Quadra FNX Mining Ltd. Announces Record Revenue of $260 Million for the 2010 Third Quarter
VANCOUVER, BRITISH COLUMBIA -- (Marketwire) -- 11/10/10 -- (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) is pleased to provide its third quarter 2010 financial and operational results. The third quarter of 2010 marked the first full quarter for the combined Quadra FNX and the strong financial performance reflects the increased production as a result of the merger, as well as the stronger copper price.
THIRD QUARTER HIGHLIGHTS:
-- Total revenues increased 186% to $259.1 million in the quarter compared
with $90.7 million in 2009. These record quarterly revenues were
generated from the sale of 56.8 million pounds of copper and 33,500
ounces of total precious metals (TPM's)
-- On September 1, 2010 the company commenced commercial production at the
Morrison deposit in Sudbury, which generated operating income of $3.1
million for the month of September.
-- The Robinson Mine generated operating income for the quarter of $46.0
million compared with $24.1 million for the same quarter in 2009, an
increase of 92%. Operating income this year from Robinson totals $131.1
million. Previously identified potential problems with historical
workings at Robinson have been resolved.
-- Net earnings of $37.2 million or $0.20 per share (basic) for the three
months ended September 30, 2010 compared to earnings of $14.7 million or
$0.15 per share (basic) for the three months ended September 30, 2009.
-- Adjusted earnings, which exclude the impact of derivative gains, gains
and losses on marketable securities and investments, merger costs and
related tax adjustments, were $42.0 million or $0.22 per share (basic).
-- EBITDA was $76.6 million or $0.41 per share compared with $27.3 million
or $0.28 per share in 2009.
-- On-going exploration at the Victoria property in the Sudbury basin has
expanded and added significant confidence in the Zone 4 sulphide
mineralized system which was first discovered in May 2010.
-- Work progressed on the Sierra Gorda feasibility study and the Company
continued discussions with potential financial partners.
-- The Company continues to make significant progress on the integration of
the former Quadra and FNX teams at both the corporate and mine site
level.
-- The Company ended the third quarter of 2010 with $323 million of cash on
hand.
As reported in the Press Release dated October 18, 2010, the US operations had a mixed quarter. At Robinson, production rebounded versus the second quarter and confirmatory drilling indicates that the historic underground workings below the Ruth pit are not expected to have any further impact on the remainder of 2010 or any impact on 2011 or on the reserve base. The operations team has now completed the generation of a block model for the mine that reflects the extensive metallurgical program over the last two years, improving the ability to predict production going forward. Production at Carlota remained largely flat and technical studies are ongoing as how to deal with the fines in the ore body, which are affecting percolation. It has now been concluded that these are not a local effect but occur throughout the ore body and planned programmes include material stacking strategies, processing options and leaching strategies. A review of the pit slope in the area of the Kelly fault has also indicated that a change in the pit wall angle may be necessary, and that increased stripping may be required. The economic and reserve implications of this potential change are currently being studied and will be published once finalized. On the positive side, the Company has developed a new ore genesis model which improves our understanding of the fines issue and supports exploration potential at depth. An initial drill program will be following this up in the fourth quarter.
Operating and Financial
Summary Three months ended Nine months ended
In millions of US dollars
(except per share data and September September September September
production data) 30, 2010 30, 2009 30, 2010 30, 2009
----------------------------------------------------------------------------
Revenues 259.1 90.7 625.8 302.5
Adjusted earnings (1) 42.0 21.4 120.1 66.6
Adjusted earnings per share
(basic) $ 0.22 $ 0.22 $ 0.84 $ 0.77
EBITDA (2) 80.6 27.3 208.9 66.5
EBITDA per share (basic) $ 0.43 $ 0.28 $ 1.46 $ 0.77
Earnings for the period 37.2 14.7 114.6 34.0
Basic earnings per share $ 0.20 $ 0.15 $ 0.80 $ 0.39
Diluted earnings per share $ 0.19 $ 0.15 $ 0.79 $ 0.39
1) Adjusted earnings is a non-GAAP financial measure and consists of net
earnings with adjustments make to exclude derivative losses, gain on
marketable securities and investments, merger costs, and adjustments of
prior year taxes.
2) EBITDA is a non-GAAP financial measure which is defined as operating
income less general and administrative costs and excluding accretion of
assets retirement obligations, amortization, depletion and depreciation
and inventory write down.
The Canadian operations reached a significant milestone when commercial production was declared at Morrison on September 1, 2010. The ramp up of Morrison is on schedule and the concept of selective mining continues with a focus on ore quality versus tonnes mined. Podolsky struggled with adverse ground conditions, but production is expected to rebound in the fourth quarter as the high grade stope initially planned for the third quarter is brought into production. McCreedy West met production tonnage and copper grade goals in the third quarter and production for the year is expected to be on target. The Company continues to investigate the restart of nickel production at the Sudbury operations. Key considerations in making this decision include the processing terms from Vale, nickel prices and infrastructure capabilities.
In Chile, third quarter production at the Franke mine was similar to the second quarter as a result of variable recoveries, despite success with the changes to the leach pad height on some of the pads leached. Adjustments to the leach parameters at Franke, particularly the leach solution strategies, will continue as well as adjustments to the crush size going forward.
During the quarter, significant advancements were made on the Sierra Gorda and Victoria development projects, and it was announced that ongoing drilling at the Victoria property had expanded and added considerable confidence to Zone 4, which has now been delineated over a vertical length of over 3,000 feet, yielding grades significantly higher than are typical in the Sudbury camp. Studies are currently being initiated to support a decision on an advanced underground exploration program and work is processing on environment permitting and with First Nations negotiations.
Partnership discussions and the technical work for the ongoing Financing Study on Sierra Gorda continued through the quarter. The Financing Study is still targeted to be completed by the end of the first quarter of next year, with the Feasibility Study to follow. The base case for project has increased in scope and the development plan now envisions a plus 25 year operation processing 111ktpd of sulphide ore at start-up, expanding to 190ktpd at the end of the fourth year. The Scoping Study released in mid-2009 had a more modest throughput of 111ktpd and an initial capital cost of $1.7 billion. For the purposes of discussions with potential partners, the Company is assuming a capital cost of between $2 1/2 billion and $2 3/4 billion for the larger scale project. An updated capital cost estimate is being prepared as part of the Financing Study. The target date for the commencement of development remains the third quarter of 2011, with production targeted in the first half of 2014.
Paul Blythe, President & CEO comments; 'We continue to make significant progress on the integration of the former Quadra and FNX teams at both the corporate and mine site level. We have a robust balance sheet of approximately$600 million in cash and marketable securities at today's prices. There is an experienced team in place that is driving forward on resolving our technical issues and our organic growth projects at Sierra Gorda and Victoria. We are now stronger and have more capacity to deal with our much larger asset base.'
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.quadrafnx.com and www.sedar.com.
This Management Discussion and Analysis ('MD&A') of Quadra FNX Mining Ltd. and its subsidiaries ('Quadra FNX' or the 'Company') has been prepared as at November 9, 2010 and is intended to be read in conjunction with the accompanying unaudited consolidated financial statements for the three and nine month periods ended September 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 to 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 millions of United States dollars unless otherwise indicated.
----------------------------------------------------------------------------
Three months ended Nine months ended
September 30 September 30
2010 2009 Change 2010 2009 Change
----------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
(All amounts in millions of United States dollars
except per share amounts)
Revenues 259.1 90.7 186% 625.8 302.5 107%
Operating income 66.5 31.6 111% 179.8 101.9 76%
EBITDA (1) 80.6 27.3 195% 208.9 66.5 214%
EBITDA per share (basic) 0.43 0.28 55% 1.46 0.77 90%
Earnings for the period 37.2 14.7 153% 114.6 34.0 237%
Earnings per share
(basic) 0.20 0.15 33% 0.80 0.39 105%
Cash 323.0 85.5 278% 323.0 85.5 278%
Working capital 544.5 205.0 166% 544.5 205.0 166%
----------------------------------------------------------------------------
(1) EBITDA is a non-GAAP measure which is defined as earnings attributable
to shareholders before interest expenses, income taxes, depreciation,
amortization and accretion.
DESCRIPTION OF BUSINESS AND NATURE OF OPERATIONS
On May 20, 2010, Quadra Mining Ltd. ('Quadra') completed a merger with FNX Mining Company Inc. ('FNX') and the combined company was named Quadra FNX Mining Ltd. ('Quadra FNX' or the 'Company') (see section below 'Merger of Quadra and FNX').
Quadra FNX is a mining company that owns and operates six mines producing copper as well as nickel and precious metals. Before the merger Quadra owned three open pit mines, the Robinson copper mine in Nevada and two heap leach SX/EW copper mines - the Carlota mine in Arizona and the Franke mine in Chile. As a result of the merger with FNX in the second quarter of 2010, the Company now owns and operates three underground mines the McCreedy West mine and the Levack mine which includes the Morrison deposit together known as the Levack Complex as well as the Podolsky mine all located in Canada's Sudbury mining district. The Company also owns the Sierra Gorda project, an advanced copper-molybdenum project in northern Chile, and the Victoria project in Sudbury. Quadra FNX's strategic plan is based on growing to a sustainable 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.
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 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 $37.2 million or $ 0.20 per share (basic) for the three months ended September 30, 2010, compared to $14.7 million or $0.15 per share (basic) in the same quarter of 2009. The increased earnings in the third quarter of 2010 were primarily a result of higher average copper prices in the current year, and the increased earnings contribution from Franke, as well as the profits from the Sudbury operations following the merger with FNX. Third quarter 2010 earnings were also impacted by an $8.5 million accounting loss on derivatives, a $2.6 million foreign exchange loss and a $6.7 million unrealized gain on held for trading marketable securities (see 'General & administrative and other expenses').
In the third quarter of 2010, the Company sold a total of 56.8 million pounds of copper at an average realized price of $3.52/lb compared to 27.6 million pounds at an average realized price of $2.65/lb in the third quarter of 2009.
Earnings for the first nine months of 2010 were $114.6 million or $0.80 per share (basic) compared to $34.0 million or $0.39 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 Franke which commenced operations in the second half of 2009, as well as the earnings contributed from the Sudbury operations following the merger with FNX and lower derivative losses in the current year.
Operating Income
Operating income for the three and nine months ended September 30, 2010 and 2009 was as follows:
Three Three Nine Nine
months months months months
ended ended ended ended
September September September September
30, 2010 30, 2009 30, 2010 30, 2009
----------------------------------------------
(All amounts in millions of
U.S. dollars)
Robinson 46.0 24.1 131.1 90.7
Carlota 8.0 7.5 25.8 11.2
Franke 1.5 - 11.3 -
Levack Complex, excluding
Morrison (0.2) - (2.1) -
Morrison (1) 3.1 - 3.1 -
Podolsky 7.1 - 9.4 -
DMC Mining Services ('DMC') 1.0 - 1.2 -
----------------------------------------------
Operating income 66.5 31.6 179.8 101.9
----------------------------------------------
----------------------------------------------
(1) For the period after September 1, 2010, the day of commencement of
commercial production
Note: For accounting purposes, the financial results of the Levack Complex, Podolsky, Morrison and DMC have been consolidated commencing from May 21, 2010, the day after the closing date of the merger of Quadra and FNX.
Operating income increased in the third quarter and the first nine months of 2010 primarily due to higher average copper prices and increased revenues from Franke which did not commence operations until the second half of 2009. The Company's Sudbury operations also had a positive impact on the third 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 tables for Revenues in the three months ended September 30, 2010 and September 30, 2009 and the nine months ended September 30, 2010, please visit the following link: http://media3.marketwire.com/docs/qux1110tables1.pdf.
Note: For accounting purposes, the financial results of the Levack Complex, Morrison, Podolsky, and DMC have been consolidated commencing from May 21, 2010, the day after the closing date of the merger of Quadra and FNX.
To view the table for Revenues in the nine months ended September 30, 2009, please visit the following link: http://media3.marketwire.com/docs/qux1110tables2.pdf.
(1) Represents total revenues from sale of copper divided by pounds sold
(2) Excluding the Morrison deposit
(3) For the period after September 1, 2010, the day of commencement of
commercial production
(4) Total precious metal, including gold, platinum and palladium
Robinson revenues
At Robinson, 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 September 30, 2010, revenues from concentrate sales at Robinson were higher than the third quarter of 2009 due to higher sales volumes and copper prices. In the third quarter of 2010, copper prices increased from $2.96/lb at June 30, 2010 to $3.65/lb at September 30, 2010 resulting in positive pricing adjustments of $1.9 million related to the settlement of sales from the second quarter of 2010. In addition, the Company recorded a positive price adjustment of $6.5 million related to the third quarter shipments from Robinson which were revalued using the copper price of $3.65/lb at September 30, 2010.
For the first nine months of 2010, revenues from concentrate sales at Robinson were higher than the same period in 2009 due to significantly higher copper prices. During the nine month period of 2010, the copper price continued to recover, resulting in positive price adjustments in the period.
At June 30, 2010, receivables included 10.4 million pounds of copper which has been provisionally valued at $2.96/lb. During the third quarter of 2010, these receivables were settled at an average final price of $3.19/lb. In the third quarter of 2010, Robinson shipped approximately 28.9 million pounds of copper at an average provisional price of $3.16/lb, of which 16.1 million pounds were settled during the quarter with an average final price of $3.44/lb. At September 30, 2010, receivables include 12.8 million pounds of copper which has been provisionally valued at $3.65/lb.
Carlota and Franke revenues
Revenues from Carlota and Franke 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 third quarter of 2010, revenues from cathode sales at Carlota were higher than the same quarter of 2009 due to higher average copper prices in the current quarter. In the first nine months of 2010, revenues from cathode sales at Carlota 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 Carlota continues to ramp up production.
In the third quarter of 2010, Franke recorded revenues of $41.4 million from the sale of 12.8 million pounds of copper cathode. In the first nine months of 2010, revenues from Franke were $100.3 million from the sale of 30.9 million pounds of copper cathode. Franke did not have any sales in the first nine 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 and payment for the metals in the copper and nickel ores shipped to Vale 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.
For the third quarter of 2010, the Levack Complex, excluding Morrison recorded revenues of $11.8 million, including positive price adjustments of $1.8 million related to prior quarter sales. Morrison reached commercial production on September 1, 2010 generating revenues of $13.9 million in the third quarter of 2010. Revenues generated by Podolsky in the same period were $28.1 million, including positive price adjustments of $1.9 million related to prior quarter sales. Average realized copper prices were higher than the Company's other mines due to positive price adjustments for prior quarter shipments as a result of the increased copper prices. At September 30, 2010, receivables include 6.1 million pounds of copper sold from the Levack Complex (including Morrison) and Podolsky which have been provisionally valued at $3.65/lb.
Third quarter revenues at the Levack Complex (including Morrison) and Podolsky also include non-cash revenue of $5.3 million for the amortization of a deferred revenue liability related to the Company's obligation to sell 50% of the gold, platinum and palladium 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.
For the period of May 21 to September 30, 2010, the Levack Complex, excluding Morrison recorded revenues of $15.8 million. The Morrison deposit reached commercial production on September 1, 2010 and contributed revenues of $15.2 million in the period. Revenues generated by Podolsky in the same period were $43.3 million.
DMC revenues
DMC provides contract mining services in Canada, the United States and Mexico. Contract revenue is earned primarily based on units of production and recognized at the time that service has been performed. Revenues from DMC totalled $12.1 million for the third quarter of 2010. Since the merger closing date of May 20, 2010, DMC has recorded revenues of $16.7 million.
Operating expenses
Three months ended
September 30, 2010
-------------------------------------------------------------
Levack
Complex Morrison
Robinson Carlota Franke (1) (2) Podolsky DMC Total
(in millions of
U.S. dollars)
Cost of sales 70.3 10.4 33.3 9.2 5.1 15.0 10.2 153.5
Amortization,
depletion,
depreciation
and accretion 7.1 2.3 6.6 2.8 5.8 6.1 0.8 31.5
Royalties and
mineral taxes 6.5 1.1 - - - - 7.6
-------------------------------------------------------------
Operating
expenses 83.9 13.8 39.9 12.0 10.9 21.1 11.0 192.6
-------------------------------------------------------------
-------------------------------------------------------------
Three months ended
September 30, 2009
--------------------------------------------------------------
Levack
Complex Morrison
Robinson Carlota Franke (1) (2) Podolsky DMC Total
(in millions
of U.S.
dollars)
Cost of sales 41.3 11.3 - - - - - 52.6
Start-up
inventory
adjustment - (4.3) - - - - - (4.3)
Amortization,
depletion,
depreciation
and accretion 4.2 1.7 - - - - - 5.9
Royalties and
mineral taxes 4.1 0.9 - - - - - 5.0
--------------------------------------------------------------
Operating
expenses 49.6 9.6 - - - - - 59.2
--------------------------------------------------------------
--------------------------------------------------------------
Nine months ended
September 30, 2010
--------------------------------------------------------------
Levack
Complex Morrison
Robinson Carlota Franke (1) (2) Podolsky DMC Total
(in millions
of U.S.
dollars)
Cost of sales 189.6 39.0 74.1 14.4 5.8 25.1 14.2 362.2
Amortization,
depletion,
depreciation
and accretion 19.5 8.0 14.9 3.3 6.3 8.9 1.4 62.3
Royalties and
mineral taxes 17.6 3.9 - - - - - 21.5
--------------------------------------------------------------
Operating
expenses 226.7 50.8 89.0 17.7 12.1 34.0 15.6 446.0
--------------------------------------------------------------
--------------------------------------------------------------
Note: For accounting purposes, the financial results of the Levack Complex, Morrison, Podolsky, and DMC have been consolidated commencing from May 21, 2010, the date after the closing date of the merger of Quadra and FNX.
Nine months ended
September 30, 2009
-------------------------------------------------------------
Levack
Complex Morrison
Robinson Carlota Franke (1) (2) Podolsky DMC Total
(in millions of
U.S. dollars)
Cost of sales 143.6 34.5 - - - - - 178.1
Start-up
inventory
(reversal)
adjustment - (9.7) - - - - - (9.7)
Amortization,
depletion,
depreciation
and accretion 15.5 3.7 - - - - - 19.2
Royalties and
mineral taxes 10.8 2.2 - - - - - 13.0
-------------------------------------------------------------
Operating
expenses 169.9 30.7 - - - - - 200.6
-------------------------------------------------------------
(1) Excluding the Morrison deposit
(2) The Morrison deposit reached commercial production as of September 1,
2010
Robinson
Cost of sales at Robinson were higher in the third quarter of 2010 as a result of the higher onsite costs (see 'Review of Operations and Projects') as well as higher concentrate sales volumes in the current quarter. Cost of sales in the third quarter of 2009 were reduced by an accounting adjustment to capitalize $7.0 million of stripping costs at Robinson related to the new Ruth pit area. No stripping costs were capitalized in the third quarter of 2010. Cost of sales for the first nine 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 higher in the three and nine month periods ended September 30, 2010 than the same periods of 2009, mainly due to the amortization of stripping costs that were capitalized during 2009 and higher concentrate sales volumes.
Royalties and mineral taxes in the third quarter and for the first nine months of 2010 were higher than the same periods of 2009, mainly due to the higher copper prices and sales volumes in the current year.
Carlota
Cost of sales at Carlota was slightly lower in the third quarter of 2010 than the same quarter of 2009. Higher cost of sales in the third quarter of 2009 was a result of the reversal of start-up inventory adjustment during the year. Cost of sales for the first nine months of 2010 was higher than the same period of 2009 due mainly to higher onsite costs in the current year and higher sales volume (see 'Review of Operations and Projects'). Operating expenses in the first nine months of 2009 also included a reversal of a start-up inventory adjustment of $9.7 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 nine month periods ended September 30, 2010 mainly due to the higher sales volumes in the current year.
Royalties and mineral taxes for the three and nine month periods ended September 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
Franke recorded cost of sales of $33.3 million and amortization, depletion and depreciation of $6.6 million in the third quarter of 2010. Franke was still in the construction phase in the third quarter of 2009, and therefore did not have any production or cost of sales in the comparative period.
Levack Complex, Morrison, Podolsky and DMC
The cost of sales and amortization, depletion, depreciation and accretion reported for the Levack Complex, Morrison, Podolsky and DMC reflect the expenses incurred between May 21, 2010 (the date immediately following the closing date of the merger with FNX) and September 30, 2010.
General & administrative and other expenses
General and administrative expenses for the third quarter of 2010 were $10.6 million compared to $4.8 million for the same quarter of 2009. The increase in general and administrative expenses in the current quarter was mainly due to $3.5 million of severance payments related to the merger with FNX. For the first nine months of 2010, general and administrative expenses were $24.0 million compared to $12.4 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 a result of the merger with FNX, as well as costs associated with the non-binding MOU that was negotiated with SGID during the first quarter of 2010. Stock-based compensation expenses for the third quarter were $2.9 million compared to $1.2 million for the same quarter of 2009. For the first nine months of 2010, stock-based compensation expenses increased to $6.3 million compared to $4.8 million in the same period of 2009. The increase in stock-based compensation expenses was due to additional grants of stock options and restricted share units in the current year.
The Company recognized a loss on derivatives of $8.5 million for the third quarter of 2010. These derivative losses primarily relate to a reduction in the fair value of the copper put options and an increase in Franke long-term supply contracts derivative liabilities as a result of increased copper prices. For the first nine months of 2010, the Company recognized a loss of $12.0 million on derivatives primarily due to the decrease in fair value of the copper put options as well as the increase in derivative liabilities associated with the Franke long-term supply contracts. The loss on derivatives for the third quarter and the first nine months of 2009 of $13.8 million and $39.8 million respectively related to a decline in value of copper puts and collars.
Foreign exchange losses of $2.6 million and $0.8 million respectively were recognized in the three and nine month periods ended September 30, 2010, and primarily relate to the translation of future income tax liabilities denominated in Canadian dollars. The Company expensed transaction costs for the merger with FNX of $0.2 million and $7.2 million for the three and nine month periods ended September 30, 2010, respectively.
In the third quarter of 2010, the Company recorded net interest and other income of $4.7 million compared to net interest and other income of $8.0 million in the same quarter of 2009. Other income in the current quarter was as a result of the unrealized gain from the increase in fair value of held for trading marketable securities. Other income in the same period of 2009 primarily related to a realized gain on sale of marketable securities.
The Company recorded income tax expense of $11.0 million in the third quarter of 2010, compared to $6.5 million in the same quarter of 2009. For the first nine months of 2010, the Company recorded income tax expense of $29.2 million compared to $12.5 million in the same period of 2009. The tax expense for the first nine months of 2010 has been recorded based on an estimated annual effective tax rate of 22.8% (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 earnings from the Franke mine in Chile which has a lower statutory tax rate. Tax expense in the first nine months of 2010 also included a $2.3 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
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 nine months ended September 30, 2010 from the Company's operating mines is summarized as follows:
Three months Nine months
ended ended
September 30, September 30,
2010 2010
--------------- -------------
Copper production (million lbs)
Robinson (3) 26.7 82.4
Carlota (4) 7.3 22.9
Franke (4) 10.1 29.4
Levack Complex, excluding Morrison (5) 1.2 3.7
Morrison deposit (2) (5) 6.3 11.4
Podolsky (5) 5.4 17.2
--------------- -------------
56.9 166.9
Nickel production (million lbs)
Levack Complex, excluding Morrison (5) 0.2 0.6
Morrison deposit (2) (5) 0.8 2.6
Podolsky (5) 0.3 1.2
--------------- -------------
1.3 4.4
TPM (1) (thousand ozs)
Robinson (3) 15.3 57.3
Levack Complex, excluding Morrison (5) 8.1 24.1
Morrison deposit (2) (5) 3.0 5.7
Podolsky (5) 5.4 22.2
--------------- -------------
31.8 109.3
(1) Total precious metal, including gold, platinum and palladium
(2) Including pre-production ore
(3) Produced in concentrate
(4) Produced in cathode
(5) Shipped payable metal
ROBINSON MINE (NEVADA)
Three Three Nine Nine
months months months months
ended ended ended ended
September September September September
30, 30, 30, 30,
2010 2009 2010 2009
-------------------------- --------------------------
(All amounts in millions of U.S.
dollars unless otherwise
indicated)
Copper in concentrate
production (million
lbs) 26.7 33.6 82.4 93.2
Gold in concentrate
production (thousand
ozs) 15.3 21.1 57.3 73.8
Waste mined (thousand
tonnes) 13,228 12,138 35,117 32,123
Ore mined (thousand
tonnes) 3,644 4,360 10,736 11,628
Ore milled (thousand
tonnes) 3,299 3,555 10,231 10,126
Copper grade (%) 0.49 0.75 0.50 0.66
Gold grade (g/t) 0.25 0.26 0.25 0.31
Copper recovery 75.3% 57.4% 73.5% 63.0%
Gold recovery 58.2% 71.4% 68.5% 73.0%
Onsite costs $ 59.0 $ 49.4 $ 165.1 $ 146.1
Offsite costs $ 9.9 $ 11.1 $ 33.0 $ 33.9
-------------------------- --------------------------
Total onsite and
offsite costs $ 68.9 $ 60.5 $ 198.1 $ 180.0
Cash cost per pound
of copper produced
(US$/lb) $ 1.58 $ 1.27 $ 1.40 $ 1.17
Capital expenditure $ 13.6 $ 6.8 $ 26.8 $ 13.8
There has been extensive mining at Robinson for over 100 years and the operation periodically deals with historical workings and work commenced by BHP Billiton and continued 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 and during the quarter the Company continued confirmatory drilling at the bottom of the Ruth pit. Based on the evaluation of historical information and drill results to date, the Company does not expect the underground workings in the Ruth pit to have further impact in 2010 or going forward.
In the third quarter of 2010, Robinson processed ore from both the Ruth and Veteran pits, producing 26.7 million pounds of copper and 15,300 ounces of gold in concentrate. Head grades in the Ruth pit improved from the levels achieved in the second quarter; however this was partially offset by lower throughput resulting from harder and more abrasive ore encountered at the bottom of the Veteran pit.
As anticipated in 2010 mine plan, total material mined in the third quarter of 2010 was slightly higher than in 2009. Copper production in the third quarter of 2010 was lower than in 2009 due to lower head grade and milling rates, partially offset by higher copper recoveries. Copper recoveries in 2010 benefited from the additional flotation capacity that was installed in the fourth quarter of 2009. In addition, new contractual terms with concentrate customers provided Robinson more flexibility with respect to concentrate grade.
Gold production in the third quarter of 2010 was lower compared to the same quarter of 2009 due to lower head grades in the Ruth pit area which 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 third quarter of 2010 were $9.6 million higher than the same quarter of 2009, primarily due to increased diesel fuel costs of $2.7 million caused by increased diesel fuel usage, increased plant and mobile equipment maintenance of $2.7 million due to scheduled engine replacements, $2.7 million related to removal of mud from the Ruth pit and increased royalty cost of $1.0 million due to increase in metal prices and sales volumes. Onsite costs for the first nine months of 2010 were $19.0 million higher than the same period of 2009 primarily due to increased diesel costs of $3.7 million caused by increased price and consumption, increased royalties of $3.7 million due to an elevated copper price and $6.0 million in truck replacement parts as well $3.5 million related to removal of mud from the Ruth pit.
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 third quarter were $1.2 million lower than the same quarter of 2009 due primarily to lower ocean freight rates partially offset by higher sales volumes. Offsite costs in the first nine months of 2010 were generally in line with the same periods of 2009.
The cash cost per pound of copper produced was $1.58 in the third quarter of 2010 as compared to $1.27 in the same quarter of 2009. The cash cost per pound of copper produced for the first nine months of 2010 was $1.40 compared to $1.17 in the same period of 2009. The increased unit cost in the first nine 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 third quarter of 2010 were primarily related to Ruth pit development and exploration as well as metallurgical definition drilling in the Ruth pit.
Robinson Outlook
The results from the metallurgical drill program carried out over the last two years have been used to create a new recovery model within the block model. This is expected to improve the planning and ability to forecast going forward. However, the complex nature of the Robinson ore body will continue to cause metal production variations from quarter to quarter for the duration of the mine life.
Mining of the Veteran pit is expected to be completed in the fourth quarter of 2010, after which all mining will occur from the Ruth area. In the fourth quarter Robinson is expected to mine higher grades and softer material from the Ruth pit, offsetting the impact of an unscheduled three day mill shut down to repair a faulty conveyor belt in October. The Company expects that 2010 copper production from Robinson will be at the lower end of the previously stated range of 115-125 million pounds of copper, while gold production is expected to achieve the target of 75,000 ounces.
In the bottom of the Ruth pit, there is approximately 3.4 million cubic yards of mixed tailings from historic gold operations and slide debris from the historical pit walls. This material is a mixture of fined grained and larger rocks that contains significant moisture (Ruth pit mud). During the third quarter the Company engaged a new specialized contractor to continue the removal of the material. The removal of this material by mid-2011 is critical in order to allow mining to advance deeper in the Ruth pit.
The dewatering of the Ruth pit also remains a focus going forward. This will be critical for mining at the bottom of the Ruth pit in 2012. While the dewatering is ramping up to 13,000 U.S. gallon per minute ('US GPM') from the current 9,000 US GPM by year end, the Company have decided to increase the dewatering capacity to the limit of permitting at 18,000 US GPM by installing the necessary additional wells and pumps.
Onsite costs are expected to increase in 2010 compared to 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 $9 million primarily on Ruth pit development and exploration.
CARLOTA MINE (ARIZONA)
Three Three Nine Nine
months months months months
ended ended ended ended
September September September September
30, 30, 30, 30,
2010 2009 2010 2009
------------------------ ------------------------
(All amounts in millions of U.S.
dollars unless otherwise indicated)
Copper cathode production
(million lbs) 7.3 6.6 22.9 20.0
Waste mined (thousand
tonnes) 4,688 4,689 15,676 14,204
Ore mined (thousand
tonnes) 2,253 1,427 4,857 4,483
Ore placed (thousand
tonnes) 2,253 1,427 4,857 4,484
Total copper grade (%) 0.77 0.45 0.56 0.36
Onsite costs $ 21.4 $ 17.8 $ 72.3 $ 54.6
Cash cost per pound of $
copper sold (US$/lb) (1) 1.74 $ 1.88 $ 1.80 $ 1.85
Capital expenditure $ 5.4 $ 6.6 $ 17.3 $ 17.2
(1) Company changed its calculation method of cash costs per pound for its
heap leach operations to conform with industry standards (see 'Non-
GAAP' Financial Measures').
Total tonnes mined in the third quarter of 2010 at Carlota were higher than the same quarter of 2009 due to the increase of the haulage fleet. Ore tonnes mined during the third quarter of 2010 were higher than the same quarter of 2009 as access to ore in the Cactus pit was re-established after the storm event in early 2010. Copper production in the third 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 reagents, fuel, electricity, equipment maintenance costs, and royalties. Onsite costs in the third quarter of 2010 were $3.7 million higher than the same quarter of 2009 due primarily to mine equipment leases of $0.6 million, diesel fuel of $1.0 million, ferric sulphate of $0.4 million and outside services of $1.2 million related to remediation activities following the storm event, and a $0.4 million increase in royalty expenses due to the increased copper prices and sales volumes. Onsite costs in the first nine months of 2010 were $17.7 million higher than the same period of 2009, primarily due to a $3.5 million increase in maintenance repairs to the mine equipment, a $1.7 million increase in mine equipment leases, a $3.7 million increase in diesel fuel, a $3.7 million increase in ferric sulphate, a $2.6 million increase in outside services related to remediation activities following the storm event and a $1.3 million increase in royalty expenses due to increased copper prices and sales volumes.
Capital expenditures at Carlota in the third quarter of 2010 were primarily related to construction of the Leach Pad Phase 2 and Pinto Creek diversion channel as well as to additional water control measures.
Carlota Outlook
The Company has evaluated the impact of the January storm event 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 expected to produce approximately 35 million pounds of cathode at Carlota in 2010, as a result of the following:
-- The remaining impact of storm water volume within the leach pad on the
grade of the pregnant-leach-solution ('PLS').
-- A lower than expected percolation rate due to the presence of higher
than expected percentage of fines in the ore and slower than expected
leaching rates for both sulfide and oxide ores.
As expected ore grades and volumes have improved during the third quarter. However, due to the slower leaching kinetics of the sulfide (chalcocite) ores being placed on the pad and the continued lower percolation rate of 5 1/hr/m2 (versus 6 1/hr/m2 outlined in the Feasibility Study), copper production in the fourth quarter is expected to be similar to the levels achieved in the third quarter.
Since the rain event, the operation has consumed most of the excess storm water through evaporation and the saturation of fresh ore from the mine, but solution levels remained higher than normal for most of the third quarter of 2010.
It is now believed that the fines causing the reduced percolation rate at Carlota will be pervasive throughout the ore body. A broad range of studies to establish the optimum course forward are ongoing and include changes to blending techniques, additional processing measures, alternative irrigation strategies, the evaluation of alternative stacking methods and potential reductions in leach pad lift height. The Company currently has a significant amount of recoverable copper stacked on the Carlota leach pads. The existence of fines is affecting the recovery of copper from these pads. Studies are ongoing to determine the best way to deal with this issue, which may entail the removal and restacking of ore to fully recover the predicted quantities of recoverable copper, an alternative that may not be economically viable. The Company will be reviewing these alternatives in the coming months.
The Quadra FNX exploration group has developed a new ore genesis model for the Carlota ore body which implies further exploration potential at depth. Initial drilling at the periphery of the Carlota pit has intersected copper mineralization, supporting the validity of the new exploration model. Additional drilling, targeting mineralization below the Carlota ore body, will be initiated in the fourth quarter 2010.
As operations have progressed the pit wall stability has been regularly reviewed by an independent consultant who is now of the view that the slope in the area of the Kelly fault will have to be decreased implying that increased stripping may be required. The economic and reserve implications are being evaluated and will be published upon completion.
Onsite costs in 2010 are expected to be higher than in the prior year due to additional costs to recover from the rain event early in the year, increased costs for equipment leases, maintenance activities, diesel fuel and reagents. Capital expenditures for the remainder of 2010 are expected to be $10 million, primarily related to the planned leach pad expansion and updated reclamation bonding.
FRANKE MINE (CHILE)
Three Three Nine Nine
months months months months
ended ended ended ended
September September September September
30, 30, 30, 30,
2010 2009 2010 2009
------------------------ -----------------------
(All amounts in millions of U.S. dollars
unless otherwise indicated)
Copper cathode production
(million lbs) 10.1 4.1 29.4 4.1
Waste mined (Tonnes 000's) 1,292 1,528 3,369 1,528.0
Ore mined (Tonnes 000's) 969 - 2,955 -
Ore placed (Tonnes 000's) 941 552 2,501 552.0
Copper grade (%) 0.77 0.80 0.83 0.80
Onsite and offsite costs $ 24.9 $ - $ 72.7 $ -
Cash cost per pound of
copper sold (US$/lb) (1) $ 2.60 $ - $ 2.40 $ -
Capital expenditure $ 9.6 $ - $ 18.1 $ -
(1) Company changed its calculation method of cash costs per pound for its
heap leach operations to conform with industry standards (see 'Non-
GAAP' Financial Measures').
A total of 10.1million pounds of copper cathode was produced at Franke during the third quarter of 2010. Franke was in the pre-production phase in the first nine months of 2009 with 4.1 million pounds of pre-production copper cathode produced.
Since the second quarter, the stacker system throughput rate has improved and third quarter 2010 production was an operations-to-date record. However, production at Franke was impacted by lower-than-expected leach recovery during the 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 third quarter of 2010 were higher than expected due mainly to higher ore tonnes placed on the leach pads. Capital expenditures at Franke in the third 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 was expected to be approximately 45 million pounds. The reasons for this decrease in guidance were:
-- 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.
As previously disclosed, the Company has been adjusting the leach operating parameters, including reducing the lift height and increasing solution application rates. These changes have been proven beneficial and will continue along with other optimizations. Specifically, attention is now focused on acid addition and cures as well as optimizing the crush size for the ore, based on an increasing understanding of the liberation characteristics of the ore. Improved copper recovery is expected with these initiatives. Additional leach pad space was constructed in the third quarter to accommodate the lower heap heights.
In late November, Franke will assemble and commission the stacking equipment ordered in July. The new equipment is expected to improve plant utilization and bring the production rate to design.
The block model at Franke was extensively revised during the month, taking into account a full geological model and the knowledge gained to date. This will significantly improve short term predictability and long term planning.
Franke's acid supply has been fully contracted for the remainder of 2010 with half of the required quantity contracted at a price dependent on copper price and the remainder at market terms. Major capital expenditures for the remainder of 2010 are expected to total $8 million and are related to completing the stockpile covers to control dust and to completing the acid storage tank.
LEVACK COMPLEX (excluding Morrison) (SUDBURY, CANADA)
Three Three Nine Nine
months months months months
ended ended ended ended
September September September September
30, 30, 30, 30,
2010 2009 2010 2009
---------------------- ----------------------
(All amounts in millions of U.S. dollars
unless otherwise indicated)
Copper ore sold (thousand
tonnes) (1) 72.6 2.3 207.3 99.0
Copper grade (%) 0.9 0.8 1.0 1.3
Copper sold - payable (million
lbs) 1.2 - 3.7 2.6
Nickel sold - payable (million
lbs) 0.2 - 0.6 1.3
Gold sold - payable (thousand
ozs) 0.9 (0.2) 3.3 1.6
Platinum sold - payable
(thousand ozs) 2.7 0.1 7.7 4.2
Palladium sold - payable
(thousand ozs) 4.5 0.1 13.1 6.4
Total onsite and offsite costs
(2) $ 9.2 - $ 20.2 -
Cash cost per pound of copper
sold (US$/lb) (2) $ 2.83 - $ 3.73 -
Capital expenditure (2) $ 2.9 - $ 4.4 -
(1) Converted to metric tonnes from short tons
(2) For the period since the May 21, 2010, the date after the merger of
Quadra and FNX
Note: Production 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. There were no shipments in third quarter of 2009 due to a Vale planned shut down and subsequent strike. Shipments commenced at the end of September 2009.
The Levack Complex is comprised of two adjacent mining operations, McCreedy West and Levack, which includes the Morrison deposit (which is discussed separately in the following section).
McCreedy West met production tonnage and copper grade goals in the third quarter of 2010. Production for the year is expected to be on target.
Levack Complex Outlook
Quadra FNX continues to investigate restarting nickel production at its Levack Complex. Key considerations in this decision include the processing terms from Vale Inco, nickel prices and infrastructure capabilities.
MORRISON DEPOSIT (SUDBURY, CANADA)
Three Three Nine Nine
months months months months
ended ended ended ended