TORONTO, CANADA — (Marketwire) — 07/25/11 — All amounts in Canadian dollars unless indicated otherwise
Inmet (TSX: IMN) announces second quarter net income from continuing operations of $56 million compared to $51 million in the second quarter of 2010.
Second quarter highlights
Inmet Board approval for development decision on Cobre Panama
On July 25, 2011, the Board of Directors of Inmet approved the development of Cobre Panama as described in the final FEED study of March, 2010 after completing a comprehensive review and risk assessment. This approval is conditional on the achievement of the following project milestones:
As a result of the development decision, KPMC, under an amended option agreement we have agreed to with it, must make its election on whether to exercise its option to acquire a 20 percent interest in Minera Panama by the later of 60 days after the date of this release or the date that is seven days after we have publicly announced ANAM-s approval of the ESIA.
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 June 30, 2011. Revised objective is as of July 25, 2011.
Adoption of International Financial Reporting Standards
We have prepared our second 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.
Forward looking information
Securities regulators encourage companies to disclose forward-looking information to help investors understand a company-s future prospects. This press release contains statements about our future financial condition, results of operations and business.
These are „forward-looking“ because we have used what we know and expect today to make a statement about the future. Forward-looking statements usually include words such as may, expect, anticipate, believe or other similar words. We believe the expectations reflected in these forward-looking statements are reasonable. However, actual events and results could be substantially different because of the risks and uncertainties associated with our business or events that happen after the date of this press release. You should not place undue reliance on forward-looking statements. As a general policy, we do not update forward-looking statements except as required by securities laws and regulations.
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 8.
Copper
Copper prices on the London Metals Exchange (LME) averaged US $4.14 per pound this quarter, a decrease of 8 percent from the first quarter of 2011 and a 29 percent increase over the second quarter of 2010.
Zinc
Zinc prices on the LME averaged US $1.02 per pound this quarter, slightly lower than last quarter-s average price of US $1.09 per pound and a 9 percent increase over the second quarter of 2010.
Pyrite
Prices for sulphur stabilized during the second quarter and we expect to realize similar prices for the remainder of the year.
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.
Our sales are affected by the conversion of US dollar revenue to Canadian dollars. Compared to the same quarter last year, the value of the Canadian dollar appreciated 6 percent relative to the US dollar and depreciated 6 percent relative to the euro.
Our earnings are affected by changes in foreign currency exchange rates when we:
Treatment charges down for zinc
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. We finalized our terms with zinc smelters this quarter, agreeing on treatment charges for zinc concentrates that are lower than last year, reflecting a tightening zinc concentrate market. Results this quarter include adjustments we-ve made to first quarter charges, which were at 2010 rates.
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 $3 million in negative finalization adjustments from first quarter sales.
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:
Significantly higher pyrite sales volumes, no gold sales volumes
Our sales volumes are directly affected by the amount of production from our mines and our ability to ship to our customers.
2011 outlook for sales
We use our production objectives to estimate our sales target.
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.
Our copper treatment and refining charges were lower than they were in 2010 because Troilus stopped operating in June 2010. Zinc treatment charges were lower than last year because our terms with smelters were lower.
2011 outlook for smelter processing charges and freight
We expect costs for copper treatment and refining to be higher in 2011 based on agreements we signed recently with customers. We sell approximately 90 percent of our copper concentrate under long-term contracts.
Spot smelter processing charges continue to be significantly higher than they were in 2010, because the earthquake in Japan in March caused stoppages in copper smelter production, lowering short-term demand for copper concentrates. This should settle in the third quarter and we expect spot processing charges to normalize.
We expect copper price participation to be minimal.
We expect total zinc smelter processing charges, including price participation, to be lower than in 2010 because of a tightening zinc concentrate market and our long-term contracts reflect this.
We expect our ocean freight costs to be similar to 2010.
Las Cruces sells its copper cathode production directly to buyers in the Spanish and Mediterranean markets and therefore does not incur smelter processing charges and has relatively low freight costs.
Direct production costs
Direct production costs are higher this year, mainly because we began recognizing operating results at Las Cruces in our consolidated income statement effective July 1, 2010, partly offset by the closure of Troilus mid-year in 2010. At Cayeli, consumables, ground control and royalty costs were higher as anticipated in our guidance. Pyhasalmi realized higher consumable, electricity and ground support costs this quarter than the second quarter of 2010.
Inventory changes
Copper inventories at Cayeli and Pyhasalmi increased this quarter end by a combined 3,000 tonnes because of the timing of shipments.
2011 outlook for cost of sales (excluding depreciation)
We expect consolidated direct production costs to be higher in 2011 because we will recognize a full year of production costs in the income statement for Las Cruces. This will be somewhat offset by the closure of Troilus.
Our budget for 2011 assumes our costs at Pyhasalmi will be similar to 2010 and higher at Cayeli. Costs at Las Cruces will rise to reflect increased production, but should decrease significantly per pound of copper produced as this operation continues to ramp up to full production.
Certain variable costs may continue to affect our earnings, depending on metal prices:
Depreciation was higher this quarter and year to date mainly because Las Cruces began to depreciate its operating assets in the income statement on July 1, 2010. There was no depreciation at Troilus in 2011 because it stopped operating in June 2010.
2011 outlook for depreciation
We expect depreciation to be higher in 2011 mainly because we will recognize Las Cruces- operating results in earnings for the entire year. This will be offset somewhat by the closure of Troilus.
Corporate costs
Corporate costs include corporate development and exploration, general and administration costs, taxes, interest and other income.
Corporate development and exploration
Costs year to date are approximately $13 million higher than 2010. In the first quarter, we incurred approximately $6 million of expenses from work related to the arrangement agreement to merge with Lundin Mining Corporation. We and Lundin Mining Corporation agreed to mutually 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. In addition, we incurred $2 million in expenditures in the first quarter to drill the Balboa deposit at Cobre Panama. Work on Balboa continued in the second quarter and we began capitalizing drilling and evaluation costs for this deposit based on the positive results to date. See Status of development project – Cobre Panama on page 22 for more information. Increased costs compared to 2010 also reflect our higher budget for 2011 to explore for world class deposits.
Interest income
Interest income was higher this quarter and year to date compared to last year because our long-term bond portfolio provided higher yields and because our cash and long-term bond balances were higher.
Foreign exchange losses
We have foreign exchange gains or losses when we revalue certain foreign denominated assets and liabilities.
Our foreign exchange losses were from:
We continue to hold the proceeds we received 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. In the first quarter, we recognized total foreign exchange losses of $9.5 million on these funds because the US dollar depreciated in value relative to the Canadian dollar.
2011 outlook for investment and other income
Investment and other income is affected by cash and held to maturity investments, and by interest rates and exchange rates.
Stand-by costs
In the first quarter of 2010, we could not mine ore at Las Cruces because of the water levels in the pit. We expensed $6.8 million in operating and maintenance costs for the water purification plant because they did not relate to production activities. We recognized these expenses as stand-by costs because we were not yet at commercial production.
Our tax expense changes as our earnings change.
The consolidated effective tax rate increased this quarter and 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.
2011 outlook for income tax expense
We expect statutory tax rates at our operations to remain the same as they were in 2010 unless a statutory tax rate change is enacted.
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 expect to reduce our tax-effected Canadian tax loss pools by about $2 million.
Results of our operations
2011 estimates
Our financial review by operation includes estimates for our 2011 operating earnings and operating cash flows. We used our 2011 objectives for production and cost per tonne of ore milled to build these estimates, as well as the following assumptions for the remaining six months of the year:
Copper production improved from last quarter
Copper grades increased this quarter as we began to produce higher copper grade ore that had been deferred earlier in the year. We will continue to process this high copper grade ore in the third quarter. Low stockpiles early in the quarter limited blending opportunities, which led to lower overall copper recoveries than planned. Stockpiles have since grown giving us the ability to optimize blending going forward. Mill throughput was lower this quarter compared to the second quarter of 2010 due to a routine shutdown. Although copper production was lower than expected, we anticipate making up this production in the second half of the year.
Zinc grades this quarter were significantly lower than the second quarter of 2010 because of variation in ore types. Ore containing bornite minerals continued to pose challenges to the process plant, lowering metallurgical recoveries this year especially for zinc. Zinc production was therefore lower than last year.
The additional resources for ground control are improving production reliability. The mine achieved a 30 day monthly production record in June, producing 103,000 tonnes of ore and also achieving weekly records for rockbolts installed, shotcrete applied and sheets of wire mesh installed.
Cost per tonne of ore milled this quarter and year to date were higher than 2010 mainly because of higher royalty costs (pushed up by higher realized metals prices), additional ground support costs and increased costs for labour and consumables. This change was, however, consistent with our expectations and the objective for the year.
2011 outlook
Production levels in 2011 should remain at approximately 1.2 million tonnes. We expect copper grades to be 3.2 percent consistent with our original plan. We have reduced our zinc grade objective to 5.6 percent, compared to our previous target of 5.9 percent because of mine sequence changes and updates to forecast stope grades. We expect there will continue to be bornite containing ore in the mill feed, and we have reduced our objective for zinc recoveries from 73 percent to 68 percent. The result is that we adjusted our zinc production objective from 48,600 tonnes to 45,700 tonnes.
The objective for 2011 uses the assumptions listed on page 15.
The table below shows what contributed to the change in operating earnings and operating cash flow between 2011 and 2010.
2011 outlook for capital spending
We expect to spend $19 million on capital in 2011, for underground development, ore pass rehabilitation, mobile equipment, a shotcrete delivery line extension, a new concrete batch plant and additional mill improvements.
Progress update
In June 2011, we completed a planned maintenance shutdown at Las Cruces for 16 days to install new components and modify equipment, working to increase the underflow (or solids) density of the grinding thickener to its design capacity of 80 percent. After the shutdown, we operated consistently at solid densities at 80 percent or higher, compared to 75 percent before the shutdown. The plant started up on schedule, achieving record throughput above 80 percent soon after start-up and record weekly production of 1,340 tonnes of cathode copper.
Within two weeks after start-up, a support structure of the new grinding thickener failed due to a faulty weld, causing a subsequent shut-down for repair. Production was halted for seven days to empty, repair and re-fill the thickener before it resumed. We are extremely disappointed by the poor performance of our technology provider and are in discussions with it about rectifying the situation.
Copper cathode production in the second quarter was slightly better than the first quarter (8,500 tonnes compared to 8,100 tonnes). This reflects the downtime for the June shutdown and the continuing improvements to the reactors, including installing and commissioning new oxygen distributors.
Recoveries increased in the second quarter to 83 percent, approaching our objective of 85 percent as the efficiency of oxygen dispersion continues to improve. Higher iron levels in the reactors have also increased copper recoveries and ferric iron levels, allowing us to leach copper more effectively.
Despite these measurable improvements, we still need to closely monitor the leach reaction process. The leach solution in the reactors is extremely corrosive and abrasive, damaging even high nickel alloy stainless steel. We are monitoring and attempting to mitigate the wear on components inside the leach reactors, such as the cooling baffles, oxygen distributors and agitators.
Ore mining continues to progress well, and we have built up stockpiles and expect to mine up to one million tonnes this year.
Our water management continues to be successful, and we are progressively increasing our capacity for drainage and reinjection, as we commission new wells while aiming to reduce contact water inflows. Favourable summer climatic conditions have allowed us to reduce our discharge to the river.
Operating costs this quarter include $5 million for shutdown costs.
We look forward to the coming months and we expect to reach production design capacity this year, as all critical components of the operation have performed on a sustained basis at close to their design capacity or better. Our task now is to achieve reliable, sustained operations for the balance of the year, and to optimize the required maintenance and component replacements.
We are reducing our cathode copper production objective from 50,200 tonnes to between 42,000 and 45,000 tonnes for the year to reflect actual performance during the ramp-up year to date and the impact of the failure of the new grinding thickener in July.
Capital spending this year was mainly on plant improvements, the permanent water purification plant and mine development. In 2010 it was mainly for the permanent water purification plant.
We expect to spend $68 million on capital projects in 2011, including $16 million for mine development and $37 million for plant improvements.
Higher zinc grades increase zinc production
Pyhasalmi processed at an annualized rate that was in line with its annual objective.
The operation maintained its strong production record and achieved copper recoveries of 96 percent and zinc recoveries of 91 percent. Zinc grades were significantly higher this quarter and year to date compared to last year, and are consistent with our plan, pushing zinc production significantly higher. Copper production this quarter was slightly below the same quarter in 2010 and higher year to date because of variations in copper grades. Pyrite production was higher this quarter to meet higher customer demand.
Pyhasalmi remains on target to mine 1.4 million tonnes of 1 percent copper and 2.6 percent zinc in 2011, and to produce 13,300 tonnes of copper and 31,900 tonnes of zinc.
It expects to produce and sell 800,000 tonnes pyrite in 2011. In March 2011, Pyhasalmi signed a five year sales contract with a customer in the Far East for up to 400,000 tonnes of pyrite per year, and now has long term agreements covering sales of up to 760,000 tonnes per year.
Capital spending in 2011 is mainly to replace underground mobile equipment.
Status of our development project
Cobre Panama
Engineering, infrastructure and power
Basic engineering progressed as scheduled this quarter and we have compiled equipment lists, and finalized the process flow diagrams in all plant, port and power areas. We received permits and started several early work projects during the quarter. Preparatory road construction commenced in July in anticipation of major civil work scheduled to begin in early 2012. All early work projects have been approved under separate ESIAs by the regulatory authorities.
As part of our project related efforts, we had been working with GDF Suez Energy Central America S.A. (GDF Suez) to jointly develop an „over the fence“ 300 megawatt coal-fired power plant to be owned and operated by GDF Suez. We believe the project would benefit more by directly incorporating the power plant into the project and as a result we reached an agreement with GDF Suez to terminate our joint development agreement. GDF Suez closely collaborated with us to transition Minera Panama as the developer and owner of the power plant. This change will be reflected in the ongoing basic engineering for the project-s capital and operating (including power) cost estimates that we expect to have by the end of this year. As part of the transition, Minera Panama has engaged SK Engineering and Construction, Co. Ltd. of Korea under a limited notice to proceed with basic engineering for the power plant.
ESIA approval and corporate responsibility progress
This quarter, we initiated work on our responses to the second set of questions from ANAM, pertaining to the ESIA, which we believe will receive approval in September. The second set of questions is focused mainly on our biodiversity strategy as well as follow up questions on social and economic impacts. We expect to complete our responses and submit them to ANAM within the next month.
Board Approval for Development Decision on Cobre Panama
On July 25, 2011, the Board of Directors of Inmet approved development of Cobre Panama as described in the final FEED study of March, 2010 after completion of a comprehensive review and risk assessment. This approval is conditional on the achievement of the following project milestones:
As a result of the development decision, KPMC, under an amended option agreement we have agreed to with it, must make its election on whether to exercise its option to acquire a 20 percent interest in Minera Panama by the later of 60 days after the development decision or the date that is seven days after we have publicly announced ANAM-s approval of the ESIA. In the event that KPMC exercises its option, it will be required to invest approximately US$135 million in Minera Panama within 30 days of the expiry of the initial 60 day period. Any such funds invested by KPMC will be used to fund project related expenditures.
Partnership process recommencement
This quarter, we recommenced a process to engage potential new partners in Cobre Panama. At this point, multiple interested parties have executed confidentiality agreements with us and are engaged at various stages of due diligence on the project.
Drilling
We continued with resource drilling this quarter on the recently discovered Balboa deposit. On May 31, 2011, we provided a progress update from 12 further holes drilled on Balboa which is available at . This drilling has defined a quartz-bornite-chalcopyrite mineralized porphyry returning higher copper and gold grades than those encountered at any time previously on the Cobre Panama property in over 40 years of exploration drilling. The Balboa mineralization starts near surface and this implies that it could be mined with a relatively low strip ratio but at generally higher copper and gold grades than the current mineral resources. Drills continue to delineate the extents of zone on 200 metre centres and we have also begun infill drilling on 100 metre centres with a view to establishing National Instrument 43-101 compliant mineral reserves and resources by year-end.
2011 outlook for development
In the latter half of 2011, we plan to:
After basic engineering is completed and we have received the appropriate approvals, site capture, preparation and construction should take approximately 48 months.
Managing our liquidity
We develop our financing strategy by considering 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 $624 million of held to maturity investments ($373 million at December 31, 2010), providing a total of $1,625 million in capital available to finance our growth strategy as at June 30, 2011.
Operating cash flows this year were higher than 2010 because our operating earnings before depreciation were higher. The large inflow of cash related to working capital this quarter and year to date mainly reflects lower accounts receivable at Cayeli and Pyhasalmi due to the timing of collections from customers.
2011 outlook for cash from operating activities
The table below shows expected operating cash flow from our key operations, based on our outlook for metal prices and production listed on page 15, and the assumptions in Results of our operations, which starts on page 15.
Please see Results of our operations and Status of our development project for a discussion of actual results and our 2011 objective. Capital spending this year was mainly for Cobre Panama and for plant improvements at Las Cruces.
Purchase of long-term investments
We used the US dollar proceeds from the sale of Ok Tedi to buy US $273.9 million in US Treasury bonds with AAA credit ratings. The bonds mature between March 2012 and January 2016 and have a weighted average annual yield to maturity of 1.2 percent. In 2010, we bought $219 million in medium-term Canadian government and corporate bonds with credit ratings of A to AAA.
Issuance of common shares
On May 17, 2011, a subsidiary of Temasek Holdings (Private) Ltd. exchanged its subscriptions receipts for 7.78 million Inmet common shares and we received cash of $500 million, plus accrued interest on funds in escrow during the subscription period.
Cash from discontinued operation
In January 2011, we sold our 18 percent equity interest in Ok Tedi for net proceeds of $307 million after Papua New Guinea withholding taxes.
2011 outlook for investing and financing
Capital spending
We expect capital spending to be $319 million in 2011. The more significant items include:
Financial condition
Our strategy is to ensure we have sufficient liquidity (including cash and committed credit facilities) to finance our operating requirements as well as our growth projects. At June 30, 2011, we had $1,625 million in total funds, including $1,001 million in cash and short-term investments and $624 million invested in long-term bonds.
Cash
At June 30, 2011 our cash and short-term investments of $1,001 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 the highest 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 June 30, 2011, we held cash and short-term investments in the following:
See note 7 on page 70 in the consolidated financial statements for more details about where our cash is invested.
Medium-term bonds
We have created a bond portfolio to provide better yields with no change to our investment risk. As at June 30, 2011, the portfolio was $624 million (Held to maturity investments):
The bonds mature between August 2011 and May 2016. Although our intention is to hold these investments to maturity, there is a liquid market for them and they are available to us at any time.
Restricted cash
Our restricted cash balance of $76 million as at June 30, 2011 included:
Accounting changes
The Accounting Standards Board incorporated International Financial Reporting Standards (IFRS) into the Canadian Institute of Chartered Accountants Accounting Handbook effective for interim and annual financial statements relating to fiscal years beginning on or after January 1, 2011. The first quarter of 2011 was the first presentation of our results under IFRS, with an effective transition date of January 1, 2010.
While the adoption of IFRS did not change our business activities, it has significantly changed our reported financial position. Our key controls over financial reporting did not change as a result of our transition to IFRS. For all changes to policies and procedures that have been identified, the effectiveness of internal controls over financial reporting and disclosure controls and procedures has been assessed and any changes have been implemented. In addition, controls over the IFRS changeover process have been implemented as necessary.
See note 3 to our interim consolidated financial statements for a complete list of our significant accounting policies followed on adoption of IFRS. See note 6 to the financial statements for a detailed description of our conversion to IFRS, including a line-by-line reconciliation of our financial statements previously prepared under Canadian GAAP to those under IFRS for the three and six months ended June 30, 2010 and for the year ended December 31, 2010.
The table below reconciles total equity under Canadian GAAP to total equity under IFRS, and illustrates the after-tax effect of each of the most significant adjustments had on equity.
i) Revenue
Under Canadian GAAP, we recognized revenue when title was legally transferred to the purchaser. For certain shipments at Cayeli, Pyhasalmi and Ok Tedi, we transfer title when we receive the first provisional payment, which is later than the transfer point for risks and rewards of ownership.
Under IFRS, we recognize revenue when all significant risks and rewards of ownership of our products are transferred to the purchaser.
ii) Impairment of assets
Under Canadian GAAP, we used a two-step approach to impairment testing:
Under IFRS we use a one step approach to test for and measure impairment, and compare asset carrying values directly with the higher of fair value less costs to sell and value in use (which uses discounted future cash flows). IFRS also requires a full or partial reversal of previous impairment losses when circumstances have changed and the impairments have been reduced. Impairment losses were not reversed under Canadian GAAP.
We increased January 1, 2010 property plant and equipment at Cayeli by approximately $50 million to reverse an impairment charge we recognized for this operation in 1996. The increase is the IFRS carrying amount we would have calculated, net of depreciation, if we had not recognized the original impairment. This will also result in a higher ongoing depreciation expense for Cayeli, including an increase of $8 million for the year ended December 31, 2010.
iii) Asset retirement obligations
Under Canadian GAAP, we used a credit adjusted risk free interest rate and were not required to update the rate when market rates changed.
Under IFRS, we measure asset retirement obligations using a risk free interest rate and revalue when market risk free interest rates change.
iv) Business combinations
Under Canadian GAAP, companies that acquired an additional interest in an entity they already controlled accounted for it as a step acquisition. Under IFRS, acquiring a non-controlling interest is not considered a business combination, and is instead accounted for as an equity transaction.
Under IFRS, we have accounted for our acquisition of the remaining 30 percent interest in Las Cruces in December 2010 as an equity transaction, because we already controlled it. We recognized the difference between the non-controlling interest (as determined under IFRS) and the fair value of the consideration paid, in retained earnings.
v) First time adoption of IFRS: property, plant and equipment associated with asset retirement obligations First time adoption of International Financial Reporting Standards (IFRS 1) provides specific exemptions that we used when we adopted IFRS.
IFRS and Canadian GAAP both require us to recognize a corresponding change in asset retirement obligations in the carrying value of the related property, plant and equipment (where we identify an asset) and depreciate this amount prospectively. The amount under IFRS was different from the amount determined under Canadian GAAP because of the different way IFRS determines asset retirement obligations.
We used an optional transitional calculation to determine the property, plant and equipment associated with our provision for asset retirement obligations. Under the transitional calculation, we measured the provision at the transition date and discounted it to the date the liability first arose. The result became the initial asset value. Depreciation was applied to this value. We applied this exemption to certain mines instead of determining property, plant and equipment associated with asset retirement obligations retrospectively.
Supplementary financial information
Pages 31 and 32 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, zinc and pyrite. We have three wholly-owned mining operations: Cayeli (Turkey), Las Cruces (Spain) and Pyhasalmi (Finland). We also have a 100 percent interest in Cobre Panama, a development property in Panama.
This press release is also available at .
Second quarter conference call
Will be held on
– Tuesday, July 26, 2011
– 8:30 a.m. Eastern Time
– webcast available at or
You can also dial in by calling
– Local or international: +1.416.695.6616
– Toll-free within North America: +1.800.952.6845
Starting at approximately 10:30 a.m. (ET) Tuesday, July 26, 2011, a conference call replay will be available
– Local or international: +1.905.694.9451 passcode 5516403
– Toll-free within North America: +1.800.408.3053 passcode 5516403
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 in Toronto, Canada. Our principal activities are the exploration, development and mining of base metals.
2. Basis of presentation and statement of compliance
International Financial Reporting Standards (IFRS) require us to make an explicit and unreserved statement that our financial statements are in compliance with IFRS. We will make this statement when we issue our 2011 annual financial statements. These condensed interim financial statements have been prepared in accordance with IAS 34 Interim Financial Reporting as issued by the International Accounting Standards Board (IASB) and using the accounting policies we expect to adopt in our consolidated financial statements for the year ending December 31, 2011.
This is the first year we have prepared our financial statements in accordance with IFRS. See note 6, First time adoption of IFRS, for information about our transition from Canadian GAAP. You should read our interim statements in conjunction with our annual statements which you can find in our 2010 Annual Report.
We have prepared the consolidated financial statements under the historical cost convention, modified by the revaluation of certain financial instruments we have measured in accordance with IFRS. The financial statements are in Canadian dollars and all values are rounded to the nearest thousand except where otherwise indicated. These statements have been approved by Inmet-s board of directors and have been reviewed by our external auditors.
Our segmented statements reflect the management structure of our company, where each operation retains its own management team and compiles its own financial information, following the accounting policies outlined here.
3. Summary of significant accounting policies
Basis of consolidation
Entities we control
We have control of an entity when we have the right to govern its operating and financial policies (usually when we have more than 50 percent voting power through ownership or agreements), unless a non-controlling interest is able to prevent us from exercising control.
We consolidate the results of entities we control and eliminate all intercompany balances and transactions. When we acquire a new entity, we consolidate from the day that control passes to us. We consolidate those we sell until the day control passes to the acquirer.
Interests in jointly controlled entities
We jointly control an entity when we hold a long-term interest in it, and share joint control over its operating and financial decisions with one or more other parties under a contractual arrangement.
We proportionately consolidate our share of any entity we jointly control, combining its line-by-line results with similar line items in our financial statements.
Foreign exchange
Functional and presentation currency
Inmet Mining-s functional currency is the Canadian dollar. We report our consolidated financial statements in Canadian dollars.
Our entities measure the items in their financial statements in their functional currency (the currency of the primary economic environment they operate in). Cayeli and Cobre Panama use the US dollar and Pyhasalmi and Las Cruces use the euro.
Foreign currency transactions
Monetary items denominated in foreign currencies are translated into each entity-s functional currency at the rate of exchange on the balance sheet date, and gains and losses on translation are recognized in the statement of earnings for the period. We recognize all other transactions in foreign currencies at the exchange rate at the time of the transaction.
Financial statements of foreign operations
For operations that have a functional currency other than the Canadian dollar, we translate the statement of earnings and balance sheet as follows:
We also recognize exchange differences relating to long-term intercompany loan balances with foreign operations that form part of the net investment in the foreign operation in this separate component of accumulated other comprehensive income.
When we sell all or part of a foreign operation, or repay its share capital or intercompany debt considered part of the net investment, we recognize exchange differences arising from the translation of the net investment in the statement of earnings.
Business combinations
When we acquire a subsidiary, we account for it using the purchase method.
The cost of the business combination is the fair value at the date of exchange of:
We allocate total consideration paid to the identifiable assets, liabilities and contingent liabilities (identifiable net assets) we acquired, at their fair value on the date of the acquisition, including mineral reserves and resources that can be reliably valued.
We expense transaction costs related to an acquisition as incurred.
If the fair value of our share of the identifiable net assets acquired is greater than the fair value of the consideration paid, we recognize the difference in the statement of earnings on the acquisition date.
Non controlling interest is the portion of an entity that we do not own (the profit or loss and net assets we are not entitled to). We record non controlling interests in equity, separate from our shareholders- equity.
Revenue
Gross sales include the sale of all concentrate, cathode copper and gold dore. It does not include smelter processing charges and freight, which are presented as a separate line item in the statement of earnings.
We recognize revenue when all significant risks and rewards of ownership of our products have been transferred to the customer – usually when the customer takes on the insurance risk and the goods have been delivered to the shipping agent.
Most of our sales contracts set the sales price at the commodity-s market price on a specified future date. To calculate our revenue from the sale of our products, we use the forward price of the commodity for the day we expect the contract to settle. Variations between the price we record on the date of initial revenue recognition and the final price we receive due to changes in market prices represents an embedded derivative in our sales contracts. We adjust our revenue every period for any change in the value of the contract using the period end forward price for the day the contract is expected to settle. When it settles, we record the difference between the forward price and the final price we receive in revenue.
We recognize interest income in investment and other income, based on the principal outstanding and the effective interest rate.
We recognize dividends and royalties in investment and other income when we have established the right to receive payment.
Inventories
Inventories include:
We measure inventory at the lower of cost or net realizable value, as follows:
We classify inventories of stockpiled ore that we do not expect to process in the next year as other assets.
Property, plant and equipment
On initial acquisition, we recognize property, plant and equipment at cost. Cost includes the purchase price, costs that can be directly attributed to acquiring it, and the cost required to bring the asset to the location and the condition necessary to operate in the way we intended it to.
In subsequent periods, we recognize it at cost less accumulated depreciation and any impairment in value.
We depreciate the cost, less estimated residual values of property, plant and equipment, as follows:
When different parts (or components) of an asset are significant and have different useful lives, we depreciate the individual components separately, considering both a component-s physical life, and the present estimated mineral reserves at the mine where the component is located.
We review estimates in remaining useful lives and residual values at least annually and account for any changes prospectively.
When we carry out a major maintenance refit, we may replace or overhaul assets or parts of assets. When we replace an asset or a component that we have been depreciating separately, we capitalize these costs if this extends its useful life and it is probable that this will result in future economic benefits to the operation. In addition, we write off the asset or component that has been replaced. If we replace part of an asset that was not considered a component, we use the replacement value to estimate the carrying amount of the replaced asset and immediately write that off. We expense all other regular maintenance costs as incurred.
Exploration and evaluation expenditures
We expense the costs of exploration and evaluation as incurred, except for the following:
Development expenditures
We capitalize the costs of acquiring and developing mineral reserves and resources on the balance sheet as we incur them. These costs include accessing the ore body, designing and constructing the production infrastructure, interest and financing relating to construction, and costs that can be directly attributed to bringing the assets to the condition necessary for their intended use. This includes costs during the commissioning period when required before the asset can operate at normal levels.
Development expenditures are not depreciated. When production begins, we reclassify these costs to the appropriate category of property, plant and equipment and depreciate them according to our accounting policy.
Capitalized stripping
In open pit mining operations, we remove overburden and other waste in order to access the ore body (stripping). During development, we capitalize the cost of stripping as part of the cost of mine development and reclassify it to property when production begins.
During the production phase, we capitalize these costs to property when stripping activity gives us access to reserves that would not otherwise have been accessible, and that we expect will be mined in the future. We amortize production phase stripping costs over the reserves that are directly affected by the stripping activity on a units-of-production basis.
Leasing
We determine whether an arrangement is, or contains, a lease based on the substance of the arrangement, considering whether the arrangement is dependent on the use of a specific asset or whether the arrangement conveys a right to use the asset.
We classify a lease as financial when we carry substantially all of the risks and rewards of owning the asset. We capitalize assets under financial leases at either the fair value of the leased asset or the present value of the minimum lease payments over the lease term using the interest rate in the lease agreement – whichever is lower. We determine these amounts at the inception of the lease and depreciate the corresponding asset over its estimated useful life or the lease term – whichever is shorter. We recognize a corresponding amount representing our future obligation for finance leases in Other liabilities in the balance sheet, and recognize the associated accretion expense over time in finance costs in the statement of earnings.
We classify a lease as operating when we do not have substantially all the risks and rewards of ownership. We recognize rentals payable under operating leases in the statement of earnings on a straight line basis over the term of the lease.
Impairment of assets
At each reporting date, we look for indications of impairment of our non-current assets. If there are indicators of impairment, we carry out a formal test to see whether the asset-s carrying amount exceeds its recoverable amount.
An asset-s recoverable amount is its fair value less costs to sell or its value-in-use – whichever is higher.
If the carrying amount of the asset exceeds its recoverable amount, we recognize an impairment loss in the statement of earnings to reflect the lower amount of the asset. We recognize impairment losses related to continuing operations in the statement of earnings in the expense category that relates to the asset-s function.
We carry out these reviews for each asset, unless the asset does not generate cash flows on its own. In this case, we will carry out the review at the cash-generating unit level. Cash generating units are the smallest identifiable group of assets and liabilities that generate cash inflows that are largely independent of the cash inflows from other assets or groups of assets. This generally results in an evaluation of assets at the mine entity level.
We reverse an impairment loss in the statement of earnings if the estimates we used to calculate the recoverable amount have changed since we recognized the impairment. We increase the carrying amount to the recoverable amount, net of the depreciation or amortization that would have arisen if we had not recognized the original impairment loss.
After a reversal, we recognize depreciation over the asset-s remaining useful life based on its revised carrying amount, less any residual value.
Government subsidies
We recognize government subsidies when there is reasonable assurance we will receive the subsidy and will comply with all of the associated conditions. We credit government subsidies related to a capital expenditure against the carrying amount of the related asset, and amortize the subsidy over the expected useful life of the asset. We credit subsidies that are not associated with an asset to income, to match them with the expenses they relate to.
Provisions for asset retirement obligations
Our mines, closed properties and joint ventures are subject to environmental laws and regulations in Canada and the other countries we operate in. Mining companies are legally obligated to rehabilitate land and other property that has been damaged or contaminated in the course of their business activities. While rehabilitation activities usually happen after the site has been closed, companies are required to estimate reclamation costs from both operating sites and closed sites.
We incur obligations to restore and rehabilitate land and the environment as we carry out the regular construction and operation of our mines. Costs can include, among other things, the dismantling and demolition of infrastructure, removal of residual materials and remediation of disturbed areas. We recognize a provision for these costs as the related disturbances occur, using our best estimate of future costs based on information available at the balance sheet date, including an adjustment for risk when there is significant variability in possible outcomes. We discount the provision using a current inflation adjusted pre-tax risk free interest rate and include the accretion of the discounted amount over time in finance costs in the statement of earnings.
When we recognize a provision, we record a corresponding increase in the carrying amount of the related asset (where we can identify one) and recognize depreciation following our accounting policies for property, plant and equipment.
We review these provisions annually for changes to our obligations, legislation or discount rates that affect our cost estimates or lives of operations. We adjust the provision and the cost of the related asset (where we can identify one) when there is a change in the estimated cash flows or discount rate, and depreciate the adjusted cost of the asset prospectively.
When we do not identify an asset, such as at our closed sites, we record a provision or a change in provision in cost of sales.
Other provisions
We recognize a provision when we have a legal or constructive obligation because of past events, and it is probable that, to settle the obligation, we will be required to make a payment that we can reliably estimate. If its effect is material, we discount the provision to net present value using a pre-tax risk free interest rate. We recognize the accretion of discounted provisions over the time of the obligation in finance costs in the statement of earnings.
Income taxes
We calculate current income tax expense for each of our taxable entities based on the local taxable income at the local statutory tax rate enacted or substantively enacted at the balance sheet date, and include adjustments to income taxes payable or recoverable for previous periods.
We calculate deferred tax assets and liabilities based on temporary differences between the carrying amounts in our balance sheet and their tax bases, using income tax rates we expect to be in effect when the temporary differences are likely to be settled. We present all deferred taxes as non-current assets and liabilities on the balance sheet.
We only recognize deferred tax assets when it is probable that we will have enough taxable income in the future to recover them. We include the effects of changes in tax rates in income when the change is enacted or substantively enacted.
We recognize deferred tax assets or liabilities for all temporary differences, except for:
We review the carrying amount of deferred income tax assets at each balance sheet date and adjust it if:
We recognize current and deferred tax that relates to equity items in equity, and not in the statement of earnings.
Assets held for sale and discontinued operations
Assets held for sale
We classify assets and disposal groups as held for sale if we will recover their carrying amounts through a sale transaction rather than through continuing use. This condition is regarded as met only when the sale is highly probable and the assets or disposal groups are available for immediate sale in their present condition. We must be committed to the sale, which should be expected to qualify for recognition as a completed sale within one year of the date of classification.
We carry assets (or disposal groups) held for sale at the lower of the carrying amount before being classified as held for sale, and the fair value less costs to sell. We present the assets and liabilities of a disposal group classified as held for sale separately as one line in the assets and liabilities sections on the statement of financial position.
Discontinued operations
A discontinued operation is a component of an entity that has been disposed of or classified as held for sale, with operations and cash flows that are clearly distinguished both operationally and for financial reporting purposes from the rest of the entity. To be classified as a discontinued operation, an operation must:
When the operation is discontinued at the balance sheet date, the results are presented in one line on the statement of earnings, and prior period results are represented as discontinued.
See note 10 for a breakdown of our results from discontinued operations.
Cash and short-term investments
Cash includes cash and money market instruments that mature in 90 days or less from the date of acquisition. Short-term investments mature in 91 days to a year.
In the consolidated statements of cash flows, we disclose:
See note 7 for a breakdown of our cash and short-term investments.
Restricted cash includes cash that has been pledged for other uses, such as reclamation, and is not available for immediate disbursement.
See note 8 for a breakdown of our restricted cash.
Financial instruments
Financial instruments include cash, as well as any contract that gives rise to a financial asset to one party and a financial liability or equity instrument to another party. We classify financial instruments at their initial recognition. We initially recognize financial instruments at their fair value.
Fair value is the value a financial instrument can be closed out or sold at, in a transaction with a willing and knowledgeable counterparty. It is usually the instrument-s quoted market price. If a quoted market price is not available, we determine fair value with models using market-based or independent information and assumptions.
Cash and short-term investments, accounts receivable from metal sales, restricted cash and accounts payable and accrued liabilities
These financial instruments have been designated as fair value through profit and loss and are recorded at fair value. We record any changes in their fair value in net income. We record interest and dividends earned on cash, short-term investments and restricted cash in Investment and other income. For cash, we calculate fair value using published price quotations in an active market where there is one. Otherwise fair value represents cost plus accrued interest, which is reasonable given its short-term nature. We record accounts receivable related to metal sales at fair value based on forward market metal prices on the date of the balance sheet (see our Revenue policy above). We record accounts payable and accrued liabilities at amortized cost, which approximates fair value because of their short-term nature.
Investments
Our investments in equity securities are designated as available-for-sale and recorded at fair value. We calculate fair value using the bid price of the investment as quoted in an active market. We record changes in the fair value of our investments in Other comprehensive income. The change in fair value of an investment in an equity security appears in Investment and other income only when it is sold or impaired.
Our investments in long-term government and corporate bonds are designated as held to maturity. We initially recognize these investments at fair value and subsequently at amortized cost with the related interest income recorded in Investment and other income. We only designate investments as held to maturity when we intend, and have the ability, to hold them to maturity.
We capitalize transaction costs related to investments we make and include these in the investment-s initial carrying value.
Loans and receivables
All non-metal receivables are designated as loans and receivables. We initially measure these assets at fair value. In subsequent periods, we measure them at amortized cost using the effective interest rate method.
Long-term debt
Our long-term debt is designated as other liabilities and is accounted for at amortized cost. We record interest expense on long-term debt in finance costs in the statement of earnings unless it relates specifically to a development project, and has been accounted for using our accounting policy for borrowing costs.
Derecognition of financial instruments
We will derecognize a financial asset when:
We derecognize financial liabilities when the associated obligation is discharged, cancelled or has expired.
Impairment of financial assets
We review our investments for impairment at the end of each reporting period based on both quantitative and qualitative criteria, including the extent that cost exceeds market value, the length of a market decline and the financial health of the issuer.
For loans and receivables and our investments in long-term bonds, we measure the amount of the loss as the difference between the asset-s carrying amount and the present value of estimated future cash flows discounted at the asset-s original effective interest rate. We reduce the carrying amount of the asset and recognize the amount of the loss in the income statement in investment and other income. If, in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognized, we reverse the previously recognized impairment loss. We recognize any subsequent reversal of an impairment loss in the income statement, to the extent that the carrying value of the asset does not exceed its amortized cost at the reversal date.
If our investments in equity securities are impaired, we transfer the difference between its cost and its current fair value, less any impairment loss previously recognized in the income statement, from accumulated other comprehensive income to the income statement in investment and other income.
Embedded derivatives
When we enter into a contract, we determine whether it contains an embedded derivative. We separate an embedded derivative from its host contract if the derivative is not measured at fair value through profit and loss, and when its economic characteristics and risks are not closely related to the host contract. In these circumstances, we recognize the embedded derivative according to our accounting policy for derivatives.
Derivatives and hedging
We designate non-financial derivative contracts as held-for-trading and record them at fair value on the balance sheet. We include mark-to-market adjustments on these instruments in net income, unless the instruments are designated as part of a hedge relationship.
We record derivatives on the balance sheet at fair value. On the date we enter into a derivative, we designate it as a hedging instrument or a non-hedge derivative. A hedging instrument is designated in either:
When we enter into a hedging contract, we formally document the relationship between the hedging instrument and the items it hedges, and the related risk-management strategy. This documentation:
At the end of every quarter, we determine whether we expect a hedging instrument to be highly effective in offsetting risk in the future. If we do not expect it to be highly effective, we stop hedge accounting prospectively, and keep accumulated gains or losses in other comprehensive income until the hedged item affects earnings.
We also stop hedge accounting prospectively if:
If we conclude that it is probable that a forecasted transaction will not happen within the documented time frame, we immediately transfer all gains and losses accumulated in other comprehensive income to earnings. When hedge accounting stops, we reclassify the derivative as a non-hedge derivative prospectively.
We classify cash flows from a derivative in the same category as the cash flows from the item it hedges. We record cash flows from non-hedge derivatives as operating cash flows.
We record derivatives on the balance sheet at fair value and record changes in the fair value of derivatives at the end of every period:
Gold forward sales contracts
We use the dollar offset method to assess the prospective and retrospective effectiveness of a hedging relat
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