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Inmet Announces Fourth Quarter Earnings of $0.69 per Share
All amounts in Canadian dollars unless indicated otherwise
Inmet (TSX:IMN) announces fourth quarter earnings of $0.69 per share.
Fourth quarter highlights
Strong earnings from operations
Earnings from operations were $92 million compared to $93 million in the fourth quarter of 2010. The impact of significantly higher sales volumes this quarter mainly from Las Cruces, was offset by lower average copper and zinc prices. Although sales volumes were higher this quarter, timing of shipments resulted in copper sales lagging production by a combined 3,000 tonnes at Ãayeli and Las Cruces. This timing effect reduced earnings from operations by approximately $12 million (or $0.13 per share on an after-tax basis).
Las Cruces production increased
In the fourth quarter of 2011, Las Cruces produced 14,100 tonnes of copper cathode, and finished the year with December production above 5,000 tonnes. In the last two weeks of 2011, we sustained recoveries above 88 percent at throughput levels and cathode production approaching design capacity. We believe that the commissioning phase of the operation is now essentially complete and anticipate output in 2012 to stabilize at the plant design capacity of 72,000 tonnes per year.
Continued strong performance at Ãayeli and Pyhäsalmi
Ãayeli milled a record 316,000 tonnes this quarter and 1,195,000 tonnes for the year. Pyhäsalmi milled 348,000 tonnes this quarter and reached near-record annual throughput of 1,386,000 for the year.
Adjustment of applied interest rate for closure liabilities under International Financial Reporting Standards (IFRS)
We recognized a charge of $17 million in earnings from operations, or $0.24 per share, for post-closure liabilities at our closed properties primarily as a result of a decrease in the discount rates we applied in determining the liabilities at period end. This compares to a charge of $13 million recognized in the fourth quarter of 2010.
Net income decreased
Our net income from continuing operations was $49 million lower than for the same quarter of 2010. We recognized after-tax foreign exchange losses of $9 million this quarter, mainly on cash and long-term bonds we held in US dollars. In the fourth quarter of 2010, we disposed of a non-core investment and recognized a gain of $50.5 million.
Cobre Panama received approval of Environmental Social Impact Assessment
On December 28, 2011, the government of Panama, through the Autoridad Nacional del Ambiente (ANAM), Panama's environmental regulatory authority, approved the Environmental and Social Impact Assessment (ESIA) required for development of Cobre Panama, including the mining operations and related infrastructure, a port facility, and a coal-fired power plant.
Korea Panama Mining Corp. (KPMC) election to exercise Cobre Panama option
In January 2012, we received notice from KPMC that it elected to exercise its option to acquire a 20 percent interest in Minera Panama S.A. (MPSA), the owner and developer of Cobre Panama, which would leave Inmet with an 80 percent interest. The option exercise is expected to close by the end of February 2012. At closing, KPMC will invest approximately US $155 million into MPSA, representing a 20 percent share of development costs to closing, over the US $30 million of such costs KPMC has already funded.
Key financial data
three months ended December 31
Year ended December 31
(thousands, except per share amounts)
2011
2010
Change
2011
2010
change
FINANCIAL HIGHLIGHTS
Sales
Gross sales
$
241,059
$
230,269
+5
%
$
979,045
$
778,556
+26
%
Net income
Net income from continuing operations
$
48,072
$
96,863
-50
%
$
264,732
$
265,714
-
Net income from continuing operations per share
$
0.69
$
1.73
-60
%
$
3.99
$
4.74
-16
%
Net income from discontinued operations
-
$
47,993
-100
%
$
83,439
$
124,755
-33
%
Net income from discontinued operations per share
-
$
0.84
-100
%
$
1.26
$
2.21
-43
%
Net income attributable to Inmet shareholders
$
48,072
$
146,932
-67
%
$
348,171
$
391,876
-11
%
Net income per share
$
0.69
$
2.57
-73
%
$
5.25
$
6.95
-24
%
Cash flow
Cash flow provided by operating activities
$
73,097
$
90,515
-19
%
$
404,854
$
254,918
+59
%
Cash flow provided by operating activities per share (1)
$
1.05
$
1.59
-34
%
$
6.09
$
4.52
+35
%
Capital spending
(2)
$
58,976
$
58,862
-
$
208,541
$
127,619
+63
%
OPERATING HIGHLIGHTS
Production
(3)
Copper (tonnes)
26,200
17,500
+50
%
84,800
65,500
+29
%
Zinc (tonnes)
17,900
21,300
-16
%
80,400
81,400
-1
%
Gold (ounces)
-
-
-
-
37,900
-100
%
Pyrite (tonnes)
210,500
186,800
+13
%
804,900
584,100
+38
%
Copper cash cost (US $ per pound)
(4)
$
0.82
$
0.74
+11
%
$
0.86
$
0.64
+34
%
as at December 31
as at
December 31
FINANCIAL CONDITION
2011
2010
Current ratio
9.3 to 1
3.4 to 1
Gross debt to total equity
1%
1%
Net working capital balance (millions)
$1,304
$626
Liquidity balance including cash and long-term bonds (millions)
$1,706
$699
Gross debt (millions)
$17
$17
Shareholders' equity (millions)
$3,414
$2,555
(1)
Cash flow provided by operating activities divided by average shares outstanding for the period.
(2)
Year ended December 31, 2011 includes capital spending of $133 million at Cobre Panama and $54 million at Las Cruces. Year ended December 31, 2010 includes capital spending of $85 million at Cobre Panama and $80 million at Las Cruces, reduced by positive cash flow from pre-operating costs net of revenues and working capital changes at Las Cruces of $56 million.
(3)
Inmet's share. 2010 production does not include our share of Ok Tedi.
(4)
Copper cash cost per pound is a non-GAAP financial measure - see Supplementary financial information on pages 30 to 32.
Fourth quarter press release
Where to find it
Our financial results
5
Key changes in 2011
5
Understanding our performance
6
Earnings from operations
8
Corporate costs
12
Results of our operations
15
Ãayeli
16
Las Cruces
18
Pyhäsalmi
20
Status of our development project
22
Cobre Panama
22
Managing our liquidity
24
Financial condition
27
Accounting changes
28
Supplementary financial information
30
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, 2011.
Adoption of International Financial Reporting Standards
We have prepared our fourth quarter 2011 consolidated financial statements and other financial information according to International Financial Reporting Standards, and restated our 2010 comparative financial statements and other financial information following our IFRS accounting policies. See Adoption of International Financial Reporting Standards on page 28 for more information.
Caution with respect to forward-looking statements and information
Securities regulators encourage companies to disclose forward-looking information to help investors understand a company's future prospects. This interim report contains statements about our business, results of operation and future financial condition.
These statements 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 like may, expect, anticipate, believe or other similar words. Our objectives and outlook have been prepared based on our existing operations, expectations and circumstances. Actual events and results could be substantially different, however, because of the risks and uncertainties associated with our business or events that happen after the date of this interim report.
You should not place undue reliance on forward-looking statements. As a general policy, we do not update forward-looking statements except if there is an offering document or where securities legislation requires us to do so.
Although we have attempted to identify factors that would cause actual actions, events or results to differ materially from those disclosed in the forward-looking statements or information, there may be other factors that cause actions, events or results not to be as anticipated, estimated or intended. Also, many of the factors are beyond the control of Inmet. Accordingly, readers should not place undue reliance on forward-looking statements or information. Inmet undertakes no obligation to update forward-looking statements or information as a result of new information after the date of this interim report except as required by law. All forward-looking statements and information herein are qualified by this cautionary statement.
Our financial results
three months ended December 31
Year ended December 31
(thousands, except per share amounts)
2011
2010
change
2011
2010
change
EARNINGS FROM OPERATIONS
(1)
Ãayeli
$
35,807
$
36,810
-3
%
$
159,698
$
148,504
+8
%
Las Cruces
41,710
23,508
+77
%
126,392
44,889
+182
%
Pyhäsalmi
31,182
45,440
-31
%
143,149
120,257
+19
%
Other
(16,722
)
(13,071
)
+28
%
(16,722
)
16,595
-201
%
91,977
92,687
-1
%
412,517
330,245
+25
%
DEVELOPMENT AND EXPLORATION
Corporate development and exploration
(6,541
)
(5,434
)
+20
%
(29,202
)
(13,495
)
+116
%
CORPORATE COSTS
General and administration
(7,734
)
(4,758
)
+63
%
(34,401
)
(20,364
)
+69
%
Investment and other income
(4,011
)
50,622
-108
%
30,725
58,344
-47
%
Stand by costs
-
-
-
-
(6,753
)
-100
%
Finance costs
(2,390
)
(4,294
)
-44
%
(9,484
)
(13,176
)
-28
%
Income taxes
(23,229
)
(31,960
)
-27
%
(105,423
)
(69,087
)
+53
%
(37,364
)
9,610
-487
%
(118,583
)
(51,036
)
+132
%
Net income from continuing operations
48,072
96,863
-51
%
264,732
265,714
-
Income from discontinued operation (net of taxes)
-
47,993
-100
%
83,439
124,755
-33
%
Non-controlling interest
-
(2,076
)
-100
%
-
(1,407
)
-100
%
Net income attributable to Inmet shareholders
$
48,072
$
146,932
-67
%
$
348,171
$
391,876
-11
%
Income from continuing operations per common share
$
0.69
$
1.73
-60
%
$
3.99
$
4.74
-16
%
Diluted income from continuing operations per common share
$
0.69
$
1.73
-60
%
$
3.98
$
4. 73
+16
%
Basic net income per common share
$
0.69
$
2.57
-73
%
$
5.25
$
6.95
-24
%
Diluted net income per common share
$
0.69
$
2.57
-73
%
$
5.23
$
6.94
-25
%
Weighted average shares outstanding
69,332
57,053
+22
%
66,432
56,345
+18
%
(1)
Gross sales less smelter processing charges and freight, cost of sales including depreciation and provisions for mine reclamation at closed properties.
Key changes in 2011
(millions)
three months ended
December 31
Year ended
December 31
see
page
EARNINGS FROM OPERATIONS
Market Factors
Higher (lower) copper prices denominated in Canadian dollars
$
(27
)
$
36
8
Lower zinc prices denominated in Canadian dollars
(7
)
(7
)
8
Other changes in prices denominated in Canadian dollars
(1
)
16
8
Lower smelter processing charges
4
7
10
Foreign exchange - decreased operating costs
2
9
11
Operational Factors
Higher sales volume at Las Cruces, net of production costs
37
114
19
2010 earnings from Troilus
-
(30
)
Higher sales volumes at our other mines
6
18
8
Higher operating costs at our other mines
(3
)
(19
)
11
Higher depreciation due to Las Cruces production
(9
)
(57
)
12
Other
(3
)
(4
)
Increase (decrease) in operating earnings, compared to 2010
(1
)
83
Lower (higher) taxes from lower (higher) income
9
(37
)
14
Higher corporate development, exploration and administrative costs
(4
)
(30
)
12
Foreign exchange changes
(8
)
12
13
Gain on sale of investment in Premier Gold Mines Ltd. in 2010
(51
)
(51
)
13
Higher interest income
2
9
13
Las Cruces standby charges in 2010
-
7
14
Other
4
6
Lower net income from continuing operations compared to 2010
(49
)
(1
)
Lower income from discontinued operation - Ok Tedi
(48
)
(41
)
14
Non-controlling interest in 2010
(2
)
-
Lower net income attributable to Inmet shareholders compared to 2010
$
(99
)
$
(42
)
Understanding our performance
Metal prices
The table below shows the average metal prices we realized in US dollars and Canadian dollars, this quarter and year to date compared to 2010. The prices we realize include finalization adjustments - see Gross sales on page 9.
three months ended December 31
Year ended December 31
2011
2010
change
2011
2010
change
US dollar metal prices
Copper (per pound)
US $3.51
US $4.10
-14
%
US $3.84
US $3.55
+8
%
Zinc (per pound)
US $0.87
US $1.06
-18
%
US $0.97
US $0.96
+1
%
Canadian dollar metal prices
Copper (per pound)
C $3.59
C $4.15
-13
%
C $3.80
C $3.66
+4
%
Zinc (per pound)
C $0.89
C $1.07
-17
%
C $0.96
C $0.99
-3
%
Copper
Copper was one of the strongest performing base metals for most of this year, with London Metals Exchange (LME) prices rising from US $4.42 per pound at the beginning of the year, to a record high price of US $4.60 per pound on February 14. Prices remained strong for much of the year, before they fell sharply by 23 percent in the final quarter of 2011, closing the year at US $3.43 per pound. LME copper prices averaged US $4.00 per pound this year, the highest ever average annual price, compared to US $3.42 per pound in 2010. LME copper prices averaged US $3.40 per pound in the fourth quarter, a decrease of 13 percent from the comparative quarter of 2010.
Zinc
LME zinc prices averaged US $0.86 per pound this quarter, a decrease of 18 percent from the fourth quarter of 2010. LME zinc prices averaged US $0.99 per pound this year, slightly higher than the average 2010 zinc price of US $0.98 per pound.
Exchange rates
Exchange rates affect our revenue and earnings. The table below shows the average exchange rates we realized this quarter and year to date compared to 2010.
three months ended December 31
Year ended December 31
2011
2010
change
2011
2010
change
Exchange rates
1 US$ to C$
$
1.02
$
1.01
+1
%
$
0.99
$
1.03
-4
%
1 euro to C$
$
1.38
$
1.38
-
$
1.38
$
1.37
+1
%
1 euro to US$
$
1.35
$
1.37
-1
%
$
1.39
$
1.39
-
1 US$ to Turkish lira
TL
1.83
TL
1.46
+25
%
TL
1.65
TL
1.50
+10
%
Compared to the same quarter last year, the value of the Canadian dollar went down 1 percent relative to the US dollar, and maintained its value 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
translate Ãayeli's Turkish lira denominated costs into its functional currency (US dollars)
revalue US dollars and euros that we hold in cash and long-term bonds at Corporate.
Lower zinc treatment charges
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.
Our copper contracts with the smelters for 2011 had higher payment terms than 2010, consistent with the overall industry. Additionally, spot smelter processing charges for a portion of the year were significantly higher as the earthquake in Japan in March 2011 caused temporary stoppages in copper smelter production, lowering short-term demand for copper concentrates. Zinc treatment charges were lower in 2011 compared to 2010, reflecting a tightening zinc concentrate market.
three months ended December 31
Year ended December 31
(US$)
2011
2010 (1)
change
2011
2010 (1)
change
Treatment charges
Copper (per dry metric tonne of concentrate)
US $55
US $45
+22
%
US $57
US $51
+12
%
Zinc (per dry metric tonne of concentrate)
US $184
US $239
-23
%
US $216
US $244
-11
%
Price participation
Copper (per pound)
US $0.02
US $0.03
-33
%
US $0.02
US $0.02
-
Zinc (per pound)
US ($0.02
)
-
-100
%
US ($0.01
)
US ($0.01
)
-
Freight charges
Copper (per dry metric tonne of concentrate)
US $58
US $58
-
US $51
US $50
+2
%
Zinc (per dry metric tonne of concentrate)
US $11
US $12
-9
%
US $22
US $26
-15
%
(1)
2010 charges exclude Ok Tedi charges.
Statutory tax rates remain consistent
The table below shows the statutory tax rates for each of our taxable operating mines.
2011
2010
change
Statutory tax rates
Ãayeli
24
%
24
%
-
Las Cruces
30
%
30
%
-
Pyhäsalmi
26
%
26
%
-
Earnings from operations
three months ended December 31
Year ended December 31
(thousands)
2011
2010
change
2011
2010
change
Gross sales
$
241,059
$
230,269
+5
%
$
979,045
$
778,556
+26
%
Smelter processing charges and freight
(28,228
)
(35,733
)
-21
%
(130,726
)
(138,464
)
-6
%
Cost of sales:
Direct production costs
(78,456
)
(75,887
)
+3
%
(302,513
)
(236,124
)
+28
%
Inventory changes
7,003
12,719
-45
%
666
6,426
-90
%
Other non-cash expenses
(21,685
)
(19,799
)
+10
%
(25,229
)
(24,161
)
+4
%
Depreciation
(27,716
)
(18,882
)
+47
%
(108,726
)
(55,988
)
+94
%
Earnings from operations
$
91,977
$
92,687
-1
%
$
412,517
$
330,245
+25
%
Significantly higher gross sales this year
three months ended December 31
Year ended December 31
(thousands)
2011
2010
change
2011
2010
change
Gross sales by operation
Ãayeli
$
79,656
$
79,944
-
$
353,706
$
333,611
+6
%
Las Cruces
100,941
66,794
+51
%
356,918
128,643
+177
%
Pyhäsalmi
60,462
81,775
-26
%
268,421
242,476
+11
%
Other (Troilus)
-
1,756
-100
%
-
73,826
-100
%
$
241,059
$
230,269
+5
%
$
979,045
$
778,556
+26
%
Gross sales by metal
Copper
$
183,155
$
153,554
+19
%
$
696,257
$
470,378
+48
%
Zinc
34,394
49,843
-31
%
177,172
176,065
+1
%
Gold
-
1,756
-100
%
-
56,672
-100
%
Other
23,510
25,116
-6
%
105,616
75,441
+40
%
$
241,059
$
230,269
+5
%
$
979,045
$
778,556
+26
%
Key components of the increase in sales: increasing gross sales at Las Cruces, no sales at Troilus
(millions)
three months ended
December 31
Year ended
December 31
Higher (lower) copper prices, denominated in Canadian dollars
$
(27
)
$
36
Lower zinc prices, denominated in Canadian dollars
(7
)
(7
)
Higher (lower) other metal prices
(1
)
16
2010 gross sales from Troilus
(2
)
(74
)
Higher sales volumes at Las Cruces
46
205
Higher sales volumes at our other operations
2
25
Other
-
(1
)
Higher gross sales, compared to 2010
$
11
$
200
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 $4 million in positive finalization adjustments from third quarter sales.
At the end of this quarter, the following sales had not been settled:
21 million pounds of copper provisionally priced at US $3.45 per pound
10 million pounds of zinc provisionally priced at US $0.83 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:
(millions of pounds)
copper
zinc
January 2012
11
10
February 2012
4
-
March 2012
6
-
Unsettled sales at December 31, 2011
21
10
Significantly higher copper and pyrite sales volumes, no 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 was significantly higher mainly from Las Cruces. Additionally in late 2010, we acquired the 30 percent non-controlling interest in Las Cruces to increase our ownership to 100 percent. This quarter, timing of shipments resulted in copper sales volumes lagging production volumes by a combined 3,000 tonnes at Ãayeli and Las Cruces.
Zinc production was lower this quarter than in 2010 due to lower zinc grades at Ãayeli and Pyhäsalmi, and in line with 2010 production levels this year.
We did not produce any gold this year as Troilus ceased production in 2010.
Pyhäsalmi's pyrite sales volumes were higher than in 2010 because of increased customer demand in Europe and China.
three months ended December 31
Year ended December 31
Sales volumes
2011
2010 (1)
change
2011
2010 (1)
change
Copper contained in concentrate
10,300
9,200
+12
%
41,200
43,300
-5
%
Copper cathode (tonnes)
12,800
5,500
+133
%
42,000
19,100
+120
%
Total copper (tonnes)
23,100
14,700
+57
%
83,200
62,400
+33
%
Zinc (tonnes)
17,300
21,000
-18
%
84,400
80,700
+5
%
Gold (ounces)
-
1,300
-100
%
-
47,300
-100
%
Pyrite (tonnes)
175,900
178,200
-1
%
809,200
573,300
+41
%
Production
three months ended December 31
Year ended December 31
objective
Inmet's share (2)
2011
2010 (1)
Change
2011
2010 (1)
change
2012
Copper (tonnes)
Ãayeli
8,600
6,700
+28
%
28,700
28,200
+2
%
27,000 - 30,000
Las Cruces
14,100
6,900
+104
%
42,100
20,600
+104
%
61,700 - 68,600
Pyhäsalmi
3,500
3,900
-10
%
14,000
14,700
-5
%
11,300 - 12,600
Troilus
-
-
-
-
2,000
-100
%
-
26,200
17,500
+50
%
84,800
65,500
+29
%
100,000 - 111,200
Zinc (tonnes)
Ãayeli
11,300
13,100
-14
%
48,100
51,300
-6
%
36,000 - 39,800
Pyhäsalmi
6,600
8,200
-20
%
32,300
30,100
+7
%
22,800 - 25,200
17,900
21,300
-16
%
80,400
81,400
-1
%
58,800 - 65,000
Gold (ounces)
Troilus
-
-
-
-
37,900
-100
%
-
Pyrite (tonnes)
Pyhäsalmi
210,500
186,800
+13
%
804,900
584,100
+38
%
800,000
(1)
2010 volumes exclude Ok Tedi.
(2)
Inmet's share: 100 percent for Ãayeli, Pyhäsalmi and Troilus. Our share of Las Cruces was 70 percent until December 15, 2010 and 100 percent after that.
2012 outlook for sales
We use our production objectives to estimate our sales target.
We expect copper production in 2012 to be significantly higher than 2011 as Las Cruces operates more consistently towards its nameplate capacity of 72,000 tonnes of copper cathode per year. Pyhäsalmi expects its copper production to decrease in 2012 as fewer higher grade stopes are available in the short-term mining sequence.
We expect zinc sales volumes to decrease in 2012 as a result of lower zinc production from Ãayeli and Pyhäsalmi as they each move towards their average reserve grade of 4.3 percent and 2.1 percent, respectively.
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.
According to international research, global copper supply should grow modestly in 2012. New production should be mostly offset by declining production at large existing copper mines and could possibly also be impacted by labour disruptions. Continued strong demand is expected in China, with increasing economic recovery in the United States, and continued interest from investors. Increasing demand, combined with tighter supply, should translate into historically elevated copper prices during 2012.
For zinc, modest increases in both market supply and demand are expected, with a decreasing market surplus compared to 2011, which should continue to support prices in 2012 at levels consistent with those of 2011.
Lower smelter processing charges this year
three months ended December 31
Year ended December 31
(thousands)
2011
2010
change
2011
2010
change
Smelter processing charges and freight by operation
Ãayeli
$
14,845
$
16,899
-12
%
$
71,704
$
75,268
-5
%
Las Cruces
363
271
+34
%
1,227
298
+312
%
Pyhäsalmi
13,020
18,563
-30
%
57,795
58,372
-1
%
Other (Troilus)
-
-
-
-
4,526
-100
%
$
28,228
$
35,733
-21
%
$
130,726
$
138,464
-6
%
Smelter processing charges and freight by metal
Copper
$
11,351
$
9,799
+16
%
$
43,761
$
43,806
-
Zinc
11,618
18,560
-37
%
65,587
70,709
-7
%
Other
5,259
7,374
-29
%
21,378
23,949
-11
%
$
28,228
$
35,733
-21
%
$
130,726
$
138,464
-6
%
Smelter processing charges by type, and freight
Copper treatment and refining charges
$
3,803
$
2,695
+41
%
$
14,884
$
14,855
-
Zinc treatment charges
6,401
10,047
-36
%
35,498
39,999
-11
%
Copper price participation
430
547
-21
%
1,592
1,800
-12
%
Zinc price participation
(670
)
(41
)
+1,534
%
(1,934
)
(1,987
)
-3
%
Content losses
9,228
11,992
-23
%
43,823
45,109
-3
%
Freight
8,724
10,234
-15
%
35,612
37,240
-4
%
Other
312
259
+20
%
1,251
1,448
-14
%
$
28,228
$
35,733
-21
%
$
130,726
$
138,464
-6
%
2012 outlook for smelter processing charges and freight
We expect our costs for copper treatment and refining to be slightly higher in 2012 than in 2011. A tight concentrate supply is expected to keep the copper market in a deficit position in 2012 and treatment costs close to this year's level. We do not expect to pay copper price participation.
We expect total zinc smelter processing charges, including price participation, to be lower than in 2011 and a continued deficit to exist 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 2011.
Higher direct production costs and cost of sales
three months ended December 31
Year ended December 31
(thousands)
2011
2010
change
2011
2010
change
Direct production costs by operation
Ãayeli
$
24,779
$
25,584
-3
%
$
96,299
$
90,927
+6
%
Las Cruces
39,039
35,769
+9
%
147,636
66,702
+121
%
Pyhäsalmi
14,638
14,534
+1
%
58,578
54,590
+7
%
Other (Troilus)
-
-
-
-
23,905
-100
%
Total direct production costs
78,456
75,887
+3
%
302,513
236,124
+28
%
Inventory changes
(7,003
)
(12,719
)
-45
%
(666
)
(6,426
)
-90
%
Charges for mine rehabilitation and other non-cash charges
21,685
19,799
+10
%
25,229
24,161
+4
%
Total cost of sales (excluding depreciation)
$
93,138
$
82,967
+12
%
$
327,076
$
253,859
+29
%
Direct production costs
Direct production costs were $67 million (or 28 percent) higher in 2011 than they were in 2010 mainly because we began recognizing operating results at Las Cruces in our consolidated income statement effective July 1, 2010, somewhat offset by the closure of Troilus in mid-2010.
Inventory changes
Copper inventories at Ãayeli and Las Cruces increased this quarter end and at the end of the fourth quarter of 2010 because of timing of shipments.
Charges for mine rehabilitation and other non-cash charges
These charges include accruals for asset retirement obligations, provisions for severance and retirement and other non-cash expenses. We recorded an additional $17 million this quarter, and for the year, for post-closure liabilities at our closed properties primarily as a result of a decrease in the discount rates we applied in determining the liabilities. Under IFRS, we are required to revalue our asset retirement obligations for changes in market risk-free interest rates - this discount rate decrease reflects the significantly reduced current interest rate environment and resulted in a charge of $12 million. See note 3 to our interim consolidated financial statements for more detail on how we recognize our asset retirement obligations. Additionally, we recognized a $5 million increase in our estimated closure obligations at Troilus for on-going treatment of tailings effluent for suspended solids and associated labour costs. In 2010, we recorded increased asset retirement obligations of $16 million: $10 million 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, and $6 million from a decrease in the discount rates we applied.
2012 outlook for cost of sales (excluding depreciation)
We expect consolidated direct production costs to be higher in 2012 because higher production at Las Cruces will increase total variable costs, primarily electricity and royalties.
Our budget for 2012 assumes our costs at Ãayeli and Pyhäsalmi will be similar to 2011.
Certain variable costs may continue to affect our earnings, depending on metal prices:
royalties at Ãayeli are affected by its net income
royalties at Las Cruces are affected by its net sales.
The total amount we spend in Canadian dollars will also be affected by the value of the US dollar and euro relative to the Canadian dollar.
Additionally, changes in market risk-free interest rates could significantly increase or decrease our costs related to mine rehabilitation at our closed properties.
Higher depreciation
three months ended December 31
Year ended December 31
(thousands)
2011
2010
change
2011
2010
change
Depreciation by operation
Ãayeli
$
5,568
$
4,145
+34
%
$
22,037
$
20,577
+7
%
Las Cruces
19,757
12,516
+58
%
77,392
23,068
+235
%
Pyhäsalmi
2,391
2,193
+9
%
9,297
8,281
+12
%
Other (Troilus)
-
28
-100
%
-
4,062
-100
%
$
27,716
$
18,882
+47
%
$
108,726
$
55,988
+94
%
Depreciation was higher this year mainly because Las Cruces only began to depreciate its operating assets in our consolidated income statement on July 1, 2010 and because this operation's production was higher for 2011 than 2010. There was no depreciation at Troilus in 2011 because it stopped operating in mid-2010.
2012 outlook for depreciation
We expect depreciation to be higher in 2012 because of higher production volumes at Las Cruces.
Corporate costs
Corporate costs include corporate development and exploration, general and administration costs, interest and other income, stand-by costs and taxes.
Spending on corporate development and exploration
Corporate development and exploration costs were approximately $16 million higher than 2010. In early 2011, we incurred approximately $6 million of expenses related to the arrangement agreement to merge with Lundin Mining Corporation. We mutually agreed to terminate our arrangement agreement on March 29, 2011. All of the costs incurred in connection with the proposed merger were expensed and classified as corporate development and exploration in the consolidated statement of earnings. Increased costs compared to 2010 also reflect our higher budget for 2011 to explore for world class deposits.
2012 outlook for corporate development and exploration
We expect to spend more on exploration in 2012, focusing on Mexico, Chile and Peru, where we have established field offices, and on Cobre Panama to drill more exploration targets on the concession there. We will also continue exploring in areas around our existing operations.
General and administration
General and administration costs are largely for management remuneration, governance and strategy. Costs in 2011 were $14 million higher than 2010 ($3 million in the fourth quarter) mainly because of increased human resources and other spending as we plan our move forward with Cobre Panama, and the impact of share-based compensation plans adopted this year.
2012 outlook for general and administration
We expect general and administration costs to be higher than 2011 as we expect to continue to increase our human resources as we plan our move forward with Cobre Panama.
Investment and other income
three months ended December 31
Year ended December 31
(thousands)
2011
2010
2011
2010
Interest income
$
4,821
$
2,887
$
16,627
$
8,234
Foreign exchange gain (loss)
(8,601
)
(1,464
)
10,789
(968
)
Dividend and royalty income
1,508
634
3,041
3,173
Gain on sale of investment in Premier Gold Mines Ltd.
-
50,505
-
50,505
Other
(1,739
)
(1,940
)
268
(2,600
)
$
(4,011
)
$
50,622
$
30,725
$
58,344
Interest income
We recognized higher interest income this year because of higher yields on our held to maturity bond portfolio and because of higher cash balances this year.
Gain on sale of investment in Premier Gold Mines Ltd (Premier Gold) - 2010
We sold 9.45 million common shares of Premier Gold Mines Ltd. in 2010 for $61 million in cash and recognized a gain of $51 million.
Foreign exchange gain (loss)
We have a foreign exchange gain or loss when we revalue certain foreign denominated assets and liabilities.
Our foreign exchange gains (losses) were from:
three months ended December 31
Year ended December 31
(thousands)
2011
2010
2011
2010
Translation of US dollar cash and held-to-maturity investments held at corporate
$
(9,029
)
$
(72
)
$
3,338
$
(47
)
Translation of Turkish lira taxes payable at Ãayeli
(287
)
(1,131
)
4,027
(672
)
Translation of other monetary assets and liabilities
715
(228
)
3,424
(249
)
$
(8,601
)
$
(1,431
)
$
10,789
$
(968
)
We continue to hold the proceeds from the sale of our equity interest in Ok Tedi in US dollars and plan to use this money to fund our US dollar denominated capital program at Cobre Panama. We have recognized total foreign exchange gains of $3 million this year on these funds because the US dollar appreciated relative to the Canadian dollar. We recognized a foreign exchange loss of $9 million on these funds in the fourth quarter of 2011 as the US dollar depreciated relative to the Canadian dollar. Ãayeli's income taxes are denominated in Turkish lira. This operation recognized a foreign exchange gain of $4 million this year from the revaluation of its taxes payable due to the appreciation of the US dollar (Ãayeli's functional currency) relative to the Turkish lira.
2012 outlook for investment and other income
Investment and other income is affected by cash and held to maturity investment balances, and by interest rates and exchange rates. At December 31, 2011, we held US $276 million in cash and held to maturity investments subject to translation in our Canadian accounts. At the end of January 2012, we converted â¬150 million to US $200 million in one of our euro functional currency companies. This US $200 million will also be subject to translation, but in our euro accounts.
Stand-by costs
In the first quarter of 2010, we could not mine ore at Las Cruces because of water levels in the pit. We expensed $7 million in operating and maintenance costs for the water purification plant because they did not relate to production activities.
Income tax expense
three months ended December 31
Year ended December 31
(thousands)
2011
2010
change
2011
2010
change
Ãayeli
$
9,754
$
12,863
$
52,620
$
35,885
Las Cruces
8,362
(20
)
23,536
(4,094
)
Pyhäsalmi
6,830
12,213
31,719
28,996
Corporate and other
(1,717
)
6,904
(2,452
)
8,300
$
23,229
$
31,960
$
105,423
$
69,087
Consolidated effective tax rate
33
%
25
%
+8
%
28
%
21
%
+7
%
Our tax expense changes as our earnings change.
The consolidated effective tax rate is higher year to date compared to last year, mainly because in 2010 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 since there is no corresponding tax expense on the foreign exchange gain. Additionally, taxes at Ãayeli were higher this year as it recognized a tax expense on a foreign exchange gain from its US dollar denominated cash (Ãayeli's income taxes are denominated in Turkish lira). Corporate and other taxes were lower this year as there were no mining duties payable after the closure of Troilus in 2010.
2012 outlook for income tax expense
For Pyhäsalmi, the statutory rate should decrease from 26 percent to 24.5 percent based on changes to enacted rates in Finland. We expect all other statutory tax rates at our operations in 2012 to remain the same as they were in 2011, unless a statutory tax rate change is enacted.
Discontinued operation
We sold our 18 percent equity interest in Ok Tedi in January 2011, and have reported our results relating to Ok Tedi as discontinued operations retroactively. After-tax income of $83 million in 2011 includes net earnings of $17 million in January, before the sale, and a gain on sale of $66 million net of withholding taxes. We paid Papua New Guinea withholding taxes of $28 million on the sale. We did not pay any Canadian taxes, and we have reduced our tax-effected Canadian tax loss pools by about $3 million.
Results of our operations
2012 estimates
Our financial review by operation includes estimates for our 2012 operating earnings and operating cash flows. We have based these estimates on our 2012 objectives for production (using the midpoints in our production volume ranges) and cost per tonne of ore milled, as well as the following assumptions for the year:
Copper price
US $3.80 per pound
Zinc price
US $0.95 per pound
US $ to C$ exchange rate
$1.00
euro to C$ exchange rate
$1.30
Working capital
Assume no changes for the year
Ãayeli
three months ended December 31
Year ended December 31
2011
2010
change
2011
2010
change
Tonnes of ore milled (000's)
316
288
+10
%
1,195
1,147
+4
%
Tonnes of ore milled per day
3,400
3,100
+10
%
3,300
3,150
+4
%
Grades (percent)
copper
3.5
3.2
+9
%
3.2
3.2
-
zinc
5.3
6.5
-18
%
6.0
6.3
-5
%
Mill recoveries (percent)
copper
79
73
+8
%
75
76
-1
%
zinc
67
70
-4
%
68
71
-4
%
Production (tonnes)
copper
8,600
6,700
28
%
28,700
28,200
+2
%
zinc
11,300
13,100
-14
%
48,100
51,300
-6
%
Cost per tonne of ore milled (C$)
$
79
$
89
-11
%
$
81
$
79
+3
%
Record throughput achieved this year
Ãayeli's mine production reached a record 1.2 million tonnes this year and set new records for weekly tonnage of 30,160 tonnes and monthly tonnage of 108,100 tonnes. This increase in performance is the result of improved mine planning processes, the implementation of a mine control system, and additional rehabilitation resources. Ãayeli's ground conditions require constant monitoring and reinforcement, including the need to minimize any underground void area. The underground void volume was reduced to an all-time low during the year.
Mill production this year also reached a record 1.2 million tonnes despite difficult metallurgy from milling five different ore types with some ore types containing bornite minerals. Bornite activates zinc leading to its inclusion in Ãayeli's copper concentrate rather than reporting to the zinc concentrate. This reduced the overall metallurgical recoveries for both copper and zinc this year. Copper grades this year were in line with our target and with last year. Copper production was therefore slightly below our expectations. Zinc production was essentially on target because higher grades offset the impact of lower recoveries.
Cost per tonne of ore milled was higher than 2010 mainly because consumables, ground control and royalty costs were higher, somewhat offset by the impact of the depreciation of the Turkish lira relative to the US dollar on Turkish lira costs.
2012 outlook for production
In 2012, production levels should remain at approximately 1.2 million tonnes. As the ore pass project progresses, the mine will rely on two rather than three ore passes for much of 2012, reducing flexibility and increasing ore mixing. This will be mitigated by the introduction of a new mining block in 2012 in close proximity to one of the functioning ore passes.
Both copper and zinc recoveries should remain near 2011 levels in 2012, reflecting the ongoing metallurgical challenges presented by the higher percentages of bornite containing ores and the decreasing zinc grade.
We expect to produce between 27,000 tonnes and 30,000 tonnes of copper and between 36,000 and 39,800 tonnes of zinc. Zinc production at Ãayeli from 2008 to 2011 benefitted from grades well above the average reserve grade of 4.3 percent. In 2012, lower zinc grades expected account for the anticipated decline in zinc production.
Financial review
Higher copper sales volumes offset by lower realized metal prices this quarter
three months ended December 31
Year ended December 31
objective
(millions of Canadian dollars unless
otherwise stated)
2011
2010
2011
2010
2012
Sales analysis
Copper sales (tonnes)
6,900
4,800
27,500
26,300
28,500
Zinc sales (tonnes)
9,900
12,700
50,000
51,200
37,900
Gross copper sales
$
54
$
45
$
221
$
205
$
239
Gross zinc sales
20
29
105
109
79
Other metal sales
6
6
28
20
17
Gross sales
80
80
354
334
335
Smelter processing charges and freight
(15
)
(17
)
(72
)
(75
)
(65
)
Net sales
$
65
$
63
$
282
$
259
$
270
Cost analysis
Tonnes of ore milled (thousands)
316
288
1,195
1,147
1,200
Direct production costs ($ per tonne)
$
79
$
89
$
81
$
79
$
80
Direct production costs
$
25
$
26
$
96
$
91
$
96
Change in inventory
(3
)
(4
)
(1
)
(4
)
-
Depreciation and other non-cash costs
7
4
27
23
32
Operating costs
$
29
$
26
$
122
$
110
$
128
Operating earnings
$
36
$
37
$
160
$
149
$
142
Operating cash flow
$
8
$
42
$
157
$
116
$
130
The objective for 2012 uses the assumptions listed on page 15.
The table below shows what contributed to the change in operating earnings and operating cash flow between 2011 and 2010.
(millions)
three months ended
December 31
Year ended
December 31
Higher (lower) copper prices, denominated in Canadian dollars
$
(10
)
$
7
Lower zinc prices, denominated in Canadian dollars
(3
)
(1
)
Higher (lower) other metal prices, denominated in Canadian dollars
(1
)
7
Higher copper sales volumes
18
6
Lower zinc sales volumes
(4
)
(3
)
Lower smelter processing charges and freight
-
4
Foreign exchange - decreased production costs
2
9
Higher production costs denominated in local currencies
(1
)
(14
)
Other
(2
)
(4
)
Higher (lower) operating earnings, compared to 2010
(1
)
11
Change in tax expense because of change in taxable income
7
(10
)
Changes in working capital (see note 20 on page 74)
(42
)
36
Other
2
4
Higher (lower) operating cash flow, compared to 2010
$
(34
)
$
41
Capital spending
three months ended December 31
Year ended December 31
objective
(thousands)
2011
2010
change
2011
2010
change
2012
Capital spending
$
3,500
$
6,700
-48
%
$
13,100
$
14,900
-12
%
$
20,000
We spent $13 million this year to engineer a pair of new ore pass upgrades, add to the underground mobile equipment fleet, install copper concentrate column flotation cells, install a conveyor dust collection system in the mill, add surface storm water runoff capacity, and to continue our mine development. In 2010, we spent $15 million to upgrade underground mobile equipment, remediate the head frame, and install a new double deck screen for the crusher and mine development.
2012 outlook for capital spending
We expect to spend $20 million on capital in 2012, including $7 million to upgrade our ore pass system to addresses deterioration that has accumulated over time from normal abrasion, and to extend the shotcrete slickline and replace certain mobile equipment.
Las Cruces
three months ended December 31
Year ended December 31
(100 percent)
2011
2010
change
2011
2010
change
Tonnes of ore processed (000's)
231
164
+41
%
776
495
+57
%
Copper grades (percent)
6.9
6.4
+8
%
6.5
7.0
-7
%
Plant recoveries (percent)
86
86
-
84
83
+1
%
Cathode copper production (tonnes)
14,100
9,000
+57
%
42,100
28,500
+48
%
Cost per pound of cathode produced (C$) (1)
$
1.25
$
1.80
-31
%
$
1.59
$
1.74
-9
%
(1)
Subsequent to July 1, 2010
Improved plant performance
Las Cruces production in 2011 was significantly higher than 2010, increasing to 42,100 tonnes of copper cathode from 28,500 tonnes. In the fourth quarter of 2011, Las Cruces produced 14,100 tonnes, and finished the year with monthly production above 5,000 tonnes. In the last two weeks of 2011, we sustained recoveries above 88 percent at increased throughput levels and cathode production approached design capacity.
Plant reliability and process stability continued to improve throughout the year while copper recoveries increased. In the area of process stability, the largest gains were from improvements to the grinding thickener and oxygen distribution within the leach reactors. Plant reliability has been enhanced by the addition of surge capacity with the leach feed tank and the leach residue tank ahead of the leach filters. Better control of the precipitated solids and redundant pipelines has greatly reduced the downtime experienced previously to clean key components. Rebuilding of the grinding thickener in June was successful in allowing us to reach the designed density for feeding the leach circuit and controlling the leach chemistry. During the year we progressively improved oxygen distributors in the leach reactors and now have a design that allows effective use of the oxygen in the reaction. We completed our program to change all 8 leach reactor agitators to fully stainless steel components and agitator wear has been well controlled.
Our water purification and drainage and reinjection well systems performed well this year. We have completed and commissioned all phases of the water purification plant, which has increased our treatment capacity. The addition of new dewatering wells has further reduced pit inflows over the course of the year and at year end, pit and pond water levels were well controlled.
Notwithstanding the significant improvements achieved this year, production fell short of our target of 50,200 tonnes of copper cathode.
Cost per pound of cathode produced this quarter was significantly lower than earlier in the year and in the same quarter of 2010, as higher production translated into a lower unit cost.
2012 outlook for production
For 2012, we expect throughput and recoveries to stabilize at the high levels we achieved towards the end of 2011. We have set our production objective as a range of 61,700 to 68,600 tonnes copper cathode, or approximately 90 percent of design capacity. No major construction projects are planned for the year. Routine maintenance is planned for mill relining, solids management and thickener inspection. Additional strengthening of the grinding thickener will take place during our planned shutdown activities to add security to this critical equipment. In total, we expect a minimum of 90 percent operating time throughout 2012.
Las Cruces' unit operating costs should continue to decrease as production volumes increase.
Financial review
Higher operating earnings and operating cash flow this year as Las Cruces ramps up
three months ended December 31
Year ended December 31
objective
(millions of Canadian dollars unless otherwise stated)
2011
2010
2011
2010
(1)
2012
Sales analysis
Copper sales (tonnes)
12,800
7,600
42,000
15,600
65,200
Gross copper sales
$
101
$
67
$
357
$
129
$
551
Smelter processing charges and freight
-
-
(1
)
-
(3
)
Net sales
$
101
$
67
$
356
$
129
$
548
Cost analysis
Pounds of copper produced (millions)
31
20
93
38
144
Direct production costs ($ per pound)
$
1.25
$
1.80
$
1.59
1.74
$
1.14
Direct production costs
$
39
36
$
148
$
67
$
164
Change in inventory
(3
)
(10
)
1
(11
)
-
Depreciation and other non-cash costs
23
17
81
28
92
Operating costs
$
59
$
43
$
230
$
84
$
256
Operating earnings
$
42
$
24
$
126
$
45
$
292
Operating cash flow
$
46
$
34
$
195
$
59
$
385
(1)
Subsequent to July 1, 2010 and at 100 percent
The objective for 2012 uses the assumptions listed on page 15.
The table below shows what contributed to the change in operating earnings and operating cash flow between 2011 and 2010.
(millions)
three months ended
December 31
Year ended
December 31
Higher (lower) copper prices, denominated in Canadian dollars
$
(12
)
$
23
Higher copper sales volumes due to higher production
39
193
Higher smelter processing charges and freights
-
(1
)
Higher operating costs due to higher production
(3
)
(80
)
Higher depreciation
(6
)
(54
)
Higher operating earnings, compared to 2010
18
81
Changes in working capital (see note 20 on page 74)
(15
)
(9
)
Change in depreciation
6
54
Standby charges in 2010
-
7
Other
3
3
Higher operating cash flow, compared to 2010
$
12
$
136
Capital spending
three months ended December 31
Year ended December 31
objective
(100 percent and millions of Canadian dollars)
2011
2010
change
2011
2010
change
2012
Capital
$
10
$
28
-64
%
$
54
$
80
-33
%
$
48
Pre-operating costs capitalized, net of sales, working capital and other
-
4
-100
%
-
(56
)
-100
%
-
$
10
$
32
-69
%
$
54
$
24
+125
%
$
48
Capital spending in 2011 and 2010 was mainly for plant improvements, the permanent water purification plant and mine development.
2012 outlook for capital spending
We expect to spend $48 million on capital projects in 2012. The largest expenditures will come in the areas of mine development, tailings facility expansion and land purchase.
Pyhäsalmi
three months ended December 31
Year ended December 31
2011
2010
change
2011
2010
change
Tonnes of ore milled (000's)
348
350
-1
%
1,386
1,401
-1
%
Tonnes of ore milled per day
3,800
3,800
-
3,800
3,800
-1
%
Grades (percent)
copper
1.1
1.2
-8
%
1.1
1.1
-
zinc
2.1
2.6
-19
%
2.6
2.4
+8
%
sulphur
43
43
-
42
43
-2
%
Mill recoveries (percent)
copper
95
96
-1
%
96
96
-
zinc
90
89
+1
%
91
90
+1
%
Production (tonnes)
copper
3,500
3,900
-10
%
14,000
14,700
-5
%
zinc
6,600
8,200
-20
%
32,300
30,100
+7
%
pyrite
210,500
186,800
+13
%
804,900
584,100
+38
%
Cost per tonne of ore milled (C$)
$
42
$
42
-
$
42
$
39
+8
%
Record pyrite production and sales
Pyhäsalmi maintained its strong performance in 2011, processing 1.4 million tonnes of ore through the mill and achieving copper recoveries of 96 percent and zinc recoveries of 91 percent. Backfill supply was reliable and the underground open void volume was maintained at planned levels.
Copper production in 2011 was higher than target and lower than 2010 because of variations in copper grades. Zinc grades were significantly higher than last year, pushing zinc production higher. A record 805,000 tonnes of pyrite concentrate was produced this year to meet higher customer demand.
Operating costs have been higher this year mostly because of increased ground support and consumables costs, and due to the incremental costs associated with producing more pyrite.
2012 outlook for production
Pyhäsalmi expects to mine 1.4 million tonnes of approximately 1 percent copper and 2 percent zinc in 2012, and produce between 11,300 tonnes and 12,600 tonnes of copper and 22,800 tonnes and 25,200 tonnes of zinc. Copper and zinc production should be lower than 2011 as fewer higher grade stopes are available in the short-term mining sequence. Both copper and zinc grades should recover after 2012.
Pyhäsalmi expects to produce and sell 800,000 tonnes of pyrite in 2012.
Financial review
Higher earnings this year because of significantly higher pyrite sales volumes
three months ended December 31
Year ended December 31
objective
(millions of Canadian dollars unless otherwise stated)
2011
2010
2011
2010
2012
Sales analysis
Copper sales (tonnes)
3,400
4,500
13,700
14,800
11,900
Zinc sales (tonnes)
7,400
8,300
34,400
29,500
24,000
Pyrite sales (tonnes)
175,900
178,200
809,200
573,300
800,000
Gross co
Inmet (TSX:IMN) announces fourth quarter earnings of $0.69 per share.
Fourth quarter highlights
Strong earnings from operations
Earnings from operations were $92 million compared to $93 million in the fourth quarter of 2010. The impact of significantly higher sales volumes this quarter mainly from Las Cruces, was offset by lower average copper and zinc prices. Although sales volumes were higher this quarter, timing of shipments resulted in copper sales lagging production by a combined 3,000 tonnes at Ãayeli and Las Cruces. This timing effect reduced earnings from operations by approximately $12 million (or $0.13 per share on an after-tax basis).
Las Cruces production increased
In the fourth quarter of 2011, Las Cruces produced 14,100 tonnes of copper cathode, and finished the year with December production above 5,000 tonnes. In the last two weeks of 2011, we sustained recoveries above 88 percent at throughput levels and cathode production approaching design capacity. We believe that the commissioning phase of the operation is now essentially complete and anticipate output in 2012 to stabilize at the plant design capacity of 72,000 tonnes per year.
Continued strong performance at Ãayeli and Pyhäsalmi
Ãayeli milled a record 316,000 tonnes this quarter and 1,195,000 tonnes for the year. Pyhäsalmi milled 348,000 tonnes this quarter and reached near-record annual throughput of 1,386,000 for the year.
Adjustment of applied interest rate for closure liabilities under International Financial Reporting Standards (IFRS)
We recognized a charge of $17 million in earnings from operations, or $0.24 per share, for post-closure liabilities at our closed properties primarily as a result of a decrease in the discount rates we applied in determining the liabilities at period end. This compares to a charge of $13 million recognized in the fourth quarter of 2010.
Net income decreased
Our net income from continuing operations was $49 million lower than for the same quarter of 2010. We recognized after-tax foreign exchange losses of $9 million this quarter, mainly on cash and long-term bonds we held in US dollars. In the fourth quarter of 2010, we disposed of a non-core investment and recognized a gain of $50.5 million.
Cobre Panama received approval of Environmental Social Impact Assessment
On December 28, 2011, the government of Panama, through the Autoridad Nacional del Ambiente (ANAM), Panama's environmental regulatory authority, approved the Environmental and Social Impact Assessment (ESIA) required for development of Cobre Panama, including the mining operations and related infrastructure, a port facility, and a coal-fired power plant.
Korea Panama Mining Corp. (KPMC) election to exercise Cobre Panama option
In January 2012, we received notice from KPMC that it elected to exercise its option to acquire a 20 percent interest in Minera Panama S.A. (MPSA), the owner and developer of Cobre Panama, which would leave Inmet with an 80 percent interest. The option exercise is expected to close by the end of February 2012. At closing, KPMC will invest approximately US $155 million into MPSA, representing a 20 percent share of development costs to closing, over the US $30 million of such costs KPMC has already funded.
Key financial data
three months ended December 31
Year ended December 31
(thousands, except per share amounts)
2011
2010
Change
2011
2010
change
FINANCIAL HIGHLIGHTS
Sales
Gross sales
$
241,059
$
230,269
+5
%
$
979,045
$
778,556
+26
%
Net income
Net income from continuing operations
$
48,072
$
96,863
-50
%
$
264,732
$
265,714
-
Net income from continuing operations per share
$
0.69
$
1.73
-60
%
$
3.99
$
4.74
-16
%
Net income from discontinued operations
-
$
47,993
-100
%
$
83,439
$
124,755
-33
%
Net income from discontinued operations per share
-
$
0.84
-100
%
$
1.26
$
2.21
-43
%
Net income attributable to Inmet shareholders
$
48,072
$
146,932
-67
%
$
348,171
$
391,876
-11
%
Net income per share
$
0.69
$
2.57
-73
%
$
5.25
$
6.95
-24
%
Cash flow
Cash flow provided by operating activities
$
73,097
$
90,515
-19
%
$
404,854
$
254,918
+59
%
Cash flow provided by operating activities per share (1)
$
1.05
$
1.59
-34
%
$
6.09
$
4.52
+35
%
Capital spending
(2)
$
58,976
$
58,862
-
$
208,541
$
127,619
+63
%
OPERATING HIGHLIGHTS
Production
(3)
Copper (tonnes)
26,200
17,500
+50
%
84,800
65,500
+29
%
Zinc (tonnes)
17,900
21,300
-16
%
80,400
81,400
-1
%
Gold (ounces)
-
-
-
-
37,900
-100
%
Pyrite (tonnes)
210,500
186,800
+13
%
804,900
584,100
+38
%
Copper cash cost (US $ per pound)
(4)
$
0.82
$
0.74
+11
%
$
0.86
$
0.64
+34
%
as at December 31
as at
December 31
FINANCIAL CONDITION
2011
2010
Current ratio
9.3 to 1
3.4 to 1
Gross debt to total equity
1%
1%
Net working capital balance (millions)
$1,304
$626
Liquidity balance including cash and long-term bonds (millions)
$1,706
$699
Gross debt (millions)
$17
$17
Shareholders' equity (millions)
$3,414
$2,555
(1)
Cash flow provided by operating activities divided by average shares outstanding for the period.
(2)
Year ended December 31, 2011 includes capital spending of $133 million at Cobre Panama and $54 million at Las Cruces. Year ended December 31, 2010 includes capital spending of $85 million at Cobre Panama and $80 million at Las Cruces, reduced by positive cash flow from pre-operating costs net of revenues and working capital changes at Las Cruces of $56 million.
(3)
Inmet's share. 2010 production does not include our share of Ok Tedi.
(4)
Copper cash cost per pound is a non-GAAP financial measure - see Supplementary financial information on pages 30 to 32.
Fourth quarter press release
Where to find it
Our financial results
5
Key changes in 2011
5
Understanding our performance
6
Earnings from operations
8
Corporate costs
12
Results of our operations
15
Ãayeli
16
Las Cruces
18
Pyhäsalmi
20
Status of our development project
22
Cobre Panama
22
Managing our liquidity
24
Financial condition
27
Accounting changes
28
Supplementary financial information
30
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, 2011.
Adoption of International Financial Reporting Standards
We have prepared our fourth quarter 2011 consolidated financial statements and other financial information according to International Financial Reporting Standards, and restated our 2010 comparative financial statements and other financial information following our IFRS accounting policies. See Adoption of International Financial Reporting Standards on page 28 for more information.
Caution with respect to forward-looking statements and information
Securities regulators encourage companies to disclose forward-looking information to help investors understand a company's future prospects. This interim report contains statements about our business, results of operation and future financial condition.
These statements 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 like may, expect, anticipate, believe or other similar words. Our objectives and outlook have been prepared based on our existing operations, expectations and circumstances. Actual events and results could be substantially different, however, because of the risks and uncertainties associated with our business or events that happen after the date of this interim report.
You should not place undue reliance on forward-looking statements. As a general policy, we do not update forward-looking statements except if there is an offering document or where securities legislation requires us to do so.
Although we have attempted to identify factors that would cause actual actions, events or results to differ materially from those disclosed in the forward-looking statements or information, there may be other factors that cause actions, events or results not to be as anticipated, estimated or intended. Also, many of the factors are beyond the control of Inmet. Accordingly, readers should not place undue reliance on forward-looking statements or information. Inmet undertakes no obligation to update forward-looking statements or information as a result of new information after the date of this interim report except as required by law. All forward-looking statements and information herein are qualified by this cautionary statement.
Our financial results
three months ended December 31
Year ended December 31
(thousands, except per share amounts)
2011
2010
change
2011
2010
change
EARNINGS FROM OPERATIONS
(1)
Ãayeli
$
35,807
$
36,810
-3
%
$
159,698
$
148,504
+8
%
Las Cruces
41,710
23,508
+77
%
126,392
44,889
+182
%
Pyhäsalmi
31,182
45,440
-31
%
143,149
120,257
+19
%
Other
(16,722
)
(13,071
)
+28
%
(16,722
)
16,595
-201
%
91,977
92,687
-1
%
412,517
330,245
+25
%
DEVELOPMENT AND EXPLORATION
Corporate development and exploration
(6,541
)
(5,434
)
+20
%
(29,202
)
(13,495
)
+116
%
CORPORATE COSTS
General and administration
(7,734
)
(4,758
)
+63
%
(34,401
)
(20,364
)
+69
%
Investment and other income
(4,011
)
50,622
-108
%
30,725
58,344
-47
%
Stand by costs
-
-
-
-
(6,753
)
-100
%
Finance costs
(2,390
)
(4,294
)
-44
%
(9,484
)
(13,176
)
-28
%
Income taxes
(23,229
)
(31,960
)
-27
%
(105,423
)
(69,087
)
+53
%
(37,364
)
9,610
-487
%
(118,583
)
(51,036
)
+132
%
Net income from continuing operations
48,072
96,863
-51
%
264,732
265,714
-
Income from discontinued operation (net of taxes)
-
47,993
-100
%
83,439
124,755
-33
%
Non-controlling interest
-
(2,076
)
-100
%
-
(1,407
)
-100
%
Net income attributable to Inmet shareholders
$
48,072
$
146,932
-67
%
$
348,171
$
391,876
-11
%
Income from continuing operations per common share
$
0.69
$
1.73
-60
%
$
3.99
$
4.74
-16
%
Diluted income from continuing operations per common share
$
0.69
$
1.73
-60
%
$
3.98
$
4. 73
+16
%
Basic net income per common share
$
0.69
$
2.57
-73
%
$
5.25
$
6.95
-24
%
Diluted net income per common share
$
0.69
$
2.57
-73
%
$
5.23
$
6.94
-25
%
Weighted average shares outstanding
69,332
57,053
+22
%
66,432
56,345
+18
%
(1)
Gross sales less smelter processing charges and freight, cost of sales including depreciation and provisions for mine reclamation at closed properties.
Key changes in 2011
(millions)
three months ended
December 31
Year ended
December 31
see
page
EARNINGS FROM OPERATIONS
Market Factors
Higher (lower) copper prices denominated in Canadian dollars
$
(27
)
$
36
8
Lower zinc prices denominated in Canadian dollars
(7
)
(7
)
8
Other changes in prices denominated in Canadian dollars
(1
)
16
8
Lower smelter processing charges
4
7
10
Foreign exchange - decreased operating costs
2
9
11
Operational Factors
Higher sales volume at Las Cruces, net of production costs
37
114
19
2010 earnings from Troilus
-
(30
)
Higher sales volumes at our other mines
6
18
8
Higher operating costs at our other mines
(3
)
(19
)
11
Higher depreciation due to Las Cruces production
(9
)
(57
)
12
Other
(3
)
(4
)
Increase (decrease) in operating earnings, compared to 2010
(1
)
83
Lower (higher) taxes from lower (higher) income
9
(37
)
14
Higher corporate development, exploration and administrative costs
(4
)
(30
)
12
Foreign exchange changes
(8
)
12
13
Gain on sale of investment in Premier Gold Mines Ltd. in 2010
(51
)
(51
)
13
Higher interest income
2
9
13
Las Cruces standby charges in 2010
-
7
14
Other
4
6
Lower net income from continuing operations compared to 2010
(49
)
(1
)
Lower income from discontinued operation - Ok Tedi
(48
)
(41
)
14
Non-controlling interest in 2010
(2
)
-
Lower net income attributable to Inmet shareholders compared to 2010
$
(99
)
$
(42
)
Understanding our performance
Metal prices
The table below shows the average metal prices we realized in US dollars and Canadian dollars, this quarter and year to date compared to 2010. The prices we realize include finalization adjustments - see Gross sales on page 9.
three months ended December 31
Year ended December 31
2011
2010
change
2011
2010
change
US dollar metal prices
Copper (per pound)
US $3.51
US $4.10
-14
%
US $3.84
US $3.55
+8
%
Zinc (per pound)
US $0.87
US $1.06
-18
%
US $0.97
US $0.96
+1
%
Canadian dollar metal prices
Copper (per pound)
C $3.59
C $4.15
-13
%
C $3.80
C $3.66
+4
%
Zinc (per pound)
C $0.89
C $1.07
-17
%
C $0.96
C $0.99
-3
%
Copper
Copper was one of the strongest performing base metals for most of this year, with London Metals Exchange (LME) prices rising from US $4.42 per pound at the beginning of the year, to a record high price of US $4.60 per pound on February 14. Prices remained strong for much of the year, before they fell sharply by 23 percent in the final quarter of 2011, closing the year at US $3.43 per pound. LME copper prices averaged US $4.00 per pound this year, the highest ever average annual price, compared to US $3.42 per pound in 2010. LME copper prices averaged US $3.40 per pound in the fourth quarter, a decrease of 13 percent from the comparative quarter of 2010.
Zinc
LME zinc prices averaged US $0.86 per pound this quarter, a decrease of 18 percent from the fourth quarter of 2010. LME zinc prices averaged US $0.99 per pound this year, slightly higher than the average 2010 zinc price of US $0.98 per pound.
Exchange rates
Exchange rates affect our revenue and earnings. The table below shows the average exchange rates we realized this quarter and year to date compared to 2010.
three months ended December 31
Year ended December 31
2011
2010
change
2011
2010
change
Exchange rates
1 US$ to C$
$
1.02
$
1.01
+1
%
$
0.99
$
1.03
-4
%
1 euro to C$
$
1.38
$
1.38
-
$
1.38
$
1.37
+1
%
1 euro to US$
$
1.35
$
1.37
-1
%
$
1.39
$
1.39
-
1 US$ to Turkish lira
TL
1.83
TL
1.46
+25
%
TL
1.65
TL
1.50
+10
%
Compared to the same quarter last year, the value of the Canadian dollar went down 1 percent relative to the US dollar, and maintained its value 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
translate Ãayeli's Turkish lira denominated costs into its functional currency (US dollars)
revalue US dollars and euros that we hold in cash and long-term bonds at Corporate.
Lower zinc treatment charges
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.
Our copper contracts with the smelters for 2011 had higher payment terms than 2010, consistent with the overall industry. Additionally, spot smelter processing charges for a portion of the year were significantly higher as the earthquake in Japan in March 2011 caused temporary stoppages in copper smelter production, lowering short-term demand for copper concentrates. Zinc treatment charges were lower in 2011 compared to 2010, reflecting a tightening zinc concentrate market.
three months ended December 31
Year ended December 31
(US$)
2011
2010 (1)
change
2011
2010 (1)
change
Treatment charges
Copper (per dry metric tonne of concentrate)
US $55
US $45
+22
%
US $57
US $51
+12
%
Zinc (per dry metric tonne of concentrate)
US $184
US $239
-23
%
US $216
US $244
-11
%
Price participation
Copper (per pound)
US $0.02
US $0.03
-33
%
US $0.02
US $0.02
-
Zinc (per pound)
US ($0.02
)
-
-100
%
US ($0.01
)
US ($0.01
)
-
Freight charges
Copper (per dry metric tonne of concentrate)
US $58
US $58
-
US $51
US $50
+2
%
Zinc (per dry metric tonne of concentrate)
US $11
US $12
-9
%
US $22
US $26
-15
%
(1)
2010 charges exclude Ok Tedi charges.
Statutory tax rates remain consistent
The table below shows the statutory tax rates for each of our taxable operating mines.
2011
2010
change
Statutory tax rates
Ãayeli
24
%
24
%
-
Las Cruces
30
%
30
%
-
Pyhäsalmi
26
%
26
%
-
Earnings from operations
three months ended December 31
Year ended December 31
(thousands)
2011
2010
change
2011
2010
change
Gross sales
$
241,059
$
230,269
+5
%
$
979,045
$
778,556
+26
%
Smelter processing charges and freight
(28,228
)
(35,733
)
-21
%
(130,726
)
(138,464
)
-6
%
Cost of sales:
Direct production costs
(78,456
)
(75,887
)
+3
%
(302,513
)
(236,124
)
+28
%
Inventory changes
7,003
12,719
-45
%
666
6,426
-90
%
Other non-cash expenses
(21,685
)
(19,799
)
+10
%
(25,229
)
(24,161
)
+4
%
Depreciation
(27,716
)
(18,882
)
+47
%
(108,726
)
(55,988
)
+94
%
Earnings from operations
$
91,977
$
92,687
-1
%
$
412,517
$
330,245
+25
%
Significantly higher gross sales this year
three months ended December 31
Year ended December 31
(thousands)
2011
2010
change
2011
2010
change
Gross sales by operation
Ãayeli
$
79,656
$
79,944
-
$
353,706
$
333,611
+6
%
Las Cruces
100,941
66,794
+51
%
356,918
128,643
+177
%
Pyhäsalmi
60,462
81,775
-26
%
268,421
242,476
+11
%
Other (Troilus)
-
1,756
-100
%
-
73,826
-100
%
$
241,059
$
230,269
+5
%
$
979,045
$
778,556
+26
%
Gross sales by metal
Copper
$
183,155
$
153,554
+19
%
$
696,257
$
470,378
+48
%
Zinc
34,394
49,843
-31
%
177,172
176,065
+1
%
Gold
-
1,756
-100
%
-
56,672
-100
%
Other
23,510
25,116
-6
%
105,616
75,441
+40
%
$
241,059
$
230,269
+5
%
$
979,045
$
778,556
+26
%
Key components of the increase in sales: increasing gross sales at Las Cruces, no sales at Troilus
(millions)
three months ended
December 31
Year ended
December 31
Higher (lower) copper prices, denominated in Canadian dollars
$
(27
)
$
36
Lower zinc prices, denominated in Canadian dollars
(7
)
(7
)
Higher (lower) other metal prices
(1
)
16
2010 gross sales from Troilus
(2
)
(74
)
Higher sales volumes at Las Cruces
46
205
Higher sales volumes at our other operations
2
25
Other
-
(1
)
Higher gross sales, compared to 2010
$
11
$
200
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 $4 million in positive finalization adjustments from third quarter sales.
At the end of this quarter, the following sales had not been settled:
21 million pounds of copper provisionally priced at US $3.45 per pound
10 million pounds of zinc provisionally priced at US $0.83 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:
(millions of pounds)
copper
zinc
January 2012
11
10
February 2012
4
-
March 2012
6
-
Unsettled sales at December 31, 2011
21
10
Significantly higher copper and pyrite sales volumes, no 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 was significantly higher mainly from Las Cruces. Additionally in late 2010, we acquired the 30 percent non-controlling interest in Las Cruces to increase our ownership to 100 percent. This quarter, timing of shipments resulted in copper sales volumes lagging production volumes by a combined 3,000 tonnes at Ãayeli and Las Cruces.
Zinc production was lower this quarter than in 2010 due to lower zinc grades at Ãayeli and Pyhäsalmi, and in line with 2010 production levels this year.
We did not produce any gold this year as Troilus ceased production in 2010.
Pyhäsalmi's pyrite sales volumes were higher than in 2010 because of increased customer demand in Europe and China.
three months ended December 31
Year ended December 31
Sales volumes
2011
2010 (1)
change
2011
2010 (1)
change
Copper contained in concentrate
10,300
9,200
+12
%
41,200
43,300
-5
%
Copper cathode (tonnes)
12,800
5,500
+133
%
42,000
19,100
+120
%
Total copper (tonnes)
23,100
14,700
+57
%
83,200
62,400
+33
%
Zinc (tonnes)
17,300
21,000
-18
%
84,400
80,700
+5
%
Gold (ounces)
-
1,300
-100
%
-
47,300
-100
%
Pyrite (tonnes)
175,900
178,200
-1
%
809,200
573,300
+41
%
Production
three months ended December 31
Year ended December 31
objective
Inmet's share (2)
2011
2010 (1)
Change
2011
2010 (1)
change
2012
Copper (tonnes)
Ãayeli
8,600
6,700
+28
%
28,700
28,200
+2
%
27,000 - 30,000
Las Cruces
14,100
6,900
+104
%
42,100
20,600
+104
%
61,700 - 68,600
Pyhäsalmi
3,500
3,900
-10
%
14,000
14,700
-5
%
11,300 - 12,600
Troilus
-
-
-
-
2,000
-100
%
-
26,200
17,500
+50
%
84,800
65,500
+29
%
100,000 - 111,200
Zinc (tonnes)
Ãayeli
11,300
13,100
-14
%
48,100
51,300
-6
%
36,000 - 39,800
Pyhäsalmi
6,600
8,200
-20
%
32,300
30,100
+7
%
22,800 - 25,200
17,900
21,300
-16
%
80,400
81,400
-1
%
58,800 - 65,000
Gold (ounces)
Troilus
-
-
-
-
37,900
-100
%
-
Pyrite (tonnes)
Pyhäsalmi
210,500
186,800
+13
%
804,900
584,100
+38
%
800,000
(1)
2010 volumes exclude Ok Tedi.
(2)
Inmet's share: 100 percent for Ãayeli, Pyhäsalmi and Troilus. Our share of Las Cruces was 70 percent until December 15, 2010 and 100 percent after that.
2012 outlook for sales
We use our production objectives to estimate our sales target.
We expect copper production in 2012 to be significantly higher than 2011 as Las Cruces operates more consistently towards its nameplate capacity of 72,000 tonnes of copper cathode per year. Pyhäsalmi expects its copper production to decrease in 2012 as fewer higher grade stopes are available in the short-term mining sequence.
We expect zinc sales volumes to decrease in 2012 as a result of lower zinc production from Ãayeli and Pyhäsalmi as they each move towards their average reserve grade of 4.3 percent and 2.1 percent, respectively.
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.
According to international research, global copper supply should grow modestly in 2012. New production should be mostly offset by declining production at large existing copper mines and could possibly also be impacted by labour disruptions. Continued strong demand is expected in China, with increasing economic recovery in the United States, and continued interest from investors. Increasing demand, combined with tighter supply, should translate into historically elevated copper prices during 2012.
For zinc, modest increases in both market supply and demand are expected, with a decreasing market surplus compared to 2011, which should continue to support prices in 2012 at levels consistent with those of 2011.
Lower smelter processing charges this year
three months ended December 31
Year ended December 31
(thousands)
2011
2010
change
2011
2010
change
Smelter processing charges and freight by operation
Ãayeli
$
14,845
$
16,899
-12
%
$
71,704
$
75,268
-5
%
Las Cruces
363
271
+34
%
1,227
298
+312
%
Pyhäsalmi
13,020
18,563
-30
%
57,795
58,372
-1
%
Other (Troilus)
-
-
-
-
4,526
-100
%
$
28,228
$
35,733
-21
%
$
130,726
$
138,464
-6
%
Smelter processing charges and freight by metal
Copper
$
11,351
$
9,799
+16
%
$
43,761
$
43,806
-
Zinc
11,618
18,560
-37
%
65,587
70,709
-7
%
Other
5,259
7,374
-29
%
21,378
23,949
-11
%
$
28,228
$
35,733
-21
%
$
130,726
$
138,464
-6
%
Smelter processing charges by type, and freight
Copper treatment and refining charges
$
3,803
$
2,695
+41
%
$
14,884
$
14,855
-
Zinc treatment charges
6,401
10,047
-36
%
35,498
39,999
-11
%
Copper price participation
430
547
-21
%
1,592
1,800
-12
%
Zinc price participation
(670
)
(41
)
+1,534
%
(1,934
)
(1,987
)
-3
%
Content losses
9,228
11,992
-23
%
43,823
45,109
-3
%
Freight
8,724
10,234
-15
%
35,612
37,240
-4
%
Other
312
259
+20
%
1,251
1,448
-14
%
$
28,228
$
35,733
-21
%
$
130,726
$
138,464
-6
%
2012 outlook for smelter processing charges and freight
We expect our costs for copper treatment and refining to be slightly higher in 2012 than in 2011. A tight concentrate supply is expected to keep the copper market in a deficit position in 2012 and treatment costs close to this year's level. We do not expect to pay copper price participation.
We expect total zinc smelter processing charges, including price participation, to be lower than in 2011 and a continued deficit to exist 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 2011.
Higher direct production costs and cost of sales
three months ended December 31
Year ended December 31
(thousands)
2011
2010
change
2011
2010
change
Direct production costs by operation
Ãayeli
$
24,779
$
25,584
-3
%
$
96,299
$
90,927
+6
%
Las Cruces
39,039
35,769
+9
%
147,636
66,702
+121
%
Pyhäsalmi
14,638
14,534
+1
%
58,578
54,590
+7
%
Other (Troilus)
-
-
-
-
23,905
-100
%
Total direct production costs
78,456
75,887
+3
%
302,513
236,124
+28
%
Inventory changes
(7,003
)
(12,719
)
-45
%
(666
)
(6,426
)
-90
%
Charges for mine rehabilitation and other non-cash charges
21,685
19,799
+10
%
25,229
24,161
+4
%
Total cost of sales (excluding depreciation)
$
93,138
$
82,967
+12
%
$
327,076
$
253,859
+29
%
Direct production costs
Direct production costs were $67 million (or 28 percent) higher in 2011 than they were in 2010 mainly because we began recognizing operating results at Las Cruces in our consolidated income statement effective July 1, 2010, somewhat offset by the closure of Troilus in mid-2010.
Inventory changes
Copper inventories at Ãayeli and Las Cruces increased this quarter end and at the end of the fourth quarter of 2010 because of timing of shipments.
Charges for mine rehabilitation and other non-cash charges
These charges include accruals for asset retirement obligations, provisions for severance and retirement and other non-cash expenses. We recorded an additional $17 million this quarter, and for the year, for post-closure liabilities at our closed properties primarily as a result of a decrease in the discount rates we applied in determining the liabilities. Under IFRS, we are required to revalue our asset retirement obligations for changes in market risk-free interest rates - this discount rate decrease reflects the significantly reduced current interest rate environment and resulted in a charge of $12 million. See note 3 to our interim consolidated financial statements for more detail on how we recognize our asset retirement obligations. Additionally, we recognized a $5 million increase in our estimated closure obligations at Troilus for on-going treatment of tailings effluent for suspended solids and associated labour costs. In 2010, we recorded increased asset retirement obligations of $16 million: $10 million 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, and $6 million from a decrease in the discount rates we applied.
2012 outlook for cost of sales (excluding depreciation)
We expect consolidated direct production costs to be higher in 2012 because higher production at Las Cruces will increase total variable costs, primarily electricity and royalties.
Our budget for 2012 assumes our costs at Ãayeli and Pyhäsalmi will be similar to 2011.
Certain variable costs may continue to affect our earnings, depending on metal prices:
royalties at Ãayeli are affected by its net income
royalties at Las Cruces are affected by its net sales.
The total amount we spend in Canadian dollars will also be affected by the value of the US dollar and euro relative to the Canadian dollar.
Additionally, changes in market risk-free interest rates could significantly increase or decrease our costs related to mine rehabilitation at our closed properties.
Higher depreciation
three months ended December 31
Year ended December 31
(thousands)
2011
2010
change
2011
2010
change
Depreciation by operation
Ãayeli
$
5,568
$
4,145
+34
%
$
22,037
$
20,577
+7
%
Las Cruces
19,757
12,516
+58
%
77,392
23,068
+235
%
Pyhäsalmi
2,391
2,193
+9
%
9,297
8,281
+12
%
Other (Troilus)
-
28
-100
%
-
4,062
-100
%
$
27,716
$
18,882
+47
%
$
108,726
$
55,988
+94
%
Depreciation was higher this year mainly because Las Cruces only began to depreciate its operating assets in our consolidated income statement on July 1, 2010 and because this operation's production was higher for 2011 than 2010. There was no depreciation at Troilus in 2011 because it stopped operating in mid-2010.
2012 outlook for depreciation
We expect depreciation to be higher in 2012 because of higher production volumes at Las Cruces.
Corporate costs
Corporate costs include corporate development and exploration, general and administration costs, interest and other income, stand-by costs and taxes.
Spending on corporate development and exploration
Corporate development and exploration costs were approximately $16 million higher than 2010. In early 2011, we incurred approximately $6 million of expenses related to the arrangement agreement to merge with Lundin Mining Corporation. We mutually agreed to terminate our arrangement agreement on March 29, 2011. All of the costs incurred in connection with the proposed merger were expensed and classified as corporate development and exploration in the consolidated statement of earnings. Increased costs compared to 2010 also reflect our higher budget for 2011 to explore for world class deposits.
2012 outlook for corporate development and exploration
We expect to spend more on exploration in 2012, focusing on Mexico, Chile and Peru, where we have established field offices, and on Cobre Panama to drill more exploration targets on the concession there. We will also continue exploring in areas around our existing operations.
General and administration
General and administration costs are largely for management remuneration, governance and strategy. Costs in 2011 were $14 million higher than 2010 ($3 million in the fourth quarter) mainly because of increased human resources and other spending as we plan our move forward with Cobre Panama, and the impact of share-based compensation plans adopted this year.
2012 outlook for general and administration
We expect general and administration costs to be higher than 2011 as we expect to continue to increase our human resources as we plan our move forward with Cobre Panama.
Investment and other income
three months ended December 31
Year ended December 31
(thousands)
2011
2010
2011
2010
Interest income
$
4,821
$
2,887
$
16,627
$
8,234
Foreign exchange gain (loss)
(8,601
)
(1,464
)
10,789
(968
)
Dividend and royalty income
1,508
634
3,041
3,173
Gain on sale of investment in Premier Gold Mines Ltd.
-
50,505
-
50,505
Other
(1,739
)
(1,940
)
268
(2,600
)
$
(4,011
)
$
50,622
$
30,725
$
58,344
Interest income
We recognized higher interest income this year because of higher yields on our held to maturity bond portfolio and because of higher cash balances this year.
Gain on sale of investment in Premier Gold Mines Ltd (Premier Gold) - 2010
We sold 9.45 million common shares of Premier Gold Mines Ltd. in 2010 for $61 million in cash and recognized a gain of $51 million.
Foreign exchange gain (loss)
We have a foreign exchange gain or loss when we revalue certain foreign denominated assets and liabilities.
Our foreign exchange gains (losses) were from:
three months ended December 31
Year ended December 31
(thousands)
2011
2010
2011
2010
Translation of US dollar cash and held-to-maturity investments held at corporate
$
(9,029
)
$
(72
)
$
3,338
$
(47
)
Translation of Turkish lira taxes payable at Ãayeli
(287
)
(1,131
)
4,027
(672
)
Translation of other monetary assets and liabilities
715
(228
)
3,424
(249
)
$
(8,601
)
$
(1,431
)
$
10,789
$
(968
)
We continue to hold the proceeds from the sale of our equity interest in Ok Tedi in US dollars and plan to use this money to fund our US dollar denominated capital program at Cobre Panama. We have recognized total foreign exchange gains of $3 million this year on these funds because the US dollar appreciated relative to the Canadian dollar. We recognized a foreign exchange loss of $9 million on these funds in the fourth quarter of 2011 as the US dollar depreciated relative to the Canadian dollar. Ãayeli's income taxes are denominated in Turkish lira. This operation recognized a foreign exchange gain of $4 million this year from the revaluation of its taxes payable due to the appreciation of the US dollar (Ãayeli's functional currency) relative to the Turkish lira.
2012 outlook for investment and other income
Investment and other income is affected by cash and held to maturity investment balances, and by interest rates and exchange rates. At December 31, 2011, we held US $276 million in cash and held to maturity investments subject to translation in our Canadian accounts. At the end of January 2012, we converted â¬150 million to US $200 million in one of our euro functional currency companies. This US $200 million will also be subject to translation, but in our euro accounts.
Stand-by costs
In the first quarter of 2010, we could not mine ore at Las Cruces because of water levels in the pit. We expensed $7 million in operating and maintenance costs for the water purification plant because they did not relate to production activities.
Income tax expense
three months ended December 31
Year ended December 31
(thousands)
2011
2010
change
2011
2010
change
Ãayeli
$
9,754
$
12,863
$
52,620
$
35,885
Las Cruces
8,362
(20
)
23,536
(4,094
)
Pyhäsalmi
6,830
12,213
31,719
28,996
Corporate and other
(1,717
)
6,904
(2,452
)
8,300
$
23,229
$
31,960
$
105,423
$
69,087
Consolidated effective tax rate
33
%
25
%
+8
%
28
%
21
%
+7
%
Our tax expense changes as our earnings change.
The consolidated effective tax rate is higher year to date compared to last year, mainly because in 2010 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 since there is no corresponding tax expense on the foreign exchange gain. Additionally, taxes at Ãayeli were higher this year as it recognized a tax expense on a foreign exchange gain from its US dollar denominated cash (Ãayeli's income taxes are denominated in Turkish lira). Corporate and other taxes were lower this year as there were no mining duties payable after the closure of Troilus in 2010.
2012 outlook for income tax expense
For Pyhäsalmi, the statutory rate should decrease from 26 percent to 24.5 percent based on changes to enacted rates in Finland. We expect all other statutory tax rates at our operations in 2012 to remain the same as they were in 2011, unless a statutory tax rate change is enacted.
Discontinued operation
We sold our 18 percent equity interest in Ok Tedi in January 2011, and have reported our results relating to Ok Tedi as discontinued operations retroactively. After-tax income of $83 million in 2011 includes net earnings of $17 million in January, before the sale, and a gain on sale of $66 million net of withholding taxes. We paid Papua New Guinea withholding taxes of $28 million on the sale. We did not pay any Canadian taxes, and we have reduced our tax-effected Canadian tax loss pools by about $3 million.
Results of our operations
2012 estimates
Our financial review by operation includes estimates for our 2012 operating earnings and operating cash flows. We have based these estimates on our 2012 objectives for production (using the midpoints in our production volume ranges) and cost per tonne of ore milled, as well as the following assumptions for the year:
Copper price
US $3.80 per pound
Zinc price
US $0.95 per pound
US $ to C$ exchange rate
$1.00
euro to C$ exchange rate
$1.30
Working capital
Assume no changes for the year
Ãayeli
three months ended December 31
Year ended December 31
2011
2010
change
2011
2010
change
Tonnes of ore milled (000's)
316
288
+10
%
1,195
1,147
+4
%
Tonnes of ore milled per day
3,400
3,100
+10
%
3,300
3,150
+4
%
Grades (percent)
copper
3.5
3.2
+9
%
3.2
3.2
-
zinc
5.3
6.5
-18
%
6.0
6.3
-5
%
Mill recoveries (percent)
copper
79
73
+8
%
75
76
-1
%
zinc
67
70
-4
%
68
71
-4
%
Production (tonnes)
copper
8,600
6,700
28
%
28,700
28,200
+2
%
zinc
11,300
13,100
-14
%
48,100
51,300
-6
%
Cost per tonne of ore milled (C$)
$
79
$
89
-11
%
$
81
$
79
+3
%
Record throughput achieved this year
Ãayeli's mine production reached a record 1.2 million tonnes this year and set new records for weekly tonnage of 30,160 tonnes and monthly tonnage of 108,100 tonnes. This increase in performance is the result of improved mine planning processes, the implementation of a mine control system, and additional rehabilitation resources. Ãayeli's ground conditions require constant monitoring and reinforcement, including the need to minimize any underground void area. The underground void volume was reduced to an all-time low during the year.
Mill production this year also reached a record 1.2 million tonnes despite difficult metallurgy from milling five different ore types with some ore types containing bornite minerals. Bornite activates zinc leading to its inclusion in Ãayeli's copper concentrate rather than reporting to the zinc concentrate. This reduced the overall metallurgical recoveries for both copper and zinc this year. Copper grades this year were in line with our target and with last year. Copper production was therefore slightly below our expectations. Zinc production was essentially on target because higher grades offset the impact of lower recoveries.
Cost per tonne of ore milled was higher than 2010 mainly because consumables, ground control and royalty costs were higher, somewhat offset by the impact of the depreciation of the Turkish lira relative to the US dollar on Turkish lira costs.
2012 outlook for production
In 2012, production levels should remain at approximately 1.2 million tonnes. As the ore pass project progresses, the mine will rely on two rather than three ore passes for much of 2012, reducing flexibility and increasing ore mixing. This will be mitigated by the introduction of a new mining block in 2012 in close proximity to one of the functioning ore passes.
Both copper and zinc recoveries should remain near 2011 levels in 2012, reflecting the ongoing metallurgical challenges presented by the higher percentages of bornite containing ores and the decreasing zinc grade.
We expect to produce between 27,000 tonnes and 30,000 tonnes of copper and between 36,000 and 39,800 tonnes of zinc. Zinc production at Ãayeli from 2008 to 2011 benefitted from grades well above the average reserve grade of 4.3 percent. In 2012, lower zinc grades expected account for the anticipated decline in zinc production.
Financial review
Higher copper sales volumes offset by lower realized metal prices this quarter
three months ended December 31
Year ended December 31
objective
(millions of Canadian dollars unless
otherwise stated)
2011
2010
2011
2010
2012
Sales analysis
Copper sales (tonnes)
6,900
4,800
27,500
26,300
28,500
Zinc sales (tonnes)
9,900
12,700
50,000
51,200
37,900
Gross copper sales
$
54
$
45
$
221
$
205
$
239
Gross zinc sales
20
29
105
109
79
Other metal sales
6
6
28
20
17
Gross sales
80
80
354
334
335
Smelter processing charges and freight
(15
)
(17
)
(72
)
(75
)
(65
)
Net sales
$
65
$
63
$
282
$
259
$
270
Cost analysis
Tonnes of ore milled (thousands)
316
288
1,195
1,147
1,200
Direct production costs ($ per tonne)
$
79
$
89
$
81
$
79
$
80
Direct production costs
$
25
$
26
$
96
$
91
$
96
Change in inventory
(3
)
(4
)
(1
)
(4
)
-
Depreciation and other non-cash costs
7
4
27
23
32
Operating costs
$
29
$
26
$
122
$
110
$
128
Operating earnings
$
36
$
37
$
160
$
149
$
142
Operating cash flow
$
8
$
42
$
157
$
116
$
130
The objective for 2012 uses the assumptions listed on page 15.
The table below shows what contributed to the change in operating earnings and operating cash flow between 2011 and 2010.
(millions)
three months ended
December 31
Year ended
December 31
Higher (lower) copper prices, denominated in Canadian dollars
$
(10
)
$
7
Lower zinc prices, denominated in Canadian dollars
(3
)
(1
)
Higher (lower) other metal prices, denominated in Canadian dollars
(1
)
7
Higher copper sales volumes
18
6
Lower zinc sales volumes
(4
)
(3
)
Lower smelter processing charges and freight
-
4
Foreign exchange - decreased production costs
2
9
Higher production costs denominated in local currencies
(1
)
(14
)
Other
(2
)
(4
)
Higher (lower) operating earnings, compared to 2010
(1
)
11
Change in tax expense because of change in taxable income
7
(10
)
Changes in working capital (see note 20 on page 74)
(42
)
36
Other
2
4
Higher (lower) operating cash flow, compared to 2010
$
(34
)
$
41
Capital spending
three months ended December 31
Year ended December 31
objective
(thousands)
2011
2010
change
2011
2010
change
2012
Capital spending
$
3,500
$
6,700
-48
%
$
13,100
$
14,900
-12
%
$
20,000
We spent $13 million this year to engineer a pair of new ore pass upgrades, add to the underground mobile equipment fleet, install copper concentrate column flotation cells, install a conveyor dust collection system in the mill, add surface storm water runoff capacity, and to continue our mine development. In 2010, we spent $15 million to upgrade underground mobile equipment, remediate the head frame, and install a new double deck screen for the crusher and mine development.
2012 outlook for capital spending
We expect to spend $20 million on capital in 2012, including $7 million to upgrade our ore pass system to addresses deterioration that has accumulated over time from normal abrasion, and to extend the shotcrete slickline and replace certain mobile equipment.
Las Cruces
three months ended December 31
Year ended December 31
(100 percent)
2011
2010
change
2011
2010
change
Tonnes of ore processed (000's)
231
164
+41
%
776
495
+57
%
Copper grades (percent)
6.9
6.4
+8
%
6.5
7.0
-7
%
Plant recoveries (percent)
86
86
-
84
83
+1
%
Cathode copper production (tonnes)
14,100
9,000
+57
%
42,100
28,500
+48
%
Cost per pound of cathode produced (C$) (1)
$
1.25
$
1.80
-31
%
$
1.59
$
1.74
-9
%
(1)
Subsequent to July 1, 2010
Improved plant performance
Las Cruces production in 2011 was significantly higher than 2010, increasing to 42,100 tonnes of copper cathode from 28,500 tonnes. In the fourth quarter of 2011, Las Cruces produced 14,100 tonnes, and finished the year with monthly production above 5,000 tonnes. In the last two weeks of 2011, we sustained recoveries above 88 percent at increased throughput levels and cathode production approached design capacity.
Plant reliability and process stability continued to improve throughout the year while copper recoveries increased. In the area of process stability, the largest gains were from improvements to the grinding thickener and oxygen distribution within the leach reactors. Plant reliability has been enhanced by the addition of surge capacity with the leach feed tank and the leach residue tank ahead of the leach filters. Better control of the precipitated solids and redundant pipelines has greatly reduced the downtime experienced previously to clean key components. Rebuilding of the grinding thickener in June was successful in allowing us to reach the designed density for feeding the leach circuit and controlling the leach chemistry. During the year we progressively improved oxygen distributors in the leach reactors and now have a design that allows effective use of the oxygen in the reaction. We completed our program to change all 8 leach reactor agitators to fully stainless steel components and agitator wear has been well controlled.
Our water purification and drainage and reinjection well systems performed well this year. We have completed and commissioned all phases of the water purification plant, which has increased our treatment capacity. The addition of new dewatering wells has further reduced pit inflows over the course of the year and at year end, pit and pond water levels were well controlled.
Notwithstanding the significant improvements achieved this year, production fell short of our target of 50,200 tonnes of copper cathode.
Cost per pound of cathode produced this quarter was significantly lower than earlier in the year and in the same quarter of 2010, as higher production translated into a lower unit cost.
2012 outlook for production
For 2012, we expect throughput and recoveries to stabilize at the high levels we achieved towards the end of 2011. We have set our production objective as a range of 61,700 to 68,600 tonnes copper cathode, or approximately 90 percent of design capacity. No major construction projects are planned for the year. Routine maintenance is planned for mill relining, solids management and thickener inspection. Additional strengthening of the grinding thickener will take place during our planned shutdown activities to add security to this critical equipment. In total, we expect a minimum of 90 percent operating time throughout 2012.
Las Cruces' unit operating costs should continue to decrease as production volumes increase.
Financial review
Higher operating earnings and operating cash flow this year as Las Cruces ramps up
three months ended December 31
Year ended December 31
objective
(millions of Canadian dollars unless otherwise stated)
2011
2010
2011
2010
(1)
2012
Sales analysis
Copper sales (tonnes)
12,800
7,600
42,000
15,600
65,200
Gross copper sales
$
101
$
67
$
357
$
129
$
551
Smelter processing charges and freight
-
-
(1
)
-
(3
)
Net sales
$
101
$
67
$
356
$
129
$
548
Cost analysis
Pounds of copper produced (millions)
31
20
93
38
144
Direct production costs ($ per pound)
$
1.25
$
1.80
$
1.59
1.74
$
1.14
Direct production costs
$
39
36
$
148
$
67
$
164
Change in inventory
(3
)
(10
)
1
(11
)
-
Depreciation and other non-cash costs
23
17
81
28
92
Operating costs
$
59
$
43
$
230
$
84
$
256
Operating earnings
$
42
$
24
$
126
$
45
$
292
Operating cash flow
$
46
$
34
$
195
$
59
$
385
(1)
Subsequent to July 1, 2010 and at 100 percent
The objective for 2012 uses the assumptions listed on page 15.
The table below shows what contributed to the change in operating earnings and operating cash flow between 2011 and 2010.
(millions)
three months ended
December 31
Year ended
December 31
Higher (lower) copper prices, denominated in Canadian dollars
$
(12
)
$
23
Higher copper sales volumes due to higher production
39
193
Higher smelter processing charges and freights
-
(1
)
Higher operating costs due to higher production
(3
)
(80
)
Higher depreciation
(6
)
(54
)
Higher operating earnings, compared to 2010
18
81
Changes in working capital (see note 20 on page 74)
(15
)
(9
)
Change in depreciation
6
54
Standby charges in 2010
-
7
Other
3
3
Higher operating cash flow, compared to 2010
$
12
$
136
Capital spending
three months ended December 31
Year ended December 31
objective
(100 percent and millions of Canadian dollars)
2011
2010
change
2011
2010
change
2012
Capital
$
10
$
28
-64
%
$
54
$
80
-33
%
$
48
Pre-operating costs capitalized, net of sales, working capital and other
-
4
-100
%
-
(56
)
-100
%
-
$
10
$
32
-69
%
$
54
$
24
+125
%
$
48
Capital spending in 2011 and 2010 was mainly for plant improvements, the permanent water purification plant and mine development.
2012 outlook for capital spending
We expect to spend $48 million on capital projects in 2012. The largest expenditures will come in the areas of mine development, tailings facility expansion and land purchase.
Pyhäsalmi
three months ended December 31
Year ended December 31
2011
2010
change
2011
2010
change
Tonnes of ore milled (000's)
348
350
-1
%
1,386
1,401
-1
%
Tonnes of ore milled per day
3,800
3,800
-
3,800
3,800
-1
%
Grades (percent)
copper
1.1
1.2
-8
%
1.1
1.1
-
zinc
2.1
2.6
-19
%
2.6
2.4
+8
%
sulphur
43
43
-
42
43
-2
%
Mill recoveries (percent)
copper
95
96
-1
%
96
96
-
zinc
90
89
+1
%
91
90
+1
%
Production (tonnes)
copper
3,500
3,900
-10
%
14,000
14,700
-5
%
zinc
6,600
8,200
-20
%
32,300
30,100
+7
%
pyrite
210,500
186,800
+13
%
804,900
584,100
+38
%
Cost per tonne of ore milled (C$)
$
42
$
42
-
$
42
$
39
+8
%
Record pyrite production and sales
Pyhäsalmi maintained its strong performance in 2011, processing 1.4 million tonnes of ore through the mill and achieving copper recoveries of 96 percent and zinc recoveries of 91 percent. Backfill supply was reliable and the underground open void volume was maintained at planned levels.
Copper production in 2011 was higher than target and lower than 2010 because of variations in copper grades. Zinc grades were significantly higher than last year, pushing zinc production higher. A record 805,000 tonnes of pyrite concentrate was produced this year to meet higher customer demand.
Operating costs have been higher this year mostly because of increased ground support and consumables costs, and due to the incremental costs associated with producing more pyrite.
2012 outlook for production
Pyhäsalmi expects to mine 1.4 million tonnes of approximately 1 percent copper and 2 percent zinc in 2012, and produce between 11,300 tonnes and 12,600 tonnes of copper and 22,800 tonnes and 25,200 tonnes of zinc. Copper and zinc production should be lower than 2011 as fewer higher grade stopes are available in the short-term mining sequence. Both copper and zinc grades should recover after 2012.
Pyhäsalmi expects to produce and sell 800,000 tonnes of pyrite in 2012.
Financial review
Higher earnings this year because of significantly higher pyrite sales volumes
three months ended December 31
Year ended December 31
objective
(millions of Canadian dollars unless otherwise stated)
2011
2010
2011
2010
2012
Sales analysis
Copper sales (tonnes)
3,400
4,500
13,700
14,800
11,900
Zinc sales (tonnes)
7,400
8,300
34,400
29,500
24,000
Pyrite sales (tonnes)
175,900
178,200
809,200
573,300
800,000
Gross co
