First Quantum Minerals Reports Operational and Financial Results for the Three and Six Months Ended June 30, 2010
VANCOUVER, BRITISH COLUMBIA -- (Marketwire) -- 08/10/10 -- (All figures expressed in US dollars, unless otherwise noted) -
First Quantum Minerals Ltd. ('First Quantum' or the 'Company') (TSX: FM)(LSE: FQM) today announced its results for the three and six months ended June 30, 2010. The complete financial statements and management discussion and analysis are available for review at www.first-quantum.com and should be read in conjunction with this news release.
SUMMARY OPERATING AND FINANCIAL DATA
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Three months ended Six months ended
June 30 June 30
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(USD millions unless
otherwise noted) 2010 2009 2010 2009
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Production - copper (tonnes) 85,402 92,486 170,464 181,926
Production - gold (ounces) 51,471 40,488 96,113 87,252
Sales - copper (tonnes) 74,421 93,482 155,862 163,256
Realized copper price (per lb) $2.61 $1.80 $2.76 $1.68
Net sales $528.7 $412.1 $1,091.5 $673.1
Net earnings before impairment
and acquisition costs $115.4 $101.5 $280.1 $112.4
Net earnings (loss) $(588.2) $101.5 $(442.0) $112.4
Earnings per share before
impairment and acquisition
costs $1.44 $1.31 $3.50 $1.54
Earnings (loss) per share $(7.33) $1.31 $(5.53) $1.54
Average copper unit cash
cost of production
(C1)(1)(per lb) $1.21 $0.90 $1.21 $0.94
Cash $729.6 $789.6 $729.6 $789.6
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Unless otherwise indicated, all comparisons of performance throughout this
report are to the comparative periods for 2009
(1) C1 cost is a non-GAAP measure. See 'Regulatory disclosures -
non-GAAP measures' for further information
SECOND QUARTER HIGHLIGHTS
-- Ramped up on-site activities in the development of Ravensthorpe, Kevitsa
and Kalumbila
-- Net earnings of $115.4 million (EPS of $1.44) before impairment and
acquisition costs on a higher copper price, partially offset by lower
sales volumes (sales volumes and inventory impacted by a change in the
timing of recognizing sales through the metal marketing division, see
'Revenues - Metal marketing division' for further discussion)
-- 8% decrease in total copper production resulting from lower ore grades
mined and processed and a decrease in capital investment at Frontier in
response to the continuing uncertain operating environment in the
Republique democratique du Congo ('RDC')
-- 27% increase in total gold production resulting from circuit
improvements and plant expansions completed at Kansanshi and Guelb
Moghrein
-- Non-cash impairment charge of $703.6 million, net of tax, of which
$689.0 million is related to the Kolwezi project pursuant to
requirements of Canadian generally accepted accounting principles. See
'Other items' for further discussion
-- Strong cash and working capital position despite significant investments
in Ravensthorpe, Kevitsa and Kalumbila in 2010. Dividends for 2010 will
be based on net earnings before impairment charges
RECENT DEVELOPMENTS and NEAR TERM OUTLOOK
Kansanshi copper and gold operation, Zambia
-- At Kansanshi the first phase of the roll out of the new mining fleet has
commenced with the delivery of three 180 tonne diesel/AC haul trucks.
The trolley assist project has advanced with the design of the power
supply system and the re-design of the short and medium term mine access
ramps. Installation of the secondary crusher on the sulphide circuit has
been completed and commissioning will continue into Q3 2010.
-- Kansanshi's sulphide circuit throughput and recoveries are expected to
increase on the commissioning of the secondary sulphide crusher in Q3
and with additional flotation capacity in Q1 2011. The commissioning of
the new AC mining fleet will increase mining capacity in Q3 and Q4 2010.
Frontier copper operation, RDC
-- Q2 copper production at Frontier was 33% lower than Q2 2009 due to the
impact of reduced capital investment in mining in particular.
Management's decision to reduce capital investment is a consequence of
the uncertainty following the legal proceedings instigated by the RDC
state-owned mining agency, Sodimico.
-- In the short term, Frontier will continue to focus on increased waste
stripping to establish wider and more efficient and productive working
areas in the pit to expose additional sources of ore and add flexibility
and operational optimization for the remainder of 2010.
Guelb Moghrein copper and gold operation, Mauritania
-- At Guelb Moghrein the 3.8 million tonne per annum expansion was
completed with the successful commissioning of the final stages
including the heavy fuel oil power station and the high pressure
grinding rollers.
-- Optimization of the plant expansion will continue which is expected to
further enhancing copper and gold recoveries. Modified mine feed systems
are being introduced to allow more effective blending of ore to target
improved metal recovery.
Kevitsa nickel/copper/PGE project, Finland
-- Construction work has commenced at Kevitsa with the installation of site
infrastructure including road access, office buildings and lay down
areas. Site earthworks and the placement of the concrete mill
foundations also commenced in Q2. Detailed design work continues in the
Helsinki offices of the contracted Finnish engineer. Commissioning of
the processing plant is budgeted to commence in Q1 2012. The mineral
resource and reserve model at Kevitsa is expected to be finalized before
year end to include all the results of drilling activity collected up to
the end of June 2010.
Ravensthorpe nickel project, Australia
-- The refurbishment of the processing facilities at Ravensthorpe has
advanced significantly during Q2 2010 with the removal of the original
crushing facilities and the commencement of the engineering work for the
new crushing and materials handling facilities. Commissioning of the
plant is budgeted to commence in Q1 2011.
-- The previously proposed Australian resource taxes regime was modified
during Q2 2010 and the amended Minerals Resource Rent Tax will not apply
to nickel production from Ravensthorpe.
Kalumbila copper property, Zambia
-- Geological exploration and delineation drilling has commenced at the
Kalumbila copper project in the North West Province of Zambia.
Environmental studies also commenced in preparation for environmental
and mining license applications.
-- Base-line environmental and social consultations are planned as part of
the environmental impact assessment to be prepared in support of a
mining license. Exploration activities will focus on the three main
prospects Kalumbila, Kawako and Kawanga targeting both copper and
nickel.
Production Guidance
-- Estimated production for 2010 is 360,000 tonnes of copper and 210,000
ounces of gold. The lower estimated copper production reflects lower
year to date production and management's decision to reduce capital
investment at Frontier due to the uncertainty following the legal
proceedings instigated by a state owned mining agency in the RDC,
Sodimico.
-- Estimated average C1 cost for 2010 has increased to $1.17 per pound,
reflecting additional mine stripping costs and the reduction in
estimated copper and gold production.
REVENUES
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NET SALES
(after provisional pricing Three months ended Six months ended
and realization charges) June 30 June 30
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(USD millions unless
otherwise noted) 2010 2009 2010 2009
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Kansanshi - copper 331.0 235.4 706.6 391.1
- gold 30.5 18.6 52.9 26.6
Frontier - copper 57.8 110.7 144.4 165.9
Guelb Moghrein - copper 24.0 25.7 67.2 46.2
- gold 13.8 21.4 34.8 41.1
Bwana/Lonshi - copper 16.6 - 30.6 0.4
- acid - 0.3 - 1.8
Corporate 55.0 - 55.0 -
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Net sales 528.7 412.1 1,091.5 673.1
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Copper provisional
pricing adjustment
included above (13.7) 3.5 (4.8) 40.9
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COPPER SELLING PRICE USD/lb USD/lb USD/lb USD/lb
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Current period sales 2.98 2.08 3.06 1.85
Prior period provisional
pricing adjustment (0.09) 0.02 (0.02) 0.11
Treatment charges/refining
charges ('TC/RC') and
freight parity charges (0.28) (0.30) (0.28) (0.28)
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Realized copper price 2.61 1.80 2.76 1.68
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The Q2 2010 average realized copper price was significantly higher than Q2 2009 due to an increase in the average LME copper price. Copper sales volumes for Q2 decreased 20% to 74,421 tonnes due to lower production volumes and an increase in tonnes in inventory at the Company's metal marketing division. Additionally, some of the concentrate produced at Guelb during process reconfigurations did not meet current customer specifications and required blending before final sale, resulting in a delay of sales volumes into Q3.
The Q2 negative provisional pricing adjustment resulted from the finalization of contracts totalling 19,477 tonnes of copper at an average price of $3.24 per pound ($7,132 per tonne). These contracts were provisionally priced at $3.55 per pound ($7,836 per tonne) at March 31, 2010 and were finalized during April, May and June 2010.
The year to date negative provisional pricing adjustment resulted from the finalization of contracts totalling 21,647 tonnes of copper at an average price of $3.24 per pound ($7,140 per tonne). These contracts were provisionally priced at $3.34 per pound ($7,361 per tonne) at December 31, 2009 and were finalized during January and February 2010.
At June 30, 2010, 16,949 tonnes of copper provisionally priced at $2.96 per pound ($6,527 per tonne) remain subject to final pricing in July and August 2010. Refer to the 'Outlook' section for further discussion.
Gold revenues increased by 11% over Q2 2009 to $44.3 million. The increase resulted from a higher realized gold price which offset lower sales volumes in Q2 2010.
Metal marketing division
A metal marketing division was established in Q1 2010 to improve the management of copper and gold sales from the Company's operations and reduce the Company's exposure to provisional pricing. Prior to the establishment of the metal marketing division, revenues were recognized by operations when title transferred to buyers, usually upon leaving the mine site. Copper and gold sales managed by the metal marketing division are now recognized when title has transferred to final purchasers resulting in reduced sales volumes and higher inventory in the current period. The Q2 impact on total copper and gold sales was $49.7 million and earnings $24.1 million. The impact on current year sales volumes and inventory balances are summarized as follows:
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Metal inventory Impact on sales
METAL MARKETING DIVISION balance held as at volume for the period
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Three Six
months months
ended ended
March 31, June 30, June 30, June 30,
2010 2010 2010 2010
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Copper (tonnes)
Kansanshi 304 1,190 886 1,190
Guelb Moghrein 1,356 2,757 1,401 2,757
Frontier 2,568 7,143 4,575 7,143
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Total copper 4,228 11,090 6,862 11,090
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Gold (ounces)
Guelb Moghrein 2,328 5,921 3,593 5,921
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In addition to marketing the Company's production, the metal marketing division purchased and sold metal from external parties during Q2, resulting in corporate revenue of $55.0 million and finished goods inventory of $23.6 million.
In order reduce the effect of movements in metal prices between the time of shipment of metal from the mine site and final recognition of the sale, the metal marketing division enters into futures contracts. Reflecting the decrease in copper price in Q2 a derivative instrument gain of $11.5 million relating to these futures contracts was recognized during the period.
SEGMENTED OPERATING RESULTS
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KANSANSHI COPPER AND GOLD Three months ended Six months ended
OPERATION June 30 June 30
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2010 2009 2010 2009
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Production (tonnes)
Copper cathode 20,667 21,237 39,847 45,073
Copper in concentrate 15,091 18,787 22,293 40,387
Copper cathode tolled 20,350 20,368 47,551 35,770
Total copper production
(tonnes) 56,108 60,392 109,691 121,230
Copper sales (tonnes) 54,666 56,485 111,130 103,176
Gold production (ounces) 26,919 20,117 51,191 42,110
Sulphide ore tonnes milled
(000's) 2,791 3,381 5,240 6,641
Sulphide ore grade processed
(%) 0.6 1.0 0.7 1.1
Sulphide copper recovery
(%) 95 96 94 91
Mixed ore tonnes milled
(000's) 1,288 545 2,537 545
Mixed ore grade processed
(%) 1.5 1.6 1.4 1.6
Mixed copper recovery (%) 68 67 66 67
Oxide ore tonnes milled
(000's) 1,408 1,300 2,658 2,643
Oxide ore grade processed
(%) 1.5 1.4 1.4 1.5
Oxide copper recovery (%) 94 89 92 91
Cash costs (C1) (per lb)(1) $1.05 $0.99 $1.11 $0.99
Total costs (C3) (per lb)(2) $1.26 $1.27 $1.32 $1.25
Gross operating profit (USD M) $204.6 $124.0 $431.7 $170.7
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Q2 copper production decreased by 7% from Q2 2009 due to lower mining volumes and ore grades processed. Mine equipment availability issues limited ore volumes and grades early in Q2. Availabilities improved later in Q2 and are expected to be sustained on the commissioning of new equipment and improved pit maintenance. Continued strong recoveries across all circuits moderated the effects of the lower ore production from mining operations.
Q2 sulphide circuit production was impacted by 40% lower grades processed. Recoveries remained strong partially offsetting the impact of the lower ore grades. A secondary sulphide crusher is under construction and scheduled for commissioning in Q3 which is expected to increase throughput capacity.
Mixed ore circuit recovery rates continued to increase in Q2 reaching 73% in June. This is as a result of further circuit improvements and processing less weathered ore sourced directly from the pit versus ore stockpiles. Throughput was lower than plan due to some mill downtime in Q2.
Recoveries on the oxide circuit benefited from improved flotation recovery and leaching efficiency in Q2. Throughput was lower than plan due to less ore supply from mining, though grades were broadly the same as Q2 2009. Measures are being taken to further enhance the recovery rates from the oxide circuit during the second half of 2010. See 'Development activities' for further discussion.
Total gold production increased by 34% due to the gold plant expansions made in the second half of 2009. Kansanshi produced a record 10,815 ounces of gold in dore in Q2, however gold in concentrate production was impacted by the lower head grades of ore processed through the sulphide and mixed ore circuits.
Kansanshi's cash unit cost of production (C1) increased from Q2 2009 due to higher ore costs and processing costs incurred, partially offset by an increased gold credit. Ore costs were 40% higher than Q2 2009 due to processing lower grade ore and increased costs related to equipment availability issues in the period. Increased processing costs in the current period resulted from the allocation of some fixed costs to lower total copper production. Acid costs were also higher due to the mineralogy of oxide ore currently being processed. An increased gold credit to $0.25 per pound resulted from higher gold sales volumes and prices realized in Q2.
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Three months ended Six months ended
FRONTIER COPPER OPERATION June 30 June 30
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2010 2009 2010 2009
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Production - copper in
concentrate (tonnes) 16,181 24,058 36,967 43,329
Copper sales (tonnes) 11,762 26,706 27,283 40,932
Sulphide ore tonnes milled
(000's) 2,147 2,035 4,079 3,605
Sulphide ore grade processed
(%) 0.8 1.3 0.9 1.3
Sulphide copper recovery (%) 93 92 92 93
Cash costs (C1)
(USD per lb)(1) $1.82 $0.98 $1.66 $1.09
Total costs (C3)
(USD per lb)(2) $2.19 $1.12 $1.97 $1.23
Gross operating profit (USD M) $14.1 $69.5 $63.0 $98.1
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Q2 copper production at Frontier was 33% lower than Q2 2009 due to the impacts of reduced capital investment in mining in particular. Management's decision to reduce capital investment is a consequence of the uncertainty following the legal proceedings instigated by the RDC state-owned mining agency, Sodimico, see 'Other items' for further discussion. Frontier's mine equipment availability was impacted as a result and access to higher grade ore was limited. A focus on waste stripping activity continued in order to establish a wider footprint in the pit floor, further impacting ore production and the cost of ore tonnes mined in the period.
The significant increase in cash costs was caused by lower ore grades processed, increased mining costs, and inefficiencies experienced on 33% lower copper production in Q2. The strip ratio increased to 3.7 in Q2 from 1.0 in Q2 2009, directly increasing the cost of ore tonnes mined in the current period. Mining costs were also impacted by limited access to higher grade ore in the pit floor as a result of mine equipment downtime in Q2. Processing costs were impacted by inefficiencies of significantly lower copper production.
Operating profit was lower as a result of 56% lower sales volumes in addition to the higher production costs in Q2. Sales were impacted by lower production in Q2 and an increase in inventory held by the metal marketing division. Increased production costs also reduced the gross margin realized on copper sales in the period.
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GUELB MOGHREIN COPPER AND Three months ended Six months ended
GOLD OPERATION June 30 June 30
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2010 2009 2010 2009
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Production - copper in
concentrate (tonnes) 10,390 8,036 18,795 17,367
Copper sales (tonnes) 5,591 10,291 12,941 19,148
Gold production (ounces) 24,552 20,371 44,922 45,142
Sulphide ore tonnes milled
(000's) 744 474 1,404 1,004
Sulphide ore grade
processed (%) 1.6 2.0 1.5 1.9
Sulphide copper recovery (%) 87 86 88 90
Cash costs (C1)
(USD per lb)(1) $1.08 $0.06 $0.87 $0.21
Total costs (C3)
(USD per lb)(2) $1.69 $0.46 $1.56 $0.56
Gross operating profit (USD M) $11.8 $20.9 $47.8 $38.8
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Guelb Moghrein's plant expansion project resulted in 57% higher tonnes milled, 29% higher copper produced and 21% higher gold produced during Q2 in comparison to Q2 2009. The increased throughput was partially offset by reduced ore grades processed. Optimization of the circuit configuration aimed at increasing copper and gold recoveries was undertaken during Q2. This resulted in some circuit downtime and a limited amount of copper produced which required blending.
Gold production was 21% higher than Q2 2009, but behind plan due to circuit reconfigurations made during the quarter. This affected the recovery of gold dore production from the gold plant. Q3 gold dore production is expected to improve from the current quarter with the new circuit configuration and the addition of a gravity concentrator.
Guelb Moghrein's average cash cost of production (C1) was higher compared to Q2 2009 due to increased processing costs incurred during circuit optimization work and a lower gold credit related to lower gold sales volumes in Q2.
Guelb Moghrein's Q2 operating profit decreased from the comparative period due to a decrease in copper and gold sales volumes. Sales were limited by the production of some copper concentrate which required blending and an increase in the volume of copper and gold held by the metal marketing division.
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BWANA/LONSHI COPPER Three months ended Six months ended
OPERATION June 30 June 30
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2010 2009 2010 2009
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Production - copper cathode
(tonnes) 2,723 - 5,011 -
Copper sales (tonnes) 2,402 - 4,508 -
Oxide ore tonnes milled (000's) 114 - 215 -
Oxide ore grade processed (%) 2.6 - 2.7 -
Oxide copper recovery (%) 90 - 90 -
Cash costs (C1)
(USD per lb)(1) $1.34 - $1.30 -
Total costs (C3)
(USD per lb)(2) $1.34 - $1.37 -
Gross operating loss (USD M) $(3.4) $(4.3) $(5.4) $(6.6)
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(1), (2) C1 costs and C3 costs are non-GAAP measures. See 'Regulatory disclosures - non-GAAP measures' for further information
The Bwana Mkubwa copper SX/EW plant continued production of grade A copper cathode from the Lonshi oxide ore stockpile in Q2. The plant will continue operating until the ore stockpile is exhausted in Q3. The operation is cash generative as the gross operating loss for Q2 includes a non-cash expense of $5.7 million related to the inventory net realizable value write-up recognized in 2009. The write-up is expensed as the Lonshi ore stockpile is processed in 2010.
COSTS AND EXPENSES
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Three months ended Six months ended
June 30 June 30
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(USD millions unless
otherwise noted) 2010 2009 2010 2009
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Gross operating profit 228.0 210.1 538.0 301.0
General and administrative (5.6) (5.6) (12.9) (11.3)
Acquisition transaction
costs - - (18.5) -
Other income 4.3 10.4 11.6 10.9
Derivative instrument
adjustments 11.5 (52.7) 8.0 (99.1)
Exploration (11.5) (5.7) (19.3) (11.2)
Assets impaired (813.1) - (813.1) -
Interest (14.6) (11.5) (28.5) (22.6)
Income taxes 42.1 (37.3) (43.2) (38.5)
Non-controlling interests (29.3) (6.2) (64.1) (16.8)
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Net earnings (loss)
attributable to equity
holders of the parent (588.2) 101.5 (442.0) 112.4
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Earnings (loss) per share
- basic (USD per share) (7.33) 1.31 (5.53) 1.54
- diluted (USD per share) (7.33) 1.30 (5.53) 1.53
Weighted average shares
outstanding
- basic (number of shares
- millions) 80.3 77.2 79.9 72.9
- diluted (number of shares
- millions) 80.3 77.9 79.9 73.4
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The derivative instrument adjustments of $11.5 million in Q2 2010 consist primarily of mark-to-market gains recognized on futures sales contracts held by the metal marketing division at June 30, 2010. In Q2 2009, the Company's derivative loss was incurred on derivative positions entered into in order to protect the Company against the uncertain economic outlook of early 2009.
Exploration expenses in Q2 include $7.4 million incurred at the Lonshi underground evaluation project and $1.9 million at the Kalumbila property.
Following developments and actions against KMT and CMD, the Company has determined that a complete impairment of the Kolwezi assets is required in accordance with Canadian generally accepted accounting principles ('GAAP') totalling $798.5 million, before tax. Other impairment charges include a net realizable value adjustment for the Bwana Mkubwa copper plant.
Interest expense has increased from Q2 2009 due to the issuance of the 6%, $500.0 million convertible bonds in June 2009. Interest expense includes non-cash accretion of $3.4 million on the convertible bonds in Q2.
Income taxes include the derecognition of a future income tax liability of $109.5 million relating to the Kolwezi purchase which was recognized concurrently with the asset impairment. Normalized income taxes have increased from Q2 2009 due to increased profitability and a decrease in the proportionate earnings contribution from Guelb Moghrein, which is operating under a tax holiday.
Non-controlling interests has increased from Q2 2009 due to the increase in net income of Kansanshi in 2010. In February 2010, the Company acquired the remaining 20% ownership interest in Mauritanian Copper Mines SARL, which owns Guelb Moghrein, resulting in no further non-controlling interests in this operation.
FINANCIAL POSITION AND LIQUIDITY
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Three months ended Six months ended
June 30 June 30
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(USD millions unless
otherwise noted) 2010 2009 2010 2009
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Cash flows from operating
activities
- before changes in
working capital 170.3 158.5 379.4 243.6
- after changes in
working capital 309.2 154.9 462.7 95.8
Cash flows from financing
activities (79.3) 567.2 (70.8) 646.7
Cash flows from investing
activities (89.0) (95.9) (621.8) (169.4)
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Net cash flows 140.9 626.2 (229.9) 573.1
Cash balance 689.3 749.3 689.3 749.3
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Available credit facilities
- Corporate revolving loan
and short-term facility 250.0 250.0 250.0 250.0
- Corporate revolving
credit and term loan
facility 50.0 - 50.0 -
- Short-term borrowings 18.6 - 18.6 -
Cash flows from operating
activities per share
(basic)
- before working capital
(USD per share) $2.12 $2.05 $4.75 $3.34
- after working capital
(USD per share) $3.85 $2.01 $5.79 $1.31
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Operating cash flows were generated from positive operating results during Q2. Working capital movements during the quarter include a decrease in accounts receivable of $119.6 million as a result of improved collections, and an increase of $50.2 million in inventory caused by an increase in tonnes held by the metal marketing division.
Cash flows from financing activities comprise dividend payments made to equity holders of the Company as well as dividends paid to non-controlling interests. Restricted cash increased to meet a scheduled principal repayment due in September 2010.
Investing activities in Q2 consist primarily of property, plant and equipment expenditures. The Company invested $9.9 million at Ravensthorpe on plant developments and $11.6 million at Kevitsa marking the first quarter of significant project development. The Company undertook significant investing activities during Q1 including; the acquisition of the Ravensthorpe nickel project for $338.8 million, of which $34.0 million was paid in 2009, the acquisition of Kiwara PLC for $133.2 million in net cash and $137.2 million in common shares of the Company, and the acquisition of the 20% non-controlling interest in Mauritanian Copper Mines for $63.0 million.
In addition to the Company's cash reserves, additional sources of funding available include the $250.0 million corporate revolving loan and $50.0 million available under the corporate revolving credit and term loan facility. An additional $18.6 million is also available for draw under the Company's short-term facility. The Company's working capital balance (not including cash and debt) at June 30, 2010 decreased by $83.3 million from December 31, 2009. Significant year to date working capital changes include; a $123.2 million decrease in accounts receivable due to collections and reduced sales volumes, a $71.7 million increase in inventory, a $57.2 million increase in recoverable taxes and a $86.7 million increase in current taxes payable related to earnings from operations and timing of tax payments.
As at June 30, 2010, the Company had the following contractual obligations outstanding:
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Less
than 1 1-2 2-3 3-4 4-5 There-
(USD millions) Total year years years years years after
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Term debt 178.7 115.6 45.1 4.5 4.5 4.5 4.5
Convertible bonds 500.0 - - - - 500.0 -
Accounts payable 338.0 338.0 - - - - -
Deferred payments 9.2 0.4 0.4 0.3 0.2 - 7.9
Commitments 153.4 153.4 - - - - -
Asset retirement
obligations 36.9 - - 7.7 - - 29.2
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INVENTORY
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Gold in dore
Copper (tonnes) (ounces)
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Kansanshi 20,600 1,769
Frontier 10,700 -
Guelb Moghrein 8,900 400
Bwana/Lonshi 500 -
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Total 40,700 2,169
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Finished copper inventory increased by 11,200 tonnes in Q2 to 40,700 tonnes as at June 30, 2010 with an average cost of approximately $1.30 per pound ($2,855 per tonne). Guelb Moghrein's inventory includes finished copper in concentrate requiring further blending prior to sale, which is expected to be completed in Q3. Approximately 9,800 tonnes of Kansanshi copper in concentrate was in the process of being treated or stockpiled for treatment at the Mufulira smelter as at June 30, 2010. Included in the total finished goods inventory balance of $139.9 million is $23.6 million of external copper purchased for resale by the metal marketing division.
Contained gold in dore inventory decreased to 2,169 ounces due to timing of shipments in Q2. Gold contained in copper in concentrate is not included in the inventory balances noted above.
COMPREHENSIVE INCOME
The market value of available-for-sale investments decreased during Q2 resulting in the Company recognizing a tax affected decrease in the fair value of investments of $22.7 million.
EQUITY
As at the date of this report the Company has 80,599,606 shares outstanding.
DEVELOPMENT ACTIVITIES
Acquisition of the Ravensthorpe nickel project, Australia
In February 2010, the Company acquired the Ravensthorpe nickel project for $338.8 million.
Ravensthorpe is located in Western Australia, approximately 550km southeast of Perth. It is an open pit mine and hydrometallurgical process plant that uses proven technology to recover nickel and cobalt to produce a mixed nickel cobalt hydroxide intermediate product. Ravensthorpe's development was completed in 2007, however, operations were suspended in January 2009 after the LME nickel price dropped to as low as $8,810 per tonne in late 2008.
The Company has engaged an engineering firm and is proceeding with the detailed design of modifications for the Ravensthorpe process plant, of which a significant part will be the modification of the crushing, conveying, stockpile, reclaim and rejects handling areas of the plant. Approval of the project management plan from the department of mines and petroleum was received in Q2 and site works are underway with completion scheduled for Q1 2011. This will be followed by approximately six months of commissioning and ramp-up. The capital requirement for the modification is estimated at approximately $150 million.
The Company expects Ravensthorpe's average annual production of nickel metal will be approximately 39,000 tonnes for the first five years after recommencement of operations and an average annual production of 28,000 tonnes of nickel metal over the expected life of mine of 32 years.
The previously proposed Australian resource taxes regime has been modified during Q2 2010 and the amended Minerals Resource Rent Tax will not apply to Ravensthorpe's nickel production.
Acquisition of Kiwara PLC
In January 2010, the Company acquired all of the issued share capital of Kiwara PLC ('Kiwara') which owned 85% of Kalumbila Minerals Limited ('Kalumbila') which holds mineral property licences on the periphery of the Kabombo Dome in North Western Province, Zambia. Under the terms of the Kiwara acquisition agreement, the Company acquired a further 10% interest in Kalumbila in February 2010 and 1% in May 2010 bringing its ownership interest to 96%. The Company holds options to acquire the remaining 4% interest in Kalumbila for GBP 3.5 million.
At the time of acquisition Kiwara had begun an in-fill drill program at Kalumbila to determine a mineral resource estimate for the properties. In Q2, six drill rigs were actively focused on two detailed sections over the central resource. These have confirmed excellent continuity of mineralization that will allow for further resource drilling to cover a larger area. Emphasis has now moved on to widely spaced drilling to test the ultimate extent of the Kalumbila ore system. An economic assessment including metallurgical test work, engineering and geotechnical studies are planned in the second half of 2010.
In addition to the resource development program, a regional exploration program has been initiated to assess the potential of a high grade nickel prospect as well as further copper and uranium prospects in the extensive Kalumbila tenure package.
Acquisition of the non-controlling interest in Mauritanian Copper Mines SARL
In February 2010, the Company completed the acquisition of the 20% non-controlling interest in Mauritanian Copper Mines SARL, which owns the Guelb Moghrein copper and gold operation, for $63.0 million.
Kevitsa nickel/copper/PGE project, Finland
Design of the project is well progressed and all significant long lead equipment items will be delivered to suit the construction sequence. Construction on site commenced during Q2, with plant site earthworks in progress and the concrete works commenced in July.
The project effort for the second half of 2010 will concentrate on completion of detailed design, procurement of the balance of equipment, and continued construction on earthworks, concrete works, structural and building erection, and plant site infrastructure.
Kansanshi copper/gold operation, Zambia
The secondary sulphide crusher is due for integration into the processing circuit in Q3 which will increase throughput capacity and plant availability. Further enhancement of milling rates and overall operational stability are planned via the installation of a milling expert IT system which is scheduled for implementation by early Q4.
The installation of additional flotation capacity on sulphide and mixed ore is progressing with commissioning due in January 2011. This additional capacity will enhance recovery potential of both sulphide and mixed ore at the higher production rates. Oxide circuit developments aimed at improving recovery are expected to be completed during the second half of 2010.
The six gold gravity concentrators have contributed to the sustained increase in gold recovered and produced as dore. Investigations are ongoing into additional opportunities for gravity recovery of gold and further projects will be initiated in Q3. Further upgrades to downstream secondary gravity concentration are in progress.
Following an extensive geological review and drilling program at Kansanshi, a revised mineral resource and reserve estimate has been completed. In summary, the revised mineral reserve estimate is:
Total tonnes: 304,500,000
Total copper: 1.16%
Acid soluble copper
(leach and mixed ore only): 0.81%
Gold (grams per tonne): 0.17
Strip ratio: 2.2
Using a 0.3% cut-off grade, the measured and indicated resource categories and the contained copper increase by approximately 18% and 50%, respectively. Significantly increased estimated proven and probable mineral reserves estimates imply a mine life of approximately 13 years at a throughput rate of 24 million tonnes per year. The mine life increases to 20 years when the inferred mineral resource estimate is added. The overall strip ratio increases marginally to 2.2:1 compensated by the increase in head grade to 1.16% total copper.
Guelb Moghrein copper/gold operation, Mauritania
Commissioning of the new high pressure grinding rollers ('HPGR') commenced in Q2 and will continue to be optimized in Q3 marking the completion of the 3.8 million tonne per annum plant expansion. Commissioning of the two remaining generators on heavy fuel was completed in Q2.
Frontier copper operation, RDC
At the Frontier mine, capital investment plans have been cut-back in response to uncertainty of tenure following the legal proceedings instigated by the RDC state-owned mining agency, Sodimico. See 'Other items' for further discussion. In the short term, Frontier will continue to focus on increased waste stripping to establish wider and more efficient and productive working areas in the pit.
Lonshi underground evaluation project, RDC
The exploration and development of the underground project was suspended in June 2010 in response to the uncertain development environment in the RDC. See 'Other items' for further discussion.
Exploration
Exploration activities continued at a high rate during Q2 2010 with a total of up to 18 drill rigs in operation exploration projects between Finland, the RDC, Zambia and Mauritania.
At Kevitsa, further encouraging results are currently being compiled to build a new resource model. This should be completed in August. The new resource model is expected to be completed without compromising the strip ratio. Extensions of previous drill holes have defined extensive mineralization continuing at depth to over 900m below surface.
At Kansanshi, two exploration rigs continued drilling on the SE Dome prospect. 57 drill holes have now been completed that define a clear dome structure of typical Kansanshi vein style mineralization. Resource definition drilling is now in progress.
At Kalumbila, drill rigs have been actively focused on two detailed sections over the central resource. These have confirmed excellent continuity of mineralization that will allow confidence for future resource drilling to be wider spaced. Some long wide intercepts in the hanging wall of the main mineralization will improve the strip ratio for an open pit mine. Emphasis has now moved to wide spaced drilling to test the ultimate extent of the Kalumbila ore system.
At Frontier, drilling in the western footwall of the ore body has located intercepts of over 200m of mineralization that could have a significant impact on the expansion of the pit to the west.
In Mauritania, exploration drilling recommenced in June, initially on the near mine extensions east and west of Guelb Moghrein. Regional drill targets have been defined for testing as soon as additional drilling capacity can be obtained.
OTHER ITEMS
Kolwezi update
During 2007, the Government of the RDC announced a review of over 60 mining agreements entered into over the last decade with foreign companies. The Kolwezi mining convention ('Contract of Association'), to which the Company's subsidiary Congo Mineral Developments Limited ('CMD') is a party, was included in this review. The Company and its contributing partners in the Kolwezi Project, Industrial Development Corporation of South Africa ('IDC') and the IFC (International Finance Corporation), have obtained legal advice that the Contract of Association is valid and binding and that all terms have been complied with by CMD. The Contract of Association also provides a dispute resolution mechanism through international arbitration.
Despite CMD's voluntary participation in the revisitation and efforts to reach a negotiated resolution, CMD received a letter from the RDC Prime Minister dated August 21, 2009, which reported on the outcome of an August 4, 2009 meeting of the RDC Council of Ministers with respect to the Contract of Association advising of the 'impossibility to pursue the partnership' and directed that the exploitation permit held by KMT, the Company formed by the parties to pursue the project, be returned to Gecamines.
Because of the urgent circumstances and in view of the precipitous actions of the RDC and of its State entities based on the decision of the Council of Ministers, on August 26 and September 3, 2009, KMT and CMD initiated three proceedings before the Tribunal de Grande Instance (court of first instance) in Kinshasa (the 'Local Court') seeking to obtain appropriate provisional measures to preserve their rights and to secure the KMT Project site.
Subsequently, on September 15 and 16, 2009 KMT's offices in Lubumbashi and facilities in Kolwezi were sealed by order of the General Prosecutor of Katanga. On September 16, 2009, the Company had no choice but to announce that it had suspended construction at its KMT Project. Given the actions taken by the RDC government, the Company was also advised there was no longer any purpose in pursuing interim relief in the Local Court.
At the time of suspension the construction of the Kolwezi Project was at an advanced stage (approximately 75% complete) and was on schedule to start commissioning in May 2010. The suspension resulted in the immediate loss of 700 local jobs in the Kolwezi area, loss of tax revenues to the RDC government, and an indefinite delay in commissioning of the Kolwezi Project.
On October 21, 2009, KMT and CMD appeared before the Local Court and asked the Local Court to note that it was not obligated to rule on the provisional requests previously sought, and to note the withdrawal of the proceedings. The RDC and Gecamines contested the withdrawal of the proceedings. The debate that followed before the Local Court dealt only with questions of procedure, namely the withdrawal of the demands and incidentally on the joining of the three cases. There was no debate on the merits and no evidence was provided to the Local Court. The Company learned by way of a press conference called by the Vice Minister of Mines that the Local Court had rendered judgment on October 28, 2009, but that judgment was only served on KMT on November 23, 2009. The judgment held that the actions instituted by CMD and KMT were receivable, but not founded in law. The Local Court concluded on the basis of no evidence that there was not a clerical error in the Decree granting authorization for the constitution of KMT, but rather there was a formal defect. The Local Court also found without any evidence presented that there was fraud committed in the constitution of KMT and held that for this reason KMT did not exist in law. The Court then accepted the cross-claim of the RDC and Gecamines, and, as a consequence, ordered each of CMD and KMT to pay to Gecamines and the RDC as damages and interest the equivalent of $3 million and court costs.
On December 21, 2009 CMD and KMT filed an appeal of the judgment (the 'Local Appeal').
By letter transmitted on January 11, 2010, Gecamines notified CMD, IFC and IDC of the decision of its Board of Directors to cancel the Contract of Association. By letter dated January 15, 2010, KMT's legal counsel replied to this letter, setting out summary reasons why the purported cancellation of the Contract of Association was not well founded and requiring that Gecamines withdraw its cancellation letter, failing which CMD, IFC and IDC reserved their rights to initiate the international arbitration proceedings provided for in the Contract of Association. Gecamines did not withdraw its cancellation letter.
In the Company's view, the Local Court's decision constituted a denial of justice and this, along with the actions taken by Gecamines to wrongfully cancel the Contract of Association, demonstrated the need for the Company to file international arbitration seeking orders obliging the RDC and Gecamines to respect their undertakings and obligations under the Contract of Association. On February 1, 2010, CMD, IFC and IDC commenced international arbitration at the International Chamber of Commerce (ICC) in Paris.
On February 22, 2010, without any prior notice KMT and CMD received a Notice of Hearing Date from Gecamines and CAMI setting the Local Appeal for hearing in less than 48 hours on February 24, 2010. Gecamines and CAMI requested the confirmation of the Local Court judgment and also made an unsupported request for up to US$12 billion in damages to be awarded to Gecamines and CAMI. KMT's lawyers attended and objected to the proceedings. Following a hearing on February 24, 2010, the Company received official notification of the Local Appeal judgment on April 7, 2010 confirming the award of US$12 billion in damages against CMD and KMT. The Company filed for a 'cassation' on June 19, 2010, the final venue of appeal in the RDC. However, despite the further right of appeal, the damages award is now enforceable against KMT and CMD in the RDC.
On July 16, 2010 KMT and CMD were summoned by the RDC, Gecamines and CAMI to appear before the Court of Appeal of Kinshasa in order to have a liquidator appointed to wind up KMT and value its assets as part of the enforcement of the judgement of the Appeal Court of Kinshasa. CMD and KMT requested a postponement, which was refused. On August 2, 2010 KMT received notice of a judgement of the Appeal Court of Kinshasa rendered on July 27, 2010. The judgement decided that KMT is in the process of being liquidated and a Congolese liquidator was appointed.
The Company believes there is no legal basis for the cancellation of KMT's exploitation permit, the sealing of the KMT facilities, Gecamines' cancellation of the Contract of Association, or the decision of the Local Court and Local Appeal, and as previously noted, that CMD and the KMT Project's other contributing partners, the IFC and the IDC, continue to have a valid and binding contract with the RDC and Gecamines.
Following developments and actions against KMT and CMD, the Company has determined that a complete impairment of the Kolwezi assets is required in accordance with GAAP. The historical carrying value of the Kolwezi development project was $798.5 million and was comprised of the initial acquisition cost and subsequent capital expenditures. A future tax liability of $109.5 million relating to the acquisition of Kolwezi was derecognized concurrently with the asset impairment.
The Company believes that the value of the Kolwezi assets substantially exceeds the historical carrying value and the Company will continue to pursue all available avenues to recover the value of the project, including international arbitration. The timing of any negotiated or arbitrated settlement is not known at this time, but it could possibly take years.
The Company is currently finalizing its conversion to IFRS. Pursuant to IFRS, the Kolwezi assets were materially impaired in the year ended December 31, 2009 and accordingly, the impairment recorded in Q2 2010 under IFRS will be materially lower than the impairment under Canadian GAAP.
Societe de Developpement Industriel et minier du Congo ('Sodimico')
Sodimico, a RDC state owned mining company, obtained a judgment against Compagnie Miniere De Sakania SPRL ('Comisa') and the Company on March 12, 2010 from the Tribunal de Commerce of Lubumbashi and was notified of the judgment on April 5, 2010. The judgment orders Comisa and the Company to pay to Sodimico $17.3 million for the value of studies made by Sodimico over the perimeters of titles now held by Comisa and a further $40 million as additional unknown damages. The court found, based on documents provided by Sodimico, that Comisa acquired the rights over the Lonshi deposits 'at the operation stage' and 'therefore there is no doubt that it must have used the results of the geological and mining studies made by Sodimico'. In fact, Comisa did not use any geological data or studies belonging to Sodimico and there is no factual or legal basis for the judgment. Comisa filed an appeal of the judgment which was set to be heard July 27, 2010 in Lubumbashi. The hearing was adjourned to October 2010. The Company believes that Sodimico could not enforce payment of the judgment amount against Comisa, and therefore no liability has been recorded as at June 30, 2010.
On March 8, 2010, the Company, and its RDC subsidiaries Comisa and Frontier, and also Bwana, a wrongly named Zambian subsidiary of the Company, were served notices of a case introduced by Sodimico against the RDC before the RDC Supreme Court of Justice ('Supreme Court'). Sodimico requested the cancellation of a February 2000 letter from the Minister of Mines, which Sodimico alleged wrongfully withdrew mining titles belonging to Sodimico. These titles are further alleged to have been subsequently granted to Comisa and Frontier. A hearing was held by the Supreme Court on May 14, 2010 and on May 21, 2010. The Supreme Court delivered a judgment purporting to restore certain mineral rights to Sodimico. These purported mineral rights now conflict with mineral rights held by Frontier SPRL and Comisa SPRL. The conclusions of the Supreme Court are impossible to reconcile with the known history of the mineral rights in question. No steps have been taken to date to terminate either of Frontier's or Comisa's titles and they continue to operate without interference. The final outcome of the judgment remains uncertain and may result in an impairment of the Company's carrying value of Frontier which could be material.
Zambian taxation update
The Government of the Republic of Zambia ('GRZ') announced in January 2008 a number of proposed changes to the tax regime in the country in relation to mining companies. These changes included a new windfall tax on copper sales revenue; a new variable profit tax; a concentrate export levy of 15%; an increase in the royalty rate to 3%; an increase in the income tax rate to 30%; and other changes including changes in the timing of deductibility of capital allowances and streaming of hedging losses and gains. These changes were passed by Parliament in March 2008 and the majority of changes took effect from April 1, 2008.
After the election of the current President, the GRZ reviewed these tax changes and proposed that the new windfall tax be removed, the deductibility of capital allowances be increased back to 100% in the period of expenditure and to allow hedging income be part of mining income for tax purposes. These changes were passed by Parliament in March 2009 and the majority of changes took effect from April 1, 2009. These enacted changes are not retroactive to April 1, 2008.
The Company, through its Zambian subsidiaries, is party to Development Agreements with GRZ for its existing operations which provide an express right to full and fair compensation for any loss, damages or costs (including interest) incurred by the Company by reason of the government's failure to comply with the tax stability guarantees set out in the Development Agreements, and rights of international arbitration in the event of any dispute. Following consultation with external legal counsel, the Company assessed there to be a high probability of recovery from the GRZ of payments made in respect of these taxes.
In the consolidated financial statements, the Company has recognized a tax expense and liability in accordance with applicable laws notwithstanding the Development Agreements. In addition and reflecting the enforceability of the Development Agreements, the Company has recognized a receivable from the GRZ for an amount in respect of the expected ultimate repayment of taxes in excess of the taxes permitted under the Development Agreements. As required by the financial instruments accounting standards, this receivable has been classified as 'loans and receivables' and initially recorded at fair value based on management's best estimate of the timing of receipt and amounts due. The receivable will be assessed for impairment in future periods based on changes in facts and circumstances; any impairment amounts required in the future may be material. As at June 30, 2010, this receivable amounts to $238.5 million.
The Company is involved in discussions with the GRZ to find an alternative solution to arbitration or litigation to fully resolve all outstanding matters in relation to the tax changes introduced in conflict with the Development Agreements. The timing and outcome of these discussions remains uncertain.
OPERATIONAL OUTLOOK
The Company's 2010 production outlook has been lowered to 360,000 tonnes of copper and 210,000 ounces of gold. The lower estimated copper production reflects lower year to date 2010 production and management's decision to cut-back capital investment at Frontier due to the uncertainty following the legal proceedings instigated by a state owned mining agency in the RDC.
The estimated average C1 cost for 2010 has increased to $1.17 per pound, reflecting additional mine stripping costs and the reduction in estimated copper and gold production.
Kansanshi
The commissioning of the secondary crusher on the sulphide circuit in Q3 and the completion of the additional flotation capacity in Q4 will allow the treatment rate and copper recoveries to be enhanced for both the sulphide and mixed ore. This will subsequently allow an improved balance of material being mined which will reduce the need for further pre-strip activities and hence stabilize the mining schedule. Further improvements will be achieved with the commissioning of the de-slime circuit in the oxide stream and final optimization of the gravity concentrators. The new AC drive truck fleet and the delivery of the electric face shovels in Q4 2010 will result in an increase in mining volumes, which will allow a greater activity in the North West open pit.
Guelb Moghrein
Optimization of the 3.8 million tonne per annum expansion will continue during Q3 including works to increase grinding circuit throughput. Copper and gold recoveries will remain the focus of the overall plant optimization. The blend of mine feed will be enhanced to ensure that the ore quality remains within practical operational limits.
Frontier
The revised mining plan and schedule will allow ore to be mined from at least three distinct areas which will improve the quality of ore feed to the plant. However, mining will continue to focus on waste stripping to improve operational flexibility. The dewatering shaft development will continue and towards the targeted depth of 300 metres.
Hedging program
As at June 30, 2010, the following derivative positions were outstanding:
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