Constellation Copper Reports Delayed Third Quarter
2007 Financial Results
Denver, Colorado, January 11, 2008 - Constellation Copper Corporation ("Constellation" or the "Company") (TSX: CCU) announced today its financial results for the quarter ended September 30, 2007. The Company's management had previously determined it was impractical to meet the original filing requirements and provide meaningful unaudited financial statements until a management evaluation was completed. All dollar amounts are in US dollars unless otherwise stated.
Recent developments
-
A comprehensive management evaluation of Lisbon Valley completed in late November 2007 resulted in the conversion to a "leach only" operation and planned cessation of normal mining operations at the end of January 2008. In connection with the decision and due to a variety of operating factors, the Company recorded an asset impairment of $92.9 million.
-
The Company is amending its commodity swap arrangements to defer $5.1 million of settlement payments and also to close-out approximately 7.5 million pounds of copper forward sales at a fixed price of $3.08 per pound.
-
In November 2007, the Company revised its copper offtake agreement to simplify pricing and reduce uncertainty of volatile copper markets.
-
Lisbon Valley production in the third quarter of 2007 was 4,433,000 pounds of copper cathode at a cash cost of $1.77 per pound, excluding royalties and taxes of $0.04 per pound.
-
Copper sales during the third quarter of 2007 were 4,693,000 pounds at an average price of $3.42 per pound.
-
Copper production at Lisbon Valley was 4,090,000 pounds for the fourth quarter of 2007 and 19,773,000 pounds for the full year of 2007.
-
A preliminary economic assessment ("PEA") for the San Javier property in Sonora, Mexico was completed in December 2007, indicating the project is both technically and economically feasible.
-
Limited engineering and evaluation activities continued at the Terrazas property in Chihuahua, Mexico.
Going concern and liquidity
Since achieving commercial production on November 1, 2006, the Company has a history of operating losses and negative cash flows due to insufficient copper production at Lisbon Valley. Recovery of copper from the heap leach process has been significantly slower than anticipated in the original feasibility studies and cash flow assumptions, resulting in continued requirements to fund increases to in-process inventories. Since inception, the Lisbon Valley mine has experienced operating difficulties and high maintenance costs primarily relating to its crushing and material handling systems. Extended periods of cold weather and greater than normal precipitation also have resulted in delays and inefficiencies.
In addition to funding working capital, the Company is required to settle forward sales contracts each month at copper prices that are currently significantly lower than the market price of copper. The forward sales contracts, which continue through December 2008, were put in place primarily as a requirement of the Lisbon Valley project financing. In connection with a proposed amendment to the Company's commodity transaction agreement with Investec Bank (UK) Limited ("Investec"), the Company deferred $5,100,000 of forward settlements until no later than December 31, 2008. The Company is required to pay monthly interest on the amount deferred at an annual rate of LIBOR plus 4%. The Company is also required to make interest payments of approximately Cdn.$1.9 million semi-annually in March and September on its outstanding Cdn.$69.0 million 5.5% senior convertible debentures.
In late November 2007, as a result of a comprehensive management evaluation of Lisbon Valley operations, the Company announced its decision to cease mining and crushing activities and convert the Lisbon Valley mine to a leach only operation in early 2008. The evaluation included analyses of various mining plans, waste stripping requirements, contract mining arrangements, available mining equipment, projected copper prices and extensive operating cost and cash flow projections. In connection with the evaluation and conversion to a leach only operation, the Company recorded an asset impairment of $92,918,000.
The remaining Lisbon Valley asset carrying values will be reviewed in subsequent periods and adjusted if it becomes determinable that additional amounts may not be recoverable. Circumstances that could lead to additional impairments include, but are not limited to, lower than expected copper production, lower copper prices, higher than expected operating costs, and an inability to renegotiate material contracts to terms more favorable to the Company. Future adjustments could be material.
At September 30, 2007, the Company had approximately $10,871,000 of cash. The cash balance has been reduced further to approximately $3,200,000 at December 31, 2007 and in order to provide liquidity, the Company is actively pursuing various near term financing alternatives, including bank financing, equity investment, mergers, and sale of certain assets or sale of the entire company. There is significant doubt about the Company's ability to continue as a going concern.
Lisbon Valley
The Lisbon Valley mine has continued to operate below expectations. Copper production was 4,433,000 pounds for the third quarter of 2007, compared to a projection of approximately 4,800,000 pounds. A significant portion of the production shortfall during the 2007 third quarter related to 2.5 days of unscheduled downtime of the solvent extraction electrowinning ("SX-EW") plant as a result of problems with the electrical control and other mechanical systems. This is the first time the SX-EW plant has been out of service for an extended period since commissioning in early 2006. In addition to the process plant downtime, the agglomerator, which mixes crushed ore with sulfuric acid before the ore is loaded onto the leach pad, was out of service for six days in July 2007 for unscheduled maintenance.
During the quarter ended September 30, 2007, the Company loaded 18,859,000 contained pounds of copper on the leach pad, including 7,378,000 contained pounds in primary crushed ore (minus six-inch size) loaded directly to a separate area of the leach pad. Through June 30, 2007, all ore had been processed through the secondary crushing system and agglomerator before being stacked on the leach pad. In July 2007, the Company leased three 100-ton capacity haul trucks and a dozer for a period of six months to haul supplemental ore from the primary crusher to the leach pad. Initially, the truck hauled ore was expected to be predominantly oxide ore. To date, the truck hauled ore has consisted of mostly slower leaching sulfide ore. The results from leaching the primary crushed ore have not been significantly different from stacked ore.
At September 30, 2007, there was only enough pumping capacity at Lisbon Valley to irrigate about half of the ore stacked on the leach pad. In June 2007, the Company began constructing an Intermediate Leach Solution (ILS) pond and distribution system to double the amount of ore under leach. The ILS system was completed in mid-November 2007, as scheduled. The ILS system is expected to increase the grade of the pregnant leach solution (PLS) by re-circulating ("stacking") the low grade solution through previously leached areas of the leach pad before it is processed through the SX-EW plant. The full benefit from the ILS system is not expected to be realized until the second quarter of 2008.
Copper sales were 4,693,000 pounds at an average realized copper price of $3.42 per pound during the third quarter of 2007. The copper price realized during the first and second quarter of 2007 was $2.70 and $3.43 per pound, respectively. Realized copper prices do not include forward sales or put option contract activities.
During October 2007, the Company suspended exploration drilling activities at Lisbon Valley to conserve cash.
In late November 2007, the Company decided to suspend mining and crushing activities and convert the Lisbon Valley mine to a leach only operation. The Company's evaluation included various long-term mining plans given the existing waste to ore stripping ratio requirements and instability in the Centennial open pit wall at Lisbon Valley. The Company also evaluated the cost and benefits of contract mining arrangements and the availability and cost of obtaining additional mining equipment. The evaluation of other operating costs included recent increases to sulfuric acid prices, availability and costs of additions to the work force in a very tight local labor market and continual problems experienced since inception with the mine's material handling systems. In addition, the Company evaluated the results of recent production enhancements, long-term copper price projections and its existing forward sales positions.
The Company expects normal mining operations to continue until the end of January 2008. In connection with the decision to convert to leach only and in compliance with federal requirements, the Company notified approximately 100 employees, including the entire mining and crushing departments, that their positions would be eliminated at or soon after the end of January 2008.
As a result of continued production difficulties and the resultant conversion to leach only, the Company assessed the estimated recoverability of the Lisbon Valley assets and recorded an asset impairment charge of $92,918,000 at September 30, 2007.
Leaching of ore on the leach pad is expected to continue as long as it remains economic, depending on recovery rates, market copper prices and operating costs, including the successful re-negotiation of the terms of certain material contracts. At present, leaching is expected to continue until June 2010.
Exploration and development projects
During the quarter ended September 30, 2007, the Company continued drilling and related activities at the San Javier project in Sonora, Mexico. In-fill drilling of the Cerro Verde deposit of the project was partially completed prior to the suspension of drilling activities in October 2007 to conserve cash. Boundary definition drilling was completed at Cerro Verde earlier in 2007. Results from column tests started during the second quarter of 2007 to examine the leaching characteristics of different ore types and crush sizes have been encouraging, and indicate rapid leaching and low acid consumption of the bulk samples.
A PEA was completed in December 2007, as scheduled. The PEA indicates the project is both technically and economically feasible and recommends advancement to the next stage of evaluation. The San Javier project is currently envisioned as an open pit, heap leach mine with a conventional SX-EW processing facility with a nominal processing rate of 30,000 tonnes of ore per day and average annual production of 49.3 million pounds of copper over the first five years at an average operating cost of $1.14 per pound. The initial capital cost is estimated to be $238.9 million, including all mining equipment and a $39.2 million contingency.
During the third quarter of 2007, the Company performed limited engineering and cost studies for an agitation leach processing alternative at the Terrazas property in Chihuahua, Mexico. The Company is evaluating additional sources of zinc oxide materials for processing at the site and continues to consider partnering opportunities for the Terrazas project, as well as other financing alternatives.
Results of operations
The Company had a net loss of $97,955,000 ($0.55 per share) for the third quarter of 2007, compared to a net loss of $10,126,000 ($0.06 per share) for the third quarter of 2006. The net loss in the third quarter of 2007 included an asset impairment of $92,918,000, related to continued production problems and the conversion to a leach only operation at Lisbon Valley.
Revenues during the third quarter of 2007 were $16,071,000 from the sale of 4,693,000 pounds of cathode copper at an average price of $3.42 per pound. Costs of sales, excluding depreciation and amortization costs, were $8,553,000, or $1.82 per pound of copper sold. Non-cash costs of $1,841,000, $0.39 per pound sold, are combined with non-operating depreciation and amortization of $16,000 and reported separately on the consolidated statement of operations. Depreciation and amortization in the third quarter of 2006 was $21,000, all relating to corporate activities. All mine operating expenditures, net of revenues, in the third quarter of 2006 were capitalized.
The net loss for the third quarter of 2007 included a realized loss of $6,459,000 on derivative instruments, including $5,725,000 on settlement of forward sales contracts, $549,000 on expiry of put options and $185,000 final settlement for deliveries of cathode copper under the terms of the Company's offtake agreement. In accordance with the newly adopted CICA's financial instrument accounting guidelines, the customer's option to price their purchases during the month subsequent to delivery creates an embedded derivative instrument in instances where that pricing option is selected. The customer selected the subsequent month pricing option for the second, third and fourth quarters of 2007. In November 2007, in an effort to reduce the uncertainty of copper markets, the Company agreed to revise the terms of its offtake agreement to temporarily suspend the customer's option to final copper pricing in the month after shipment. All remaining shipments
in 2007 were billed and settled at the COMEX price in effect on the day following the shipping date.
The Company had an unrealized gain of $1,412,000 on derivative instruments during the third quarter of 2007, including $100,000 related to forward contracts, $549,000 related to put options and $763,000 related to customer pricing options. Also during the third quarter of 2007, the Company had interest expense of $1,573,000, including accretion and a foreign exchange loss of $3,106,000. Interest expense was capitalized prior to achieving commercial production. The foreign exchange loss relates primarily to the strengthening of the Canadian dollar to the US dollar for the outstanding Cdn.$69.0 million convertible debentures and related accrued interest. The Company had realized and unrealized losses on derivative instruments of $6,282,000 and $1,832,000, respectively, and a foreign exchange loss of $37,000 in the third quarter of 2006. Subsequent to September 30, 2007, the Company amended its commodity swap arrangement to fix the
price on approximately 50% of its outstanding forward sales contracts.
General and administrative expenses were $832,000 for the quarter ended September 30, 2007, compared to $682,000 in the quarter ended September 30, 2006. Stock based compensation expense was $228,000, net of $28,000 capitalized, and $469,000, net of $58,000 capitalized, for the quarters ended September 30, 2007 and 2006, respectively. Stock based compensation expense is recorded as options vest. The higher stock based compensation expense in the third quarter of 2006 relates primarily to the vesting schedule of 4,015,000 options granted during June 2006.
During the third quarter of 2007, the Company expensed $326,000 for exploration activities on properties on which mineral resources had not yet been identified, compared to exploration expense of $880,000 in the third quarter of 2006. In accordance with its accounting policies, the Company began capitalizing costs on the San Javier project in January 2007. In prior periods, costs related to San Javier were expensed. Interest income was $236,000 in the third quarter of 2007 compared to $77,000 in the third quarter of 2006, reflecting higher cash balances including remaining proceeds of the convertible debentures issued in March 2007.
Cash flows
The Company's cash balance at September 30, 2007 was $10,871,000 compared to $5,726,000 at December 31, 2006. The higher cash balance in 2007 was due primarily to proceeds from the issuance of convertible debentures in March 2007, net of repayment of the Lisbon Valley project financing, funding working capital, settling forward contracts as they become due and additions to mineral properties and property, plant and equipment.
Cash used in operating activities was $8,027,000 during the third quarter of 2007, compared to $17,738,000 for the third quarter of 2006. Cash used to build inventories during the third quarter of 2007 was $7,037,000 compared to $11,451,000 during the third quarter of 2006.
The Company continues to be unable to benefit in full from current high copper prices as a result of the forward sales contracts entered into primarily as a requirement of the Lisbon Valley project financing. Approximately 1.2 million pounds of copper each month through December 2008 are subject to forward sales contracts. The Company settles the forward sales in cash each month for the difference between the contract price and the monthly average London Metals Exchange (LME) copper price. The settlements of forward sales contracts required by the Lisbon Valley project financing commenced in April 2006. During the third quarter of 2007, the Company's forward sales settlements required total cash payments of $5,725,000.
The average LME price of copper increased dramatically from a low of $2.57 per pound during the first quarter of 2007 to a high of $3.62 per pound during the third quarter of 2007. As a result of the increase in copper prices, the cost to close out the outstanding forward sales contracts in advance of the original contract maturity dates, has also risen significantly.
Cash used in investing activities was $7,453,000 in the third quarter of 2007 compared to $1,547,000 during the quarter ended September 30, 2006. Expenditures in the quarters ended September 30, 2007 and 2006 on mineral properties were $2,062,000 and $1,600,000, respectively. Effective January 1, 2007, the Company began capitalizing expenditures relating to the San Javier property. In the quarter ended September 30, 2007, expenditures on property, plant and equipment were $4,229,000, related primarily to the leach pad expansion and ILS system. In the quarter ended September 30, 2006, $432,000 of cash was generated as a result of netting pre-commercial revenues against mine development expenditures. In the quarter ended September 30, 2007 the Company increased restricted cash by $1,168,000, including interest earned, compared to an increase of $22,000 in the third quarter of 2006. The increase in restricted cash in the third quart
er of 2007 consisted of payments and interest related to the Company's reclamation bonds.
During the third quarter of 2007, the Company received $519,000 in connection with the exercise of options compared to $19,306,000 received in the third quarter of 2006 from the exercise of options and warrants.
Outlook
As a result of the Company's decision in November 2007 to convert to a leach only configuration, all mining and crushing activities at Lisbon Valley are expected to cease in late January 2008. The continuation of leach only operations at Lisbon Valley is dependent on several factors, including sustaining production of cathode copper, reductions in operating costs, continued high copper prices and successful renegotiation of several material contracts. If cash flows from leach only operations are lower than anticipated, the Company could experience additional liquidity problems, including an inability to fund obligations as they become due and requirements to pay vendors for goods and services in advance of delivery.
The Company is currently estimating copper production of 35 million pounds for the period January 2008 through June 2010. Copper production is a function of PLS flow rates, PLS grades and processing extraction efficiency.
Although the PLS flow rates and extraction efficiency are somewhat predictable, it is extremely difficult to forecast PLS grades due to the uncertainty of leach time. The completion of the ILS system at Lisbon Valley in November 2007 is expected to increase PLS grades as a portion of the leaching solution is re-circulated back over previously leached sections of the pad before it is processed through the SX-EW facility. The full effect of the ILS system on production is expected when the planned maximum flow rate is achieved in the second quarter of 2008 and when warmer weather is expected.
The Company is in the process of amending its commodity swap arrangement. Under the terms of the proposed amendment, the Company deferred, until no later than December 2008, approximately $5,084,000 of forward sales settlements originally due in the fourth quarter of 2007 and January 2008. The deferred amounts are subject to interest at LIBOR, plus 4%
, payable monthly. The Company also agreed to settle the copper price on approximately 50 percent of its remaining forward sales contracts at $3.08 per pound, and fix the related loss at $8,947,000. The remaining 7.5 million pounds of forward sales contracts, at an average contract price of $1.86 per pound, will be settled at prevailing LME average monthly copper prices.
In November 2007, in an effort to reduce the uncertainty of copper markets, the Company agreed to revise the terms of its offtake agreement to temporarily suspend the customer's option to final copper pricing in the month after shipment. For shipments during the fourth quarter of 2007, the customer had previously selected the option to adjust provisional pricing to a final price determined anytime during the month subsequent to the month shipped. All November shipments on or before November 27, 2007, were final settled at the November 27, 2007 COMEX copper price. All rema
ining shipments in 2007 were billed and settled at the COMEX price in effect on the day following the shipping date.
Attached to this press release are the Company's unaudited consolidated financial statements for the quarter ended September 30, 2007. For a more complete discussion, please refer to the Company's third quarter 2007 report and the Company's audited financial statements and MD&A for the year ended December 31, 2006 on the SEDAR website at www.sedar.com.
As previously announced, the Company will host a conference call on Monday, January 14, 2008 at 11:00 AM (EST), to discuss 2007 third quarter results. To participate in the conference call, please dial (416) 644-3414 (Toronto and surrounding area), or toll free 1-800-732-6179. To ensure your participation, please call approximately five minutes prior to the scheduled start of the call.
TO VIEW FINANCIAL STATEMENTS, PLEASE CLICK HERE.
For further information please contact:
Constellation Copper Corporation
Patrick James, Chief Executive Officer
Michelle Hebert, Manager, Corporate Affairs
Tel: (720) 228-0055
Toll Free: 1-877-370-5400
Fax: (303) 863-1736
info@constellationcopper.com
www.constellationcopper.com
Renmark Financial Communications Inc.
Neil Murray-Lyon : nmurraylyon@renmarkfinancial.com
Barbara Komorowski: bkomorowski@renmarkfinancial.com
Tel.: (514) 939-3989
Fax : (514) 939-3717
www.renmarkfinancial.com
This press release contains certain forward-looking statements. In certain cases, forward-looking statements can be identified by the use of words such as "plans", "expects" or "does not anticipate", or "believes", or variations of such words and phrases or statements that certain actions, events or results "may", "could", "would", "might" or "will" "be taken", "occur" or "be achieved". Forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause the actual results,
performance or achievements of the Company to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. Such factors include, among others, risks related to changes in commodity and power prices, changes in interest and currency exchange rates, inaccurate geological and metallurgical assumptions (including with respect to the size, grade and recoverability of mineral reserves and resources), unanticipated operational difficulties (including failure of plant, equipment or processes to operate in accordance with specifications, cost escalation, unavailability of materials and equipment, delays in the receipt of government approvals, industrial disturbances or other job action, and unanticipated events related to health, safety and environmental matters), political risk, social unrest, and changes in general economic conditions or conditions in the financial markets. Although the Company has
attempted to identify important factors that could cause actual actions, events or results to differ materially from those described in forward-looking statements, there may be other factors that cause actions, events or results to differ from those anticipated, estimated or intended. There can be no assurance that forward-looking statements will prove to be accurate, as actual results and future events could differ materially from those anticipated in such statements. Accordingly, readers should not place undue reliance on forward-looking statements.
 
