initially record it. We expect these sales to settle in the following months:
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(millions of pounds) copper zinc
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July 2010 16 10
August 2010 3 -
September 2010 3 -
December 2010 1 -
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Unsettled sales at June 30, 2010 23 10
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Lower gold sales volumes this year - Troilus concluded processing low-grade stockpiled ore
Our sales volumes are directly affected by the amount of production from our mines, and our ability to ship to our customers.
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three months ended June 30 six months ended June 30
2010 2009 change 2010 2009 change
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Sales volumes
Copper (tonnes) 21,800 18,300 +19% 43,300 36,800 +18%
Zinc (tonnes) 21,600 18,600 +16% 41,300 37,300 +11%
Gold (ounces) 40,000 52,500 -24% 83,400 131,900 -37%
Pyrite (tonnes) 108,300 121,000 -10% 199,100 197,000 +1%
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Production
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June 30 30 objective
Inmet's share(1) 2010 2009 change 2010 2009 change 2010
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Copper (tonnes)
Cayeli 7,100 7,500 -5% 14,200 14,600 -3% 30,500
Las Cruces
cathode 4,600 - +100% 7,800 - +100% 25,000
Las Cruces
copper
contained in
ore - - - - - - 12,300
Pyhasalmi 4,000 3,700 +8% 6,900 7,300 -5% 13,400
Troilus 700 1,100 -36% 2,000 3,900 -49% 2,000
Ok Tedi 6,100 6,900 -12% 12,800 13,500 -5% 29,300(2)
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22,500 19,200 +17% 43,700 39,300 +11% 112,500
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Zinc (tonnes)
Cayeli 15,000 11,800 +27% 26,500 23,600 +12% 51,700
Pyhasalmi 5,600 5,700 -2% 12,800 9,200 +39% 31,300
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20,600 17,500 +18% 39,300 32,800 +20% 83,000
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Gold (ounces)
Troilus 18,600 26,700 -30% 37,900 84,800 -55% 37,900
Ok Tedi 18,100 23,900 -24% 39,000 44,600 -13% 102,600(2)
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36,700 50,600 -27% 76,900 129,400 -41% 140,500
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Pyrite (tonnes)
Pyhasalmi 137,700 132,200 +4% 335,200 323,000 +4% 420,000
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(1) Inmet's share represents 100 percent for Cayeli, Pyhasalmi and Troilus,
18 percent for Ok Tedi and 70 percent for Las Cruces.
(2) This production objective is subject to the possible exchange of our 18
percent equity interest in Ok Tedi for a 5 percent net smelter return
royalty, which is expected to occur in the third quarter of 2010.
Copper production this quarter and year to June was higher than 2009 because of new production at Las Cruces, offset somewhat by lower production at Ok Tedi as a result of the labour disruption.
Zinc production was up mainly because zinc grades and recoveries at Cayeli were higher.
Gold production was down because grades were lower at Troilus (as production was drawn from the last of its low grade stockpiles) and at Ok Tedi because of a labour disruption and lower grades.
2010 outlook for sales
We use our production objectives to estimate our sales target, except for copper contained in ore at Las Cruces that we intend to ship directly to smelters that may get shipped in 2011. We expect copper and zinc sales volumes this year to be higher than 2009 because we expect production to be higher. We expect gold sales volumes to be lower than 2009 because production ended at Troilus at the end of the second quarter of 2010.
We expect copper production to be about 33 percent higher than 2009 because of the incremental production at Las Cruces. We will begin recognizing Las Cruces' results in operating earnings as of July 1, 2010. We estimate our 70 percent share of 2010 production at Las Cruces to include 25,000 tonnes of copper cathode, and 12,300 tonnes of copper contained in ore that we intend to ship directly to smelters. We do not have the permits we need to ship the ore yet and therefore we have excluded this ore from our sales target, but we have begun mining and stockpiling it in anticipation of receiving the permits. We expect zinc production to increase because we plan to mine higher zinc grades at Pyhasalmi in 2010.
Our Canadian dollar sales revenues are affected by the US dollar denominated metal price we receive, and the exchange rate between the US dollar and Canadian dollar. The overall outlook for copper demand is broadly positive in 2010 and copper is the most favoured base metal because of its strong fundamentals.
Lower smelter processing charges and freight for the quarter
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(thousands) 2010 2009 change 2010 2009 change
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Smelter processing
charges and freight
by operation
Cayeli $ 18,590 $ 18,438 +1% $38,695 $ 37,514 +3%
Pyhasalmi 8,550 12,326 -31% 20,055 21,317 -6%
Troilus 1,563 2,458 -36% 4,321 8,718 -50%
Ok Tedi (1) 8,091 7,367 +10% 18,052 13,580 +33%
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$ 36,794 $ 40,589 -9% $81,123 $ 81,129 -
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Smelter processing
charges and freight
by metal
Copper $ 15,660 $ 19,827 -21% $34,745 $ 38,343 -9%
Zinc 15,504 11,780 +32% 35,978 26,968 +33%
Other 5,630 8,982 -37% 10,400 15,818 -34%
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$ 36,794 $ 40,589 -9% $81,123 $ 81,129 -
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Smelter processing
charges by type and
freight
Copper treatment
and refining
charges $ 5,532 $ 8,882 -38% $12,377 $ 18,575 -33%
Zinc treatment
charges 12,794 5,602 +128% 20,863 17,281 +21%
Copper price
participation 410 1,275 -68% 1,120 2,738 -59%
Zinc price
participation (5,351) 2,407 -322% (1,438) 739 -295%
Content losses 12,302 10,660 +15% 26,936 21,400 +26%
Freight 10,095 9,724 +4% 18,559 16,386 +13%
Other 1,012 2,039 -50% 2,706 4,010 -33%
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$ 36,794 $ 40,589 -9% $81,123 $ 81,129 -
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(1) Our 18 percent share of Ok Tedi's smelter processing charges and
freight.
Our copper treatment and refining charges were lower than they were in 2009 because we have more favourable terms with smelters. Total zinc processing charges including price participation were higher than last year mainly because sales volumes were higher. Content losses were higher because metal prices are higher than they were last year.
2010 outlook for smelter processing charges and freight
We expect costs for copper treatment and refining to be lower in 2010 based on agreements we have signed with our customers. We sell approximately 90 percent of our copper concentrate under long-term contracts. We are estimating annual treatment costs of US $50 per dry metric tonne in 2010. We also expect price participation to be minimal.
We expect the zinc concentrate market to be dictated by zinc price levels and demand from China. We expect zinc processing charges to be lower than they were in 2009.
In 2010, Las Cruces may sell high grade crushed ore to smelters and incur smelter processing charges. We expect the cost to smelt and refine the ore to be higher than it is at our other operations, because copper grades in crushed ore are lower than they are in concentrates, and the level of impurities is higher.
Las Cruces sells its copper cathode production directly to buyers in the Spanish and Mediterranean markets.
We expect our ocean freight costs to be about 20 percent higher than they were in 2009 because of the expected recovery in global trade and associated shipping demand.
Direct production costs and cost of sales slightly lower than last year
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30 six months ended June 30
(thousands) 2010 2009 change 2010 2009 change
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Direct production
costs by operation
Cayeli $ 21,273 $ 19,834 +7% $ 43,009 $ 40,306 +7%
Pyhasalmi 12,853 15,711 -18% 27,831 31,365 -11%
Troilus 11,814 13,816 -14% 23,905 32,422 -26%
Ok Tedi (1) 21,567 22,574 -4% 44,314 46,261 -4%
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Total direct
production costs 67,507 71,935 -6% 139,059 150,354 -8%
Inventory changes 2,825 (2,222) +227% 10,400 1,673 +522%
Reclamation,
accretion and other
non-cash expenses 2,105 4,114 -49% 3,958 11,704 -66%
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Total cost of sales $ 72,437 $ 73,827 -2% $ 153,417 $ 163,731 -6%
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(1) Our 18 percent share of Ok Tedi's direct
production costs.
Direct production costs are lower in the quarter and year to date than they were in 2009, mainly because we finished mining at Troilus in April 2009 and at Pyhasalmi because of a stronger Canadian dollar relative to the euro.
2010 outlook for cost of sales
Our budget for 2010 assumes our costs will be similar to 2009 in local currency terms. Consolidated direct production costs should be higher because production costs at Las Cruces will no longer be capitalized as of July 1, 2010, somewhat offset by lower Canadian dollar costs at Pyhasalmi due to a stronger Canadian dollar relative to the euro.
Certain variable costs may continue to affect our earnings, depending on
metal prices:
-- royalties at Cayeli are affected by its net income
-- variable employee compensation costs at Ok Tedi are affected by its cash
flows
-- royalties at Las Cruces are affected by its net sales.
Depreciation higher this quarter
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(thousands) 2010 2009 change 2010 2009 change
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Depreciation by
operation
Cayeli $ 3,246 $ 3,373 -4% $ 6,470 $ 6,846 -5%
Pyhasalmi 1,903 2,162 -12% 3,712 4,764 -22%
Troilus 5,623 3,301 +70% 10,002 6,720 +49%
Ok Tedi 8,179 4,768 +72% 13,991 10,953 +28%
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$ 18,951 $ 13,604 +39% $ 34,175 $ 29,283 +17%
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Depreciation at Troilus and Ok Tedi was significantly higher this quarter and year to June because we increased their assets related to asset retirement obligations at the end of 2009. We also began amortizing the cost of underwater storage pits Ok Tedi uses to store sulphur concentrate the tailings management plant produces.
2010 outlook for depreciation
We expect depreciation to be higher in 2010 because we will begin to depreciate Las Cruces' operating assets starting July 1.
Corporate costs
Corporate costs include general and administration costs, taxes, interest and other income.
Investment and other income (expense)
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three months ended six months ended June
June 30 30
(thousands) 2010 2009 2010 2009
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Interest income $ 1,760 $ 701 $ 3,357 $ 2,743
Foreign exchange gain (loss) (20,738) 18,196 (23,153) 8,098
Dividend and royalty income 1,175 385 1,889 685
Mark to market on Ok Tedi
copper forward contracts - (1,007) - (2,426)
Other (567) (1,809) (541) (3,837)
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($18,370) $ 16,466 ($18,448) $ 5,263
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Foreign exchange gain (loss)
We have a foreign exchange gain or loss when we:
-- revalue certain foreign denominated assets and liabilities
-- distribute funds from our self-sustaining operations and recognize the
foreign exchange we previously deferred on our original investment and
on funds as they accumulated.
Our foreign exchange gains (losses) are from:
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three months ended June six months ended June
30 30
(thousands) 2010 2009 2010 2009
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Translation of Las
Cruces' US dollar-
denominated bank credit
facility $ - $ 15,273 $ - $ 3,808
Translation of foreign -
denominated cash held
at corporate 202 149 (569) (1,446)
Translation of other -
monetary assets and
liabilities 381 (1,138) 72 1,824
Reduction in our net
investments (21,321) 3,912 (22,656) 3,912
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($20,738) $ 18,196 ($23,153) $ 8,098
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We recognized foreign exchanges losses of $21 million this quarter on the repatriation of cash from Cayeli and Pyhasalmi. In the same quarter of 2009, we recognized a total foreign exchange gain of $18 million mainly from revaluing Las Cruces' US dollar denominated debt under its credit facility.
2010 outlook for investment and other income
Investment and other income is affected by our cash and held to maturity investment balances, and by interest rates and exchange rates. For the remainder of the year, we expect to repatriate funds only from Ok Tedi. Because Ok Tedi distributes its earnings more frequently, the effect of repatriation is normally not significant.
Stand-by costs
In the first quarter of 2010, we could not mine ore at Las Cruces because of the water levels in the pit. We expensed $6.8 million in water plant operating and maintenance costs because they did not relate to production activities.
Asset impairment
We made a decision in 2008 not to proceed with the Cerattepe project. All work ceased on the project and we took a $34 million charge to write down the assets to its net realizable value. In the first quarter of 2009, we took an additional impairment charge of $6 million, as well as a $6 million tax recovery (reflected in income taxes), to adjust to current net realizable value.
Income tax expense (recovery)
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three months ended June 30 six months ended June 30
(thousands) 2010 2009 change 2010 2009 change
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Cayeli $ 4,953 $ 2,212 +124% $ 12,406 $ 1,631 +661%
Pyhasalmi 4,911 1,870 +163% 9,926 2,305 +331%
Ok Tedi 11,054 12,469 -11% 27,589 19,009 +45%
Las Cruces (7,067) 4,302 +264% (14,530) 267 -5,542%
Troilus and
corporate 1,316 3,199 -59% (161) 19,730 -101%
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$ 15,167 $ 24,052 -37% $ 35,230 $ 42,942 -18%
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Consolidated
effective tax
rate 24% 27% -3% 22% 27% -5%
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Our tax expense changes as our earnings change.
The consolidated effective tax rate went down by 5 percent compared to 2009 mainly because Las Cruces recognized a tax recovery on a foreign exchange loss from its intercompany US dollar denominated debt. The foreign exchange eliminates on consolidation, but the tax recovery does not as there is no corresponding tax expense on the foreign exchange gain.
2010 outlook for income tax expense
We expect statutory tax rates at our operations in 2010 to remain the same as they were in 2009 unless a statutory tax rate change is enacted.
Results of our operations
2010 estimates
Our financial review by operation includes estimates for our 2010 operating earnings and operating cash flows. We used our 2010 objectives for production and cost per tonne of ore milled to build these estimates, along with the following assumptions for the remaining six months of the year:
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Copper price US $3.00 per pound
Zinc price US $0.80 per pound
Gold price US $1,100 per ounce
Copper treatment cost US $50 per tonne for contracts and US $29 per
tonne for spot sales
Zinc treatment cost US $265 per tonne (basis US $2,500 per tonne)
and US $135 per tonne for spot sales
US $ to C$ exchange rate $1.05
euro to C$ exchange rate $1.29
Working capital Assume no changes for the year
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Cayeli
-----------------------------------------------------------------
three months ended June
30
2010 2009 change
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Tonnes of ore milled (000's) 295 296 -
Tonnes of ore milled per day 3,200 3,300 -
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Grades (percent) copper 3.2 3.2 -
zinc 7.0 5.9 +19%
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Mill recoveries (percent) copper 76 80 -5%
zinc 73 68 +7%
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Production (tonnes) copper 7,100 7,500 -5%
zinc 15,000 11,800 +27%
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Cost per tonne of ore milled (C$) $72 $67 +7%
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six months ended June 30 objective
2010 2009 change 2010
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Tonnes of ore milled (000's) 584 561 +4% 1,200
Tonnes of ore milled per day 3,200 3,100 +4% 3,300
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Grades (percent) copper 3.2 3.3 -3% 3.3
zinc 6.3 6.0 +5% 6.1
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Mill recoveries (percent) copper 77 79 -3% 78
zinc 72 70 +3% 70
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Production (tonnes) copper 14,200 14,600 -3% 30,500
zinc 26,500 23,600 +12% 51,700
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Cost per tonne of ore milled (C$) $74 $72 +3% $72
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Production results on target
Production at Cayeli was strong this quarter, and in line with its annual 1.2 million tonne objective. Cayeli set several new records for milling this quarter including: best monthly feed rate (153 dry tonnes per hour), best daily tonnage processed (3,789 tonnes), and highest daily concentrate tonnes produced (1,042 tonnes).
Copper production was lower for the quarter and year to date compared to 2009 mainly due to lower recoveries because of variation in ore types. Zinc production was significantly higher than 2009 because grades and recoveries were higher.
There were four falls of ground during the quarter, and we continue to focus on ground support and rehabilitation. Additionally, we have significantly reduced the underground backfill void.
2010 outlook for production
Production levels should remain at 1.2 million tonnes in 2010, and we expect copper and zinc grades should be at 3.3 percent for copper and 6.1 percent for zinc.
Financial review
Higher earnings for the year because copper and zinc prices were higher
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(millions of Canadian
dollars unless otherwise three months six months revised
stated) ended June 30 ended June 30 objective
2010 2009 2010 2009 2010
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Sales analysis
Copper sales (tonnes) 5,600 6,800 12,100 13,300 30,500
Zinc sales (tonnes) 16,600 12,700 28,900 27,500 51,700
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Gross copper sales $ 35 $ 36 $ 85 $ 73 $ 214
Gross zinc sales 30 23 59 44 101
Other metal sales 3 5 6 7 14
------------------------------------------------
Gross sales 68 64 150 124 329
Smelter processing charges
and freight (18) (19) (38) (38) (77)
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Net sales $ 50 $ 45 $ 112 $ 86 $ 252
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Cost analysis
Tonnes of ore milled
(thousands) 295 296 584 561 1,200
Direct production costs ($
per tonne) $ 72 $ 67 $ 74 $ 72 $ 72
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Direct production costs $ 21 $ 20 $ 43 $ 40 $ 86
Change in inventory - (1) (1) - -
Depreciation and other non-
cash costs 5 4 8 9 18
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Operating costs $ 26 $ 23 $ 50 $ 49 $ 104
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Operating earnings $ 24 $ 22 $ 62 $ 37 $ 148
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Operating cash flow $ 24 $ 24 $ 53 $ 15 $ 128
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The objective for 2010 uses the assumptions listed on page 13.
The table below shows what contributed to the change in operating earnings and operating cash flow between 2010 and 2009.
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three months ended six months ended
(millions) June 30 June 30
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Higher metal prices, denominated
in Canadian dollars $ 4 $ 31
Lower sales volumes (2) (4)
(Higher) lower smelter processing
charges 2 (1)
Higher operating costs (1) (3)
Other (1) 2
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Higher operating earnings,
compared to 2009 $ 2 $ 25
Change in tax expense because of
change in taxable income (3) (5)
Changes in working capital (see
note 2 on page 44) - 19
Other 1 (1)
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Higher operating cash flow,
compared to 2009 $ - $ 38
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Capital spending expected to be lower due to timing
----------------------------------------------------------------------------
three months ended June revised
30 six months ended June 30 objective
2010 2009 change 2010 2009 change 2010
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Capital
spending $ 3,100 $ 3,000 +3% $ 4,900 $ 6,600 -26% $ 19,000
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2010 outlook for capital spending
We expect to spend $19 million in 2010 on mobile equipment, site water control, stope stability, additional mill upgrades and development. The second phase of the headframe realignment project is underway and should be completed in the third quarter. This will bring the headframe back to its design configuration. We have established a monitoring and correction program to ensure the facility remains stable for the remaining life of the mine. At the same time, we will implement several geotechnical recommendations to curtail surface instability.
Las Cruces
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three months ended June 30
(100 percent) 2010 2009 change
----------------------------------------------------------------------
Tonnes of ore processed (000's) 111,000 - +100%
Tonnes of unprocessed ore (000's) - - -
----------------------------------------------------------------------
Copper grades (percent) cathode 7.2 - +100%
unprocessed
ore - - -
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Plant recoveries (percent) 84 - +100%
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Copper production (tonnes) cathode 6,600 - +100%
unprocessed
ore - - -
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Cost per tonne of ore processed
(subsequent to July 1, 2010) (C$) - - -
----------------------------------------------------------------------
----------------------------------------------------------------------------
revised
six months ended June 30 objective
(100 percent) 2010 2009 change 2010
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Tonnes of ore processed (000's) 188,000 - +100% 566,000
Tonnes of unprocessed ore (000's) - - - 128,000
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Copper grades (percent) cathode 7.0 - +100% 7.2
unprocessed
ore - - - 13.7
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Plant recoveries (percent) 84 - +100% 89
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Copper production (tonnes) cathode 11,100 - +100% 35,700
unprocessed
ore - - - 17,600
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Cost per tonne of ore processed
(subsequent to July 1, 2010) (C$) - - - $ 135
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Fatality at Las Cruces
On May 25, 2010, a contractor at Las Cruces suffered fatal injuries in a workplace accident. As a result, Las Cruces commissioned an independent investigation to determine the cause of this tragic accident and to recommend and implement measures to minimize the potential for this kind of accident from happening again. Las Cruces remains committed to pursuing all measures necessary to provide its workers and contractors with a safe working environment.
Progress update
During the second quarter, cathode production has improved by approximately 44 percent compared to the previous quarter and the plant demonstrated during consecutive running days its ability to reach the currently available plant capacity. However, a number of equipment failures and operational issues delayed the ramp-up of the plant and limited our ability to operate continuously. As a result, we produced 6,600 tonnes of copper cathode during the second quarter as compared to a target of 12,400 tonnes. This represents approximately 37 percent of design capacity (72,000 tonnes of copper cathode per year) or 55 percent of available capacity. Available capacity reflects the temporary constraint of having only two of the three leach residue filters available as one is dedicated to the neutralization plant. Installation of the new neutralization filter is on track and the necessary additional filtration capacity should be available by the end of July. Excluding the impact of production days lost due to mechanical failures, we produced at approximately 46 percent of design capacity for the quarter or 69 percent of available capacity. During the quarter, we achieved production for single days nearing 100 percent of design capacity and for extended periods we operated at over 60 percent of design capacity.
In May, production ran very well as we produced at an average daily rate of 104 tonnes of copper cathode or 52 percent of design capacity and 78 percent of available capacity while operating 28 days during the month. This encouraged us to believe we were moving towards commercial production rates by the end of the second quarter.
We experienced a set-back during June because of unexpected non-corrosion related equipment failures mostly related to the grinding and leach thickeners causing 10 days of lost production time.
After one year since the start up of the plant, we have confirmed the exceptional quality of a high grade ore body, a sound leaching and electrowinning process and that we have completed or initiated the necessary technical improvements to the plant to improve reliability. We believe that our ramp up pattern is typical of hydrometallurgical plants and other complex processes and that the critical step to achieving full production at this point is to improve reliability and operational uptime.
2010 outlook
In July, we have continued to focus on increasing available plant capacity and reducing the causes of equipment failures and downtime as we identified these to be the root causes of our ramp up challenges. The most important steps are:
-- installed an additional pressure filter and completed commissioning of
the filter to increase capacity and remove a significant bottleneck to
throughput
-- adding permanent water treatment capacity which will be commissioned in
the third quarter. This will allow for a more consistent discharge into
the aquifer and maintain water balance throughout the process
-- completing phase two of the Dewatering and Reinjection System which will
reduce the quantity of water flowing into the pit and the resulting
water treatment load in both the plant and water treatment facility
-- adding a large surge tank between leaching and filtration to further
smooth out the leaching operation toward the end of this year
-- applying a disciplined and systematic problem solving process to
identify and address root causes of downtime.
We believe we have identified the key bottlenecks to production. All of these steps and improvements should significantly add to our operating reliability. July month to date has demonstrated further signs of improvement and we have returned to production rates similar to those in May, with total copper cathode production of 2,300 tonnes as of July 25.
We believe there will be continuing challenges in the ramping up process and we are encouraged by the improved capability of our operating teams to address those as they have demonstrated in recent months. We will continue with the rigorous implementation of the ramp up plan to achieve our goal of full production by the end of the year. We require a period of continuous operation to accurately predict the timing of achieving our performance but believe a range for our 70 percent share of production of 20,000 to 30,000 tonnes of copper cathode is achievable.
We have begun mining high grade ore and stockpiling it in preparation for shipping to smelters. We have not yet received the necessary permit from the regulators to move the material off-site and cannot determine when this will occur.
Taking all factors into account, we believe it is appropriate to cease capitalizing Las Cruces' pre-operating costs net of sales and to begin recognizing these results in operating earnings and operating cash flow in our consolidated statements. This wi