Quadra FNX Mining Ltd. Announces 2010 Second Quarter Financial Results
VANCOUVER, BRITISH COLUMBIA -- (Marketwire) -- 08/12/10 -- (All figures, except per share amounts, are in $ US thousands unless otherwise stated or unless context requires otherwise)
Quadra FNX Mining Ltd. (the 'Company' or 'Quadra FNX') (TSX: QUX) announces net earnings of $21.7 million or $0.16 per share (basic) for the three months ended June 30, 2010 compared to a loss of $7.3 million or ($0.08) per share (basic) for the three months ended June 30, 2009. Earnings in the quarter benefited from a higher average copper price in the current year, and the increased earnings contributed from the Carlota and Franke Mines, as well as the earnings from the Sudbury operations since May 21, 2010 (the date after the closing of the merger with FNX Mining Ltd.). Second quarter adjusted earnings, which exclude the impact of derivative gains, gains and losses on marketable securities and investments, merger costs and related tax adjustments, were $20.6 million or $0.15 per share (basic). Operating cash flow before working capital of $43.4 million or $0.31 per share in the second quarter 2010 compares to $24.4 million or $0.26 per share in the same period of 2009. During the second quarter 2010, Quadra recorded revenues of $169.1 million from the sale of 46.5 million pounds of copper and 28,133 ounces of total precious metals (TPM).
Revenues, cashflows and earnings from the former FNX operations are reported only for the period commencing May 21, 2010 (the date after the closing of the merger with FNX Mining Ltd.).
Three months Six months
ended ended
June June June June
Operating and Financial Summary 30, 30, 30, 30,
US $ 000s ( except per share data and
production data) 2010 2009 2010 2009
----------------------------------------------------------------------------
Revenues 169,144 100,053 366,636 211,784
Copper produced (million lbs) (4) 54.8 37.5 110.0 90.6
Copper sales (million lbs) (5) 46.5 31.7 94.1 72.1
TPM produced (ounces) (3), (4) 36,870 34,563 77,558 76,627
TPM sales (ounces) (3), (5) 28,133 23,152 52,061 53,410
Adjusted earnings (1) 20,641 10,779 78,046 44,569
Adjusted earnings per share (basic) $ 0.15 $ 0.11 $ 0.65 $ 0.55
Earnings for the period (5) 21,754 (7,328) 77,401 19,327
Basic earnings per share $ 0.16 $ (0.08) $ 0.65 $ 0.24
Diluted earnings per share $ 0.15 $ (0.08) $ 0.64 $ 0.24
Cash flow from operating activities
before working capital (2) 43,403 24,426 117,215 64,946
Cash flow from operating activities
before working capital - per share $ 0.31 $ 0.26 $ 0.98 $ 0.81
Net changes in non-cash working
capital (17,261) (23,838) (33,415) (51,033)
Cash flow from operating activities 26,142 588 83,800 13,913
(1) Adjusted earnings is a non-GAAP financial measure and consists of net
earnings with adjustments made to exclude derivative losses, gains on
marketable securities and the tax impact of these items. See
reconciliation of adjusted earnings in section below 'Non-GAAP Financial
Measures'.
(2) Cash flow from operations before working capital is a non-GAAP financial
measure and consists of cash provided from operating activities less net
changes in non-cash working capital.
(3) Total precious metal, including gold, platinum and palladium.
(4) Metal production from the former FNX operations includes pre-production
ore from the Morrison Deposit and is reported for all historical periods,
including the period prior to the merger of Quadra and FNX.
(5) Revenues, cashflows and earnings from the former FNX operations are
reported only for the period commencing May 21, 2010 (the date after the
closing of the merger with FNX Mining Ltd.).
Paul Blythe, President and CEO of Quadra comments; 'In the second quarter of 2010, we successfully completed the merger with FNX Mining Company Inc. and with this transaction, established a new, mid-cap Canadian mining company with considerable financial strength and a diverse asset base. The immediate focus following the merger has been the integration of the two companies and the optimisation of the various projects and operations that are ramping up. Our second quarter financial results, while solid, reflect some of the production issues we experienced in the first half of the year, particularly at our two heap leach operations - the Carlota and Franke mines. As reported in the Press Release dated June 19, 2010, production has been affected at Carlota, by the one in 300 year rain event in January, and at Franke, by equipment availability and recovery issues. There has been good progress at both operations in dealing with these issues and we expect to see continuing improvements in the second half of the year.
The Robinson Mine continued to generate the majority of our overall revenues and operating income during the quarter, however, as we have mined further into the Ruth pit, which will be the only production pit by the fourth quarter, an area of underground workings from the 1950 s has proven to be larger than expected. These workings were block caves where higher grade ore was extracted, with lower grade material then caving in to fill the voids. While we continue to understand and evaluate the impact of this block caving, we feel it prudent to lower Robinson s copper production expectation to 115 - 125 million pounds of copper and 75,000 ounces of gold for the year (previously 135 million pounds of copper and 80,000 ounces of gold). We were aware of the underground workings at Ruth and have relied on historical records to understand these. Now that we are well along with dewatering the pit, we have the drill access required to drill from the bottom of the pit to confirm the full extent of these workings, and this work is in progress.'
Paul Blythe continued; 'Looking at the Sudbury assets, the Morrison deposit is still on track to achieve commercial productio n in the third quarter, building up through the fourth quarter to full production in 2011. The Morrison deposit is expected to meet its 2010 payable metal objectives. A deliberate decision has been made to maximise mined grade, delivering the same metal production in fewer tons, to provide the best overall cost structure taking into account processing and smelting charges. At the Podolsky Mine, the second quarter was a significant improvement over the first and we expect this trend to continue and for this asset to achieve its production target for the year.
We continue to make progress at our development assets, in particular at Sierra Gorda where we are on schedule to have the financing study completed by year end. Following the withdrawal of State Grid as a potential development partner, discussions with other interested parties commenced immediately. We plan to wait until some key milestones are reached in the study before entering into definitive negotiations. At the Victoria property in Sudbury, we have continued our exploration success and to date have discovered four different sulphide-mineralized zones to a depth of approximately 6,050 feet.'
Paul Blythe concludes; 'In conclusion, this quarter certainly had some challenges, but, as a result of the merger, the combined company is stronger both financially and with respect to operational expertise. Our immediate focus is on our existing operations and on integration, but our overall objective remains unchanged, to continue to grow the Company organically and through M&A.'
A summary of the financial statements together with the Management Discussion and Analysis ('MD&A') are provided below. The complete financial statements and the MD&A will be available at www.quadramining.com and www.sedar.com.
The following Management Discussion and Analysis ('MD&A') of Quadra FNX Mining Ltd. and its subsidiaries ('Quadra FNX' or the 'Company') has been prepared as at August 11, 2010 and is intended to be read in conjunction with the accompanying unaudi ted consolidated financial statements for the three and six month periods ended June 30, 2010. This MD&A contains 'forward looking information and reference to the cautionary statement at the end of this MD&A is advised. Additional information relating t o the Company, including its Annual Information Form, is available on the SEDAR website at www.sedar.com. The Company is a reporting issuer in all provinces and territories of Canada and its common shares are traded on the Toronto Stock Exchange under the symbol: QUX.
All financial information in this MD&A is prepared in accordance with the Canadian Generally Accepted Accounting Principles and all dollar amounts are expressed in thousands of United States dollars unless otherwise indicated.
DESCRIPTION OF BUSINESS AND NATURE OF OPERATIONS
On May 20, 2010, Quadra Mining Ltd. completed a merger with FNX Mining Company Inc. ('FNX') and the combined company was named Quadra FNX Mining Ltd. (see section below 'Merger of Quadra and FNX').
Quadra FNX is a mining company that owns and operates the Robinson copper mine ('Robinson' or 'Robinson Mine') near Ely, Nevada, which has been in production since 2004, the Carlota mine ('Carlota' or 'Carlota Mine'), a heap leach SX/EW copper operation in Arizona, which commenced operations in 2008 and the Franke mine ('Franke' or 'Franke Mine'), a heap leach SX/EW copper operation in northern Chile, which commenced operations in 2009. As a result of the merger with FNX in the second quarter of 2010, the Company now owns and operates the McCreedy West and Levack mines (together known as the 'Levack Complex') which include the Morrison deposit (formerly known as LFD) and the Podolsky mine ('Podolsky') all located in Canada s prolifi c Sudbury mining district. The Sudbury operations produce, develop and explore for copper, nickel, platinum, palladium and gold. The Company also owns the Sierra Gorda project ('Sierra Gorda'), an advanced copper-molybdenum project in northern Chile, and the Malmbjerg molybdenum project ('Malmbjerg') in Greenland. The Company also owns a mining services business DMC Mining Services (or 'DMC') that provides services in contract mining, mine shaft sinking, lateral mine development, mine constructio n and raise boring. Quadra FNX s strategic plan is based on growing to a production rate in excess of 500 million pounds of copper per year from diverse operations and with a pipeline of development projects for long term sustainability and growth. The immediate focus is on integration of the two companies and optimisation of the various projects and operations that are ramping up.
SECOND QUARTER HIGHLIGHTS:
-- In the second quarter of 2010, the Company completed a merger with FNX
and issued 88.9 million common shares to former FNX shareholders (see
'Merger of Quadra and FNX'). The financial results of FNX have been
consolidated commencing from May 21, 2010.
-- For the second quarter of 2010, the Company recorded earnings of $21.8
million or $0.16 per share (basic) compared to a loss of $7.3 million or
$0.08 per share (basic) in the second quarter of 2009.
-- Second quarter adjusted earnings(1) were $20.6 million or $0.15 per
share (basic) after making adjustments to exclude the gain on
derivatives, gains and losses on marketable securities and investments,
merger costs, and the tax effects of these items.
-- Total revenues were $169.1 million for the second quarter of 2010
compared to $100.1 million for the second quarter of 2009.
-- Total production from Quadra FNX operations over the three months ended
June 30, 2010 was 54.8 million pounds of copper, 15,200 ounces of gold
in concentrate from Robinson and 21,670 ounces of payable total precious
metals (TPMs) from the Sudbury operations.
-- The cash cost per pound of copper(1) for the Company s five operating
mines over the three month period e nded June 30, 2010 was $1.95 per
pound.
-- Cash flow from operating activities (before working capital changes)(1)
was $43.4 million or $0.31 per share (basic) compared to $24.4 million
or $0.26 per share (basic) for the second quarter of 2009.
-- The Company s US operations continued their excellent safety performance
with a Total Incident Rate ('TIR') of 0.90, compared to TIR of 2.59 for
US surface metal mines. Employees and contractors at the Sudbury
operations experienced a TIR of 10.45, compared to a TIR of 3.46 for all
Ontario mines. Employees of DMC Mining Services experienced a TIR of
1.90 compared to a TIR of 2.98 for all Ontario mine contractors.
Employees and contractors at Franke experienced a TIR of 3.09.
-- The Company continued to advance the development of the Morrison deposit
in Sudbury, which remains on track to reach commercial production in the
third quarter of 2010.
-- As a result of the continuing exploration success at the Victoria
property in Sudbury, drilling continued during the quarter.
-- The Company s memorandum of understanding ('MOU') with State Grid
International Development Limited ('SGID') expired in June 2010 and the
parties were not able to conclude a definitive agreement for the
formation of a joint venture.
-- Work is progressing on the Sierra Gorda feasibility study and the
Company is in discussions with potential partners with the objective of
putting in place the financing for the project.
-- On April 30 and May 4, 2010, the Company received positive legal rulings
on two of the outstanding lawsuits related to the Sierra Gorda project
(see 'Contingencies').
-- The Company ended the second quarter of 2010 with $325 million of cash
on hand.
(1)See 'Non-GAAP Financial Measures' below for additional information.
MERGER OF QUADRA AND FNX
On May 20, 2010, Quadra and FNX completed a merger of the two companies. The merger was structured as a court-approved plan of arrangement (the 'Transaction') under the Business Corporations Act (Ontario) pursuant to which Quadra has acquired all of the issued and outstanding common shares of FNX. Under the terms of the Transaction, former shareholders of FNX received 0.87 common shares of Quadra and $0.0001 for each common share of FNX. Outstanding options and warrants to acquire FNX shares were converted into options and warrants to acquire Quadra shares, adjusted in accordance with the same exchange ratio. A total of 88.9 million common shares were issued to former FNX shareholders, and options and warrants to acquire 2.9 million and 6.5 million common shares, respectively were issued on conversion of FNX options and warrants.
Upon completion of the merger, existing Quadra and FNX shareholders owned approximately 52% and 48% of the combined company, respectively, on a fully diluted basis. The acquisition is accounted for as a business combination, and Quadra is considered to be the acquirer for accounting purposes. The total purchase consideration for accounting purposes is $980.2 million, based on the fair value of the issued common shares and other consideration as of May 20, 2010, the closing date of the merger. FNX's assets and liabilities have been re-measured at their individual fair values at the closing date of the merger and FNX's financial results have been consolidated commencing from May 21, 2010.
FINANCIAL PERFORMANCE
Earnings
The Company recorded earnings of $21.8 million or $0.16 per share (basic) for the three months ended June 30, 2010, compared to a loss of $7.3 million or $0.08 per share (basic) in the same quarter of 2009. The increased earnings in the second quarter of 2010 were primarily a result of higher average copper prices in the current year, and the increased earnings contribution from the Carlota and Franke Mine, as well as the profits from the Sudbury operations following the merger with FNX. Second quarter of 2010 earnings were also impacted by a $3.6 million accounting gain on derivatives, a $6.0 million unrealized loss on marketable securities, an $8.8 million gain on the Gold Wheaton note receivable and $5.3 million of transaction costs associated with the FNX merger.
In the second quarter of 2010, the Company sold a total of 46.5 million pounds of copper at an average realized price of $2.79/lb compared to 31.7 million pounds at an average realized price of $2.35/lb in the second quarter of 2009.
Earnings for the first six months of 2010 were $77.4 million or $0.65 per share (basic) compared to $19.3 million or $0.24 per share (basic) for the same period in 2009. The increase in earnings in 2010 is primarily due to higher copper prices in the current year, the earnings contribution from Carlota and from the Franke Mine which commenced operations in the second half of 2009, and lower derivative losses in the current year.
Operating Income
Operating income for the three and six months ended June 30, 2010 and 2009 was as follows:
Three months Three months Six months Six months
ended ended ended ended
June 30, June 30, June 30, June 30,
2010 2009 2010 2009
---------------------------------------------------
Robinson 23,902 24,757 85,071 66,760
Carlota 6,714 (631) 17,863 3,610
Franke 362 - 9,818 -
Levack Complex (1,796) - (1,796) -
Podolsky 2,335 - 2,335 -
DMC Mining Services
('DMC') 71 - 71 -
---------------------------------------------------
Operating income 31,588 24,126 113,362 70,370
---------------------------------------------------
---------------------------------------------------
Note: For accounting purposes, the financial results of the Levack Complex, Podolsky, and DMC have been consolidated commencing from May 21, 2010, the date immediately after the closing date of the merger of Quadra and FNX.
Operating income increased in the second quarter and the first six months of 2010 primarily due to higher average copper prices and increased revenues from the Carlota mine, and from the Franke mine which did not commence operations until the second half of 2009. The Company's Sudbury operations also had a positive impact on the second quarter of 2010 operating income. These factors were partially offset by higher onsite costs at Robinson and Carlota (see 'Review of Operations and Projects').
To view the Revenues table, please visit the following link:
http://media3.marketwire.com/docs/Revs.pdf.
Robinson revenues
At the Robinson Mine, revenues are generated by the sale of copper and gold in concentrates. Revenues are generally recognized at the time of delivery to a customer based on metal prices at that time, however, under Robinson's current sales contracts, which follow normal industry practice, final pricing for copper sold in concentrate is generally set at up to three months after the time of arrival of a shipment at the customer s port of delivery. As a result, Robinson s quarterly revenues include estimated prices for sales, based on forward copper prices at quarter end, as well as pricing adjustments for sales that occurred in previous quarters, based on the actual price received and the price at quarter end for sales from previous quarters that were not settled in the quarter.
In the quarter ended June 30, 2010, revenues from concentrate sales at the Robinson Mine were higher than the second quarter of 2009 due to higher copper prices offset by negative price adjustments. In the second quarter of 2010, copper prices decreased from $3.55/lb at March 31, 2010 to $2.96/lb at June 30, 2010 resulting in negative pricing adjustments of $7.4 million related to the first quarter of 2010 sales. In addition, the Company recorded a negative price adjustment of $4.0 million related to the second quarter shipments from Robinson which were revalued using the copper price at June 30, 2010 of $2.96/lb.
For the first six months of 2010, revenues from concentrate sales at the Robinson Mine were higher than the same period in 2009 due to significantly higher copper prices offset by lower sales volumes. During the six month period of 2009, the copper price continued to recover, resulting in significant positive price adjustments in the period.
At March 31, 2010, receivables included 29.4 million pounds of copper which has been provisionally valued at $3.56 per pound. During the second quarter of 2010, these receivables were settled at an average final price of $3.19/lb. In the second quarter of 2010, Robinson shipped approximately 24.8 million pounds of copper at an average provisional price of $3.35/lb, of which 14.4 million pounds were settled during the quarter with an average final price of $3.21/lb. At June 30, 2010, receivables include 10.4 million pounds of copper which has been provisionally valued at $2.96/lb.
Carlota and Franke revenues
Revenues from the Carlota Mine and the Franke Mine are generated by the sale of copper cathodes. The pricing of copper cathode sales is generally set within one month from the time of shipment or one month after the time of shipment and therefore pricing adjustments in subsequent periods are minimal.
In the second quarter of 2010, revenues from cathode sales at the Carlota Mine were higher than the same quarter of 2009 due to higher average copper prices in the current quarter. In the first six months of 2010, revenues from cathode sales at the Carlota Mine were also higher than the same period of 2009 due to higher sales volumes and higher average copper prices in the current year. The increased sales volumes were a result of higher cathode production as the Carlota Mine continues to ramp up production.
In the second quarter of 2010, Franke recorded revenues of $25.4 million from the sale of 7.8 million pounds of copper cathode. In the first six months of 2010, revenues from the Franke Mine were $58.9 million from the sale of 18.1 million pounds of copper cathode. Franke did not have any production or sales in the first six months of 2009.
Levack Complex and Podolsky revenues
At the Levack Complex and Podolsky, revenues are generated by the sale of copper and nickel ores to Vale in Sudbury, Ontario for processing. The quantity of payable metal contained in the delivered ores is based on assay grades and, when final assays are not yet available at the end of a month, on estimated grades. Revenues are initially recognized using provisional prices at the time ore is delivered to and accepted by the third party processor. Final pricing of the metals in copper and nickel ores are generally set between three to six months after the delivery. As a result, the Levack Complex and Podolsky's quarterly revenues include estimated prices for sales, based on metal prices at quarter end, as well as pricing adjustments for sales that occurred in previous quarters, based on the actual price received and the price at quarter end for sales from previous quarters that were not settled in the quarter.
Between May 21 and June 30, 2010, the Levack Complex recorded revenues of $5.1 million, including negative price adjustments of $0.1 million related to prior quarter sales. Revenues generated by the Podolsky mine in the same period were $15.2 million, including negative price adjustments of $0.8 million related to prior quarter sales. Average realized copper prices were lower than the Company's other mines due to lower average copper prices in the second half of the quarter, when the results of these operations were consolidated. At June 30, 2010, receivables include 5.9 million pounds of copper sold from Levack Complex and Podolsky which have been provisionally valued at $2.96 /lb.
Second quarter revenues at the Levack Complex and Podolsky also include non-cash revenue of $1.6 million for the amortization of a deferred revenue liability. This liability relates to the Company's obligation to sell 50% of the gold, platinum and palladiu m contained in ore mined and shipped from certain deposits to Gold Wheaton Gold Corp. ('Gold Wheaton'). Pursuant to an agreement with Gold Wheaton dated July 15, 2008, the Company receives a cash payment equal to the lower of $400 per gold equivalent ounce (subject to a 1.0% annual inflationary adjustment commencing July 1, 2011) and the prevailing market price per ounce of gold, for each gold equivalent ounce sold to Gold Wheaton.
DMC revenues
DMC provides contract mining services in Canada, the United States and Mexico. Contract revenue is earned primarily based on unit of production and recognized at the time that service has been performed. Revenues from DMC totalled $4.6 million for the second quarter since the merger closing date of May 20, 2010.
To view the operating expenses table, please visit the following link:
http://media3.marketwire.com/docs/operatingexpenses.pdf.
Robinson
Cost of sales at Robinson were higher in the second quarter of 2010 as a result of the higher concentrate sales volumes in the current quarter. Cost of sales in the second quarter of 2009 was impacted by an accounting adjustment to capitalize $1.2 million of stripping costs at Robinson related to the new Ruth pit area. No stripping costs were capitalized in the second quarter of 2010. Cost of sales for the first six months of 2010 were higher than the same period of 2009 due to higher concentrate sales volumes and higher onsite costs (see 'Review of Operations and Projects').
Amortization, depletion, depreciation and accretion were slightly higher in the three and six month periods ended June 30, 2010 than the same periods of 2009, mainly due to the amortization of stripping costs that were capitalized during 2009.
Royalties and mineral taxes in the second quarter and for the first six months of 2010 were higher than the same periods of 2009, mainly due to the higher copper prices in the current year.
Carlota
Cost of sales at Carlota was slightly lower in the second quarter of 2010 than the same quarter of 2009. Higher cost of sales in the second quarter of 2009 was a result of the reversal of start-up inventory adjustment during the first quarter of 2009. Cost of sales for the first six months of 2010 was higher than the same period of 2009 due mainly to higher sales volume. Operating expenses in the first six months of 2009 also included a reversal of a start-up inventory adjustment of $5.3 million due to the increase in copper prices and the resulting increase in the net realizable value of the inventory.
Amortization, depletion, depreciation and accretion were higher in the three and six month periods ended June 30, 2010 mainly due to the higher sales volumes in the current year.
Royalties and mineral taxes for the three and six month periods ended June 30, 2010 were higher than the same periods of 2009 mainly due the higher sales volumes and higher copper prices in the current year.
Franke
The Franke Mine recorded cost of sales of $20.3 million and amortization, depletion and depreciation of $4.7 million in the second quarter of 2010. Franke was still in the construction phase in the second quarter of 2009, and therefore did not have any production or cost of sales in the comparative period.
Levack Complex, Podolsky and DMC
The cost of sales and amortization, depletion, depreciation and accretion reported for the Levack Complex, Podolsky and DMC reflect the expenses incurred between May 21, 2010 (the date immediately following the closing date of the merger with FNX) and June 30, 2010.
General & administrative and other expenses
General and administrative expenses for the second quarter of 2010 were $6.8 million compared to $4.1 million for the same quarter of 2009. For the first six months of 2010, general and administrative expense were $13.4 million compared to $7.6 million for the same period of 2009. The increased general and administrative expenses reflect the Company s increased activity level and payroll costs in the current year, as well as costs associated with the non-binding MOU that was agreed with SGID during the first quarter of 2010. Stock-based compensation expenses for the three and six months ended June 30, 2010 were $1.8 million and $3.4 million respectively, which was generally in line with the prior year.
The Company recognized gains on derivatives of $3.6 million for the second quarter of 2010. These derivative gains primarily relate to a reduction in the liabilities associated with the Franke copper collars. All of the Franke copper collar contracts had been settled by June 30, 2010. For the first six months of 2010, the Company recognized a loss of $3.5 million on derivatives primarily due to the decrease in fair value of the copper put options. The loss on derivatives for the second quarter and the first six months of 2009 of $17.1 million and $26.0 million respectively related to a decline in value of copper put and collars.
Foreign exchange gains of $2.0 million and $1.9 million respectively were recognized in the three and six month periods ended June 30, 2010, and relate to the translation of working capital denominated in Canadian dollars. The Company expensed transaction costs for the merger with FNX of $5.3 million and $7.0 million for the three and six month period ended June 30, 2010, respectively.
In the second quarter of 2010, the Company recorded net interest and other income of $2.1 million compared to net interest and other expense of $8.6 million in same quarter of 2009. The income in the current quarter was a result of the unrealized gain from the increase in fair value of Gold Wheaton note receivable.
The Company recorded an income tax expense of $4.9 million in the second quarter of 2010, compared to a recovery of $0.2 million in the same quarter of 2009. For the six month period of 2010, the Company recorded an income tax expense of $18.2 million compared to $6.0 million in the same period of 2009. The tax expense for the first six months of 2010 has been recorded based on an estimated annual effective tax rate of 20% (2009 - 24%). The decrease in effective tax rate in 2010 is mainly due to the utilization of U.S. Alternative Minimum Tax credits which were earned in prior years and the operation of the Franke Mine in Chile which has a lower statutory tax rate. Tax expense in the first six months of 2010 also included a $0.3 million future income tax recovery related to the gain on marketable securities which has been recorded in other comprehensive income.
REVIEW OF OPERATIONS AND PROJECTS
(iii)Note: Production and operating statistics in this section are reported for historical periods for all of the Company's mines, including periods prior to the merger of Quadra and FNX. For accounting purposes, the financial results of the Sudbury Operations have been consolidated commencing from May 21, 2010, the date immediately following the closing date of the merger of Quadra and FNX.
Production for the three and six months ended June 30, 2010 and 2009 from the Company s operating mines is summarized as follows:
Three Three
months months Six months Six months
ended ended ended ended
June 30, June 30, June 30, June 30,
2010 2009 2010 2009
--------------------------------------------
Copper production (Million lbs)
Robinson Mine 23.7 22.9 55.7 59.6
Carlota Mine 7.4 6.8 15.6 13.4
Franke Mine 10.4 - 19.3 -
Levack Complex 1.4 2.4 3.0 2.8
Morrison deposit(ii) 3.3 - 4.6 -
Podolsky Mine 8.6 5.4 11.8 14.8
--------------------------------------------
54.8 37.5 110.0 90.6
Nickel production (Million lbs)
Levack Complex 0.4 1.2 0.9 1.6
Morrison deposit(ii) 0.7 - 1.3 -
Podolsky Mine 0.6 0.3 0.9 1.1
--------------------------------------------
1.7 1.5 3.1 2.7
TPM(i) (ozs)
Robinson Mine 15,200 18,031 42,046 52,680
Levack Complex 8,485 8,781 16,463 12,273
Morrison deposit(ii) 1,691 - 2,275 -
Podolsky Mine 11,494 7,751 16,774 11,674
--------------------------------------------
36,870 34,563 77,558 76,627
(i)Total precious metal, including gold, platinum and palladium
(ii) Pre-production ore
ROBINSON MINE
(NEVADA)
Three months Three months Six months Six months
ended June ended June ended June ended June
30, 30, 30, 30,
2010 2009 2010 2009
-------------------------------------------------------
Copper in
concentrate
production (Million 23.7 22.9 55.7 59.6
lbs)
Gold in concentrate
production (ozs) 15,200 18,031 42,046 52,680
Waste mined (Tonnes
000's) 12,130 11,606 21,889 19,985
Ore mined (Tonnes
000's) 3,965 3,775 7,092 7,268
Ore milled (Tonnes
000's) 3,630 3,164 6,932 6,571
Copper grade (%) 0.40 0.58 0.64 0.62
Gold grade (g/t) 0.20 0.25 0.31 0.34
Copper recovery 73.5% 56.3% 63.6% 66.6%
Gold recovery 66.3% 70.4% 73.0% 73.6%
Onsite costs $ 54,067 $ 51,821 $ 106,041 $ 96,699
Offsite costs $ 10,538 $ 10,076 $ 23,142 $ 22,867
--------------------------- --------------------------
Total onsite and
offsite costs $ 64,605 $ 61,897 $ 129,183 $ 119,566
Cash cost per pound
of copper produced $ 1.60 $ 1.59 $ 1.31 $ 1.10
Capital expenditure $ 6,028 $ 3,852 $ 13,157 $ 6,988
There has been extensive mining at Robinson for over 100 years and the operation periodically deals with historical workings. Work commenced by BHP Billiton and added to by Quadra FNX has endeavoured to define the size and location of these historical workings as part of the resource estimate process. The evaluation of these workings is based on a combination of historical records and definition drilling. During the second quarter, previously identified underground areas were encountered that are significantly larger than expected. They are historical block caves where ore was removed and surrounding lower grade material caved to fill in any voids. These underground workings impacted production in the second quarter of 2010 and head grades of both copper and gold were lower than planned during the quarter.
Total ore and waste mined in the second quarter of 2010 were higher than in 2009 as anticipated in the 2010 mine plan. Copper production in the second quarter of 2010 was higher than in 2009 due to higher copper recoveries. Copper recoveries in 2010 benefited from the additional flotation capacity that was installed in the fourth quarter of 2009 and from new contractual terms with concentrate customers that give Robinson more flexibility with respect to concentrate grade. Copper recoveries in the second quarter of 2009 were lower than normal as access to hypogene ore was restricted due to regulatory concerns with the stability of the north pit wall in the Veteran pit, which have since been resolved.
Gold production in the second quarter of 2010 was lower due to lower head grades in the Ruth pit area, and the lower grades in turn led to lower gold recoveries as expected.
Robinson Operating and Capital Costs
Operating costs are comprised of onsite and offsite costs (see 'Non-GAAP Financial Measures'). Onsite costs include all stripping costs and are primarily driven by the volume of waste and ore moved, payroll costs, supplies and equipment maintenance costs and royalties. Onsite costs in the second quarter of 2010 were $2.2 million higher than the same quarter of 2009, primarily due to increased royalty costs of $1.0 million caused by higher metal prices and increased mobile equipment maintenance of $1.0 million due to scheduled engine replacements. Onsite costs for the first six months of 2010 were $9.3 million higher than the same period of 2009 primarily due to increased diesel costs of $2.6 million caused by increased consumption, increased royalties of $2.7 million due to an elevated copper price and $3.1 million in truck replacement parts.
Offsite costs are primarily driven by smelting and refining charges, the volume of concentrate transported, and rail and ocean freight rates. Offsite costs in the second quarter and the first six months of 2010 were generally in line with the same periods of 2009.
The cash cost per pound of copper produced was $1.60 in the second quarter of 2010 as compared to $1.59 in same quarter of 2009. The cash cost per pound of copper produced for the first six months of 2010 was $1.31 compared to $1.10 in the same period of 2009. The increased unit cost in the first six months of 2010 is due to lower copper production and higher onsite costs. The cash cost per pound of copper produced is a non-GAAP term and consists of onsite costs (including all stripping costs), and offsite costs, less by- product revenue, divided by the pounds of copper produced in the period (see 'Non-GAAP Financial Measures').
Capital expenditures at Robinson in the second quarter of 2010 were primarily related to Ruth Pit development, and to exploration and Ruth pit metallurgical definition drilling.
Robinson Outlook
Due to the impact of underground workings, the Company now expects that 2010 production will be 115-125 million pounds of copper compared to the original guidance of 135 million pounds. The 2010 gold production will be in the range of 75,000 ounces, as the decrease in gold head grade is expected to be partially offset by improved recovery. The Company had recognised for a while that additional confirmatory drilling in some areas at the bottom of the Ruth pit would be necessary to confirm the status of other historical underground mining, but this did not include the affected area. Mining of these latter historical areas was planned based on documentation to hand, but not carried out. Dewatering of the Ruth pit has progressed well and the accumulated mud and slide rock is currently being removed from the bottom of the pit. Although this process is expected to take until the end of next year to complete, the Company expects to be able to safely begin the above confirmatory drilling in the next quarter and complete this program by the end of this year.
In 2010, mining will continue in both the Veteran Pit and Ruth Pit areas. The metallurgical drill programme results have been used to create a new recovery model within the block model, as opposed to the historical model originally developed by BHP in the nineties. The complex nature of the Robinson ore body will continue to cause metal production variations from quarter to quarter indefinitely.
Onsite costs are expected to increase in 2010 over 2009 primarily as a result of expected increases in tonnage mined and milled as well as an increase in future royalty expenses due to anticipated higher copper prices. Capital costs for the remainder of 2010 are expected to be approximately $20 million primarily on Ruth Pit development and exploration.
CARLOTA MINE (ARIZONA)
Three Three
months months Six months Six months
ended June ended June ended June ended June
30, 30, 30, 30,
2010 2009 2010 2009
------------------------- ------------------------
Copper cathode production
(Million lbs) 7.4 6.8 15.6 13.4
Waste mined (Tonnes
000's) 5,965 4,997 10,988 9,515
Ore mined (Tonnes 000's) 1,615 1,325 2,604 3,056
Ore placed (Tonnes 000's) 1,615 1,325 2,604 3,057
Copper grade (%) 0.24 0.29 0.22 0.27
Onsite costs $ 24,799 $ 18,809 $ 50,880 $ 36,841
Cash cost per pound of
copper produced $ 3.34 $ 2.77 $ 3.26 $ 2.75
Capital expenditure $ 6,707 $ 7,706 $ 11,906 $ 10,542
Total tonnes mined in the second quarter of 2010 at Carlota were higher than the same quarter of 2009 due to the increase of the haulage fleet by two trucks in the second half of 2010. The storm event in early 2010 impacted the accessibility of ore in the Cactus pit thereby redirecting mine plan focus on moving waste. Copper production in the second quarter of 2010 was higher than the same quarter of 2009 as a result of leaching higher grade ore placed in the fourth quarter of 2009.
Carlota Operating and Capital Costs
Carlota s onsite operating costs are mainly driven by the volume of waste and ore moved, payroll costs, supplies, process rea gents, fuel, electricity, equipment maintenance costs, and royalties. Onsite costs in the second quarter of 2010 were $6.0 million higher than the same quarter of 2009 due primarily to mine equipment leases of $0.8 million, diesel fuel of $1.5 million, ferric sulphate of $1.7 million and outside services of $0.8 million of which the latter was directly related to remediation activities following the storm event. Onsite costs in the first six months of 2010 were $14.0 million higher than the same period of 2009, primarily due to a $2.9 million increase in maintenance repairs to the min equipment, a $1.1 million increase in mine equipment leases, a $1.5 million increase in diesel fuel, a $3.1 million increase in ferric sulphate, a $1.9 million increase in outside services which was directly related to remediation activities following the storm event and a $1.2 million increase in royalty expenses due to increased copper prices and sales volumes.
Capital expenditures at the Carlota Mine in the second quarter of 2010 were primarily related to construction of the Leach Pad Phase 2 and Pinto Creek Diversion Channel.
Carlota Outlook
The Company has evaluated the impact of the storm event that occurred in January, and the subsequent unusually wet winter and spring weather, which resulted in water levels well above normal for Arizona, and concluded that it will not be possible to recover the production losses that resulted from these events. On June 19, 2010 the Company announced that it now expects to produce approximately 35 million pounds of cathode at Carlota in 2010, as a result of the following:
-- The impact of storm water and greater than normal rainfall on the grade
of the pregnant -leach-solution ('PLS').
-- A reduction in the volume and grade of material placed on the pad
resulting from being unable to access the Cac tus pit due to the amount
of water in the pit.
As a result of the recently improved weather conditions at Carlota, PLS grades are expected to return to normal levels. Mine access to the Cactus pit was regained at the end of March and as mining progresses, it is expected that ore grades and volumes will improve in the second half of the year. The Company expects a higher production rate in the second half of the year as a result of improving ore grades and volumes.
Since the rain event, the percolation rate has fallen back to the levels encountered in 2009, (5 l/hr/m2). While this rate has been used for 2010 budgeting and guidance purposes, it represents a 20% lower rate than envisioned in the feasibility study. The existence of fines was initially considered a localized phenomenon but there is increasing evidence that the fines content of a significant proportion of the ore is higher than anticipated by the study, implying a continuing lower percolation rate. Studies are ongoing to establish whether the higher fines levels relate to specific rock and ore types, which would allow blending, or whether additional processing measures are required.
Onsite costs in 2010 are expected to be higher than the prior year due to additional costs to recover from the early 2010 rain events, increased costs for equipment leases, maintenance activities, diesel fuel and reagents. Capital expenditures for 2010 are expected to be $26 million, primarily related to the planned leach pad expansion and updated reclamation bonding.
FRANKE MINE (CHILE)
Three months
ended Six months ended
June 30, 2010 June 30, 2010
--------------------------------
Copper cathode production (Million lbs) 10.4 19.3
Waste mined (Tonnes 000's) 990 2,077
Ore mined (Tonnes 000's) 942 1,986
Ore placed (Tonnes 000's) 799 1,560
Copper grade (%) 0.86 0.88
Onsite and offsite costs $ 25,583 $ 46,759
Cash cost per pound of copper produced $ 2.46 $ 2.42
Capital expenditure $ 6,159 $ 8,517
A total of 10.4 million pounds of copper cathode was produced at Franke during the second quarter of 2010. There was no production from Franke in the first six months of 2009, as the mine did not commence operations until July 2009.
Production at the Franke Mine was impacted by leach recovery and equipment performance issues during the quarter. A number of process changes have been put in place to resolve the issues, including reducing heap height, increasing leach solution application rates and acid cure additions for recovery, and additional stacking equipment ordered to improve plant utilization, the current equipment being inadequate for the duty. The transformer damaged by power surges resulting from the earthquake has been repaired and was back in service late in the second quarter.
Franke Operating and Capital Costs
Franke's operating costs are mainly driven by the volume of waste and ore moved by the mining contractor, acid costs, payroll costs, fuel, electricity and equipment maintenance costs. Onsite costs in the second quarter of 2010 were in line with the Company s expectations and forecast for copper placed on the leach pads. Capital expenditures at the Franke Mine in the second quarter of 2010 were primarily related to the construction of stockpile covers to control dust emissions, leach pad construction, and acid tank construction.
Franke Outlook
On June 19, 2010, the Company announced that Franke s 2010 copper production is expected to be about 45 million pounds (approximately 15 million pounds below the original annual guidance). The reasons for this decrease in guidance are:
-- The ore to leach pad stacker system throughput was previously estimated
at approx. 10,500tpd, but is now expected to continue to perform at
8,500tpd until December - a shortfall of 20%.
-- Leach recoveries were lower than expected as a result of sub-optimal
leach parameters.
The Company ordered the replacement stacking equipment with greater throughput capacity. With the benefits of this new equipment, the volume of material placed on the leach pads is expected to be at or above feasibility levels by the first half of 2011. Commissioning of this equipment is scheduled for December 2010.
As previously disclosed, the Company has been adjusting the leach operating parameters, including reducing the lift height in the heap leach pad, increasing solution application rates and blending to control the carbonate content. Based on current pad performance using the changed operating parameters, recoveries are expected to improve but there will not be resolution until the first pads running under the revised parameters complete their leach cycle and can be sampled and analyzed in the third quarter. Additional pad area to offset the impact of the lower lift height is under construction.
Franke's acid supply has been substantially contracted in advance for 2010 with half of the required quantity contracted for at a price dependent on copper price and the remainder at a fixed price. Capital expenditures for 2010 are expected to be approximately $20 million, primarily related to the planned leach pad expansion and acid tank construction.
LEVACK COMPLEX (SUDBURY, CANADA)
Three Three
months months Six months Six months
ended June ended June ended June ended June
30, 30, 30, 30,
2010 2009 2010 2009
------------------------ -----------------------
Copper ore sold (Tonnes) (1) 67,510 89,249 134,760 96,760
Copper grade (%) 1.1 1.3 1.1 1.3
Nickel ore sold (Tonnes) (1) 4,368 26,867 9,972 30,872
Nickel grade (%) 2.5 2.0 3.0 2.0
Copper sold - payable
(Million lbs) 1.4 2.4 3.0 2.8
Nickel sold - payable
(Million lbs) 0.4 1.2 0.9 1.6
Gold sold - payable (ozs) 1,257 1,280 2,358 1,709
Platinum sold - payable
(ozs) 2,627 2,979 5,106 4,187
Palladium sold - payable
(ozs) 4,601 4,522 8,999 6,377
Total onsite and offsite
costs $ 10,434 $ 14,821 $ 20,223 17,391
Cash cost per pound of
copper sold $ 2.26 0.86 $ 0.92 0.27
Capital expenditure $ 1,831 $ 1,209 $ 3,997 $ 1,721
(1) Converted to metric tonnes from short tons
Note: The above table excludes pre-production ore from the Morrison deposit.
Production and operating statistics in the above table are reported for all
historical periods, including the period prior to the merger of Quadra and
FNX on May 20, 2010.
Levack Complex is comprised of two adjacent mining operations, the McCreedy West Mine and the Levack Mine, which includes the Morrison deposit.
Excluding the impact of the Morrison deposit, copper sales in the second quarter and first six months of 2010 was lower than what was achieved in the same period of 2009 as a result of access limitations imposed by Morrison deposit development and pre-production. As no primary nickel production took place in the current year, nickel production in the first half of 2010 was lower than 2009.
Levack Complex Operating and Capital Costs
Levack operating costs were lower in the second quarter of 2010 compared to the same quarter of 2009 due to the reduced tonnage mined in the current quarter. The operating costs were higher for the first half of 2010 than the comparable period in 2009 due to the increased tonnage in the first half of 2010.
Capital costs for the second quarter and the first half of 2010 are higher than the previous year as capital spending was curtailed in late 2008 and 2009 to reflect market conditions.
MORRISON DEPOSIT (SUDBURY, CANADA)
Three months Six months
ended ended
June 30, 2010 June 30, 2010
------------------------------
Copper ore sold (Tonnes) 20,044 32,743
Copper grade (%) 9.1 7.8
Copper sold - payable (Million lbs) 3.3 4.6
Nickel sold - payable (Million lbs) 0.7 1.3
Gold sold - payable (ozs) 309 328
Platinum sold - payable (ozs) 447 578
Palladium sold - payable (ozs) 935 1,369
(i)Pre-production ore
The Morrison deposit is a high grade deposit in the lower part of the Levack Mine. In the second quarter of 2010, pre-production revenues were generated and recorded as a credit to the development cost of the Morrison deposit.
Morrison Outlook
Development continues at Morrison and the Company continues to expect commercial production to be achieved during the third quarter of 2010.
As the Company has gained additional information about the characteristics of the deposit, it has been determined that it will be operationally and commercially beneficial to mine parts of Morrison in a more selective manner. Narrow cut and fill mining methods are currently being tested, as well as narrow blasthole stoping methods and it is anticipated that both of these methods may be used in the mining of the narrow portions of the deposit. Overall, these more selective mining techniques are allowing production of the expected amount of metal from a smaller quantity of tonnes. The Morrison deposit remains on track to meet its 2010 production objectives.
The planned ramp and access to the #2 Shaft at the 3600 Level has been delayed due to poor conditions at the shaft bottom and ore haulage to 2600 Level is expected to continue into 2011. The truck fleet and ventilation systems are being upgraded to allow the Company to continue to haul to the 2600 Level at a higher rate. The Company does not expect this delay to impact near term production.
For the first six months of 2010, $23.1 million has been spent on the development of the Morrison deposit. The Company expects 2010 capital spending to total approximately $45 million.
PODOLSKY (SUDBURY, CANADA)
Three months Three months
ended June ended June Six months Six months
30, 30, ended June ended June
2010 2009 30, 2010 30, 2009
--------------------------- -----------------------
Copper ore sold (Tonnes)
(1) 128,867 58,087 200,211 141,865
Copper grade (%) 3.7 4.5 3.3 5.6
Copper sold - payable
(Million lbs) 8.6 5.4 11.8 14.8
Nickel sold - payable
(Million lbs) 0.6 0.3 0.9 1.1
Gold sold - payable
(ozs) 1,936 1,915 2,844 1,823
Platinum sold - payable
(ozs) 4,907 2,947 7,113 4,518
Palladium sold - payable
(ozs) 4,651 2,889 6,817 5,333
Total onsite and offsite
costs $ 19,517 $ 9,625 $ 31,579 $ 29,759
Cash cost per pound of
copper sold $ 1.07 $ 0.55 $ 1.24 $ 0.92
Capital expenditure $ 3,757 $ 2,923 $ 6,580 $ 2,738
(1) Converted into metric tonnes from original short tons
Note: Production and operating statistics in the above table are reported for all historical periods, including the period prior to the merger of Quadra and FNX on May 20, 2010.
The significant amount of pre-development work completed at Podolsky has allowed the operation to achieve considerably higher throughput and metal production versus the same quarter last year. As anticipated, copper production for the first half of 2010 was lower than 2009 due to lower mine grades.
Podolsky Operating and Capital Costs
Podolsky's total operating costs were higher in the second quarter of 2010 primarily due to the increase in production tonnag e which resulted in additional waste development, backfill costs and higher maintenance costs versus the same quarter of 2009.
Capital expenditures were higher in the second quarter and first six months of 2010 than the comparable periods of 2009 due to increased pre-production development and diamond drilling.
Podolsky Outlook
An updated geological model and strict grade control efforts combined to improve grade versus the first quarter while the significant amount of development work completed during the quarter has improved operational flexibility allowing the operation to remain at current throughput levels for the remainder of the year. Capital expenditures at Podolsky continue as planned, while operating costs are now expected to be approximately 10% higher, due mainly to higher throughput volumes. The Company continues to expect Podolsky to meet its 2010 metal sales objective of 27 million pounds of copper.
SUDBURY EXPLORATION PROPERTIES
As at June 30, 2010, the Company held a 100% interest in the Podolsky Nickel Ramp (located on the Podolsky property), Kirkwood and Victoria mineral properties. The Falconbridge Footwall, Foy Offset, and Other Properties are located in the Sudbury mining district of Ontario. The Falconbridge Footwall and Foy Offset properties are pursuant to a joint venture agreement (the 'Falconbridge Joint Venture') with Xstrata Nickel. As at June 30, 2010, the Company and Xstrata Nickel held an 80% and 20% interest (2009 - 79% and 21%), respectively, in the Falconbridge Joint Venture, with $0.4 million spent on the Falconbridge Footwall to the end of June 30, 2010. However, Xstrata Nickel has declined to participate in the 2010 work program. The Company is the operator of the Falconbridge Joint Venture. FNX holds between a 30% and 100% interest in the mineral exploration properties included in the Other Properties.
Throughout the second quarter of 2010, the Victoria property continued to be the primary focus for the Sudbury exploration team. At the end of the quarter six diamond drill rigs were focused on the Victoria Ni-Cu-PGE sulphide mineralization below 3,000 feet depth. To date four different sulphide-mineralized zones have been intersected to a depth of approximately 6,050 feet within the west end of Ethel Lake segment of the Worthington Offset. All boreholes are subject to BH-UTEM4 surveys to further delineate the sulphide- mineralized system. A news release dated May 10, 2010, summarized significant intersections from zones 2 and 4. This included 1,367 feet (down-dip) of 1.3% Cu, 0.6% Ni and 2.2 g/t Pt+Pd+Au intersected in diamond drill hole FNX1190. At the end of the second quarter, 82,509 feet of drilling had been completed at Victoria as a result of the continued success of the project.
All of the Company's mineral exploration properties are at the exploration stage and there can be no assurance that commercially viable mineral deposits or reserves exist therein.
SIERRA GORDA (CHILE)
In late 2009, the Company approved a budget of approximately $40 million for 2010 to advance the Sierra Gorda project. During the second quarter of 2010, the Company incurred costs of $31.7 million on the project. The principal activities were infill and condemnation drilling, metallurgical and process test work and the execution of the engineering study (approximately 40% complete) required to support a development decision and project financing. The engineering and preparation of the Financing Study was awarded to SNC-Lavalin Inc.. Their work is being supported by a number of other consultants and by Quadra FNX management. The Environmental Impact Study ('EIS') has been prepared by Golder Associates and was submitted to the regulatory authorities of Chile on May 31, 2010.
The objective of the infill drilling program is to increase the amount of measured and indicated resources to the confidence level required for pre-feasibility and feasibility studies while the condemnation drilling will ensure facility and infrastructure placements outside the zones of potential economic mineralization. During the first quarter, nine diamond drill rigs were committed to the project and approximately 40