First Quantum Minerals Reports Operational and Financial Results for the Three Months and Year Ended December 31, 2010
VANCOUVER, BRITISH COLUMBIA -- (Marketwire) -- 03/15/11 -- (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 months and year ended December 31, 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.
EARNINGS AND COMPARATIVE EARNINGS
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Three months ended Year ended
December 31 December 31
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(USD millions unless
otherwise noted) 2010 2009 2010 2009
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Earnings attributable to
shareholders of the Company 455.3 227.2 (123.4) 463.4
Add (deduct):
Asset impairments (net of
tax and non controlling
interests) (0.7) - 933.9 -
Impairment Zambian tax
receivable (net of non
controlling interests) 210.7 - 239.2 -
Acquisition transaction
costs - - 18.5 -
Gain on sale of
investments (510.8) (9.6) (510.8) (18.6)
Reversal of inventory
impairment - (15.5) - (25.4)
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Comparative earnings 154.5 202.1 557.4 419.4
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Earnings (loss) per share as
reported $ 5.61 $ 2.91 $ (1.54) $ 6.14
Comparative earnings per
share $ 1.90 $ 2.58 $ 6.94 $ 5.55
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Earnings attributable to shareholders of the Company have been adjusted to remove the effect of unusual items to arrive at comparative earnings. Comparative earnings and comparative earnings per share are not measures recognized under GAAP and do not have a standardized meaning prescribed by GAAP. The Company has disclosed these measures to assist with the understanding of results and to provide further financial information about the financial results to investors.
SUMMARY OPERATING AND FINANCIAL DATA
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Three months ended Year ended
December 31 December 31
----------------------------------------------------------------------------
(USD millions
unless
otherwise
noted) 2010 2009 2010 2009 2008
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Production -
copper
(tonnes) 75,920 98,528 323,017 373,940 334,415
Production -
gold (ounces) 48,564 62,679 191,395 193,288 116,177
Sales - copper
(tonnes) 76,290 98,171 311,560 366,581 334,787
Realized copper
price (per lb) $ 3.51 $ 2.73 $ 2.98 $ 2.16 $ 2.22
Average copper
unit cash cost
of production
(C1)(1) (per
lb) $ 1.06 $ 0.97 $ 1.18 $ 0.96 $ 1.23
Net sales $ 700.8 $ 644.8 $ 2,378.2 $ 1,864.2 $ 1,740.4
Operating
profit $ 381.0 $ 383.3 $ 1,211.9 $ 969.1 $ 743.5
Net earnings
(loss) $ 455.3 $ 227.2 $ (123.4) $ 463.4 $ 45.9
Earnings (loss)
per share $ 5.61 $ 2.91 $ (1.54) $ 6.14 $ 0.67
Cash $ 1,385.2 $ 959.5 $ 1,385.2 $ 959.5 $ 216.5
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Unless otherwise indicated, all comparisons of performance throughout this
report are to the comparative periods for 2009
Q4 HIGHLIGHTS AND SIGNIFICANT ITEMS
-- Record quarterly copper production of 66,232 tonnes at Kansanshi as a
result of ongoing circuit optimizations
-- Investment in Equinox Minerals Limited ('Equinox') shares sold for net
proceeds of $646.5 million resulting in a gain of $510.8 million
-- Advanced the development of Ravensthorpe and Kevitsa and exploration at
Trident
-- 23% decrease in total copper production resulting from the forced
suspension of operations at Frontier and lower ore grades at Guelb
Moghrein
-- 23% decrease in total gold production resulting from lower gold grades
at Guelb Moghrein and Kansanshi
-- Acquisition of Antares Minerals Inc. ('Antares') for $609.0 million.
Antares' principal asset is the 100% owned Haquira project in Peru, one
of the world's major undeveloped copper deposits
-- Continued strong cash and working capital position notwithstanding
significant cash investments in Ravensthorpe, Kevitsa and Trident
RECENT DEVELOPMENTS AND OUTLOOK
During Q4, the Company continued its growth strategy with significant exploration activities and continued optimization of output from operating mines. As recently announced, over the 2011 - 2015 timeframe, the Company expects to invest approximately $2 billion in continuing to advance its growth and diversification strategy. Assuming the growth projects currently underway and those contemplated achieve their targeted completion dates, First Quantum expects to be producing approximately 470,000 tonnes of copper and 55,000 tonnes of nickel annually in 2015. These estimates do not include assumptions for production from the Sentinel and Haquira deposits.
Kansanshi copper and gold operation, Zambia
-- An expansion to the treatment capacity of the oxide circuit is currently
underway with completion scheduled for Q4 2011. The project is expected
to increase annual production capacity to 285,000 tonnes of copper and
build in added operational flexibility.
-- An evaluation of recent near mine drilling has indicated the strong
potential to further increase the mineral resource. Intensive resource
and reserve delineation drilling is now in progress and is planned to
continue through to 2012. Results from this drill program will assist in
the design for the expansion program to increase the operation's annual
production capacity to 400,000 tonnes of copper.
-- An evaluation study is underway on building a copper smelter close to
Kansanshi to process the expected increase in production.
Guelb Moghrein copper and gold operation, Mauritania
-- Ongoing optimization of the autogenous circuit, including mill feed
control systems, pebble crushing, and high pressure grinding rolls to
achieve design throughput was started in Q4 and will continue into 2011.
Gold circuit optimization will continue through oxygen management and a
recently commissioned falcon concentrator to maximize gold recovery.
Kevitsa nickel/copper/PGE project, Finland
-- Construction works at Kevitsa have advanced well during Q4, with
progress being achieved on the tailings dam and water reservoir. Site
earthworks are substantially complete and concrete installation is on
schedule. Key infrastructure has been completed including the access
road and power supply line.
-- Design works have been finalized and installation of mechanical
equipment is in progress. The main mining equipment has been selected
and supply contracts awarded during Q4 to allow deliveries by Q3 2011.
Ravensthorpe nickel project, Australia
-- The refurbishment of the processing facilities at Ravensthorpe has
advanced significantly during Q4 2010. The new crusher installations
have progressed with completion expected in Q1 2011.
-- The re-commissioning of various components of the fixed plant has
commenced with certain sections being handed over to operations in
February 2011.
-- Grade control drilling has continued and detailed scheduling for the re-
commencement of operations has started. The build up of the operational
teams continues and site based activities are allowing for the planning
of detailed re-commissioning work scheduled for Q2 2011.
Trident project, Zambia
-- Significant exploration activities at the Sentinel copper deposit and
Enterprise nickel target continued during Q4. A further internal update
of the Sentinel geological model has identified a significant continuous
zone of mineralization. An economic assessment including metallurgical
test work, engineering and geotechnical studies is underway.
Environmental studies were completed and the Environmental Impact
Assessment ('EIA') was submitted in January 2011.
-- Subject to results of the on-going resource and mine studies, securing
all relevant permits and approval by the Company's Board of Directors,
the Company expects that the initial design and construction phases
could commence during 2011 with commercial production from Sentinel in
early 2014.
Haquira project, Peru
-- In December 2010, the Company acquired all of the issued share capital
of Antares Minerals Inc. ('Antares') for $609.0 million. Antares'
principal asset is the 100% owned Haquira project located in southern
Peru. Haquira is one of the world's major undeveloped copper deposits
with excellent potential for the development of a large-scale copper
mine. Haquira currently has reported measured and indicated resources of
3.7 million tonnes of contained copper equivalent and inferred resources
of 2.4 million tonnes of contained copper equivalent.
-- The Company commenced integration of the Haquira exploration project in
Peru after the acquisition was completed. Drilling with four core rigs
commenced in February 2011 and will be expanded later in the year. The
initial focus will be on growing the secondary copper resources which
are currently open in several areas.
Production Guidance
-- The Company's 2011 production outlook is 300,000 tonnes of copper and
200,000 ounces of gold.
-- Estimated average C1 cost for 2011 is $1.10 per pound of copper.
-- The Company also expects nickel production to commence with the
commissioning of the Ravensthorpe project in the second half of 2011.
REVENUES
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NET SALES
(after provisional pricing Three months ended Year ended
and realization charges) December 31 December 31
----------------------------------------------------------------------------
(USD millions unless
otherwise noted) 2010 2009 2010 2009
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Kansanshi - copper 462.9 380.3 1,542.5 1,151.1
- gold 33.1 29.1 115.5 74.4
Guelb Moghrein - copper 74.7 45.4 186.2 115.7
- gold 21.3 24.2 79.1 81.6
Frontier - copper 47.4 165.8 265.3 439.2
Bwana/Lonshi - copper 3.5 - 51.3 0.4
- acid - - - 1.8
Corporate 57.9 - 138.3 -
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Net sales 700.8 644.8 2,378.2 1,864.2
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Copper provisional pricing
adjustment included above 4.9 5.5 (4.8) 40.0
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COPPER SELLING PRICE USD/lb USD/lb USD/lb USD/lb
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Current period sales 3.93 3.00 3.35 2.35
Sales contract derivatives (0.20) - (0.09) -
Prior period provisional
pricing adjustment 0.03 0.02 (0.01) 0.05
Treatment charges/refining
charges ('TC/RC') and
freight parity charges (0.25) (0.29) (0.27) (0.24)
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Realized copper price 3.51 2.73 2.98 2.16
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The Q4 2010 average realized copper price was significantly higher than Q4 2009 due to an increase in the average LME copper price. The Company has a policy seeking to minimize the impact of copper price fluctuations on revenues by hedging quotational period price movements using derivative futures contracts. In Q4, the realized copper price was impacted by derivative adjustments of $34.4 million which partially offset the increase in LME copper price during the period.
Copper sales volumes for Q4 decreased 22% to 76,290 tonnes due to the forced suspension of operations at Frontier at the end of August 2010. Sales volumes from Kansanshi were lower than production reflecting the timing of recognition of sales through the Company's metal marketing division. Sales volumes from Guelb Moghrein, Frontier and Bwana exceeded production due to the sale of copper held in inventory as at September 30, 2010.
The Q4 positive provisional pricing adjustment resulted from the finalization of contracts totalling 16,024 tonnes of copper at an average price of $3.79 per pound ($8,355 per tonne). These contracts were provisionally priced at $3.65 per pound ($8,054 per tonne) at September 30, 2010 and were finalized during October and November 2010.
At December 31, 2010, 9,284 tonnes of copper provisionally priced at $4.40 per pound ($9,693 per tonne) remain subject to final pricing in Q1 2011. Refer to the 'Outlook' section for further discussion.
Gold revenues increased by 2% over Q4 2009 to $54.4 million. The increase resulted from a higher realized gold price which offset lower sales volumes in Q4 2010. Sales volumes were impacted by lower production at Kansanshi and Guelb Moghrein in Q4 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 manage the Company's exposure to provisional pricing. Prior to the establishment of the division, revenues were recognized by operations when title transferred to third party buyers, usually at the mine gate. Copper and gold sales managed by the metal marketing division are now recognized when title has transferred to the final third party offtaker resulting in reduced sales volumes and higher inventory for the year. The impact on 2010 sales volumes is a reduction of total copper sold by 9,197 tonnes. These tonnes remained in the finished copper inventory balance of the metal marketing division at December 31, 2010.
In addition to marketing the Company's production, the metal marketing division purchases and sells metal from external parties. During Q4, the division had revenues of $57.9 million and finished goods inventory of $26.0 million related to external purchases and sales.
SEGMENTED OPERATING RESULTS
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Kansanshi Copper and Three months ended Year ended
Gold Operation December 31 December 31
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2010 2009 2010 2009
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Production (tonnes)
Copper cathode 24,921 21,535 86,682 92,044
Copper in
concentrate 14,925 16,017 46,941 65,920
Copper cathode
tolled 26,386 24,901 97,501 87,015
Total copper
production (tonnes) 66,232 62,453 231,124 244,979
Copper sales
(tonnes) 58,704 62,417 225,189 239,578
Gold production
(ounces) 28,982 32,476 109,629 99,936
Sulphide ore tonnes
milled (000's) 2,699 2,777 10,382 11,994
Sulphide ore grade
processed (%) 0.8 0.8 0.8 1.0
Sulphide copper
recovery (%) 93 93 93 93
Mixed ore tonnes
milled (000's) 1,636 1,566 5,462 3,588
Mixed ore grade
processed (%) 1.3 1.4 1.3 1.4
Mixed copper
recovery (%) 70 64 67 65
Oxide ore tonnes
milled (000's) 1,521 1,478 5,674 5,661
Oxide ore grade
processed (%) 2.4 2.2 2.2 2.2
Oxide copper
recovery (%) 84 83 86 83
Cash costs (C1) (per
lb)(2) $ 1.07 $ 0.96 $ 1.10 $ 0.99
Total costs (C3)
(per lb)(2) $ 1.29 $ 1.28 $ 1.31 $ 1.27
Gross operating
profit (USD M) $ 326.2 $ 231.2 $ 997.8 $ 610.4
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Kansanshi's Q4 copper production achieved a record 66,232 tonnes, surpassing the previous quarterly record of 62,453 tonnes from Q4 2009. The increased production resulted from strong throughput and recoveries across the circuits. Mine production also improved significantly from the prior year benefitting from new equipment commissioned in Q2 and Q3 2010.
Q4 sulphide circuit production was consistent with the comparative quarter as only minor variances were experienced in throughput, grade and recovery. The sulphide circuit improvements of 2010 are ongoing and some circuit downtime was experienced due to crusher optimization work conducted early in Q4 2010.
The mixed ore circuit achieved record quarterly production in Q4 2010 due to improved throughput and recovery of higher grade sulphide and oxide ore. Throughput benefitted from exceptional milling performance and minimal circuit downtime in Q4. The average recovery of 70% benefitted from ore mined from the northwest pit, which contains an optimal blend of sulphide and oxide ore for processing in the mixed ore circuit.
Q4 oxide circuit production also achieved a quarterly record as a result of improved circuit throughput and high total copper recovery. The benefits from the circuit improvements conducted in 2010, aimed at achieving higher recoveries were seen in Q4 2010.
Gold circuit improvements have significantly increased recovery of gold contained in ore feed, however the gold grade was 35% lower in Q4 2010 resulting in lower total gold production compared to Q4 2009.
Kansanshi's cash unit cost of production (C1) increased from Q4 2009 due to higher ore costs and higher processing costs. This was partially offset by an increased gold credit. The cost of ore processed was 11% higher than Q4 2009, despite a decrease in total mining costs per tonne of mined material, due to the impact of higher waste stripping on the cost per ore tonne mined. Processing costs were higher as a result of increased consumable costs and maintenance expenses incurred on the sulphide circuit. The increased gold credit resulted from a higher realized gold price in Q4 2010.
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Guelb Moghrein Copper and Gold Three months ended Year ended
Operation December 31 December 31
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2010 2009 2010 2009
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Production - copper in
concentrate (tonnes) 9,687 11,816 36,969 36,608
Copper sales (tonnes) 10,700 9,330 32,932 35,436
Gold production (ounces) 19,582 30,203 81,766 93,352
Sulphide ore tonnes milled
(000's) 748 769 2,796 2,287
Sulphide ore grade processed (%) 1.4 1.7 1.5 1.8
Sulphide copper recovery (%) 91 92 91 89
Cash costs (C1) (USD per lb)(2) $ 1.03 $ 0.63 $ 0.90 $ 0.44
Total costs (C3) (USD per lb)(2) $ 1.79 $ 1.02 $ 1.65 $ 0.83
Gross operating profit (USD M) $ 40.9 $ 41.0 $ 118.3 $ 94.6
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Guelb Moghrein's Q4 copper production was lower than Q4 2009 as a result of lower grade ore sources available. Tonnes milled were consistent with Q4 2009, however, throughput was negatively affected by downtime of the crusher and mill circuit for maintenance and circuit optimization work in Q4 2010.
Gold production was 35% lower than Q4 2009 due to lower gold grade processed, offset partially by increased recovery and throughput. Gold grades contained in ore mined are correlated with the decrease in copper ore grades available in Q4 2010.
Guelb Moghrein's average cash cost of production (C1) was higher compared to Q4 2009 due to increased ore costs and processing costs incurred on lower grade ore and circuit downtime. Fuel prices also increased in Q4 2010 impacting mine operations as well as power generation costs. The gold credit benefitted from higher realized gold price Q4 2010.
Guelb Moghrein's Q4 2010 operating profit was consistent with the comparative period as an increased copper price offset higher operating costs and depreciation expense incurred on plant expansions from 2010.
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Three months ended Year ended
Frontier Copper Operation December 31 December 31
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2010 2009 2010 2009
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Production - copper in
concentrate (tonnes) - 24,259 47,508 92,353
Copper sales (tonnes) 6,381 26,424 46,024 91,567
Sulphide ore tonnes milled
(000's) - 2,280 5,425 8,068
Sulphide ore grade processed (%) - 1.2 1.0 1.2
Sulphide copper recovery (%) - 91 90 92
Cash costs (C1) (USD per lb)(2) - $ 1.32 $ 1.77 $ 1.13
Total costs (C3) (USD per lb)(2) - $ 1.52 $ 2.10 $ 1.30
Gross operating profit (USD M) $ 14.7 $ 104.1 $ 101.0 $ 270.0
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There was no copper production in Q4 at Frontier following the forced shut down of operations on August 27, 2010 by the Republique Democratique du Congo ('RDC') Government. Q4 copper sales and operating profit resulted from the sale of inventory held in the Company's metal marketing division at September 30, 2010. At present, the Company does not have physical access to the Frontier copper operation. See 'Other items' for further discussion.
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Three months ended Year ended
Bwana/Lonshi Copper Operation December 31 December 31
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2010 2009 2010 2009
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Production - copper cathode
(tonnes) - - 7,415 -
Copper sales (tonnes) 505 - 7,415 -
Oxide ore tonnes milled (000's) - - 327 -
Oxide ore grade processed (%) - - 2.5 -
Oxide copper recovery (%) - - 91 -
Cash costs (C1) (USD per lb)(2) - - $ 1.28 -
Total costs (C3) (USD per lb)(2) - - $ 1.43 -
Gross operating profit (loss)
(USD M) $ 1.2 $ 7.0 $ 2.9 $ (5.9)
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The Bwana Mkubwa copper SX/EW plant was placed on care and maintenance in Q3 2010. During 2011 some of the plant and equipment will be relocated to Kansanshi as part of the oxide circuit expansion project currently underway. Bwana Mkubwa sold 505 tonnes of copper cathode in Q4 from the inventory held at September 30, 2010.
COSTS AND EXPENSES
----------------------------------------------------------------------------
Three months ended Year ended
December 31 December 31
----------------------------------------------------------------------------
(USD millions unless otherwise
noted) 2010 2009 2010 2009
----------------------------------------------------------------------------
Gross operating profit 381.0 383.3 1,211.9 969.1
General and administrative (18.4) (5.3) (44.6) (25.3)
Acquisition transaction costs - - (18.5) -
Other income (4.5) (4.3) 5.1 7.6
Gain on sale of investments 510.8 9.6 510.8 18.6
Derivative instrument
adjustments (1.0) 3.6 1.1 (135.9)
Exploration (15.6) (10.3) (47.5) (25.9)
Assets impaired 0.7 - (1,119.3) -
Interest (14.8) (18.3) (58.8) (60.4)
Income taxes (390.3) (88.6) (494.6) (200.3)
Non-controlling interests 7.4 (42.5) (69.0) (84.1)
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Net earnings (loss) attributable
to shareholders of the Company 455.3 227.2 (123.4) 463.4
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Earnings (loss) per share
- basic (USD per share) 5.61 2.91 (1.54) 6.14
- diluted (USD per share)(3) 5.14 2.67 (1.54) 5.92
Weighted average shares
outstanding
- basic (number of shares -
millions) 81.2 78.2 80.3 75.5
- diluted (number of shares -
millions)(3) 90.1 87.9 80.3 81.0
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General and administrative costs increased in Q4 2010 due to elevated legal costs related to the RDC impairments. Additionally, increased support of new global projects and acquisitions impacted Q4 2010 costs.
The derivative instrument adjustments in Q4 2010 relate to derivatives entered into to manage the Company's exposure to interest rate and currency risk. In 2010, the Company also entered into derivatives to manage the risk of copper price fluctuations on individual sales contracts over the specific quotational periods for copper sales. These gains and losses are recognized with the revenue to which the derivatives relate in accordance with the Company's accounting policy. In 2009, derivative instrument losses were incurred on copper derivative positions entered into to protect against the Company's general commodity price risk in the uncertain economic outlook of early 2009.
In Q4 2010, the Company sold its investment in Equinox for net proceeds of $646.5 million. The resulting gain on sale of investments was $510.8 million which was recorded in other income.
Exploration expenses in Q4 include $12.1 million incurred at the Trident project representing a significant increase in exploration activity. See 'Development activities' for further discussion.
Interest expense decreased from Q4 2009 due to a decrease in LIBOR and lower outstanding debt balances.
Q4 income taxes include a $263.4 million impairment of the Zambian taxes receivable. See 'other items' for further discussion on Zambian taxes. Normalized income taxes increased from Q4 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 decreased in Q4 2010 as 20% of the Zambian tax impairment was attributable to non-controlling interests, totalling $52.7 million. 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 Year ended
December 31 December 31
----------------------------------------------------------------------------
(USD millions unless
otherwise noted) 2010 2009 2010 2009 2008
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Cash flows from
operating activities
- before changes in
working capital 326.6 269.9 899.8 678.1 636.6
- after changes in
working capital 290.3 270.1 761.3 562.6 765.4
Cash flows from
financing activities (88.9) (47.5) (110.0) 547.0 (24.2)
Cash flows from
investing activities 510.7 (111.1) (225.6) (366.6) (765.0)
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Net cash flows 712.1 111.5 425.7 743.0 (23.8)
Cash balance 1,344.9 919.2 1,344.9 919.2 176.2
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Total assets 5,258.6 4,564.6 5,258.6 4,564.6 3,004.5
Total long term
liabilities 2,129.5 1,687.7 2,129.5 1,687.7 1,290.6
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Available credit
facilities
- Corporate
revolving credit
and term loan
facility 50.0 50.0 50.0 50.0 -
- Corporate
revolving loan and
short-term
facility - 250.0 - 250.0 200.0
- Short-term
borrowings 54.3 - 54.3 - -
Cash flows from
operating activities
per share (basic)
- before working
capital (USD per
share) $ 4.02 $ 3.45 $ 11.21 $ 8.98 $ 9.33
- after working
capital (USD per
share) $ 3.58 $ 3.45 $ 9.49 $ 7.45 $ 11.23
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Operating cash flows before changes in working capital were 21% higher than Q4 2009 due to significantly higher copper prices in the current period. This was offset partially by an increase in the average cash cost of production and the loss of Frontier's contribution in Q4 2010. Working capital movements during Q4 2010 include an increase in accounts receivable of $91.9 million as a result of a significant increase in copper price and an increase in accounts payable due to increasing project development activity at Ravensthorpe and Kevitsa.
Cash outflows from financing activities resulted in a reduction in short-term debt of $41.9 million which relates to the timing of financing by the metal marketing division in Q4 2010. Financing activities also include an increase in restricted cash of $40.3 million pursuant to the requirements of the Company's corporate revolving and term loan facility.
Cash flows from investing activities include $646.5 million in net proceeds on the sale of Equinox shares in Q4 2010. The Company invested $44.2 million on the plant at Ravensthorpe and $28.9 million at Kevitsa as development was advanced at both projects. Kansanshi invested $49.3 million on additional mining equipment and the secondary crusher during the period.
The Company undertook significant investing activities in early 2010 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,
-- the acquisition of Antares for $4.6 million in net cash and $603.9
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 significant cash reserves, additional sources of funding available include $50.0 million under the corporate revolving credit and term loan facility and $54.3 million under short-term borrowings. Subsequent to year end, the Company signed a $250.0 million project loan secured over the assets and offtake agreements of the Kevitsa project.
As at December 31, 2010, the Company had the following contractual obligations outstanding:
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Less
than 1 1 - 2 2 - 3 3 - 4 4 - 5
(USD millions) Total year years years years years Thereafter
----------------------------------------------------------------------------
Term debt 161.0 140.8 4.2 4.0 4.0 4.0 4.0
Convertible bonds 500.0 - - - 500.0 - -
Accounts payable 776.2 776.2 - - - - -
Deferred payments 7.7 0.4 0.3 0.3 - - 6.7
Finance leases 30.5 1.8 2.0 2.1 2.2 2.3 20.1
Commitments 279.7 279.7 - - - - -
Asset retirement
obligations 55.9 1.3 1.3 1.3 1.3 0.5 50.2
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INVENTORY
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Copper (tonnes) Gold in dore (ounces)
----------------------------------------------------------------------------
Kansanshi 28,023 3,813
Guelb Moghrein 7,079 2,037
Frontier 1,651 -
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Total 36,753 5,850
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The Company's finished copper inventory decreased by 289 tonnes in Q4 to 36,753 tonnes as at December 31, 2010 with an average cost of approximately $1.33 per pound ($2,936 per tonne). Frontier's inventory balance represents finished copper held in transit to final offtakers through the metal marketing division. Approximately 16,900 tonnes of Kansanshi copper in concentrate was in the process of being treated or stockpiled for treatment at the Mufulira smelter as at December 31, 2010. Included in the total finished goods inventory balance, but not in the table above, is 2,721 tonnes of third party material purchased for resale by the metal marketing division.
Contained gold in dore inventory increased to 5,851 ounces due to timing of shipments in Q4. Gold contained in copper in concentrate is not included in the inventory balances noted above.
COMPREHENSIVE INCOME
During Q4 2010, the Company sold its investment in Equinox, resulting in a gain of $510.8 million and a corresponding reclassification from other comprehensive income. A portion of the Equinox gain was recognized in other comprehensive income during 2009 and accordingly the full reclassification amount in Q4 2010 has resulted in a comprehensive loss of $350.6 million for the year ended December 31, 2010.
EQUITY
The Company issued 5,481,963 shares pursuant to the acquisition of Antares in Q4 2010. At the date of this report the Company has 86,179,019 shares outstanding.
DEVELOPMENT ACTIVITIES
During Q4, the Company continued its growth strategy with significant exploration activities and continued optimization of output from operating mines. Over the 2011 - 2015 timeframe, the Company expects to invest approximately $2 billion in continuing to advance its growth and diversification strategy. Assuming the growth projects currently underway and those contemplated achieve their targeted completion dates, First Quantum expects to be producing approximately 470,000 tonnes of copper and 55,000 tonnes of nickel annually in 2015. These estimates do not include assumptions for production from the Sentinel and Haquira deposits.
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 550 kilometres 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.
Multi-discipline engineering, design and procurement activities for the Ravensthorpe process plant are now nearing completion. Construction work is approaching peak levels for crushing, conveying, storage, reclaim and rejects plant areas. The environmental and project management approval processes continue to be managed with one outstanding approval for the sands impoundment facility expected in March 2011.
Re-commissioning of the existing plant continues with the first areas handed over to operations in February 2011. Major mechanical equipment deliveries have proceeded well, and more minor equipment deliveries are being prioritized to maintain target completion dates. Upgrade and modification work scheduling indicates that process plant areas will commence systematic pre-commissioning during Q2 2011, and this will be followed by approximately six months of plant commissioning and ramp-up.
The operations recruitment program is continuing and is on schedule. Ravensthorpe expects to produce an average of 39,000 tonnes of nickel annually for the first five years after recommencement of operations. The expected average annual production is 28,000 tonnes over the total life of mine of 32 years.
Kevitsa nickel/copper/PGE project, Finland
Detailed design activities are close to complete for specific engineering disciplines and overall the detailed design for the project is at 70% completion. Equipment deliveries to site have commenced and will increase during the first half of 2011.
There are approximately 300 construction workers on site, and this will gradually increase to a planned peak in excess of 400. Construction activities are focusing on earthworks, concrete and process plant buildings.
The process plant earthworks are largely complete. Approximately 50% of the project concrete has been poured and the milling and flotation buildings are in the process of being erected. Key infrastructure has been completed including the access road and power supply line. Mechanical erection commenced in Q1 2011.
Kevitsa has an initial production target of 10,000 tonnes of nickel and 20,000 tonnes of copper. Commercial production is targeted for mid 2012 with mine life estimated at more than twenty years. An expansion is proposed for 2014 subject to relevant approvals.
Trident project, Zambia
In January 2010, the Company acquired all of the issued share capital of Kiwara PLC ('Kiwara') which owned 85% of Kalumbila Minerals Limited ('Kalumbila') and 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, 1% in May 2010, and the remaining 4% in November 2010 bringing its ownership interest to 100%.
The Trident project includes the Sentinel copper deposit and the Enterprise and Intrepid targets.
Environmental applications have been completed and submitted to the Environmental Council of Zambia and preliminary investigations for the infrastructure requirements at Trident were started.
Although a NI-43-101 compliant resource for the Sentinel deposit is not expected until mid-2011, based on drilling and other work to date, the Company's internal study has been updated since first reported in October 2010. The internal study now assumes a resource of at least 700 million tonnes, head grade in the range of 0.65% to 0.80% copper and annual throughput rate of 40 million tonnes of ore for annual production of approximately 250,000 tonnes of copper. Both mining and processing conditions continue to appear to be relatively straightforward supporting the assumption that the unit cash cost of production is likely to be in the range of the Kansanshi mine. Results from the ongoing drill program may lead to an expansion of the resource base and allow the possibility of further production expansion.
Subject to results of the on-going resource and mine studies, securing all relevant permits and approval by the Company's Board of Directors, the Company expects that the initial design and construction phases could commence during 2011with commercial production in early 2014. See 'Exploration' for further discussion on the Company's exploration program at the Trident project.
It should be noted that the potential quantities and grades and other technical parameters presented in this document in relation to the Sentinel deposit are conceptual in nature only. There has been insufficient exploration to define a NI-43-101 compliant resource and it is uncertain whether further exploration will result in the Sentinel deposit being delineated as a mineral resource and whether the Sentinel deposit will be developed into a mine.
Antares Minerals Inc.
In December 2010, the Company acquired all of the issued share capital of Antares for $609.0 million. Antares' principal asset is the 100% owned Haquira project located in southern Peru adjacent to Xstrata Copper's Las Bambas copper-gold project. It is one of the world's major undeveloped copper deposits with excellent potential for the development of a large-scale copper mine. Haquira currently has reported measured and indicated resources of 3.7 million tonnes of contained copper equivalent and inferred resources of 2.4 million tonnes of contained copper equivalent. See 'Exploration' for further discussion on the Company's exploration program at the Haquira project.
Kansanshi copper/gold operation, Zambia
At the Kansanshi operation, an expansion project is underway to expand annual copper production capacity from the current 250,000 tonnes to 400,000 tonnes of copper in 2015. The project will be implemented in two phases. Phase 1, which is currently underway, is expected to increase annual production capacity to approximately 285,000 tonnes. It is focused on expanding the treatment capacity of the oxide circuit by about 20% to 8.5 million tonnes and building in flexibility to allow for the mixed and sulphide circuits to be switched as needed to suit mining activity. The expansion will include the use of relocated equipment from the recently closed Bwana Mkubwa copper SX/EW plant as well as new installations. This phase of the expansion project is scheduled for Q4 2011.
Construction of Phase 2 is expected to start in the second half of 2012 with commissioning targeted for the first half of 2014. This phase of the expansion will focus on the construction of a new concentrator with a planned annual throughput of 25 million tonnes of ore. As a result, Kansanshi's total annual production capacity is expected to increase to approximately 400,000 tonnes of copper. The capital budget for Phase 2 is expected to be in the range of $350 million.
Potential copper smelter, Zambia
Currently, Kansanshi's concentrate production is treated by smelters in Zambia, but from time to time, due to limited capacity, some copper concentrate is sold to third parties for export sale. Due to the substantial increase in production expected from the Kansanshi mine and together with anticipated new production in Zambia including from the Sentinel deposit, an evaluation is currently underway to determine the economics and options for building and operating a copper smelter nearby Kansanshi. The evaluation is expected to be completed in the second half of 2011.
Guelb Moghrein copper/gold operation, Mauritania
Ongoing optimization of the autogenous circuit, including mill feed control systems, pebble crushing, and high pressure grinding rolls to achieve design throughput will continue in 2011. Gold circuit optimization will continue with oxygen management and a recently commissioned falcon concentrator to maximize gold recovery.
Exploration
Exploration activities continued at a high rate during Q4 2010 with nearly 30 drill rigs active on the Company's projects despite seasonal rains in Zambia.
Sentinel
Up to 16 core drills are active on the Trident project. Over 100,000 metres of drilling has been completed in more than 300 holes on Sentinel since work commenced in April 2010. A pattern of 200-metre spaced lines has been concluded over approximately eight kilometres of strike and preliminary results suggest good continuity of mineralization. Reconnaissance drill lines further to the west have defined a thick sequence of mineralization although this appears to diminish as the target horizon extends southwards. Current emphasis has moved to infill drilling over the core of the Sentinel deposit where access roads have been constructed to allow operations to continue through the seasonal rains. At present drill rates of over 5,000 metres per week, it is planned to complete the resource drilling by mid 2011. Up to five drills are active on the Enterprise nickel target approximately 12 kilometres to the northwest of Sentinel. Over 20 core holes have now been completed on a series of sections over approximately 1,000 metres of strike. Preliminary results have returned some strong nickel intercepts however it is clear that mineralization is structurally controlled and continuity between sections is yet to be established.
Kansanshi
A major program of resource development and exploration drilling is planned at Kansanshi in 2011 and 2012. The program will include 140,000 metres of core drilling focused on extensions of the current Kansanshi resource around the Main Pit and Northwest Pit as well as resource definition on the Southeast Dome prospect and a series of systematic regional drill traverses over the entire Kansanshi Dome (approximately 10 x 6 kilometres). Drill tenders have been received to expand the current Kansanshi drilling capability from six to approximately 14 core rigs. An updated reserve and resources estimate incorporating results from the program is expected to be released in 2012.
Kevitsa
At Kevitsa, resource estimation and reserve optimization was completed incorporating all 2010 drilling results and has indicated a significant expansion of the resource compared to the prior model in 2009. Recent near mine drilling has included a deep hole to test electro-magnetic targets near the base of the Kevitsa intrusion and shallower holes on the eastern side of the intrusion where high grade chalcopyrite stringers have been encountered on the contact. The regional drilling program in Finland moved into a target testing phase with eight prospects in the Kevitsa North project tested by shallow base-of-till drilling. Initial geochemistry results are encouraging and two targets are currently subject to follow up core drilling.
Guelb Moghrein
Up to three exploration drill rigs have been active in Mauritania testing near mine and regional targets. Several extensive but low grade intercepts have been recorded in core holes near Guelb Moghrein and these appear to represent an anomalous halo to the main mineral system. Drilling has been in progress testing large geochemical targets recently defined through regional broad scale soil sampling.
Haquira
The Company commenced integration of the Haquira exploration project in Peru after the acquisition was completed in December 2010. Drilling with four core rigs commenced in February and will be expanded later in 2011. The initial focus will be on expanding the secondary copper resources which are currently open in several areas as well as modeling and testing extensions to the Haquira East and Haquira West porphyry hosted sulphide mineralization. A budget of over $30 million has been allocated to the drill programs. An updated reserves and resources estimate and the environmental impact assessment are expected in mid-2012 when detailed project design will commence.
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.
OTHER ITEMS
RDC - Kolwezi dispute
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, in partnership with Industrial Development Corporation of South Africa ('IDC') and the International Finance Corporation ('IFC'). At the conclusion of the 'Revisitation', 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. The letter notes the 'impossibility to pursue the partnership' and directed that the exploitation permit held by Kingamyambo Musonoi Tailings SARL ('KMT'), the Company formed by the parties to pursue the KMT project, be returned to La Generale des carrieres et des mines ('Gecamines') pursuant to the Contract of Association. Subsequently, on September 15, 2009 CMD received an order by the General Prosecutor of Katanga to seal KMT's facilities. In January 2010, Gecamines terminated the Contract of Association.
On February 1, 2010, CMD, the IFC and the IDC commenced international arbitration at the International Chamber of Commerce (ICC) in Paris. A Tribunal has been appointed and a final decision is expected in the latter part of 2012.
On February 22, 2010, without any prior notice KMT and CMD received a Notice of Hearing Date from Gecamines and the RDC mining registry ('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 the 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 judgment of the Appeal Court of Kinshasa rendered on July 27, 2010. The judgment 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, and Gecamines' termination of the Contract of Association, and that CMD and the KMT project's other contributing partners, the IFC and 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 there to be a complete impairment of the Kolwezi assets. The historical carrying value of the Kolwezi project's net assets was $791.2 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 concurrent with the asset impairment.
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 could take years.
Sodimico
The state-owned mining company, Societe de Developpement Industriel et Minier du Congo ('Sodimico') 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 the Company 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 held by Comisa and a further $40.0 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'. Comisa filed an appeal of the judgment, which is set to be heard on July 15, 2011. The Company believes that Sodimico cannot enforce payment of the judgment amount against Comisa, and therefore no liability has been recorded as at December 31, 2010.
RDC - Frontier and Lonshi
On March 8, 2010, the Company, two of its RDC subsidiaries Comisa and Frontier SPRL ('Frontier') 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 restoring certain mineral rights to Sodimico. These rights conflicted with mineral rights held by Frontier and Comisa. On August 24, 2010 Comisa received notification from CAMI of the withdrawal of its mining and, the majority of, its exploration titles based on instructions from the Minister of Mines. On August 10, 2010 Frontier received notification from CAMI of the withdrawal of its mining and exploration titles based on instructions from the Minister of Mines.
On August 27, 2010, the Company announced the suspension of operations at the Frontier mine. This suspension followed the withdrawal of Frontier's exploitation permit by CAMI and a letter received from Sodimico, which has purportedly been granted Frontier's titles, demanding that Frontier stop all mining and exports and leave the mining title areas.
As a result of these actions the Company has fully impaired the RDC assets of Frontier including product and supplies inventories, mineral properties, plant and equipment. The carrying value of these assets, and associated liabilities was $254.0 million in property, plant and equipment, $52.1 million in inventories and $0.6 million of liabilities net of other assets. The impairment was recorded net of current and future tax recoveries of $62.9 million, severance and site closure costs of $7.3 million have been expensed following closure and the non controlling interest liability was reduced by $13.1 million as a result of the impairment.
Frontier has declared force majeure under the RDC mining code; however, due to the circumstances surrounding the curtailment of operations, Frontier may be exposed to ongoing claims by the RDC government. The amount and likelihood of any such claims is not determinable. The Company's exposure to any such claims is limited to its assets in the RDC.
On October 1, 2011, Frontier commenced international arbitration under the facilities of the International Centre for Settlement of Investment Disputes ('ICSID') in Washington, United States of America. The timing of any decision and award in the arbitration proceedings is not known at this time, but could take years.
Zambian taxation
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 windfall tax on copper sales revenue; a 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.
Under the President elected in October 2008, the GRZ reviewed these tax changes and proposed that the windfall tax be removed, the deductibility of capital allowances be reinstated 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 were not retroactive to April 1, 2008. On May 18, 2009 the GRZ issued a temporary exemption of the concentrate export levy of 15% until December 31, 2009 in order to allow the export of copper in concentrate that cannot be treated in Zambia due to the lack of smelter capacity within the country at that time.
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. Based on legal advice on its rights under the Development agreement, the Company recorded a receivable from the GRZ for an amount it regarded as reasonable expected ultimate repayment of taxes in excess of that permitted under the Development Agreements. However, in November 2010, the GRZ required payment of all back taxes outstanding pursuant to the 2008 and 2009 legislation. The Company's Zambian subsidiaries have agreed to pay the back taxes by June 2011 as required, without prejudice. Given the changes in circumstances, the receivable has been assessed for impairment under the accounting standards. As at December 31, 2010, the Company recorded an impairment of the entire receivable amount of $299.0 million, of which $59.8 million was attributable to non-controlling interest. The impairment charge has been recorded as a component of income tax expense.
Until resolved differently with the GRZ, the Company will account for taxes in excess of the Development Agreement as a tax expense with no associated receivable.
OPERATIONAL OUTLOOK
The Company's 2011 production outlook is 300,000 tonnes of copper and 200,000 ounces of gold.
The estimated average C1 cost for 2011 is $1.10 per pound of copper.
The Company also expects nickel production to commence with the commissioning of the Ravensthorpe project in the second half of 2011.
Kansanshi
The expansion project currently underway is expected to increase annual production capacity to approximately 285,000 tonnes of copper. It is focused on expanding the treatment capacity of the oxide circuit by about 20% to 8.5 million tonnes and building in flexibility to allow for the mixed and sulphide circuits to be switched as needed to suit mining activity. The expansion will include the use of relocated equipment from the recently closed Bwana Mkubwa copper SX/EW plant as well as new installations. This phase of t