------------------------------------------------------------------------- three months ended nine months ended September 30 September 30 (18 percent) 2006 2005 change 2006 2005 change ------------------------------------------------------------------------- Sales copper (tonnes) 9,400 8,700 + 8% 27,200 27,100 - gold (ounces) 24,600 24,000 + 3% 77,000 76,800 - ------------------------------------------------------------------------- Operating earnings (millions) $60.0 $22.6 + 165% $163.7 $65.6 + 150% ------------------------------------------------------------------------- Operating cash flows (millions) $46.9 $2.8 +1575% $138.7 $39.5 + 251% ------------------------------------------------------------------------- ...mainly because of higher metal prices ------------------------------------------------------------------------- three nine months months ended ended September September (millions) 30 30 ------------------------------------------------------------------------- Higher metal prices, denominated in Canadian dollars $47 $121 Higher sales volumes 2 1 Higher smelter processing charges and freight (6) (15) Higher variable compensation costs (2) (5) Higher operating costs (4) (4) ------------------------------------------------------------------------- Increase in operating earnings, compared to 2005 $37 $98 Increased tax expense because of higher earnings (13) (39) Changes in net working capital 19 38 Other 1 2 ------------------------------------------------------------------------- Increase in operating cash flow, compared to 2005 $44 $99 -------------------------------------------------------------------------
Changes in working capital for the quarter and year to date were from a collection of accounts receivable balances and higher taxes payable, which were a result of higher income.
Outlook for earnings and cash flows
Ok Tedi's ability to ship concentrate down the river systems affect the mine's earnings and cash flows. An El Nino in the fourth quarter could lower river levels and affect Ok Tedi's ability to make shipments, which could reduce earnings and cash flows.
Planning for the future
Ok Tedi has approved the implementation of a comprehensive mine waste management program to substantially reduce the risk of future acid drainage from the mine waste, as part of its objective to improve its environmental performance.
This new program, together with ongoing dredging and the addition of limestone to the waste rock, should significantly mitigate the environmental impact of Ok Tedi's operations by significantly reducing the amount of sulphides in the mill tailings that are currently discharged into the Ok Tedi River system.
This quarter, Ok Tedi placed orders for items with long lead-times, and awarded contracts to various engineering firms for the flotation upgrade, tailings pipeline and tailings storage project. Based on the advanced engineering work, the capital cost of the new waste management program is now estimated to be US $150 million (Inmet's share would be US $27 million). Incremental annual operating costs are equivalent to US $0.05 per pound of copper. Construction is expected to begin in 2007 with start up of a pyrite removal plant during the first half of 2008.
Status of our development projects Las Cruces Quarterly development update
Progress at Las Cruces is on schedule to meet our start-up date of early 2008 with construction activities well underway. The Dewatering and Re- Injection system (DRS) is operating as expected and more than six million cubic metres of overburden material have been excavated from the area of the future pit. At the current mining rate, we expect to reach the ore in the fall of 2007. Key infrastructure projects such as the construction of an underpass, the diversion of several streams and the construction of a supply water storage pond are either completed or progressing according to schedule. The total number of employees is now at 265, of which 217 are contractors.
By the end of September, we had spent (euro) 58 million of the total estimated capital costs of (euro) 380 million. Spending year to date was less than anticipated due to the timing of payments including a staggered payment schedule for the lump-sum supply contracts for the process plant, which comprises a grinding plant, leach plant and solvent and extraction and electrowinning plants. This does not affect the construction schedule.
The following are some additional highlights of the quarter: Procurement for the construction of the process plant is well underway - We have awarded almost a quarter of all planned key contracts. Contracts awarded this quarter include those for mass earthworks for site preparation, the construction of the temporary office facilities and the purchase of the crushing plant. - The lump-sum contracts for the delivery of the processing plant were signed in September with Outokumpu Technology. - We expect to begin with the civil work involved in building the plant in November, followed by the concrete work in early 2007. Obtained several municipal construction licenses - We obtained several important construction permits and municipal licenses this quarter, including permits for stream diversions, the water supply pond and the high voltage substation. Government mandated external audit reviews for the DRS, mining, and environmental activities were also successfully completed. - We still need to obtain several municipal construction licenses including those for the installation of the supply water pipeline and the discharge water pipeline. CERATTEPE Quarterly development update
Last year, Artvin-based local non-governmental groups made two related applications to cancel the operating licenses for the Cerattepe property. The local administrative court in Erzurum, Turkey gave us its decision on these applications on July 31, 2006. The court ruled in favour of the applicants and determined that the relevant government authorities incorrectly exempted the licenses from environmental assessment regulations.
The defendant in the applications was the Turkish Ministry of Energy and Natural Resources and we have joined as intervener. The ministry has appealed this decision to the Danistay, the highest administrative court in Turkey, and has applied for an interim ruling that prevents the local court decision from remaining in effect during the appeal period. We are optimistic that the Danistay will look favourably upon the interim ruling application, and expect to receive it in approximately two to four months. If the Danistay does not agree with the interim ruling application, then work on the project will remain suspended until the Danistay issues its decisions on the appeal. We expect a decision on the appeal will be made by the end of 2007.
We continue to move the project ahead, and since the local administrative court decision, we have continued to work with Deutsche Montan Technologie GmbH (DMT), a German mining engineering firm, to provide engineering, procurement and project management services for the Cerattepe project. We are also continuing with other work to update capital and operating cost budgets and develop tender documents for such items as the portal rehabilitation and underground development.
The date for the third option payment for the purchase of Cerattepe, of US $4.5 million, was extended by mutual agreement with the vendor from September 30, 2006 to the earlier of March 31, 2008, or upon 30 days after the receipt of the Danistay's decision on the appeal.
Because of the delay caused by the court proceedings, we do not expect production start-up for Cerattepe to begin in 2008, as we had originally projected. Assuming an interim ruling is obtained that the local court decision not remain in effect during the appeal period, we would expect Cerattepe to begin production in 2009.
PETAQUILLA Update on the feasibility study
In April, the partners in the Petaquilla Mineral joint venture agreed to retain AMEC Engineering to provide a cost update of the 1998 feasibility study on the Petaquilla copper and gold porphyry deposit in Panama. The study is conducted under TeckCominco's supervision who is the operator of the joint venture. Work on the study is on target and the final report is expected by the end of this year.
Inmet owns 48 percent of the Petaquilla joint venture; 52 percent is owned by Petaquilla Minerals and TeckCominco has the right to half of Petaquilla Minerals' 52 percent or 26 percent of the joint venture by funding all of Petaquilla Minerals' interest.
Managing our liquidity ------------------------------------------------------------------------- three months ended nine months ended September 30 September 30 (millions) 2006 2005 2006 2005 ------------------------------------------------------------------------- CASH FROM OPERATING ACTIVITIES Cayeli $64 $22 $149 $44 Pyhasalmi 30 14 71 33 Troilus 13 4 12 17 Ok Tedi 47 3 139 40 Corporate development and exploration not included in operations' cash flow (1) - (2) (2) General and administration (3) (1) (8) (5) Other 1 (2) (4) (3) ------------------------------------------------------------------------- 151 40 357 124 ------------------------------------------------------------------------- CASH FROM INVESTING AND FINANCING Acquisitions 2 (9) 4 (9) Non-controlling cash on acquisition - 9 - 9 Capital spending (50) (20) (87) (39) Long-term borrowings 10 - 37 - Redemption of convertible debentures - - - (64) Funding from non-controlling shareholder - - 9 - Financial assurance deposits (5) (1) (7) (2) Subsidies received - - 5 - Dividends paid on common shares - - (5) - Debt issue costs - (1) (6) (1) Foreign exchange on cash held in foreign currency - (8) (2) (13) Other (2) - (1) 3 ------------------------------------------------------------------------- (45) (30) (53) (116) ------------------------------------------------------------------------- Increase in cash 106 10 304 8 Cash and short-term investments Beginning of period 450 244 252 246 ------------------------------------------------------------------------- End of period $556 $254 $556 $254 ------------------------------------------------------------------------- CASH FROM OPERATING ACTIVITIES ------------------------------------------------------------------------- three nine months months ended ended September September (millions) 30 30 ------------------------------------------------------------------------- Increased earnings from operations (see page 5) $94 $249 Non-cash changes in operating earnings: Increased tax expense (19) (68) Changes in working capital 31 49 Other 5 3 ------------------------------------------------------------------------- Increase in operating cash flow, compared to 2005 $111 $233 -------------------------------------------------------------------------
Operating cash flows this quarter and year to date were higher than the third quarter of 2005 because of higher operating earnings and a reduction in net working capital. This was reduced somewhat by higher taxes.
Net working capital this quarter was lower because of a collection of accounts receivable balances at all operations and higher accounts payable balances at Cayeli and Ok Tedi. These changes were offset to some extent by tax installments paid at Cayeli and Ok Tedi.
The change in net working capital year to date was from lower accounts receivable balances and increases in accounts and taxes payable.
Outlook for operating cash flow
We expect operating cash flows from operations to continue to be strong for the rest of the year, in line with strong metal prices, however this will depend on earnings and changes in working capital.
CASH FROM INVESTING AND FINANCING Capital spending ------------------------------------------------------------------------- three months ended nine months ended revised September 30 September 30 objective (millions) 2006 2005 2006 2005 2006 ------------------------------------------------------------------------- Cayeli $4 $4 $11 $13 $19 Pyhasalmi 1 1 3 2 7 Troilus 1 2 2 8 2 Ok Tedi 4 1 7 2 10 Las Cruces 39 12 61 12 119 Cerattepe - 1 1 2 2 Accruals and other 1 (1) 2 - - ------------------------------------------------------------------------- $50 $20 $87 $39 $159 -------------------------------------------------------------------------
Refer to Results of our operations and Status of our development projects for a discussion of actual results and our 2006 objective.
Long-term borrowing and financial assurance deposits
This quarter, Las Cruces borrowed an additional (euro) 7 million for the continuing development of the mine, and provided $4 million as collateral to the banks for issuing letters of credit to its suppliers and the local townships. Year to date, Las Cruces has borrowed a total of (euro) 26 million against its credit facilities.
Our restricted cash balances at September 30, 2006 included the deposits made this year, plus our December balances related to:
- Ok Tedi's $10 million in trust for future rehabilitation - Inmet's $14 million of cash collateralized letters of credit, and - $5 million related to issuing letters of credit to suppliers, the local townships and for dewatering at Las Cruces. Redemption of convertible debentures In 2005 we redeemed our convertible debentures for $64 million. Outlook for investing and financing cash flow
The change in capital expenditure at Las Cruces is from capital expenditures for plant construction that were pushed into 2007. Additional drawdowns on the credit facility will therefore also be lower than planned. Our board has declared a dividend of $0.10 per common share under our dividend policy on December 15, 2006 to common shareholders of record as at November 30, 2006.
CASH BALANCE
Our cash balance at September 30, 2006 of $556 million was held corporately and at our operations. We had $232 million of this cash held in investments that mature greater than 90 days, but less than 120 days.
SHARE CAPITAL ------------------------------------------------------------------------- Common shares outstanding as of September 30, 2006 and October 27, 2006 48,277,726 ------------------------------------------------------------------------- Deferred share units outstanding as of September 30, 2006 (redeemable on a one-for-one basis for common shares) 74,153 ------------------------------------------------------------------------- OFF BALANCE SHEET TRANSACTIONS
The following table shows our Troilus and Ok Tedi gold hedging transactions, the currency and interest rate hedges related to Las Cruces and their respective marked-to-market valuations as at September 30, 2006.
------------------------------------------------------------------------- ------------------------------------------------------------------------- Type of Expiry Quantity Price C$ marked-to- contract market gain (loss) at September 30 2006 ------------------------------------------------------------------------- Gold forward sales Troilus 2006 14,600 ounces US $352 per oz. 2007 58,200 ounces US $352 per oz. 2008 58,200 ounces US $352 per oz. ------------------------------------------------------------ 131,100 ounces US $352 per oz. $(40.3 million)(1) Ok Tedi 2006 3,375 ounces US $370 per oz. 2007 13,500 ounces US $371 per oz. 2008 6,750 ounces US $372 per oz. ------------------------------------------------------------ 23,625 ounces US $371 per oz. $(7.2 million)(1) Currency forward sales (euro) Las Cruces 2008 US $215 million 171.80 million $(1.6) million ------------------------------------------------------------ Interest rate swaps Las Cruces 2008 US $179 million 5.2 percent $7.6 million to 2014 (reducing in conjunction with debt repayment schedule) ------------------------------------------------------------------------- ------------------------------------------------------------------------- (1) At a gold price of US $599 per ounce. Managing risk
The following is an update to the discussion, only where required, of the key risks associated with our business and the strategies we use to manage them. You can find the full discussion in the annual Management's Discussion and Analysis in Inmet's 2005 Annual Report.
Development of the lower mine at Cayeli
The new ore handling system was commissioned in August and ramp-up of the system will take place over the following months. Two additional ore passes will be commissioned at the end of the first quarter in 2007, which will complete the infrastructure project. Unexpected complications during the ramp- up phase may have a negative impact on Cayeli's production.
Ground conditions at Cayeli
Ground conditions at Cayeli have improved and the number of incidents related to ground failures have significantly decreased. To ensure that we minimize the risk of poor ground conditions, we continue to actively manage them by adhering to appropriate support standards, by designing and sequencing working areas to minimize the impact of difficult ground conditions and by monitoring and modeling ground events to use the information gathered as a predictive tool.
Collective bargaining agreement at Cayeli
The current three-year collective labour agreement expired in May 2006 and negotiations continued this quarter. Turkish labour regulations require that negotiations be complete in early December. If negotiations result in a labour disruption, production will be affected, depending on the length of the disruption.
Environmental and social impacts on Ok Tedi
Dredging the sediments in the Ok Tedi River at Bige has reduced the river bed aggradation and overbank flooding, but riverine waste disposal at Ok Tedi has had, and continues to have, two significant effects on the Ok Tedi and Fly River systems: sedimentation of the river beds resulting in overbank flooding, and acid rock drainage effects from oxidation of sulphur in the waste streams.
While studies to assess the impact are ongoing, Ok Tedi believes, based on current findings, that these effects will likely be greater and last longer than previously thought to be the case. As described on page 28, a comprehensive mine waste management program has been initiated to reduce these risks.
Meteorological factors at Ok Tedi
Ok Tedi's ability to generate electrical power, ship concentrates to its customers and bring supplies to the operations depends on the amount of rainfall in the area. Prolonged dry weather conditions could, therefore, have a negative impact on its operating results. At the end of the third quarter, low precipitation had lowered river levels and the use of hydro power. Fortunately, Ok Tedi did not experience any serious interruption in river navigation and concentrate stocks are at low levels.
Meteorological forecasts have indicated that we may experience an El Nino event sometime in the fourth quarter. An El Nino event is likely to reduce precipitation in the region where Ok Tedi operates, which could limit navigation of the Fly and Ok Tedi rivers during those periods. Ok Tedi is taking the necessary steps to minimize the impact on the operation in case an El Nino occurs
Negotiations of the Community Mine Continuation Agreements (CMCAs)
Ok Tedi began its mid-term review of the Community Mine Continuation Agreements (CMCAs) during the second quarter. The CMCAs set out the level of compensation that is paid to the communities impacted by the mining operation. The review is part of the current CMCAs process, and is to address any material changes that may have taken place since 2002, when the agreements were signed. Negotiations are currently underway and Ok Tedi expects to complete the negotiations by early 2007. Current payments under the CMCAs approximate US $4 million annually (Inmet's share - US $1 million).
Development at Las Cruces
Las Cruces is a development project, and while we are confident that the project will add value as planned, there is still significant uncertainty. Risks associated with detailed engineering, mine and processing facilities construction, permitting and relations with local communities will continue to exist. In addition, a local non-governmental group has initiated several legal proceedings claiming that various governmental approvals for the project were not granted in accordance with regulatory requirements. We believe these claims are without merit and are vigourously defending against them. One of these proceedings was dismissed earlier this year; during the third quarter another one was also definitively dismissed. Two of the proceedings remain outstanding. There remains a risk that completion of the project could be delayed.
Foreign exchange exposure on returns of investment
Our operations (except for Troilus) operate in currencies different than our Canadian dollar reporting currency. Since these operations are self- sustaining, we defer changes in our net investment (which includes our initial investment, earnings and long-term intergroup loans) that arise from changes in foreign exchange rates in our foreign currency translation account. The balance at the end of this quarter was a deferred loss of $37 million. Repatriating funds through dividends, loan repayments or capital redemptions could result in foreign exchange losses, because the Canadian dollar is much stronger now than it was at the time of our original investment. The amount of the loss, if any, will depend on the amount repatriated and foreign exchange rates. We realized a foreign exchange loss on the repatriation of our foreign investment from Cayeli and Ok Tedi of $1million this quarter and $3 million year to date.
Sensitivity analysis
The table below shows you the effect of key variables on our net income, based on our revised objectives for 2006.
------------------------------------------------------------------------- Would change Would change our 2006 our 2006 net net income per A change of: income by: share by: ------------------------------------------------------------------------- Metal prices Copper (per pound) US $0.10 $12 million $0.25 Zinc (per pound) US $0.05 $4 million $0.08 Gold (per ounce)(1) US $10 $2 million $0.03 ------------------------------------------------------------------------- Exchange rates Canadian dollar per US dollar C$0.05 $18 million $0.37 Canadian dollar per euro C$0.05 $3 million $0.07 ------------------------------------------------------------------------- Treatment and refining charges Copper treatment charge per tonne and copper refining charge per pound US $10 US $0.10 $4 million $0.07 Zinc treatment charge per tonne US $10 $1 million $0.03 ------------------------------------------------------------------------- Freight and energy costs Concentrate freight per tonne 10% $3 million $0.05 Fuel price per litre $0.10 $3 million $0.06 Electricity per kilowatt hour $0.01 $3 million $0.05 ------------------------------------------------------------------------- (1) Calculations include hedging in place at December 31, 2005. About Inmet
Inmet is a Canadian-based global mining company that produces copper, zinc and gold. We have interests in four mining operations in locations around the world, including Cayeli in Turkey, Pyhasalmi in Finland, Troilus in Canada and Ok Tedi in Papua New Guinea. Inmet's common shares are listed and trade on the Toronto Stock Exchange under the stock symbol IMN.
Inmet Mining Corporation
CONTACT: PRNewswire - - 10/27/2006
