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Highlights - Lower net income per share Net income per share this quarter was lower than in the second quarter of 2007, mainly because lower zinc prices reduced second quarter 2008 sales by $53 million. The difference was also the result of the recognition of $15 million in foreign exchange losses in 2008 from the repatriation of cash from our subsidiaries. A $12 million gain on sale of investment was recorded in 2007. - Higher production For the second quarter 2008 copper production was similar to 2007, while gold and zinc production was higher. Cayeli and Pyhasalmi have continued to deliver strong throughput. - Production outlook For the year, we expect to produce 93,100 tonnes of copper, 78,700 tonnes of zinc and 268,400 ounces of gold. This reflects a reduction in our original copper estimate because of the current delay in direct ore shipping at Las Cruces and a reduction in our gold estimate because of lower expected grades at Ok Tedi. We increased pyrite projections to 645,000 tonnes to reflect the strong demand for this product. - Lower operating cash flow per share Operating cash flow this quarter was $115 million or $2.38 per common share compared to $138 million or $2.85 per share in the second quarter of 2007. - Petaquilla is moving forward We began acting as operator, on behalf of Teck Cominco, of the Petaquilla project on April 1, and on July 28 formally announced an all-cash offer of $2 per share for all of the outstanding common shares of Petaquilla Copper Ltd. (PTC). PTC has a 26 percent stake in Minera Petaquilla SA, the Panamanian company that holds the project concession. The purpose of the offer is to acquire control of PTC in order to protect our interest in the Petaquilla Concession and advance the development of the copper project. - Las Cruces construction on target subject to regulator consent Las Cruces is still on target to begin production in 2008 subject to lifting of the suspension of the dewatering system permit. Good progress has been made to address the water quality concerns of the dewatering system as temporary water treatment facilities are now in place. Remediation of the waste dump and residue storage areas are underway following a slide of material in July. Key financial data ------------------------------------------------------------------------- three months ended June 30 six months ended June 30 2008 2007 change 2008 2007 change ------------------------------------------------------------------------- FINANCIAL HIGHLIGHTS (thousands, except per share amounts) Sales Gross sales $281,463 $320,018 -12% $557,744 $606,632 -8% Net income Net income $67,705 $138,050 -51% $174,379 $239,128 -27% Net income per share $1.40 $2.86 -51% $3.60 $4.95 -27% Cash flow Cash flow provided by operating activities $114,797 $137,731 -17% $195,708 $242,711 -19% Cash flow provided by operating activities per share(1) $2.38 $2.85 -17% $4.05 $5.03 -19% Capital spending $121,028 $82,079 +47% $232,442 $134,014 +73% ------------------------------------------------------------------------- OPERATING HIGHLIGHTS Production(2) Copper (tonnes) 19,300 19,100 +1% 38,600 38,600 - Zinc (tonnes) 21,000 16,600 +27% 41,300 38,700 +7% Gold (ounces) 59,900 54,800 +9% 116,200 110,800 +5% Cash costs Copper (US $ per pound)(3) $0.65 $0.15 +333% $0.48 $0.12 +300% Gold (US $ per ounce)(3) $360 $338 +7% $374 $393 -5% ------------------------------------------------------------------------- as at as at June 30 December 31 FINANCIAL CONDITION 2008 2007 ------------------------- Current ratio 6.0 to 1 5.6 to 1 Gross debt to total equity(4) 25% 18% Net working capital balance (millions) $1,034 $855 Cash balance (millions) $999 $841 Shareholders' equity (millions) $1,658 $1,392 ------------------------------------------------------------------------- (1) Calculated as cash flow provided by operating activities divided by average shares outstanding for the respective period. (2) Inmet's share. (3) Cash cost per pound of copper and cash cost per ounce of gold are non-GAAP measures - see Supplementary financial information on pages 29, 30 and 31. (4) Gross debt includes long-term debt and current portion of long-term debt. Second quarter press release Where to find it Our financial results .......................... 4 Key changes in 2008 ............................ 4 Understanding our performance .................. 5 Earnings from operations ..................... 7 Corporate costs .............................. 11 Results of our operations ...................... 12 Cayeli ....................................... 12 Pyhasalmi .................................... 14 Troilus ...................................... 16 Ok Tedi ...................................... 18 Status of our development projects ............. 20 Las Cruces ................................... 20 Petaquilla ................................... 22 Managing our liquidity ......................... 23 Financial condition ............................ 25 Managing risk .................................. 26 Accounting changes ............................. 28 Supplementary financial information ............ 29 Quarterly review ............................... 32 Consolidated financial statements .............. 33
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, 2008.
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.
Our financial results ------------------------------------------------------------------------- (thousands, except per three months ended June 30 six months ended June 30 share amounts) 2008 2007 change 2008 2007 change ------------------------------------------------------------------------- EARNINGS FROM OPERATIONS(1) Cayeli $45,262 $64,741 -30% $98,917 $124,176 -20% Pyhasalmi 27,232 44,890 -39% 55,226 76,332 -28% Troilus 7,510 3,718 +102% 16,145 6,530 +147% Ok Tedi 49,656 65,391 -24% 103,574 105,406 -2% Other (494) (355) +39% (988) (843) +17% ------------------------------------------------------------------------- 129,166 178,385 -28% 272,874 311,601 -12% ------------------------------------------------------------------------- DEVELOPMENT AND EXPLORATION Corporate development and exploration (2,483) (1,836) +35% (5,101) (2,678) -90% ------------------------------------------------------------------------- CORPORATE COSTS General and administration (2,790) (2,162) (6,438) (5,002) Investment and other income (11,358) 1,685 3,396 9,112 Interest expense (471) (424) (918) (862) Income and capital taxes (44,457) (48,783) (89,327) (84,433) Non-controlling interest 98 (545) (107) (340) ------------------------------------------------------------------------- (58,978) (50,229) +17% (93,394) (81,525) +15% ------------------------------------------------------------------------- Net income before other items $67,705 $126,320 -46% $174,379 $227,398 -23% Gain on sale of Wolfden - 11,730 - 11,730 ------------------------------------------------------------------------- Net income $67,705 $138,050 -51% $174,379 $239,128 -27% ------------------------------------------------------------------------- Basic and diluted net income per share $1.40 $2.86 -51% $3.61 $4.95 -27% ------------------------------------------------------------------------- Weighted average shares outstanding 48,282 48,278 48,282 48,278 -27% ------------------------------------------------------------------------- (1) Gross sales less smelter processing charges and freight, cost of sales, depreciation and provisions for mine rehabilitation. Key changes this year ------------------------------------------------------------------------- three months six months ended ended see (millions) June 30 June 30 page ------------------------------------------------------------------------- EARNINGS FROM OPERATIONS Sales Lower metal prices denominated in Canadian dollars $(46) $(19) 7 Lower sales volumes - (22) 8 Costs Lower smelter processing charges and freight 7 18 9 Higher operating costs, including costs that vary with income and cash flows (10) (16) 10 ------------------------------------------------------------------------- Decrease in earnings from operations, compared to 2007 $(49) $(39) CORPORATE COSTS Change in taxes from change in income 2 (6) 11 Change in tax rates 2 1 11 Foreign exchange losses (9) (2) 11 Gain on sale of Wolfden in 2007 (12) (12) 11 Higher (lower) interest income (1) 2 11 Other (3) (9) 11 ------------------------------------------------------------------------- Decrease in net income, compared to 2007 $(70) $(65) ------------------------------------------------------------------------- Understanding our performance Metal prices The table below shows the average metal prices we realized in US dollars and Canadian dollars (the prices we realize include finalization adjustments - see Gross sales on page 7). ------------------------------------------------------------------------- three months ended June 30 six months ended June 30 2008 2007 Change 2008 2007 Change ------------------------------------------------------------------------- US dollar metal prices Copper (per pound) $3.83 $3.71 +3% $4.00 $3.27 +22% Zinc (per pound) $0.94 $1.75 -46% $1.00 $1.54 -35% Gold (per ounce) $725 $575 +26% $748 $569 +31% ------------------------------------------------------------------------- Canadian dollar metal prices Copper (per pound) $3.87 $4.08 -5% $4.04 $3.73 +8% Zinc (per pound) $0.95 $1.92 -51% $1.01 $1.76 -43% Gold (per ounce) $732 $632 +16% $755 $649 +16% ------------------------------------------------------------------------- Exchange rates affect revenue and earnings. The table below shows the average exchange rates we realized. ------------------------------------------------------------------------- three months ended June 30 six months ended June 30 2008 2007 change 2008 2007 change ------------------------------------------------------------------------- Exchange rates 1 US$ to C$ $1.01 $1.10 -8% $1.01 $1.14 -11% 1 euro to C$ $1.58 $1.46 +8% $1.54 $1.50 +3% ------------------------------------------------------------------------- Sales are affected by the conversion of US dollar revenue to Canadian dollars. Because of the weaker US dollar this year, gross sales and net income were lower compared to 2007: - gross sales decreased by $27 million for the quarter and $67 million year to date - net income decreased by $36 million for the quarter and $62 million year to date. The net income changes included the impact of foreign exchange losses from the recognition of deferred foreign exchange losses when cash was repatriated from Cayeli and Ok Tedi. These losses are recorded in Investment and other income and were $21 million for the quarter and $26 million for the year to date.
The change in the average value of the Canadian dollar relative to the euro lowered net income slightly between periods because euro-based costs were slightly higher when converted to Canadian dollars.
There was a larger change in the value of the euro relative to the Canadian dollar in 2008, between December 31, 2007 to March 31, 2008 and June 30, 2008, when we revalued euro denominated cash and short-term intergroup receivables and from the recognition of deferred foreign exchange gains when cash was repatriated from Pyhasalmi. This resulted in foreign exchange gains of $3 million and $10 million for the three and six months of this year, respectively, which we recorded in Investment and other income.
Treatment charges and freight down for copper and up 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.
------------------------------------------------------------------------- three months ended June 30 six months ended June 30 2008 2007 change 2008 2007 change ------------------------------------------------------------------------- Treatment charges Copper (per dry metric tonne of concentrate) US $40 US $59 -32% US $46 US $69 -33% Zinc (per dry metric tonne of concentrate) US $292 US $384 -24% US $291 US $249 +17% ------------------------------------------------------------------------- Price participation Copper (per pound) US $0.05 US $0.11 -55% US $0.05 US $0.08 -38% Zinc (per pound)(1) US $(0.01) US $(0.12) -92% US $(0.02) US $0.09 -122% ------------------------------------------------------------------------- Freight charges Copper (per dry metric tonne of concentrate) US $54 US $67 -19% US $50 US $55 -9% Zinc (per dry metric tonne of concentrate) US $41 US $39 +5% US $41 US $33 +24% ------------------------------------------------------------------------- (1) Zinc price participation is based on a zinc price of US $2,000 per tonne in 2008 and US $3,500 per tonne in 2007. Copper treatment charges were lower this quarter and year to date than they were in 2007 because we have better contract terms with smelters. While zinc treatment charges were higher than 2007, zinc price participation was down significantly. Statutory tax rates down slightly The table below shows the statutory tax rates for each of our taxable operating mines. ------------------------------------------------------------------------- 2008 2007 change ------------------------------------------------------------------------- Statutory tax rates Cayeli 24% 27% -3% Pyhasalmi 26% 26% - Ok Tedi 37% 37% - ------------------------------------------------------------------------- Cayeli's tax rate is lower because the withholding tax rate was reduced from 8 percent to 5 percent. EARNINGS FROM OPERATIONS Earnings from operations include the following: ------------------------------------------------------------------------- three months ended June 30 six months ended June 30 (thousands) 2008 2007 change 2008 2007 change ------------------------------------------------------------------------- Gross sales $281,463 $320,018 -12% $557,744 $606,632 -8% Smelter processing charges (53,209) (55,413) -4% (97,366) (120,019) -19% Cost of sales: Direct production costs (82,076) (66,936) +23% (159,610) (140,652) +13% Inventory changes (1,744) (6,290) -72% 1,196 (9,898) -112% Provisions for mine rehabilitation and other non-cash charges (6,073) (4,955) +23% (10,725) (7,008) +53% Depreciation (9,195) (8,039) +14% (18,365) (17,454) +5% ------------------------------------------------------------------------- Earnings from operations $129,166 $178,385 -28% $272,874 $311,601 -12% ------------------------------------------------------------------------- Gross sales were lower this year mainly because the price of zinc was down ------------------------------------------------------------------------- three months ended June 30 six months ended June 30 (thousands) 2008 2007 change 2008 2007 change ------------------------------------------------------------------------- Gross sales by operation Cayeli $98,313 $112,208 -12% $198,929 $229,942 -13% Pyhasalmi 61,249 75,807 -19% 116,157 141,147 -18% Troilus 35,171 25,849 +36% 69,422 56,091 +24% Ok Tedi(1) 86,730 106,154 -18% 173,236 179,452 -3% ------------------------------------------------------------------------- $281,463 $320,018 -12% $557,744 $606,632 -8% ------------------------------------------------------------------------- Gross sales by metal Copper $161,530 $189,056 -15% $329,698 $332,380 -1% Zinc 52,185 82,702 -37% 100,991 172,483 -41% Gold 45,046 36,816 +22% 88,333 77,873 +13% Other 22,702 11,444 +98% 38,722 23,896 +62% ------------------------------------------------------------------------- $281,463 $320,018 -12% $557,744 $606,632 -8% ------------------------------------------------------------------------- (1) Our 18 percent share of Ok Tedi's sales. Key components of the change in sales: zinc prices down, gold prices up ------------------------------------------------------------------------- three months six months ended ended (millions) June 30 June 30 ------------------------------------------------------------------------- (Lower) higher copper prices, denominated in C$ $(11) $27 Lower zinc prices, denominated in C$ (53) (74) Higher gold prices, denominated in C$ 7 13 Higher pyrite prices, denominated in C$ 7 11 Changes in other metal prices 4 4 Higher (lower) sales volumes 7 (30) ------------------------------------------------------------------------- Decrease in gross sales, compared to 2007 $(39) $(49) -------------------------------------------------------------------------
We record sales using the metal price we receive for sales that settle during the reporting period. For sales that have not been 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 we receive by adjusting our gross sales in the period we settle the sale (finalization adjustment).
Finalization adjustments in the second quarter were minimal.
At the end of this quarter, the following sales had not been settled:
- 35 million pounds of copper provisionally priced at US $3.90 per pound - 23 million pounds of zinc provisionally priced at US $0.87 per pound. The finalization adjustment we record for these sales will depend on the actual price when the sale settles, which can be from one to five months after we initially record it. Sales volume higher for zinc ------------------------------------------------------------------------- three months ended June 30 six months ended June 30 2008 2007 change 2008 2007 change ------------------------------------------------------------------------- Sales volumes Copper (tonnes) 18,900 20,900 -10% 37,200 40,900 -9% Zinc (tonnes) 25,000 19,700 +27% 45,500 44,900 +1% Gold (ounces) 61,600 59,000 +4% 117,000 120,800 -3% ------------------------------------------------------------------------- Our sales volumes are directly affected by the amount of production from our mines, and our ability to ship to our customers. Higher production increased sales volumes this quarter compared to the same period last year. While production was also higher for the first six months of 2008, sales volumes were mostly lower than the same period in 2007 because of shipment timing. Production ------------------------------------------------------------------------- revised Inmet's three months ended June 30 six months ended June 30 objective share(1) 2008 2007 change 2008 2007 change 2008 ------------------------------------------------------------------------- Copper (tonnes) Ok Tedi 7,400 6,700 +10% 14,100 14,900 -5% 32,100 Cayeli 7,600 8,100 -6% 15,800 15,600 +1% 33,600 Pyhasalmi 3,100 3,600 -14% 6,600 6,900 -4% 13,000 Las Cruces - - - - - - 7,400 Troilus 1,200 700 +71% 2,100 1,400 +50% 7,000 ------------------------------------------------------------------------- 19,300 19,100 +1% 38,600 38,600 - 93,100 ------------------------------------------------------------------------- Zinc (tonnes) Cayeli 13,200 8,300 +59% 25,900 20,200 +28% 47,800 Pyhasalmi 7,700 8,300 -7% 15,300 18,500 -17% 30,900 ------------------------------------------------------------------------- 20,900 16,600 +26% 41,200 38,700 +6% 78,700 ------------------------------------------------------------------------- Gold (ounces) Troilus 37,800 35,100 +8% 72,800 68,300 +7% 163,200 Ok Tedi 22,100 19,700 +12% 43,400 42,500 +2% 105,200 ------------------------------------------------------------------------- 59,900 54,800 +9% 116,200 110,800 +5% 268,400 ------------------------------------------------------------------------- Pyrite (tonnes) Pyhasalmi 111,200 98,400 +13% 305,700 258,900 +18% 645,000 ------------------------------------------------------------------------- (1) Inmet's share represents 100 percent for Cayeli, Pyhasalmi and Troilus, 18 percent for Ok Tedi and 70 percent for Las Cruces. This quarter: - copper production was consistent with the second quarter of 2007. This was the net result of higher grades at Ok Tedi and Troilus, and lower grades at Cayeli and Pyhasalmi. - zinc production was higher mainly because of higher grades, recoveries and throughput at Cayeli. - gold production was higher due to higher grades. 2008 outlook for sales We expect sales of all metals for the year to be consistent with our 2008 production estimates in the chart above. We have estimated an October production start up at Las Cruces. The total amount we will receive in Canadian dollars will be affected by US dollar denominated metal prices and the exchange rate between the US dollar and the Canadian dollar. Smelter processing charges and freight were consistent with last year ------------------------------------------------------------------------- three months ended June 30 six months ended June 30 (thousands) 2008 2007 change 2008 2007 change ------------------------------------------------------------------------- Smelter processing charges and freight by operation Cayeli $25,565 $24,302 +5% $47,578 $55,470 -14% Pyhasalmi 14,561 15,100 -4% 25,381 33,714 -25% Troilus 2,421 2,020 +20% 4,608 4,713 -2% Ok Tedi(1) 10,662 13,991 -24% 19,799 26,122 -24% ------------------------------------------------------------------------- $53,209 $55,413 -4% $97,366 $120,019 -19% ------------------------------------------------------------------------- Smelter processing charges and freight by metal Copper $21,516 $27,160 -21% $42,409 $54,640 -22% Zinc 24,679 25,071 -2% 44,451 58,786 -24% Other 7,014 3,182 +120% 10,506 6,593 +59% ------------------------------------------------------------------------- $53,209 $55,413 -4% $97,366 $120,019 -19% ------------------------------------------------------------------------- Smelter processing charges by type and freight Copper treatment and refining charges $5,099 $7,398 -31% $11,074 $18,423 -40% Zinc treatment charges 14,348 14,562 -1% 26,140 21,646 +21% Copper price participation 2,281 5,222 -56% 4,244 9,082 -53% Zinc price participation (366) (5,082) -93% (2,261) 8,533 -126% Content losses 16,104 20,829 -23% 32,361 42,792 -24% Other 2,239 3,252 -31% 4,512 2,179 +107% Freight 13,504 9,232 +46% 21,296 17,364 +23% ------------------------------------------------------------------------- $53,209 $55,413 -4% $97,366 $120,019 -19% ------------------------------------------------------------------------- (1) Our 18 percent share of Ok Tedi's smelter processing charges and freight.
Copper treatment and refining charges were lower in 2008 compared to 2007 because of more favourable contract terms with smelters. Zinc treatment charges were higher, but lower prices significantly reduced zinc price participation charges. For the quarter, zinc treatment charges expensed were similar with last year's second quarter because of adjustments made to first quarter sales after contracts were finalized with the smelters in the second quarter. Freight charges were higher because Pyhasalmi increased their shipments of pyrite and freight rates increased as a result of rising demand and fuel prices.
2008 outlook for smelter processing charges and freight
Contract terms for long-term copper sales at our operating mines, and treatment charges are averaging about US $50 per dry metric tonne with little to no price participation.
Contract terms for long-term zinc treatment charges have been finalized averaging about US $300 per dry metric tonne. Price participation of zinc concentrate is averaging US $0.10 per dry metric tonne for zinc priced at higher than US $2,000 per tonne ($1.36 per pound), and (US $0.10) per dry metric tonne for zinc priced at less than US $2,000 per tonne.
Copper cathode production at Las Cruces should begin in the fourth quarter. Copper cathode will be sold directly to buyers, bypassing the smelters and eliminating smelter and refining treatment charges. In the fourth quarter, the mine also intends to sell crushed ore and pay smelter processing charges. These charges are expected to be higher than what our other operations pay because of the impurity levels in this ore.
Direct production costs and cost of sales were higher than last year ------------------------------------------------------------------------- three months ended June 30 six months ended June 30 (thousands) 2008 2007 change 2008 2007 change ------------------------------------------------------------------------- Direct production costs by operation Cayeli $22,638 $20,865 +8% $45,978 $41,766 +10% Pyhasalmi 15,351 11,833 +30% 29,955 25,450 +18% Troilus 22,345 18,569 +20% 42,292 37,906 +12% Ok Tedi(1) 21,742 15,669 +39% 41,385 35,530 +16% ------------------------------------------------------------------------- Total direct production costs 82,076 66,936 +23% 159,610 140,652 +13% Inventory changes 1,744 6,290 -72% (1,196) 9,898 -112% Reclamation, accretion and other non-cash expenses 6,073 4,955 +23% 10,725 7,008 +53% ------------------------------------------------------------------------- Total cost of sales $89,893 $78,181 +15% $169,139 $157,558 +7% ------------------------------------------------------------------------- (1) Our 18 percent share of Ok Tedi's direct production costs. Key reasons for the increase in direct production costs ------------------------------------------------------------------------- three months six months ended ended (millions) June 30 June 30 ------------------------------------------------------------------------- Volume $(2) $(3) Labour costs 6 8 Consumables 7 9 Energy 1 4 Costs that vary with income and cash flow (2) 1 Other 5 - ------------------------------------------------------------------------- Increase in direct production costs, compared to 2007 $15 $19 ------------------------------------------------------------------------- Depreciation was higher than last year ------------------------------------------------------------------------- three months ended June 30 six months ended June 30 (thousands) 2008 2007 change 2008 2007 change ------------------------------------------------------------------------- Depreciation by operation Cayeli $2,556 $1,871 +37% $4,929 $4,568 +8% Pyhasalmi 2,232 2,433 -8% 4,382 4,794 -9% Troilus 1,718 2,007 -14% 4,136 4,716 -12% Ok Tedi 2,689 1,728 +56% 4,918 3,376 +46% ------------------------------------------------------------------------- $9,195 $8,039 +14% $18,365 $17,454 +5% -------------------------------------------------------------------------
At Cayeli, depreciation is higher because of the shaft extension that was finished in the last quarter of 2007. Ok Tedi has higher depreciation because it has been spending on new mine equipment and other sustaining capital over the last few years.
2008 outlook for depreciation
We estimate depreciation will be about $40 million for 2008 assuming production at Las Cruces commences in October.
CORPORATE COSTS
Corporate costs include general and administration costs, taxes and interest. We also record income from investments in this category, as well as income we receive from other transactions.
Investment and other income was lower because of foreign exchange losses ------------------------------------------------------------------------- three months six months ended June 30 ended June 30 (thousands) 2008 2007 2008 2007 ------------------------------------------------------------------------- Interest income $6,963 $7,378 $15,686 $14,394 Dividend income and royalty 1,504 1,000 1,504 2,000 Foreign exchange gain (loss) (18,573) (9,400) (11,715) (9,545) Sale of Wolfden - 11,730 - 11,730 Other (1,252) 2,707 (2,079) 2,263 ------------------------------------------------------------------------- $(11,358) $13,415 $3,396 $20,842 -------------------------------------------------------------------------
We recorded a net foreign exchange loss of $18.6 million this quarter. This included a foreign exchange loss of $15 million when we received dividends from Cayeli, Pyhasalmi and Ok Tedi, and a $4 million loss when we revalued some of our foreign currency denominated accounts and cash balances. For the year, we recognized $20 million in foreign exchange losses from dividends received. In 2007, we sold our shares in Wolfden for cash proceeds of $51 million and recorded a gain of $11.7 million.
2008 outlook for investment and other income
Investment and other income is affected by cash balances, interest rates and exchange rates. For the rest of the year, we expect to repatriate funds only from Ok Tedi. This operation distributes its earnings more frequently, so the foreign exchange effect of repatriation is normally not significant.
On June 30, 2008, the Las Cruces credit facility converted from a euro denominated loan to a US $215 million dollar loan. Starting on July 1, we will revalue the loan to euros (the functional currency of Las Cruces). Foreign exchange gains or losses on revaluations will be reflected in Investment and other income.
Income tax expense was lower in the quarter because of lower earnings ------------------------------------------------------------------------- three months ended June 30 six months ended June 30 (thousands) 2008 2007 change 2008 2007 change ------------------------------------------------------------------------- Cayeli $8,655 $13,763 -37% $27,779 $27,434 +1% Pyhasalmi 6,425 10,379 -38% 12,448 17,286 -28% Ok Tedi 23,803 23,291 +2% 43,150 37,908 +14% Las Cruces (84) 691 -112% 166 486 -66% Corporate 5,658 659 +759% 5,784 1,319 +339% ------------------------------------------------------------------------- $44,457 $48,783 -9% $89,327 $84,433 +6% -------------------------------------------------------------------------
Our tax expense changes as our earnings change. Cayeli's effective tax rate was 20 percent this quarter. This is lower than its statutory rate of 24 percent because taxable foreign exchange losses in its Turkish lira tax accounts generated a lower tax expense of $2 million. For the year to date, Cayeli's effective tax rate was 27 percent, the result of foreign exchanges gains in its tax accounts. The effective tax rate at Ok Tedi is also higher than its statutory 37 percent for the quarter and year to date because of foreign exchange gains recorded in its tax accounts. The tax expense at Corporate reflects a provision for Quebec mining duties. We expect 2008 to be the first year we have to pay this tax because we have fully drawn down our tax deductible assets in regard to this mining tax return.
2008 outlook for income tax expense
We are not expecting any further changes in statutory tax rates at our operations in 2008. We estimate approximately $15 million for Quebec mining duties will be expensed for the year, but this will depend on Troilus' 2008 net income.
Results of our operations
Cayeli ------------------------------------------------------------------------- revised three months ended June 30 six months ended June 30 objective 2008 2007 change 2008 2007 change 2008 ------------------------------------------------------------------------- Tonnes of ore milled (000's) 279 249 +12% 557 508 +10% 1,100 Tonnes of ore milled per day 3,100 2,700 +12% 3,100 2,800 +10% 3,000 ------------------------------------------------------------------------- Grades (percent) copper 3.5 3.9 -10% 3.6 3.7 -3% 3.8 zinc 6.3 5.3 +19% 6.4 5.7 +12% 6.0 ------------------------------------------------------------------------- Mill recoveries (percent) copper 78 83 -6% 79 83 -5% 81 zinc 75 63 +19% 73 70 +4% 72 ------------------------------------------------------------------------- Production (tonnes) copper 7,600 8,100 -6% 15,800 15,600 +1% 33,600 zinc 13,200 8,300 +59% 25,900 20,200 +28% 47,800 ------------------------------------------------------------------------- Cost per tonne of ore milled (C$) $81 $84 -4% $83 $82 +1% $80 -------------------------------------------------------------------------
On target to achieve production goal of 1.1 million tonnes
Cayeli produced ore this quarter at an annualized rate of more than 1.1 million tonnes, which is consistent with our annual objective and higher than last year. Higher zinc grades along with the higher throughput increased zinc production compared to last year. Copper production was slightly lower in the second quarter compared to last year because of lower copper grades mined.
Operating costs are higher than in previous years. This is mainly because of inflation in Turkey (which has increased labour costs), rising electricity rates in Turkey, and increasing commodity prices worldwide.
2008 outlook for production and costs
Improvements to Cayeli's ore pass system were completed in the first half of the year and we expect to continue to reliably mine and process 1.1 million tonnes of ore this year. Development in 2008 is focusing on access and level development of the lower mine ore blocks. Mine development rates are higher than 2007 and development of the lower mine is proceeding as planned. We expect to operate at an annual production rate of 1.2 million tonnes by 2009.
Costs could change, depending on the value of the Turkish lira relative to the US dollar. If the Turkish lira decreases in value, Turkish lira based costs such as labour will go down, reducing our costs.
Royalties also have a significant effect on costs and are variable depending on earnings. Cost per tonne of ore milled includes $8 per tonne in royalties in the second quarter, and $12 per tonne in royalties year to date. Our objective is $12 per tonne, which is based on metal price assumptions for the rest of the year.
Financial review Lower earnings this quarter because shipments in 2007 were considerably higher than production ------------------------------------------------------------------------- three months six months (millions of Canadian dollars ended June 30 ended June 30 otherwise stated) 2008 2007 2008 2007 ------------------------------------------------------------------------- Sales analysis Copper sales (tonnes) 6,800 7,200 13,500 15,400 Zinc sales (tonnes) 17,300 10,600 31,200 26,300 --------------------------------------- Gross copper sales $57 $66 $121 $124 Gross zinc sales 37 44 70 101 Other metal sales 4 2 8 5 --------------------------------------- Gross sales 98 112 199 230 Smelter processing charges and freight (25) (24) (48) (56) ------------------------------------------------------------------------- Net sales $73 $88 $151 $174 ------------------------------------------------------------------------- Cost analysis Tonnes of ore milled (thousands) 279 249 557 508 Direct production costs ($ per tonne) $81 $84 $83 $82 ------------------------------------------------------------------------- Direct production costs 23 21 46 42 Change in inventory 1 (1) - 2 Depreciation and other non-cash costs 4 3 6 6 ------------------------------------------------------------------------- Operating costs $28 $23 $52 $50 ------------------------------------------------------------------------- Operating earnings $45 $65 $99 $124 ------------------------------------------------------------------------- Operating cash flow $31 $63 $50 $122 ------------------------------------------------------------------------- The table below shows what contributed to the change in operating earnings and operating cash flow between 2008 and 2007. ------------------------------------------------------------------------- three months six months ended ended (millions) June 30 June 30 ------------------------------------------------------------------------- Change in metal prices, denominated in Canadian dollars $(38) $(34) Higher (lower) sales volumes 11 (2) Lower smelter processing charges 9 14 Higher operating costs (2) (3) ------------------------------------------------------------------------- Decrease in operating earnings, compared to 2007 $(20) $(25) (Higher) lower tax expense 3 (4) Lower tax rate 2 2 Changes in working capital (12) (46) Other (5) 1 ------------------------------------------------------------------------- Decrease in operating cash flow, compared to 2007 $(32) $(72) ------------------------------------------------------------------------- The change in working capital this quarter is from higher tax payments, reduced in part by the collection of accounts receivable. Year to date, higher accounts receivable balances and higher taxes paid resulted in a $46 million reduction in working capital. Capital spending ahead of schedule, but on track for the year ------------------------------------------------------------------------- three months ended June 30 six months ended June 30 objective 2008 2007 change 2008 2007 change 2008 ------------------------------------------------------------------------- Capital spending $6,300 $3,900 +62% $12,000 $8,300 +45% $23,000 ------------------------------------------------------------------------- Capital spending in the quarter and the year to June was mainly for replacing mine equipment. 2008 outlook for capital spending Cayeli expects to spend $23 million in 2008 on repairing a ventilation raise, buying mine equipment and replacing other equipment. PYHASALMI ------------------------------------------------------------------------- revised three months ended June 30 six months ended June 30 objective 2008 2007 change 2008 2007 change 2008 ------------------------------------------------------------------------- Tonnes of ore milled (000's) 344 346 -1% 691 671 +3% 1,370 Tonnes of ore milled per day 3,800 3,800 -1% 3,800 3,700 +3% 3,750 ------------------------------------------------------------------------- Grades (percent) copper 1.0 1.1 -9% 1.0 1.1 -9% 1.0 zinc 2.5 2.6 -4% 2.4 3.0 -20% 2.5 sulphur 40 41 -2% 41 40 +3% 41 ------------------------------------------------------------------------- Mill recoveries (percent) copper 95 96 -1% 96 96 - 94 zinc 92 90 +2% 92 92 - 90 ------------------------------------------------------------------------- Production (tonnes) copper 3,100 3,600 -14% 6,600 6,900 -4% 13,000 zinc 7,700 8,300 -7% 15,300 18,500 -17% 30,900 pyrite 111,200 98,400 +13% 305,700 258,900 +18% 645,000 ------------------------------------------------------------------------- Cost per tonne of ore milled (C$) $45 $34 +32% $43 $38 +13% $41 -------------------------------------------------------------------------
Consistent strong performance
Mill throughput has been consistent between years. Copper and zinc production is lower, however, because the areas being mined contain lower grades.
Strengthening of the pyrite market has resulted in significantly improved prices and sales.
2008 outlook for production and costs
We expect throughput and copper production for the year to be consistent with our earlier estimates.
Pyhasalmi has commissioned new copper flotation cells and installed a primary mill motor for the mill in May. The mill motor should allow speed to be adjusted more easily, which should increase throughput capacity in the grinding circuit and reduce energy costs.
We have revised our costs upwards to reflect the strength of the euro relative to the Canadian dollar.
Financial review Lower sales volumes reduce operating earnings ------------------------------------------------------------------------- three months six months (millions of Canadian dollars ended June 30 ended June 30 otherwise stated) 2008 2007 2008 2007 ------------------------------------------------------------------------- Sales analysis Copper sales (tonnes) 3,300 3,400 6,800 6,800 Zinc sales (tonnes) 7,700 9,100 14,300 18,600 Pyrite sales (tonnes) 142,700 124,400 266,800 258,300 --------------------------------------- Gross copper sales $29 $30 $57 $54 Gross zinc sales 16 38 31 72 Other metal sales 16 8 28 15 --------------------------------------- Gross sales 61 76 116 141 Smelter processing charges and freight (15) (15) (25) (34) ------------------------------------------------------------------------- Net sales 46 61 91 107 ------------------------------------------------------------------------- Cost analysis Tonnes of ore milled (thousands) 344 346 691 671 Direct production costs ($ per tonne) $45 $34 $43 $38 ------------------------------------------------------------------------- Direct production costs 15 12 30 25 Change in inventory 1 1 (1) - Depreciation and other non-cash costs 3 3 7 6 ------------------------------------------------------------------------- Operating costs $19 $16 $36 $31 ------------------------------------------------------------------------- Operating earnings $27 $45 $55 $76 ------------------------------------------------------------------------- Operating cash flow $19 $10 $50 $51 ------------------------------------------------------------------------- The table below shows what contributed to the change in operating earnings and operating cash flow between 2008 and 2007. ------------------------------------------------------------------------- three months six months ended ended (millions) June 30 June 30 ------------------------------------------------------------------------- Lower metal prices, denominated in Canadian dollars $(8) $(9) Lower sales volumes (8) (14) Lower smelter processing charges and freight 3 7 Higher freight on pyrite sales (3) (3) Higher operating costs (2) (2) ------------------------------------------------------------------------- Decrease in operating earnings, compared to 2007 $(18) $(21) Lower tax expense because of lower earnings 4 4 Changes in working capital 23 16 ----------------------- Increase (decrease) in operating cash flow, compared to 2007 $9 $(1) ------------------------------------------------------------------------- The change in working capital this quarter and year to date is mainly because the accounts receivable was lower and fewer income taxes were paid. Capital spending in 2008 will mainly be used to improve mill efficiencies ------------------------------------------------------------------------- three months ended June 30 six months ended June 30 objective (thousands) 2008 2007 change 2008 2007 change 2008 ------------------------------------------------------------------------- Capital spending $1,600 $400 +300% $3,400 $700 +386% $12,000 ------------------------------------------------------------------------- Spending this quarter was mainly for the mill motor and other asset replacements and upgrades. 2008 outlook for capital spending We expect to spend $12 million in 2008, mainly for mine and mill equipment. TROILUS ------------------------------------------------------------------------- revised three months ended June 30 six months ended June 30 objective 2008 2007 change 2008 2007 change 2008 ------------------------------------------------------------------------- Tonnes of ore milled (000's) 1,454 1,487 -2% 2,851 3,122 -9% 6,100 Tonnes of ore milled per day 16,000 16,300 -2% 15,700 17,200 -9% 16,700 ------------------------------------------------------------------------- Strip ratio 1.6 1.0 +60% 1.4 1.0 +40% 1.1 ------------------------------------------------------------------------- Grades gold (grams/ tonne) 0.96 0.90 +7% 0.94 0.84 +12% 1.00 copper (percent) 0.09 0.05 +80% 0.08 0.05 +60% 0.12 ------------------------------------------------------------------------- Mill recoveries (percent) gold 84 81 +4% 84 81 +4% 83 copper 92 88 +5% 92 86 +7% 92 ------------------------------------------------------------------------- Production gold (ounces) 37,800 35,100 +8% 72,800 68,300 +7% 163,200 copper (tonnes) 1,200 700 +71% 2,000 1,400 +43% 7,000 ------------------------------------------------------------------------- Cost per tonne of ore milled (C$) $15 $12 +25% $15 $12 +25% $12 -------------------------------------------------------------------------
Higher gold production
Throughput this quarter continued to be lower than expectations. Modifications to maximize mill throughput were complete during the first quarter, but because harder ore was mined from the upper areas of the 87 pit, we have yet to benefit from the modifications.
Gold production this quarter and year to date was higher than the same periods last year, mainly because grades from the 87 pit were higher. Gold recoveries also continue to be higher than expected.
A higher cost per tonne compared to previous years is mainly because the cost of fuel and steel grinding media are higher.
2008 outlook for production and costs
Troilus is mining through the hard, lower grade ore of the upper benches of the 87 pit and expects to access the higher grade, softer ore of the main 87 pit in August of this year. Both grades and mill throughput will improve as it progresses deeper and towards the north. The pit will remain on track for completion in early 2009 and then will begin stockpile recovery. Despite lower throughput than expected, Troilus should meet targeted gold and copper production this year because of the higher expected grades.
Financial review Higher gold prices helped earnings ------------------------------------------------------------------------- three months six months (millions of Canadian dollars ended June 30 ended June 30 otherwise stated) 2008 2007 2008 2007 ------------------------------------------------------------------------- Sales analysis Gold sales (ounces) 36,300 32,400 71,500 72,100 Copper sales (tonnes) 1,200 700 2,100 1,400 --------------------------------------- Gross gold sales $24 $18 $50 $44 Gross copper sales 10 7 18 11 Other metal sales 1 1 1 1 --------------------------------------- Gross sales 35 26 69 56 Smelter processing charges and freight (2) (2) (4) (5) ------------------------------------------------------------------------- Net sales $33 $24 $65 $51 ------------------------------------------------------------------------- Cost analysis Tonnes of ore milled (thousands) 1,454 1,487 2,851 3,122 Direct production costs ($ per tonne) $15 $12 $15 $12 ------------------------------------------------------------------------- Direct production costs $22 $19 $42 $38 Change in inventory - (1) - 1 Depreciation and other non-cash costs 3 2 7 6 ------------------------------------------------------------------------- Operating costs $25 $20 $49 $45 ------------------------------------------------------------------------- Operating earnings $8 $4 $16 $7 ------------------------------------------------------------------------- Operating cash flow $8 $4 $15 $5 --------------------------------------------
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