Inmet Announces Fourth Quarter Earnings of $2.53 Per Share Compared With Earnings of $1.60 Per Share in the Fourth Quarter of 2009
TORONTO, CANADA -- (Marketwire) -- 02/23/11 -- All amounts in Canadian dollars unless indicated otherwise
Inmet (TSX: IMN) announces fourth quarter earnings of $2.53 per share compared with earnings of $1.60 per share in the fourth quarter of 2009.
Fourth quarter highlights
-- Consolidation of ownership interest in Las Cruces to 100 percent
On December 15, 2010, we acquired Leucadia National Corporation's
(Leucadia's) 30 percent indirect equity interest and associated
subordinated sponsor loans in Las Cruces for value of $497 million,
significantly increasing our exposure to copper. The consideration we
paid included US $150 million in cash and 5.44 million Inmet common
shares.
-- Amendment of subscription agreement with Temasek and subsequent Panama
Mineral Resources Code amendment passed by National Assembly
On December 23, 2010, the subscription agreement with Temasek was
amended such that the subscription receipts purchased will now be
exchangeable for 7.78 million Inmet common shares (formerly 9.26 million
Inmet common shares), representing a subscription price per Inmet common
share of approximately $64. The subscription receipts will now be
automatically exchanged no later than 150 days after the coming into
effect of legislation to amend Panama's Mineral Resources Code to permit
entities in which foreign governmental bodies or authorities have an
interest to hold direct or indirect interests in mining concessions in
Panama. The legislation to amend the Code passed final reading in the
Panamanian Assembly and came into effect in February 2011. We expect to
exchange the Temasek subscription receipts for common shares before
June 30, 2011.
-- Sale of our interest in Ok Tedi
On December 2, 2010, we announced an agreement with Ok Tedi Mining
Limited for it to repurchase our 18 percent equity interest in Ok Tedi
for US $335 million. Our net proceeds after withholding taxes in Papua
New Guinea were US $307 million. The transaction closed on January 28,
2011.
-- Las Cruces progressing
We continued to improve plant throughput and leaching conditions,
significantly increased copper recoveries from 77 percent in the third
quarter to 86 percent and produced 9,000 tonnes of copper cathode this
quarter. We continue to implement the ramp up plan to achieve our goal
of full production rates in 2011.
-- Continuing strong performance at Cayeli and Pyhasalmi
Cayeli milled 288,000 tonnes and Pyhasalmi milled 350,000 tonnes with
both operations reaching near- record annual throughput in 2010.
-- Sale of non-core investment
We disposed of our investment in Premier Gold Mines Limited for $61.4
million in cash and recognized a gain of $50.5 million. This increased
earnings after tax by $0.90 per share.
Merger with Lundin Mining Corporation to create Symterra Corporation
On January 12, 2011, we entered into an arrangement agreement with Lundin Mining Corporation (Lundin) to merge, and create Symterra Corporation (Symterra), an international copper producer.
The proposed merger will be effected by way of a Plan of Arrangement completed under the Canada Business Corporations Act. It will feature a common share exchange through which Inmet common shareholders will receive 3.4918 common shares of the merged company for each common share of Inmet they own and Lundin common shareholders will receive 0.3333 common shares of the merged company for each common share of Lundin they own. The exchange ratio represents no premium to either party based on the 30 day volume weighted average price on the Toronto Stock Exchange for each of Inmet and Lundin to January 11, 2011.
Inmet and Lundin shareholders must both approve the proposed merger by two thirds of the votes cast at special shareholder meetings held to consider the transaction. The joint information circular was mailed to shareholders on February 18, 2011. The shareholder meetings will be held on March 14, 2011.
The arrangement agreement includes customary reciprocal deal protections. Each party has agreed not to solicit any alternative transactions and has furthermore agreed to pay the other a break fee of $120 million in certain circumstances. In addition, each company has granted the other a right to match any competing offer.
Both Boards of Directors have determined that the proposed merger is in the best interest of their respective companies based on a number of factors, including fairness opinions received from their financial advisors, and have unanimously approved the terms of the proposed merger and recommend that their respective shareholders vote in favour of the proposed merger.
The largest shareholder of each of Inmet (Leucadia, representing 17.94 percent of Inmet) and Lundin (Lukas Lundin and Lundin family trusts, representing 12.32 percent of Lundin) has executed an agreement to vote their shares in favour of the proposed merger subject to customary fiduciary waivers in the case of a superior offer. The directors of each company have agreed to vote their shares in favour of the merger.
We believe that the combination of the two companies will create a larger, financially stronger, diversified and more globally competitive base metals mining company with a balanced portfolio of five low-cost, long-life mines predominately located in Europe, substantial opening cash balances, a strong balance sheet and excellent growth prospects with two world class copper development projects. We believe that the business combination will create superior value from greater scale, greater management depth, a more diversified asset base and enhanced capital markets profile. We believe that the growth prospects for shareholders are greater through Symterra than Inmet could achieve on its own.
There is a risk that we may not realize the anticipated benefits of the arrangement and statements regarding the merger of Inmet and Lundin are subject to various risks and assumptions. See Forward- looking information on page 4.
Key financial data
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December 31 December 31
2010 2009 change 2010 2009 change
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FINANCIAL
HIGHLIGHTS
(thousands,
except per share
amounts)
Sales
Gross sales $ 318,128 $ 290,570 9% $1,098,087 $ 983,885 12%
Net income
Net income $ 144,505 $ 89,763 61% $ 358,898 $ 269,169 33%
Net income per
share $ 2.53 $ 1.60 58% $ 6.37 $ 5.14 24%
Cash flow
Cash flow
provided by
operating
activities $ 135,332 $ 125,781 8% $ 409,333 $ 322,751 27%
Cash flow
provided by
operating
activities per
share (1) $ 2.37 $ 2.24 6% $ 7.26 $ 6.17 18%
Capital spending
(2) $ 63,343 $ 63,353 - $ 143,963 $ 268,264 -46%
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OPERATING
HIGHLIGHTS
Production (3)
Copper (tonnes) 25,600 24,300 5% 94,300 83,600 13%
Zinc (tonnes) 21,300 23,500 -9% 81,400 78,000 4%
Gold (ounces) 23,600 50,800 -54% 125,400 228,400 -45%
Pyrite (tonnes) 186,800 60,900 207% 584,100 383,900 52%
Copper cash cost
(US $ per pound)
(4) $ 0.53 $ 0.22 141% $ 0.49 $ 0.44 11%
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as at December 31 as at December 31
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FINANCIAL CONDITION 2010 2009
Current ratio(6) 3.4 to 1 4.2 to 1
Gross debt to total equity(5) 1% 1%
Net working capital balance
(millions) $ 611 $ 609
Cash balance including long-term
bonds (millions) $ 699 $ 634
Gross debt (millions) (5) $ 17 $ 17
Shareholders' equity (millions) $ 2,758 $ 2,238
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(1) Cash flow provided by operating activities divided by average shares
outstanding for the period.
(2) For the year ended December 31, 2010, this includes capital spending of
$85 million at Cobre Panama and $55 million at Las Cruces, less $31
million (positive cash flow from pre-operating costs, net of revenues
and working capital changes). For the year ended December 31, 2009,
this includes capital spending of $139 million at Las Cruces (mainly
for construction) and $85 million at Cobre Panama.
(3) Inmet's share.
(4) Copper cash cost per pound is a non-GAAP measure - see Supplementary
financial information on pages 33 to 35.
(5) Gross debt includes long-term debt and the current portion of long-term
debt. For comparative purposes, the 2009 balance excludes the non-
recourse note that was owed from Las Cruces to its non-controlling
shareholder.
(6) The decrease in our current ratio from 2009 is mainly due to our
investment in long-term bonds during the year.
Fourth quarter press release
Where to find it
Our financial results 5
Key changes in 2010 5
Understanding our performance 6
Earnings from operations 8
Corporate costs 13
Results of our operations 15
Cayeli 16
Las Cruces 18
Pyhasalmi 20
Ok Tedi 22
Status of our development project 24
Cobre Panama 24
Financial condition 29
Accounting changes 30
Supplementary financial information 33
In this press release, Inmet means Inmet Mining Corporation and we, us and our mean Inmet and/or its subsidiaries and joint ventures. This quarter refers to the three months ended December 31, 2010.
Forward looking information
Securities regulators encourage companies to disclose forward-looking information to help investors understand a company's future prospects. This press release contains statements about our future financial condition, results of operations and business. Our objectives and outlook have been prepared based on our existing operations, expectations and circumstances. If the proposed merger with Lundin occurs, actual results would be substantially different.
These are 'forward-looking' because we have used what we know and expect today to make a statement about the future. Forward-looking statements usually include words such as may, expect, anticipate, believe or other similar words. We believe the expectations reflected in these forward-looking statements are reasonable. However, actual events and results could be substantially different because of the risks and uncertainties associated with our business or events that happen after the date of this press release. You should not place undue reliance on forward-looking statements. As a general policy, we do not update forward-looking statements except as required by securities laws and regulations.
Our financial results
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three months ended December 31 year ended December 31
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(thousands,
except per
share amounts) 2010 2009 change 2010 2009 change
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EARNINGS FROM
OPERATIONS (1)
Cayeli $ 31,753 $ 57,854 -45% $ 142,452 $ 123,729 15%
Las Cruces 22,005 - 100% 42,619 - 100%
Pyhasalmi 41,642 24,106 73% 116,287 63,232 84%
Troilus (6,785) 20,033 -134% 15,601 104,645 -85%
Ok Tedi 69,582 48,168 44% 188,784 150,257 26%
Other (495) (6,193) -92% (2,018) (7,594) -73%
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157,702 143,968 10% 503,725 434,269 16%
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DEVELOPMENT AND
EXPLORATION
Corporate
development
and
exploration (3,975) (2,915) 36% (12,036) (10,837) 11%
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CORPORATE COSTS
General and
administration (4,767) (9,836) -52% (20,638) (23,892) -14%
Investment and
other income 50,331 280 17,875% 35,416 9,131 288%
Asset
impairment - (3,496) -100% - (9,915) -100%
Stand by costs - - - (6,753) - -100%
Interest
expense (2,520) (496) 408% (6,873) (1,977) 248%
Income and
capital taxes (54,307) (38,599) 41% (135,055) (121,779) 11%
Non-controlling
interest 2,041 857 138% 1,112 (5,831) -119%
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(9,222) (51,290) -82% (132,791) (154,263) -14%
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Net income $ 144,505 $ 89,763 61% $ 358,898 $ 269,169 33%
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Basic net
income per
share $ 2.53 $ 1.60 58% $ 6.37 $ 5.14 24%
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Diluted net
income per
share $ 2.53 $ 1.60 58% $ 6.35 $ 5.13 24%
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Weighted
average shares
outstanding 57,053 56,107 2% 56,345 52,334 8%
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(1) Gross sales less smelter processing charges and freight, cost of sales,
depreciation and provisions for mine reclamation.
Key changes in 2010
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(millions) December 31 December 31 page
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EARNINGS FROM OPERATIONS
Sales
Higher copper prices
denominated in Canadian
dollars $ 26 $ 92 8
Higher (lower) zinc prices
denominated in Canadian
dollars (5) 11 8
Higher gold and other prices
denominated in Canadian
dollars 7 16 8
Lower sales volumes (17) (8) 8
Costs
(Higher) lower processing
charges and freight 4 (1) 10
Lower operating costs,
including costs that vary
with income and cash flows 3 9 11
Operating earnings at Las
Cruces 22 43 19
Lower operating earnings at
Troilus due to conclusion of
operations (27) (89)
Other 1 (4)
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Higher earnings from
operations compared to 2009 14 69
CORPORATE COSTS
Gain on sale of investment in
Premier Gold Mines Ltd. 51 51 13
Foreign exchange on Las Cruces
credit facility and
realization of related hedge
contracts in 2009 - (9) 13
Higher income taxes (16) (13) 14
Other foreign exchange changes 3 (22) 13
Asset impairment in 2009 3 10 14
Other - 4
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Higher net income compared to
2009 $ 55 $ 90
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Understanding our performance
Metal prices
The table below shows the average metal prices we realized in US dollars and Canadian dollars (the prices we realize include finalization adjustments - see Gross sales on page 8).
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three months ended year ended
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2010 2009 change 2010 2009 change
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US dollar metal
prices
Copper (per pound) US $4.17 US $3.31 26% US $3.55 US $2.63 35%
Zinc (per pound) US $1.06 US $1.11 -5% US $0.96 US $0.81 19%
Gold (per ounce) US $1,355 US $1,110 22% US $1,194 US $980 22%
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Canadian dollar
metal prices
Copper (per pound) C $4.23 C $3.51 21% C $3.66 C $3.00 22%
Zinc (per pound) C $1.07 C $1.18 -9% C $0.99 C $0.92 8%
Gold (per ounce) C $1,373 C $1,177 17% C $1,230 C $ 1,117 10%
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Copper
Copper prices rose significantly from US $3.67 per pound at the beginning of the quarter, to a record high of US $4.42 per pound on December 31, and averaging US $3.92 per pound for the quarter. This quarter, London Metals Exchange (LME) inventories increased by 4,000 tonnes to 378,000 tonnes.
Zinc
Zinc prices averaged US $1.05 per pound this quarter, an increase of 15 percent from the third quarter of 2010, despite an increase in LME inventories to approximately 700,000 tonnes on December 31.
Gold
Gold prices rose for the ninth consecutive quarter, increasing by 12 percent, and reached a record high of US $1,423 per ounce early in December.
Pyrite
Sulphur prices rose steadily this quarter, driven mainly by increasing prices for agricultural products, which increased demand for sulphuric acid from agricultural product growing regions.
Exchange rates
Exchange rates affect our revenue and earnings. The table below shows the average exchange rates we realized this quarter and year to date compared to 2009.
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2010 2009 change 2010 2009 change
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Exchange rates
1 US$ to C$ $ 1.01 $ 1.06 -5% $ 1.03 $ 1.14 -10%
1 euro to C$ $ 1.38 $ 1.56 -12% $ 1.37 $ 1.59 -14%
1 euro to US$ $ 1.36 $ 1.48 -8% $ 1.33 $ 1.39 -4%
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Our sales are affected by the conversion of US dollar revenue to Canadian dollars. Compared to the same quarter last year, the value of the Canadian dollar appreciated 5 percent relative to the US dollar, and 12 percent relative to the euro.
Our earnings are affected by changes in foreign currency exchange rates when we:
-- translate the results of our operations from their functional currency
(US dollars or euros) to Canadian dollars
-- revalue US dollars and euros that we hold in cash in Canada.
Treatment charges down for copper
Treatment charges are one component of smelter processing charges. We also pay smelters for content losses and price participation.
The table below shows the average charges we realized this quarter and for the year. While treatment charges for zinc concentrates were higher than last year, price participation was lower.
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(US$) 2010 2009 change 2010 2009 change
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Treatment charges
Copper (per dry
metric tonne of
concentrate) $ 35 $ 57 -39% $ 48 $ 64 -25%
Zinc (per dry metric
tonne of
concentrate) $ 253 $ 190 33% $ 248 $ 189 31%
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Price participation
Copper (per pound) $ 0.01 $ 0.01 - $ 0.01 $ 0.02 -50%
Zinc (per pound) $ - $ 0.13 -100% ($0.01) $ 0.06 -117%
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Freight charges
Copper (per dry
metric tonne of
concentrate) $ 84 $ 43 95% $ 71 $ 37 92%
Zinc (per dry metric
tonne of
concentrate) $ 15 $ 15 - $ 28 $ 21 33%
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Statutory tax rates remain consistent
The table below shows the statutory tax rates for each of our taxable operating mines.
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2010 2009 Change
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Statutory tax rates
Cayeli 24% 24% -
Las Cruces 30% 30% -
Pyhasalmi 26% 26% -
Ok Tedi 37% 37% -
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Earnings from operations
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three months ended year ended
December 31 December 31
(thousands) 2010 2009 change 2010 2009 change
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Gross sales $ 318,128 $ 290,570 9% $1,098,087 $ 983,885 12%
Smelter
processing
charges and
freight (38,440) (53,696) -28% (166,754) (176,432) -5%
Cost of sales:
Direct
production
costs (103,489) (78,612) 32% (330,594) (297,159) 11%
Inventory
changes 19,844 8,767 126% 8,894 7,273 22%
Provisions for
mine
rehabilitation
and other non-
cash charges (14,980) (5,150) 191% (24,064) (21,546) 12%
Depreciation (23,361) (17,911) 30% (81,844) (61,752) 33%
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Earnings from
operations $ 157,702 $ 143,968 10% $ 503,725 $ 434,269 16%
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Gross sales were higher
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(thousands) 2010 2009 change 2010 2009 change
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Gross sales by
operation
Cayeli $ 68,694 $ 113,747 -40% $ 312,723 $ 305,091 3%
Las Cruces 66,794 - 100% 128,643 - 100%
Pyhasalmi 72,780 59,747 22% 233,481 184,991 26%
Troilus 1,756 41,203 -96% 73,826 199,879 -63%
Ok Tedi (1) 108,104 75,873 42% 349,414 293,924 19%
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$ 318,128 $ 290,570 9% $1,098,087 $ 983,885 12%
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Gross sales by
metal
Copper $ 225,836 $ 154,925 46% $ 693,427 $ 503,242 38%
Zinc 42,094 64,964 -35% 168,316 160,253 5%
Gold 33,345 54,889 -39% 166,921 257,713 -35%
Other 16,853 15,792 7% 69,423 62,677 11%
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$ 318,128 $ 290,570 9% $1,098,087 $ 983,885 12%
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(1) Our 18 percent share of Ok Tedi's sales.
Key components of the change in sales: higher copper prices, new gross sales at Las Cruces, lower sales volumes at Troilus and Cayeli
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three months ended year ended
(millions) December 31 December 31
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Higher copper prices, denominated in
Canadian dollars $ 26 $ 92
Higher (lower) zinc prices,
denominated in Canadian dollars (5) 11
Higher gold prices, denominated in
Canadian dollars 4 12
Changes in other metal prices 3 4
Gross sales at Las Cruces 67 129
Lower gross sales from Troilus (39) (126)
Lower sales volumes at our other
mines (28) (8)
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Higher gross sales, compared to 2009 $ 28 $ 114
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We record sales that settle during the reporting period using the metal price on the day they settle. For sales that have not settled, we use an estimate based on the month we expect the sale to settle and the forward price of the metal at the end of the reporting period. We recognize the difference between our estimate and the final price by adjusting our gross sales in the period when we settle the sale (finalization adjustment).
This quarter, we recorded $6 million in positive finalization adjustments from third quarter sales.
At year end, the following sales had not been settled:
-- 3 million pounds of copper provisionally priced at US $4.37 per pound
-- 15 million pounds of zinc provisionally priced at US $1.11 per pound.
The finalization adjustment we record for these sales will depend on the actual price we receive when they settle, which can be up to five months from the time we initially record the sales. We expect these sales to settle in the following months:
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(millions of pounds) copper zinc
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January 2011 3 15
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Unsettled sales at December 31, 2010 3 15
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Significantly higher copper and pyrite sales volumes, lower gold sales volumes this year
Our sales volumes are directly affected by the amount of production from our mines, and our ability to ship to our customers.
Copper production and sales volumes were up this year mainly because of Las Cruces. Zinc production was lower this quarter but higher this year because of changes in zinc grades at Pyhasalmi. Copper and zinc sales volumes were lower than production volumes this quarter mainly because of the timing of shipments at Cayeli. Gold production and sales volumes were lower this year because Troilus ceased production in June 2010. Pyhasalmi realized higher pyrite sales volumes this year because of higher demand from China.
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2010 2009 change 2010 2009 change
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Sales volumes
Copper (tonnes) 22,200 21,700 2% 90,100 79,300 14%
Zinc (tonnes) 17,700 24,500 -28% 77,400 79,400 -3%
Gold (ounces) 23,500 45,800 -49% 133,600 228,900 -42%
Pyrite (tonnes) 90,200 116,900 -23% 485,300 412,500 18%
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Production
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Inmet's share(1) 2010 2009 change 2010 2009 change 2011
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Copper (tonnes)
Cayeli 6,600 8,200 -20% 28,200 29,200 -3% 30,900
Las Cruces cathode 6,900 2,300 200% 20,600 3,900 428% 50,200
Pyhasalmi 3,900 3,600 8% 14,700 14,600 1% 13,300
Troilus - 1,000 -100% 2,000 5,900 -66% -
Ok Tedi 8,200 9,200 -11% 28,800 30,000 -4% -
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25,600 24,300 5% 94,300 83,600 13% 94,400
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Zinc (tonnes)
Cayeli 13,100 13,800 -5% 51,300 50,900 1% 48,600
Pyhasalmi 8,200 9,700 -15% 30,100 27,100 11% 31,900
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21,300 23,500 -9% 81,400 78,000 4% 80,500
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Gold (ounces)
Troilus - 24,200 -100% 37,900 135,200 -72% -
Ok Tedi 23,600 26,600 -11% 87,500 93,200 -6% -
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23,600 50,800 -54% 125,400 228,400 -45% -
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Pyrite (tonnes)
Pyhasalmi 186,800 60,900 207% 584,100 383,900 52% 600,000
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(1) Inmet's share: 100 percent for Cayeli, Pyhasalmi and Troilus and 18
percent for Ok Tedi. Our share of Las Cruces is 70 percent until
December 15, 2010 and 100 percent thereafter.
2011 outlook for sales
We use our production objectives to estimate our sales target.
We expect copper production in 2011 to be slightly higher than it was this year. Our share of copper production at Las Cruces should more than double as the operation ramps up to its nameplate capacity of 72,000 tonnes of copper cathode, and because we increased our ownership in Las Cruces from 70 percent to 100 percent in December 2010. Higher production at Las Cruces should be mostly offset, however, by the divestment of our 18 percent equity interest in Ok Tedi in January 2011.
We expect 2011 zinc sales volumes to be similar to this year because zinc production should be approximately the same as it was in 2010.
With production ceasing at Troilus in 2010 and the sale of our 18 percent equity investment in Ok Tedi in January 2011, no gold sales are expected for 2011.
Our Canadian dollar sales revenues are affected by the US dollar denominated metal price we receive, and the exchange rate between the US dollar and Canadian dollar.
We expect global copper supply to grow modestly in 2011. New production should be mostly offset by declining production at large existing copper mines and possible labour disruptions. We expect continued strong demand in China, increasing economic recovery in Europe and the United States, and continued interest from investors. Increasing demand, combined with tighter supply, should mean copper prices will remain close to all time highs during 2011.
For zinc, we expect modest increases in both market supply and demand, and a small market deficit, which should support prices in 2011 at levels consistent with those of 2010.
Lower smelter processing charges, higher freight this year
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Smelter processing
charges and
freight by
operation
Cayeli $ 14,593 $ 27,032 -46% $ 71,810 $ 82,126 -13%
Las Cruces 271 - 100% 298 - 100%
Pyhasalmi 13,876 17,094 -19% 53,685 50,896 5%
Troilus - 2,750 -100% 4,526 13,740 -67%
Ok Tedi (1) 9,700 6,820 42% 36,435 29,670 23%
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$ 38,440 $ 53,696 -28% $166,754 $176,432 -5%
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Smelter processing
charges and
freight by metal
Copper $ 17,034 $ 18,880 -10% $ 70,678 $ 75,932 -7%
Zinc 16,063 28,421 -43% 68,212 74,295 -8%
Other 5,343 6,395 -16% 27,864 26,205 6%
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$ 38,440 $ 53,696 -28% $166,754 $176,432 -5%
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Smelter processing
charges by type
and freight
Copper treatment
and refining
charges $ 3,808 $ 7,651 -50% $ 22,538 $ 34,914 -35%
Zinc treatment
charges 8,865 9,594 -8% 38,817 33,750 15%
Copper price
participation 545 524 4% 2,082 4,622 -55%
Zinc price
participation (122) 7,312 -102% (2,068) 11,164 -119%
Content losses 14,329 18,822 -24% 54,881 53,778 2%
Freight 9,159 8,314 10% 44,439 32,041 39%
Other 1,856 1,479 25% 6,065 6,163 -2%
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$ 38,440 $ 53,696 -28% $166,754 $176,432 -5%
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(1) Our 18 percent share of Ok Tedi's smelter processing charges and
freight.
Our copper treatment and refining charges were lower than they were in 2009 because of more favourable terms with smelters. Our 2009 rates were negotiated at the end of 2008, amidst the global market downturn. Zinc treatment charges were higher for the year than for 2009 because of our terms with smelters, more than offset by lower price participation. Zinc treatment charges this quarter were lower than the fourth quarter of 2009 because sales volumes were lower. Content losses were higher because metal prices were higher than they were last year. Freight was higher this year mainly because pyrite shipments were higher.
2011 outlook for smelter processing charges and freight
We sell approximately 90 percent of our copper concentrate under long-term contracts. We expect our costs for copper treatment and refining to remain low in 2011. A tight concentrate supply should keep the copper market in a deficit position in 2011, and treatment costs close to this year's level. We expect copper price participation to be minimal.
We expect total zinc smelter processing charges, including price participation, to be lower than in 2010, and a small deficit to evolve in the zinc concentrate market.
Las Cruces sells its copper cathode production directly to buyers in the Spanish and Mediterranean markets and therefore does not incur smelting processing charges and has relatively low freight costs.
We expect our ocean freight costs to be similar to rates realized in 2010.
Direct production costs and cost of sales higher than last year
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(thousands) 2010 2009 change 2010 2009 change
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Direct production
costs by operation
Cayeli $ 25,584 $ 23,540 9% $ 90,927 $ 82,429 10%
Las Cruces 37,322 - 100% 68,119 - 100%
Pyhasalmi 14,534 16,694 -13% 54,590 62,085 -12%
Troilus - 12,915 -100% 23,905 56,503 -58%
Ok Tedi (1) 26,049 25,463 2% 93,053 96,142 -3%
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Total direct
production costs 103,489 78,612 32% 330,594 297,159 11%
Inventory changes (19,844) (8,767) 126% (8,894) (7,273) 22%
Reclamation,
accretion and other
non-cash expenses 14,980 5,150 191% 24,064 21,546 12%
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Total cost of sales $ 98,625 $ 74,995 32% $345,764 $311,432 11%
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(1) Our 18 percent share of Ok Tedi's direct production costs.
Direct production costs
Direct production costs are higher this quarter and for the year than they were in 2009, mainly because we began recognizing operating results at Las Cruces in our consolidated income statement effective July 1, 2010, and because of higher labour and royalty costs at Cayeli. This was partly offset by the closure of Troilus, and lower costs at Pyhasalmi because of a stronger Canadian dollar relative to the euro.
Inventory changes
Inventory at Cayeli was higher this quarter end because of the timing of shipments, and at Las Cruces because we stockpiled ore before the rainy season. For the year, these increases were offset by the impact of the closure of Troilus in the second quarter of 2010.
Charges for reclamation, accretion and other non-cash charges
These charges include an accrual for asset retirement obligations, provisions for severance and retirement and other non-cash expenses. We recorded an additional $8 million this year for closure liabilities at Troilus to reflect the longer time we expect will be required for post-closure monitoring, as well as higher owner and other costs. In 2009, we recorded an additional $6 million for closure liabilities at our closed sites to reflect the longer time we expected to treat water at certain sites, and because of escalating costs.
2011 outlook for cost of sales
We expect consolidated direct production costs to be lower in 2011 because of the closure of Troilus mid-year in 2010 and the disposition of our 18 percent interest in Ok Tedi. These lower costs will be somewhat offset by production costs at Las Cruces that will be recognized in the income statement for the entire year.
Our budget for 2011 assumes our costs at Cayeli and Pyhasalmi will be similar to 2010.
Certain variable costs may continue to affect our earnings, depending on metal prices:
-- royalties at Cayeli are affected by its net income
-- royalties at Las Cruces are affected by its net sales.
Higher depreciation
----------------------------------------------------------------------------
three months ended year ended
December 31 December 31
(thousands) 2010 2009 change 2010 2009 change
----------------------------------------------------------------------------
Depreciation by
operation
Cayeli $ 2,051 $ 3,522 -42% $ 12,212 $ 13,348 -9%
Las Cruces 12,285 - 100% 22,613 - 100%
Pyhasalmi 2,041 1,983 3% 7,678 8,220 -7%
Troilus 28 6,521 -100% 10,850 16,642 -35%
Ok Tedi 6,956 5,885 18% 28,491 23,542 21%
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$ 23,361 $ 17,911 30% $ 81,844 $ 61,752 33%
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Depreciation was higher this year mainly because Las Cruces began to depreciate its operating assets in the income statement on July 1, 2010. Depreciation decreased at Troilus because the mine concluded operations in June 2010. Depreciation at Ok Tedi was higher this year because it increased the assets related to asset retirement obligations at the end of 2009 and began amortizing the cost of storage pits it constructed to store the sulphur concentrate the tailings management plant produces.
2011 outlook for depreciation
We expect depreciation to be higher in 2011 mainly because we will recognize Las Cruces' operating results in earnings for the entire year. Depreciation will be higher at Cayeli as a result of the impact of adoption of IFRS (see Plan on transition to International Financial Reporting Standards - Impairment of assets on page 30). This will be offset somewhat by the closure of Troilus and the sale of our 18 percent share of Ok Tedi.
Corporate costs
Corporate costs include general and administration costs, taxes, interest and other income.
General and administration
General and administration costs are largely for management remuneration, governance and strategy. Costs in 2010 were $3 million lower than 2009 ($5 million in the fourth quarter) mainly because of the costs associated with the changes to the board and executive management in 2009. This was somewhat offset by higher human resource and other costs in 2010 in preparation for moving forward with Cobre Panama.
Investment and other income
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three months ended year ended
December 31 December 31
(thousands) 2010 2009 2010 2009
----------------------------------------------------------------------------
Interest income $ 2,887 $ 828 $ 8,234 $ 4,706
Foreign exchange loss (1,755) (4,836) (23,896) (14,155)
Dividend and royalty
income 634 350 3,173 1,335
Loss on settlement of
interest rate swap
contract - - - (14,823)
Gain on recognition
of settlement of
foreign currency
forward contract - - - 35,615
Mark to market on Ok
Tedi copper forward
contracts - (125) - (3,353)
Gain on sale of
investment in
Premier Gold Mines
Ltd. 50,505 - 50,505 -
Other (1,940) 4,063 (2,600) (194)
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$ 50,331 $ 280 $ 35,416 $ 9,131
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Gain on sale of investment in Premier Gold Mines Ltd
We sold 9.45 million common shares of Premier Gold Mines Ltd. this quarter for $61.4 million in cash and recognized a gain of $50.5 million, taking advantage of favourable market conditions.
Recognition of interest rate swap contract and foreign currency forward contract in 2009
In the third quarter of 2009, we repaid 100 percent of Las Cruces' US dollar denominated bank credit facility (see also Long-term debt repayments and settlement of interest rate swap contract - 2009 on page 27), and replaced it with intergroup debt using the proceeds from our equity offering earlier that year. In conjunction with this, Las Cruces terminated its interest rate swap contracts, paying out $16 million for early termination. This had the following effects on investment and other income in 2009:
-- when we converted the Las Cruces debt from euro to US dollars in 2008,
Las Cruces settled a foreign exchange forward contract and received
proceeds of $52 million. We deferred the proceeds in accumulated other
comprehensive income, and were amortizing them to income over the term
of the debt. When we repaid the debt, we realized the remaining deferred
gain of $36 million in investment and other income.
-- when we repaid the debt, we recorded the $15 million interest rate swap
loss that we had deferred in accumulated other comprehensive income in
investment and other income.
Foreign exchange loss
We have foreign exchange gains or losses when we:
-- revalue certain foreign denominated assets and liabilities
-- distribute funds from our self-sustaining operations and recognized the
foreign exchange we previously deferred on our original investment and
on funds as they accumulated.
Our foreign exchange gains (losses) were from:
----------------------------------------------------------------------------
three months ended year ended
December 31 December 31
(thousands) 2010 2009 2010 2009
----------------------------------------------------------------------------
Translation of Las
Cruces' US dollar-
denominated bank
credit facility
prior to settlement $ - $ - $ - $ 2,460
Translation of
foreign denominated
cash held at
corporate 246 (895) (116) (18,655)
Translation of other
monetary assets and
liabilities (2,001) (292) (1,124) (353)
Reduction in our net
investments - (3,649) (22,656) (1,176)
----------------------------------------------------------------------------
$ (1,755) $ (4,836) $ (23,896) $ (14,155)
----------------------------------------------------------------------------
We recognized foreign exchanges losses of $23 million this year on the repatriation of cash from Cayeli, Pyhasalmi and Ok Tedi. In 2009, we recognized foreign exchange losses of $14 million from revaluing US dollar denominated cash we held at Corporate to repay Las Cruces' US dollar denominated debt under its credit facility.
2011 outlook for investment and other income
Investment and other income is affected by our cash and held to maturity investment balances, and by interest rates and exchange rates. In 2011, we will stop recognizing foreign exchange gains and losses when we repatriate funds that represent the accumulation of earnings at our operations. See Plans on transition to International Financial Reporting Standards on page 30 for more information. We also expect to recognize a significant gain as a result of the disposition of our 18 percent investment in Ok Tedi.
Stand-by costs
We could not mine ore at Las Cruces in the first quarter of 2010 because of the water levels in the pit. We expensed $6.8 million in operating and maintenance costs for the water purification plant because they did not relate to production activities.
Asset impairment
We made a decision in 2008 not to proceed with the Cerattepe project. All work ceased on the project and we took a $34 million charge to write down the assets to its net realizable value. In 2009, we took an additional impairment charge of $10 million, as well as a $6 million tax recovery (reflected in income taxes), to adjust to current net realizable value.
Income tax expense (recovery)
----------------------------------------------------------------------------
three months ended year ended
December 31 December 31
(thousands) 2010 2009 change 2010 2009 change
----------------------------------------------------------------------------
Cayeli $ 10,646 $ 12,516 $ 32,379 $ 19,788
Las Cruces (192) (2,354) (3,894) 5,595
Pyhasalmi 10,968 5,372 27,868 12,016
Ok Tedi 25,880 18,480 70,807 56,413
Troilus and
corporate 6,878 4,654 7,522 27,042
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$ 54,180 $ 38,668 $134,682 $120,854
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Consolidated
effective tax
rate 27% 30% -3% 27% 31% -4%
----------------------------------------------------------------------------
Our tax expense changes as our earnings change.
The consolidated effective tax rate fell this year compared to 2009 mainly because Las Cruces recognized a tax recovery on a foreign exchange loss from its intercompany US dollar denominated debt. The foreign exchange eliminates on consolidation, but the tax recovery does not as there is no corresponding tax expense on the foreign exchange gain. Additionally, mining duties for Troilus were lower as operations concluded during 2010.
2011 outlook for income tax expense
We expect statutory tax rates at our operations to remain the same as they were in 2010 unless a statutory tax rate change is enacted.
Results of our operations
2011 estimates
Our financial review by operation includes estimates for 2011 operating earnings and operating cash flows. We used our 2011 objectives for production and cost per tonne of ore milled to build these estimates, as well as the following assumptions:
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Copper price US $4.30 per pound
Zinc price US $1.00 per pound
Copper treatment cost US $56 per tonne for contracts and US $20 per
tonne for spot sales
Zinc treatment cost US $210 per tonne (basis US $2,000 per tonne) and
US $170 per tonne for spot sales
US $ to C$ exchange rate $1.05
euro to C$ exchange rate $1.37
Working capital Assume no changes for the year
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Cayeli
----------------------------------------------------------------
three months ended
December 31
2010 2009 change
----------------------------------------------------------------
Tonnes of ore milled
(000's) 288 300 -4%
Tonnes of ore milled
per day 3,100 3,300 -4%
----------------------------------------------------------------
Grades (percent) copper 3.2 3.5 -9%
zinc 6.5 6.5 -
----------------------------------------------------------------
Mill recoveries
(percent) copper 73 79 -8%
zinc 70 71 -1%
----------------------------------------------------------------
Production (tonnes) copper 6,600 8,200 -20%
zinc 13,100 13,800 -5%
----------------------------------------------------------------
Cost per tonne of ore
milled (C$) $ 89 $ 78 14%
----------------------------------------------------------------
----------------------------------------------------------------------------
year ended
December 31 objective
2010 2009 change 2011
----------------------------------------------------------------------------
Tonnes of ore milled
(000's) 1,147 1,151 - 1,200
Tonnes of ore milled
per day 3,150 3,150 - 3,300
----------------------------------------------------------------------------
Grades (percent) copper 3.2 3.3 -3% 3.2
zinc 6.3 6.3 - 5.6
----------------------------------------------------------------------------
Mill recoveries
(percent) copper 76 77 -1% 80
zinc 71 71 - 73
----------------------------------------------------------------------------
Production (tonnes) copper 28,200 29,200 -3% 30,900
zinc 51,300 50,900 1% 48,600
----------------------------------------------------------------------------
Cost per tonne of ore
milled (C$) $ 79 $ 72 10% $ 81
----------------------------------------------------------------------------
Another year of strong production
Cayeli's mine production reached a record 1.16 million tonnes this year, and set several new records in the fourth quarter of 2010 for milling, including best daily tonnage of 3,850 tonnes, and best weekly tonnage of 26,600 tonnes. The mine also placed a record amount of pastefill and shotcrete during the year.
Despite this, mill production was slightly lower than 2009 production as well as our objective for 2010 of 1.2 million tonnes. This was due to higher rehabilitation requirements in the highest producing areas during July, and two lesser ground falls this quarter.
Copper grades were consistent with our 2010 target and zinc grades were slightly above our 2010 target despite the mine plan changes incurred due to the July rehabilitation requirements.
Copper recoveries for 2010 were below our target and last year's recoveries due to more difficult metallurgy from the increased presence of secondary copper minerals and less than optimal blending conditions from low blending stockpile volumes during several periods over the course of the year.
Copper production was therefore below 2009 and our target this year, while zinc production was essentially on target.
Over the year, we conducted a thorough ground control audit evaluating all aspects of the mine's ground control program. We also completed a shotcrete ground support audit, continued developing a life of mine sequence stress model and commissioned a microseismic event analysis, all to reduce the geotechnical risks associated with a maturing ore body.
We completed the second and final phase to correct the misalignment of the Cayeli headframe this year (the result of local ground movement over the years). The headframe is now aligned with the concrete collar and under normal stresses. A formal program has been established to monitor the facility in the future and adjust it, if necessary.
Cost per tonne of ore milled was higher this year mainly because of higher royalties from higher realized metals prices and labour cost increases.
2011 outlook for production
In 2011, production levels should remain at approximately 1.2 million tonnes, and the copper grades should remain essentially unchanged at 3.2 percent. We expect zinc grades to decrease to 5.6 percent, reflecting lower zinc grades in the deeper areas of the mine.
With the commissioning of the new copper column flotation cell and high quality copper concentrate thickener, we expect improvements in copper and zinc recoveries as well as improved zinc depression in the copper concentrate. We therefore expect recoveries to increase to 80 percent for copper and 73 percent for zinc.
Financial review
Lower earnings for the quarter because sales volumes were lower due to timing of shipments
----------------------------------------------------------------------------
(millions of
Canadian three months ended year ended
dollars unless December 31 December 31 objective
otherwise stated) 2010 2009 2010 2009 2011
----------------------------------------------------------------------------
Sales analysis
Copper sales
(tonnes) 4,800 8,900 25,400 29,000 30,900
Zinc sales (tonnes) 9,400 15,000 47,900 52,400 48,600
---------------------------------------------------------
Gross copper sales $ 42 $ 69 $ 194 $ 185 $ 308
Gross zinc sales 21 39 101 102 113
Other metal sales 6 6 18 18 14
---------------------------------------------------------
Gross sales 69 114 313 305 435
Smelter processing
charges and
freight (15) (27) (72) (82) (79)
----------------------------------------------------------------------------
Net sales $ 54 $ 87 $ 241 $ 223 $ 356
----------------------------------------------------------------------------
Cost analysis
Tonnes of ore
milled (thousands) 288 300 1,147 1,151 1,200
Direct production
costs ($ per
tonne) $ 89 $ 78 $ 79 $ 72 $ 81
----------------------------------------------------------------------------
Direct production
costs $ 26 $ 24 $ 91 $ 83 $ 97
Change in inventory (6) 1 (8) - -
Depreciation and
other non-cash
costs 2 4 16 16 18
----------------------------------------------------------------------------
Operating costs $ 22 $ 29 $ 99 $ 99 $ 115
----------------------------------------------------------------------------
Operating earnings $ 32 $ 58 $ 142 $ 124 $ 241
----------------------------------------------------------------------------
Operating cash flow $ 42 $ 51 $ 117 $ 96 $ 200
----------------------------------------------------------------------------
The objective for 2011 uses the assumptions listed on page 15.
The table below shows what contributed to the change in operating earnings and operating cash flow between 2010 and 2009.
----------------------------------------------------------------------------
three months ended year ended
(millions) December 31 December 31
----------------------------------------------------------------------------
Higher metal prices, denominated in
Canadian dollars $ 1 $ 40
Lower sales volumes (29) (17)
Higher operating costs