First Quantum lowers 2011 production guidance
(In United States dollars, tabular amounts in millions, except where noted)
VANCOUVER, BRITISH COLUMBIA–(Marketwire – Nov. 8, 2011) – First Quantum Minerals Ltd. (“First Quantum” or the “Company”) (TSX:FM)(LSE:FQM) today announced its results for the three and nine months ended September 30, 2011. The complete unaudited financial statements and management’s discussion and analysis are available for review at www.first-quantum.com and should be read in conjunction with this news release.
The Company’s financial statements are now being prepared in accordance with International Financial Reporting Standards (“IFRS”). The changes in accounting policies have been applied consistently to the comparative period unless otherwise noted. See “Regulatory Disclosures” for further discussion.
SUMMARY OPERATING AND FINANCIAL DATA
|Three months ended||Nine months ended|
|September 30||September 30|
|Production – copper (tonnes)||58,785||76,633||198,260||247,097|
|Sales – copper (tonnes)||71,443||79,408||207,619||235,270|
|Production – gold (ounces)||41,468||46,718||131,701||142,831|
|Sales – gold (ounces)||47,458||44,934||131,233||138,229|
|Net realized copper price (per lb)||$3.54||$2.93||$3.78||$2.78|
|Average copper cash cost of production (C1)1 (per lb)||$1.52||$1.21||$1.37||$1.21|
|Net earnings attributable to shareholders of the Company||90.9||(117.2)||452.9||(148.9)|
|Earnings (loss) per share as reported||$0.20||$(0.29)||$1.03||$(0.37)|
|Comparative earnings per share2||$0.30||$0.35||$1.14||$1.08|
|All comparisons of performance throughout this report are to the comparative periods for 2010 unless otherwise noted.|
|1 Cash costs (C1) are not recognized under IFRS. See “Regulatory Disclosures” for further information.|
|2 Earnings attributable to shareholders of the Company have been adjusted to remove the effect of unusual items to arrive at comparative earnings. Comparative earnings and comparative earnings per share are not measures recognized under IFRS and do not have a standardized meaning prescribed by IFRS. The Company has disclosed these measures to assist with the understanding of results and to provide further financial information about the results to investors. See “Regulatory Disclosures” for a reconciliation of Comparative earnings.|
Q3 results benefit from a higher copper price offset by lower production and higher cash costs of production
- Q3 2011 net earnings attributable to shareholders of the Company of $90.9 million ($0.20 per share). Comparative earnings of $139.3 million ($0.30 per share) versus $139.2 million ($0.35 per share) in Q3 2010.
- 12% increase in gross profit over Q3 2010 due to a higher net realized copper price, offset partially by the loss of Frontier’s contribution and higher costs in Q3 2011.
- Strengthened balance sheet following the induced conversion of the $500.0 million bonds into shares of the Company and the final installment to repay the $400.0 million term loan facility.
- 8% decrease in copper production from Kansanshi and Guelb Moghrein. The lower production was due to lower sulphide ore availability as Kansanshi focused on mine pit development to enable access to increased ore to meet the future requirements of the expanded plant throughput.
- The Company’s common shares were split on a five-for-one basis during Q3 2011. Depositary receipts were also listed on the Lusaka Stock Exchange (“LuSE”) in Zambia making First Quantum Minerals the first mining company to list on the LuSE.
Development projects advanced towards completion and commercial operation
- Ravensthorpe is performing well in the commissioning phase and ramping up as planned towards commercial operation before the end of 2011. The achievements to date confirm that the problem areas, identified prior to the acquisition of the project, have been successfully addressed.
- Construction of the Kevitsa project is over 90% complete and on schedule to begin pre-commissioning in December 2011. Commercial operation is expected to commence in mid 2012.
- Drilling at Sentinel is substantially complete and finalization of the resource estimation is expected in Q4 2011. Plant design is now well advanced and construction will start in Q4 2011. Production is expected to commence in 2014.
- Kansanshi’s expansion of the oxide/leach processing circuit to 7.2 million tonnes per annum (“Mtpa”) is progressing well and is scheduled for completion during Q1 2012.
- In anticipation of the establishment of a substantial nickel resource at Enterprise, the neighbouring Sentinel plant is being designed to incorporate a nickel concentrator facility with a capacity of between 40,000 and 70,000 tonnes of nickel per annum.
- An evaluation to construct a copper smelter at Kansanshi is nearing completion. The smelter is designed to process 1.2 million tonnes of copper in concentrate to produce over 300,000 tonnes of copper metal and 1.1 million tonnes of acid as a by-product.
Operational outlook for 2011
- Production of 265,000 tonnes of copper and 175,000 ounces of gold. A reduced outlook for 2011 reflects lower production to date as well as lower expected sulphide ore grades in the short-term at Kansanshi and lower acid availability in Zambia.
- Average cash cost of $1.35 per pound of copper. The revised forecast is a result of higher costs to date, lower production and higher input costs.
- Ravensthorpe commercial operation is planned before the end of 2011.
|Sales revenues (after realization charges)||Three months ended
|Nine months ended
|Guelb Moghrein||– copper||72.3||56.3||178.2||123.5|
|COPPER SELLING PRICE||USD/lb||USD/lb||USD/lb||USD/lb|
|Gross payable realized copper price||4.02||3.31||4.12||3.19|
|Realized copper price||3.84||3.18||4.04||3.09|
|Treatment charges/refining charges (“TC/RC”) and freight charges||(0.30)||(0.25)||(0.26)||(0.27)|
|Net realized copper price||3.54||2.93||3.78||2.82|
Sales revenues were up 10% from Q3 2010 as an increase in the net realized copper price exceeded the lower sales volumes. The primary basis for the decrease in sales volumes was the forced shut down of operations at Frontier at the end of August 2010. Gold revenues increased by 30% from Q3 2010 to $65.8 million due to the higher realized gold price and the timing of sales from Kansanshi and Guelb Moghrein. TC/RC and freight charges were higher in Q3 2011 reflecting an increase in off-take terms.
The Company’s revenues are recognized at provisional prices when title passes to the customer. Any subsequent adjustments for final pricing are materially offset by derivative adjustments and shown on a net basis in cost of sales (see “Other Items – Hedging Program” for further discussion). Accordingly, the gross payable realized copper price will approximate the average LME monthly cash price net of assay adjustments. Gross payable realized copper price is based on payable copper sales before off-take deductions.
SEGMENTED OPERATING RESULTS
|Kansanshi Copper and Gold Operation||Three months ended
|Nine months ended
|Copper production (tonnes)||50,179||55,201||171,132||164,892|
|Copper sales (tonnes)||61,102||55,355||181,796||166,485|
|Gold production (ounces)||26,677||29,456||82,706||80,647|
|Gold sales (ounces)||29,592||29,907||86,746||86,387|
|Sulphide ore tonnes milled (000’s)||2,185||2,443||7,227||7,683|
|Sulphide ore grade processed (%)||0.4||0.8||0.7||0.8|
|Sulphide copper recovery (%)||88||93||93||92|
|Mixed ore tonnes milled (000’s)||2,057||1,289||5,391||3,826|
|Mixed ore grade processed (%)||0.9||1.2||1.0||1.4|
|Mixed copper recovery (%)||61||67||64||66|
|Oxide ore tonnes milled (000’s)||1,594||1,495||4,580||4,153|
|Oxide ore grade processed (%)||2.3||2.4||2.3||2.2|
|Oxide copper recovery (%)||84||78||86||86|
|Cash costs (C1) (per lb)1||$1.56||$1.09||$1.35||$1.11|
|Total costs (C3) (per lb) 1||$1.90||$1.42||$1.67||$1.33|
|Gross profit (USD M)||$266.7||$241.8||$1,000.9||$673.8|
|1 C1 and C3 costs are not recognized under IFRS. See “Regulatory Disclosures” for further information.|
In Q3 2011, Kansanshi’s mine plan was amended to allow for the pit development required for the production expansion project to 400,000 tonnes per annum. The development work was required to establish wider pits which will enable access to increased ore to meet the future requirements of the expanded plant throughput. This work reduced mining of the sulphide ore body deeper in the pits resulting in a reduction in sulphide ore availability and tonnes milled in Q3 2011. The low sulphide ore availability from mining operations was supplemented by processing low grade ore stockpiles. A portion of this mine development work incurred has been capitalized during Q3 2011.
The sulphide and mixed ore circuits were reconfigured during the quarter to enable the current mined ore feed profile to better match the plant throughput capacity for mixed and sulphide ore. This has increased the circuit throughput capacity for mixed ore to 12 Mtpa and reduced the sulphide ore circuit capacity to 6.5 Mtpa. The new configuration is expected to remain in place until the end of 2012.
The mixed circuit throughput rate benefitted from increased capacity following the circuit reconfiguration later in Q3 2011. Mixed ore grades and recoveries were lower than Q3 2010 as a result of a less favourable blend of sulphide and oxide ore processed. Recent flotation cell capacity improvements have allowed for the mixed circuit to maintain targeted recoveries at significantly increased throughput rates.
Production from the oxide circuit increased from Q3 2010 due to strong milling rates and recoveries despite limited availability of acid in Q3 2011. Some high-grade, higher acid consuming oxide ore was stockpiled in Q3 2011 for processing when the acid supply improves in 2012.
Gold production was 9% lower than Q3 2010 as grades decreased proportionately with the decreased copper grades in Q3 2011.
Kansanshi’s cash cost of production (C1) increased 43% over Q3 2010 due primarily to the impact of lower grades and recoveries in Q3 2011. Total processing costs were also higher as a result of increased input costs for acid, oil-based consumables and costs incurred during circuit reconfiguration. The gold credit in Q3 2011 benefitted from an increased realized gold price.
Kansanshi’s gross profit was 10% higher than Q3 2010 as a result of higher sales volumes and realized prices in the current period, offset partially by higher production costs.
Outlook for 2011
Efforts will continue to focus on pit development in Q4 2011 utilizing the increased mine fleet and an additional mine contractor. Available sulphide ore will remain low during Q4 2011 with grade increasing gradually towards the end of 2011. Cut backs in both pits are expected to open up access to higher grade sulphide ore in 2012 and allow for continued pit development as required for the plant expansion. The additional flotation capacity installed in the mixed circuit will allow for recovery rates to be maintained at significantly increased throughput volumes into 2012.
Oxide ore availability is expected to remain sound, however domestic acid supply will influence grade processed and total cathode produced into 2012. All four of the Company’s acid plants are now operating and a fifth acid plant is planned for construction and commissioning by the end of Q2 2012 to reduce the impact of acid supply shortages on Kansanshi’s operational flexibility and oxide circuit production.
The ongoing program of advanced grade control drilling will enhance the mine planning performance on the complex orebody, and with the increased mining fleet, will improve the flexibility of the mine to deliver the various ore-types to the plant.
Gold production is expected to improve as gravity gold extraction capacity has been amended to focus on potential gains from oxide ore versus the recently reduced sulphide treatment rate and ore grade.
|Guelb Moghrein Copper and Gold Operation||Three months ended
|Nine months ended
|Production – copper in concentrate (tonnes)||8,606||8,487||27,126||27,282|
|Copper sales (tonnes)||10,332||9,291||24,173||22,232|
|Gold production (ounces)||14,791||17,262||48,995||62,184|
|Gold sales (ounces)||17,866||15,027||44,487||51,842|
|Sulphide ore tonnes milled (000’s)||668||644||2,057||2,048|
|Sulphide ore grade processed (%)||1.4||1.4||1.4||1.5|
|Sulphide copper recovery (%)||91||92||91||91|
|Cash costs (C1) (USD per lb)1||$1.33||$0.79||$1.40||$0.85|
|Total costs (C3) (USD per lb)1||$1.89||$1.85||$2.14||$1.60|
|Gross profit (USD M)||$52.4||$29.7||$124.3||$77.6|
|1 C1 and C3 costs are not recognized under IFRS. See “Regulatory Disclosures” for further information.|
Guelb Moghrein’s Q3 2011 copper production was slightly ahead of Q3 2010 as improved throughput was offset partially by lower copper recovery. Engineering works continued in Q3 2011 with a view to further increase throughput to design capacity. Gold production was lower than Q3 2010 due to lower grades and recoveries.
Guelb Moghrein’s cash cost of production (C1) was higher than Q3 2010 due to increased waste stripping and higher costs for personnel, diesel and heavy-fuel oil, and plant maintenance. The gold credit in Q3 2011 benefitted from an increased realized gold price.
Gross profit from Guelb Moghrein improved from Q3 2010 on increased copper and gold prices and higher sales volumes.
Outlook for 2011
At Guelb Moghrein the continued focus is on raising feed tonnages to design capacity. Progress was achieved in Q3 2011 improving pit working areas and overall mining performance. The plant circuit throughput is improving with modifications to equipment and additional depth of plant personnel. The metallurgical team is focused on recoveries, particularly in the gold circuit where opportunities exist for improvement.
COSTS AND EXPENSES
|Three months ended||Nine months ended|
|September 30||September 30|
|General and administrative||(24.8)||(13.3)||(58.0)||(26.2)|
|Net finance costs||(1.4)||(4.8)||(4.5)||(14.8)|
|Acquisition transaction costs||–||–||–||(18.5)|
|Bond inducement costs||(48.4)||–||(48.4)||–|
|Impairment of assets||–||(303.7)||–||(610.3)|
|Net earnings (loss) for the period||120.5||(104.9)||561.0||(72.5)|
|Net earnings (loss) for the period attributable to:|
|Shareholders of the Company||90.9||(117.2)||452.9||(148.9)|
|Earnings (loss) per share|
|basic and diluted (USD per share)||0.20||(0.29)||1.03||(0.37)|
|Weighted average shares outstanding|
|basic and diluted (number of shares – millions)||456.9||401.1||438.1||399.6|
Exploration expenses in Q3 2011 include $5.2 million incurred at the Enterprise and Intrepid targets in Zambia, $4.8 million at the Haquira project in Peru and $4.3 million for regional exploration in Finland. Exploration costs incurred in Q3 2010 consist primarily of Lonshi underground exploration costs and drilling at Sentinel. See “Development Activities – Exploration” for further discussion.
General and administrative costs increased from 2010 due primarily to higher personnel costs driven by an increased complement of skilled employees to develop and manage the significantly expanded pipeline of projects. Q3 2011 also includes legal and other costs related to the Democratic Republic of Congo (“RDC”) matters. General and administrative costs are expected to remain at 2011 levels in the short-term.
During Q3 2011 the Company induced the conversion of its convertible bond which included transaction costs and an incentive payment totalling $48.4 million. See “Equity” for further discussion.
Income taxes in Q3 2010 are net of a $63.1 million recovery of income taxes related to the Frontier impairment. Normalized income taxes in Q3 2011 are consistent with Q3 2010 as a decrease in earnings before taxes was offset by higher tax rates. Kansanshi’s effective tax rate increased from 30% in Q3 2010 to 43% in 2011. See “Other Items” for further discussion on Zambian taxes.
FINANCIAL POSITION AND LIQUIDITY
|Three months ended||Nine months ended|
|September 30||September 30|
|Cash flows from operating activities|
|before changes in working capital||251.5||183.3||735.9||596.5|
|after changes in working capital||97.8||7.9||417.5||511.8|
|Cash flows from financing activities||(61.7)||30.6||(203.5)||(61.9)|
|Cash flows from investing activities||(380.9)||(95.0)||(804.4)||(736.3)|
|Net cash flows||(344.8)||(56.5)||(590.4)||(286.4)|
|Cash flows from operating activities per share1|
|before working capital (USD per share)||$0.55||$0.46||$1.68||$1.49|
|after working capital (USD per share)||$0.21||$0.02||$0.95||$1.28|
|1 Cash flows per share is not recognized under IFRS. See “Regulatory Disclosures” for further information.|
Operating cash flows before changes in working capital increased from Q3 2010 due to the higher net earnings. Working capital movements during Q3 2011 resulted in a decrease in cash of $153.7 million. This was primarily due to the payment of $224.5 million in Zambian taxes in Q3 2011.
Cash flows from financing activities include dividend payments of $25.8 million made to common shareholders of the Company as well as dividends paid to non-controlling interests of $3.3 million. The bond inducement costs of $48.4 million and the final $20.2 million repayment of the $400 million term loan facility are also included in cash flows from financing activities.
Capital expenditures for property, plant and equipment were $380.9 million in Q3 2011, comprising primarily of:
- $104.3 million at Kansanshi for the oxide circuit expansion, mine fleet, and mine pit development costs,
- $101.2 million at Ravensthorpe related to final development and pre-commissioning costs,
- $86.6 million at Kevitsa for ongoing project development,
- $59.5 million at Sentinel for deposits on long-lead plant and mine equipment.
As at September 30, 2011, the Company had the following contractual obligations outstanding:
|1 – 2
|2 – 3
|3 – 4
|4 – 5
|Trade, other and current taxes payable|
Finished copper inventory decreased by 12,927 tonnes to 26,333 tonnes as at September 30, 2011 carried at an average cost of $2.20 per pound ($4,855 per tonne). Approximately 9,000 tonnes of Kansanshi’s copper in concentrate was in the process of being treated or stockpiled for treatment at the Mufulira smelter as at September 30, 2011. Included in the total finished goods inventory balance, but not in the table above, is 6,125 tonnes of third party material purchased for resale by the metal marketing division.
At the date of this report, the Company has 476,301,325 shares outstanding. Changes in common shares outstanding during Q3 2011 are as follows:
|Total shares outstanding as at June 30, 2011||86,179|
|a)||Shares issued on conversion of convertible bonds||8,955|
|b)||Lusaka stock exchange listing||126|
|c)||Five-for-one common share split||381,041|
|Total shares outstanding as at September 30, 2011||476,301|
a) Conversion of convertible bonds
On July 27, 2011, the Company announced a voluntary incentive payment offer in relation to its $500 million 6% convertible bonds. The offer included a cash payment of $8,088.91 per $100,000 in principal amount of the Bonds (the “Incentive Payment”) and a cash payment of $1,410.68 per $100,000 in principal amount of the Bonds (the “Conversion Price Adjustment Payment”) to convert any or all of the convertible bonds due 2014. The incentive offer period expired on July 28, 2011, with 99.98% of the bondholders accepting the conversion offer.
Of the $48.4 million paid, an estimated $35.7 million related to payments for interest and dividend adjustments that would have been incurred in future periods.
On August 4, 2011, the Company issued 8,955,547 common shares on conversion. The $460.0 million convertible debt liability and the $48.3 million equity component of the convertible debt have been transferred to common share capital. The incentive payment and other transactions costs have been recognized in profit and loss in Q3 2011.
b) Lusaka Stock Exchange listing
On July 20, 2011 the Company issued 125,679 common shares in connection with a listing of depositary receipts by the Company on the Lusaka Stock Exchange in Zambia (the “LuSE”). These shares, together with 7,700 common shares in the capital of the Company purchased on the open market, support the depositary receipts. First Quantum Minerals is the first mining company to list on the LuSE and these are the first depositary receipts issued in Africa. The depositary receipts are held by local Zambian investors and employees and trade under the LuSE Symbol “FQM”.
c) Common share split
On July 29, 2011, shareholders of the Company approved a five-for-one share split of the Company’s issued and outstanding common shares. The record date of the share split was August 11, 2011. The Company’s common shares began trading on a split basis from August 9, 2011.
Earnings per share have been retroactively restated on a five-for-one basis for all comparative periods.
Ravensthorpe nickel project, Australia
Phased commissioning of the Ravensthorpe project began in Q1 2011 with the re-commissioning of existing elements. Commissioning of the new elements began in Q2 2011 with first ore feed into the crushing plant achieved in June. The reconstructed crushing plants are performing to expectations and are consistently achieving the design throughputs.
Both beneficiation plants have been re-commissioned, the surge ponds for beneficiated ore have been filled, and reject product from the new beneficiation plant has been successfully dewatered so that it can be readily conveyed and trucked. These achievements confirm that the problem areas, identified prior to the acquisition of the project, within the crushing, beneficiation and rejects plants, have been successfully addressed.
The atmospheric leach (“AL”) plant was commissioned in September and operated at an average of over 90% of design during October 2011. Both pressure acid leach (“PAL”) trains were also successfully brought on line during October and have operated at up to 70% of design during their start up campaigns which are shortened for routine precautionary inspections. Ramp up of the AL and PAL will continue and it is expected that commercial operations will start before the end of 2011.
Ravensthorpe is forecast to produce an average of 39,000 tonnes of nickel annually for the first five years after commencement of operations. The estimated average annual production is 28,000 tonnes over the total life of mine of over 30 years.
Kevitsa nickel/copper/PGE project, Finland
Construction of the Kevitsa project is over 90% complete and on schedule to begin pre-commissioning in December 2011. Commercial operation is expected to commence in mid 2012.
Approvals are being actively pursued through the relevant authorities to increase the throughput rate to 7.5 Mtpa. With the current estimated measured and indicated resources, this increased rate is expected to lift the annual production to approximately 15,000 tonnes of nickel and 28,000 to 30,000 tonnes copper while preserving a mine life in excess of 20 years.
Trident project, Zambia
In April 2011, large scale mining licenses for the development of the Trident project were received from the Government of the Republic of Zambia (“GRZ”). The licences give the Company the exclusive rights to carry out mining operations on the full area of interest at Trident for a period of 25 years. The environmental impact assessment was approved and a land use agreement was agreed to in July 2011 for the development of Sentinel project.
Resource drilling on the Sentinel project is essentially complete with approximately 170,000 metres of core drilling in nearly 500 holes completed during the past 14 months. Geological modelling, data analysis and reporting are currently in progress. Finalization of the resource estimation is nearly complete and a National Instrument 43-101 compliant resource statement for the Sentinel deposit is expected in Q4 2011. Based on an internally generated resource estimate, the project is expected to initially produce 150,000 tonnes of copper in concentrate annually, rising up to 300,000 tonnes of copper in concentrate.
Project design works continued during Q3 2011 and the Company entered into commitments for long-lead mining, crushing and milling equipment. Initial construction works at Sentinel are planned to commence in Q4 2011 targeting production in 2014. Plans for development of necessary infrastructure to service the project are underway.
Kansanshi copper/gold operation, Zambia
Works have commenced at Kansanshi which are expected to expand the annual copper production capacity from 250,000 tonnes to 400,000 tonnes by the end of 2014. The first phase of this increase relates to the expansion of the oxide/leach facilities which will be undertaken in two stages. Stage one is expected to increase annual production capacity to approximately 285,000 tonnes. It is focused on expanding the annual treatment capacity of the oxide circuit to approximately 7.2 Mtpa by Q1 2012. Stage two is planned to increase the oxide throughput further to 12 Mtpa by the end of 2012.
The oxide circuit expansion to 7.2 Mtpa is progressing well with the relocation of equipment from the mothballed Bwana copper processing plant on schedule. Construction of the second operating cell of the oxide tailings dam is largely complete and will be commissioned in Q4 2011. Construction of an additional acid plant at Kansanshi was initiated with completion of the 1,000 tonne per day plant due at the end of Q2 2012. The additional acid capacity is anticipated to reduce the reliance on the inconsistent supply of acid from local smelters and increase the amount of oxide ore that can be treated ahead of the expected construction of a smelter at Kansanshi in 2014.
The second phase of the increase is a proposed expansion of the sulphide treatment facilities by construction of a new section of plant capable of treating 16 Mtpa of sulphide ore. Subject to the completion of the resource drilling program, construction of this new plant will start in 2012 and continue until 2014, with all elements of the expansions to 400,000 tonnes per annum of copper expected to be complete by the end of 2014.
Copper smelter project, Zambia
Currently, Kansanshi’s concentrate production is treated at smelters in Zambia, but from time to time, due to limited capacity, copper concentrate is sold to third parties for export sale. Due to the substantial increase in production expected from the Kansanshi mine together with anticipated new production in Zambia including from the Sentinel project, an evaluation is currently nearing completion to construct a copper smelter at Kansanshi capable of processing 1.2 million tonnes of copper in concentrate to produce over 300,000 tonnes of copper metal. This evaluation is expected to be completed in Q4 2011.
The smelter is being planned to produce over 3,000 tonnes per day of acid as a by-product. This abundant supply of low cost acid will benefit Kansanshi’s performance through the treatment of high acid-consuming oxide ores and the leaching of some mixed ores. This is also expected to reduce the cash costs for Kansanshi as a whole by lowering the cost of acid and increasing production capacity.
Exploration activities continued at a high rate during Q3 2011 with ongoing drill programs in Zambia, Finland, Peru and Mauritania.
At the Trident project in Zambia ten core drills are still active with most rigs focused on the Enterprise prospect and reconnaissance drilling on regional targets.
Eight drills are currently testing the Enterprise nickel target in a focused program that commenced in Q4 2010. 140 holes for 49,750 metres have been completed to an average depth of about 350 metres, over an area of approximately 2.2 kilometres by 1 kilometre. Drilling is largely completed on 100-metre spaced sections through the centre of the area and mineralization has been intercepted on most sections. Strong, thick intercepts of 2% to 3% nickel have been reported from the centre of the target while peripheral holes are generally thinner reporting intercepts of 0.5% to 1% nickel. An area covering 950 metres by 600 metres containing strong intercepts has been defined. This mineralized area is open to the south west.
Ground geophysical surveys have demonstrated a strong conductive anomaly coincident with the high grade sulphide mineralization and this method will provide a useful prospecting tool for further mineralization in the area.
Recent near mine exploration activities have been focused on geophysical targets on the fringe of the Kevitsa resource. A new zone of Kevitsa style mineralization has been identified in an area known as the “East Lobe”. It is unclear if this joins up with the main resource but it is possible that this area will provide some incremental tonnage to be included in the mine model.
An extensive program of base of till drilling is in progress to the south and east of Kevitsa. Some historical drilling in this area suggests mineralization is present however continuity and extent remains unknown. Regional exploration activities were focused on the Kuusamo schist belt south east of Rovaniemi where a series of geophysical targets have been prioritized for top of bedrock drill testing. Several hundred holes have been completed to date.
To the north of Kevitsa several high priority nickel, copper, platinum group elements targets await environmental approval for drilling and should be drilled once the ground freezes.
The drill capacity at Haquira has been increased from four to six rigs. Drilling at Haquira West has reported some encouraging intercepts of hypogene mineralization in porphyry suggesting that good potential remains to establish a more substantial sulphide resource below the scattered supergene cap.
The results of electro-magnetic surveys completed over the entire Haquira tenure are now available. The magnetic survey in particular highlights the Haquira East and West porphyries very effectively. Several other potential porphyry signatures are clear in the data and provide targets for future drill testing. Geochemical sampling on a regular grid over the entire ground package has recently commenced. Several areas of new tenure have been applied for over vacant ground in the Haquira district. Airborne geophysical surveys and basic reconnaissance are planned to cover the tenure before the end of 2011.
The ramp up of the Kansanshi resource and exploration drill program continued during Q3 2011 with 16 rigs now operating and the new core shed and laboratory fully functioning. The new ALS-Chemex on site analytical lab has accelerated assay turn around improving drill planning and resource modeling. Encouraging assays continue to be reported from the resource development program with good vein intercepts around the North-west pit in particular.
Kansanshi exploration drilling currently has eight rigs operating at the south-east Dome and a series of broad regional traverses designed to define the architecture of the regional domes that appear to focus mineralization.
Mauritania & West Africa
In Mauritania, three drill rigs continue to test targets around Guelb Moghrein. Some limited mineralization has been defined on small targets immediately east of the mine. More substantial intercepts of low grade disseminated chalcopyrite have been reported from a gravity target called “Red Chris” several kilometres to the north of the mine.
Reconnaissance exploration including ground geophysics, mapping and geochemical sampling continued on mafic hosted nickel, copper, platinum group elements targets in Mali and Burkina Faso. With the stabilizing political situation in Cote d„Ivoire access to JV properties in the Man district is again possible.
The GRZ announced in January 2008 a number of proposed changes to the tax regime in the country in relation to mining companies. These changes included a windfall tax on copper sales revenue; a variable profit tax; a concentrate export levy of 15%; an increase in the royalty rate to 3%; an increase in the income tax rate to 30%; and other changes including changes in the timing of deductibility of capital allowances and streaming of hedging losses and gains. These changes were passed by Parliament in March 2008 and the majority of changes took effect from April 1, 2008.
Under the President elected in October 2008, the GRZ reviewed these tax changes and proposed that the windfall tax be removed, the deductibility of capital allowances be reinstated to 100% in the period of expenditure and to allow hedging income be part of mining income for tax purposes. These changes were passed by Parliament in March 2009 and the majority of changes took effect from April 1, 2009. These enacted changes were not retroactive to April 1, 2008.
The Company, through its Zambian subsidiaries, is party to Development Agreements with the GRZ for its existing operations which provide an express right to full and fair compensation for any loss, damages or costs (including interest) incurred by the Company by reason of the government’s failure to comply with the tax stability guarantees set out in the Development Agreements and rights of international arbitration in the event of any dispute. Based on legal advice on its rights under the Development Agreements, the Company initially recorded a receivable from the GRZ for an amount it regarded as reasonable expected ultimate repayment of taxes in excess of that permitted under the Development Agreements. However, in November 2010, the GRZ required payment of all back taxes outstanding pursuant to the 2008 and 2009 legislation by June 30, 2011. The Company’s Zambian subsidiaries complied with the GRZ’s demand and completed the payment of all back taxes, totalling $224 million, on June 27, 2011, in addition to $80 million paid in 2010, without prejudice to its rights under the Development Agreement.
Until resolved differently with the GRZ, the Company is recognizing taxes in excess of the Development Agreement as a tax expense with no associated receivable, resulting in an effective tax rate of approximately 43% at Kansanshi.
RDC – Disputes
The Company has reported extensively through press releases and prior MD&A’s on its disputes with the RDC government. As reported, the illegal actions taken by the RDC government resulted in the cessation of construction of the Company’s Kolwezi project in September 2009, the suspension of operations at the Frontier mine in August 2010, and suspension of all of the Company’s exploration activities in the RDC, including the Lonshi underground mine. As previously reported, in relation to the Kolwezi project, the RDC local courts have also rendered judgments against the Company’s RDC subsidiaries Congo Mineral Developments Limited (“CMD”) and Kingamyambo Musonoi Tailings SARL (“KMT”) of US$12 billion in damages. The Company believes this judgment has no legal basis and in any event would not be enforceable against the Company outside of the RDC.
The Company has commenced international arbitrations in respect of the Kolwezi project and the Frontier and Lonshi mines and will continue to pursue all available avenues to recover the value of its RDC assets. The Company has also commenced legal action against Eurasian Natural Resources Corporation (“ENRC”) subsidiaries in the British Virgin Islands. The timing of any judgments or negotiated or arbitrated settlements is not known at this time.
As at September 30, 2011, the following derivative positions were outstanding:
|September 30, 2011||December 31, 2010|
|Floating to fixed interest rate swap||26.0||–||–||–||(0.4)|
|Average fixed interest rate||1.80%|
|USD/EUR extendible collar||–||(0.1)||–||–|
|Futures sales contracts over quotation period||45,275||111.8||(6.9)||3.0||(42.3)|
|Average price ($/tonne)||$8,830|
|Embedded derivative hedged by future sales||47,343||–||–||–||–|
|Average price ($/tonne)||$7,132|
|Net provisional copper exposure (tonnes)||2,068|
|Futures sales contracts over quotation period (ounces)||15,350||2.9||(0.2)||–||(0.9)|
|Average price ($/ounce)||$1,728|
|Embedded derivative hedged by future sales||16,023||–||–||–||–|
|Average price ($/tonne)||$1,625|
|Net provisional gold exposure (ounces)||673|
a) Provisional pricing and derivative contracts
A portion of the Company’s metal sales is sold on a provisional pricing basis whereby sales are recognized at prevailing metal prices when title transfers to the customer and final pricing is not determined until a subsequent date, typically two months later. The difference between final price and provisional invoice price is recognized in net income. In order to mitigate the impact of these adjustments on net income, the Company enters into derivative contracts to directly offset the pricing exposure on the provisionally priced contracts. The provisional pricing gains or losses and offsetting derivative gains or losses are both recognized as a component of cost of sales. Derivative assets are presented in other assets and derivative liabilities are presented in other liabilities with the exception of copper and gold embedded derivatives which are included with accounts receivable.
As at September 30, 2011, substantially all of the Company’s metal sales contracts subject to pricing adjustments were hedged by offsetting derivative contracts.
On Behalf of the Board of Directors of First Quantum Minerals Ltd.
G. Clive Newall, President
Listed in Standard and Poor’s