Message to Shareholders
April 7, 2011We look back on 2010 as a transformative year, in which two successful, entrepreneurial Canadian base metal companies combined to create a new, mid-tier copper focused mining company - Quadra FNX Mining Ltd. The merger of equals between Quadra Mining Ltd. and FNX Mining Company Inc. was overwhelmingly approved by our respective shareholders at a Special Meeting held in May 2010. There are many benefits to this merger including expansion and diversification of the production portfolio, a combined company with all the core skills required to grow the business across the spectrum from exploration to marketing, an augmented and complementary management team and board, and a strong balance sheet. This robust platform and increased financial capacity provides us with the critical mass to grow organically through our pipeline of projects and through accretive M&A opportunities as they occur.
After a pause during the first half of the year, copper prices continued to recover from the global recession that led to an associated commodity price collapse in late 2008. Overall, the copper price appreciated approximately 30% in 2010, with the spot price starting the year at US$3.38 per pound, touching a low of US$2.75 in June and reaching a record US$4.41 per pound by year end. As a result of this improved environment, as well as the increase in copper production from the combined asset base, Quadra FNX enjoyed record financial performance in 2010. Earnings increased 114% to US$173 million or US$1.11 per share from US$81 million or US$0.89 per share in the previous year, and revenues doubled to just under US$1 billion (US$958 million) from US$479 million in 2009. The average operating cost, net of by-product credits was US$1.57 per pound of copper produced. Our balance sheet also reaped the benefits of a strong metal market and the sale of our holding in Gold Wheaton at the end of the year. Initial proceeds of C$263 million were received in January 2011, and contingent proceeds of C$31 million were received in March, which when received increased our cash balance to approximately US$600 million.
Operating results during 2010 were strong at the underground operations, and our newest asset, the Morrison Deposit achieved commercial production in September. Results however were mixed at the open pit operations which had to work around a mixture of weather, geological and production challenges. By the end of the year, significant progress was made in resolving these issues. Overall production for the year was 224 million pounds of copper, 148 thousand ounces of precious metals and 7 million pounds of nickel.
During the year, we made excellent progress on our two primary development projects, Sierra Gorda in Chile and Victoria in Sudbury, Ontario. These projects are the future of the company and both will be long life, low cost producers.
The Sierra Gorda Financing Study, which establishes the capital and operating costs for the project, together with the development parameters, was the focus for 2010 and was subsequently completed by the end of the first quarter of 2011. The NI 43-101 compliant Feasibility Study is expected to be completed in the second quarter of 2011. Discussions with potential partners were ongoing through 2010 and continue to progress well. We remain confident that a partnership and financing structure will also be in place by mid-2011. Approval of the environmental permit remains on track for the end of June. Orders were placed for the mining equipment during the year in order to allow pre-stripping to commence in early 2012, and our focus now is on detailed engineering and procuring long lead time process equipment. Our target for commencement of production remains the year 2014.
The Victoria project was discovered in 2008, and in 2010 our exploration team delineated additional zones including Zone 4, which showed continuity of high grade mineralization of over 3,000 feet, making Victoria one of the most important discoveries in the Sudbury district in recent times. Our next steps will be to develop an inferred resource, and beyond this, to develop a shaft in order to continue exploration from underground. Such a shaft would ultimately be one of two required for commercial production. To this end, we are advancing permitting, First Nations consultations and discussions with all stakeholders as well as Vale on processing terms and their potential back-in right.
No less important than our financial and operational performance, is our safety performance. Safety is a key part of who we are, what we do and the way that we do it. It has long been established that the best mines are the safest mines and that the safest mines are the best mines in terms of many metrics including production. We achieved a number of important milestones in 2010 including zero lost time accidents at the underground operations in Sudbury and a total reportable incident rate, or TRIR, of 1.8 at the open pit operations, which compares to 2.1 for U.S. surface mines. Our contract mining division, DMC Mining, maintained a TRIR of 2.3 compared to 4.1 for Ontario mine contractors. Having said this, we will continue to strive for Zero Harm -- a core corporate value that also extends to the environment and to the communities where we operate.
In the near term, we will continue to optimize our existing operations and to ramp up the Morrison Deposit. In the longer term, our strategy is to increase our annual output to 500 million pounds of copper from multiple operations. We already have diversity of production and low risk political exposure, with six operating mines in the jurisdictions of Canada, USA and Chile and as our pipeline projects move into production, they will allow us to reach this goal. Our critical mass will also provide the ability to deliver meaningful growth through M&A at the single transaction level.
On behalf of the Board, I would like to thank you, our shareholders, for your ongoing support. I would also like to thank our employees for their commitment and operational ingenuity in delivering the results that generate value for our shareholders, and also for their patience and loyalty during the integration period, always a difficult time. I believe we have integrated two highly skilled and complementary teams with a common culture and a shared entrepreneurial spirit. We believe that spirit sets us apart from our peer group and that our shared values, our dedication and our experience has equipped us to judge properties, events and situations, to take carefully calculated risks, and to make decisions that deliver.
Paul M. Blythe, President & CEO
CAUTIONARY STATEMENT ON FORWARD-LOOKING INFORMATION
Certain information appearing in this letter constitutes forward looking information. Forward looking information is subject to known and unknown risks, uncertainties and other factors, including potentially inaccurate assumptions, which may cause the actual results, performance or achievements to be materially different from the results, performance or achievements expected or implied by the forward looking information.
For additional disclosure about the Company, including a detailed discussion of the risks, assumptions and uncertainties relating to the Company's activities, please see our Annual Information Form, Financial Statements and other materials available from www.sedar.com or our website, www.quadrafnx.com.