Inmet Announces Third Quarter Earnings of $1.53 Per Share Compared With Earnings of $1.10 Per Share in the Third Quarter of 2009
TORONTO, CANADA -- (Marketwire) -- 10/26/10 -- All amounts in Canadian dollars unless indicated otherwise
Inmet (TSX: IMN) announces third quarter earnings of $1.53 per share compared with earnings of $1.10 per share in the third quarter of 2009.
Third quarter highlights
-- Strong earnings from operations
Earnings from operations were $148 million compared to $112 million in
the third quarter of last year- a result of higher metal prices and
earnings from Las Cruces.
-- Operating earnings at Las Cruces
Las Cruces began recognizing its results from operations in operating
earnings and operating cash flows effective July 1, 2010. This increased
consolidated operating earnings by $21 million and operating cash flows
by $32 million.
-- Las Cruces progressing on commissioning plan
We produced 8,400 tonnes of copper cathode this quarter, an increase of
27 percent compared to the second quarter of 2010. Overall, plant
reliability has improved significantly and no substantial mechanical
downtime was experienced in the third quarter. We are now in the process
of ramping up throughput and production. Our ramp up pattern is typical
of hydrometallurgical plants and other complex processes, and the
critical next step to achieving full production is to maintain optimum
recovery while increasing feed into the plant. We will continue to
rigorously implement the ramp up plan to achieve our goal of full
production, and are encouraged by the capability that the plant has
demonstrated in recent months. Notwithstanding the significant
improvements achieved during the third quarter, production fell short of
our forecast. We have revised our copper production objective for 2010
to 20,000 tonnes for our 70 percent share to reflect the slower ramp up
and the deferral of direct ore shipments.
-- Submission of Cobre Panama Environmental and Social Impact Assessment
and selection process for the Engineering, Procurement and Construction
Management contractor
Minera Panama submitted its environmental and social impact assessment
(ESIA) to the Autoridad Nacional del Ambiente (ANAM), the Panamanian
environmental regulatory authority in September. In addition, we have
completed our selection of an Engineering, Procurement and Construction
Management (EP+CM) contractor and, subject to board approvals, will move
into the basic engineering phase of the Cobre Panama project in the
fourth quarter. These represent significant milestones in the
development of the project.
Key financial data
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September 30 September 30
2010 2009 change 2010 2009 change
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FINANCIAL HIGHLIGHTS
(thousands, except
per share amounts)
Sales
Gross sales $ 313,349 $ 241,121 +30% $ 779,959 $ 693,315 +12%
Net income
Net income 86,086 $ 61,551 +40% $ 214,393 $ 179,406 +20%
Net income per share $ 1.53 $ 1.10 +40% $ 3.82 $ 3.51 +9%
Cash flow
Cash flow provided
by operating
activities $ 102,135 $ 89,277 +14% $ 274,001 $ 196,970 +39%
Cash flow provided
by operating
activities per
share (1) $ 1.82 $ 1.59 +14% $ 4.88 $ 3.86 +26%
Capital spending (2) $ 47,785 $ 23,789 +101% $ 80,620 $ 204,911 -61%
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OPERATING HIGHLIGHTS
Production (3)
Copper (tonnes) 24,800 19,900 +25% 68,500 59,200 +16%
Zinc (tonnes) 20,800 21,700 -4% 60,100 54,500 +10%
Gold (ounces) 24,900 48,200 -48% 101,800 177,600 -43%
Pyrite (tonnes) 62,000 - +100% 397,000 323,000 +23%
Copper cash cost (US
$ per pound) (4) $ 0.49 $ 0.46 +7% $ 0.46 $ 0.54 -15%
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as at September 30 as at December 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) $ 527 $ 609
Cash balance including long-term
bonds (millions) $ 823 $ 634
Gross debt (5) $ 17 $ 18
Shareholders' equity (millions) $ 2,393 $ 2,238
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(1) Cash flow provided by operating activities divided by average shares
outstanding for the period.
(2) For the nine months ended September 30, 2010, this includes capital
spending of $65 million at Cobre Panama and $52 million at Las Cruces
reduced by positive cash flow from pre-operating costs net of revenues
and working capital changes at Las Cruces of $60 million. For the nine
months ended September 30, 2009 this includes $108 million of capital
spending at Las Cruces (mainly for construction) and $70 million at
Cobre Panama.
(3) Inmet's share.
(4) Copper cash cost per pound is a non-GAAP measure - see Supplementary
financial information on pages 30 to 32.
(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.
Third 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
Ok Tedi 20
Status of our development project 22
Cobre Panama 22
Managing our liquidity 23
Financial condition 27
Accounting changes 28
Supplementary financial information 30
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 September 30, 2010. Revised objective is as of October 26, 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 three months ended nine months ended
amounts) September 30 September 30
2010 2009 change 2010 2009 change
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EARNINGS FROM
OPERATIONS (1)
Cayeli $ 49,131 $ 28,789 +71% $ 110,699 $ 65,875 +68%
Las Cruces 20,614 - +100% 20,614 - +100%
Pyhasalmi 29,479 20,800 +42% 74,645 39,126 +91%
Troilus 5,087 14,096 -64% 22,386 84,612 -74%
Ok Tedi 44,329 48,974 -9% 119,202 102,089 +17%
Other (512) (409) +25% (1,523) (1,401) +9%
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148,128 112,250 +32% 346,023 290,301 +19%
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DEVELOPMENT AND
EXPLORATION
Corporate
development and
exploration (2,758) (1,963) +40% (8,061) (7,922) +2%
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CORPORATE COSTS
General and
administration (4,073) (5,147) -21% (15,871) (14,056) +13%
Investment and
other income 3,533 3,588 -2% (14,915) 8,851 -269%
Asset impairment - - - - (6,419) -100%
Stand-by costs - - - (6,753) - +100%
Interest expense (3,480) (496) +602% (4,353) (1,481) +194%
Income and capital
taxes (45,354) (39,988) +13% (80,748) (83,180) -3%
Non-controlling
interest (9,910) (6,693) +48% (929) (6,688) -86%
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(59,284) (48,736) +22% (123,569) (102,973) +20%
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Net income $ 86,086 $ 61,551 +40% $ 214,393 $ 179,406 +20%
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Basic net income
per share $ 1.53 $ 1.10 +40% $ 3.82 $ 3.51 +9%
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Diluted net income
per share $ 1.53 $ 1.09 +40% $ 3.81 $ 3.50 +9%
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Weighted average
shares
outstanding 56,107 56,107 - 56,107 51,062 +10%
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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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EARNINGS FROM OPERATIONS
Sales
Higher copper and zinc prices
denominated in Canadian dollars $ 37 $ 99 7
Higher (lower) sales volumes (1) 3 7
Costs
Higher freight charges (9) (12) 9
(Higher) lower operating costs,
including costs that vary with
income and cash flows (4) 6 10
Operating earnings at Las Cruces 21 21 16
Lower operating earnings at Troilus (9) (62)
Other 1 1
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Higher earnings from operations
compared to 2009 36 56
CORPORATE COSTS
Foreign exchange changes 18 (13) 11
Settlement and realization of hedge
contracts in 2009 (21) (21) 11
Asset impairment in 2009 - 6 12
(Higher) lower income taxes (5) 2 12
Non-controlling interest change (3) 6
Stand-by costs - (7) 12
Other - 6
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Higher net income compared to 2009 $ 25 $ 35
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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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three months ended nine months ended
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2010 2009 change 2010 2009 change
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US dollar metal prices
Copper (per pound) $ 3.46 $ 2.83 +22% $ 3.25 $ 2.39 +36%
Zinc (per pound) $ 0.95 $ 0.83 +14% $ 0.92 $ 0.68 +35%
Gold (per ounce) $ 1,216 $ 957 +27% $ 1,157 $ 945 +22%
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Canadian dollar metal
prices
Copper (per pound) $ 3.60 $ 3.11 +16% $ 3.37 $ 2.80 +20%
Zinc (per pound) $ 0.99 $ 0.91 +9% $ 0.96 $ 0.80 +20%
Gold (per ounce) $ 1,263 $ 1,050 +20% $ 1,199 $ 1,105 +9%
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Copper
Copper prices increased from US $2.88 per pound at the start of the quarter to US $3.65 per pound on September 30. London Metals Exchange (LME) inventories continued to fall in the third quarter to below 400,000 tonnes for the first time since early November 2009.
Zinc
Zinc prices increased 27 percent this quarter, from US $0.78 per pound at the start of the quarter to US $0.99 per pound on September 30. LME inventories of zinc have remained essentially consistent since May 2010, and were 617,000 tonnes at the end of the quarter.
Gold
Gold prices rose 5 percent this quarter with eight consecutive quarters of price gains. In late September gold prices closed at US $1,300 per ounce for the first time ever.
Pyrite
Sulphur prices rose steadily this quarter, driven mainly by demand from China. Additional pyrite demand from China this year depends on the cost of freight, which is significant relative to sulphur prices.
Exchange rates
Exchange rates affect our revenue and earnings. The table below shows the average exchange rates we realized this quarter and year to date compared to 2009.
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2010 2009 change 2010 2009 change
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Exchange rates
1 US$ to C$ $ 1.04 $ 1.10 -5% $ 1.04 $ 1.17 -11%
1 euro to C$ $ 1.34 $ 1.57 -15% $ 1.36 $ 1.59 -14%
1 euro to US$ $ 1.29 $ 1.43 -10% $ 1.32 $ 1.37 -4%
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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 5 percent relative to the US dollar, and 15 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.
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. While treatment charges for zinc concentrates are higher than last year, price participation is lower.
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(US$) 2010 2009 change 2010 2009 change
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Treatment charges
Copper (per dry metric
tonne of concentrate) $ 48 $ 66 -27% $ 53 $ 66 -20%
Zinc (per dry metric
tonne of concentrate) $ 244 $ 186 +31% $ 245 $ 189 +30%
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Price participation
Copper (per pound) $ 0.01 $ 0.03 -67% $ 0.01 $ 0.03 -67%
Zinc (per pound) ($0.01) $ 0.06 -117% ($0.01) $ 0.02 -150%
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Freight charges
Copper (per dry metric
tonne of concentrate) $ 68 $ 44 +55% $ 68 $ 35 +94%
Zinc (per dry metric
tonne of concentrate) $ 30 $ 18 +67% $ 31 $ 23 +35%
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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
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three months ended September nine months ended September
30 30
(thousands) 2010 2009 change 2010 2009 change
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Gross sales $ 313,349 $ 241,121 +30% $ 779,959 $ 693,315 +12%
Smelter processing
charges and
freight (47,191) (41,607) +13% (128,314) (122,736) +5%
Cost of sales:
Direct
production
costs (88,045) (69,698) +26% (227,104) (218,547) +4%
Inventory
changes (550) 179 -407% (10,950) (1,493) +633%
Provisions for
mine
rehabilitation
and other non-
cash charges (5,127) (3,187) +61% (9,085) (16,397) -45%
Depreciation (24,308) (14,558) +67% (58,483) (43,841) +33%
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Earnings from
operations $ 148,128 $ 112,250 +32% $ 346,023 $ 290,301 +19%
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Gross sales were higher
-
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three months ended nine months ended
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(thousands) 2010 2009 change 2010 2009 change
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Gross sales by
operation
Cayeli $ 93,597 $ 67,612 +38% $ 244,029 $ 191,344 +28%
Las Cruces 61,849 - +100% 61,849 - +100%
Pyhasalmi 65,255 48,262 +35% 160,701 125,244 +28%
Troilus 9,893 34,279 -71% 72,070 158,676 -55%
Ok Tedi (1) 82,755 90,968 -9% 241,310 218,051 +11%
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$ 313,349 $ 241,121 +30% $ 779,959 $ 693,315 +12%
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Gross sales by
metal
Copper $ 213,664 $ 138,345 +54% $ 467,591 $ 348,344 +34%
Zinc 39,951 35,237 +13% 126,222 95,289 +32%
Gold 33,716 54,099 -38% 133,576 202,824 -34%
Other 26,018 13,440 +94% 52,570 46,858 +12%
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$ 313,349 $ 241,121 +30% $ 779,959 $ 693,315 +12%
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(1) Our 18 percent share of Ok Tedi's sales.
Key components of the change in sales: higher copper prices, new gross
sales at Las Cruces, lower sales volumes at Troilus
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three months ended nine months ended
(millions) September 30 September 30
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Higher copper prices, denominated in
Canadian dollars $ 23 $ 69
Higher zinc prices, denominated in
Canadian dollars 3 22
Higher gold prices, denominated in
Canadian dollars 2 7
Changes in other metal prices 9 (2)
Gross sales at Las Cruces 62 62
Lower gross sales from Troilus (24) (87)
Higher (lower) sales volumes at our
other mines (2) 13
Other (1) 3
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Higher gross sales, compared to 2009 $ 72 $ 87
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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 third quarter, we recorded $3 million in positive finalization adjustments from second quarter sales.
At the end of this quarter, the following sales had not been settled:
-- 22 million pounds of copper provisionally priced at US $3.64 per pound
-- 13 million pounds of zinc provisionally priced at US $0.99 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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October 2010 10 13
November 2010 8 -
December 2010 4 -
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Unsettled sales at September 30, 2010 22 13
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Significantly higher copper and pyrite sales volumes, lower gold sales volumes
Our sales volumes are directly affected by the amount of production from our mines, and our ability to ship to our customers.
Copper production and sales volumes are up this quarter and year to date mainly because of Las Cruces. Zinc production is flat this quarter but higher year to date because zinc grades at Pyhasalmi were higher. Gold production and sales volumes are lower because Troilus stopped producing in June 2010. We realized significantly higher pyrite sales volumes this quarter because of higher demand from China.
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2010 2009 change 2010 2009 change
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Sales volumes
Copper (tonnes) 24,600 20,800 +18% 67,900 57,700 +18%
Zinc (tonnes) 18,400 17,600 +5% 59,700 54,900 +9%
Gold (ounces) 26,700 51,100 -48% 110,100 183,100 -40%
Pyrite (tonnes) 196,000 98,600 +99% 395,100 295,600 +34%
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Production
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three months ended nine months ended revised
September 30 September 30 objective
Inmet's share(1) 2010 2009 change 2010 2009 change 2010
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Copper (tonnes)
Cayeli 7,300 6,400 +14% 21,500 21,000 +2% 29,200
Las Cruces cathode 5,800 1,500 +287% 13,600 1,500 +807% 20,000
Las Cruces copper
contained in ore - - - - - - -
Pyhasalmi 3,900 3,700 +5% 10,800 11,000 -2% 13,400
Troilus - 1,000 -100% 2,000 4,900 -59% 2,000
Ok Tedi 7,800 7,300 +7% 20,600 20,800 -1% 29,300(2)
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24,800 19,900 +25% 68,500 59,200 +16% 93,900
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Zinc (tonnes)
Cayeli 11,700 13,600 -14% 38,200 37,100 +3% 51,700
Pyhasalmi 9,100 8,100 +12% 21,900 17,400 +26% 31,300
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20,800 21,700 -4% 60,100 54,500 +10% 83,000
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Gold (ounces)
Troilus - 26,200 -100% 37,900 111,000 -66% 37,900
Ok Tedi 24,900 22,000 +13% 63,900 66,600 -4% 93,600(2)
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24,900 48,200 -48% 101,800 177,600 -43% 131,500
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Pyrite (tonnes)
Pyhasalmi 62,000 - +100% 397,000 323,000 +23% 500,000
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(1) Inmet's share: 100 percent for Cayeli, Pyhasalmi and Troilus, 18
percent for Ok Tedi and 70 percent for Las Cruces.
(2) This production objective could change in the fourth quarter of 2010,
if we exchange our 18 percent equity interest in Ok Tedi for a 5
percent net smelter return royalty.
2010 outlook for sales
We use our production objectives as the basis for our sales objectives.
We have decreased our copper production objective by 17,300 tonnes from our June 30, 2010 expectation because of slower ramp up than anticipated at and the deferral of direct shipment of ore to smelters (see page 16).
Las Cruces has mined and stockpiled 100,000 tonnes of 12 percent grade ore to ship directly to smelters. We have applied for but not yet received the necessary permit to move the material offsite. The regulator has taken the position that shipping this ore is inconsistent with our mandate to process ore on-site. We believe there are substantial tax and employment benefits associated with shipping this high grade ore concurrently with operating the plant. We continue to pursue obtaining this permit on the basis of the substantial benefits the direct shipping would provide to the regional economy but cannot determine when it will occur.
We began recognizing Las Cruces' results in operating earnings as of July 1, 2010.
We expect our zinc production objective to be consistent with our original expectations and gold to be less. Lower gold grades have been mined at Ok Tedi through the year to reduce the quantity of sulphur to the mill feed. Higher pyrite production is expected at Pyhasalmi to meet the increased demand.
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 for the balance of 2010.
Higher freight charges 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 $ 18,522 $ 17,580 +5% $ 57,217 $ 55,094 +4%
Las Cruces 27 - +100% 27 - +100%
Pyhasalmi 19,754 12,485 +58% 39,809 33,802 +18%
Troilus 205 2,272 -91% 4,526 10,990 -59%
Ok Tedi (1) 8,683 9,270 -6% 26,735 22,850 +17%
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$ 47,191 $ 41,607 +13% $128,314 $122,736 +5%
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Smelter processing
charges and freight
by metal
Copper $ 18,899 $ 21,483 -12% $ 53,644 $ 59,826 -10%
Zinc 16,171 11,962 +35% 52,149 38,930 +34%
Other 12,121 8,162 +49% 22,521 23,980 -6%
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$ 47,191 $ 41,607 +13% $128,314 $122,736 +5%
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Smelter processing
charges by type and
freight
Copper treatment and
refining charges $ 6,353 $ 8,657 -27% $ 18,730 $ 27,290 -31%
Zinc treatment
charges 9,089 7,016 +30% 29,952 24,065 +24%
Copper price
participation 417 1,393 -70% 1,537 4,138 -63%
Zinc price
participation (508) 2,669 -119% (1,946) 3,505 -156%
Content losses 13,616 12,217 +11% 40,552 33,741 +20%
Freight 16,721 7,228 +131% 35,280 23,663 +49%
Other 1,503 2,427 -38% 4,209 6,334 -34%
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$ 47,191 $ 41,607 +13% $128,314 $122,736 +5%
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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 this quarter than they were in 2009 because we have more favourable terms with smelters. Zinc treatment charges were higher than last year because of our terms with smelters and higher sales volumes. Content losses were higher because metal prices are higher than they were last year. Freight rates were higher mainly because pyrite shipments were higher.
2010 outlook for smelter processing charges and freight
We sell approximately 90 percent of our copper concentrate under long-term contracts. We expect price participation to be minimal.
We expect total zinc smelter processing charges, including price participation, to be lower than they were in 2009.
Las Cruces sells its copper cathode production directly to buyers in the Spanish and Mediterranean markets and therefore does not incur smelting processing charges and has relatively low freight costs.
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 higher than last year
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(thousands) 2010 2009 change 2010 2009 change
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Direct production
costs by operation
Cayeli $ 22,333 $ 18,583 +20% $ 65,342 $ 58,889 +11%
Las Cruces 30,797 - +100% 30,797 - +100%
Pyhasalmi 12,225 14,026 -13% 40,056 45,391 -12%
Troilus - 12,671 -100% 23,905 43,588 -45%
Ok Tedi (1) 22,690 24,418 -7% 67,004 70,679 -5%
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Total direct
production costs 88,045 69,698 +26% 227,104 218,547 +4%
Inventory changes 550 (179) +407% 10,950 1,493 +633%
Reclamation,
accretion and
other non-cash
expenses 5,127 3,187 +61% 9,085 16,397 -45%
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Total cost of sales $ 93,722 $ 72,706 +29% $ 247,139 $ 236,437 +5%
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(1) Our 18 percent share of Ok Tedi's direct production costs.
Direct production costs are higher in the quarter and year to date than they were in 2009, mainly because we began recognizing operating results at Las Cruces in the income statement effective July 1, 2010 and because of higher labour and royalty costs at Cayeli. This was partly offset by the closure of Troilus and lower costs at Pyhasalmi because of a stronger Canadian dollar relative to the euro. The closure of Troilus also resulted in higher inventory changes in the first half of the year.
2010 outlook for cost of sales
Consolidated direct production costs should be higher because of production costs at Las Cruces and higher labour and royalty costs at Cayeli, but will be reduced somewhat by lower Canadian dollar costs at Pyhasalmi and due to the closure of Troilus.
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 $ 3,691 $ 2,980 +24% $ 10,161 $ 9,826 +3%
Las Cruces 10,328 - +100% 10,328 - +100%
Pyhasalmi 1,925 1,473 +31% 5,637 6,237 -10%
Troilus 820 3,401 -76% 10,822 10,121 +7%
Ok Tedi 7,544 6,704 +13% 21,535 17,657 +22%
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$ 24,308 $ 14,558 +67% $ 58,483 $ 43,841 +33%
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Depreciation was higher in 2010 mainly as Las Cruces began to depreciate its operating assets in the income statement in the third quarter. Depreciation at Ok Tedi was higher this quarter and year to date because it increased the assets related to asset retirement obligations at the end of 2009 and began amortizing the cost of storage pits it uses to store the sulphur concentrate the tailings management plant produces. Depreciation recognized at Troilus during the third quarter of 2010 represented the final remaining inventory being sold.
2010 outlook for depreciation
We expect depreciation to be higher in 2010 mainly because of the impact of Las Cruces.
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 nine months ended
September 30 September 30
(thousands) 2010 2009 2010 2009
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Interest income $ 1,990 $ 1,135 $ 5,347 $ 3,878
Foreign exchange gain (loss) 1,012 (17,417) (22,141) (9,319)
Dividend and royalty income 650 300 2,539 985
Loss on settlement of interest
rate swap contract - (14,823) - (14,823)
Gain on recognition of
settlement of foreign currency
forward contract - 35,615 - 35,615
Mark to market on Ok Tedi copper
forward contracts - (802) - (3,228)
Other (119) (420) (660) (4,257)
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$ 3,533 $ 3,588 $ (14,915) $ 8,851
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Recognition of interest rate swap contract and foreign currency forward
contract in 2009
In the third quarter of 2009, we repaid 100 percent of Las Cruces' US dollar
denominated bank credit facility (see also Long-term debt repayments and
settlement of interest rate swap contract on page 25), and replaced it with
intergroup debt using the proceeds from our equity offering earlier that
year. In conjunction with this, Las Cruces terminated its interest rate swap
contracts paying out $16 million for early termination. This had the
following effects on investment and other income in the third quarter of
2009:
-- when we converted the Las Cruces debt from euro to US dollars in 2008,
Las Cruces settled a foreign exchange forward contract and received
proceeds of $52 million. We deferred the proceeds in accumulated other
comprehensive income, and have been amortizing it to income over the
term of the debt. When we repaid the debt, we realized the remaining
deferred gain of $36 million in investment and other income.
-- when we repaid the debt, we recorded the $15 million interest rate swap
loss that we had deferred in accumulated other comprehensive income in
investment and other income.
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 nine months ended
September 30 September 30
(thousands) 2010 2009 2010 2009
----------------------------------------------------------------------------
Translation of Las Cruces' US
dollar-denominated bank credit
facility $ - $ (1,348) $ - $ 2,460
Translation of foreign
denominated cash held at
corporate 207 (16,314) (362) (17,760)
Translation of other monetary
assets and liabilities 805 1,684 877 3,508
Reduction in our net investments - (1,439) (22,656) 2,473
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$ 1,012 $ (17,417) $ (22,141) $ (9,319)
----------------------------------------------------------------------------
We recognized foreign exchanges losses of $21 million this year on the repatriation of cash from Cayeli and Pyhasalmi. In 2009, we recognized foreign exchange losses of $14 million from revaluing US dollar denominated cash we held at Corporate to repay 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. We only expect to receive funds from Ok Tedi over the rest of the year. 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 nine months ended
September 30 September 30
(thousands) 2010 2009 change 2010 2009 change
----------------------------------------------------------------------------
Cayeli $ 9,327 $ 5,641 $ 21,733 $ 7,272
Las Cruces 10,828 7,682 (3,702) 7,949
Pyhasalmi 6,974 4,339 16,900 6,644
Ok Tedi 17,338 18,924 44,927 37,933
Troilus and
corporate 805 2,658 644 22,388
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$ 45,272 $ 39,244 $ 80,502 $ 82,186
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Consolidated
effective tax rate 32% 37% -5% 27% 31% -4%
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Our tax expense changes as our earnings change.
For the year to date, the consolidated effective tax rate went down by 4 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. For the quarter, the consolidated effective tax rate decrease of 5 percent is mainly from lower mining taxes in Canada because of the closure of Troilus.
2010 outlook for income tax expense
For the remainder of the year, we expect statutory tax rates at our operations to remain the same 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 three months of the year:
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Copper price US $3.60 per pound
Zinc price US $1.00 per pound
Gold price US $1,300 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 $1.29
Working capital Assume no changes for the year except for
Troilus
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Cayeli
----------------------------------------------------------------------------
three months ended nine months ended revised
September 30 September 30 objective
2010 2009 change 2010 2009 change 2010
----------------------------------------------------------------------------
Tonnes of ore
milled
(000's) 275 290 -5% 859 851 +1% 1,170
Tonnes of ore
milled per
day 3,000 3,200 -5% 3,100 3,100 - 3,300
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Grades
(percent) copper 3.4 3.1 +10% 3.2 3.2 - 3.2
zinc 6.2 6.5 -5% 6.3 6.2 +2% 6.3
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Mill
recoveries
(percent) copper 78 72 +8% 77 76 +1% 78
zinc 68 72 -6% 71 70 +1% 70
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Production
(tonnes) copper 7,300 6,400 +14% 21,500 21,000 +2% 29,200
zinc 11,700 13,600 -14% 38,200 37,100 +3% 51,700
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Cost per tonne of
ore milled (C$) $ 81 $ 64 +27% $ 76 $ 69 +10% $ 75
----------------------------------------------------------------------------
Production results on target
Mill production at Cayeli this quarter was lower than 2009 because mine production was down due to the significant amount of rehabilitation required in the lower part of the mine. This pushed production into upper level stopes that have higher grades and more difficult geotechnical conditions. The addition of a new bolting unit and increasing targets for shotcrete application will permit our return to planned production levels in the lower part of the mine in the fourth quarter.
Year to date, however, we remain ahead of 2009 levels, which is a substantial accomplishment given 2009 was a record year, and we expect to come close to our original 1.2 million tonnes annual throughput objective. Cayeli set a new record this quarter for daily mill tonnage, processing 3,794 tonnes.
Copper production was higher this quarter compared to 2009 mainly due to higher grades from mining tertiary stopes in the upper part of the mine. Zinc grades and recoveries this quarter were lower than 2009 resulting in lower production. Year to date, copper and zinc production were consistent with 2009 levels.
We continue to focus on ground support and rehabilitation, and progress the ore pass rehabilitation and concrete delivery line extension projects to sustain production levels. We do not expect any long term impact from the increased support needs and we are improving our capabilities with the addition of new equipment and personnel.
Cost per tonne of ore milled was significantly higher than 2009 mainly because mill throughput was lower, royalties were higher due to higher realized metals prices, and labour costs increased.
2010 outlook for production
We expect to produce 29,200 tonnes of copper and 51,700 tonnes of zinc, consistent with our original projections.
We have increased our annual objective for cost per tonne of ore milled by $3 to $75 per tonne to reflect higher costs year to date.
Financial review
Higher earnings for the quarter because copper prices and volumes were
higher
----------------------------------------------------------------------------
(millions of Canadian three months ended nine months ended revised
dollars unless September 30 September 30 objective
otherwise stated) 2010 2009 2010 2009 2010
----------------------------------------------------------------------------
Sales analysis
Copper sales (tonnes) 8,500 6,800 20,600 20,100 29,200
Zinc sales (tonnes) 9,600 10,000 38,500 37,500 51,700
--------------------------------------------------
Gross copper sales $ 67 $ 43 $ 152 $ 116 $ 231
Gross zinc sales 21 19 80 63 111
Other metal sales 6 6 12 12 14
--------------------------------------------------
Gross sales 94 68 244 191 356
Smelter processing charges
and freight (19) (18) (57) (55) (81)
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Net sales $ 75 $ 50 $ 187 $ 136 $ 275
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Cost analysis
Tonnes of ore milled
(thousands) 275 290 859 851 1,200
Direct production costs ($
per tonne) $ 81 $ 64 $ 76 $ 69 $ 75
----------------------------------------------------------------------------
Direct production costs $ 22 $ 19 $ 66 $ 59 $ 90
Change in inventory (1) (1) (2) (1) -
Depreciation and other
non-cash costs 5 3 12 12 19
----------------------------------------------------------------------------
Operating costs $ 26 $ 21 $ 76 $ 70 $ 109
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Operating earnings $ 49 $ 29 $ 111 $ 66 $ 166
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Operating cash flow $ 21 $ 30 $ 74 $ 45 $ 141
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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.
----------------------------------------------------------------------------
three months ended nine months ended
(millions) September 30 September 30
----------------------------------------------------------------------------
Higher metal prices, denominated in
Canadian dollars $ 16 $ 48
Higher sales volumes 8 3
Higher operating costs (4) (6)
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Higher operating earnings, compared to
2009 20 45
Change in tax expense because of
change in taxable income (2) (6)
Changes in working capital (see note 2
on page 43) (28) (9)
Other 1 (1)
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Higher (lower) operating cash flow,
compared to 2009 $ (9) $ 29
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Capital spending expected to be lower due to timing
----------------------------------------------------------------------------
three months ended nine months ended revised
September 30 September 30 objective
2010 2009 change 2010 2009 change 2010
----------------------------------------------------------------------------
Capital spending $ 3,300 $ 4,100 -20% $ 8,200 $ 10,600 -23% $ 16,000
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2010 outlook for capital spending
We expect to spend $16 million in 2010 on mobile equipment, site water control, stope stability, additional mill upgrades and development. The second phase of the headframe realignment project is nearing completion and should be done in the fourth quarter. This will bring the headframe back to its design configuration. We have established a monitoring and correction program to ensure the facility remains stable for the remaining life of the mine. At the same time, we will implement several geotechnical recommendations to curtail surface instability.
Las Cruces
---------------------------------------------------------------------
three months ended
September 30
(100 percent) 2010 2009 change
---------------------------------------------------------------------
Tonnes of ore processed (000's) 143 42 +240%
Tonnes of unprocessed ore
(000's) - - -
---------------------------------------------------------------------
Copper grades
(percent) cathode 7.5 6.4 +17%
unprocessed
ore - - -
---------------------------------------------------------------------
Plant recoveries
(percent) 77 82 -6%
---------------------------------------------------------------------
Copper production
(tonnes) cathode 8,400 2,200 +282%
unprocessed
ore - - -
---------------------------------------------------------------------
Cost per tonne of ore processed
(subsequent to July 1, 2010) not not
(C$) $ 215 applicable applicable
---------------------------------------------------------------------
Las Cruces
---------------------------------------------------------------------------
nine months ended revised
September 30 objective
(100 percent) 2010 2009 change 2010
---------------------------------------------------------------------------
Tonnes of ore processed (000's) 331 42 +688% 469
Tonnes of unprocessed ore
(000's) - - - -
---------------------------------------------------------------------------
Copper grades
(percent) cathode 7.2 6.4 +13% 7.2
unprocessed
ore - - - -
---------------------------------------------------------------------------
Plant recoveries
(percent) 81 82 -1% 85
---------------------------------------------------------------------------
Copper production
(tonnes) cathode 19,500 2,200 +786% 28,600
unprocessed
ore - - - -
---------------------------------------------------------------------------
Cost per tonne of ore processed
(subsequent to July 1, 2010) not not
(C$) $ 215 applicable applicable $ 171
---------------------------------------------------------------------------
Progress update
Significant progress has been made to date with the production process. Initially, our efforts were directed at correcting equipment deficiencies and materials selection for the plant. During this '1st Phase' of commissioning, constant breakdowns prevented the ramp up and stable operation of the plant until April of this year. Plant reliability has since greatly improved and no substantial mechanical downtime was experienced in the third quarter. In a '2nd Phase', we addressed bottlenecks in the plant design and our main focus has now shifted to increasing throughput while working to balance plant runtime with the process chemistry. In July and August 2010, throughput rose to 50 percent of design capacity.
In mid-September, we entered the '3rd Phase' dedicated to metallurgical optimization. We made a strategic decision to lower plant throughput in order to implement measures to reach and maintain our design recovery rates (above 90 percent). This was a necessary step to achieve the proper leaching conditions before further increasing the copper feed and potentially sacrificing copper recoveries. In October, we have reached these recovery levels and we plan to continue to raise throughput in step with maintaining recovery levels. We are now focused on two key remaining issues:
-- copper recovery through sulphide leaching is dependent on maintaining an
adequate level of ferric iron in solution. Increasing throughput too
rapidly and without the necessary ferric iron concentrations leads to a
rapid decline in recovery; we will not sacrifice longer term recovery
for short term increases in throughput. Total iron concentrations in the
feed exceed the design specifications and we are working to ensure the
optimum leaching conditions to increase and maintain ferric iron levels.
-- to reach maximum throughput, Las Cruces must also operate the grinding
thickener reliably at the design underflow density. Design work is
underway to modify the thickener in 2011 while optimizing its near term
performance. This modification will triple the available torque in the
thickener and improve the rake geometry to prevent the temporary
blockages that have hampered operating at high solids density.
We produced 8,400 tonnes of copper cathode this quarter. Although this was at the lower end of our expectations, it represents an increase of 27 percent compared to the second quarter of 2010.
Mining in the pit during the quarter went well and we are on track to stockpile 500,000 tonnes of ore for the plant in advance of the rainy season. This should ensure uninterrupted feed if access to the pit is restricted.
2010 outlook
We are continuing to focus on increasing plant capacity and reducing bottlenecks as they occur. We see the following measures as evolutionary as we continue to optimize the plant to reach its full potential:
-- adding a large surge tank between leaching and filtration to further
smooth out the leaching operation toward the end of this year
-- adding a clarifier in December to remove solids from the leach solution
greatly reducing maintenance requirements
-- grinding thickener components will be redesigned and installed by mid-
2011 to improve underflow density to the leaching process.
We are encouraged by our progress in recent months and our detailed understanding of the remaining issues. We will continue with our rigorous implementation of the ramp up plan that maintains high recovery levels and high cathode purity. We require a period of continuous operation to accurately predict the timing of achieving our overall design performance but believe production for 2010 of 28,600 tonnes of copper cathode (20,000 tonnes for our 70 percent share) is achievable.
Las Cruces has mined and stockpiled 100,000 tonnes of 12 percent grade ore to ship directly to smelters. We have applied for but not yet received the necessary permit to move the material offsite. The regulator has taken th