Inmet Announces Fourth Quarter Earnings from Operations of $112 Million Compared to $89 Million in the Fourth Quarter of 2011
(firmenpresse) - TORONTO, CANADA -- (Marketwire) -- 02/21/13 -- Inmet Mining Corporation (TSX: IMN) -
All amounts in US dollars unless indicated otherwise
Fourth quarter highlights
Fourth quarter press release
Where to find it
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, 2012.
Change in Inmet's functional and presentation currencies to the US dollar
The decision to construct Cobre Panama has significantly increased Inmet's exposure to the US dollar. Effective June 1, 2012, the US dollar was adopted as Inmet's functional currency on a prospective basis. We translated Inmet's May 31, 2012 financial statement items from Canadian dollars to US dollars using the May 31, 2012 exchange rate US $0.97 per Canadian dollar (Transition Rate). Our operating entities continue to measure the items in their financial statements using their functional currencies; Cayeli and Cobre Panama use the US dollar, and Pyhasalmi and Las Cruces use the euro.
At the same time we changed our presentation currency from Canadian dollars to US dollars and now report our results in US dollars. We have restated all comparative financial statements from previously reported Canadian dollar amounts to US dollars using the Transition Rate.
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
Understanding our performance
Metal prices
The table below shows the average metal prices we realized this quarter and year to date.
The prices we realize include finalization adjustments - see Gross sales on page 8.
Copper
Copper prices on the London Metals Exchange (LME) averaged $3.61 per pound this year, or 10 percent lower than the average in 2011 of $4.00 per pound. Although average copper prices were lower in 2012, prices recovered substantially from the sharp decline that occurred in the fourth quarter of 2011. LME copper prices averaged $3.59 per pound in the fourth quarter, an increase of 6 percent over the comparative quarter of 2011.
Zinc
LME zinc prices averaged $0.89 per pound this quarter, an increase of 3 percent over the fourth quarter of 2011. For the year, LME zinc prices averaged $0.88 per pound, 11 percent lower than the average 2011 zinc price of $0.99 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 2011.
Compared to the same quarter last year, the value of the US dollar depreciated 3 percent relative to the Canadian dollar, and appreciated 4 percent relative to the euro and 2 percent relative to the Turkish lira.
Our earnings are affected by changes in foreign currency exchange rates when we:
Prior to the adoption of the US dollar as Inmet's functional currency effective June 1, 2012, our earnings were affected by changes in foreign currency exchange rates when we revalued our US dollar denominated cash, bonds and other securities and senior unsecured notes held corporately at Inmet.
Treatment charges for zinc decreased this year
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 year to date. Treatment charges for zinc concentrates were lower this year than in 2011, reflecting agreements we have signed with customers.
Statutory tax rates
The table below shows the statutory tax rates for each of our taxable operating mines.
Earnings from operations
Significantly higher gross sales this year
Key components of the change in gross sales: increasing sales volumes at Las Cruces, lower realized copper prices for the year
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 $5 million in negative finalization adjustments from third quarter shipments.
At the end of this quarter, the following sales had not been settled:
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:
Higher copper sales volumes, lower zinc 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. This quarter, timing of shipments resulted in copper sales volumes lagging production volumes by a combined 1,900 tonnes as compared to 3,100 tonnes in the fourth quarter of 2011.
Sales volumes
Production
2012 production compared to target
Copper production slightly exceeded our target range as copper grades and recoveries at Cayeli exceeded expectations. Zinc production also exceeded our target range as zinc grades and recoveries at both Cayeli and Pyhasalmi were higher than expected. We produced more pyrite at Pyhasalmi than our target to meet the increased customer demand in China.
2012 production compared to 2011
Copper production was higher than in 2011 mainly because of higher production at Las Cruces. Zinc production was lower than in 2011 due to lower zinc grades at Cayeli and Pyhasalmi. This quarter, zinc production was higher than the fourth quarter of 2011 due to higher grades and recoveries at Pyhasalmi. Pyhasalmi increased pyrite production this year to meet higher customer demand.
2013 outlook for sales
We use our production objectives to estimate our sales target.
We expect overall copper production in 2013 of between 108,300 tonnes and 116,300 tonnes, in line with 2012.
We expect zinc production volumes in 2013 to decrease by approximately 10 percent as zinc grades trend more towards overall reserve grades at Cayeli and Pyhasalmi.
Our revenues are also affected by the metal prices we receive.
According to international research, copper supply should grow modestly in 2013. Production from the start-up of new operations and improvements at existing mines could be somewhat offset by the risk of mine underperformance, delays to existing or new development projects and possible labour disruptions. Continued strong demand is expected in China, coupled with continued economic recovery in Europe and the United States. The small expected market surplus should support copper prices in 2013 at a level similar to 2012.
For zinc, modest increases are expected in both market supply and demand with a contracting market surplus. These market trends should support average prices in 2013 above those of 2012.
Zinc smelter processing charges down, copper charges up this year
For the year, and the quarter, changes in our copper treatment and refining charges are due to changes in copper-in concentrate sales volumes. Sales volumes also drove variations in zinc treatment charges at Cayeli and Pyhasalmi, in addition to more favorable terms with smelters, reflecting a deficit in the zinc concentrate market at the time our 2012 contracts were negotiated.
2013 outlook for smelter processing charges and freight
We expect our costs for copper treatment and refining to be higher in 2013 than in 2012 as the global copper concentrate supply is expected to narrowly exceed smelter capacity in 2013, shifting the market to a slight surplus position towards the end of the year. We do not expect to pay copper price participation in 2013.
We expect total zinc smelter processing charges, including price participation, to be slightly higher than 2012.
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 2012.
Higher direct production costs and cost of sales
Direct production costs
Direct production costs were $28 million higher this year ($10 million higher this quarter) mainly because higher production at Las Cruces increased variable electricity, consumables and royalty costs, somewhat offset by the impact of the weaker euro relative to the US dollar.
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 year for post-closure liabilities at our closed properties, including $10 million in the fourth quarter. $7 million of these costs related to the decrease in discount rates and the US dollar to Canadian dollar exchange rate we applied in determining the liabilities in the first nine months of 2012. 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 current low interest rate environment. Additionally, this quarter we recognized a $4 million increase in our estimated closure obligations at Troilus for ongoing treatment of tailings effluent for suspended solids and associated labour costs, as well as increased estimated cash flows required to remediate our other closed properties. In 2011, we recorded increased asset retirement obligations of $16 million: $5 million for closure liabilities at Troilus related to an increase in our estimated closure obligations for ongoing treatment of tailings effluent for suspended solids and associated labour costs and $11 million from a decrease in the discount rates we applied.
2013 outlook for cost of sales (excluding depreciation)
We expect consolidated direct production costs to be slightly higher in 2013 because higher production at Las Cruces will increase total variable costs, primarily electricity, consumables and royalties. We also expect slightly higher direct production costs at Cayeli in 2013 due to increased labour and electricity costs, and increased costs associated with higher expected tonnes processed in 2013 than in 2012.
Our budget for 2013 assumes our costs at Pyhasalmi will be similar to 2012.
Certain variable costs may continue to affect our earnings, depending on metal prices:
The total amount we report in US dollars will also be affected by the value of the euro and the Turkish lira relative to the US dollar.
Additionally, changes in market risk-free interest rates could significantly increase or decrease our costs related to mine rehabilitation at our closed properties. At December 31, 2012, the interest rates we used to value our asset retirement obligations at our closed properties ranged from 1.1 percent to 2.4 percent.
Higher depreciation
Depreciation was higher this year than last mainly because of higher copper sales volumes at Las Cruces and Cayeli.
2013 outlook for depreciation
We expect depreciation to be higher in 2013 because of higher sales volumes at Las Cruces.
Corporate costs
Corporate costs include corporate development and exploration, general and administration costs, taxes, interest and other income.
Spending on corporate development and exploration
Corporate development and exploration costs were approximately $8 million higher than 2011, which mainly reflects our higher budget for 2012 to explore for world class deposits.
2013 outlook for corporate development and exploration
We expect spending on exploration in 2013 to be slightly higher than 2012, focusing on Mexico, Chile and Peru, where we have established field offices, the United States 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 2012 were $19 million higher than 2011 mainly because stock-based compensation expense was $10 million higher. As a result of the decision to proceed with full construction of Cobre Panama, we recognized a non-cash stock-based compensation expense of $8 million this year on Long-Term Incentive Plan (LTIP) units issued in previous years that relate to the project. This expense represents the cumulative impact from the units' grant dates to December 31, 2012, on a 100 percent award basis, as no value was attributed to these units prior to a positive construction decision for Cobre Panama. See note 22c to our 2011 annual financial statements for more details on these units. The increase in general and administration expense also reflects increased human resources and other costs supporting the growth of the business and construction activities for Cobre Panama.
2013 outlook for general and administration
We expect general and administration costs in 2013 to be similar to those in 2012.
Investment and other income
Foreign exchange gains and losses
We have foreign exchange gains or losses when we revalue certain foreign denominated assets and liabilities.
Our foreign exchange gains and losses were from:
We recognized net foreign exchange gains of $15 million this year from the revaluation of US dollar denominated cash, bonds and other securities and the senior unsecured notes held in Inmet prior to the change in its functional currency from the Canadian dollar to the US dollar effective June 1, 2012. As of this date, Inmet's US dollar-denominated monetary assets and liabilities were no longer revalued. Instead we began recognizing foreign exchange impacts on the revaluation of Inmet's Canadian dollar denominated monetary assets and liabilities with a gain of $10 million in 2012 on Canadian dollar denominated cash, bonds and other securities due to a weakening in the US dollar relative to the Canadian dollar. We recognized a foreign exchange loss of $2 million this quarter on these Canadian dollar denominated holdings.
Additionally, in 2012 we began holding our euro-based operations' excess cash in US dollars. We recognized $16 million in foreign exchange losses this year, including $15 million this quarter, on the revaluation of US denominated cash balances to euros due to a depreciation in the US dollar relative to the euro.
2013 outlook for investment and other income
Investment and other income is affected by the balance of our cash, bonds and other securities, and by interest rates and exchange rates. We are capitalizing interest income earned on funds from the proceeds of our senior unsecured notes (as we are capitalizing interest costs on the senior unsecured notes). At December 31, 2012, we held Cdn $218 million in cash, bonds and other securities subject to translation in our US dollar denominated accounts and US $599 million in cash subject to translation in our euro accounts.
Income tax expense
Our tax expense changes as our earnings change.
The consolidated effective tax rate was higher this quarter compared to the same quarter of 2011 mainly because of the improvement in earnings at Las Cruces, combined with its lower intergroup interest expense as it repaid a portion of its intergroup debt earlier this year. Additionally, we realized higher foreign exchange losses and other corporate costs this quarter for which there is no tax recovery.
2013 outlook for income tax expense
We expect the statutory tax rates at our operations in 2013 to remain the same as they were in 2012, unless a statutory tax rate change is enacted. We expect income tax expense to increase in 2013 due to higher income from operations mainly from higher sales volumes as Las Cruces, offset partly by lower expected copper sales volumes at Cayeli.
Discontinued operation - 2011
We sold our 18 percent equity interest in Ok Tedi in January 2011, and have reported our results relating to Ok Tedi in that year as discontinued operations. After-tax income of $81 million in 2011 includes net earnings of $17 million in January 2011, before the sale, and a gain on sale of $64 million net of withholding taxes. We paid Papua New Guinea withholding taxes of $27 million on the sale.
Results of our operations
2013 estimates
Our financial review by operation includes estimates for our 2013 operating earnings and operating cash flows. We have based these estimates on our 2013 objectives for production (using the midpoints in our production volume ranges) and cost per tonne of ore milled (cost per pound of copper produced at Las Cruces), as well as the following assumptions for the year:
Cayeli
Copper production exceeded target this year
Cayeli's mine production reached a record 1.21 million tonnes this year. The increase in mine production is the result of consistent ground support and rehabilitation performance, improved mine planning processes, including new scheduling software capable of quick scenario reviews, and capturing further benefits from the mine control system implemented in 2011.
Mill production this year reached a record of 1.22 million tonnes. Managing tailings density and coordination with the mine's pastefill requirements were key in achieving the higher throughput level this year. Copper production in 2012, at 31,400 tonnes, was better than in 2011 and exceeded the high end of our guidance range due to higher copper grades and recoveries. Zinc production was significantly lower than in 2011, consistent with our expectations, due to the lower zinc grade and associated lower recoveries.
Cost per tonne of ore milled was slightly lower than 2011 mainly because we processed more ore this year. Higher cost per tonne of ore milled this quarter reflects higher costs for electricity and a study Cayeli has undertaken to further increase its productivity.
The three-year labour agreement at Cayeli expired in May 2012. The negotiation of a new labour agreement, initially delayed due to changes to government labour regulations, is proceeding in early 2013 and we will make a strong effort to manage labour cost escalations to retain our cost competitiveness.
Our tax filings remain subject to examination by applicable tax authorities for a certain length of time following the tax year to which those filings relate. In 2012 Cayeli became the subject of an audit of its 2008 to 2011 taxation years. On February 4, 2013, Cayeli received an assessment from the Turkish tax authorities adjusting the amount of withholding taxes to be remitted on dividends paid by Cayeli to its direct shareholder. The shares of Cayeli are owned by an indirect wholly-owned Spanish subsidiary of Inmet. The Turkish tax authorities have taken the position that Inmet and not the Spanish subsidiary is the beneficial owner of the dividends. The Turkish tax authorities are therefore taking the position that the withholding tax on the dividends should be the 15 percent domestic rate and not the reduced rate of 5 percent under the Turkey-Spain tax treaty. The dividends paid during the period assessed total TL 628 million. The assessed tax liability is TL 63 million (US $35 million) plus interest and penalties. Our view is that the relevant facts and circumstances support the position that Cayeli fulfilled its tax remittance obligations and Cayeli intends to vigorously dispute the assessment.
2013 outlook for production
In 2013, the production level should increase from 1.2 million tonnes to 1.25 million tonnes. The mine should benefit from the commissioning of the two new ore passes by the third quarter of 2013, the extension of a shotcrete slickline to the lower levels of the mine, improved lower mine infrastructure and the addition of stope production from a new mining block, all of which should ease pressure on existing production areas. Cayeli's ground conditions require constant monitoring and reinforcement, including the need to minimize any underground void area. Continued progress in meeting the challenges of poor ground conditions and planned operational efficiencies is aimed at reducing the risks associated with achieving our production plan.
Both copper and zinc recoveries should be lower in 2013, reflecting the increased proportions of metallurgically challenging ore types.
We expect to produce between 27,800 tonnes and 30,900 tonnes of copper and between 35,900 tonnes and 39,900 tonnes of zinc in 2013.
We expect operating costs in 2013 to be slightly higher than 2012 levels primarily due to increased manpower levels, increased electricity costs and increased mine department consumables.
Financial review
Lower copper sales volumes due to lower copper production volumes and timing of shipments this quarter
The objective for 2013 uses the assumptions listed on page 15.
The table below shows what contributed to the change in operating earnings and operating cash flow between 2012 and 2011.
Capital spending
We spent $18 million in capital this year to begin construction of a pair of new ore passes, add to the underground mobile fleet, improve underground pastefill and water drainage infrastructure, replace the surface concrete batch plant, and continue mine development. In 2011 we spent $13 million to engineer the new ore passes, purchase mobile equipment, install column flotation cells and a conveyor dust collection system in the mill, add surface water runoff capacity, and continue our mine development.
2013 outlook for capital spending
We expect to spend $18 million on capital in 2013, including $6 million on mine development and $5 million to complete the upgrade of our ore pass system to address deterioration that has accumulated over time from normal abrasion.
Las Cruces
Plant production consistently at or above design capacity
2012 was a year of significant accomplishments for Las Cruces with plant production averaging the design capacity of 6,000 tonnes of copper cathode for the last 9 months of the year. This production level was reached following a shutdown in March to remove and re-align the ball mill gearing as well as to make numerous operating improvements to improve process flows. Las Cruces produced 17,300 tonnes of copper cathode in this quarter of 2012, with a three day maintenance shutdown, and achieved plant recoveries of 90 percent.
The plant reliability increased in all areas during 2012 with stable reactor and agitator performance and further improvements to crushing, conveying and grinding. In all, 12 days of planned downtime were required for ongoing plant maintenance compared to our original plan of 20 days. Overall copper recoveries were 88 percent in 2012, an improvement from 84 percent in 2011 due to the full implementation of the leach feed surge tank with oxygen addition. Plant feed grades averaged 7.1 percent during the year, compared to 6.5 percent in 2011.
Las Cruces production of 67,700 tonnes of copper cathode this year was significantly higher than 42,100 tonnes in 2011 as a result of process improvements and came within 1.5 percent of the high end of our guidance range.
Cost per pound of copper produced was significantly lower than in 2011 due to higher production volumes.
2013 outlook for production
In 2013, we will concentrate on reducing recovery losses downstream of the leaching reactors that have increased with the increase in copper cathode production and due to operating with process solutions that contain more copper.
We expect to produce between 68,500 tonnes and 72,000 tonnes copper cathode in 2013. The plant will be tested at higher ore throughput and lower grade to assess the effects on plant performance before we enter into lower copper grade areas of the mine that we expect in 2014.
We expect cost per pound of copper in 2013 to be similar to 2012 levels.
Financial review
Higher sales volumes due to higher production
The objective for 2013 uses the assumptions listed on page 15.
The table below shows what contributed to the change in operating earnings and operating cash flow between 2012 and 2011.
Capital spending
We spent $43 million this year mainly on mine development, tailings facility expansion and land purchase. In 2011, we spent $52 million mainly for mine development, tailings facility expansion and plant improvements.
2013 outlook for capital spending
We expect to spend $49 million on capital projects in 2013. The largest expenditures should be for mine development ($22 million), tailings facility expansion ($5 million), debottlenecking ($8 million) and other plant improvement projects.
Pyhasalmi
Lower grades this year in-line with annual objectives
Pyhasalmi continued its strong performance in 2012, processing 1.4 million tonnes of ore and achieving copper recoveries of 96 percent and zinc recoveries of 92 percent. Backfill supply was reliable and the underground open void volume was maintained below planned levels.
Both copper and zinc production were at the high end of our guidance range but lower than in 2011, as expected, because of lower grades in the areas we mined. A record 891,700 tonnes of pyrite concentrate was produced this year to meet higher customer demand.
Operating costs were higher this year than they were in 2011 due to higher labour, consumables and contractor costs, and due to the incremental costs associated with producing more pyrite.
2013 outlook for production
Pyhasalmi expects to mine 1.4 million tonnes of approximately 1 percent copper and 1.7 percent zinc in 2013, and produce between 12,000 tonnes and 13,400 tonnes of copper and 20,300 tonnes and 22,500 tonnes of zinc. Zinc production should be lower than it was in 2012 as we expect a decrease in zinc grades in 2013.
Pyhasalmi expects to produce and sell 820,000 tonnes of pyrite in 2013.
Operating costs are expected to remain at levels consistent with 2012.
Financial review
Lower earnings because of lower sales volumes and realized metal prices this year
The objective for 2013 uses the assumptions listed on page 15.
The table below shows what contributed to the change in operating earnings and operating cash flow between 2012 and 2011.
Capital spending
2013 outlook for capital spending
Capital spending of $8 million in 2013 will primarily be to replace underground mobile equipment, upgrade the pyrite flotation cleaner cells and flotation air blower system, and improve the reclaim water system.
Status of our development project
Cobre Panama
Construction progress
For a visual update on our construction progress, we invite you to visit our photo gallery on Inmet's web site at .
At December 31, 2012, total construction was 9.3 percent completed compared to a planned completion percentage of 10.9 percent. We made the following advancements in the project's development this quarter:
Infrastructure
Power plant
Process plant
MPSA and its contractors' workforce comprise more than 90 percent local residents from the Provinces of Cocle and Colon, Panama. The combined construction workforce is expected to increase to more than 9,000 people by the end of 2014.
Our one-team approach for safety and health execution on the project has led to the current lost-time injury frequency of less than 0.23 injuries per 200,000 work hours worked since the Full Notice to Proceed was issued in May 2012.
Capital spending
The following table provides a breakdown of capital expenditures on a 100 percent basis.
We expect completion to take approximately 44 months from the point we issued Full Notice to Proceed. The schedule below provides the expected timing of capital spending by year.
Capital commitments
Since construction commenced in May 2012, contracts have been awarded for mass earthworks and quarry development at both the mine and port sites, the tailings management facility, the coastal road joining the mine to the port, permanent and temporary camp construction, the port causeway and commodity berth, infrastructure and the power plant, detailed engineering and procurement of certain equipment for the process plant, the mobile mine equipment fleet, fuel supply, construction camp catering and the mine pre-stripping. The total value of commitments that MPSA has entered into since the start of full construction is approximately $4.1 billion, representing 67 percent of estimated capital expenditures. MPSA expects to award the construction contract for the mineral processing plant during the third quarter of 2013.
Funding plan
The table below outlines the total project funding plan as at December 31, 2012.
Increase to Cobre Panama reserves and mine life
In December 2012, we announced an increase to proven and probable mineral reserves at Cobre Panama. The additional mineral reserves reflect the completion of work on resource definition, metallurgical recoveries, pit design and other engineering, allowing us to include the Balboa, Brazo and Botija Abajo mineralization in our mine plan for Cobre Panama. The additional mineral reserves increased Cobre Panama's total estimated contained copper by 27 percent to approximately 26 billion pounds, and increased estimated contained gold by 41 percent to approximately 7.3 million ounces. These additional mineral reserves have been integrated into a revised mine plan that extends the estimated mine life for Cobre Panama from 31 to 40 years.
2013 outlook for development
We plan to:
Infrastructure
Power Plant
Process Plant
Other
Managing our liquidity
We develop our financing strategy by looking at our long-term capital requirements and deciding on the optimal mix of cash, future operating cash flow, credit facilities and project financing.
Our capital structure includes a liquidity cushion that gives us the flexibility to deal with operational disruptions or general market downturns.
Our available liquidity also includes $2,077 million of bonds and other securities ($607 million at December 31, 2011), providing a total of $3,618 billion in capital available to finance our growth strategy as at December 31, 2012.
OPERATING ACTIVITIES
Key components of the change in operating cash flows
Operating cash flows this quarter and year to date were higher than in 2011 primarily due to higher earnings from operations before non-cash charges. The increase this quarter was also due to a reduction in net working capital, mainly due to the timing of income tax payments made by Pyhasalmi, and payments received from Cayeli's customers.
This year, the increase in net working capital reflects higher accounts receivable at Las Cruces associated with higher copper cathode sales during 2012 and the timing of collections from customers.
2013 outlook for cash from operating activities
The table below shows expected operating cash flow from our operations, based on our outlook for metal prices and production (see page 15), and the assumptions in Results of our operations (starting on page 15).
2013 estimated operating cash flow by operation
INVESTING AND FINANCING
Capital spending
Please see Results of our operations and Status of our development project for a discussion of actual results and our 2013 objectives. Capital spending this year was mainly for Cobre Panama.
Purchase and maturing of investments
In 2012, we invested $2.3 billion in US dollar-denominated bonds and other securities comprising US Treasury bonds, Canadian government and corporate bonds and Supranational bonds with credit ratings of A to AAA. The securities mature between 2013 and 2018 and have a weighted average annual yield to maturity of 0.31 percent. During the year, $840 million of securities matured. In 2011, we used most of the US dollar proceeds from the sale of Ok Tedi to buy $274 million in US Treasury bonds with AA credit ratings and $67 million of bonds matured.
Issuance of senior unsecured notes
On May 18, 2012, we issued $1.5 billion in senior unsecured notes, bearing a coupon rate of interest of 8.75 percent and maturing on June 1, 2020. The notes were priced at 98.584 percent of their face value, yielding proceeds of $1.43 billion net of the discount and transaction fees. On December 18, 2012, we issued an additional $0.5 billion of senior unsecured notes, bearing a coupon rate of interest of 7.5 percent and maturing in June 2021. The notes were priced at 100 percent of their face value, yielding proceeds of $493 million net of transaction fees. Interest is payable on the notes semi-annually on December 1 and June 1 of each year. As the proceeds will be used to fund the development of Cobre Panama, interest costs will be capitalized to project assets during the construction period.
These notes are unconditionally guaranteed on a senior unsecured basis by certain Inmet subsidiaries. The notes contain certain customary covenants and restrictions for a financing instrument of this type.
Sale of 20 percent interest in Cobre Panama
On April 25, 2012, KPMC completed its acquisition of a 20 percent interest in MPSA. KPMC acquired its interest for $161 million in cash. Together with the 20 percent of funding of the estimated $6.2 billion of development costs for Cobre Panama it will provide during the construction period, this amounts to total funding of $1.4 billion. During 2012, KPMC provided $100 million of this funding ($40 million this quarter).
Issuance of common shares - 2011
In May 2011, a subsidiary of Temasek Holdings (Private) Ltd. exchanged its subscription receipts for 7.78 million Inmet common shares and we received cash of $486 million.
Cash from discontinued operation - 2011
In January 2011, we sold our 18 percent equity interest in Ok Tedi for net proceeds of $297 million (after Papua New Guinea withholding taxes).
2013 outlook for investing and financing
Capital spending
We expect capital spending to be $2,326 million in 2013. The more significant items include:
Sale of precious metal stream to Franco-Nevada
In August 2012, we announced the completion of a precious metals stream agreement with Franco-Nevada. Under the terms of the agreement, a wholly-owned subsidiary of Franco-Nevada will provide a $1 billion deposit which will be used to fund a portion of Cobre Panama project capital costs. The deposit will become available after Inmet's funding since issuing a FNTP reaches $1 billion (expected by mid-2013) and will be provided pro-rata on a 1:3 ratio with Inmet's subsequent funding contributions.
Financial condition
Our strategy is to make sure we have sufficient liquidity (including cash and committed credit facilities) to finance our operating requirements as well as our growth projects. At December 31, 2012, we had $3,618 million in total funds, including $1,541 million of cash and short-term investments and $2,077 million invested in bonds and other securities.
Cash
At December 31, 2012 our cash and short-term investments of $1,541 million included cash and money market instruments that mature in 90 days or less.
Our policy is to invest excess cash in highly liquid investments of high credit quality, and to limit our exposure to individual counterparties to minimize the risk associated with these investments. We base our decisions about the length of maturities on our cash flow requirements, rates of return and other factors.
At December 31, 2012, we held cash and short-term investments in the following:
See note 4 on page 45 in the consolidated financial statements for more details about where our cash is invested.
Bonds and other securities
We hold a portfolio of bonds and other securities to provide better yields while minimizing our investment risk. As at December 31, 2012, our portfolio was $2,077 million. The portfolio includes:
The securities mature between 2013 and 2018.
Restricted cash
Our restricted cash balance of $78 million as at December 31, 2012 included:
COMMON SHARES
Additional risk factor
We have significantly increased our cash balance following the issuance of our senior unsecured notes for the construction of Cobre Panama. For U.S. federal income tax purposes a non-U.S. corporation may be classified as a "passive foreign investment company" (PFIC) for U.S. federal income tax purposes in any taxable year in which either (1) at least 75 percent of its gross income is passive income, or (2) on average at least 50 percent of the gross value of its assets is attributable to assets that produce passive income or are held for the production of passive income. Based on our analysis, we do not believe that we are a PFIC in the current taxation year. The methods used to determine income and assets for the purpose of this test are subject to interpretation and judgement, and based on the manner in which fair value is determined, the analysis could show that we are a PFIC. If we are classified as a PFIC, U.S. taxpayers that hold our common shares could be subject to adverse U.S. federal income tax consequences, including increased tax liabilities and possible additional reporting requirements. As the determination of PFIC status is made annually at the close of each tax year and is dependent on a number of assumptions, there can be no assurance that Inmet is not a PFIC in the current year or will not become a PFIC in any future tax year. U.S. taxpayers that hold our common shares are urged to consult their tax advisors concerning the potential U.S. federal income tax consequences of holding common shares if Inmet were considered a PFIC in any year.
Supplementary financial information
Pages 32 and 33 include supplementary financial information about cash costs. These measures do not fall into the category of International Financial Reporting Standards.
We use unit cash cost information as a key performance indicator, both on a segmented and consolidated basis. We have included cash costs as supplementary information because we believe our key stakeholders use these measures as a financial indicator of our profitability and cash flows before the effects of capital investment and financing costs, such as interest.
Since cash costs are not recognized financial measures under International Financial Reporting Standards, they should not be considered in isolation of earnings or cash flows. There is also no standard way to calculate cash costs, so they are not a reliable way to compare us to other companies.
About Inmet
Inmet is a Canadian-based global mining company that produces copper and zinc. We have three wholly-owned mining operations: Cayeli (Turkey), Las Cruces (Spain) and Pyhasalmi (Finland), and have an 80 percent interest in the Cobre Panama development project, currently in construction.
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Notes to the consolidated financial statements
1. Corporate information
Inmet Mining Corporation is a publicly traded corporation listed on the Toronto stock exchange. Our registered and head office is 330 Bay Street, Suite 1000, Toronto Canada. Our principal activities are the exploration, development and mining of base metals.
2. Basis of presentation and statement of compliance
We prepared these interim consolidated financial statements using the same accounting policies and methods as those described in our consolidated financial statements for the year ended December 31, 2012, except as described in note 3. These interim financial statements are in compliance with International Accounting Standard 34, Interim Financial Reporting (IAS 34). Accordingly, certain information and disclosure normally included in annual financial statements prepared in accordance with International Financial Reporting Standards have been omitted or condensed. The preparation of financial statements in accordance with IAS 34 requires us to use certain critical accounting estimates and requires us to exercise judgement in applying our accounting policies. The areas involving a higher degree of judgement or complexity, or areas where assumptions and estimates are significant to the financial statements, have been set out in note 4 to our consolidated financial statements for the year ended December 31, 2012. These interim financial statements should be read in conjunction with our consolidated financial statements for the year ended December 31, 2012, which are included in our 2012 annual report.
3. Change in functional and presentation currencies to the US dollar
Prior to June 1, 2012, Inmet Mining's functional currency and our presentation currency were the Canadian dollar. The decision to proceed with full scale development of Cobre Panama has significantly increased Inmet Mining's exposure to the US dollar considering:
Consequently, effective June 1, 2012, the US dollar was adopted as Inmet Mining's functional currency. Our operating entities continue to measure the items in their financial statements using their functional currencies; Cayeli and Cobre Panama use the US dollar, and Pyhasalmi and Las Cruces use the euro. IFRS requires a change in functional currency to be accounted for prospectively. We therefore translated Inmet Mining's May 31, 2012 financial statement items from Canadian dollars to US dollars using the May 31, 2012 exchange rate US $0.97 per Canadian dollar (Transition Rate). The resulting translated amounts for non-monetary items are treated as their historical cost.
Following the change in Inmet Mining's functional currency, we elected to change our presentation currency from Canadian dollars to US dollars as we believe that changing the presentation currency to US dollars will provide shareholders with a more accurate reflection of our underlying financial performance and position. The change in presentation currency represents a voluntary change in accounting policy. We have restated all comparative financial statements from previously reported Canadian dollar amounts to US dollars using the Transition Rate.
4. Cash and short-term investments
5. Restricted cash
6. Bonds and other securities
The table below provides a breakdown of our bonds and other securities as at the balance sheet date by financial instrument classification.
7. Accounts payable and accrued liabilities
The table below shows the significant components of our accounts payable and accrued liabilities balance.
8. Provisions
We recorded an additional $14 million of asset retirement obligations this year ($10 million this quarter), for liabilities at our closed properties. $7 million of this increase is the result of a decrease in the discount rates we applied in determining the liabilities. Additionally, we recognized $7 million due to an increase in our estimated closure costs, primarily at Troilus for on-going treatment of tailings and associate labour costs. We also recognized liabilities of $20 million at Cobre Panama as a result of development activities that took place during the year.
In 2011, we recorded increased asset retirement obligations of $16 million: $5 million for additional closure liabilities at Troilus, and $11 million from a decrease in the discount rates we applied.
9. Long-term debt
(a) On May 18, 2012, we issued $1,500 million aggregate principal amount of 8.75 percent senior unsecured notes (8.75 percent Notes) due June 2020. The 8.75 percent Notes were priced at 98.584 percent of their face value, yielding proceeds of $1,445 million net of the discount and directly attributable transaction costs.
We may redeem, prior to June 1, 2016, up to 35 percent of the 8.75 percent Notes with the net proceeds of certain equity offerings at a redemption price equal to 108.75 percent of the principal amount plus accrued interest. Prior to June 1, 2016, we may redeem the 8.75 percent Notes in whole or in part at 100 percent of their principal amount, plus accrued interest, plus a premium that effectively compensates the holder fully for lost interest between the redemption date and June 1, 2016. We may redeem the 8.75 percent Notes at any time on or after June 1, 2016 at the redemption prices and periods set forth below, plus accrued and unpaid interest:
On December 18, 2012, we issued $500 million aggregate principal amount of 7.5 percent senior unsecured notes (7.5 percent Notes) due June 2021. The 7.5 percent Notes were priced at 100 percent of their face value, yielding proceeds of $493 million net of the directly attributable transaction costs.
We may redeem, prior to December 1, 2015, up to 35 percent of the 7.5 percent Notes with the net proceeds of certain equity offerings at a redemption price equal to 107.5 percent of the principal amount plus accrued interest. Prior to December 1, 2016, we may redeem the 7.5 percent Notes in whole or in part at 100 percent of their principal amount, plus accrued interest, plus a premium that effectively compensates the holder fully for lost interest between the redemption date and December 1, 2016. We may redeem the 7.5 percent Notes at any time on or after December 1, 2016 at the redemption prices and periods set forth below, plus accrued and unpaid interest:
These senior unsecured notes have been designated as Other liabilities and accounted for initially at fair value and subsequently at amortized cost using the effective interest rate method. Interest is payable on the notes semi-annually on December 1 and June 1 of each year. As the proceeds are being used to fund the development of Cobre Panama, interest costs are being capitalized to project assets during the construction period of this project. The notes are unconditionally guaranteed on a senior unsecured basis by Inmet and certain subsidiaries. The notes contain certain customary covenants and restrictions for a financing instrument of this type.
10. Stock-based compensation
During 2012, the following issuances were made under our equity-based compensation plans:
Stock option plan
On February 22, 2012, a grant of 83,084 options was made to senior management, with an exercise price of Cdn $64.17, graded vesting and an expiry date of February 21, 2019. We calculated the compensation expense for these options using the Black Scholes valuation model and assuming the following weighted average parameters, resulting in a weighted average fair value per option of Cdn $29.23 per option: 5 year expected life, 50 percent expected volatility, expected dividend rate of 0.3 percent annually and a risk free interest rate of 1.5 percent.
Performance share unit (PSU) plan
On February 21, 2012, the Board granted 36,580 PSUs to senior executives based on a 5 day Volume Weighted Average Price prior to the grant date of Cdn $64.17 and a 3 year vesting period from January 1, 2012 to December 31, 2014.
We used a Monte Carlo simulation model to calculate the compensation expense for the PSUs assuming no forfeitures, historical average volatilities and a risk free interest rate of 1.0 percent, resulting in December 31, 2012 fair values per PSU of Cdn $133.61 and Cdn $109.26, respectively, for the 2011 and 2012 awards.
We recognized the following share-based compensation expense in general and administration relating to all outstanding equity-based awards:
11. Accumulated other comprehensive loss
Accumulated other comprehensive loss includes:
Currency translation adjustments
The table below is breakdown of our currency translation adjustments.
12. Sale of 20 percent interest in Cobre Panama
On April 25, 2012, Korea Panama Mining Corporation (KPMC) completed its acquisition of a 20 percent interest in Minera Panama, owner and developer of Cobre Panama. KPMC acquired its interest for $161 million in cash, representing, together with US $30 million it already paid, its 20 percent share of development costs to that date. As we continued to control Minera Panama after the closing of this transaction, the sale was treated as a capital transaction with the $8 million difference between 20 percent of our book value of Cobre Panama and the consideration received recognized in retained earnings.
13. Investment and other income
14. Finance costs
15. Income tax
For the three months ended December 31, 2012:
16. Net income per share
The table below shows our earnings per common share for the three months ended December 31.
The table below shows our earnings per common share for the year ended December 31.
17. Statements of cash flows
18. Commitments
Capital commitments
As at December 31, 2012, Cobre Panama had committed $3.6 billion (net of spending to that date) on a 100 percent basis for the design and supply of coal-fired power plant, two SAG mills, four ball mills, and the related gearless drive, engineering and other construction activities.
Las Cruces committed $5 million for the upgrade of its safety infrastructure.
Sale of precious metal stream to Franco-Nevada Corporation (Franco-Nevada)
In August 2012, we announced the completion of a precious metals stream agreement with Franco-Nevada. Under the terms of the agreement, a wholly-owned subsidiary of Franco-Nevada will provide a $1 billion deposit which will be used to fund a portion of Cobre Panama project capital costs. The deposit will become available after Inmet's funding since issuing a Full Notice to Proceed reaches $1 billion and will be provided pro-rata on a 1:3 ratio with Inmet's subsequent funding contributions.
The amount of precious metals deliverable under the stream is indexed to the copper in concentrate produced from the entire project and approximates 86 percent of the payable precious metals attributable to Inmet's 80 percent ownership based on the current mine plan. Beyond the currently contemplated mine life, the precious metals deliverable under the stream will be based on a fixed percentage of the precious metals in concentrate.
Franco-Nevada will pay to MPSA an amount for each ounce of precious metals delivered equal to $400 per ounce for gold and $6 per ounce for silver (subject to an annual adjustment for inflation) for the first 1,341,000 ounces of gold and 21,510,000 ounces of silver (approximately the first 20 years of expected deliveries) and thereafter the greater of $400 per ounce for gold and $6 per ounce for silver (subject to an adjustment for inflation) or one half of the then prevailing market price. In all cases the amount paid is not to exceed the prevailing market price per ounce of gold and silver.
Cayeli tax audit
Our tax filings remain subject to examination by applicable tax authorities for a certain length of time following the tax year to which those filings relate. In 2012 Cayeli became the subject of an audit of its 2008 to 2011 taxation years. On February 4, 2013, Cayeli received an assessment from the Turkish tax authorities adjusting the amount of withholding taxes to be remitted on dividends paid by Cayeli to its direct shareholder. The shares of Cayeli are owned by an indirect wholly-owned Spanish subsidiary of Inmet. The Turkish tax authorities have taken the position that Inmet and not the Spanish subsidiary is the beneficial owner of the dividends. The Turkish tax authorities are therefore taking the position that the withholding tax on the dividends should be the 15 percent domestic rate and not the reduced rate of 5 percent under the Turkey-Spain tax treaty. The dividends paid during the period assessed total TL 628 million. The proposed tax liability is TL 63 million (US $35 million) plus interest and penalties. Our view is that the relevant facts and circumstances support the position that Cayeli fulfilled its tax remittance obligations and Cayeli intends to vigorously dispute the assessment.
Contacts:
Inmet Mining Corporation
Jochen Tilk
President and Chief Executive Officer
+1.416.860.3972
Inmet Mining Corporation
Flora Wood
Director, Investor Relations
+1.416.361.4808
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Datum: 21.02.2013 - 22:18 Uhr
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News-ID 232146
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