First Quantum earns US$45.9 million in 2008

Vancouver – Despite record copper production First Quantum Minerals (FM-T) managed to earn just US$45.9 million in 2008 as the plunging copper price forced the company to take major investment impairment and price adjustment charges.

First Quantum has three operations in Zambia: the Kansanshi open pit copper-gold mine, the Kashime copper project, and the Bwana Mkubwe solvent extraction-electrowinning (SXEW) facility and sulphuric acid plant. In the Democratic Republic of Congo (DRC) the Vancouver-based company owns the Frontier copper mine and is developing the Kolwezi copper-cobalt tailings project. First Quantum also runs the Guelb Moghrein copper-gold mine in Mauritania and is exploring the Kevitsa nickel-copper-platinum group metals project in Finland.

It was a big year for First Quantum in terms of copper production. Fourth quarter copper production was up 31%, compared to the fourth quarter of 2007, with the boost coming primarily from full production at Frontier and expanded operations at Kansanshi. The company produced 97,280 tonnes of copper in the quarter.

But the company’s battle against the global economy shows. In 2008, First Quantum sold 50% more copper than in 2007 yet the company only earned US$45.9 million, compared to US$520 million in 2007. The key issue: that in the second half of the year, the price of copper fell 65%.

Frontier, an open pit mine feeding sulphide ore into a mill and flotation facility, achieved commercial production in the fourth quarter of 2007 and since then the company has worked to ramp up production. The fourth quarter 2008 was its best quarter to date, producing 24,917 tonnes copper

At Kansanshi, the new sulphide circuit began commissioning in the second quarter. The expansion allows the Kansanshi facility to process 15 million tonnes of ore annually, almost 30% better than before the expansion.

And at Guelb Moghrein First Quantum was forced to recognize a $28.1-million negative provisional pricing adjustment, resulting in an operating loss for the quarter. The mine produced 8,177 tonnes of copper, a 14% increase compared to the same period in 2007. At the same time, however, the mine produced fewer gold ounces and saw higher processing costs, which lifted the unit cost of production to 96¢ per lb. from the 2007 fourth quarter level of 37¢ per lb.

During the year First Quantum spent US$56.9 million on mining equipment and expansion activities at Guelb Moghrein. The gold recovery circuit was completed in December and commercial gold production was achieved in January.

First Quantum finished mining the Lonshi open pit in the third quarter but ore remains stockpiled in the DRC, where borders are closed to ore exports. Ore had been processed at the Bwana SXEW facility in Zambia but the DRC has suspended ore exports during its review of mining contracts. As such Bwana has been placed on care and maintenance until Lonshi ore is available or alternative feed has been sourced.

With the end of Lonshi and the suspension of operations at Bwana, First Quantum recorded a net realizable value adjustment on the ore stockpile and operations of US$41.9 million. First Quantum is evaluating the possibility of starting an underground operation at Lonshi.

A far bigger charge came when First Quantum settled provisional prices paid for copper shipments with the contractually specified London Metals Exchange price on delivery. At the end of the third quarter 62,931 tonnes of copper were provisionally priced at US$3.08 per lb. The average settled price for those tonnes was US$1.55 per lb. The result was a US$212.7-million hit to the company’s year-end consolidated revenues.

And though the company did not record impairments for any of its mines or projects, its listed investments did take a significant hit and force a US$254.2-million writedown.

Changes to Zambian tax laws also took their toll on First Quantum this year, though the company is fighting to regain some of its tax losses. In March 2008 the Zambian parliament passed a series of changes to the country’s mining tax regime, including a windfall tax, a variable tax, a concentrate export levy, and an increased royalty.

First Quantum paid the new taxes but is arguing that they violate the terms of its development agreement with the government, which provides the right to compensation if the Zambian government fails to comply with the agreement’s tax stability guarantees. On that basis, First Quantum estimates it will receive some US$127.5 million back from the government.

More recently, Zambia’s parliament passed a new budget that abolished the windfall tax but confirmed the variable profit tax (VPT). First Quantum says the VPT is expected to lift the future effective tax rate from the 30% base rate for mining companies in Zambia to 41%, which cost the company US$43.3 million. First Quantum maintains that these taxes are still above those permitted under its development agreements with the Zambian government and thus has recorded a future recovery of this VPT charge.

As of the end of February First Quantum had US$207 million available as working capital. And the company expects to generate sufficient cash flow from operations to cover any liquidity requirements for the next year.

The company is forecasting 380,000 tonnes of copper production and 240,000 oz. gold production during 2009 and expects the average unit cost of production for the year to be 80¢ per lb. copper. Using an average copper price forecast of US$1.60 per lb. for 2009, First Quantum expects to generate positive operating cash flows sufficient to cover all commitments, financing obligations, and capital expenditures over the next 12 months.

And to brace against further deterioration in the copper price, First Quantum initiated a short-term hedging program. The company hedged 83,500 tonnes of copper production for the five-month period ending in July.

In January First Quantum renewed its US$250-million corporate revolving loan facility. It has drawn US$150 million from the facility to date. And now that the corporate loan facility has been renewed First Quantum says its “intends to finalize long-term project financing for the development of the Kolwezi project.”

In early 2008 a syndicate of commercial and development banks agreed to provide a US$450-million loan facility to develop Kolwezi. The banks recently re-affirmed their willingness to arrange the loan however the agreement cannot be completed until the DRC completes its mine contract review.

First Quantum is limiting its capital expenditures to US$190 million, concentrating on committed capital projects. Specifically, the company will focus on development at Kolwezi and expansion at Guelb Moghrein, which will both be low-cost producers when complete.

At Kolwezi, First Quantum plans to spend US$84 million this year. The massive project is expected to cost US$553 million, of which roughly US$355 has already been committed and some US$185 million already spent. While development will continue the pace of work will slow: commercial start-up is now targeted for the third quarter of 2010, rather than the first quarter. The company spent $52 million on the project in 2009.

When complete, Kolwezi is expected to produce 35,000 tonnes of copper cathode and 7,000 tonnes of cobalt hydroxide annually. The plant will be built such that its capacity can be doubled with a US$40-million investment. Assuming the expansion goes ahead, the mine is expected to operate for 22 years.

At Kevitsa, a project First Quantum acquired in its recent US$277.6-million takeover of Scandinavian Minerals, the company will spend US$5 million in 2009 on resource expansion. The decision on the timing for development of Kevitsa has been deferred until later in 2009.

First Quantum’s share price has sat between $30 and $35 since mid-February; it closed at $33.20 on Mar. 9. The company has a 52-week trading range of $12.75 to $95.39 and has 68.8 million shares outstanding.