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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ý | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
For the fiscal year ended December 31, 2012 | ||
Or | ||
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
For the transition period from to | ||
Commission File Number: 001-33783
THOMPSON CREEK METALS COMPANY INC.
(Exact name of registrant as specified in its charter)
British Columbia, Canada (State or other jurisdiction of incorporation or organization) | 98-0583591 (I.R.S. Employer Identification No.) | |
26 West Dry Creek Circle, Suite 810, Littleton, CO (Address of principal executive offices) | 80120 (Zip code) | |
(303) 761-8801 | ||
(Registrant's telephone number, including area code) | ||
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Name of each exchange on which registered: | |||
Common Stock, no par value | New York Stock Exchange | |||
Tangible Equity Units | New York Stock Exchange | |||
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ý No o
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No ý
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405) is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment of this Form 10-K. ý
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer ý | Accelerated filer o | Non-accelerated filer o (Do not check if a smaller reporting company) | Smaller reporting company o | |||
Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Act). Yes o No ý
As of February 22, 2013, there were 169,872,817 shares of the registrant's common stock, no par value, outstanding.
As of June 30, 2012, the last day of the registrant's most recently completed second fiscal quarter, the aggregate market value of the registrant's common equity held by non-affiliates was approximately $550 million, based on the closing price of the registrant's common stock on such date as reported on the New York Stock Exchange. For purposes of this calculation, shares of common stock held by executive officers, directors and holders of greater than 10% of the registrant's outstanding common stock are assumed to be affiliates of the registrant. This determination of affiliate status is not necessarily a conclusive determination for other purposes.
DOCUMENTS INCORPORATED BY REFERENCE
Part III incorporates certain information by reference from the registrant's definitive proxy statement for the 2013 annual meeting of stockholders to be filed no later than 120 days after the end of the registrant's fiscal year ended December 31, 2012.
Thompson Creek Metals Company Inc.
INDEX TO FORM 10-K
Page | ||
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Reporting Currency, Financial and Other Information
All dollar amounts in this report are expressed in United States dollars ("US$"), unless otherwise indicated. Canadian currency is denoted as "C$." Financial information is presented in accordance with accounting principles generally accepted in the United States ("US GAAP"). Please refer to the consolidated financial statements included in Item 8, Financial Statements and Supplementary Data.
References to "we," "our" and "us" mean Thompson Creek Metals Company Inc., its predecessors and consolidated subsidiaries, or any one or more of them, as the context requires. Additional information on us is available on EDGAR at www.sec.gov or on SEDAR at www.sedar.com.
Statement Regarding Forward-Looking Information
Certain statements in this report, other than purely historical information, including estimates, projections, statements relating to our business plans, objectives and expected operating results, and the assumptions upon which those statements are based, are "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 and applicable Canadian securities legislation. Forward-looking statements may appear throughout this report, including without limitation, the following sections: Items 1 and 2, Business and Properties, Item 1A, Risk Factors and Items 7 and 7A, Management's Discussion and Analysis of Financial Condition and Results of Operations and Quantitative and Qualitative Disclosure About Market Risk. These forward-looking statements generally are identified by the words "believe," "project," "expect," "anticipate," "estimate," "intend," "strategy," "future," "opportunity," "plan," "may," "should," "will," "would," "will be," "will continue," "will likely result," and similar expressions. Forward-looking statements are based on current expectations and assumptions that are subject to risks and uncertainties which may cause actual results to differ materially from the forward-looking statements. A detailed discussion of risks and uncertainties that could cause actual results and events to differ materially from such forward-looking statements is included in Item 1A, Risk Factors and elsewhere in this report. We undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events, or otherwise.
PART I
ITEMS 1. AND 2. BUSINESS AND PROPERTIES
GENERAL
We are a growing, diversified, North American mining company. We are a significant molybdenum supplier to the global steel and chemicals sectors. We also have substantial copper and gold reserves. Our principal operating properties are the Thompson Creek Mine, an open-pit molybdenum mine and concentrator in Idaho (the "TC Mine"), the Endako Mine, an open-pit molybdenum mine, concentrator and roaster in British Columbia (in which we own a 75% joint venture interest) (the "Endako Mine") and the Langeloth metallurgical facility in Pennsylvania (the "Langeloth Facility").
We are also in the process of constructing and developing our Mt. Milligan project in British Columbia, which will be an open-pit copper and gold mine and concentrator ("Mt. Milligan"). Mt. Milligan is designed to be a conventional truck-shovel open-pit mine with a 66,000 ton per day copper flotation processing plant with estimated average annual production over the life of the mine of 81 million pounds of copper and 194,500 ounces of gold, each in concentrate. Construction and development remain on schedule with commissioning and start-up expected to commence in the third quarter of 2013 and commercial production of copper and gold expected in the fourth quarter of 2013.
Our ore reserves are our principal assets. At December 31, 2012, consolidated proven and probable reserves for the TC Mine and for the Endako Mine totaled 515.9 million pounds of contained molybdenum, with 39% of these reserves from the TC Mine and 61% from the Endako Mine. The mineral reserves for the Endako Mine are stated on a 100% basis. We own 75% of the Endako Mine. The consolidated proven and probable reserve estimates for the TC Mine utilized a cut-off grade of 0.030% molybdenum ("Mo") and an average long-term molybdenum price of $12.00 per pound. The consolidated proven and probable reserve estimates for the Endako Mine utilized a cut-off grade of 0.021% Mo and a long-term molybdenum price of C$13.50 per pound or $12.00 per pound using an exchange rate of C$1.125/US$1.00. At December 31, 2012, the consolidated proven and probable reserve for Mt. Milligan totaled 2.1 billion pounds of contained copper and 6 million ounces of contained gold. The open-pit was optimized at a $4.10/ton net smelter return cut-off value and incorporates costs for milling, plant services, tailing services and general and administrative charges and at $1.60/lb copper, $690/oz gold and a 0.85 US$/C$ exchange rate.
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We also have a copper, molybdenum and silver exploration property located in British Columbia (the "Berg property"), an underground molybdenum exploration property located in British Columbia (the "Davidson property") and a joint venture gold exploration project located in Nunavut, Canada (the "Maze Lake property").
Detailed information regarding our operations and planned exploration projects is found below. See the Glossary of Terms below for an explanation of mining terms used in this report.
We have three reportable segments: US Operations Molybdenum, Canadian Operations Molybdenum and Copper-Gold (Development). The US Operations Molybdenum segment includes all mining, milling, mine site administration, roasting and sale of molybdenum products from the TC Mine and the Langeloth Facility, as well as all roasting and sales of third-party purchased material. The Canadian Operations Molybdenum segment includes all mining, milling, mine site administration, roasting and sale of molybdenum products from the 75% owned Endako Mine. The Copper-Gold (Development) segment includes all development expenditures and development site administration from Mt. Milligan. See Note 24 to the consolidated financial statements included in Item 8, Financial Statements and Supplementary Data, for information relating to our operating segments.
The following map sets forth the locations of our mines, development projects, metallurgical facility and corporate offices.
OUR HISTORY
We are a corporation governed by the Business Corporations Act (British Columbia) ("BCBCA"). We were organized in 2000 as a corporation under the laws of Ontario, Canada and were continued as a corporation under the laws of British Columbia, Canada under the BCBCA, effective July 29, 2008. On October 26, 2006, we acquired Thompson Creek Metals Company USA. On October 20, 2010, we acquired Terrane Metals Corp. ("Terrane"), an exploration and development company in British Columbia, Canada. In acquiring Terrane, we diversified our asset base of primary molybdenum deposits to include copper and gold from the development of Mt. Milligan and exploration opportunities in the other properties acquired.
MOLYBDENUM
Molybdenum is an industrial metal principally used for metallurgical applications as a ferro-alloy in steels where high strength, temperature-resistant or corrosion-resistant properties are sought. The addition of molybdenum enhances the strength, toughness and wear- and corrosion-resistance in steels when added as an alloy. Molybdenum is used in major industries including chemical and petro-chemical processing, oil and gas for drilling and pipelines, power generation, automotive and aerospace. Molybdenum is also widely used in non-metallurgical applications such as catalysts, lubricants, flame-retardants in
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plastics, water treatment and as a pigment. As a catalyst, molybdenum is used for de-sulfurization of petroleum, allowing high sulfur fuels to meet strict environmental regulations governing emissions. Molybdenum as a high-purity metal is also used in electronics such as flat-panel displays and heat sinks. First end-user segments for molybdenum include:
• | Construction steel—40% |
• | Stainless steel—20% |
• | Chemicals—14% |
• | Tool and high-speed steel—10% |
• | Cast iron—7% |
• | Molybdenum metal—5% |
• | Super alloys—4% |
MOLYBDENUM SALES AND PRODUCTS
The world market for molybdenum consumption was 511 million pounds in 2011, increasing to 523 million pounds in 2012, both as estimated by CRU International. Over the same period, according to Platts Metals Week, the average price of molybdenum decreased from $15.49 per pound in 2011 to $12.74 per pound in 2012.
We currently source molybdenum from our two primary mines and from concentrates purchased from third-party by-product copper production. Our principal products are molybdic oxide (also known as roasted molybdenum concentrate) and ferromolybdenum. These two commodity products account for approximately 70% of our sales. Other products we produce include high soluble technical oxide, pure molybdenum tri-oxide and high purity molybdenum disulfide.
We have entered into a distributorship and sales agreement appointing our joint venture partner at the Endako Mine, Sojitz Moly Resources, Inc. ("Sojitz"), as our distributor in Asia for up to 20% of all molybdenum produced from the TC Mine for a period of ten years, commencing on January 1, 2007. These sales are made upon mutual agreement, at the prevailing market prices. The balance of the sales from the TC Mine is made directly to customers in the United States and throughout the world. These sales are primarily made pursuant to annual supply agreements for either fixed or variable volumes to be priced at the prevailing price upon delivery of the products. A smaller proportion of these sales are handled as spot sales against a purchase order for each transaction, based upon negotiated prices.
Production from the Endako Mine is sold primarily under annual supply contracts with customers who are steel, chemical and petroleum catalyst manufacturers. These annual contracts typically have fixed purchase volumes, with the sales price established by negotiated terms and conditions, referencing published molybdenum prices in various metal trade publications at or near the date of the molybdenum sale. The balance of the sales from the Endako Mine is sold on a spot sales basis, based upon negotiated prices. In 2012, sales to Sojitz totaled approximately $90.9 million (or 22.6% of consolidated revenue). No other customer accounted for more than 10% of consolidated revenue for 2012.
MOLYBDENUM PRICE HISTORY
The table below shows the high, low and average prices quoted in Platts Metals Week for molybdenum in U.S. dollars per pound for the last 10 years.
Molybdenum (Dealer oxide Platts Metals Week) | ||||||
Year | High | Low | Average | |||
2003 | $7.60 | $3.28 | $5.29 | |||
2004 | 33.25 | 7.20 | 16.20 | |||
2005 | 40.00 | 24.00 | 31.98 | |||
2006 | 28.40 | 20.50 | 24.75 | |||
2007 | 34.25 | 24.30 | 30.00 | |||
2008 | 34.00 | 8.25 | 28.94 | |||
2009 | 18.30 | 7.70 | 11.08 | |||
2010 | 18.60 | 11.75 | 15.72 | |||
2011 | 18.00 | 12.60 | 15.49 | |||
2012 | 14.78 | 10.90 | 12.74 | |||
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The prices quoted in Platts Metals Week for the week of December 31, 2012 were $11.70 (high), $11.50 (low) and $11.60 (average) per pound of molybdenum for drummed oxide.
MOLYBDENUM PRODUCTS AND USES
The following chart sets forth the principal products and uses of molybdenum and indicates the products of our company.
COPPER AND GOLD
Copper is a malleable and ductile metallic element that is an excellent conductor of heat and electricity as well as being corrosion-resistant and antimicrobial. Copper's end-use markets include construction, electrical applications, industrial machinery, transportation and consumer goods. A combination of mine production and recycled scrap material make up the annual copper supply. The key copper producing countries are Chile, Peru, the United States, Canada, Mexico, China, Australia, Indonesia and Zambia. Copper demand is closely associated with global industrial production.
Gold is a precious metal used primarily for fabrication of jewelry and electronics, among other things, or as an investment. The primary sources of gold supply are a combination of current mine production, recycled gold and draw-down of existing gold stocks held by governments, financial institutions, industrial organizations and private individuals. The key gold producing countries are China, Australia, the United States, Russia, South Africa, Peru, Canada, Ghana, Indonesia and Uzbekistan.
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COPPER AND GOLD SALES
We have entered into three concentrate sales agreements for the sale of copper-gold concentrate produced at Mt. Milligan. Pursuant to these agreements, we agreed to sell an aggregate of approximately 85% of the copper-gold-silver concentrate produced at Mt. Milligan during 2013 and 2014 and an aggregate of approximately 120,000 dry metric tons in each of the two calendar years thereafter. Under one of the agreements, we have the option to sell to the counterparty, and the counterparty has the obligation to purchase from us, up to 40,000 dry metric tons of additional concentrate per year during each of 2015 and 2016. Pricing under these concentrate sales agreements will be determined by reference to specified published reference prices during the applicable quotation periods. Payment for the concentrate will be based on the price for the agreed copper, gold and silver content of the parcels delivered, less smelting and refining charges and certain other deductions, if applicable. The copper smelting and refining charges will be negotiated in good faith and agreed by the parties for each contract year based on terms generally acknowledged as industry benchmark terms. The gold and silver refining charges are as specified in the agreements.
COPPER PRICE HISTORY
Copper is an internationally traded commodity, and its prices are determined by the major metals exchanges—the London Metals Exchange (“LME”), the Shanghai Futures Exchange and the New York Mercantile Exchange. Prices on these exchanges generally reflect the worldwide balance of copper supply and demand and can be volatile and cyclical.
The following table shows the high, low and average daily LME spot copper prices in U.S. dollars per pound over the past ten years:
Year | High | Low | Average |
2003 | $1.05 | $0.70 | $0.81 |
2004 | 1.49 | 1.06 | 1.30 |
2005 | 2.11 | 1.39 | 1.67 |
2006 | 3.99 | 2.05 | 3.05 |
2007 | 3.76 | 2.40 | 3.23 |
2008 | 4.07 | 1.25 | 3.15 |
2009 | 3.33 | 1.38 | 2.34 |
2010 | 4.42 | 2.76 | 3.42 |
2011 | 4.62 | 3.05 | 4.00 |
2012 | 3.96 | 3.30 | 3.61 |
GOLD PRICE HISTORY
The price of gold is volatile and is affected by numerous factors, all of which are beyond our control. These factors include the sale or purchase of gold by various central banks and financial institutions, inflation, recession, fluctuation in the relative values of the U.S. dollar and foreign currencies, changes in global and regional gold demand and the political and economic conditions throughout the world.
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The following table presents the high, low and average London P.M. fixed prices for gold per ounce on the London Bullion Market in U.S. dollars over the past ten years:
Year | High | Low | Average |
2003 | $416 | $320 | $363 |
2004 | 454 | 375 | 410 |
2005 | 537 | 411 | 445 |
2006 | 725 | 525 | 604 |
2007 | 841 | 608 | 695 |
2008 | 1,011 | 713 | 872 |
2009 | 1,213 | 810 | 972 |
2010 | 1,421 | 1,058 | 1,225 |
2011 | 1,895 | 1,319 | 1,572 |
2012 | 1,792 | 1,540 | 1,669 |
MINERAL RESERVES
Our proven and probable mineral reserves have been estimated in accordance with the definitions of such terms adopted by the Canadian Institute of Mining, Metallurgy and Petroleum ("CIM") and incorporated in National Instrument 43-101 ("NI 43-101") by Canadian securities regulatory authorities. Technical reports have been filed regarding the disclosure of mineral reserves for our material properties as required by NI 43-101; namely the TC Mine, the Endako Mine and Mt. Milligan. The proven and probable mineral reserves are those tonnages contained within economically optimized pits, configured using current and predicted mining and processing methods and related operating costs and performance parameters. Mineral reserve estimates reflect our reasonable expectation that all necessary permits and approvals will be obtained and maintained. We believe that our proven and probable mineral reserves are equivalent to proven and probable reserves as defined by the Securities and Exchange Commission's (the "SEC") Industry Guide 7. See the Glossary of Terms below for an explanation of mining terms used in this report.
The estimation of mineral reserves is constrained to an economically optimized pit based on all operating costs, including the costs to mine. Since all material lying within the optimized pit will be mined, the cut-off grade used in determining mineral reserves is estimated based on the material that, having been mined, is economic to transport and process without regard to primary mining costs (i.e., mining costs that were appropriately applied at the economic optimization stage).
The QA/QC controls program used in connection with the estimation of our mineral reserves consists of regular insertion and analysis of blanks and standards to monitor laboratory performance.
The following table sets forth the estimated molybdenum mineral reserves for the TC Mine and the Endako Mine as of December 31, 2012:
Proven and Probable Molybdenum Reserves at December 31, 2012
Mine | Category | Tons | Molybdenum grade | Contained molybdenum | ||||
(millions) | (%Mo) | (millions of pounds) | ||||||
TC Mine(1) | Proven—Mine | 67.0 | 0.083 | 110.7 | ||||
Proven—Stockpile | 5.1 | 0.065 | 6.6 | |||||
Probable—Mine | 62.8 | 0.068 | 86.0 | |||||
Proven + Probable | 134.9 | 0.075 | 203.3 | |||||
Endako Mine(2) | Proven—Mine | 128.3 | 0.049 | 124.7 | ||||
Proven—Stockpile | 33.4 | 0.041 | 27.3 | |||||
Probable—Mine | 158.8 | 0.046 | 148.1 | |||||
Probable—Stockpile | 16.1 | 0.039 | 12.5 | |||||
Proven + Probable | 336.6 | 0.046 | 312.6 | |||||
Total | Proven | 269.3 | ||||||
Probable | 246.6 | |||||||
Proven + Probable | 515.9 | |||||||
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_______________________________________________________________________________
(1) | The mineral reserve estimate for the TC Mine was prepared by the TC Mine staff and reviewed and verified by Bruce Parker, P.E., Mine Manager of the TC Mine, who is a Qualified Person under NI 43-101. Data verification and block model assembly was completed by Michael J. Lechner of Resource Modeling Inc. The mineral reserve estimate at the TC Mine utilized a cut-off grade of 0.030% molybdenum ("Mo") and an average long-term molybdenum price of $12.00 per pound. |
(2) | The mineral reserve estimate for the Endako Mine was prepared by the Endako Mine staff and reviewed and verified by Bob Jedrzejczak, P. Eng, Mine Superintendent of the Endako Mine, who is a Qualified Person under NI 43-101. The mineral reserve is stated on a 100% basis; we own 75% of the Endako Mine. The mineral reserve estimate for the Endako Mine utilized a cut-off grade of 0.021% Mo and a long-term molybdenum price of C$13.50 per pound (which equates to $12.00 per pound at an exchange rate of C$1.125/US$1.00). |
The following tables set forth the estimated copper and gold mineral reserves for Mt. Milligan as of December 31, 2012:
Proven and Probable Copper Mineral Reserves at December 31, 2012(1)
Property | Category | Tons | Copper grade | Contained copper | ||||
(millions) | (%Cu) | (millions of pounds) | ||||||
Mt. Milligan | Proven—Mine | 302.7 | 0.210 | 1,273 | ||||
Probable | 229.1 | 0.187 | 851 | |||||
Proven + Probable | 531.8 | 0.200 | 2,124 | |||||
Total | Proven | 1,273 | ||||||
Probable | 851 | |||||||
Proven + Probable | 2,124 | |||||||
Proven and Probable Gold Mineral Reserves at December 31, 2012(1)
Property | Category | Tons | Gold grade | Contained gold | ||||
(millions) | (ounces per ton) | (millions of ounces) | ||||||
Mt. Milligan | Proven—Mine | 302.7 | 0.013 | 3.87 | ||||
Probable | 229.1 | 0.009 | 2.16 | |||||
Proven + Probable | 531.8 | 0.011 | 6.03 | |||||
Total | Proven | 3.87 | ||||||
Probable | 2.16 | |||||||
Proven + Probable | 6.03 | |||||||
_______________________________________________________________________________
(1) | The mineral reserve estimates for Mt. Milligan were prepared by Herbert E. Welhener, MMSA-QPM of IMC, who is a Qualified Person under NI 43-101. The open-pit was optimized at a $4.10/t NSR cut-off value and incorporates costs for milling, plant services, tailing services and general and administrative charges and at $1.60/lb copper, $690/oz gold and 0.85 U.S.$/C$ exchange rate. The mineral reserve estimates are included in a NI 43-101 technical report prepared for our wholly owned subsidiary, Terrane, entitled "Technical Report—Feasibility Update Mt. Milligan Property—Northern BC" dated October 13, 2009 and filed on SEDAR on October 13, 2011. |
Reconciliation of Year-End 2012 and 2011 Proven and Probable Molybdenum Mineral Reserves(1)
Contained molybdenum | Pounds | |||
(millions of pounds) | (% of opening) | |||
December 31, 2011 | 524.8 | 100% | ||
Depletion(2) | (38.8) | (7)% | ||
Revisions and additions(3) | 29.9 | 6% | ||
December 31, 2012 | 515.9 | 98% | ||
_______________________________________________________________________________
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(1) | The depletion and revisions and additions figures incorporated in the table above were prepared by TC Mine and Endako Mine staff personnel and reviewed and verified by by Bruce Parker, P.E., Mine Manager of the TC Mine and Bob Jedrzejczak, P. Eng, Mine Superintendent of the Endako Mine, each of whom is a Qualified Person under NI 43-101. |
(2) | Depletion of mineral reserves reflects both removal of in-situ pit reserves and drawdown of stockpile reserves. |
(3) | Revisions and additions reflect changes due to model updates and optimizations, and conversions of waste stockpiles to stockpile reserves as a result of drill sampling at the Endako Mine in 2012. |
Reconciliation of Mineral Reserves Under NI 43-101 and Under SEC Industry Guide 7
As mineral reserves are reported under both NI 43-101 and SEC Industry Guide 7 standards, it is possible for mineral reserve figures to vary between the two standards due to the differences in reporting requirements under each standard. For example, NI 43-101 has a minimum requirement that mineral reserves be supported by a pre-feasibility study, whereas SEC Industry Guide 7 requires support from a detailed feasibility study that demonstrates that economic extraction is justified.
For our mineral reserves at December 31, 2012, there is no difference between the mineral reserves as disclosed under NI 43-101 and those disclosed under SEC Industry Guide 7, and therefore no reconciliation is provided.
NON-RESERVES—MEASURED AND INDICATED MINERAL RESOURCES
Cautionary note to U.S. investors concerning estimates of measured and indicated mineral resources
This section uses the terms "measured mineral resources" and "indicated mineral resources." We advise U.S. investors that, while those terms are recognized and required by Canadian regulations, the SEC does not recognize them. U.S. investors are cautioned not to assume that any part or all of the mineral deposits in these categories will ever be converted into mineral reserves.
The measured and indicated mineral resources which are reported herein do not include that part of our mineral resources that have been converted to proven and probable mineral reserves as shown above. Measured and indicated mineral resources have been estimated in accordance with the definitions of such terms adopted by the CIM and incorporated in NI 43-101. We have filed technical reports regarding the disclosure of mineral resources for the TC Mine and the Endako Mine, Mt. Milligan, and the Berg property. Measured and indicated mineral resources are equivalent to mineralized material as such term is defined in SEC Industry Guide 7. See the Glossary of Terms below for an explanation of mining terms used in this report.
The total measured and indicated mineral resources for all properties have been estimated at variable economic cut-off grades based on the metal prices provided below, and on economic parameters deemed realistic. The economic cut-off grades for mineral resources are lower than those for mineral reserves and are indicative of the fact that the mineral resource estimates include material that may become economic under more favorable conditions, including increases in metal prices.
The following tables summarize our estimated non-reserves—measured and indicated mineral resources at December 31, 2012:
Measured and Indicated Molybdenum Mineral Resources at December 31, 2012
Measured | Indicated | Measured & indicated | ||||||||||
Property | Tons | Molybdenum grade | Tons | Molybdenum grade | Tons | Molybdenum grade | ||||||
(millions) | (%) | (millions) | (%) | (millions) | (%) | |||||||
TC Mine(1) | 23.4 | 0.045 | 31.5 | 0.051 | 54.9 | 0.048 | ||||||
Endako Mine(2) | 19.2 | 0.038 | 40.3 | 0.038 | 59.5 | 0.038 | ||||||
Berg Property(3) | 58.8 | 0.030 | 499.0 | 0.038 | 557.8 | 0.037 | ||||||
Total 2012 | 101.4 | 0.032 | 570.8 | 0.038 | 672.2 | 0.037 | ||||||
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Measured and Indicated Copper Mineral Resources at December 31, 2012
Measured | Indicated | Measured & indicated | ||||||||||
Property | Tons | Copper grade | Tons | Copper grade | Tons | Copper grade | ||||||
(millions) | (%) | (millions) | (%) | (millions) | (%) | |||||||
Mt. Milligan(4) | 66.1 | 0.14 | 181.1 | 0.15 | 247.2 | 0.15 | ||||||
Berg Property(3) | 58.8 | 0.48 | 499.0 | 0.28 | 557.8 | 0.30 | ||||||
Total 2012 | 124.9 | 0.30 | 680.1 | 0.24 | 805.0 | 0.25 | ||||||
Measured and Indicated Gold Mineral Resources at December 31, 2012
Measured | Indicated | Measured & indicated | ||||||||||
Property | Tons | Gold grade | Tons | Gold grade | Tons | Gold grade | ||||||
(millions) | (opt) | (millions) | (oz/ton) | (millions) | (oz/ton) | |||||||
Mt. Milligan(4) | 66.1 | 0.006 | 181.1 | 0.006 | 247.2 | 0.006 | ||||||
Measured and Indicated Silver Mineral Resources at December 31, 2012
Measured | Indicated | Measured & indicated | ||||||||||
Property | Tons | Silver grade | Tons | Silver grade | Tons | Silver grade | ||||||
(millions) | (oz/ton) | (millions) | (oz/ton) | (millions) | (oz/ton) | |||||||
Berg Property(4) | 58.8 | 0.131 | 499.0 | 0.108 | 557.8 | 0.110 | ||||||
_______________________________________________________________________________
(1) | The mineral resource estimate for the TC Mine was prepared by the TC Mine staff and reviewed and verified by Bruce Parker, P.E., Mine Manager of the TC Mine, who is a Qualified Person under NI 43-101. The mineral resource estimate for the TC Mine utilized a cut-off grade of 0.020% Mo and an average long-term molybdenum price of $15.00 per pound. |
(2) | The mineral resource estimate for the Endako Mine was prepared by the Endako Mine staff and reviewed and verified by Bob Jedrzejczak, P. Eng, Mine Superintendent of the Endako Mine, who is a Qualified Person under NI 43-101. The mineral reserve is stated on a 100% basis; we own 75% of the Endako Mine. The mineral resource estimate for the Endako Mine was prepared using optimized pit shells at a molybdenum price of C$16.50 per pound (which equates to $15.00 per pound at an exchange rate of C$1.10/US$1.00). The mineral resource estimate for the Endako Mine utilized a cut-off grade of 0.018% Mo. |
(3) | The mineral resource estimate for the Berg property was prepared by Darin Labrenz, P.Geo, our former Director of Exploration, who is a Qualified Person under NI 43-101. The mineral resource estimate for the Berg property was prepared using a 0.30% copper equivalent cut-off, with copper equivalency defined using metal prices of $1.60/lb copper, $10/lb molybdenum, and $10/oz silver, taking into account metallurgical recoveries. Resources are reported to a maximum depth of 450 meters (1,476.38 feet) below surface. The mineral resource estimate for the Berg property is reflected in a NI 43-101 technical report prepared for our wholly owned subsidiary Terrane, entitled, "2009 Mineral Resource Estimate on the Berg Copper Molybdenum Silver Property, Tahtsa Range, British Columbia" dated June 26, 2009 and filed on SEDAR on October 13, 2011. |
(4) | The mineral resource estimate for Mt. Milligan was prepared by Herbert E. Welhener, MMSA-QPM of IMC, who is a Qualified Person under NI 43-101. The mineral resource estimate for Mt. Milligan was prepared using optimized pit shells at a $4.10/t NSR cut-off value and incorporates costing for milling, plant services, tailing services and general and administrative charges and at $2.00/lb copper, $800/oz gold and using an exchange rate of C$1.00/US$0.85. The mineral resource estimate for Mt. Milligan is reflected in a NI 43-101 technical report prepared for our wholly owned subsidiary, Terrane, entitled "Technical Report—Feasibility Update Mt. Milligan Property—Northern BC" and dated October 13, 2009 and filed on SEDAR on October 13, 2011. |
NON-RESERVES—INFERRED MINERAL RESOURCES
Cautionary note to U.S. investors concerning estimates of inferred mineral resources
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This section uses the term "inferred mineral resources." We advise U.S. investors that while this term is recognized and required by Canadian regulations, the SEC does not recognize it. "Inferred mineral resources" have a great amount of uncertainty as to their existence and great uncertainty as to their economic and legal feasibility. It cannot be assumed that all or any part of inferred mineral resources will ever be converted into mineral reserves. In accordance with Canadian rules, estimates of inferred mineral resources cannot form the basis of feasibility or other economic studies. U.S. investors are cautioned not to assume that part or all of the inferred mineral resources exists, or is economically or legally mineable.
Inferred mineral resources have been estimated in accordance with the definitions of such terms adopted by the CIM and incorporated in NI 43-101. We have filed technical reports regarding the disclosure of mineral resources for the TC Mine and the Endako Mine, Mt. Milligan, and the Berg property. See the Glossary of Terms below for an explanation of mining terms used in this report.
The following tables summarize estimated non-reserves—inferred mineral resources as of December 31, 2012:
Inferred Mineral Resources—Molybdenum
Property | Tons | Molybdenum grade | ||
(millions) | (%) | |||
TC Mine(1) | 2.6 | 0.043 | ||
Endako Mine(2) | 28.8 | 0.041 | ||
Berg Property(3) | 159.4 | 0.033 | ||
Inferred Mineral Resources—Copper
Property | Tons | Copper grade | ||
(millions) | (%) | |||
Mt. Milligan(4) | 22.6 | 0.15 | ||
Berg Property(3) | 159.4 | 0.23 | ||
Inferred Mineral Resources—Gold
Property | Tons | Gold grade | ||
(millions) | (opt) | |||
Mt. Milligan(4) | 22.6 | 0.006 | ||
Inferred Mineral Resources—Silver
Property | Tons | Silver grade | ||
(millions) | (opt) | |||
Berg Property(3) | 159.4 | 0.073 | ||
_______________________________________________________________________________
(1) | The inferred mineral resource estimate for the TC Mine was prepared by the TC Mine staff and reviewed and verified by Bruce Parker, P.E., Mine Manager of the TC Mine, who is a Qualified Person under NI 43-101. The inferred mineral resource estimate at the TC Mine utilized a cut-off grade of 0.020% Mo and an average long-term molybdenum price of $15.00 per pound. |
(2) | The mineral resource estimate for the Endako Mine was prepared by the Endako Mine staff and reviewed and verified by Bob Jedrzejczak, P. Eng, Mine Superintendent of the Endako Mine, who is a Qualified Person under NI 43-101. The mineral reserve is stated on a 100% basis; we own 75% of the Endako Mine. The Inferred Mineral Resource estimate for the Endako Mine was prepared using optimized pit shells at a molybdenum price of C$16.50 per pound (which equates to $15.00 per pound at an exchange rate of C$1.10/US$1.00). The inferred mineral resource estimate at the Endako Mine utilized a cut-off grade of 0.021% for material within the reserve geometry and 0.018% outside of the reserve geometry. |
(3) | The inferred mineral resource estimate for the Berg property was prepared by Darin Labrenz, P.Geo, our former Director of Exploration, who is a Qualified Person under NI 43-101. The inferred mineral resource estimate for the |
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Berg property is reported using a 0.30% copper equivalent cut-off, with copper equivalency defined using metal prices of $1.60/lb copper, $10/lb molybdenum, and $10/oz silver, taking into account metallurgical recoveries. Resources are reported to a maximum depth of 450 meters (1,476.38 feet) below surface. The inferred mineral resource estimate for the Berg property is reflected in a NI 43-101 technical report prepared for our wholly owned subsidiary, Terrane, entitled "2009 Mineral Resource Estimate on the Berg Copper-Molybdenum-Silver Property, Tahtsa Range, British Columbia" dated June 26, 2009 and filed on SEDAR on October 13, 2011.
(4) | The inferred mineral resource estimate for Mt. Milligan was prepared by Herbert E. Welhener, MMSA-QPM of IMC, who is a Qualified Person under NI 43-101. The inferred mineral resource estimate for Mt. Milligan was prepared using optimized pit shells at a $4.10/t NSR cut-off value and incorporates costing for milling, plant services, tailing services and general and administrative charges and at $2.00/lb copper, $800/oz gold and using an exchange rate of C$1.00/US$0.85. The inferred mineral resource estimate for Mt. Milligan is reflected in a NI 43-101 technical report prepared for our wholly owned subsidiary, Terrane, entitled "Technical Report—Feasibility Update Mt. Milligan Property—Northern BC" and dated October 13, 2009 and filed on SEDAR on October 13, 2011. |
MINES
The following tables set out certain operating and production data for each of the periods indicated:
Summary operating data
Years ended December 31, | ||||||||||
2012 | 2011 | 2010 | 2009 | 2008 | ||||||
Mined (000's ore tons) | ||||||||||
TC Mine | 13,698 | 7,610 | 10,343 | 7,174 | 11,860 | |||||
Endako Mine (75%) | 7,450 | 12,623 | 10,342 | 8,226 | 11,039 | |||||
Total Mined | 21,148 | 20,233 | 20,685 | 15,400 | 22,899 | |||||
Milled (000's tons) | ||||||||||
TC Mine Material | 10,258 | 10,398 | 10,128 | 7,591 | 10,063 | |||||
Endako Mine (75%) | 12,162 | 8,806 | 8,413 | 8,068 | 8,902 | |||||
Total Milled | 22,420 | 19,204 | 18,541 | 15,659 | 18,965 | |||||
Summary production data
Years ended December 31, | ||||||||||
2012 | 2011 | 2010 | 2009 | 2008 | ||||||
Mined (000's lb) | ||||||||||
TC Mine | 16,238 | 21,368 | 25,071 | 17,813 | 16,765 | |||||
Endako Mine (75%) | 6,191 | 6,977 | 7,506 | 7,447 | 9,280 | |||||
Total Mined Production(1) | 22,429 | 28,345 | 32,577 | 25,260 | 26,045 | |||||
Cash cost ($/lb produced) | ||||||||||
TC Mine | $8.06 | $6.66 | $5.20 | $5.72 | $7.75 | |||||
Endako Mine (75%) | $15.42 | $11.86 | $8.89 | $6.13 | $7.15 | |||||
Total average cash cost ($/lb produced)(2) | $10.09 | $7.94 | $6.07 | $5.84 | $7.54 | |||||
Processed (000's lb) | ||||||||||
Langeloth Facility: | ||||||||||
Molybdenum Sold from Purchased Product | 10,542 | 8,245 | 7,855 | 4,683 | 10,681 | |||||
Toll Roasted and Upgraded Molybdenum Processed | 6,296 | 7,071 | 5,703 | 3,841 | 5,262 | |||||
Roasted Metal Products Processed | 12,153 | 17,090 | 18,334 | 10,030 | 23,170 | |||||
_______________________________________________________________________________
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(1) | Mined production pounds reflected are molybdenum oxide and high performance molybdenum disulfide ("HPM")from our share of production from the mines but excludes molybdenum processed from purchased products. |
(2) | Weighted-average of the TC Mine and the Endako Mine (75% share) cash costs (mining, milling, mine site administration, roasting and packaging) for molybdenum oxide and HPM produced in the period, including all stripping costs. Cash cost excludes: the effect of purchase price adjustments; the effects of changes in inventory; corporate allocations; stock-based compensation; other non-cash employee benefits; depreciation, depletion, amortization and accretion; and commissioning and start-up costs for the Endako mill. The cash cost for the TC Mine, which only produces molybdenum sulfide and HPM on site, includes an estimated molybdenum loss (sulfide to oxide), an allocation of roasting and packaging costs from the Langeloth Facility and transportation costs from the TC Mine to the Langeloth Facility. |
Properties net book value
At December 31, 2012, net book values of our properties were as follows:
Property | Net book value |
(US$ millions) | |
TC Mine | $188.3 |
Endako | 189.5 |
Mt. Milligan | 2,007.1 |
Berg property | 40.0 |
Maze Lake property | 3.1 |
Howards Pass property | 8.6 |
Langeloth Facility | 97.2 |
Davidson property | 0.2 |
Corporate and other | 4.9 |
Total | $2,538.9 |
Following are descriptions of our mining operations.
Thompson Creek Mine (TC Mine)
The TC Mine is an open-pit molybdenum mine and concentrator located approximately 30 miles southwest of the town of Challis, Idaho. The TC Mine is accessible by commercial air carrier into Idaho Falls, Sun Valley and Boise, Idaho. Vehicle access to the mine is available by highway and gravel roads from each of these cities.
The TC Mine land holdings are comprised of 1,589 patented and unpatented lode, mill site and placer claims along with fee owned property totaling approximately 24,600 acres. All current ore reserves are located on patented mineral claims and are not expected to be subject to any U.S. federal government royalties that may be enacted in the future. Approximately 50% of the mineral claims are located within the boundaries of the Salmon-Challis National Forest, with the remaining 50% located within the perimeter of land managed by the United States Bureau of Land Management. The current fee to the Bureau of Land Management to maintain the unpatented claims is approximately $150,000 annually and the fees for the current assessment year have been paid. We also paid state and county property taxes of $809,000 in 2012. Currently there is no mining taking place on property that requires the payment of a royalty.
The TC Mine operation consists of an open-pit mine, ore crusher and conveyer system, mill and concentrator, tailings and containment dam and support facilities. Open-pit mining began at the TC Mine in 1983. Material mined from the TC Mine is treated at a processing plant on site, and concentrate material is transported to the Langeloth Facility (described below). Electric power is provided to the site by the Salmon River Electric Co-op through a 24.7 mile 230 kV power line to the South Butte Substation, then by a 2.6 mile 69 kV line to the mill site. Both of these lines are owned by the TC Mine. Fresh water for the TC Mine is pumped from the Salmon River.
In an effort to reduce costs at the TC Mine, given recent declines in molybdenum prices and projected operating costs at the TC Mine for 2015 and thereafter, in October 2012, we suspended waste stripping activity associated with the next phase of production at the TC Mine, referred to as Phase 8. We expect this revision to the mine plan to defer approximately $100 million in operating costs and $8 - $9 million in capital expenditures through the end of 2014. Mining operations and production are expected to continue as planned through 2014 in the current Phase 7 of the mine. We also expect to preserve the assets at the TC
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Mine to enable us to restart waste stripping of Phase 8 of the mine plan when market conditions warrant. If waste stripping has not recommenced by 2015, we expect that the mine would be placed on care and maintenance at such time.
History
The TC Mine deposit was discovered in 1968 by Cyprus Minerals Corporation ("Cyprus"). Surface exploration, diamond and reverse circulation were done by Cyprus. Cyprus started construction of the mine in 1981, with full production beginning in 1983 and continuing until 1992 when operations were suspended due to depressed molybdenum prices. In 1993, we purchased the mine and resumed operations in 1994, which have continued to the present. The mine operated continuously from 1994 through the present, however, production was reduced during 2008 and 2009 due to reduced demand for molybdenum during that period.
Geology, Deposit Types and Mineralization
The TC Mine porphyry molybdenum deposit is located near the fault intersection of two geologic provinces: continental, arc-related intrusive rocks of the late Cretaceous Idaho Batholith (the "Idaho Batholith") are exposed to the west of the mine, while complexly deformed Palaeozoic metasedimentary rocks are dominant to the east. The Idaho Batholith is a multi-phase, long-lived intrusion with a granitic to granodioritic composition. In western Idaho, the Idaho Batholith is separated by outcrops of significantly older metasedimentary rocks (such as the Middle Proterozoic Belt Supergroup). Palaeozoic metasedimentary rocks form the wall-rock portions of the TC Mine deposit. Syngenetic stratiform base-metal mineralization is locally developed in some of these Palaeozoic units. The majority of the TC Mine deposit is hosted within the igneous rocks of the TC Mine intrusive complex, with minor amounts found in the metasediments.
The TC Mine deposit is a member of a class of mineral deposits known as the porphyry molybdenum type. Porphyry molybdenum deposits have been divided into two subtypes called the Climax-type and the Endako-type. The TC Mine belongs in the latter category. In contrast to the rift-related Climax-type deposits, the Endako-type deposits are formed by subduction-related processes (described above).
Molybdenum mineralization in the deposit is hosted in the TC Mine intrusive complex, a composite granodiorite-quartz monzonite stock of Cretaceous age. The stock intruded carbonaceous and locally limy argillite of the Mississippian Copper Basin Formation. Where it is in contact with the intrusive complex, the argillite has been contact-metamorphosed to hornfels and locally to tactite. The intrusive and sedimentary rocks are unconformably overlain by the Eocene Challis Volcanics, a post-mineral sequence of andesite to rhyodacite tuffs, flows and agglomerates. Locally, the volcanic cover is up to 1,000 feet thick. These volcanic rocks fill valleys and depressions in the paleotopography around the TC Mine site.
Exploration
The 2012 exploration activities at the TC Mine consisted of surface mapping and rock sampling within the mine boundary but outside of the current mine infrastructure, site identification of exploration drill targets within the Bruno Creek drainage and permit filings with the United States Forest Service in preparation for future exploration drill sites. Exploration activities involving a prospect outside of the mine boundary included the staking of 90 unpatented, federal lode mining claims over a prospective molybdenum occurrence along with surface mapping and rock sampling.
Exploration activities in 2013 are expected to be minimal and may include surface mapping and rock sampling on the unpatented mining claim staked in 2012.
Endako Mine
The Endako Mine is an open-pit molybdenum mine, concentrator and roaster located approximately 100 miles west of Prince George, British Columbia with an estimated mine life of approximately 16 years. The Endako Mine is accessible by commercial air carrier to Prince George, British Columbia, then by vehicle west on a paved highway for 105 miles, then south on the Endako Mine road for an additional 6.8 miles. In March 2012, we completed the mill expansion project at the Endako Mine. The Endako mill expansion project included the construction of a new mill to replace the previous mill constructed in the 1960’s. The new mill is designed to process 55,000 tons of ore per day compared to 31,000 tons per day in the old mill. Commissioning of the new SAG/Ball mill and rougher flotation circuit was completed in January 2012, followed by the completion of the remaining construction work on the regrind circuit and the pebble crusher in March 2012. The previous 45-year old mill at the site has been shut down and is currently on care and maintenance.
The Endako Mine is operated as a joint venture (the "Endako Mine Joint Venture") between Thompson Creek Mining Ltd. ("TCML"), one of our subsidiaries, which holds a 75% interest, and Sojitz, which holds the remaining 25% interest. See "Endako Mine Joint Venture" below for further details regarding the Endako Mine Joint Venture. The property is currently comprised of a contiguous group of 68 mineral tenures containing 43 claims and 25 leases, covering approximately 24,159
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acres. In addition, the Endako Mine Joint Venture holds surface rights to a portion of the mine site area. The mineral leases are subject to annual fees, and the mineral claims are subject to exploration expenditure obligations. We may choose to pay annual fees to the province in lieu of exploration expenditures. All mineral claims are in good standing, and expiry dates range from July 2021 to February 2023. We expect to renew such mineral claims in the ordinary course.
The Endako Mine deposit is divided into four named areas: Northwest, Denak West, Denak East and Endako. Mining is in progress or has occurred in the Endako and both Denak areas. The Northwest zone is yet to be produced. The property contains processing facilities, waste dumps and tailings disposal areas. There are no royalties, back-in rights, encumbrances on title or other agreements, other than the agreement governing the Endako Mine Joint Venture. The infrastructure at the Endako Mine includes a 55,000 ton per day concentrator, a 40,000 to 45,000 pound per day roaster, a non-operating roaster, tailings and reclaim water ponds, a crushing plant, an administrative building, a warehouse, a change house, a first aid station, a laboratory, a garage and other shops. The power supply of the site is provided by a 5.3 mile, 69 kV power line owned by B.C. Hydro from a nearby substation. Water for the milling process is re-circulated from the tailings facility while make-up water is pumped from François Lake, located nearby.
In an effort to reduce costs at the Endako Mine, given recent declines in molybdenum prices and projected operating costs at the Endako Mine,we ceased mining ore from the Denak West pit in the third quarter of 2012 and began exclusively processing stockpiled ore. We expect to mill approximately one-third of our existing stockpiled material through mid-2013. We currently plan to resume mining at the Endako Mine during the third quarter of 2013.
At the Endako Mine, we experienced lower-than-anticipated ore grades and recovery in 2012. In addition, in late December 2012 and thus far in 2013, we experienced and are experiencing water management issues at the Endako Mine associated with frozen water in the tailings pond. We have been unable to feed sufficient water from the tailings pond to the new mill on a consistent basis, which has negatively impacted the rate and level of throughput of mined material to the mill and thus our production of molybdenum. These issues led us to revise our operating plan for the Endako Mine for 2013 during the fourth quarter of 2012. As of the date of this report, we have made modifications to the piping of tailings to the pond and have instituted other tailings management procedures to address these issues and to ensure the availability of a sufficient supply of water to the mill for the future winter seasons beyond 2013. As discussed in detail in "Management's Discussion and Analysis of Financial Conditions and Results of Operations—Overview," recent declines in molybdenum prices, together with the revised operating plan for Endako, resulted in a pre-tax non-cash write down of our share of the Endako property, plant, equipment and development assets of $530.5 million in the fourth quarter of 2012.
Endako Mine Joint Venture
The Endako Mine Joint Venture was formed on June 12, 1997 pursuant to the terms of the Exploration, Development and Mine Operating Agreement between TCML and Sojitz (the "Endako Mine Joint Venture Agreement"). We have been appointed manager of the Endako Mine Joint Venture with overall management responsibility for operations. As manager, we prepare annual budgets and production plans and submit them to Sojitz for approval. In the event Sojitz rejects any or all of a proposed budget or production plan, the parties are required to work to develop a mutually acceptable budget and production plan. As manager, we manage, direct and control the Endako Mine, provided that each of the following actions requires the approval of both us and Sojitz: (i) disposition of all or a substantial portion of the Endako Mine assets; (ii) contracts with affiliates over $500,000 or sales of product to our affiliates or affiliates of Sojitz; (iii) compensation for management of the business; (iv) modification of the Endako Mine Joint Venture Agreement; (v) any change in business purpose; (vi) any modifications or replacements to the production plan for the Endako Mine; (vii) investment in other companies; (viii) any borrowing by the joint venture or loan to any third party or any guarantee; (ix) changes in the manager, other than by reasons of default; and (x) except in the case of emergency or unexpected expenditures, a discretionary capital expenditure in excess of $1.0 million. Our and Sojitz's participating interests in the joint venture are currently 75% and 25%, respectively; those interests may be recalculated under certain circumstances set forth in the Endako Mine Joint Venture Agreement.
History
The Endako Mine deposit was discovered in 1927 by local hunters. Minor underground exploration work took place in subsequent years. In 1962, R&P Metals Corporation Ltd. began a diamond drilling program to evaluate the discovery and, based on the exploration results, incorporated a company named Endako Mines Ltd.
Canadian Exploration Limited, a wholly owned subsidiary of Placer Development Ltd. (which became Placer Dome Inc.) ("Placer"), entered into an option agreement with Endako Mines Ltd. in August 1962 and continued exploration on the property.
In March 1964, Placer decided to place the property into production. Production commenced in June 1965 at a plant capacity of approximately 10,000 tons per day (combined concentrator and roaster). Expansions in 1967 and improvements in 1980 increased the concentrator capacity. In 1982, the mine and concentrator were closed due to low molybdenum prices, but the roaster continued to operate, processing molybdenum concentrates from other operations on a toll basis.
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The mine and mill were re-opened in 1986, and by 1989 production reached approximately 31,000 tons per day. In June 1997, the parties to the Endako Mine Joint Venture purchased the Endako Mine from Placer.
Geology, Deposit Types and Mineralization
The Endako Mine deposit is located within the intermontane morphology/tectonic belt of British Columbia, Canada. The Endako Mine molybdenite deposit is hosted in the Endako quartz monzonite intrusive, a phase of the middle to late Jurassic François Lake Intrusions that form a large composite batholith. The deposit is genetically associated with the terminal stages of magmatic activity, represented by intrusion of the Casey monzogranite.
Molybdenite is the primary metallic mineral on the Endako Mine property. Minor pyrite, magnetite and chalcopyrite, and traces of sphalerite, bornite, specularite and scheelite are also present. Single occurrences of beryl and bismuthinite have been reported. Molybdenite occurs in two types of veins. Large veins (up to 4 feet wide) contain laminae and fine disseminations of molybdenite. The second vein type occurs as stockworks adjacent to the major veins in the form of fine fracture-fillings and veinlets of quartz-molybdenite. Pyrite is most abundant along the southern margin of the zone of molybdenum mineralization.
Exploration
No exploration activities were completed in 2012, and no exploration activities are planned for 2013, on the Endako Mine land tenure. In 2011, we entered into an option agreement with respect to certain land adjacent to the Endako Mine site. We terminated this option on October 15, 2012 due to less than favorable results identified by 2011 exploration drilling. In order to allow mining in the areas we refer to as the Denak West Extension and Casey Zone areas in 2013, we expect to complete a claim and lease survey and apply to the British Columbia Gold Commissioner requesting the conversion of 26 mining claims and partial mining claims to a lease.
DEVELOPMENT PROJECTS
Mt. Milligan
In October 2010, we acquired the Mt. Milligan project as part of the Terrane acquisition. We are currently in the process of constructing and developing the Mt. Milligan project located in British Columbia, which has been designed to be a conventional truck-shovel open-pit mine with a 66,000 ton per day copper flotation processing plant, with estimated average annual production of 81 million pounds of copper and 194,500 ounces of gold, each in concentrate, over the life of the mine. Construction and development of the Mt. Milligan project remained on schedule in 2012 with commissioning and start-up expected to commence in the third quarter of 2013, and commercial production of copper and gold expected in the fourth quarter of 2013. The mine at Mt. Milligan has an estimated life of approximately 22 years.
Mt. Milligan is located within the Omenica Mining Division in North Central British Columbia, approximately 96 miles northwest of Prince George, 53 miles north of Fort St. James and 59 miles west of Mackenzie. Mt. Milligan is accessible by commercial air carrier to Prince George, British Columbia, then by vehicle from the east via Mackenzie on the Finlay Philip Forest Service Road and the North Philip Forest Service Road, and from the west via Fort St. James on the North Road and Rainbow Forest Service Road. Road travel to the Mt. Milligan property site is 482 miles from Prince Rupert and 158 miles from Prince George. The forestry-based communities of Mackenzie and Fort St. James are within daily commuting distance of the Mt. Milligan site, and both of these communities are serviced by rail. The infrastructure at Mt. Milligan includes a 66,000 tons per day concentrator, currently under construction, a tailings storage facility and reclaim water ponds, an administrative building and change house, a truckshop/warehouse, a first aid station, an emergency vehicle storage, a laboratory and sewage and water treatment facilities. The power supply is provided by a 57-mile hydroelectric power line.
Mt. Milligan includes 100 claims and one mining lease with a combined area of 114,339 acres. The single mining lease was issued to Terrane on September 9, 2009, expires on September 9, 2029, and requires lease payments of approximately $100,000, due annually on September 9. Mineral claims are subject to exploration expenditure obligations, or we may choose to pay annual fees to the province in lieu of exploration expenditures. All mineral claims are in good standing and expiry dates range from September 2013 to December 2013. We expect to renew such mineral claims in the ordinary course.
A 2% net smelter return royalty, commencing in the third year of commercial production, is payable to a previous owner of the property. The royalty holder, H.R.S. Resources Corp. (successor in interest to Richard Haslinger), has the right to receive annual advances of C$20,000, first payable on or before December 31, 1994, and on each anniversary after the first advance until the commencement of commercial production, which payments have been maintained. We have a right of first refusal on any proposed disposition of the net smelter return royalty by H.R.S. Resources Corp.
We have also agreed to make certain payments to a First Nation over the course of the life of mine. We do not consider the amounts of these payments to be material to our business. The terms of the agreement under which we have agreed to make these payments are confidential.
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In October 2010, in connection with the Terrane acquisition, we entered into a purchase and sale agreement with a subsidiary of Royal Gold, Inc. ("Royal Gold") that provided for, among other things, the purchase by Royal Gold of 25% of the refined gold production from Mt. Milligan for a total payment of $311.5 million. In December 2011, we entered into an amended and restated gold stream agreement with Royal Gold, Inc., further amended in August 2012, pursuant to which Royal Gold now has the right to purchase an aggregate of 52.25% of the refined ounces of gold produced from Mt. Milligan for an aggregate investment in the project by Royal Gold of $781.5 million, plus the lower of $435 per ounce or the prevailing market rate when the gold is delivered (the "Gold Stream Arrangement"). See Note 11 to the consolidated financial statements included in Item 8, Financial Statements and Supplementary Data, for more information regarding the Gold Stream Arrangement.
History
Limited exploration activity on Mt. Milligan was first recorded in 1937. In 1984, prospector Richard Haslinger and BP Resources Canada Limited located claims on the site. In 1986, Lincoln Resources Inc. ("Lincoln") optioned the claims and in 1987 completed a diamond drilling program that led to the discovery of significant copper-gold mineralization. In 1991, Placer acquired Lincoln's interest in the Mt. Milligan property, resumed exploration drilling, completed a pre-feasibility study and applied for provincial and federal approvals to develop the project. These approvals expired in 2003. Barrick Gold Corporation purchased Placer in 2006 and sold its Canadian assets to Goldcorp Inc., which then in turn sold its interest in the Mt. Milligan project to Atlas Cromwell. Atlas Cromwell then changed its name to Terrane Metals Corp. In October 2010, we acquired Terrane and the Mt. Milligan project.
Geology, Deposit Types and Mineralization
Mt. Milligan is a tabular, near-surface, alkalic copper-gold porphyry deposit that measures some 1.6 miles north-south, 1 mile east-west and is more than 1,300 feet thick. It consists of two principal deposits, the Main deposit and Southern Star deposit. The Main deposit includes four contiguous zones: MBX, WBX, DWBX and 66, all of which are spatially associated with the MBX monzonite stock and Rainbow Dyke. The Southern Star deposit is centered on a monzonite stock of the same name and is some 1,640 feet south of the Main deposit.
Mineralization consists primarily of chalcopyrite with lesser bornite and magnetite in areas of potassic alteration, and pyrite in areas of propylitic alteration. In the main deposit, mineralization is best developed in areas of potassic alteration, where copper and gold grades are related to chalcopyrite. The highest gold grades in the 66 zone are related to pyrite mineralization.
Exploration
An 18,339-ft core drilling program was completed in 2011 to follow-up previous holes drilled into the footwall of the WBX and other stocks, where potential Au-Cu mineralization was indicated at depth. A total of eight holes were drilled, testing primarily for down-faulted blocks of mineralized rock below the western portion of the current deposit and pit limits. An additional 2,845 feet of core was drilled in ten holes to provide new samples for metallurgical test work. A minimum of six holes for approximately 13,000 feet are designed to further delineate the mineralized zones below the current pit limits. There was no exploration activity at Mt. Milligan in 2012 and there is no exploration activity planned for 2013.
EXPLORATION PROPERTIES
Berg Property
In October 2010, we acquired the Berg property as part of the Terrane acquisition. The Berg property is a copper, molybdenum, and silver exploration property that is located in the Omineca Mining Division within the Tahtsa Ranges of west-central British Columbia, approximately 52 miles southwest of Houston and 14 miles northwest of the Huckleberry Mine. The Berg property is comprised of 112 mineral claims and one mining lease centered at 53° 48' North Latitude and 127° 26' West Longitude for a total of approximately 110,000 acres. The estimated mineralized material for the Berg property is 557.8 million tons at a grade of 0.037% (Mo), 0.30% (Cu) and 0.110% (Ag).
The Berg property is 100% owned by us with a 1% net smelter return royalty to Royal Gold on eight of the mineral claims, including those which host the deposit on the Berg property. All mineral claims are in good standing and good to dates ranging from August 2013 to November 2021. Mineral claims are subject to exploration expenditure obligations, or we may choose to pay annual fees to the province in lieu of exploration expenditures. We expect to renew such mineral claims in the ordinary course.
Drilling on the property was initiated by Kennecott in 1965, and this led to the delineation of two main mineralized zones. In 1972, exploration and development of the Berg property were taken over by another owner under agreement with Kennecott, and by 1980, a total of 119 diamond drill holes for 66,036 feet had been completed on the Berg property. In 2007 and 2008, Terrane carried out aggressive diamond drill programs totaling 75,290 feet in 60 holes designed to confirm the results of
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previous work and define the resource with infill and step-out drilling, particularly below the historic resource, and provide fresh material for metallurgical test work. In 2011, we commissioned additional exploration and drilling delineation to support an advanced scoping study. The 2011 drilling program included 10,678 meters of drilling (35,024 feet). In 2012 no new drilling or field investigations were completed, however, we continued to maintain environmental baseline monitoring programs that were previously in progress. In 2013, existing environmental monitoring programs will continue with no additional drilling or field work planned.
Davidson Property
The Davidson property is located on the east flank of Hudson Bay Mountain, approximately 6 miles northwest of Smithers in west-central British Columbia. Molybdenum was first discovered at Davidson in 1944. There have been several estimates of mineralized material completed over the years, all with similar results. The estimated mineralized material for the Davidson property is 85.1 million tons of molybdenum at a grade of 0.169% Mo at a cut-off grade of 0.12% Mo.
We hold our interest in the Davidson property pursuant to the terms of a vending agreement whereby we have agreed to make annual cash payments tied to the price of molybdenum to the holders of the mineral leases and claims comprising the Davidson property, and have agreed to grant such holders a royalty interest in the property once it is in commercial production. Pursuant to the terms of such vending agreement, title to the Davidson property will not be transferred to us until commercial production has commenced or all financing is in place to build a mine capable of mining at least 500,000 metric tons (or approximately 551,000 tons) per year and transfer of title is a necessary condition to the advance of such financing. We are also responsible for all payments necessary to keep the Davidson property in good standing on an ongoing basis. We hold our interest in the Davidson property through our wholly-owned subsidiary, Blue Pearl Mining Inc.
The Davidson property is an early-stage exploration property and we have deferred further work on this property until an evaluation of the Berg property is completed.
Maze Lake Property
The Maze Lake property is an early-stage gold exploration project, located in the Kivalliq District of Nunavut in Canada, 56 miles southwest of Rankin Inlet and 28 miles west of Whale Cove, both on Hudson Bay which was acquired by Terrane following the discovery of a 18 mile long gold train was identified by regional till sampling in 2000. The Maze Lake property consists of three Inuit Owned Lands Mineral Exploration Agreements with a total area of 30,663 acres.
On May 15, 2008, Terrane formed a joint venture (the "MLJV") with Laurentian Goldfields Ltd. Upon formation of the MLJV, Terrane contributed its Maze Lake mining interests to the MLJV in return for a 43% interest in the MLJV. We acquired Terrane's interest in the MLJV in October 2010 as part of the Terrane acquisition. The Maze Lake property is operated through the MLJV under which the joint venture participants are bound by a contractual agreement establishing joint control over the joint venture. We record our proportionate share of assets, liabilities and operating costs of the joint venture. Should our interest in the MLJV decline below 10%, our interest would convert to a 2% net smelter return royalty and the MLJV would be terminated. Laurentian Goldfields Ltd. acts as the operator of the MLJV. Future exploration work will be proposed by the MLJV operator and will be considered by us.
Howards Pass Property
The Howards Pass property is an early-stage exploration project that is located along the Yukon Territory-Northwest Territories border in Canada. Between 1972 and 1982, a joint venture between Placer and United States Steel Corporation ("US Steel") (51% Placer / 49% US Steel) identified significant zinc and lead mineralization on the Howards Pass property. In 2005, Placer and US Steel optioned 100% of the property to Selwyn Resources Ltd (formerly Pacifica Resources Ltd). In our acquisition of Terrane, we acquired Placer's 51% interest in the Howards Pass property. In August 2012, Selwyn exercised its option, and in doing so, acquired the Howards Pass property. As a result, we now hold a 0.51% net smelter return royalty and a 10.2% net profits interest (capped at C$5.1 million) on such property.
OTHER PROPERTIES
Langeloth Facility
The Langeloth Facility is located in Langeloth, Pennsylvania, approximately 25 miles west of Pittsburgh. The facility receives MoS2 concentrate from the TC Mine and purchased and tolled concentrate from various third-party operations.
Four multiple-hearth furnaces are used for the conversion (roasting) of molybdenum disulfide concentrate into technical grade molybdenum oxide. The oxide can be sold or upgraded at the plant to briquettes, pure molybdenum oxide or ferromolybdenum. Two other furnaces can be used to process non-hazardous metal containing materials containing metals other than molybdenum.
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Off-gas from the roasting process contains sulfur dioxide, which is converted to sulfuric acid and sold as a by-product. Over 99.9% of the sulfur dioxide off-gas is recovered in the acid plant.
The plant has been, and continues to be, upgraded by an ongoing capital improvement program. Further, an acid plant shutdown occurs every other year to refurbish acid plant process equipment. The acid plant was temporarily shutdown in the third quarter of 2012 for this purpose. No maintenance shutdown for the acid plant is scheduled for 2013.
ENVIRONMENTAL MATTERS
Our mining and exploration activities are subject to extensive federal, provincial, state and local laws, regulations and permits governing the protection of the environment. The costs associated with compliance with such requirements are substantial and possible future legislation and regulations could cause additional operating expense, capital expenditures, restrictions and delays in the development and continued operation of our properties, the extent of which cannot be predicted with certainty. In the context of environmental permitting, including the approval of reclamation plans and compliance with long-term, post-reclamation obligations, we are required to comply with known standards and regulations which may entail significant costs.
Estimated future reclamation costs are based primarily on legal and regulatory requirements. As of December 31, 2012, we have provided financial assurance for reclamation costs of approximately $42.3 million relating to the TC Mine, $15.4 million relating to the Endako Mine (of which our 75% share is approximately $11.6 million) and $18.1 million relating to Mt. Milligan. As our operations expand, our reclamation obligations and the financial assurances that we are required to provide may increase accordingly. For a further discussion of risks associated with environmental matters, refer to Item 1A. "Risk Factors."
CURRENCY AND EXCHANGE RATE INFORMATION
The high, low, average and closing exchange rates for a U.S. dollar in terms of Canadian dollars for each of the last five years ended December 31, as quoted by the Bank of Canada, were as follows:
Year ended December 31, | ||||||||||
2012 | 2011 | 2010 | 2009 | 2008 | ||||||
High | C$1.0418 | C$1.064 | C$1.0778 | C$1.3000 | C$1.2969 | |||||
Low | 0.9710 | 0.9449 | 0.9946 | 1.0292 | 0.9719 | |||||
Average(1) | 0.9996 | 0.9891 | 1.0299 | 1.1420 | 1.0660 | |||||
Closing | 0.9949 | 1.0170 | 0.9946 | 1.0466 | 1.2246 | |||||
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(1) | Calculated as an average of the daily noon rates for each period. |
SOURCES AND AVAILABILITY OF RAW MATERIALS
Our mining operations require significant energy, principally electricity, diesel, coal and natural gas. Most of our energy is obtained from third parties under long-term contracts. Our mining operations also require significant quantities of water for mining, ore processing and related support facilities. Although we believe we have sufficient water rights to conduct our mining operations, the loss of water rights for any of our mines, in whole or in part, or shortages of water to which we have rights, could require us to curtail or shut down mining operations. For a further discussion of risks and legal proceedings associated with the availability of water, refer to Item 1A. "Risk Factors" and Item 3. "Legal Proceedings."
COMPETITION
We currently source molybdenum from our two primary mines and from concentrates purchased from third-party byproduct copper production. The world market for molybdenum consumption increased to 523 million pounds in 2012 from 511 million pounds in 2011, as estimated by CRU International. If global supply were to grow at a rate greater than global demand there will be increased competitive pressure to secure both customer sales contracts and spot sales. Such a competitive environment would also likely give rise to a decline in the price of molybdenum. We compete in a commodity market priced globally, with little price differentiation based on product quality, provided a minimum standard is met, nor is there any significant differentiation based on freight. In market circumstances where competition is heightened, our future profitability will depend on our ability to manage costs in relation to global prices.
Our future growth and our ability to compete with other mining companies also depends on our ability to bring new mines into production and to expand mineral reserves at our existing mines. Depleted reserves can be replaced in several ways,
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including by expanding known ore bodies, by locating new deposits, or by acquiring new reserves from third parties. In October 2010, we diversified our asset base with the acquisition of Terrane to include copper and gold. We intend to continue to grow our business through our exploration programs and through future acquisitions, however, we compete for attractive acquisition targets with other potential buyers that may have more financial and other resources than us. Our competitive position will depend on our ability to successfully and economically grow our business.
EMPLOYEES
As of December 31, 2012, we had approximately 1,000 employees. Approximately 70% of employees at the Langeloth Facility are members of the International Union, United Automobile, Aerospace and Agricultural Implement Workers of America union through its Local 1311. On April 6, 2010, a labor agreement was executed with such union at our Langeloth Facility for the period from March 11, 2010 through March 11, 2013. On January 2, 2013, a new labor agreement was reached with the union at our Langeloth Facility to cover the period from March 11, 2013 through March 11, 2016. Approximately 75% of the Endako Mine's employees are members of the United Steel, Paper and Forestry, Rubber, Manufacturing, Energy, Allied Industrial and Service Workers International Union. On April 1, 2011, a labor agreement was executed with such union at the Endako Mine for the period from April 1, 2011 to March 31, 2013. We believe that our relations with all of our employees are good.
GLOSSARY OF TERMS
SEC Industry Guide 7 Definitions
reserve | The term "reserve" refers to that part of a mineral deposit which could be economically and legally extracted or produced at the time of the reserve determination. Reserves must be supported by a feasibility(1) study done to bankable standards that demonstrates the economic extraction. ("Bankable standards" implies that the confidence attached to the costs and achievements developed in the study is sufficient for the project to be eligible for external debt financing.) A reserve includes adjustments to the in-situ tonnes and grade to include diluting materials and allowances for losses that might occur when the material is mined. | |
proven reserve | The term "proven reserve" refers to reserves for which (a) quantity is computed from dimensions revealed in outcrops, trenches, workings or drill holes; grade and/or quality are computed from the results of detailed sampling and (b) the sites for inspection, sampling and measurement are spaced so closely and the geologic character is so well defined that size, shape depth and mineral content of reserves are well-established. | |
probable reserve | The term "probable reserve" refers to reserves for which quantity and grade and/or quality are computed from information similar to that used for proven (measured) reserves, but the sites for inspection, sampling and measurement are farther apart or are otherwise less adequately spaced. The degree of assurance, although lower than that for proven reserves, is high enough to assume continuity between points of observation. | |
mineralized material(2) | The term "mineralized material" refers to material that is not included in the reserve as it does not meet all of the criteria for adequate demonstration for economic or legal extraction. | |
non-reserves | The term "non-reserves" refers to mineralized material that is not included in the reserve as it does not meet all of the criteria for adequate demonstration for economic or legal extraction. | |
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(1) | For SEC Industry Guide 7 purposes, the feasibility study must include adequate information on mining, processing, metallurgical, economic and other relevant factors that demonstrate, at the time of reporting, that economic extraction is justified. |
(2) | This category is substantially equivalent to the combined categories of measured mineral resource and indicated mineral resource specified in NI 43-101. |
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NI 43-101 Definitions
mineral reserve | The term "mineral reserve" refers to the economically mineable part of a measured or indicated mineral resource demonstrated by at least a preliminary feasibility study. The study must include adequate information on mining, processing, metallurgical, economic and other relevant factors that demonstrate, at the time of reporting, that economic extraction can be justified. A mineral reserve includes diluting materials and allowances for losses that may occur when the material is mined. | |
proven mineral reserve | The term "proven mineral reserve" refers to the economically mineable part of a measured mineral resource demonstrated by at least a preliminary feasibility study. This study must include adequate information on mining, processing, metallurgical, economic and other relevant factors that demonstrate, at the time of reporting, that economic extraction is justified. | |
probable mineral reserve | The term "probable mineral reserve" refers to the economically mineable part of an indicated mineral resource, and in some circumstances, a measured mineral resource demonstrated by at least a preliminary feasibility study. This study must include adequate information on mining, processing, metallurgical, economic and other relevant factors that demonstrate, at the time of reporting, that economic extraction can be justified. | |
mineral resource | The term "mineral resource" refers to a concentration or occurrence of diamonds, natural solid inorganic material, or natural solid fossilized organic material, including base and precious metals, coal, and industrial minerals, in or on the Earth's crust, in such form and quantity and of such a grade or quality that it has reasonable prospects for economic extraction. The location, quantity, grade, geological characteristics and continuity of a mineral resource are known, estimated or interpreted from specific geological evidence and knowledge. | |
measured mineral resource | The term "measured mineral resource" refers to that part of a mineral resource for which quantity, grade or quality, densities, shape and physical characteristics are so well established that they can be estimated with confidence sufficient to allow the appropriate application of technical and economic parameters, to support production planning and evaluation of the economic viability of the deposit. The estimate is based on detailed and reliable exploration, sampling and testing information gathered through appropriate techniques from locations such as outcrops, trenches, pits, workings and drill holes that are spaced closely enough to confirm both geological and grade continuity. | |
indicated mineral resource | The term "indicated mineral resource" refers to that part of a mineral resource for which quantity, grade or quality, densities, shape and physical characteristics can be estimated with a level of confidence sufficient to allow the appropriate application of technical and economic parameters, to support mine planning and evaluation of the economic viability of the deposit. The estimate is based on detailed and reliable exploration and testing information gathered through appropriate techniques from locations such as outcrops, trenches, pits, workings and drill holes that are spaced closely enough for geological and grade continuity to be reasonably assumed. | |
inferred mineral resource | The term "inferred mineral resource" refers to that part of a mineral resource for which quantity and grade or quality can be estimated on the basis of geological evidence and limited sampling and reasonably assumed, but not verified, geological and grade continuity. The estimate is based on limited information and sampling gathered through appropriate techniques from locations such as outcrops, trenches, pits, workings and drill holes. | |
Qualified Person(1) | The term "Qualified Person" refers to an individual who is an engineer or geoscientist with at least five years of experience in mineral exploration, mine development or operation or mineral project assessment, or any combination of these, has experience relevant to the subject matter of the mineral project and the technical report, and is a member in good standing of a professional association. | |
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(1) | SEC Industry Guide 7 does not require designation of a qualified person. |
Additional Definitions
alteration—any change in the mineral composition of a rock brought about by physical or chemical means
assay—a measure of the valuable mineral content
chalcopyrite—common sulfide ore of copper, made of copper and iron sulfide
concentrate—the product of mineral flotation process which separates and concentrates ore minerals from waste material
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concentrator—plant and equipment that conducts process of mineral concentration
cut-off grade—when determining economically viable Mineral Reserves, the lowest grade of mineralized material that qualifies as ore, i.e. that can be mined and processed at a profit
diamond drilling—rotary drilling using diamond-set or diamond-impregnated bits, to produce a solid continuous core of rock sample
dissemination—where minerals occur as scattered particles in the rock
fault—a surface or zone of rock fracture along which there has been displacement
feasibility study—a comprehensive study of a mineral deposit in which all geological, engineering, legal, operating, economic, social, environmental and other relevant factors are considered in sufficient detail that it could reasonably serve as the basis for a final decision by a financial institution to finance the development of the deposit for mineral production.
formation—a distinct layer of sedimentary rock of similar composition
grade—quantity of metal per unit weight of host rock
granodiorite—a group of coarse-grained plutonic rocks intermediate in composition between quartz diorite and quartz monzonite containing quartz, plagioclase, potassium feldspar with biotite and hornblende
host rock—the rock in which a mineral or an ore body may be contained
hydrothermal—the products of the actions of heated water, such as a mineral deposit precipitated from a hot solution
in-situ—in its natural position
life-of-mine—a term commonly used to refer to the likely term of a mining operation and normally determined by dividing the tons of Mineral Reserve by the annual rate of mining and processing
mineral—a naturally occurring inorganic crystalline material having a definite chemical composition
mineralization—a natural accumulation or concentration in rocks or soil of one or more potentially economic minerals, also the process by which minerals are introduced or concentrated in a rock
Mo—molybdenum
molybdenite—a mineral of molybdenum disulfide; common sulphide ore of molybdenum
MoS2—molybdenum disulfide or molybdenite
net smelter return (NSR)—refers to the revenue expected from ore delivered to the smelter, taking into account metallurgical recoveries, concentrate grades, transportation costs and smelter treatment charges, usually measured on a per ton basis
outcrop—that part of a geologic formation or structure that appears at the surface of the Earth
open-pit—surface mining in which the ore is extracted from a pit or quarry, the geometry of the pit may vary with the characteristics of the ore body
ore—mineral bearing rock that can be mined and treated profitably under current or immediately foreseeable economic conditions
ore body—a mostly solid and fairly continuous mass of mineralization estimated to be economically mineable
ore grade—the average weight of the valuable metal or mineral contained in a specific weight of ore i.e. grams per tonne of ore
oxide—gold bearing ore which results from the oxidation of near surface sulfide ore
preliminary assessment—a study that includes an economic analysis of the potential viability of Mineral Resources taken at an early stage of the project prior to the completion of a preliminary feasibility study
porphyry—a deposit of molybdenum or copper bearing ores associated with intrusive igneous rocks of porphyritic texture
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preliminary feasibility study and pre-feasibility study—each mean a comprehensive study of the viability of a mineral project that has advanced to a stage where the mining method, in the case of underground mining, or the pit configuration in the case of an open-pit, has been established and an effective method of mineral processing has been determined, and includes a financial analysis based on reasonable assumptions of technical, engineering, legal, operating, economic, social and environmental factors and the evaluation of other relevant factors which are sufficient for a qualified person, acting reasonably, to determine if all or part of the Mineral Resource may be classified as a Mineral Reserve
pyrite—common sulfide of iron
QA/QC—Quality Assurance/Quality Control is the process of controlling and assuring data quality for assays and other exploration and mining data
rock—indurated naturally occurring mineral matter of various compositions
sedimentary rock—rock formed at the Earth's surface from solid particles, whether mineral or organic, which have been moved from their position of origin and re-deposited
stockpile—a rock dump containing ore grade material to be processed at some point in the future
stockwork—a complex system of variably oriented veins
strip—to remove overburden in order to expose ore
sulfide—a mineral including sulfur (S) and iron (Fe) as well as other elements; metallic sulfur-bearing mineral often associated with gold mineralization
tailings—fine ground wet waste material produced from ore after economically recoverable metals or minerals have been extracted
ton—short ton, equal to 2,000 pounds, or 907.2 kilograms
tonne—metric tonne, equal to 1,000 kilograms or 2,204.6 pounds
vein—a thin, sheet-like crosscutting body of hydrothermal mineralization, principally quartz
volcanics—those originally molten rocks, generally fine grained, that have reached or nearly reached the Earth's surface before solidifying
ADDITIONAL INFORMATION
Our primary executive offices are located at 26 West Dry Creek Circle, Suite 810, Littleton, Colorado 80120, our telephone number is (303) 761-8801.
The public can access our website at www.thompsoncreekmetals.com. From our website, you can download and print copies of our annual reports to shareholders, annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to any of those reports, as well as other reports relating to us that are filed with or furnished to the SEC or SEDAR. You can also download from our website our corporate governance policies, including our Corporate Governance Guidelines, Charter of Board of Directors, Board of Directors Committee Charters, and our Code of Conduct and Ethics. The contents of our website are not incorporated into, and should not be considered, a part of this report.
The public may also read and copy materials that we file with the SEC at the SEC's Public Reference Room, which is located at 100 F Street NE, Room 1580, Washington D.C. 20549. You can obtain information on the operation of the Public Reference Room by calling the SEC at (800) SEC-0330. The SEC also maintains a website that contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC at www.sec.gov.
ITEM 1A. RISK FACTORS
Our operations and financial results are subject to various risks and uncertainties, including those described below, that could materially adversely affect our business, financial condition, results of operations, cash flows and the trading price of our common stock. Such risks are not the only ones we face and additional risks and uncertainties not presently known to us or that we currently deem immaterial may also affect our business.
Financial Risks
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The recent decline in molybdenum prices has adversely affected our earnings and cash flows, and further declines in molybdenum prices could have a material adverse effect on our business.
Our business is currently dependent on the price of molybdenum, and even after Mt. Milligan is in full production our business will continue to be dependent on the price of molybdenum. Molybdenum prices fluctuate widely and are affected by numerous factors beyond our control, including the following:
• | the rates of global economic growth (especially construction and infrastructure activity that require significant amounts of steel); |
•the worldwide balance of molybdenum demand and supply;
•the volume of molybdenum produced from primary mines and as a byproduct from copper mines;
•molybdenum inventory levels;
•substitution of other materials for molybdenum; and
•the production costs of our competitors.
Because copper mining, which accounts for 40% to 50% of global molybdenum production, is relatively insensitive to molybdenum demand, the supply of available molybdenum also may greatly exceed demand and cause price declines in molybdenum.
China has substantial molybdenum resources and production. If China's net trade of molybdenum were to change significantly, it could significantly impact supply of and demand for molybdenum, and consequently, molybdenum prices.
The significantly lower prices of molybdenum since the third quarter of 2011 have had a material adverse effect on our revenues, profitability and cash flows. Our average realized sales price for molybdenum fell from $14.08 per pound in the fourth quarter of 2011 to $11.77 per pound in the fourth quarter of 2012. Further declines in molybdenum prices, or the failure of prices to rebound from their current levels, could adversely affect our results of operations and liquidity. By way of illustration, for each $1 per pound change in molybdenum prices (using the molybdenum pounds sold from our mines during the twelve months ended December 31, 2012), the impact on our annual pre-tax cash flow on sales from our mines would approximate $18.1 million. In addition, a substantial or sustained decline in molybdenum prices could:
•cause us to reduce output at our operations (including possibly closing one or more of our mines or other facilities);
•affect our ability to repay our outstanding debt and meet our other financial covenants;
•reduce funds available for capital expenditures, acquisitions and exploration projects;
•reduce existing reserves due to economic viability;
•depress the price of our common stock and our publicly traded debt securities; and
•impair or cause us to write down assets.
In October 2012, in part due to the decline in molybdenum prices, we suspended waste stripping activity associated with the next phase of production at the TC Mine, referred to as Phase 8. Further declines in molybdenum prices or the failure of prices to rebound from their current levels could cause us to cease mining operations and production at the TC Mine at the end of Phase 7 or earlier, which decision could cause us to accelerate the depreciation of the TC Mine assets and could cause other material adverse impacts on our business.
In December 2012, primarily due to the decline in molybdenum prices, we had a pre-tax non-cash write down of our share of the Endako Mine property, plant, equipment and development assets of $530.5 million. In addition, in August 2012 as a cost saving measure, given declines in molybdenum prices and projected operating costs at the Endako Mine, we ceased mining new material at the bottom of the Denak West pit at the Endako Mine and began exclusively processing stockpiled ore. We expect to mill approximately one-third of our existing stockpiled material at the Endako Mine through mid-2013. We currently plan to resume mining at the Endako Mine during the third quarter of 2013. Further declines in molybdenum prices or the failure of prices to rebound from their current levels could cause us to further write down the Endako Mine assets or cease mining operations and production at the Endako Mine, either or both of which could have a material adverse impact on our business.
Our profitability depends largely on the successful completion of Mt. Milligan.
Our profitability will be substantially impacted by our ability to successfully bring Mt. Milligan into production as an operating mine within our projected time frame and budget. Mt. Milligan is still in the construction and development stage. The successful completion of Mt. Milligan is largely dependent on our ability to: (i) prevent substantial delays; (ii) manage capital expenditures; (iii) access funding necessary to complete the construction and development of the mine; and (iv) commission the mill, start-up operations and achieve designed mill recovery rates for both the copper and gold and in the timeframes currently anticipated.
There are inherent risks involved with the construction and development of all new mining projects. These risks include:
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•financing risks;
•budget overruns;
•delays associated with labor productivity;
•delays associated with inclement weather;
•the availability and delivery of critical equipment;
•the hiring of key personnel;
• | successful commissioning and start-up of operations, including the achievement of designed mill recovery rates for copper and gold; |
•successfully obtaining and maintaining all required governmental approvals; and
• | potential opposition from non-governmental organizations, environmental groups, First Nations and communities that may be located near the mines and projects. |
These and other factors may have the effect of delaying the construction or development of Mt. Milligan or increasing the expected capital expenditures for Mt. Milligan.
Costs associated with capital expenditures have escalated on an industry-wide basis over the last several years, and our estimates of the cash expenditures necessary to construct and develop Mt. Milligan have risen since we acquired Terrane. We are currently estimating an aggregate of approximately C$1.5 billion to construct and develop the Mt. Milligan copper-gold mine (of which approximately C$390.0 million of cash expenditures remains to be spent) plus an additional C$40.0 million to C$50.0 million of estimated future cash capital expenditures for a permanent operations residence at Mt. Milligan, which is expected to be completed in 2014. A number of factors have led us to increase our capital expenditure estimate for the Mt. Milligan project since we acquired Terrane, including (1) increases in the prices of materials, such as concrete, (2) increases in the costs of labor, as well as the related costs of on-site infrastructure improvements needed to improve our ability to attract qualified labor to the site, (3) the costs of securing lump sum contracts and managing change orders with certain of our contractors and suppliers in order to mitigate the risk of further cost increases and (4) additional costs relating to the tailing facility at Mt. Milligan. Although we believe our estimates are accurate, we cannot predict whether unanticipated costs may arise. Additional increases in the capital expenditures required to construct and develop Mt. Milligan could have a material adverse effect on our revenues, profitability, cash flows and liquidity. In addition, longer than anticipated commissioning and start-up periods, together with longer than anticipated timeframes to achieve designed mill recovery rates for copper and gold could have a material adverse effect on our revenues, profitability, cash flows and liquidity.
In addition, we are dependent on financing to provide the funding necessary to construct and develop Mt. Milligan. Currently, the funding for Mt. Milligan is anticipated to come from existing cash reserves, the proceeds from the issuance of the 2017 Notes, the 2018 Notes, the 2019 Notes and the tMEDS, the Gold Stream Arrangement, equipment and debt financing and cash flow from operations. A default under any of the instruments governing our financing arrangements could impair our liquidity and our ability to complete construction of Mt. Milligan. Pursuant to the terms of the Gold Stream Arrangement, as of December 31, 2012 we expect to receive remaining proceeds under the Gold Stream Arrangement of $111.9 million over the Mt. Milligan construction period. However, Royal Gold's obligation to fund these deposits is subject to the satisfaction of certain conditions included in the amended and restated purchase agreement with Royal Gold (including, without limitation, that all material permits are in good standing for the construction and development of Mt. Milligan and that the construction and development of Mt. Milligan continues in accordance with the development plan agreed between us and Royal Gold). In the event Royal Gold is unable to or does not make such payments, our liquidity and ability to successfully complete Mt. Milligan could be impaired. Failure to access our funding sources could cause a delay in the completion of Mt. Milligan or prevent us from bringing Mt. Milligan into production at all. If we are not able to successfully construct and develop Mt. Milligan to bring it into production as an operating mine within the anticipated time frame, or at all, our business, results of operations and financial condition may be adversely affected.
Changes in the market price of copper and gold, which are volatile and have fluctuated widely, will affect the profitability of our operations and financial condition once Mt. Milligan is in operation.
Our profitability and long-term viability will depend, in large part, upon the market price of copper and gold produced from Mt. Milligan. The market prices of copper and gold are volatile and are affected by numerous factors beyond our control, including the following:
•the rates of global economic growth;
•the worldwide balance of copper and gold demand and supply;
•inventory levels;
•the production costs of our competitors;
•expectations with respect to the rate of inflation;
•the relative strength of the U.S. dollar and certain other currencies;
•global or regional political or economic conditions, including interest rates and currency values;
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•supply and demand for industrial products and jewelry containing metals; and
• | sales by central banks and other holders, speculators and producers of copper and gold in response to any of the above factors. |
A substantial or sustained decline in copper or gold prices could cause us to fail to realize the anticipated benefits of Mt. Milligan, and could:
•cause us to reduce output at our operations (including possibly closing one or more of our mines or other facilities);
•affect our ability to repay our outstanding debt;
•reduce funds available for acquisitions and exploration projects;
•reduce existing reserves due to economic viability;
•result in fixed-asset write downs; and
•depress the price of our common stock and our publicly traded debt securities,
any of which could have a material adverse effect on our financial condition and results of operations. Copper and gold prices are near a historical high and there can be no assurance that the market prices of copper and gold will remain at current levels or that such prices will improve.
We may fail to realize the anticipated benefits of Mt. Milligan, which could have a material adverse effect on our business, financial condition and results of operations.
In October 2010, we acquired Mt. Milligan as part of the Terrane acquisition. We are currently in the process of constructing and developing Mt. Milligan, which will be an open-pit copper and gold mine and concentrator in British Columbia. The economic feasibility of a development project is based on many factors, including the accuracy of estimated reserves, metallurgical recoveries, capital and operating costs and future metals prices. The capital expenditures and time required to develop new mines are considerable, and changes in costs or construction schedules can affect project economics. There is a risk that we paid more than the value we will receive from the acquisition, construction and development of the Mt. Milligan project.
We may fail to realize the anticipated benefits of the Endako mill expansion, which could have a material adverse effect on our business, financial condition and results of operations.
In March 2012, we completed a mill expansion project at the Endako Mine. The Endako mill expansion project included the construction of a new mill facility, replacing the previous mill facility constructed in the 1960s. As of December 31, 2012, the new mill was not meeting its design specifications with respect to recovery of molybdenum, and various operational challenges have caused interruptions and delays in our mill production, including water management issues associated with frozen water in the tailings pond. These factors caused our actual production in 2012 to be lower than our estimated production and negatively impacted our unit costs. In 2012, our average cost per pound produced was higher than our average realized price per pound sold, which resulted in lower-of-cost-or-market write downs of Endako product inventory of $58.2 million in 2012. In December 2012, we also had a pre-tax non-cash write down of our share of the Endako property, plant, equipment and development assets of $530.5 million. In addition, in August 2012 as a cost saving measure, given declines in molybdenum prices and projected operating costs at the Endako Mine, we ceased mining new material at the bottom of the Denak West pit at the Endako Mine and began exclusively processing stockpiled ore. In the event that we experience further operational challenges and the new mill fails to achieve its design specifications or otherwise does not meet our expectations for its operation, and molybdenum prices fail to rebound from their current levels or continue to erode, we may need to further write down the Endako Mine assets or make the decision to cease mining operations and production at the Endako Mine, either or both of which could have a material adverse impact on our business.
Our substantial indebtedness could adversely affect our financial condition.
As of December 31, 2012, our total debt was approximately $1,010.5 million, including capital lease obligations, and we have unused commitments of $42.5 million net funding available under the Caterpillar equipment financing facility. Although we do not record it as indebtedness, we also have $669.6 million in deferred revenue under our Gold Stream Arrangement and an entitlement to receive an additional $111.9 million of deposits in respect of the Gold Stream Arrangement that are expected to be available to us over the Mt. Milligan construction period, provided that certain conditions are met. Until the deposits received in the Gold Stream Arrangement have been fully offset against Royal Gold’s purchases of gold under the agreement, the deposits will be secured by our Mt. Milligan assets. After the deposits have been fully offset, Royal Gold will continue to have a security interest in 52.25% of the refined gold produced from Mt. Milligan.
Subject to the limits contained in the indentures that govern our outstanding 2017 Notes, 2018 Notes and 2019 Notes, the amended and restated gold stream agreement with Royal Gold, and our other debt instruments, we may be able to incur substantial additional debt to finance working capital, capital expenditures, investments or acquisitions or for other purposes. If we do so, the risks related to our high level of debt could intensify. Specifically, our high level of debt could have important negative consequences, including:
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•making it difficult for us to satisfy our obligations with respect to our debt;
• | limiting our ability to obtain additional financing to fund future working capital, capital expenditures, acquisitions or other general corporate requirements; |
• | requiring a substantial portion of our cash flows to be dedicated to debt service payments instead of other purposes, thereby reducing the amount of cash flows available for working capital, capital expenditures, acquisitions and other general corporate purposes; |
•increasing our vulnerability to general adverse economic and industry conditions;
•limiting our flexibility in planning for and reacting to changes in the industry in which we compete;
•placing us at a disadvantage compared to other, less leveraged competitors; and
•increasing our cost of borrowing.
The indentures that govern our outstanding 2017 Notes, 2018 Notes and 2019 Notes contain covenants that restrict our current and future operations and limit our flexibility and ability to respond to changes or take certain actions.
The indentures that govern our outstanding 2017 Notes, 2018 Notes and 2019 Notes contain certain restrictive covenants that impose significant operating and financial restrictions on us and, in some circumstances, limit our ability to engage in actions that may be in our long-term best interest, including, among other things our ability to:
•incur additional debt;
•sell, lease or transfer our assets;
•pay dividends or make other distributions or repurchase or redeem capital stock;
•prepay, redeem or repurchase certain debt;
•make loans or investments;
•enter into agreements restricting our subsidiaries' ability to pay dividends;
•make capital expenditures and investments;
•guarantee debts or other obligations;
•create liens;
•enter into transactions with our affiliates; and
•enter into certain merger, consolidation or other reorganization transactions.
These restrictions could limit our ability to grow in accordance with our strategy or secure the needed working capital to withstand future downturns in our business or the economy in general, or otherwise take advantage of business opportunities that may arise, any of which could place us at a disadvantage relative to our competitors that may have less debt and are not subject to such restrictions.
A default under any of our indebtedness arrangements could trigger cross defaults to our other agreements, which could have a material adverse effect on our financial condition.
A default under the Caterpillar equipment financing facility will trigger cross defaults to our amended and restated gold stream agreement with Royal Gold, and vice versa, and could also trigger cross defaults to the indentures governing our outstanding notes and other material agreements. In the event of a default under the Caterpillar equipment financing facility, Caterpillar could: (1) terminate the lease by us of equipment purchased by the lender and leased to us pursuant to the facility; (2) terminate the lender's obligation to purchase additional equipment and lease such equipment to us pursuant to the terms of the facility; (3) accelerate the payment of all lease payments unpaid under the facility, together with default interest; (4) accelerate the payment of the balance of the purchase price for equipment, which would have been due and payable from the date of termination; and (5) foreclose on the equipment purchased and leased under the facility and apply the proceeds from the sale of such equipment to any shortfall in the payment by us of amounts due. In the event of default under our amended and restated gold stream agreement with Royal Gold, Royal Gold could require us to repay the amounts Royal Gold has invested in Mt. Milligan, which amounts totaled $669.6 million as of December 31, 2012. In the event of a default under the indentures governing the 2017 Notes, 2018 Notes and 2019 Notes, the trustee or holders of at least 25% in principal of the outstanding 2017 Notes, 2018 Notes and 2019 Notes, as applicable, may declare the principal, premium, if any, and accrued and unpaid interest on the notes to be immediately due and payable. If we were to default under any of these arrangements, we may not have sufficient assets to repay such indebtedness upon a default or have access to sufficient alternative sources of funds. If we are unable to repay the indebtedness, the lenders could foreclose against the assets securing their borrowings and we could be forced into bankruptcy or liquidation.
We may enter into provisionally-priced sales contracts, which could have a negative impact on our revenues if molybdenum prices decline.
From time to time, we enter into provisionally-priced molybdenum sales contracts, whereby the contracts settle at prices to be determined at a future date. The future pricing mechanism of these agreements constitutes an embedded derivative, which is bifurcated and separately marked to estimated fair value at the end of each period. Changes to the fair value of embedded
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derivatives related to molybdenum sales agreements are included in molybdenum sales revenue in the determination of net income. To the extent final prices are higher or lower than what was recorded on a provisional basis, an increase or decrease to molybdenum sales, respectively, is recorded each reporting period until the date of final pricing. Accordingly, in times of falling molybdenum prices, our molybdenum revenues are negatively impacted by lower prices received for contracts priced at current market rates and also from a decrease related to the final pricing of provisionally-priced sales pursuant to contracts entered into in prior years; in times of rising molybdenum prices, the opposite occurs.
A lowering or withdrawal of the ratings assigned to our debt securities by rating agencies may increase our future borrowing costs and reduce our access to capital.
Our debt currently has a non-investment grade rating, and any rating assigned could be lowered or withdrawn entirely by a rating agency if, in that rating agency's judgment, future circumstances relating to the basis of the rating, such as adverse changes, so warrant. Consequently, real or anticipated changes in our credit ratings will generally affect the market value of our outstanding debt securities. Any future lowering of our ratings likely would make it more difficult or more expensive for us to obtain additional debt financing.
Our operations are subject to currency fluctuations, which could adversely affect our results of operations and financial condition.
Exchange rate fluctuations may affect the costs that we incur in our operations. Our costs for the Endako Mine and Mt. Milligan are incurred principally in Canadian dollars. However, our future revenue is tied to market prices for molybdenum, copper, gold and silver, which are denominated in U.S. dollars. The appreciation of the Canadian dollar against the U.S. dollar can increase the cost of our production and capital expenditures in U.S. dollars, and our results of operations and financial condition could be materially adversely affected. Although we have in the past used, and may in the future use, hedging strategies to limit our exposure to currency fluctuations, there can be no assurance that such hedging strategies will be successful or that they will mitigate the risk of such fluctuations.
Mine closure and remediation costs for environmental liabilities may exceed the provisions we have made and our inability to provide reclamation bonding or maintain insurance could adversely affect our operating results and financial condition.
We are required by U.S. federal and state laws and Canadian federal and provincial laws to provide financial assurance sufficient to allow a third party to implement approved closure and reclamation plans if we are unable to do so. These laws are complex and vary from jurisdiction to jurisdiction. The laws govern the determination of the scope and cost of the closure and reclamation obligations and the amount and forms of financial assurance. The amount and nature of the financial assurances are dependent upon a number of factors, including our financial condition and reclamation cost estimates.
As of December 31, 2012, we had provided the appropriate regulatory authorities in the United States and Canada with approximately $72.4 million in reclamation financial assurance for mine closure obligations in the various jurisdictions in which we operate. As our operations expand, our reclamation obligations and the financial assurances that we are required to provide may increase accordingly. For example, we are required to post an additional $12 million (for a total of $30 million) for our reclamation security at Mt. Milligan by December 31, 2013. Changes to these amounts, as well as the nature of the security to be provided, could significantly increase our costs, making the maintenance and development of existing and new mines less economically feasible. To the extent that the value of the security provided to the regulatory authorities is or becomes insufficient to cover the amount of financial assurance we are required to post, we would be required to replace or supplement the existing security with more expensive forms of security, which might include cash deposits, which would reduce our cash available for operations and financing activities.
There can be no assurance that we will be able to maintain or add to our current level of financial assurance. Failure to provide regulatory authorities with the required financial assurances could potentially result in the closure of one or more of our operations, which could result in a material adverse effect on our operating results and financial condition.
We are required, from time to time, to post financial assurances, and there can be no assurance that we will continue to be able to obtain financial assurances on acceptable terms.
In addition to our reclamation bonding obligations, we are from time to time required to post other financial assurance in the normal course of conducting our daily activities. This financial assurance can take several forms, including, but not limited to, letters of credit, performance bonds, deposits into escrow accounts for the benefit of the counterparty, trust funds or other funding mechanisms for long-term, post-reclamation obligations or the posting of cash collateral directly with the counterparty. In each case, the form of financial assurance to be provided is dictated by several factors, including expected length of time the financial assurance obligation is expected to remain outstanding, the amount of the obligation, the cost to us of providing the various forms of financial assurance and the creditworthiness of the counterparty. Our ability to obtain certain forms of financial assurance going forward will be impacted by our future financial performance, changes to our credit rating and other
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factors that may be beyond our control. There can be no assurance that we will be able to obtain certain forms of financial assurance going forward or that we will be able to post cash collateral in lieu of being able to secure one of these other forms of financial assurance.
We will rely on a few key customers for our copper-gold concentrate from Mt. Milligan, and the loss of any one key customer could reduce our revenues.
We have entered into three concentrate sales agreements for the sale of copper-gold-silver concentrate produced at Mt. Milligan. Pursuant to these agreements, we agreed to sell an aggregate of approximately 85% of the copper-gold-silver concentrate produced at Mt. Milligan during 2013 and 2014 and an aggregate of approximately 120,000 dry metric tons in each of the two calendar years thereafter. A breach of the applicable sales agreement by one of these customers, a significant dispute with one of these customers, a force majeure event affecting one of these customers, or any other event significantly negatively impacting the contractual relationship with one of these customers could harm our financial condition. If, in such an event, we are unable to sell the affected concentrate volume to another customer, or we sell the affected concentrate to another customer on terms less advantageous terms to us, our revenues could be negatively impacted.
Operational Risks
We are relying substantially on contractors with respect to the construction of Mt. Milligan.
A significant portion of the construction of Mt. Milligan is being conducted in whole or in part by contractors, which creates a number of risks, some of which are outside our control, including:
•our ability to negotiate agreements with contractors on acceptable terms;
•our ability to replace a contractor and its operating equipment in the event that either party terminates the agreement;
•our reduced control over those aspects of the construction, which are the responsibility of the contractor;
•the potential failure of a contractor to perform under its agreement;
• | the potential interruption of work or increased costs in the event that a contractor ceases its business due to insolvency or other unforeseen events; |
• | the potential failure of a contractor to comply with applicable legal and regulatory requirements, to the extent it is responsible for such compliance; and |
•the potential problems of a contractor with managing its workforce, labor unrest or other employment issues.
In addition, we may incur liability to third parties as a result of the actions of our contractors. The occurrence of one or more of these risks could adversely affect our ability to successfully construct and develop Mt. Milligan, which could have an adverse impact on our results of operations and financial position.
Future growth depends on our ability to bring new mines into production and to expand mineral reserves at existing mines.
Our ability to replenish our reserves is important to our long-term viability. Depleted reserves can be replaced in several ways, including by expanding known ore bodies, locating new deposits or acquiring new reserves from third parties. Exploration projects involve many risks, require substantial expenditures and may not result in the discovery of sufficient additional mineral deposits that can be mined profitably. Once a site with mineralization is discovered, it may take several years from the initial phases of drilling until production is possible, if ever, during which time the economic feasibility of production may change. Substantial expenditures are required to establish recoverable proven and probable reserves, to receive regulatory approvals and permits and to construct mining and processing facilities. As a result, there is no assurance that current or future exploration programs, such as the Berg property or the Davidson property, and additional drilling at our existing operating mines, will be successful.
We intend to grow our business by acquiring quality mining assets. However, our capital available for new exploration projects and acquisitions is constrained due to the development of Mt. Milligan, the decline in molybdenum prices, higher-than-anticipated operating costs at the Endako Mine and, if the decision is made to resume waste stripping at the TC Mine, the costs associated with stripping for the next phase of mining at the TC Mine or, if the decision is made to put the TC Mine on care and maintenance, the loss of ongoing revenue from that operation and the additional costs of care and maintenance. In addition, there can be no assurance that suitable acquisition opportunities will be identified or, if identified, that acquisitions will be consummated on favorable terms or at all. Our ability to identify, consummate and to integrate effectively any future acquisitions on terms that are favorable to us may be limited by the number of attractive acquisition targets, internal demands on our resources, competition from other mining companies and, to the extent necessary, our ability to obtain financing on satisfactory terms, or at all. In addition, we compete for attractive acquisition targets with other potential buyers that have more financial and other resources than us. There is a risk that depletion of reserves will not be offset by discoveries or acquisitions. As a result, we cannot provide assurance that our exploration, development or acquisition efforts will result in any new commercial mining operations or yield new mineral reserves to replace or expand current mineral reserves. If we are not able to
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replace depleted reserves, it could have a material adverse effect on our business, prospects, results of operations and financial position.
Estimates of mineral reserves and projected cash flows may prove to be inaccurate, which could negatively impact our results of operations and financial condition.
There are numerous uncertainties inherent in estimating mineral reserves and the future cash flows that might be derived from their production. Accordingly, the figures for mineral reserves and future cash flows contained in this Form 10-K are estimates only. In respect of mineral reserve estimates, no assurance can be given that the anticipated tonnages and grades will be achieved, that the indicated level of recovery will be realized or that mineral reserves can be mined or processed profitably. The ore grade actually recovered may differ from the estimated grades of the mineral reserves and mineral resources.
In addition, actual future cash flows may differ materially from estimates. Estimates of mineral reserves, and future cash flows to be derived from the production of such mineral reserves, necessarily depend upon a number of variable factors and assumptions, including, among others, geological and mining conditions that may not be fully identified by available exploration data or that may differ from experience in current operations; historical production from the area compared with production from other producing areas; the assumed effects of regulation by governmental agencies and assumptions concerning metal prices; exchange rates; interest rates; inflation; operating costs; development and maintenance costs; reclamation and post-reclamation costs; and the availability and cost of labor, equipment, raw materials and other services required to mine and refine the ore. Market price fluctuations of molybdenum, copper and gold, as well as increased production costs or reduced recovery rates, may render mineral reserves containing relatively lower grades of mineralization uneconomical to recover and may ultimately result in a restatement of mineral resources. In addition, there can be no assurance that mineral recoveries in small scale laboratory tests will be duplicated in larger scale tests under on-site conditions or during production.
For these reasons, estimates of our mineral reserves contained in this Form 10-K, including classifications thereof based on probability of recovery, and any estimates of future cash flows expected from the production of those mineral reserves, prepared by different engineers or by the same engineers at different times may vary substantially. The actual volume and grade of mineral reserves mined and processed, and the actual cash flows derived from that production, may not be as currently anticipated in such estimates. If our actual mineral reserves or cash flows are less than our estimates, our results of operations and financial condition may be materially impaired.
Title to some of our mineral properties may be challenged or defective. Any impairment or defect in title could have a negative impact on our results of operations and financial condition.
The acquisition of title to mineral properties is a very detailed and time-consuming process. There is no guarantee that title to any of our properties will not be challenged or impaired. Third parties may have valid claims underlying portions of our interests, including prior unregistered liens; agreements; transfers or claims, including aboriginal land claims; and title may be affected by, among other things, undetected defects. As a result, we may be constrained in our ability to operate our properties or unable to enforce our rights with respect to our properties. An impairment to, or defect in, title to our properties could have a material adverse effect on our business, financial condition or results of operations.
Some of our properties are located near First Nations who may oppose the development of these properties.
The Endako Mine, Mt. Milligan, the Berg property, the Davidson property and certain of our other properties are located near First Nations, and the exploration and development of these properties may be subject to claims and opposition by First Nations. Such opposition could negatively impact us in terms of public perception, diversion of management time and resources, legal and other advisory expenses, potential blockades or other interference by third parties in our operations, or court-ordered relief impacting our operations. In addition, we may be required to, or may voluntarily, enter into certain agreements with such First Nations in order to facilitate development of our properties, which could reduce the expected earnings or income from any future production.
In particular, in May 2010, the Stellat'en First Nation filed a petition in the Supreme Court of British Columbia against the British Columbia Minister of Energy, Mines and Petroleum Resources and us alleging that the Endako Mine and the now-completed mill expansion project at the Endako Mine represent infringements of the aboriginal title of the petitioners and impacts to their aboriginal rights, and that the government breached its duty by failing to consult with the Stellat'en First Nation in relation to the impact that the Endako Mine and the mill expansion may have on such petitioners and their aboriginal title. In August 2011, the Supreme Court of British Columbia dismissed the petitioners' claims in full. The Stellat'en First Nation subsequently filed a notice of appeal from that decision seeking to have the decision of the Supreme Court of British Columbia set aside and seeking an order staying the permit amendment and any future permitting until the Province has engaged in further consultation. We and the government filed materials in response to the notice of appeal, and the matter was heard by the Court of Appeal of British Columbia in a hearing that took place in November 2012. The timing of the release of the Court's decision in this matter is unknown. In addition, in April 2012, the Stellat'en First Nation filed a new petition in the Supreme
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Court of British Columbia against the British Columbia Minister of Energy, Mines and Petroleum Resources and the Company making similar allegations to those discussed above. In April 2012, the parties agreed to put this matter into abeyance. However, in January 2013 the Stellat'en First Nation indicated that they wish to proceed with this new petition. No date for hearing the new petition has been set. There can be no assurance that these matters will be resolved in our favor. If the Stellat'en appeal or new petition is successful, permits and amendments to permits may be delayed or declared invalid, which may have a material adverse effect on the future operating plans for the Endako Mine.
Our business is subject to production and operational risks that could adversely affect our business and our insurance may not cover these risks and hazards adequately or at all.
Mining and metals processing involve significant production and operational risks outside of our control, including the following:
•unanticipated ground and water conditions;
•adverse claims to water rights and shortages of water to which we have rights;
•adjacent or adverse land or mineral ownership that results in constraints on current or future mine operations;
•geological problems, including earthquakes and other natural disasters;
•metallurgical and other processing problems;
•unusual or unexpected rock formations;
•ground or slope failures;
•structural cave-ins or slides;
•flooding or fires;
•rock bursts;
•equipment failures;
• | periodic interruptions due to inclement or hazardous weather conditions or operating conditions and other force majeure events; |
•lower than expected ore grades or recovery rates;
•accidents;
•delays in the receipt of or failure to receive necessary government permits;
•the results of litigation, including appeals of agency decisions;
•delays in transportation;
•interruption of energy supply;
•labor disputes;
•inability to obtain satisfactory insurance coverage;
•the availability of drilling and related equipment in the area where mining operations will be conducted; and
•the failure of equipment or processes to operate in accordance with specifications or expectations.
These risks could result in damage to, or destruction of, our mines, mills and roasting facilities, resulting in partial or complete shutdowns, personal injury or death, environmental or other damage to our properties or the properties of others, delays in mining, reduced production, monetary losses and potential legal liability. Milling operations are subject to hazards, such as equipment failure or failure of retaining dams around tailings disposal areas that may result in personal injury or death, environmental pollution and consequential liabilities.
Our insurance will not cover all the potential risks associated with our operations. In addition, although certain risks are insurable, we may be unable to maintain insurance to cover these risks at economically feasible premiums. Moreover, insurance against risks such as environmental pollution or other hazards as a result of exploration and production is not generally available to us or to other companies in the mining industry on acceptable terms. We might also become subject to liability for pollution or other hazards that may not be insured against or that we may elect not to insure against because of premium costs or other reasons. Losses from these events may cause us to incur significant costs that could have a material adverse effect upon our business. Furthermore, should we be unable to fund fully the cost of remedying an environmental problem, we might be required to suspend operations or enter into interim compliance measures pending completion of the required remedy.
Shortages of critical parts, equipment and skilled labor may adversely affect our operations and development projects.
The mining industry has been impacted by increased demand for critical resources such as input commodities, drilling equipment, milling equipment, tires and skilled labor. These shortages have, at times, impacted the efficiency of our operations and resulted in cost increases and delays related to construction of the new mill at the Endako Mine and the construction of Mt. Milligan. Such cost increases and delays affect operating costs, capital expenditures and production and construction schedules.
The temporary shutdown of any of our operations could expose us to significant costs and adversely affect our access to skilled labor.
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From time to time, we may have to temporarily shut down one or more of our operating sites if they are not commercially viable. There are a number of factors that may cause our operations to not be commercially viable, many of which are beyond our control. These factors include adverse changes in interest rates or currency exchange rates, decreases in the price of molybdenum or the market rates for treatment and refining charges, increases in concentrate transportation costs and increases in labor costs. In addition, periodically we must temporarily shut down equipment at our mines or other facilities for routine maintenance. During such temporary shutdowns, we will have to continue to expend capital to maintain the site or facility and equipment. We may also incur significant labor costs as a result of a temporary shutdown if we are required to give employees notice prior to any layoff or to pay severance for any extended layoff. Furthermore, temporary shutdowns may adversely affect our future access to skilled labor, as employees who are laid off may seek employment elsewhere.
In addition, if our operations are shut down for an extended period of time, we may be required to engage in environmental remediation of the plant sites or accelerated reclamation of our mines, which would require us to incur additional costs. The costs of ramping up production at one of our operations following a temporary shutdown could be significant. Given the costs involved in a temporary shutdown of our operations, we may instead choose to continue to operate those operations at a loss. Such a decision could have a material adverse effect on our results of operations and financial condition.
Increased operating costs could affect our profitability.
Costs at any particular mining location are subject to variation due to a number of factors, such as changing ore grade, changing metallurgy and revisions to mine plans in response to the physical shape and location of the ore body. In addition, costs at our mines and at our Langeloth Facility are affected by the price of input commodities, such as fuel, electricity, labor, chemical reagents, grinding media, mill liners, explosives, steel and concrete. Commodity costs are, at times, subject to volatile price movements, including increases that could make production at certain operations less profitable and changes in laws and regulations affecting their price, use and transport. Reported costs may also be affected by changes in accounting standards. A material increase in costs at any significant location could have a significant effect on our profitability and operating cash flow.
We are subject to substantial government regulation. Changes to regulation or more stringent implementation could have a material adverse effect on our results of operations and financial condition.
Our mining, processing, development and mineral exploration activities are subject to various laws governing prospecting, development, production, taxes, labor standards and occupational health, mine safety, toxic substances and other matters. Mining and exploration activities are also subject to various laws and regulations relating to the protection of the environment. No assurance can be given that we will remain in compliance with applicable regulations or that new rules and regulations will not be enacted or that existing rules and regulations will not be applied in a manner that could limit or curtail production or development of our properties. Amendments to current laws and regulations governing our operations and activities or more stringent implementation thereof could have a material adverse effect on our business, financial condition and results of operations.
Over the course of the last several years, significant new corporate governance and disclosure regulations and requirements have been adopted by U.S. federal and state and Canadian federal, state and provincial governments, as well as the stock exchanges on which our common stock is listed. We are required to expend significant resources to monitor and implement these new rules and regulations. These additional compliance costs and related diversion of the attention of management and key personnel could have a material adverse effect on our business, financial condition and results of operations.
We are required to obtain government permits in order to conduct operations.
Government approvals and permits are currently required in connection with all of our operations, and further approvals and permits may be required in the future. We must obtain and maintain a variety of licenses and permits, including without limitation air quality, water quality, water rights, dam safety, emergency preparedness, hazardous materials, waste rock management, solid waste and tailings operations. The duration and success of our efforts to obtain permits are contingent upon many variables outside of our control. Obtaining governmental permits may increase costs and cause delays depending on the nature of the activity to be permitted and the applicable requirements implemented by the permitting authority. There can be no assurance that all necessary permits will be obtained or timely obtained and, if obtained, that the costs involved will not exceed our estimates or that we will be able to maintain such permits. To the extent such approvals are required and not obtained or maintained, our operations may be curtailed, or we may be prohibited from proceeding with planned exploration, development or operation of our mineral properties.
Our Langeloth Facility is currently operating with a National Pollutants Discharge Elimination System ("NPDES") permit and Title V air quality permit, the terms of which have expired. However, the Langeloth Facility is authorized to continue to operate under its existing permits until renewed permits are issued. In March 2011, the Pennsylvania Department of Environmental Protection ("PaDEP") submitted to us a draft of a new air quality permit for the Langeloth Facility. We
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requested revisions to such draft permit, which are currently under review by PaDEP. If a new air quality or NPDES permit is not issued or, if issued and final, contains more onerous requirements with which we must comply, we could be required to install costly new pollution control equipment or to curtail or cease our operations, and our business may be adversely affected. Violations of the existing, or new, air quality or NPDES permit conditions at the Langeloth Facility could result in a range of criminal and civil penalties under the federal Clean Water Act and Clean Air Act or the Pennsylvania Clean Streams Law or Air Pollution Control Act.
The TC Mine is also currently operating with an expired NPDES permit. The TC Mine is authorized by federal regulation to continue to operate under its existing permit until the renewed permit is issued. If a renewed NPDES permit is not issued or, if issued and final, contains more onerous requirements with which we must comply, we could be required to install costly new pollution control equipment or to curtail or cease our operations, and our business may be adversely affected. Violations of the existing, or new, NPDES permit conditions at the TC Mine could result in a range of criminal and civil penalties under the federal Clean Water Act.
Our operations plan for Mt. Milligan contemplates that employees will have the option to live in an operations residence located near the mine, and that concentrate will be transported to the town of Mackenzie (as opposed to Fort St. James) to be loaded onto railcars for transport to the port of Vancouver. In order to construct and operate an operations residence and to load out concentrate in Mackenzie, we require amendments to our Environmental Assessment Certificate for Mt. Milligan. We have applied for these amendments, but they have not yet been obtained. There can be no assurance that these amendments will be obtained on acceptable terms or at all. Failure to obtain these permits may have a material adverse effect on our business.
Obtaining and maintaining the various permits for our mine development operations and exploration projects, including the Berg property and the Davidson property, will be complex, time-consuming and expensive. Changes in a mine's design, production rates, quality of material mined and many other matters often require submission of the proposed changes for agency approval prior to implementation, and these may not be obtained. In addition, changes in operating conditions beyond our control, changes in agency policy and federal and state laws, litigation initiated by First Nations and/or other parties or community opposition could further affect the successful permitting of operations.
Major network failures could have an adverse effect on our business.
Major equipment failures, natural disasters including severe weather, terrorist acts, acts of war, cyber attacks or other breaches of network systems or security that affect computer systems within our network could disrupt our business functions, including our production activities. Our mines and mills are automated and networked such that a cyber incident involving our information systems and related infrastructure could negatively impact our operations. A corruption of our financial or operational data or an operational disruption of our production infrastructure could, among other potential impacts, result in: (i) loss of production or accidental discharge; (ii) expensive remediation efforts; (iii) distraction of management; (iv) damage to our reputation or our relationship with customers; or (v) in events of noncompliance, which events could lead to regulatory fines or penalties. Any of the foregoing could have a material adverse effect on our business, results of operations and financial condition.
Our mining production depends on the availability of sufficient water supplies.
Our operations require significant quantities of water for mining, ore processing and related support facilities. Continuous production at our mines depends on our ability to maintain our water rights and claims. Although each operation has sufficient water rights and claims to cover current operational demands, we cannot predict the potential outcome of future legal proceedings on our water rights, claims and uses. The failure to obtain needed water permits, the loss of some or all water rights for any of our mines, in whole or in part, or shortages of water to which we have rights due to weather, equipment issues or other factors could require us to curtail or close mining production and could prevent us from pursuing expansion opportunities.
Environmental Risks
We must comply with comprehensive environmental statutes, regulations and other governmental controls, and we face significant environmental risks.
All phases of our operations are subject to environmental regulation. In Canada and the United States, environmental laws provide for, among other things, restrictions and prohibitions on spills, releases, emissions and discharges of various substances produced in association with, or resulting from, our operations. These laws also require that facility sites and mines be operated, maintained and reclaimed to the satisfaction of applicable regulatory authorities, including long-term, post-reclamation obligations. Compliance with such laws, including without limitation, detailed monitoring and reporting requirements, can require significant expenditures. An exceedance of a permit limitation or failure to comply with a permit requirement, may result in the imposition of fines and penalties, some of which may be material. Companies engaged in the exploration,
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development and operation of mineral properties often experience increased costs and delays as a result of the need to comply with applicable laws, regulations and permits.
For example, a proposed expansion of the TC Mine, which would entail an approximate 15-year extension of the mine life and an expansion of some facilities, with additional permitted surface disturbance on approximately 200 acres of U.S. Bureau of Land Management ("BLM") administered land, 150 acres of National Forest System land and approximately 80 acres of private land owned by us, is subject to environmental analysis and preparation of an environmental impact statement ("EIS") pursuant to the federal National Environmental Policy Act ("NEPA"). The EIS will also cover a proposed land exchange in which we would receive approximately 5,000 acres of BLM land in exchange for 900 acres of private lands owned by use. The BLM is the lead agency for preparation of the EIS and other federal and state agencies are cooperating agencies. If and when completed, the EIS would be the basis for Records of Decision (RODs) by both the BLM and the United States Forest Service to approve our proposed Modified Mine Plan of Operations, by the BLM to approve the proposed land exchange (including a related amendment of the Resource Management Plan for the BLM's Challis Resource Area) and by the U.S. Army Corps of Engineers to approve issuance of a permit under section 404 of the Clean Water Act. There is no assurance that the EIS will be completed, or that the RODs will be issued, or that these documents will be completed or issued on terms and conditions acceptable to us. The agencies' preferred alternatives in the EIS may include terms and conditions that impose regulatory or reclamation requirements that will materially increase our costs during operations and closure of the TC Mine. Moreover, litigation may be filed challenging the NEPA process for the mine expansion or the land exchange and the result thereof, which could materially increase our costs, or prevent or delay our ability to implement the expansion or the land exchange.
Environmental regulation is evolving in a manner that may require stricter standards and enforcement, increased fines and penalties for noncompliance, more stringent environmental assessments of proposed projects, and a heightened degree of training and responsibility for companies and their officers, directors and employees. Existing or future environmental regulation could have a material adverse effect on our business, financial condition and results of operations. We own or have owned, manage or have been in care or control of properties that may result in a requirement to environmentally remediate such properties that could involve material costs. In addition, environmental conditions or hazards may exist on the properties on which we hold interests that are unknown to us at present or that have been caused by previous or existing owners or operators of the properties. We may also acquire properties with environmental risks, and the indemnification proceeds we receive from the entity we acquire such properties from, if any, may not be adequate to pay all the fines, penalties and costs (including costs of remediation or removal and related response costs) incurred at or related to such properties.
Failure to comply with applicable laws, regulations and permitting requirements may result in enforcement actions, including compliance and other orders issued by regulatory or judicial authorities causing operations to cease or be curtailed, and may include corrective measures requiring capital expenditures, installation of additional equipment, operation or administration costs or other remedial actions. Parties engaged in mining operations, including us, may be required to compensate those suffering loss or damage to person or property by reason of the mining activities and may have civil or criminal fines or penalties imposed for violations of applicable laws or regulations. Amendments to current laws, regulations and permits governing operations and activities of mining companies, or more stringent implementation thereof, could have a material adverse impact on us and cause increases in exploration expenses, remedial and reclamation obligations, capital expenditures or production costs, reduction in levels of production at producing properties, or abandonment of or delays in development of new mining properties.
Regulation of greenhouse gas emissions effects and climate change issues may adversely affect our operations and markets.
Global climate change continues to attract considerable public, scientific and regulatory attention, and greenhouse gas emission regulation is becoming more commonplace and stringent. As energy, including energy produced from the combustion of carbon-based fuels, is a significant input to our mining and processing operations, we must also comply with emerging climate change regulatory requirements, including programs to reduce greenhouse gas emissions. Our principal energy sources are electricity, purchased petroleum products and natural gas. In addition, our processing facilities and mobile mining equipment emit carbon dioxide.
On July 1, 2008, the Province of British Columbia introduced a carbon tax on the purchase or use of fossil fuels within the province. As of July 1, 2012, the carbon tax rate was equal to $30 per tonne of carbon dioxide equivalent emissions. The Endako Mine and Mt. Milligan are located in British Columbia, and the carbon tax may have a material impact on our energy and compliance costs.
British Columbia is also a partner in the Western Climate Initiative ("WCI"), a collaboration among various Canadian provinces and U.S. states that seeks to reduce overall greenhouse gas emissions through a regional cap-and-trade program. British Columbia has not decided on its participation in the program. However, if British Columbia decides to join the program, regulated facilities emitting carbon dioxide in excess of the threshold amount ultimately determined for the program will be subject to the cap.
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The U.S. federal and state governments may also enact an emission trading or similar program for greenhouse gas emissions, which could significantly increase our energy and regulatory compliance costs. For example, the U.S. federal government has considered legislation to reduce greenhouse gas emissions through a cap-and-trade system of allowances and credits, among other provisions. In addition, the EPA has developed final rules requiring certain emitters of greenhouse gases to collect and report data with respect to their greenhouse gas emissions.
We are in the process of evaluating the potential impacts on our operations of these new and potential regulations. Either a carbon tax or a cap-and-trade program will likely result in increased future energy costs. The regulations will also likely increase our compliance costs. For example, we may be required to install new equipment to reduce emissions from our processing facilities in order to comply with new regulatory standards or to mitigate the financial impact of a new climate change program. We also may be subject to additional and extensive monitoring and reporting requirements. It is uncertain at this time how provincial and regional initiatives will interact with any federal climate change regulations.
The potential physical impacts of climate change on our operations are highly uncertain and may be particular to the unique geographic circumstances associated with each of our facilities. These may include changes in weather and rainfall patterns, water shortages, changing storm patterns and intensities and changing temperatures. For example, these physical impacts could require us to curtail or close mining production and could prevent us from pursuing expansion opportunities. These effects may adversely impact the cost, production and financial performance of our operations.
We must remove and reduce impurities and toxic substances naturally occurring in molybdenum and comply with applicable law relating thereto, which could result in remedial action and other costs.
Mineral ores and mineral products, including molybdenum ore and molybdenum products, contain naturally occurring impurities and toxic substances. Although we have implemented procedures that are designed to identify, isolate and safely remove or reduce such impurities and substances, such procedures require strict adherence and no assurance can be given that employees, contractors or others will not be exposed to or be affected by such impurities and toxic substances, which may subject us to liability. Standard operating procedures may not identify, isolate and safely remove or reduce such substances. Even with careful monitoring and effective control, there is still a risk that the presence of impurities or toxic substances in our products may result in such products being rejected by our customers, penalties being imposed due to such impurities or the products being barred from certain markets. Such incidents could require remedial action and could result in curtailment of operations. Legislation requiring manufacturers, importers and downstream users of chemical substances, including metals and minerals, to establish that the substances can be handled and used without negatively affecting health or the environment may impact our operations and markets. These potential compliance costs, litigation expenses, regulatory delays, remediation expenses and operational costs could negatively affect our financial results.
Changes to the labeling of certain of our products could have a material adverse effect on our results of operations and financial condition.
In December 2006, the European Union ("EU") member states adopted new chemical management legislation known as Registration, Evaluation, and Authorization of Chemicals ("REACH"). REACH applies to all chemical substances manufactured or imported into the EU in quantities of one metric ton or more annually and requires the registration of approximately 30,000 chemical substances with the European Chemicals Agency. Such registration entails the filing of extensive data on the potential risks to human health and the environment of such chemical substances. As a result of such registration, we are required to label our products imported into the EU in accordance with the product classifications mandated by REACH.
Pursuant to REACH, two of our products, pure molybdenum tri-oxide and tech oxide, have been classified as potential carcinogens. Under REACH, we utilize material safety data sheets and labeling for such products reflecting this classification. While REACH applies only to the EU, we have adopted a uniform system of labeling and use the REACH-compliant material safety data sheets and product labels worldwide.
Due to the product labeling requirements under REACH, our employees and/or our customers could raise claims against us regarding the safety of our products and the potentially carcinogenic effects they may have. There can also be no assurance that, in the wake of the new REACH classification, government regulators in the jurisdictions in which we do business will not impose more restrictive regulations on us with respect to the manufacture, sale and/or handling of our products. Any such claims or new regulations could have a material adverse effect on our operations or financial condition.
Other Risks
We own certain assets through joint ventures, and any disagreement or failure of partners to meet obligations could have a material adverse effect on our results of operations and financial condition.
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The Endako Mine is operated as a joint venture between our subsidiary, TCML, which holds a 75% interest, and Sojitz, which holds the remaining 25% interest. As a result, our interest in the Endako Mine is subject to the risks normally associated with the conduct of joint ventures. While we are the operator of the Endako Mine, Sojitz has certain consent and veto rights pursuant to the agreement governing the joint venture. Any disagreement between us and Sojitz or Sojitz's failure to meet its obligations to the joint venture could have a material adverse impact on our profitability or the viability of our interests held through joint ventures, which could have a material adverse impact on our future cash flows, earnings, results of operations and financial condition.
Intense competition could reduce our market share or harm our financial performance.
The mining industry is intensely competitive, and we compete with many companies that have more financial and technical resources. Since mines have a limited life, we must compete with others who seek mineral reserves through the acquisition of new properties. In addition, we also compete for the technical expertise needed to find, develop and operate such properties, the labor to operate the properties, and the capital for the purpose of funding such properties. Many competitors not only explore for and mine metals, but conduct refining and marketing operations on a global basis. Such competition may result in our being unable to acquire desired properties, to recruit or retain qualified employees or to acquire the capital necessary to fund our operations and develop our properties. We also compete with manufacturers of substitute materials or products for which molybdenum is typically used. Existing or future competition in the mining industry could materially adversely affect our prospects for mineral exploration and success in the future. In addition, some of our competitors may have an advantageous market position and have greater financial and other resources and may, therefore, be able to better withstand poor and volatile market conditions, obtain financing on better terms and attract better or more qualified employees, any of which may have an adverse impact on our business, financial condition and results of operations.
We are dependent upon key management personnel and executives.
We are dependent upon a number of key management personnel. Our ability to manage our exploration, development and operating activities, and hence our success, depend in large part on the efforts of these individuals. We face intense competition for qualified personnel, and there can be no assurance that we will be able to attract and retain such personnel. We do not maintain "key person" life insurance. Accordingly, the loss of the services of one or more of such key management personnel could have a material adverse effect on our business.
On November 6, 2012, our Chief Executive Officer notified our Board of Directors of his desire to retire within 18 months, subject to a suitable successor being identified by the Board. There can be no assurance that our Board will find a suitable successor. Failure to identify a suitable successor, or significant delay in identifying a successor, could have a material adverse effect on our business and our stock price.
Our business depends on good relations with our employees.
Production at our operations depends on the efforts of our employees. The Endako Mine and the Langeloth Facility each have certain unionized employees. The union agreements for the Endako Mine and the Langeloth Facility both expire in March 2013. On January 2, 2013, a new labor agreement was reached with the union at our Langeloth Facility to cover the period from March 11, 2013 through March 11, 2016. Although our unionized employees have agreed to "no-strike" clauses in their respective union agreements, there can be no assurance that the Endako Mine and the Langeloth Facility will not suffer from work stoppages. A strike, lockout or other work stoppage at one or both of these operations could have a material adverse effect on our business, results of operations and financial condition. There can be no assurance that one or both union agreements will be renewed on a timely basis and on terms favorable to us.
Further, changes in governmental regulations relating to labor relations, or otherwise in our relationship with our employees, including our unionized employees, may result in strikes, lockouts or other work stoppages, any of which could have a material adverse effect on our business, results of operations and financial condition.
Our stock price may be volatile and your investment in our common stock could suffer a decline in value.
Broad market and industry factors may adversely affect the price of our common stock, regardless of our actual operating performance. Factors that could cause fluctuation in the price of our common stock may include, among other things:
•actual or anticipated fluctuations in quarterly operating results
•changes in financial estimates by us or by any securities analysts who might cover our stock;
•speculation about our business in the press or the investment community;
•conditions or trends in our industry or the economy generally;
•changes in the prices of molybdenum, copper or gold;
• | stock market price and volume fluctuations of other publicly traded companies and, in particular, those that are in the mining industry; |
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•announcements by us or our competitors of significant acquisitions, strategic partnerships or divestitures;
•capital commitments;
•additions or departures of key personnel; and
•sales of our common stock, including sales by our directors, officers or significant stockholders.
In the past, securities class action litigation has often been instituted against companies following periods of volatility in their stock price. This type of litigation could result in substantial costs to us and divert our management’s attention and resources.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 3. LEGAL PROCEEDINGS
Stellat'en First Nation
In May 2010, the Stellat'en First Nation filed a petition in the Supreme Court of British Columbia against the British Columbia Minister of Energy, Mines and Petroleum Resources and TCM alleging that the Endako Mine and the mill expansion project at the Endako Mine represent infringements of the aboriginal title of the petitioners and impacts to their aboriginal rights, and that the government breached its duty to consult with the Stellat'en First Nation in relation to the impacts of the Endako Mine and the mill expansion. The petitioners sought a declaration that the Provincial Crown did not fulfill its duty to consult with them in relation to the mill expansion project, a declaration that the mining permits and/or tenures held by TCM are invalid, an order quashing or setting aside the decision to issue a permit amendment to TCM and an injunction prohibiting further construction or alterations relating to the mill expansion project. The matter was heard by the Supreme Court of British Columbia in a hearing that took place in the first quarter of 2011. In August 2011, the Court dismissed the petitioners' claims in full. The Stellat'en First Nation subsequently filed a notice of appeal from that decision to the Court of Appeal of British Columbia seeking to have the decision of the Supreme Court of British Columbia set aside and seeking an order staying the permit amendment and any future permitting until the Province has engaged in further consultation. The government and TCM filed materials in response to the notice of appeal, and the matter was heard by the Court of Appeal in a hearing that took place in early November 2012. The timing of the release of the Court's decision in this matter is unknown.
In April 2012, the Stellat'en First Nation filed a new petition in the Supreme Court of British Columbia against the British Columbia Minister of Energy, Mine and Petroleum Resources and TCM making similar allegations to those discussed above in relation to a new permit amendment and new water license granted to TCM in March 2012 for the Endako Mine. In April 2012, the parties agreed to put this matter into abeyance. However, in January 2013 the Stellat'en First Nation indicated that they wish to proceed with this new petition. No date for hearing the new petition has been set.
ITEM 4. MINE SAFETY DISCLOSURES
Under Section 1503(a) of the Dodd-Frank Wall Street Reform and Consumer Protection Act, mine operators are required to include in their periodic reports filed with the SEC certain information concerning mine safety violations and other regulatory matters. The required information is included in Exhibit 95 to this report.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUERS PURCHASES OF EQUITY SECURITIES
Price Range of Common Stock
Our common stock is listed on the New York Stock Exchange ("NYSE") under the symbol "TC" and the Toronto Stock Exchange ("TSX") under the symbol "TCM". On February 22, 2013, there were 169,872,817 shares of our common stock outstanding, which were held by 51 stockholders of record.
The following table sets forth information relating to the high and low sales prices of our common stock on the NYSE and TSX for the quarterly periods indicated.
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Price Range of Common Stock | ||||||||||
NYSE (US$) | TSX (C$) | |||||||||
High | Low | High | Low | |||||||
2011 | 1st quarter | 16.06 | 11.27 | 15.43 | 11.09 | |||||
2nd quarter | 13.63 | 9.21 | 13.05 | 9.02 | ||||||
3rd quarter | 10.43 | 5.98 | 10.10 | 6.25 | ||||||
4th quarter | 7.67 | 5.44 | 7.72 | 5.79 | ||||||
2012 | 1st quarter | 9.50 | 6.57 | 9.43 | 6.56 | |||||
2nd quarter | 6.97 | 3.06 | 6.89 | 3.13 | ||||||
3rd quarter | 3.87 | 2.25 | 3.76 | 2.23 | ||||||
4th quarter | 4.29 | 2.48 | 4.26 | 2.45 | ||||||
Dividends
We have not declared or paid any dividends on our common stock since the date of our formation. We intend to retain our earnings, if any, to finance the growth and development of our business and have no present intention of paying dividends or making any other distributions in the foreseeable future. In addition, the indenture governing our senior notes contains covenants restricting our ability to pay dividends to our shareholders.
Stock Performance Graph
The following graph compares the cumulative total shareholder return for C$100 invested in our common stock on December 31, 2007 against the cumulative total shareholder return of the S&P/TSX Composite Index and the S&P CompositeIndex—Materials for our five most recently completed years, assuming the reinvestment of all dividends:
December 31, | ||||||||||||
2007 | 2008 | 2009 | 2010 | 2011 | 2012 | |||||||
Thompson Creek Metals Company Inc. | $100.00 | $28.86 | $72.61 | $85.98 | $41.93 | $24.26 | ||||||
S&P/TSX Composite Index | $100.00 | $67.00 | $90.48 | $106.41 | $97.14 | $104.13 | ||||||
S&P/TSX Composite Index—Materials | $100.00 | $73.52 | $98.64 | $134.69 | $106.13 | $100.11 | ||||||
The foregoing performance graph and related information shall not be deemed "soliciting material" or "filed" with the SEC or be subject to Section 18 of the Securities Exchange Act of 1934, as amended, nor shall such information be incorporated by reference into any future filing under the Securities Act of 1933 or the Securities Exchange Act of 1934, each as amended, except to the extent that we specifically incorporate it by reference into such filing.
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ITEM 6. SELECTED FINANCIAL DATA
The following selected consolidated financial data is derived from our audited consolidated financial statements included in this report and our other reports filed with the SEC. The consolidated financial statements presented herein have been prepared in accordance with accounting principles generally accepted in the United States ("US GAAP"). These historical results are not necessarily indicative of results for any future period. The following table includes non-GAAP financial measures "adjusted net (loss) income," "adjusted net (loss) income per share—basic," and "adjusted net (loss) income per share—diluted." For a definition of these non-GAAP measures and a reconciliation to the most directly comparable financial measure calculated and presented in accordance with US GAAP, please read Non-GAAP Financial Measures in Item 7.
______________________________________________________________________________
Years Ended December 31, | ||||||||||||||||||||
2012 | 2011 | 2010 | 2009 | 2008 | ||||||||||||||||
(US dollars in millions, except per share amounts) | ||||||||||||||||||||
Statement of Operations Data: | ||||||||||||||||||||
Revenue | ||||||||||||||||||||
Molybdenum sales | $ | 386.8 | $ | 651.9 | $ | 578.6 | $ | 361.9 | $ | 992.2 | ||||||||||
Tolling, calcining and other | 14.6 | 17.2 | 16.2 | 11.5 | 19.2 | |||||||||||||||
Total revenues | 401.4 | 669.1 | 594.8 | 373.4 | 1,011.4 | |||||||||||||||
Costs and expenses: | ||||||||||||||||||||
Cost of sales | ||||||||||||||||||||
Operating expenses | 380.0 | 392.8 | 315.5 | 241.3 | 556.9 | |||||||||||||||
Depreciation, depletion and amortization | 64.0 | 74.7 | 49.9 | 43.4 | 40.5 | |||||||||||||||
Total cost of sales | 444.0 | 467.5 | 365.4 | 284.7 | 597.4 | |||||||||||||||
Selling and marketing | 8.0 | 9.7 | 9.3 | 7.5 | 12.5 | |||||||||||||||
Accretion expense | 2.3 | 1.9 | 1.5 | 1.4 | 1.7 | |||||||||||||||
Fixed asset impairment | 530.5 | — | — | — | — | |||||||||||||||
General and administrative | 27.6 | 26.5 | 21.9 | 23.8 | 35.5 | |||||||||||||||
Acquisition costs | — | — | 12.9 | — | — | |||||||||||||||
Exploration | 2.2 | 14.2 | 9.4 | 6.3 | 8.0 | |||||||||||||||
Total costs and expenses | 1,014.6 | 519.8 | 420.4 | 323.7 | 655.1 | |||||||||||||||
Operating (loss) income | (613.2 | ) | 149.3 | 174.4 | 49.7 | 356.3 | ||||||||||||||
Other expense (income) | 44.2 | (154.0 | ) | 40.5 | 103.7 | 58.9 | ||||||||||||||
Income and mining tax (benefit) expense | (111.1 | ) | 11.2 | 20.2 | 2.0 | 124.3 | ||||||||||||||
Net (loss) income | $ | (546.3 | ) | $ | 292.1 | $ | 113.7 | $ | (56.0 | ) | $ | 173.1 | ||||||||
Net (loss) income per share | ||||||||||||||||||||
—basic | $ | (3.24 | ) | $ | 1.75 | $ | 0.79 | $ | (0.44 | ) | $ | 1.45 | ||||||||
—diluted | $ | (3.24 | ) | $ | 1.73 | $ | 0.75 | $ | (0.44 | ) | $ | 1.31 | ||||||||
Basic weighted-average shares outstanding | 168.4 | 167.2 | 144.7 | 127.5 | 119.5 | |||||||||||||||
Diluted weighted-average shares outstanding | 168.4 | 168.6 | 152.5 | 127.5 | 131.7 | |||||||||||||||
Adjusted Non-GAAP Measures:(a) | ||||||||||||||||||||
Adjusted net (loss) income(a) | $ | (34.7 | ) | $ | 122.9 | $ | 163.3 | $ | 37.4 | $ | 241.3 | |||||||||
Adjusted net (loss) income per share—basic(a) | $ | (0.20 | ) | $ | 0.74 | $ | 1.13 | $ | 0.29 | $ | 2.02 | |||||||||
Adjusted net (loss) income per share—diluted(a) | $ | (0.20 | ) | $ | 0.73 | $ | 1.08 | $ | 0.29 | $ | 1.83 | |||||||||
Other Financial Data: | ||||||||||||||||||||
Cash (used) generated by operating activities | $ | (82.8 | ) | $ | 202.7 | $ | 157.4 | $ | 105.9 | $ | 389.0 | |||||||||
Capital expenditures | $ | 722.3 | $ | 686.6 | $ | 213.7 | $ | 66.1 | $ | 101.3 | ||||||||||
Balance Sheet Data as of December 31: | ||||||||||||||||||||
Cash and cash equivalents | $ | 526.8 | $ | 294.5 | $ | 316.0 | $ | 158.5 | $ | 258.0 | ||||||||||
Short-term investments | — | — | $ | — | $ | 353.0 | — | |||||||||||||
Total assets | $ | 3,410.2 | $ | 2,994.2 | $ | 2,317.7 | $ | 1,344.6 | $ | 1,046.4 | ||||||||||
Total debt, including capital lease obligations | $ | 1,010.5 | $ | 374.9 | $ | 22.0 | $ | 12.9 | $ | 17.3 | ||||||||||
Total liabilities | $ | 2,008.3 | $ | 1,264.7 | $ | 887.8 | $ | 359.2 | $ | 255.8 | ||||||||||
Shareholders' equity | $ | 1,401.9 | $ | 1,729.5 | $ | 1,429.9 | $ | 985.4 | $ | 790.6 | ||||||||||
(a) | See Non-GAAP Financial Measures in Item 7 for the definition and reconciliation of these non-GAAP measures. |
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This Management's Discussion and Analysis ("MD&A") provides information that management believes is relevant to an assessment and understanding of the consolidated financial condition and results of operations of Thompson Creek Metals Company Inc. and its subsidiaries (collectively, "Thompson Creek," "TCM," "we," "us" or "our") for the three years ended December 31, 2012, and should be read in conjunction with the Consolidated Financial Statements and accompanying notes thereto in Item 8 and Risk Factors in Item 1A. The following discussion and analysis contains "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and is intended to be covered by the safe harbor created thereby. See the discussion in Forward-Looking Statements in Item 1, Business.
The results of operations reported and summarized below are not necessarily indicative of future operating results. Throughout this MD&A, all references to earnings or losses per share are on a diluted basis, unless otherwise noted. The consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States ("US GAAP"). All dollar amounts are expressed in United States dollars ("US$") unless otherwise indicated. References to C$ refers to Canadian dollars. Future Canadian to US foreign exchange rates are assumed to be C$1.00 = US$1.00. Additional information on Thompson Creek Metals Company Inc. is available on EDGAR at www.sec.gov or on SEDAR at www.sedar.com.
Overview
We are a growing, diversified North American mining company. We are a significant molybdenum supplier to the global steel and chemicals sectors. We are diversifying into copper and gold with the construction and development of our Mt. Milligan project (“Mt. Milligan”) in British Columbia, which is expected to start-up in the third quarter of 2013 and to go into commercial production in the fourth quarter of 2013.
Our principal molybdenum producing properties are the Thompson Creek Mine, an open-pit molybdenum mine and concentrator in Idaho (the "TC Mine"), the Endako Mine, an open-pit molybdenum mine, concentrator and roaster in British Columbia (in which we own a 75% joint venture interest) (the “Endako Mine”) and the Langeloth metallurgical facility in Pennsylvania (the “Langeloth Facility”). In March 2012, we completed a mill expansion project at the Endako Mine. The new mill, which replaced a 1960s-era mill, increased ore processing capacity from 31,000 tons per day to 55,000 tons per day.
Mt. Milligan will be an open-pit copper and gold mine and concentrator. Mt. Milligan is designed to be a conventional truck-shovel open-pit mine with a 66,000-ton per day copper flotation processing plant. Mt. Milligan has estimated average annual production over the life of the mine of 81 million pounds of copper and 194,500 ounces of gold, each in concentrate.
We also have a copper, molybdenum and silver exploration project located in British Columbia (the "Berg property"); an underground molybdenum exploration property located in British Columbia (the "Davidson property"); and a joint venture gold exploration project located in Nunavut, Canada (the "Maze Lake property").
During 2012, we realized a net loss of $546.3 million, primarily as a result of a $530.5 million non-cash write down of our share of the property, plant, equipment and development assets at the Endako Mine and a non-cash goodwill impairment loss of $47.0 million, representing the remaining balance of goodwill. Our share of the remaining fixed assets at the Endako Mine was $189.5 million as of December 31, 2012.
We realized an operating loss in 2012 of $613.2 million, primarily as a result of the fixed asset write down at the Endako Mine. This operating loss also resulted from declining molybdenum market prices, lower production and higher unit costs from our mines, as well as lower-of-cost-or-market product inventory write downs of $73.8 million (of which $52.6 million was recognized in operating expenses and $21.2 million was recognized in depreciation, depletion and amortization) during 2012, and significantly lower sales volumes from our mines in 2012 due to lower production volumes. Production and costs during 2012 were negatively impacted by lower-than-anticipated ore grades and mill recovery rates at the Endako Mine and planned mine pit sequencing and waste stripping activities at the TC Mine, as explained further below.
Given the significant decline in molybdenum prices during 2012 and the performance of our two mines, we closely monitored and evaluated potential write downs throughout the year. During the third quarter of 2012, we suspended waste stripping activity associated with the next phase of production at TC Mine. This decision and the decline in molybdenum prices represented significant changes in our business, requiring us to evaluate for potential impairments on an enterprise-wide basis at September 30, 2012. For purposes of the impairment evaluation, management considered estimates of after-tax discounted future cash flows of the individual reporting units, life-of-mine plans developed using long-term analyst pricing reflective of
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the then-current price environment, management's projections for operating costs and the market value of our equity. As a result of this evaluation, an impairment charge of $47.0 million, representing the remaining balance of goodwill, was recorded.
During the fourth quarter of 2012, both management's view of future molybdenum prices and the long-term analyst view of molybdenum prices were adjusted further downward. In addition, due to certain operational issues at Endako Mine, as discussed further below, we revised our operating plan for Endako for 2013, and these revisions impacted the Endako life-of-mine plan. Combined, these events constituted a triggering event, requiring us to evaluate our long-lived assets for impairment. In accordance with US GAAP, potential long-lived asset impairments are assessed pursuant to a two-step approach. In evaluating potential long-lived asset impairments, the first step compares the carrying value of the reporting unit to its fair value computed using undiscounted estimated future cash flows from the reporting unit. If the carrying value of the assets being tested is greater than the undiscounted cash flows from that asset, then step two requires that we evaluate those assets for impairment. The amount of the impairment is recorded based on the difference between the book value and the estimated fair value of the asset computed using discounted estimated future cash flows. While the Endako Mine assets were evaluated during third quarter, no impairment loss on the Endako assets was taken during the third quarter as the anticipated undiscounted cash flows from the Endako Mine assets exceeded their carrying values (step 1). After the fourth quarter triggering event, this evaluation indicated that the anticipated undiscounted cash flows from the Endako Mine assets (step 1) were less than their carrying values. As a result, we were required, under US GAAP, to measure the impairment loss (step 2) by comparing the carrying values of the Endako Mine assets to their discounted estimated future cash flows. This evaluation resulted in a pre-tax non-cash write down of our share of the Endako property, plant, equipment and development assets of $530.5 million in the fourth quarter of 2012. Our impairment analysis did not result in any other long-lived asset impairments as of December 31, 2012. However, there can be no assurance that there will not be further asset write downs if we continue to experience operational challenges and/or if commodity prices further decline.
At the Endako Mine, we experienced lower-than-anticipated ore grades and recovery during 2012. In addition, in late December 2012 and thus far in 2013, we experienced and are experiencing tailings management issues associated with frozen water in the tailings pond. We have been unable to feed sufficient water from the tailings pond to the new mill on a consistent basis, which has negatively impacted the rate and level of throughput of mined material to the mill and thus our production of molybdenum. These issues led us to revise our operating plan for the Endako Mine for 2013. As of the date of this report, we have made modifications to the piping of tailings to the pond and have instituted other tailings management procedures to address these issues to ensure the availability of a sufficient supply of water to the mill for the future winter seasons beyond 2013.
During the first half of 2012 and the last half of 2011, our TC Mine production was negatively impacted by planned mine pit sequencing in the transition from one phase of the mine plan (Phase 6) to the next (Phase 7). These planned sequencing activities included stripping and mining of significantly lower grade ore that resulted in lower mill throughput and lower mill recovery. During this planned mine sequencing, cash costs were higher and production was lower than in 2010 and the first half of 2011 when we mined high grade ore primarily in the bottom of the pit and consequently achieved record molybdenum production.
In an effort to reduce costs at the TC Mine, given recent declines in molybdenum prices and projected operating costs at TC Mine for 2015 and thereafter, in October 2012, we suspended waste stripping activity associated with the next phase of production (Phase 8). This change in the mine plan resulted in a decline in cash costs and an increase in production during the fourth quarter of 2012 compared with the first nine months of that year. We expect this revision to the mine plan to defer approximately $100 million in operating costs and $8-$9 million in capital expenditures through the end of 2014. Mining operations and production are expected to continue as planned through 2014 in the current Phase 7 of the mine. We also expect to preserve the assets at TC Mine to enable us to restart waste stripping of Phase 8 of the mine plan when market conditions warrant. If waste stripping has not recommenced by 2015, we expect that the mine would be placed on care and maintenance.
At December 31, 2012, we estimated future capital project cash expenditures of approximately C$390.0 million for the Mt. Milligan project (through completion) plus an additional C$40.0 million to C$50.0 million of estimated future cash capital expenditures for a permanent operations residence at Mt. Milligan, which is expected to be completed in 2014. We believe that we have solidified our ability to finance these capital project expenditures with our $526.8 million of consolidated cash and cash equivalents, the expected remaining proceeds from Royal Gold (as defined below in Liquidity and Capital Resources) of $111.9 million, the $42.5 million net funding available under our equipment lease financing facility for the mobile mining fleet at Mt. Milligan and our ongoing expected cash flow from operations.
Our ability to fund the completion of the Mt. Milligan project, satisfy our working capital needs and make our scheduled debt and interest payments depends on our future operating performance and cash flow (including a successful start-up of Mt. Milligan in the last half of 2013); average realized molybdenum, gold and copper prices and our ability to access our current
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funding sources, including our equipment lease financing and our Gold Stream Arrangement (as defined below in Liquidity and Capital Resources) with Royal Gold.
Highlights 2012
• | Net loss for 2012 was $546.3 million, or $3.24 per share, which included a $530.5 million, or $3.15 per share, pre-tax non-cash write down of our share of the property, plant, equipment and development assets at the Endako Mine; a goodwill impairment loss of $47.0 million, or $0.28 per share; lower-of-cost-or-market product inventory write downs of $73.8 million, or $0.44 per share; and additional interest and finance fees related to the termination of our revolving credit facility of $7.1 million, or $0.04 per share. These items were partially offset by a foreign exchange gain, which was primarily unrealized, of $12.2 million, or $0.07 per share, and a deferred tax benefit of $105.7 million, or $0.63 per share. Net income for 2011 was $292.1 million, or $1.73 per share, which included a non-cash unrealized gain on common stock purchase warrants of $169.2 million, or $1.00 per share, lower-of-cost-or-market product inventory write downs of $24.9 million, or $0.15 per share, and a foreign exchange loss of $13.1 million, or $0.08 per share. |
• | Non-GAAP adjusted net loss for 2012 (which excludes the after-tax fixed asset write down and goodwill impairment loss of $513.4 million and a $1.8 million non-cash unrealized gain on the warrants) was $34.7 million, or $0.20 per share. Non-GAAP adjusted net income in 2011 was $122.9 million, or $0.73 per share. See "Non-GAAP Financial Measures" below for the definition and reconciliation of adjusted net (loss) income. |
• | Consolidated revenues for 2012 were $401.4 million, down approximately 40.0% from $669.1 million in 2011, as a result of a 28.4% decrease in molybdenum pounds sold and a decrease in average realized sales prices of 17.2%. The average realized sales price for molybdenum in 2012 was $13.48 per pound compared to $16.28 per pound in 2011. |
• | Consolidated operating loss was $613.2 million in 2012 compared to consolidated operating income of $149.3 million in 2011. Consolidated operating loss in 2012 was impacted by the Endako Mine asset pre-tax write down of $530.5 million and lower-of-cost-or-market product inventory write downs of $73.8 million (of which $15.6 million related to US inventory and $58.2 million related to the Endako Mine inventory), which was primarily the result of declining molybdenum market prices, lower production and higher unit costs from our mines. Consolidated operating income in 2011 was also impacted by lower-of-cost-or-market product inventory write downs of $24.9 million (of which $12.3 million related to US inventory and $12.6 million related to the Endako Mine inventory). |
• | Mined molybdenum production for 2012 was 22.4 million pounds, down 20.9% from 28.3 million pounds in 2011, primarily as a result of lower production at the TC Mine as a result of significantly lower ore grades in 2012, as well as significantly lower ore grades and mill recoveries at the Endako Mine during 2012. |
• | Non-GAAP average cash cost per pound produced for 2012 was $10.09 per pound compared to $7.94 per pound in 2011 primarily due to lower production from both of our mines. In addition, cash costs include stripping costs at the TC Mine of $28.6 million, or $1.76 per pound, for 2012 compared to $53.3 million, or $2.50 per pound, for 2011. The cash costs for 2012 exclude $5.5 million of start-up and commissioning costs at the Endako Mine. See "Non-GAAP Financial Measures" below for the definition and calculation of cash cost per pound produced. |
• | Operating cash used was $82.8 million in 2012, compared to operating cash generated of $202.7 million in 2011. |
• | Capital costs on a cash basis incurred for 2012 were $722.3 million, comprised of $610.9 million for the development of Mt. Milligan; $72.9 million of capital costs for the mill expansion project at the Endako Mine (which represents our 75% share); and $38.5 million of other capital costs for the Endako and TC Mines, the Langeloth Facility and corporate combined. The capital costs on a cash basis for 2012 exclude capitalized interest and debt issuance costs of $45.8 million (net of effect of Endako Mine asset pre-tax write down), changes in accrued amounts of $72.0 million, capital lease activity of $68.1 million, and capitalized depreciation of $4.8 million. The capital costs on a cash basis for the mill expansion at the Endako Mine exclude our share of start-up and commissioning costs of $5.5 million. |
• | Total cash and cash equivalents at December 31, 2012 were $526.8 million, compared to $294.5 million as of December 31, 2011. Total debt as of December 31, 2012 was $1,010.5 million, including capital lease obligations, compared to $374.9 million as of December 31, 2011. |
Outlook
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Our financial results can vary significantly as a result of fluctuations in the market prices of molybdenum. World market prices for molybdenum have fluctuated historically and are affected by numerous factors beyond our control. During the fourth quarter of 2012, the average Platts Metals Week published price for molybdenum oxide was $11.17 per pound, compared to $11.93 per pound in the third quarter of 2012, $13.83 per pound in the second quarter of 2012 and $14.17 per pound in the first quarter of 2012. While the monthly average price for molybdenum oxide for January 2013 was higher than at December 31, 2012 (equaling $11.80 per pound as published by Platts Metals Week), since mid-January 2013, the monthly average price for molybdenum oxide has declined. We anticipate that the price for molybdenum oxide will continue to be volatile. Any significant weakness in demand for molybdenum or reduction in molybdenum prices may have a material adverse effect on our operating results, cash flows and financial condition.
In late December 2012 and thus far in 2013, we experienced and are experiencing tailings management issues associated with frozen water in the tailings pond. We have been unable to feed sufficient water from the tailings pond to the new mill on a consistent basis due to winter conditions, which has negatively impacted the rate and level of throughput of mined material to the mill and thus our production of molybdenum. We expect that these issues will have a negative effect on our production and financial results from the Endako Mine in the first quarter of 2013. As of the date of this report, we have made modifications to the piping of tailings to the pond and have instituted other tailings management procedures to address these issues to ensure the availability of a sufficient supply of water to the mill for the future winter seasons beyond 2013.
The key operating measures that management focuses on in operating our business are production, cash costs per pound produced and capital expenditures. We continually review our operating strategy as commodity market conditions change.
We increased molybdenum inventory throughout 2012 by approximately 5 million pounds as our production volume exceeded our sales contract volumes. This excess production is expected to be sold over the course of 2013.
We anticipate that the completion and start-up of Mt. Milligan will take place in the third quarter of 2013, with commercial production of copper and gold beginning in the fourth quarter of 2013. We expect average annual production to be higher during the first full 6 years of production (approximately 89 million pounds of copper and 262,000 ounces of gold both in concentrate), compared to annual life-of-mine production. We will provide production and cash cost guidance for 2014 once Mt. Milligan is operational.
Years Ended December 31, | ||||||||||
2012 (Actual) | 2013 (Estimated) | 2014 (Estimated) | ||||||||
Molybdenum production (000's lb):(1) | ||||||||||
TC Mine | 16,238 | 20,000 - 22,000 | 17,000 - 19,000 | |||||||
Endako Mine (75% share) | 6,191 | 7,500 - 8,500 | 10,500 - 11,500 | |||||||
Total molybdenum production (000's lb) | 22,429 | 27,500 - 30,500 | 27,500 - 30,500 | |||||||
Cash cost ($/lb produced):(2) | ||||||||||
TC Mine | $ | 8.06 | $ 4.75 - 5.75 | $ 5.00 - 6.00 | ||||||
Endako Mine | 15.42 | 10.75 - 12.25 | 9.00 - 10.50 | |||||||
Total cash cost ($/lb produced) | $ | 10.09 | $ 6.50 - 7.50 | $ 6.50 - 7.75 | ||||||
Capital expenditures (in millions): | ||||||||||
Mt. Milligan(3),(4),(5),(6) | $ | 679.0 | $ 370 - 390 | — | ||||||
Mt. Milligan permanent operations residence | — | $ 35 - 40 | $ 5 - 10 | |||||||
Mt. Milligan operations | — | $ 20 - 30 | $ 20 - 30 | |||||||
Endako mill expansion (TCM share)(3),(4) | 78.4 | — | — | |||||||
TC and Endako Mines, Langeloth & other(3),(4) | 38.5 | 15 - 20 | 30 - 40 | |||||||
Total capital expenditures | $ | 795.9 | $ 440 - 480 | $ 55 - 80 | ||||||
_______________________________________________________________________________
(1) | Mined production pounds reflected are molybdenum oxide and high performance molybdenum disulfide (“HPM”) from our share of production from the mines but exclude molybdenum processed from purchased product. |
(2) | Weighted-average of the TC Mine and the Endako Mine (75% share) cash costs (mining, milling, mine site administration, roasting and packaging) for molybdenum oxide and HPM produced in the period, including all |
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stripping costs. Cash cost excludes: the effect of purchase price adjustments; the effects of changes in inventory; corporate allocations; stock-based compensation; other non-cash employee benefits; depreciation, depletion, amortization and accretion; and commissioning and start-up costs for the Endako mill. The cash cost for the TC Mine, which only produces molybdenum sulfide and HPM on site, includes an estimated molybdenum loss (sulfide to oxide), an allocation of roasting and packaging costs from the Langeloth Facility and transportation costs from the TC Mine to the Langeloth Facility. See “Non-GAAP Financial Measures” for additional information.
(3) | Excludes capitalized interest and debt issuance costs of $45.8 million (net of the effect of the Endako Mine pre-tax asset write down) and excludes changes in accruals of $72.0 million for the year ended December 31, 2012. The 2012 amounts include our share of start-up and commissioning costs for the Endako mill of $5.5 million. |
(4) | Canadian to US foreign exchange rate for 2013 and 2014 assumed at parity (C$1.00 = US$1.00). |
(5) | Includes non-cash capital lease activity of $68.1 million. |
(6) | Includes capital expenditures incurred during production ramp up. |
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Selected Consolidated Financial and Operational Information
(US$ in millions, except per share and per pound amounts)
Three Months Ended December 31, | Years Ended December 31, | |||||||||||||||||||
2012 | 2011 | 2012 | 2011 | 2010 | ||||||||||||||||
(unaudited) | ||||||||||||||||||||
Financial Information | ||||||||||||||||||||
Revenues | ||||||||||||||||||||
Molybdenum sales | $ | 95.0 | $ | 112.9 | $ | 386.8 | $ | 651.9 | $ | 578.6 | ||||||||||
Tolling, calcining and other | 4.4 | 3.8 | 14.6 | 17.2 | 16.2 | |||||||||||||||
Total revenues | 99.4 | 116.7 | 401.4 | 669.1 | 594.8 | |||||||||||||||
Costs and expenses | ||||||||||||||||||||
Cost of sales | ||||||||||||||||||||
Operating expenses | 83.9 | 107.9 | 380.0 | 392.8 | 315.5 | |||||||||||||||
Depreciation, depletion and amortization | 15.9 | 15.4 | 64.0 | 74.7 | 49.9 | |||||||||||||||
Total cost of sales | 99.8 | 123.3 | 444.0 | 467.5 | 365.4 | |||||||||||||||
Selling and marketing | 2.0 | 1.6 | 8.0 | 9.7 | 9.3 | |||||||||||||||
Accretion expense | 0.7 | 0.5 | 2.3 | 1.9 | 1.5 | |||||||||||||||
Fixed asset impairment | 530.5 | — | 530.5 | — | — | |||||||||||||||
General and administrative | 7.0 | 6.3 | 27.6 | 26.5 | 21.9 | |||||||||||||||
Acquisition costs | — | — | — | — | 12.9 | |||||||||||||||
Exploration | 0.3 | 3.1 | 2.2 | 14.2 | 9.4 | |||||||||||||||
Total costs and expenses | 640.3 | 134.8 | 1,014.6 | 519.8 | 420.4 | |||||||||||||||
Operating (loss) income | (540.9 | ) | (18.1 | ) | (613.2 | ) | 149.3 | 174.4 | ||||||||||||
Other expense (income) | 15.7 | (9.1 | ) | 44.2 | (154.0 | ) | 40.5 | |||||||||||||
Income (loss) before income and mining taxes | (556.6 | ) | (9.0 | ) | (657.4 | ) | 303.3 | 133.9 | ||||||||||||
Income and mining tax (benefit) expense | (72.2 | ) | (9.8 | ) | (111.1 | ) | 11.2 | 20.2 | ||||||||||||
Net (loss) income | $ | (484.4 | ) | $ | 0.8 | $ | (546.3 | ) | $ | 292.1 | $ | 113.7 | ||||||||
Net (loss) income per share | ||||||||||||||||||||
Basic | $ | (2.87 | ) | $ | — | $ | (3.24 | ) | $ | 1.75 | $ | 0.79 | ||||||||
Diluted | $ | (2.87 | ) | $ | — | $ | (3.24 | ) | $ | 1.73 | $ | 0.75 | ||||||||
Cash (used) generated by operating activities | $ | (46.7 | ) | $ | 21.1 | $ | (82.8 | ) | $ | 202.7 | $ | 157.4 | ||||||||
Adjusted Non-GAAP Measures:(1) | ||||||||||||||||||||
Adjusted net (loss) income (1) | $ | (18.0 | ) | $ | — | $ | (34.7 | ) | $ | 122.9 | $ | 163.3 | ||||||||
Adjusted net (loss) income per share—basic(1) | $ | (0.11 | ) | $ | — | $ | (0.20 | ) | $ | 0.74 | $ | 1.13 | ||||||||
Adjusted net (loss) income per share—diluted(1) | $ | (0.11 | ) | $ | — | $ | (0.20 | ) | $ | |||||||||||