Quadra FNX Mining Ltd.
TSX : QUX

Quadra FNX Mining Ltd.

February 28, 2011 06:30 ET

Quadra FNX Mining Ltd. Announces Record Revenues and Earnings for the Year Ended December 31, 2010

VANCOUVER, BRITISH COLUMBIA--(Marketwire - Feb. 28, 2011) -

(All figures, except per share amounts, are in $US thousands unless otherwise stated or unless context requires otherwise)

Quadra FNX Mining Ltd. (the "Company" or "Quadra FNX") (TSX:QUX) is pleased to provide its fourth quarter and year end 2010 financial and operational results. The Company recorded 2010 earnings of $173 million or $1.11 per share (basic) compared to earnings of $81 million or $0.89 per share for the previous year. The increased earnings in the current year are primarily a result of higher average copper prices, and the increased earnings contribution from Franke and the Sudbury operations following the merger with FNX. Adjusted earnings totalled $225 million or $1.45 per share (basic) for the year.

In the fourth quarter of 2010 the Company recorded earnings of $58 million or $0.30 per share (basic). Unusual items included a $33 million leach pad inventory write down at the Carlota mine and a $22 million accounting loss on derivatives. Fourth quarter 2010 adjusted earnings totalled $105 million or $0.55 per share (basic).

Operating and Financial Summary   Three months ended   Year ended
In millions of US dollars (except per  December 31,   December 31,   December 31,   December 31,
share data and production data)   2010     2009     2010     2009
                       
Revenues   331.9     176.1     957.7     478.6
                       
Adjusted earnings (1)   105.1     51.0     225.4     110.1
Adjusted earnings per share (basic) $ 0.55   $ 0.51   $ 1.45   $ 1.22
                       
EBITDA (2)   93.1     60.3     302.1     125.9
EBITDA per share (basic) $ 0.49   $ 0.61   $ 1.95   $ 1.40
 
Earnings for the period   57.9     46.5     172.5     80.5
Basic earnings per share $ 0.30   $ 0.47   $ 1.11   $ 0.89
Diluted earnings per share $ 0.30   $ 0.46   $ 1.10   $ 0.89
                       
(1)  Adjusted earnings is a non-GAAP financial measure and consists of net earnings with adjustments made to exclude derivative losses, gain on marketable securities and investments, merger costs, inventory write down of at Carlota and tax related items.
(2)  EBITDA is a non-GAAP financial measure which is defined as earnings attributable to shareholders before interest expenses, income taxes, depreciation, amortization and accretion
(3)  Revenues and earnings from the former FNX operations are reported only for the period commencing May 21, 2010 (the day after the closing of the merger with FNX Mining Ltd.).

2010 AND FOURTH QUARTER HIGHLIGHTS:

On May 20, 2010 the Company completed a merger with FNX Mining Company Inc, and with this transaction, established a new, mid-cap Canadian mining company with considerable financial strength and a diverse asset base. The following financial information only includes the FNX operations since May 21, 1010 unless otherwise stated.

  • Production for the year was 224 million pounds of copper and 148 thousand ounces of total precious metals (TPMs). Cash costs for the year were $1.57 per pound of copper. Production in the fourth quarter totalled 57 million pounds of copper and 39 thousand ounces of TPMs while cash costs were $1.55 per pound of copper.
  • In 2010 total revenues increased 100% to $958 million compared to $479 million in 2009 supported by an over 30% increase in the copper price, which ended the year at $4.42 per pound.
  • 2010 earnings increased 114% to $173 million (or $1.11 per share basic) from $81 million (or $0.89 per share basic) in 2009.
  • Operating income from the Robinson mine increased 36% to $193 million from $143 million in 2009.
  • The Morrison deposit achieved commercial production on September 1, 2010 and produced 7.1 million pounds of payable copper in the fourth quarter and 19 million pounds of payable copper for the year, exceeding expectations.
  • The Sierra Gorda Financing Study approached completion as the Company continued discussions with potential financial partners.
  • Exploration at the Victoria property resulted in the discovery of the Zone 4 sulphide mineralized system. Drilling has continued to add significant confidence and a Scoping Study is underway.
  • The Company ended the year with $320 million of cash and after year end Quadra FNX sold its holding in Gold Wheaton for initial proceeds of C$263 million, and contingent proceeds of C$30 million.

The Robinson Mine transitioned from the Veteran to the Ruth pit, and produced 109 million pounds of copper in concentrate for the year. The Morrison deposit delivered above plan and is expected to continue to increase production in both 2011 and 2012. Both the Franke and Carlota operations emerged at year-end with strategies that should improve on the 2010 results. Specifically, Carlota is transitioning to conveyor stacking while Franke is continuing to make progress on its ongoing optimisation programs.

Paul Blythe, President and CEO of Quadra FNX comments, "In mid-2010 we successfully completed the merger with FNX. Since then our strong financial results have been driven by a much improved copper price environment as well as the increase in copper production from the combined Quadra and FNX asset base. In January 2011 we closed the sale of our Gold Wheaton shares for initial cash proceeds of C$263 million which increased our cash balance to approximately $600 million."

"The internal Sierra Gorda Financing Study, which establishes the development parameters for the project, remains on track for completion by the end of the first quarter of 2011, with the NI 43-101 compliant Feasibility Study expected to be completed in the second quarter of 2011. Discussions with potential partners are ongoing and progressing well and we remain confident that a favourable partnership and financing structure will be in place by mid-2011. The environmental permit process (EIS) also remains on track for completion in June. In the meantime, we will continue to move the project forward in accordance with our 2014 start-up schedule, with our current focus on detailed engineering and mining equipment acquisition."

Paul Blythe concludes; "2010 also saw the discovery of Zone 4 at Victoria, which we view as one of the most important discoveries in the Sudbury district in recent history. Our next step is to complete an inferred resource calculation which will be used in our ongoing Scoping Study. We are also advancing permitting, First Nations consultation and discussions with Vale on processing terms and their potential back-in right. Our intention is to commence shaft construction this year, initially for underground exploration, but ultimately this infrastructure could also be for future production."

"This has been a pivotal year for our Company and, with the integration of Quadra and FNX essentially complete, we will focus on optimizing the performance of our existing asset base and on delivering growth."

The complete financial statements and the MD&A will be available at www.quadrafnx.com and www.sedar.com.

This Management Discussion and Analysis ("MD&A") of Quadra FNX Mining Ltd. and its subsidiaries ("Quadra FNX" or the "Company") has been prepared as at February 25, 2011 and is intended to be read in conjunction with the accompanying audited consolidated financial statements for the year ended December 31, 2010. This MD&A contains 'forward looking information' and reference to the cautionary statement at the end of this MD&A is advised. Additional information relating to the Company, including its Annual Information Form, is available on the SEDAR website at www.sedar.com. The Company is a reporting issuer in all provinces and territories of Canada and its common shares are traded on the Toronto Stock Exchange under the symbol: QUX.All financial information in this MD&A is prepared in accordance with the Canadian Generally Accepted Accounting Principles and all dollar amounts are expressed in millions of United States dollars unless otherwise indicated.

  Three months ended December 31  Year ended December 31
  2010 2009 Change 2010 2009 Change
FINANCIAL HIGHLIGHTS            
             
Revenues 332 176 88% 958 479 100%
Operating income 113 63 79% 293 165 77%
EBITDA (1) 93.1 60.3 54% 302.1 125.9 140%
EBITDA per share (basic) 0.49 0.61 -19% 1.95 1.40 39%
Earnings for the period 57.9 46.5 25% 172.5 80.5 114%
Earnings per share (basic) 0.30 0.47 -35% 1.11 0.89 25%
Cash 319 133 139% 319 133 139%
Working capital 755 218 247% 755 218 247%
(1)  EBITDA is a non-GAAP measure which is defined as earnings attributable to shareholders before interest expenses, income taxes, depreciation, amortization and accretion.
  Note: The financial results of FNX have been consolidated commencing May 21, 2010.

HIGHLIGHTS:

2010 Annual

  • On May 20, 2010 the Company completed a merger with FNX Mining Company Inc, and with this transaction, established a new, mid-cap Canadian mining company with considerable financial strength and a diverse asset base.
  • Total revenues increased 100% to $958 million in the current year compared to $479 million in 2009.
  • Earnings increased 114% to $172.5 million (or $1.11 per share basic) from $80.5 million (or $0.89 per share basic) in 2009.
  • EBITDA increased 140% to $302 million from $126 million in 2009.
  • Costs were $1.57 per pound of copper for the year compared with $1.26 per pound in 2009.
  • Operating income from the Robinson mine increased 36% to $193.1 million from $142.5 million in 2009.
  • Total production for the year was 224.3 million pounds of copper and 148.1 thousand ounces of TPMs.
  • The Morrison deposit achieved commercial production on September 1, 2010 and produced 18.5 million pounds of copper for the year, exceeding expectations.
  • The Sierra Gorda Financing Study approached completion as the Company continued discussions with potential financial partners.
  • On-going exploration at the Victoria property expanded and added significant confidence in the Zone 4 sulphide mineralized system which was first discovered in May 2010.

Fourth Quarter

  • Total revenues increased 88% to $332 million in the quarter compared to $176 million in 2009.
  • Earnings increased 25% to $57.9 million, despite a $33.4 million write down of Carlota leach pad inventory, compared to $46.5 million in 2009.
  • EBITDA increased 54% to $93.1 million from $60.3 million in 2009.
  • Operating income from the Robinson mine increased 20% to $62 million compared to $51.8 million in 2009.
  • Total production for the quarter was 57.3 million pounds of copper and 38.7 thousand ounces of total precious metals (TPMs). Cash costs were $1.55 per pound.
  • The ramp up of mining at Morrison continued during the quarter and contributed 7.1 million pounds of copper and 4.1 thousand ounces of TPMs in its first full quarter of commercial production
  • The Company ended the fourth quarter of 2010 with $319 million of cash.
  • In December 2010 the Company agreed to sell its shares in Gold Wheaton for initial proceeds of C$263 million, and contingent proceeds of C$30 million. The initial transaction closed on January 5, 2011.

MERGER OF QUADRA AND FNX

On May 20, 2010, Quadra and FNX completed a merger of the two companies. The merger was structured as a court-approved plan of arrangement (the "Transaction") under the Business Corporations Act (Ontario) pursuant to which Quadra acquired all of the issued and outstanding common shares of FNX. Under the terms of the Transaction, former shareholders of FNX received 0.87 common shares of Quadra and $0.0001 for each common share of FNX. Outstanding options and warrants to acquire FNX shares were converted into options and warrants to acquire Quadra shares, adjusted in accordance with the same exchange ratio. A total of 88.9 million common shares were issued to former FNX shareholders, and options and warrants to acquire 2.9 million and 6.5 million common shares, respectively were issued on conversion of FNX options and warrants.

Upon completion of the merger, existing Quadra and FNX shareholders owned approximately 52% and 48% of the combined company, respectively, on a fully diluted basis. The acquisition is accounted for as a business combination, and Quadra is considered to be the acquirer for accounting purposes. The total purchase consideration for accounting purposes is $980.2 million, based on the fair value of the issued common shares and other consideration as of May 20, 2010, the closing date of the merger. FNX's assets and liabilities have been re-measured at their individual fair values at the closing date of the merger and FNX's financial results have been consolidated commencing from May 21, 2010.

FINANCIAL PERFORMANCE

Earnings

The Company recorded earnings of $172.5 million or $1.11 per share (basic) for 2010 compared to $80.5 million or $0.89 per share (basic) for 2009. The increased earnings in the current year were primarily a result of higher average copper prices, the increased earnings contribution from Franke and the inclusion of the Sudbury operations following the merger with FNX. During 2010, the Company sold 224.6 million pounds of copper at an average price of $3.32/lb (excluding price adjustment impact) and 146.2 thousand ounces of TPMs compared to 144.7 million pounds of copper in 2009 at an average price of $2.60/lb (excluding price adjustment impact) and 95.7 thousand ounces of TPMs. 2010 earnings were also impacted by a $33.4 million write down of Carlota leach pad inventory (see "Review of Operations and Projects"), a $34.0 million accounting loss on derivatives primarily related to future copper price participation in acid supply contracts, $7.2 million of FNX transaction costs and a $5.8 million unrealized gain on held for trading marketable securities (see "General & administrative and other expenses"). 2010 earnings were also positively impacted by $13.5 million provisional price adjustment (see "Revenues").

Revenues

To view the tables for Revenues for the year ended December 31, 2010 and the year ended December 31, 2009, please visit the following link: http://media3.marketwire.com/docs/qux228_table_01.pdf

Revenues are generated by the sale of copper concentrate, copper cathodes and copper and nickel ore. For the sale of copper concentrate and copper and nickel ore, revenues are generally recognized at the time of delivery to a customer based on metal prices at that time, however, under current sales contracts, final pricing for copper sold in concentrate and copper and nickel ore is generally fixed up to six months after the time of arrival of a shipment at the customer's port of delivery. As a result, the Company's revenues include estimated prices for sales, based on forward copper prices at year end, as well as pricing adjustments for sales that occurred in previous year, based on the actual price received and the price at year end for sales from previous years that were not settled in the year. The pricing of copper cathode sales is generally set in the month of shipment or one month after the time of shipment and therefore pricing adjustments in subsequent periods are minimal. Copper sales volumes are reported based on the volume of pounds actually paid for by the customer (payable pounds). Payable pounds at Robinson are generally 3-5% lower than the metal volume actually delivered, and the amount of the deduction varies depending on concentrate grade. Revenues from sales of Sudbury copper and nickel ores are recognized based on the payable metals that are estimates based on metallurgical testing and interim payment terms, neither of which is binding, final payment terms could differ from those reported.

Revenues in 2010 were significantly higher than 2009 due to higher sales volumes and copper prices. Copper spot prices increased from $3.33/lb at December 31, 2009 to $4.42/lb at December 31, 2010 resulting in significant positive pricing adjustments related to the settlement of sales from the prior periods. The increase in sales volumes in 2010 was a result of the merger with FNX as well as ramping up production at the Franke mine and Morrison deposit.

2010 revenues at the Morrison deposit, Levack Complex (excluding Morrison) and Podolsky also include non-cash revenue of $9.4 million for the amortization of a deferred revenue liability related to the Company's obligation to sell 50% of the gold, platinum and palladium contained in ore mined and shipped from certain deposits to Gold Wheaton Gold Corp. ("Gold Wheaton"). Pursuant to an agreement with Gold Wheaton dated July 15, 2008, the Company receives a cash payment equal to the lower of $400 per gold equivalent ounce (subject to a 1.0% annual inflationary adjustment commencing July 1, 2011) and the prevailing market price per ounce of gold, for each gold equivalent ounce sold to Gold Wheaton.

Operating expenses and operating income

To view the tables for Operating expenses and operating income for the year ended December 31, 2010 and the year ended December 31, 2009, please visit the following link: http://media3.marketwire.com/docs/qux228_table_02.pdf

Cost of sales in 2010 were higher compared to 2009 due primarily to the higher onsite costs (see "Review of Operations and Projects") as well as higher sales volumes in the current year.

The existence of a high percentage of fines in the ore at the Carlota mine is affecting the production and recovery rates. It is now believed that a lower portion of the copper already on the leach pad will be recovered than was previously expected to be recoverable. As a result, the leach pad inventory at Carlota has been written down by $33.4 million to its net realizable value at December 31, 2010 (see "Review of Operations and Projects").

Amortization, depletion, depreciation and accretion ("AD&D") were higher in 2010 than in 2009, mainly due to higher AD&D expense at the Franke mine as a result of achieving full year operation in 2010 and the additional AD&D expenses from Sudbury operations after the merger with FNX. Royalties and mineral taxes in 2010 were higher than 2009, mainly due to the higher copper prices and sales volumes in the current year.

Operating income increased in 2010 compared to 2009 primarily due to higher average copper prices and increased revenues from Franke which did not commence operations until the second half of 2009. Production from the Company's Sudbury operations also had a positive impact on the 2010 operating income. These factors were partially offset by higher onsite costs at Robinson and Carlota (see "Review of Operations and Projects").

General & administrative and other expenses

General and administrative expenses for 2010 were $34.7 million compared to $18.5 million for 2009. The increased general and administrative expenses in the current year reflect the Company's increased activity level, increased payroll and severance costs as a result of the merger with FNX, as well as certain one-time business development activities during the first quarter of 2010. Stock- based compensation expenses for 2010 were $8.3 million compared to $6.8 million for 2009. This increase was due to additional grants of stock options and restricted share units in 2010.

In 2010 the Company recognized a loss of $34.0 million on derivatives primarily due to the increase in derivative liabilities associated with the Franke long-term supply contracts as a result of the increase in copper prices during the current year. The loss on derivatives in 2009 of $54.5 million primarily related to a decline in value of copper puts and collars (see "Financial Instruments and Other Instruments"). The Company expensed transaction costs for the merger with FNX of $7.2 million in 2010.

Other income in the current year primarily resulted from the unrealized gain from the increase in fair value of held for trading marketable securities and the realized gain on sale of marketable securities. Other income in 2009 primarily related to an unrealized gain on held for trading marketable securities.

The Company recorded income tax expense of $47.2 million in 2010 compared to $11.7 million in the prior year. The tax expense for the current year has been recorded based on an annual effective tax rate of 22% (2009 – 24%). The decrease in effective tax rate in 2010 is mainly due to the utilization of U.S. Alternative Minimum Tax credits which were earned in prior years and the earnings from the Franke mine in Chile which has a lower statutory tax rate. Tax expense in 2010 also included a $2.0 million future income tax recovery related to the gain on marketable securities which has been recorded in other comprehensive income.

FOURTH QUARTER FINANCIAL PERFORMANCE

The following table summarizes the financial results of the most recent eight quarters (unaudited):

SUMMARY OF QUARTERLY FINANCIAL RESULTS
 
  2010 2009
 
  Q4 Q3 Q2 Q1 Q4 Q3 Q2   Q1
 
Revenues *                  
Robinson 132 130 95 133 136 74 84   103
Carlota 30 22 24 31 19 17 16   9
Franke 41 41 25 34 21 - -   -
Podolsky 48 28 15 - - - -   -
Levack Complex (1) 63 26 5 - - - -   -
DMC 18 12 5 - - - -   -
Revenues - Total 332 259 169 197 176 91 100   112
 
Operating income 113.2 66.5 31.6 81.8 63.4 31.6 24.1   46.2
Earnings (loss) before income taxes 70.1 46.4 25.3 69.0 45.6 21.2 (7.5 ) 32.8
Earnings (loss) 57.9 37.2 21.8 55.6 46.5 14.7 (7.3 ) 26.7
Basic earnings (loss) per share $0.30 $0.20 $0.16 $0.56 $0.47 $0.16 -$0.08   $0.40
Diluted earnings (loss) per share $0.30 $0.19 $0.15 $0.55 $0.46 $0.15 -$0.08   $0.40
(1) Including Morrison deposit commercial production revenues
* See "Financial Performance - Revenues" section for description of payments process.

Earnings

The Company recorded earnings of $57.9 million or $0.30 per share (basic) for the fourth quarter of 2010, compared to $46.5 million or $0.47 per share (basic) for 2009. Fourth quarter earnings were impacted by a $33.4 million leach pad inventory write down at the Carlota mine (see "Review of Operations and Projects") and a $22.0 million accounting loss on derivatives primarily related to future copper price participation in acid supply contracts. Fourth quarter earnings also included a positive $14.4 million price adjustment (see "Revenues").

Revenue

Revenues in the fourth quarter of 2010 were higher than the same quarter of 2009 mainly due to the revenue contribution from Sudbury operations and higher copper prices. In the fourth quarter of 2010, copper prices increased from $3.65/lb at September 30, 2010 to $4.42/lb at December 31, 2010 resulting in positive pricing adjustments of $14.4 million related to the settlement of sales from the third quarter of 2010 and the revaluation of the current quarter shipments using an average copper price of $4.40/lb at December 31, 2010. 2010 revenues at the Morrison, Podolsky and Levack Complex (excluding Morrison) also include non-cash revenue of $4.1 million for the amortization of a deferred revenue liability related to Gold Wheaton.

At September 30, 2010, receivables at the Robinson mine included 12.8 million pounds of copper which has been provisionally valued at $3.65/lb. During the third quarter of 2010, these receivables were settled at an average final price of $3.79/lb. In the fourth quarter of 2010, Robinson shipped approximately 24.8 million pounds of copper at an average provisional price of $3.86/lb, of which 4.7 million pounds were settled during the quarter with an average final price of $4.15/lb. At December 31 2010, receivables at the Robinson mine and Sudbury operations include 31.5 million pounds of copper which has been provisionally valued at $4.40/lb.

Operating expenses and operating income

Operating expenses in the fourth quarter of 2010 were $218.7 million compared to $112.8 million in the same period of 2009 due primarily to the 40% increase in production, higher onsite costs (see "Review of Operations and Projects") as well as operating expenses at the Sudbury operations after the merger with FNX. Operating expenses in the fourth quarter of 2010 were also impacted by a $33.4 million leach pad inventory write down at the Carlota mine (see "Review of Operations and Projects"). Operating income increased by 79% in the fourth quarter of 2010 primarily due to higher average copper prices and increased revenues from the Company's Sudbury operations.

General & administrative and other expenses

General and administrative expenses for the fourth quarter of 2010 were $10.7 million compared to $6.0 million for the same quarter of 2009. The increased general and administrative expenses in the current quarter reflect the Company's increased activity level and payroll costs as a result of the merger with FNX. In the fourth quarter of 2010, the Company recognized a loss of $22.0 million on derivatives primarily due the increase in derivative liabilities associated with the Franke long-term supply contracts. The loss on derivatives in 2009 of $14.8 million related to a decline in value of copper puts and collars. In the fourth quarter of 2010, the Company recorded net interest and other expense of $8.0 million compared to net interest and other income of $4.2 million in 2009. Other expense in the current quarter was primarily related to the reversal of the gain on settlement of Gold Wheaton note receivable as a result of adjustments made to the value of the note in the purchase price allocation which was finalized in the quarter. Other income in the fourth quarter of 2009 primarily related to a realized gain on sale of marketable securities.

REVIEW OF OPERATIONS AND PROJECTS

***Note: Production and operating statistics in this section are reported for historical periods for all of the Company's mines, including periods prior to the merger of Quadra and FNX. For accounting purposes, the financial results of the Sudbury Operations have been consolidated commencing from May 21, 2010, the date immediately following the closing date of the merger of Quadra and FNX.

Production for the quarter and year ended December 31, 2010 from the Company's operating mines is summarized as follows:

  Three months ended   Year ended
  December 31, 2010   December 31, 2010
Copper production (Mlbs)      
  Robinson (3) 26.6   109.0
  Carlota (4) 6.6   29.5
  Franke (4) 7.8   37.2
  Morrison deposit (2) (5) 7.1   18.5
  Podolsky (5) 8.1   25.3
  McCreedy West (5) 1.1   4.8
  57.3   224.3
Nickel production (Mlbs)      
  Morrison deposit (2) (5) 1.5   4.5
  Podolsky (5) 0.4   1.6
  McCreedy West (5) 0.2   0.8
  2.1   6.9
TPM (1) (kozs)      
  Robinson (3) 15.7   73.0
  Morrison deposit (2) (5) 4.1   9.9
  Podolsky (5) 10.6   32.8
  McCreedy West (5) 8.3   32.4
  38.7   148.1
       
 
(1) Total precious metal, including gold, platinum and palladium 
(2) Including pre-production ore
(3) Produced in concentrate
(4) Produced in cathode
(5) Shipped payable metal

U.S OPERATIONS

Robinson (Nevada)

  Three months ended December 31 Year ended December 31
  2010 2009 2010 2009
 
Copper in concentrate production (Mlbs) 26.6 29.3 109.0 122.5
Gold in concentrate production (kozs) 15.7 25.1 73.0 99.0
Ore mined (Mt) 3.3 2.8 14.0 14.5
Waste mined (Mt) 11.4 13.9 46.5 46.0
Ore milled (Mt) 3.5 3.4 13.7 13.5
Copper grade (%) 0.46 0.59 0.49 0.64
Gold grade (g/t) 0.26 0.31 0.26 0.31
Copper recovery (%) 75.4 65.9 74.1 63.6
Gold recovery (%) 53.3 73.1 64.8 73.0
Cash cost per pound of copper produced ($/lb) $1.80 $1.47 $1.50 $1.10
Capital expenditure $21.5 $8.8 $46.9 $39.2
Cost of sales $62.3 $66.1 $251.8 $209.7
Operating income $62.0 $51.8 $193.0 $142.6

In 2010, Robinson processed ore from both the Veteran and Ruth pits, producing 109 million pounds of copper and 73.0 thousand ounces of gold in concentrate. Both copper and gold productions in 2010 were lower than in 2009 due mainly to anticipated lower head grade in the Ruth pit ore and the impact of unexpected underground workings which affected production in the second quarter of 2010. Operating income increased 35% although overall grades mined were 23% below 2009 levels. Mining from the lower benches of the Veteran pit was completed in December 2010 and mining in the Wedge pit ended in the first half of 2010. Total material moved in 2010 was in line with 2009. Increasing prices enabled the Company to increase operating income despite the effect of reduced grades.

In the fourth quarter of 2010, Robinson processed ore from the Ruth pit, producing 26.6 million pounds of copper and 15.7 thousand ounces of gold in concentrate. Total material mined in fourth quarter of 2010 was lower than in 2009 due to longer haulage distances while December operating performance was impacted by the highest rainfall event since the 1890's (>3"). Copper production in the fourth quarter of 2010 was lower than in 2009 due to lower head grade, partially offset by higher copper recoveries and higher milling rates of 41,600 tpd. Copper recoveries continued to benefit from the additional flotation capacity that was installed in the fourth quarter of 2009. In addition, revised contractual terms with concentrate customers provided Robinson more flexibility with respect to concentrate grade. Operating income increased 20% although overall grades mined were 16% below 2009 levels.

Gold production in the fourth quarter of 2010 was lower compared to the same quarter of 2009 due to lower head grades in the Ruth pit which in turn led to lower gold recoveries as expected.

Robinson cost of sales and capital expenditures

Cost of sales in 2010 was higher than 2009 mainly due to higher operating costs in the current year. Operating costs are comprised of onsite and offsite costs (see "Non-GAAP Financial Measures"). Onsite costs include stripping costs and are primarily driven by the volume of waste and ore moved, payroll costs, supplies and equipment maintenance costs and royalties. Onsite costs in 2010 were higher than in 2009, primarily due to increased diesel fuel costs caused by increased diesel fuel usage, increased exploration expenses, increased dewatering expenses and increased maintenance supplies costs. Onsite costs for the fourth quarter of 2010 were higher than in the same quarter of 2009 primarily due to increased exploration drilling expenses, dewatering expenses and diesel fuel usage. Cost of sales for the fourth quarter of 2010 was slightly lower than 2009 due to lower sales volumes.

Offsite costs are primarily driven by smelting and refining charges, the volume of concentrate transported, and rail and ocean freight rates. Offsite costs for 2010 were slightly lower than in 2009 primarily due to lower smelting and refining costs.

The cash cost per pound of copper produced is a non-GAAP term and consists of onsite and offsite costs, less by-product revenue, divided by the pounds of copper produced in the period (see "Non-GAAP Financial Measures"). The 2010 cash cost per pound of copper produced was $1.50 compared to $1.10 in 2009. The increased unit cost in 2010 is due to lower copper production and higher onsite costs.

In the fourth quarter of 2010 the cash cost per pound of copper produced was $1.80 compared to $1.47 in the same quarter of 2009. The increased unit cost in the fourth quarter of 2010 is due to lower copper production and higher onsite costs.

Capital expenditures at Robinson in 2010 were primarily related to Ruth pit mud removal, dewatering, district exploration, and legacy mitigation.

Carlota (Arizona)

  Three months ended December 31 Year ended December 31
  2010 2009 2010 2009
 
Copper cathode production (Mlbs) 6.6 8.0 29.5 28.0
Ore mined (Mt) 1.5 2.6 6.4 7.1
Waste mined (Mt) 5.6 3.7 21.3 17.9
Ore placed (Mt) 1.5 2.6 6.4 7.1
Total copper grade (%) 0.67 0.61 0.59 0.45
Cash cost per pound of copper sold ($/lb) (1) $1.84 $1.61 $1.81 $1.79
Capital expenditure -$4.9 $9.5 $13.3 $26.7
Cost of sales $12.7 $9.3 $51.7 $43.9
Operating (loss) income -$20.5 $7.1 $5.3 $18.2
(1) In the quarter ended September 30, 2010 the Company changed its calculation method of cash costs per pound for its heap leach operations to conform to industry standards (see "Non-GAAP" Financial Measures").

Total tonnes mined in 2010 were slightly higher than in 2009. Total tonnes mined in the fourth quarter of 2010 were higher than the same quarter of 2009 as emphasis was placed on waste stripping to open oxide ore along the Kelly Fault. Ore tonnes mined during the fourth quarter of 2010 were less than the same quarter of 2009 due to the transition from sulphide ore in the Cactus pit to oxide ore along the Kelly Fault. Copper production in the fourth quarter of 2010 was less than the same quarter of 2009 as a result of the slower leaching kinetics of sulphide ore stacked during the third and fourth quarters of 2010. In addition, in December, the SX-EW plant had upset conditions caused by a second significant storm event which temporarily reduced plant recovery.

During the second half of 2010 Carlota conducted a comprehensive study of issues which impact the performance of the leach pad. Studies determined that the high percentage of fines occurs throughout the leach pad and the orebody. Various actions to minimize the impact of the fines issue were examined, including agglomeration, blending, screening and stacking methods. The studies determined that stacking by conveyor provides a lower bulk density in the heaps and should produce improved and consistent percolation rates which should limit channelling, leading to improved copper recovery and production. Improvement to percolation rates and copper recoveries in the existing heaps are also being evaluated using drilling and solution injection into the stacked material. As a result of the fines and lower percolation rates management estimates that a lower portion of copper than previously estimated will be recovered from the leach pad, and the Carlota leach pad inventory has been written down by $33.4 million to its estimated net realizable value at December 31, 2010.

Carlota cost of sales and capital expenditures

In 2010 Carlota sold 5.3 million pounds or 24% more copper than 2009. Cost of sales in 2010, which exclude the leach pad inventory write down, were 18% higher than 2009 due to the higher sales volumes.

Cost of sales in the fourth quarter of 2010 were higher than the same period of 2009 due to the 20% increase in sales volumes.

Capital expenditures in 2010 were significantly lower than 2009 and primarily related to construction development of the Leach Pad Phase 2 and to the implementation of additional storm water control measures, but included an initial exploration program below the existing orebody.

US operations Outlook

Robinson Outlook

Overall, 2011 production at Robinson is expected to be back-end weighted contributing between 105 and 120 million pounds of payable copper and 45-50 thousand ounces of gold for the year.

In 2011 ore at the Robinson will be sourced from the Ruth pit and ore blending is expected to continue to the extent possible in the single pit operation. Typically, supergene ore types from higher elevations will be blended with ores from lower pit elevations. These blending efforts enable the operation to optimize recoveries of high grade ores, improve concentrate grades, reduce lime consumption and increase throughput. However, it is expected that the complex and variable nature of the Robinson ore body will continue to cause metal production variations from quarter to quarter and metallurgical performance is expected to continue to be highly variable throughout the life of the Ruth pit.

Ruth pit mud removal has ramped up to the required rate with the new contractor and 2011 production is not expected to be impacted. Pumping capacity and dewatering of the Ruth pit has also increased which has facilitated mud removal. Following a localised pit wall slump in January 2011, the Company has re-sequenced the mine plan and now expects to access higher grade ore in the second half of 2011. As the mining sequence transitions lower into the Ruth pit, more benches will become available and operating flexibility should improve later in the year.

Onsite costs are expected to be in line with 2010. Capital expenditures are expected to increase in 2011 mainly as a result of the removal of mud from the bottom of the Ruth Pit. This is expected to contribute an additional $15-$20 million in the capital expenditures in the first half of 2011.

In 2011 the Company has increased its exploration efforts in the Ruth pit and has also initiated an aggressive exploration and engineering program at the historical Liberty pit, located between the Veteran and the Ruth pits. While the evaluation of the Liberty area is still early stage, based on the work to date the Company believes that this historical pit could improve Robinson's medium term operating flexibility, and further enhance the longevity of operation. Exploration and engineering for potential mining in the Liberty Pit is ongoing.

Carlota Outlook

In 2010 Quadra FNX established that the high levels of fines identified in the Carlota orebody have resulted in a reduced percolation rate, and a broad range of studies to resolve the issue have been ongoing. Studies completed in the second half of 2010 determined that stacking by conveyor should provide a lower bulk density in the heaps. The mine will convert to conveyor stacking during the first quarter, using a contractor until the concept has been tested on a sustained basis.

In 2010 geotechnical drilling identified a potential stability concern in the highwall on the Kelly Fault side of the Cactus pit. The Company has taken these concerns seriously and, in the current mine plan, adjusted the highwall slope angles to ensure safety. This change has resulted in a 12 million tonnes reduction in resources (i.e., approximately 1.5 years of production). Additional work, including geotechnical drilling, mapping, drains, and a full technical review is planned in 2011 in order to fully evaluate the pit configuration.

Projected 2011 copper production remains between 30 and 35 million pounds. While injection processes are tested and changes to stacking methods are implemented production in the first quarter is expected to be in the range of 6-7 million pounds.

Total onsite costs at the Carlota Mine are expected to be in line with 2010. Capital expenditures are primarily related to the planned leach pad expansion. A new exploration program was initiated in late 2010 and the initial diamond drill holes indicate mineralization below the defined orebody and appear to confirm the revised genesis theory. Additional drilling is planned for 2011.

CHILE OPERATIONS

Franke

  Three months ended December 31 Year ended December 31
  2010 2009 2010 2009
         
Copper cathode production (Mbs) 7.8 9.4 37.2 13.5
Ore mined (Mt) 0.8 0.8 3.8 1.5
Waste mined (Mt) 1.6 0.6 4.9 2.1
Ore placed (Mt) 0.7 0.8 3.2 1.4
Copper grade (%) 0.86 0.85 0.85 0.83
Cash cost per pound of copper sold ($/lb) (1) $2.60 $2.06 $2.45 $2.06
Capital expenditure $7.7 $5.0 $24.5 $25.7
Cost of sales $26.8 $14.2 $100.9 $14.2
Operating income $9.2 $4.5 $20.5 $4.5
(1) Company changed its calculation method of cash costs per pound for its heap leach operations to conform with industry standards (see "Non-GAAP" Financial Measures").

Copper cathode production for 2010 totalled 37.2 million pounds compared to 13.5 million pounds in 2009. In the fourth quarter of 2010, a total of 7.8 million pounds of copper cathode were produced. The Franke mine commenced production in July 2009 and commercial operations in October 2009. There were 9.4 million pounds of cathode produced at Franke in the fourth quarter of 2009.

Despite the continuing improvement in the availability of the existing stacker, copper production declined during the fourth quarter as a result of short-term shutdowns required for capital projects and low crusher availability. Leach recoveries and pad permeability also lagged expectations, the permeability being affected by clays and by destruction of minerals in the high acid environment required to recover the copper from Franke ore. A number of process changes have been put in place to resolve these issues, including reducing heap height, customizing leach solution application rates and increasing acid cure for recovery. The new stacker, which was delivered in November, had a significant structural design defect which is being addressed.

Franke cost of sales and capital expenditures

Cost of sales at Franke is mainly driven by onsite costs and sales volumes. Onsite costs in 2010 were in line with the Company's expectations for copper placed on the leach pads with the exception of higher acid costs due to increased copper prices and higher power costs due to higher power consumption. Capital expenditures at Franke in 2010 primarily related to the construction of stockpile covers to control dust emissions, a change to the secondary crushing plant to improve crushing performance and tank construction for additional acid storage.

Franke Operations Outlook

The assembly and commissioning of the stacking equipment ordered in July has been delayed due to the structural failure. The manufacturer is reviewing the failure and proposed a new design in late January 2011. It is now expected that the earliest date for a workable new stacker to be in operation is mid-year. In the interim, the Company expects to sustain 85-90% of its nameplate stacking capacity with its existing equipment.

In January 2011, Marineer Zona Franca S.A. ("Marineer"), the local mining contractor at the Franke Mine in Chile, shut down all equipment at the site due to financial difficulties. The Company then made the decision to terminate the contact with Marineer and take over the mining operations at Franke. Quadra FNX has negotiated the take-over of the existing mining fleet from Komatsu, who held the lease and is in the process of recruiting operators. Franke currently has approximately two months of ore feed stockpiled at the site and does not expect the transition to owner mining to have a material impact on 2011 production.

To improve leach recovery and copper production, the Company has been adjusting the leach operating parameters, including reducing the lift height on the heap leach pad, crush size and tailoring solution application rates to individual ore types. Additional leach pad space is being developed to optimize recovery from slower-leaching ores.

The improved copper recovery expected from these changes are expected to offset the impact of the delay in the commissioning of the stacker and allow the operation to contribute between 35 and 45 million pounds of cathode copper in 2011. Copper production is expected to ramp up in the second half of the year benefiting from the transition to owner mining, the commissioning of the new stacking equipment and higher recoveries.

A portion of the employees at Franke formed a Union in late 2010 and negotiations on the terms of a new labour contract are ongoing. A final offer was submitted by Quadra FNX in mid-February, 2011 and the Union is considering their response.

Franke's 2011 acid supply has been fully contracted with approximately half of the required quantity provided under the existing long- term contract at a price dependent on copper price and the remainder at a fixed price. Major capital expenditures in 2011 include additional dust control on the processing equipment and the construction of additional leach pads.

The Company has multiple copper occurrences with ore grade intercepts within 3 to 5 kilometers of the Franke mine. The geological re-interpretation is going well and an aggressive exploration program is planned for the second half of 2011. Drilling of the China deposit has already commenced.

CANADIAN OPERATIONS

Morrison deposit

  Three months ended December 31 Year ended December 31
  2010 2009 2010 2009
 
Copper ore sold (kt) (1) 39.7 3.1 101.8 3.1
Copper grade (%) 9.5 8.2 9.4 8.2
Nickel ore sold (kt) (1) 4.0 4.5 18.5 11.4
Nickel grade (%) 3.2 3.1 2.9 2.7
Copper sold - payable (Mlbs) 7.1 0.7 18.5 1.0
Nickel sold - payable (Mlbs) 1.5 0.3 4.5 0.6
Gold sold - payable (kozs) 0.7 0.1 1.4 0.1
Platinum sold - payable (kozs) 1.0 0.2 2.4 0.2
Palladium sold - payable (kozs) 2.4 0.5 6.0 0.7
Cash cost per pound of copper sold ($/lb) (2) -$0.34 - -$0.19 -
Capital expenditure (2) (3) $10.3 - $28.7 -
Cost of sales (2) $16.1 - $22.6 -
Operating income (2) $30.9 - $32.7  
(1) Converted to metric tonnes from short tons
(2) For the period since the May 21, 2010, the day immediately after the merger of Quadra and FNX
(3) Excluding pre-production revenue credits
Note: Production statistics in the above table are reported for all historical periods, including the period prior to the merger of Quadra and FNX on May 20, 2010. The Morrison deposit includes four successive zones MD1 (previously called the Rob's deposit) though MD4. In the first two months of the third quarter of 2010, pre-production revenues from MD2 and MD3 were recorded as a credit to the development cost of the Morrison deposit. The above table includes pre-production and commercial production ore.

The Morrison deposit represents a high grade footwall deposit located in the lower part of the Levack mine. The Morrison deposit commenced commercial operations on September 1, 2010. In 2010 production from the Morrison deposit, including pre-production and the MD1 ore exceeded expectation, contributing 18.5 million pounds of payable copper, 9.8 thousand ounces of TPMs and 4.5 million pounds of payable nickel.

In 2010 selective mining methods were adopted allowing the mine to surpass its copper production expectations while mining a lesser amount of ore tonnes. Ramp and lateral development including drill platforms, secondary egress, ventilation and air, water and electrical infrastructure also continued to advance to below the 4000 Level.

In 2010 the Company advanced the rehabilitation of the #2 Shaft, as well as the 3600 Level loading pocket and related infrastructure. During 2010, access was also established to the neighbouring Craig Mine owned by Xstrata allowing for extra additional ventilation of workings in the Morrison deposit which will aid in the overall development of the mine. In late 2010, work started on a major maintenance shop facility on the 3900 Level, as well as a dewatering station. Commissioning of a new continuous feed mixing backfill plant was started in December 2010. The plant is on line and expected to be fully operational by the end of the quarter of 2011.

Morrison cost of sales and capital expenditures

Morrison achieved commercial production on September 1, 2010. Operating costs (onsite and offsite costs) prior to September 1, 2010 were capitalized. Operating costs in production were in line with expectations as additional costs related to more selective mining techniques were offset by lower haulage and processing costs.

Since commencing commercial production on September 1, 2010 the cash cost per pound of payable copper produced from Morrison averaged negative $0.19 as a result of the by-product metal credits, while cash costs during the fourth quarter of 2010 averaged negative $0.34.

Overall capital spending in 2010 was less than planned, because the upgrades to the mine dewatering system were delayed by weather and is now scheduled for completion in the first quarter of 2011.

Podolsky

  Three months ended December 31 Year ended December 31
  2010 2009 2010 2009
 
Copper ore sold (kt) (1) 118.0 167.5 415.4 315.6
Copper grade (%) 3.7 4.2 3.3 4.8
Copper sold - payable (Mlbs) 8.1 13.0 25.3 28.2
Nickel sold - payable (Mlbs) 0.4 0.8 1.6 1.8
Gold sold - payable (kozs) 1.9 2.6 5.7 3.7
Platinum sold - payable (kozs) 4.3 6.3 13.4 12.3
Palladium sold - payable (kozs) 4.4 6.2 13.6 11.3
Cash cost per pound of copper sold ($/lb) (2) $0.74 - $0.83 -
Capital expenditure (2) $4.6 - $8.5 -
Cost of sales (2) $17.4 - $42.5 -
Operating income (2) $25.3 - $34.8 -
(1) Converted to metric tonnes from short tons
(2) For the period since the May 21, 2010, the date after the merger of Quadra and FNX
Note: Production statistics in the above table are reported for all historical periods, including the period prior to the merger of Quadra and FNX on May 20, 2010.

Podolsky operating income for the period from May 21 to December 31, 2010 was $34.8 million. In calendar 2010 Podolsky mined a total of 415,000 tonnes at a grade of 3.3% copper contributing 25 million pounds of payable copper, 33 thousand ounces of TPMs and 1.6 million pounds of nickel. Ore tonnes mined increased versus the previous year, offsetting the impact of lower copper grade in the outer extent of the ore zone. In the fourth quarter of 2010, copper production was strong due to access to high grade stopes offsetting the impact of the ground control issues experienced in the third quarter of 2010.

Podolsky cost of sales and capital expenditures

Total operating costs for Podolsky in 2010 were above plan due to the higher throughput. Capital expenditures in 2010 were related to development work, diamond drilling and mobile equipment purchases.

McCreedy West

  Three months ended December 31 Year ended December 31
  2010 2009 2010 2009
 
Copper ore sold (kt) (1) 76.1 154.5 283.5 253.5
Copper grade (%) 0.8 1.1 0.9 1.2
Copper sold - payable (Mlbs) 1.1 3.3 4.8 5.9
Nickel sold - payable (Mlbs) 0.2 0.6 0.8 2.0
Gold sold - payable (kozs) 0.9 2.3 4.2 3.9
Platinum sold - payable (kozs) 2.7 6.2 10.5 10.5
Palladium sold - payable (kozs) 4.6 10.2 17.7 16.6
Cash cost per pound of copper sold ($/lb) (2) $1.55 - $1.59 -
Capital expenditure (2) $5.6 - $10.0 -
Cost of sales (2) $8.5 - $22.2 -
Operating income (2) $5.3 - $4.6 -
(1) Converted to metric tonnes from short tons
(2) For the period since the May 21, 2010, the date after the merger of Quadra and FNX
Note: Production statistics in the above table are reported for all historical periods, including the period prior to the merger of Quadra and FNX on May 20, 2010.

The Levack Complex is comprised of two adjacent mining operations, McCreedy West and Levack, which includes the Morrison deposit. McCreedy West operating income for the period from May 21 to December 31, 2010 was $4.6 million. In calendar 2010 production at the McCreedy West mine was limited to the PM zone and the 700 Complex footwall orebodies. Throughput of 283,000 tonnes in 2010 exceeded expectations and the operation surpassed its metal copper and TPM production targets for the year. Contact Nickel ore production was not undertaken in 2010 due to unfavourable metal prices and processing terms.

McCreedy West cost of sales and capital expenditures

Total operating costs for McCreedy West in 2010 were higher than planned. The higher total costs were due to the higher than planned production tonnes. Capital expenditures in 2010 were related to development work, diamond drilling and mobile equipment purchases.

Canadian Operations Outlook

Morrison deposit

The Company expects 2011 production from Morrison to range between 30 and 40 million pounds of payable copper, approximately 20-25 thousand ounces of payable TPMs and approximately 5 million pounds of payable nickel. Quadra FNX's ability to attain the upper end of the production range is mainly dependent on maximizing utilization of the internal ramp system and the successful commissioning of the backfill plant. Production is expected to continue to increase through 2011 and into 2012. Work continues on the rehabilitation of the Levack #2 shaft to the 3600 Level and conditions have proven more challenging than expected, but the Company expects during 2011 to resolve the access issues with no material affect on the 2011 production profile. Additional haul truck capacity is expected to allow continued improvement in the ore production rate until the #2 Shaft is fully serviceable. Completion of the shaft rehabilitation is expected to allow the annual production rate to be increased to over 45 million payable pounds of copper.

In 2011 exploration efforts will focus on drilling and expanding the known resource below the 4200 Level. The Morrison deposit remains open at depth, with limited drilling information is available below the 5200 Level. In 2011 onsite and offsite costs at Morrison are expected to be in the $70 to $80 million range. In addition, the Company expects to spend approximately $50 million for further development of the Morrison deposit. Key capital programs include vertical and lateral development as well as infrastructure projects such as the continuing rehabilitation of the #2 Shaft and major underground infrastructure.

Podolsky

The Company expects 2011 production from Podolsky to range between 18 and 21 million pounds of payable copper, approximately 20-25 thousand ounces of payable TPMs and about 1 million pounds of payable nickel. In 2011 increased focus will also be placed on exploration with the aim of expanding the existing resource and reserve base. The 2011 onsite and offsite costs at Podolsky are expected to be in line with 2010. Capital expenditures are primarily related to mobile equipment, mine infrastructure and additional development work.

McCreedy West

The Company currently expects 2011 production at McCreedy West to be sourced only from the copper-rich footwall zones contributing approximately 5-6 million pounds of payable copper, 25-30 thousand ounces of payable TPMs and approximately 1 million pounds of payable nickel. In 2011, onsite and offsite costs at McCreedy West are expected to be in line with 2010 Capital expenditures are primarily related to mobile equipment, mine infrastructure and development work.

Plans for mining from the Contact Nickel resources remain on hold. However access to the mining areas developed prior to the shutdown of nickel mining has been kept in a state of readiness for future mining. Negotiations continue in order to find acceptable terms which would allow contact nickel mining to recommence. In addition, a pilot plant for electromagnetic/optical sorting is being built on the McCreedy West site to evaluate the potential for improvement of the economics of the contact nickel ore. This pilot plant is expected to be commissioned by the end of the first quarter of 2011.

PROJECTS UNDER DEVELOPMENT

Sierra Gorda

In 2010 the Company incurred costs of $61.2 million on the project, including $4.8 million of land and land option costs.

In late 2009, the Company commenced the studies required to advance the Sierra Gorda project towards production.

In 2010 the Company's principal activities have been those required to support a development decision including infill and condemnation drilling, geological modeling and reserve calculation, metallurgical and process test work, permitting, as well as infrastructure and engineering studies to establish capital and operating costs. As part of the completion of the Financing Study, the Company has involved a series of world class engineering and consulting companies as advisors.

The Environmental Impact Study ("EIS") was submitted to the regulatory authorities of Chile on May 31, 2010 and was accepted as containing all necessary elements on June 7, 2010. Since then, there has been a normal course interchange of questions and clarifications with regulators with no substantive issues. Based on other projects in Chile, the permitting timeframe is expected to be approximately 12 months.

To ensure the earliest start to project development, orders for key mining equipment were placed in 2010 in advance of completing the ongoing Financing Study. Major items included two electric shovels and two drills with a total purchase price of $51 million and deposits and progress payments of $15.4 million have been paid on this equipment. A further progress payment of $30.6 million is scheduled in the first half of 2011 for shovels and drills. An order was also placed in October 2010 for the initial truck fleet; but no payments are due in the first half of 2011 on this equipment. The Sierra Gorda project is subject to several lawsuits that have been filed in Chilean courts against the Company's wholly-owned Chilean subsidiary (see section below "Contingencies").

Sierra Gorda Outlook

The internal Sierra Gorda Financing Study, which establishes the development parameters for the project, remains on track for completion by the end of the first quarter of 2011, with the NI 43-101 compliant Feasibility Study expected to be completed in the second quarter of 2011. Discussions with potential partners are progressing well and targeted for a favourable partnership and financing structure to be in place by mid-2011. Total capital expenditures to the end of June 2011 are expected to be in the $110 million range.

The Company is continuing to advance all aspects of project development including detailed engineering, key equipment selection, ordering and construction and Build-Own-Operate contract negotiations, while partnering negotiations continue. Partner selection is dependent on completion of the Financial Study.

The EIA environmental permit is on schedule for approval in mid-2011.

Victoria Project

In 2006, exploration recommenced on Victoria, following the discovery of Zone 1 in 2008. Since then drilling has resulted in the identification of three additional Zones, the most significant of which was Zone 4. On September 7, 2010 the Company announced a summary of significant intersections from this zone, including;

  • 624 feet of 1.9% Cu, 1.7% Ni and 4.1 g/t TPMs intersection in drill hole FNX1186G,
  • 308 feet of 2.1% Cu, 3.1% Ni and 5.1 g/t TPMs intersected in FNX1195C, and
  • 71 feet of 4.1% Cu, 2.0% Ni and 60.1 g/t TPMs in FNX1200.

Throughout the fourth quarter of 2010, there were five diamond drill rigs on the Victoria property focused on Zone 4. Based on the results to date, the Company has determined that the next appropriate step is to consider developing underground, shaft-accessed infrastructure which would support exploration and could subsequently serve as production infrastructure. In order to evaluate the economic potential a Scoping Study was commenced in 2010. In addition, work is also progressing on environmental permitting and consultations with First Nations and other community stakeholders.

Victoria Project Outlook

The Company considers the Victoria discovery a significant part of its growth pipeline and will continue to aggressively advance the project. Activities planed for 2011 include drilling, more advanced engineering and metallurgical work. An inferred resource is expected to be completed early in the second quarter of 2011, while the ongoing Scoping Study on options for the development of underground infrastructure and permitting is expected to be completed by mid-2011. First Nations consultations and discussions with other stakeholders are also ongoing. Initial discussions have also been held with Vale with respect to future production. While the ultimate timeline of a shaft sinking decision remains dependent on several factors, the Company continue to aggressively advance this project.

Sudbury Exploration Properties

In addition to Victoria, the Company has exploration efforts at various stages in four other exploration properties: Kirkwood, Falconbridge Footwall, Foy Offset, and North Range. The Falconbridge Footwall and Foy Offset properties are pursuant to a joint venture agreement (the "Falconbridge Joint Venture") with Xstrata Nickel.

As at December 31, 2010, the Company and Xstrata Nickel held an 80% and 20% interest (2009 – 79% and 21%), respectively, in the Falconbridge Joint Venture. Xstrata Nickel has declined to participate in the 2010 work program. The Company is the operator of the Falconbridge Joint Venture and holds between a 30% and 100% interest in certain mineral exploration properties under the joint venture.

All of the Company's Sudbury mineral exploration properties are at the exploration stage and there can be no assurance that commercially viable mineral deposits or reserves exist therein.

DMC MINING SERVICES

In December 2010, DMC announced it had signed a five year contract to develop two new mine shafts at BHP Billiton's proposed Jansen Potash Project near Saskatoon, Saskatchewan. The total value of the contract is estimated at approximately $400 million and the Company will be required to post bonds totalling $37 million prior to the end of 2011. Over the five years DMC is expected to receive a combination of fixed and variable fees based on a percentage of the total contract value. The ultimate margin DMC will earn is dependent on certain performance criteria including safety, schedule and costs. DMC will be hiring staff and hourly employees for this new work as 2011 progresses. DMC continues to provide contract expertise to third parties and to the overall Quadra FNX organization, particularly with respect areas where mine access, contracting or underground mining is involved. Activity in the raise boring business also continues to be strong. Revenue from DMC post May 20, 2010 was $35 million and operating income was $2 million.

SAFETY AND ENVIRONMENTAL

Zero Lost Time Accidents

The Sudbury operations achieved zero lost time accidents for 2010. This represents a significant safety accomplishment for both employees and contractors working at these sites. The employees at the Franke Mine also worked the year without a lost time accident.

Safety Performance

The Company's open pit operations (Franke, Robinson and Carlota) safety performance achieved a Total Recordable Injury Rate ("TRIR") of 1.8, compared to a national average rate of 2.1 for U.S. surface mines. Employees at the Sudbury operations experienced a TRIR of 10.3 compared to a 4.5 rate for Ontario mines. Employees of DMC Mining Services experienced a TRIR of 2.3 compared to a 4.1 rate for Ontario mine contractors.

Environmental Incident

On December 29, 2010 a rail shipment of copper concentrate from Robinson Mine derailed while enroute to the ship loading facility in Vancouver, Washington. The incident occurred near Baker City, Oregon and resulted in the derailment of sixteen rail cars loaded with concentrate. The derailed cars were covered and only minor amounts of concentrate were lost during the derailment. Response crews from the Union Pacific Railroad performed the cleanup and repair of the damaged track and cars.

Permitting

The Environmental Impact Assessment for the Victoria project in the Sudbury Basin, Ontario has been completed and permitting work with the Ontario Ministry of Environment is scheduled to begin in early 2011.

The Carlota mine received a letter from the Arizona Department of Environmental Quality confirming that Carlota has met all the conditions that were imposed as a result of the January 2010 storm event.

2011 OUTLOOK AND GUIDANCE SUMMARY

For 2011 the Company expects consolidated copper production of 240 million pounds +/- 10% of payable copper, plus approximately 115 thousand ounces of payable TPMs and approximately 7 million pounds of payable nickel. The table below outlines a guidance range for each of the operations.

  Payable Copper (Mlbs)  
  Low High
Robinson 105 120
Morrison 30 40
Franke 35 45
Carlota 30 35
Podolsky 18 21
Levack Complex excluding Morrison 5 6

LIQUIDITY AND CAPITAL RESOURCES

At December 31, 2010, the Company had cash and cash equivalents of $319 million. These amounts are comprised of cash deposits and highly liquid investments that are readily convertible to cash. The counter parties include banks, governments and government agencies. The Company also held marketable securities, excluding the Gold Wheaton shares, with a total fair value of $57.2 million. During the third quarter of 2010, the Company converted the C$50 million note receivable from Gold Wheaton into common shares of Gold Wheaton, increasing its ownership in Gold Wheaton to 34.5%. On December 9, the Company signed a Sale and Purchase agreement with Franco-Nevada Corporation ("Franco-Nevada") to sell all of the 56,464,126 Gold Wheaton common shares that the Company owned to Franco-Nevada at C$4.65 per share. The transaction was closed on January 5, 2011 and the Company received initial proceeds of C$263 million, a further C$30 million payment is contingent.

In connection with the merger with FNX in May 20, 2010, the Company increased cash and cash equivalents by $205 million. The Company generated cash flow from operating activities of $254 million for the current year compared to $67.4 million in 2009. The increase in operating cash flow is largely driven by the increased copper price, as well as higher sales volumes due to the operation of Franke and the merger with FNX.

At December 31, 2010, the Company had working capital of $755.5 million as compared to $217.5 million at December 31, 2009. The increase in working capital in 2010 is primarily the result of the merger with FNX combined with operating cash flow net of capital expenditures. At December 31, 2010, accounts receivable and revenues include approximately 31.5 million pounds of copper that has been provisionally valued at $4.40/lb. The final pricing for these provisionally priced sales is expected to occur between January and June 2011. Changes in the price of copper from the amounts used to calculate the provisional values will impact the Company's revenues and working capital position in the first quarter of 2011.

Capital spending in 2010 was $188.7 million for operations and projects, which included $12.5 million of capitalized Ruth pit mud removal costs. An additional $6.2 million was paid to increase environmental bonding, mainly for Robinson. In 2010, the Company also made payments of $16.8 million for equipment and other security deposits for the Sierra Gorda project.

During 2010 the Company settled 19.8 million pounds of Franke copper collars and paid $21.2 million to the counter parties. This completes the collar program for Franke. In addition, the Company purchased additional copper put options under the price protection program at a cost of $10.1 million. In the first quarter of 2010, the Franke project finance facility was increased by $12.5 million and in the fourth quarter of 2010, the Company repaid the remaining facility balance with no penalty. During 2010, the Company entered into new operating lease agreements for loading equipment for deployment at Carlota with a value of $15 million.

Liquidity Outlook

The Company's future profitability and cash position is highly dependent on the price of copper and gold and to a lesser extent nickel. Future changes in the price of copper will also impact the final settlement price of provisionally priced sales. The Company has purchased copper put options to protect a minimum floor price for a portion of its future copper production (see "Financial Instruments"). The Company is planning to spend $110 million in the first half 2011 to progress the Sierra Gorda project. In addition, the Company expects to spend $140 million on capital expenditures at its five operating mines. At current metal prices, the Company expects that it will be able to fund the 2011 capital requirements for all of its mines and projects, including the Sierra Gorda Financing Study, from existing cash on hand and internally generated funds.

Based on ongoing work, the Company is using $2.75 billion as the capital cost funding requirement in discussions with potential partners with the objective of arranging the financing for the Sierra Gorda project. The partnering arrangement is likely to include the sale of up to 50% of the project to a partner.

Commitments and contractual obligations

  Less than 1-2 2-3 3-4 4-5 After  
  1 year years years years years 5 years Total
Reclamation liabilities 0.8 0.8 0.8 0.8 0.8 73.9 77.9
Franke Mine supply contracts 16.1 15.2 15.0 12.7 10.4 51.1 120.5
Robinson Mine power supply contract 9.2 9.2 - - - - 18.4
Sierra Gorda project equipment purchase 30.6 5.1 - - - - 35.7
Minimum lease payments (capital and operating) 14.2 8.1 6.2 3.3 0.9 - 32.7
Total 70.9 38.4 22.0 16.8 12.1 125.0 285.2

Reclamation liabilities

The Company has estimated total future reclamation costs of $77.9 million (undiscounted), which primarily relate to the closure of the Robinson, Carlota and Franke mines and the Sudbury operations. The Company has estimated the fair value of this liability to be $37.5 million at December 31, 2010 based on the estimated discounted future payments. To secure a portion of the closure costs related to Robinson and Carlota, the Company has posted environmental bonds and held cash in a reclamation trust totalling $57.5 million as at December 31, 2010. The Company revises the reclamation plan and cost estimate for Robinson annually as required by the US Bureau of Land Management and adjusts the amount of the bond accordingly. The reclamation plan and cost estimate for Carlota is updated every five years as required by the regulator and the amount of the bond is adjusted accordingly. There is currently no environmental bonding in place at Franke. A closure plan for Podolsky has been submitted to the Ontario Government resulting in a bonding requirement of $4.0 million. Closure plans for the McCreedy and Levack operations are governed by arrangements between the Ontario Government and Vale and between Vale and the Company. Under the latter agreement, the Company has placed $2.5 million in trust with Vale.

Franke Mine supply contracts

The Company has a long-term supply contract for sulphuric acid for use in the copper extraction process at Franke. The minimum commitment under the contract is estimated to be $4.1 million per annum subject to adjustment based on the prevailing copper prices over the term of the contract which expires in 2022. The Company is committed to purchase 150,000 tonnes of sulfuric acid per annum at a base price of $27/tonne. The base price for acid in the contract is increased by $2.50/tonne for each $0.10/lb that the copper price exceeds $1.10/lb.

Franke also has a long-term supply contract for industrial water. The minimum commitment under the contract is estimated to be approximately $1.1 million per annum subject to adjustment based on the prevailing copper prices over the term of the contract which expires in 2020. The copper price adjustment requires, on an annualized basis, that approximately an additional $120 be paid for each $0.15/lb that the copper price exceeds a base price of $1.50/lb. The Company has also entered into various supply and other contracts for operation and development of Franke.

Robinson Mine power supply contract

Robinson has a three year supply contract for electricity. The minimum commitment under the contract is estimated to be $8.8 million plus service charges per annum over the term of the contact which expires in 2012.

Sierra Gorda project equipment purchase

During 2010, the Company placed orders for two electric shovels and two drills with a total purchase price of $51 million. Non- refundable deposits and progress payments of $15.4 million have been paid on this equipment. The equipment is expected to be delivered in 2012.

MARKET TRENDS AND FUNDAMENTALS

Since trading to a multiyear low of $1.26/lb in December 2008, due to the global credit crisis and corresponding economic downturn, copper prices have rebounded sharply over the past two years. Falling ore grades at aging large mines, the lack of funding for higher cost/new projects due to the 2008 financial crisis and project delays have caused mine supply to underperform. Continued strong emerging market demand and a rebound in 2010 Organization for Economic Cooperation and Development ("OECD") demand, coupled with a weakening USD, have provided the backdrop for copper prices to trade to all time highs in December of 2010. Going forward, the company believes that copper market fundamentals will remain strong. Continued robust demand from China and other emerging market countries, together with increasing OECD demand from a gradual recovery in the global economy, will drive global copper demand ahead of both scrap and primary mine supply.

The following graph shows the spot price of copper from 2006 to January 31, 2011 as published by the London Metal Exchange ("LME").

To view the graph for LME Copper Price, please visit the following link: http://media3.marketwire.com/docs/qux228_graph_01.pdf

At December 31, 2010, the closing spot price was $4.42/lb. At January 31, 2011, the closing spot price was $4.43/lb. The reference price of copper metal is determined by trading on the LME, where the price is set in U.S. dollars at the end of each business day.

FINANCIAL INSTRUMENTS AND OTHER INSTRUMENTS

The Company's revenues and cash flows are subject to fluctuations in the market price of copper and gold. In addition, there is a time lag between the time of initial payment on shipment and final pricing, and changes in the price of copper and gold during this period impact the Company's revenues and working capital position.

The following table summarizes the impact of the changes in copper price on the Company's after tax earnings for 2011, excluding the impact of changes in fair value of copper put options:

Copper price Impact on the after tax earnings (excluding derivates)  
+ $0.20/lb 38.6  
- $0.20/lb (38.6 )

The Company has a floor price protection program in place for a portion of its anticipated copper sales from January 2011 to July 2011. During 2010, the Company purchased additional copper put options for 190 million pounds of copper at an average strike price of $2.52/lb at a cost of $10.1 million. A total of 175 million pounds of copper put options expired unexercised.

At December 31, 2010, the Company had 95 million pounds of copper puts outstanding with an average strike price of $2.65/lb (December 31, 2009 – 79 million pounds with an average strike price of $1.86). The expiry dates of these put options are between January 2011 and July 2011.

Under the terms of these contracts, if the average LME cash price for the month is less than the strike price of the put option the Company will receive the difference in price between the average LME cash price and the strike price for the contracted number of pounds. The counter parties consist of several international financial institutions. The Company monitors its counter party exposures and does not believe there are any credit or collection issues at the current time. The change in fair value of these instruments is recorded as a derivative gain or loss on the statement of earnings.

The following table summarizes the impact of different copper prices on the Company's cash flows from copper put options in 2011:

Copper price Cash flows from copper put options
$1.50/lb 109.0
$2.00/lb 61.6
$2.50/lb 14.2
$3.00/lb -

The Company has entered into NYMEX heating oil futures contracts and collar contracts in order to manage the price risk associated with diesel fuel. During the year ended December 31, 2010, the Company settled 10.9 million gallons of NYMEX heating oil contracts resulting in a cash payment of $0.6 million to the Company (2009 – 8.1 million gallons at $6,246), which has been recorded in cost of sales on the statement of earnings. During the year ended 2010, the Company entered into contracts for a total of 8.1 million gallons of NYMEX heating oil futures at no cost (2009 - 11.9 million gallons).

At December 31, 2010, the Company had 8.1 million gallons of NYMEX heating oil futures contracts outstanding with an average strike price of $2.25/gallon (December 31, 2009 – 10.9 million gallons). The expiry dates of these NYMEX heating oil futures contracts are between January 2011 and December 2011. As a result of a review of risks to the Company the diesel price protection program was curtailed as of December 2010 and the existing contracts will be allowed to run out.

CONTINGENCIES

(a)   The Company was originally served with four lawsuits that were filed in Chilean Courts against the Company's wholly-owned Chilean subsidiary, Minera Quadra Chile Limitada ("MQCL"). These lawsuits seek to invalidate certain of the option agreements under which the Company acquired mining tenements that comprise a significant part of the Sierra Gorda project. MQCL is aware that the same plaintiffs are attempting to initiate additional lawsuits seeking to declare null and void the option agreements relating to the mineral properties that are already the subject of the first case. Based on advice of Chilean counsel, Quadra believes that the option agreements are valid and that the lawsuits are without merit.
   
  The plaintiffs in the lawsuits are or were shareholders in the "sociedades legales mineras" ("SLM") or legal mining companies that owned certain of the mining tenements that were optioned to the Company in 2004. The Company believes it fully complied with the terms of all option agreements and the plaintiffs accepted all option payments until April 2008. In 2009 the company has settled one case for an immaterial sum and recently a court dismissed the plaintiff's appeal in another case. In another case an arbitrator found that the contracts were valid and in a further case the court ruled in favour of MQCL and awarded MQCL costs. The plaintiffs are appealing or attempting to appeal certain decisions.
   
  Although the Company believes, based on advice from Chilean counsel, that the disputed option agreements are valid and that the legal claims are without merit, the outcome is uncertain. These lawsuits are subject to the procedural and substantive laws of Chile and the allegations are based on the actions of the SLM management, in respect of which MQCL has no direct knowledge. MQCL is vigorously defending these lawsuits; however, there is no assurance that it will be successful.
   
(b) The payable metals the processor is required to pay for ore shipped and sold by the Company are determined based on the metal which the processor is able to recover from the various ore deposits. This will vary depending on the particular metallurgical composition of each ore deposit as determined by metallurgical testing of the various ore deposits. There are several different final payable metals terms with Vale Inco for the various ore deposits at the Levack Complex to reflect the differences in the metallurgical composition of the ore deposits.
   
  Interim processing costs terms and interim payable metals terms, based on preliminary metallurgical testing, have been established by Vale for the Levack and Podolsky mines. Once final payable metals and processing costs terms are determined, it is expected that they may be applied to ore shipped from Levack in prior periods. The Company cannot, at this time, determine the amount, if any, of such adjustment. Depending on the outcome of the final payable metals and costs terms there may be a material increase or decrease in payable metals and/or processing costs to be recorded.
   
(c)  In the normal course of business DMC enters into agreements that contain indemnification commitments and may contain features that meet the expanded definition of guarantees. The terms of these indemnification agreements will vary based on the contract and typically do not provide for a limit on the maximum potential liability. The Company has not made any payments under such indemnifications and no amounts have been accrued in the financial statements with respect to these indemnification commitments.
   
(d)  The Company is subject to other lawsuits from time to time which are not disclosed on the grounds that they are not believed to be material.

TRANSACTIONS WITH RELATED PARTIES

One of the directors of the Company is a partner of an affiliate of Blake, Cassels & Graydon LLP. During the year ended December 31, 2010, the Company incurred legal fees of $1.8 million with that entity (year ended December 31, 2009: $0.5 million), all of which were at normal business terms. As a result of the merger with FNX, Gold Wheaton became a significantly influenced investee and thus became a related party. All transactions conducted with Gold Wheaton are at terms in the purchase and sale agreement. Since the merger, sales to Gold Wheaton for the period ended December 31, 2010 totaled $13.9 million and accounts receivable at December 31, 2010 from Gold Wheaton was $10.9 million.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

In preparing financial statements management has to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. Based on historical experience, current conditions and expert advice, management makes assumptions that are believed to be reasonable under the circumstances. These estimates and assumptions form the basis for judgments about the carrying value of assets and liabilities and reported amounts for revenues and expenses. Different assumptions would result in different estimates and actual results may differ materially from results based on these estimates. These estimates and assumptions are also affected by management's application of accounting policies. Critical accounting policies and estimates are those that affect the consolidated financial statements materially and involve a significant level of judgment by management.

Mineral Properties

Mineral property development costs, including exploration, mine construction, and stripping costs, are capitalized until production is achieved, and are then amortized over the remaining life of the mine based on proven and probable reserves. The determination of the extent of reserves is a complex task in which a number of estimates and assumptions are made. These involve the use of geological sampling and models as well as estimates of future costs. New knowledge derived from further exploration and development of the ore body may also affect reserve estimates. In addition the determination of economic reserves depends on assumptions on long-term commodity prices and in some cases exchange rates.

The carrying value of mineral properties is reviewed regularly and whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. An impairment loss is recognized for a mineral property if its carrying value exceeds the total undiscounted cash flows expected from its use and disposal. Undiscounted cash flows for mineral properties are estimated based on a number of assumptions including management's view of long-term commodity prices, proven and probable reserves, estimated value beyond proven and probable reserves, and estimates of future operating, capital, and reclamation costs. Based on management's view of future metal prices and cost assumptions, the carrying value of the Company's mineral properties was not impaired at December 31, 2010.

Leach Pad Inventory

Leach pad inventory is comprised of ore that has been extracted from the mine and placed on the heap leach pad for further processing. Costs are removed from leach pad inventory as cathode copper is produced, based on the average cost per recoverable pound of copper in process. The quantity of recoverable copper in process is an engineering estimate which is based on the expected grade and recovery of copper from the ore placed on the leach pad. The nature of the leaching process inherently limits the ability to precisely monitor inventory levels. However, the estimate of recoverable copper placed on the leach pad is reconciled to actual copper production, and the engineering estimates will be refined based on actual results over time.

Revenue Recognition

Sales are recognized and revenues are recorded at market prices when title transfers and the rights and obligations of ownership pass to the customer. The majority of the Company's product is sold under pricing arrangements where final prices are determined by quoted market prices in a period subsequent to the date of sale. For sales of Robinson's concentrates and Sudbury's copper and nickel ores, final pricing is generally determined three to six months after the date of sale. For the sales of copper cathode, final pricing is generally determined in the month or the subsequent month after the date of sale. The Company estimates provisional pricing for its product based on forward prices for the expected date of the final settlement. Subsequent variations in price are recognized as revenue adjustments as they occur until the price is finalized. As a result, revenues include estimated prices for sales in that period as well as pricing adjustments for sales that occurred in the previous period. These types of adjustments can have a material impact on revenues.

Asset Retirement Obligations, Reclamation and Mine Closure

Due to uncertainties concerning environmental remediation, the ultimate cost to the Company of future site restoration could differ from the amounts provided. In 2010 and in previous years the Company has revised its estimate of the timing and amount of closure costs at its mines, which resulted in adjustments to the liability recorded in the Company's financial statements. The estimate of the total liability for future site restoration costs is subject to change based on cost inflation, amendments to laws and regulations and may also change as new information concerning the Company's operations becomes available. The Company is not able to determine the impact on its financial position, if any, of environmental laws and regulations that may be enacted in the future.

Future Income Tax Assets

Management believes that uncertainty exists regarding the realization of certain future tax assets and therefore a valuation allowance has been recorded as of December 31, 2010. At December 31, 2010 the Company had additional available U.S. Alternative Minimum Tax Credits of $7.0 million, which have not been recognized due to the uncertainty of realization. The Company also has not recognized the benefit of the tax basis of Carlota and Franke in excess of the acquisition price, and certain non-capital losses. However, the Company has recognized a net current future income tax asset for other temporary differences created between the tax and accounting basis of assets and liabilities in the United States, Chile and the Company's Sudbury operations. Management estimates that, using long term copper prices in line with its mine plan estimates, the future taxable income will be sufficient to utilize the future tax assets which have been recognized.

OUTSTANDING SHARE DATA

The Company had 190,415,494 common shares issued and outstanding at December 31, 2010. As of February 25, 2011, the Company had 190,607,095 common shares issued and outstanding.

INTERNAL CONTROL OVER FINANCIAL REPORTING

The Company's management is responsible for establishing and maintaining adequate internal control over financial reporting. Any system of internal control over financial reporting, no matter how well designed, has inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.

On May 20, 2010, the Company completed a merger with FNX. As a result, FNX is a business that the Company has acquired not more than 365 days before the last day of the period covered by the interim filings. Management believes that the internal controls and procedures of FNX have a material effect on its financial reporting internal controls. The Company is reviewing FNX's processes and controls and will be expanding its internal control over financial reporting scope to include FNX over the next fiscal year. The Company will exclude FNX from its disclosure controls and procedures and internal controls over financial reporting assessments for the year ended December 31, 2010, as permitted by NI 52-109 and applicable rules relating to business acquisitions.

Other than as described above, there have been no changes in internal control over financial reporting during the year ended December 31, 2010 that have materially affected, or are reasonably likely to materially affect internal control over financial reporting.

CONVERSION TO INTERNATIONAL FINANCIAL REPORTING STANDARDS ("IFRS")

Canadian publicly listed companies will be required to prepare financial statements in accordance with IFRS for interim and annual periods beginning on or after January 1, 2011. The Company's reporting under IFRS will commence in the first quarter of 2011.

The Company has appointed a project manager to lead the conversion to IFRS. The project manager is working with other members of the finance group to execute the implementation plan. The project planning is substantially completed and included an initial diagnostic review of significant IFRS differences that was completed by the Company's external auditors. Based on the work done so far, the Company does not expect that the conversion to IFRS will have a significant impact on its accounting processes and internal controls (including information technology systems). The Company will be updating its disclosure controls and procedures to ensure they are appropriate for reporting under IFRS. In addition, the Company does not expect the conversion to IFRS to have a significant impact on its risk management or other business activities.

Significant accounting impacts of conversion to IFRS

The Company has completed its assessment of all accounting policy differences that may arise on conversion from Canadian GAAP to IFRS. The following is a summary of the key accounting policy differences that have been identified to date including quantification of these differences on its consolidated financial statements. Management is continuing to evaluate the differences and the full impact on future financial reporting is not reasonably determinable and estimable at this time.

Property, Plant & Equipment – IFRS requires that the Company identify the different components of its fixed assets and record amortization based on the useful lives of each component. The Company has reviewed and analyzed the depreciation of its existing property, plant & equipment on this basis, and has concluded that there are no material differences between IFRS and current depreciation policies. As such, no adjustment will be required on the opening Statement of Financial Position as at January 1, 2010. Subsequent additions to property, plant & equipment from the transition date will be subject to componentization and amortized over their respective useful lives. Based on current IFRS guidance, current accounting policies for stripping costs and exploration costs will not be impacted by the conversion to IFRS.

Business Combinations – IFRS 1 provides an exemption that allows companies transitioning to IFRS not to restate business combinations completed prior to the date of transition. The Company has elected to use this exemption and will not be restating the accounting for any acquisitions prior to January 1, 2010. The impact of this policy decision is that, all business combinations entered before January 1, 2010 will continue to be accounted for as they originally were under Canadian GAAP. The acquisition of FNX has been accounted for under the new CICA Handbook Section 1582 Business Combinations, which the Company early adopted in 2010. This section is consistent with IFRS.

Asset Retirement Obligations – The Company has elected to use an IFRS 1 exemption to take a simplified approach to calculate and recognize the asset related to the asset retirement obligation on the opening IFRS Statement of Financial Position. The provision for asset retirement obligation is calculated as at the transition date in accordance with IAS 37 "Provisions, contingent liabilities and contingent assets" ("IAS 37"). To determine the amount of the corresponding asset, the calculated provision under IAS 37 is discounted back to the date when the provision first arose, at which date the corresponding asset is recognized. This asset is depreciated to its carrying amount as at the transition date. IFRS will require the Company to re-measure its provision for asset retirement obligations on a quarterly basis using a pre-tax risk free rate adjusted for the risks specific to the obligation, which will result in some variability in both the carrying value of the liability and corresponding asset, and associated expenses in profit or loss.

The above asset retirement obligations policy choices resulted in a net decrease of shareholders' equity as at January 1, 2010. The net decrease comprise of an increase in provision for asset retirement obligations resulting from changes in discount rates, and corresponding increase in related asset of the provision (net of accumulated depreciation to transition date).

Impairment - IAS 36 "Impairment of Assets", uses a one-step approach to both testing for and measurement of impairment, with asset carrying values compared directly with the higher of fair value less costs to sell and value in use (which uses discounted future cash flows). This may potentially result in more write-downs where carrying values of assets were previously supported under Canadian GAAP on an undiscounted cash flow basis, but could not be supported on a discounted cash flow basis. IFRS also has the requirement under IAS 36 to reverse any previous impairment losses up to carrying value had there been no impairment losses where circumstances have changed. Canadian GAAP prohibits reversal of impairment losses.

Warrants – IFRS requires a change in accounting of the Company's warrants to lenders and those in connection with the FNX merger from treatment as equity instruments under Canadian GAAP to a derivative financial liability under IAS 39 "Financial Instruments: Recognition and Measurement" ("IAS 39"). The warrants were also measured at carrying value under Canadian GAAP. Although the exercise price of the warrants is fixed in Canadian dollars, the functional currency of the Company is in US dollars, thus, the foreign exchange conversion is considered a derivative under IAS 39 as the Company will report a variable amount of cash upon the exercise of the warrants. In compliance with IFRS, the warrants will be classified and accounted for as a financial liability, thereby decreasing shareholders' equity at January 1, 2010 and subsequent financial reporting dates. The financial liability will be stated at fair value at each date of the statement of financial position with changes in fair value and foreign exchange included in the periods' profit or loss.

Financial instruments – All financial assets and liabilities, including derivatives are recognized on the Statement of Financial Position under IFRS. They are re-measured to fair value at each subsequent Statement of Financial Position date until the financial assets/liabilities are derecognized. Gains and losses arising from changes in fair value are included in the profit and loss of the period in which they occur. Management has considered all material contracts and has reviewed a representative sample of them for applicability. There were two separate agreements to buy non-financial items having features that would qualify it as having an embedded derivative. The pricing of these non-financial items has variable elements based on future price of copper and annual fluctuations of various price indices. Current accounting of these agreements under Canadian GAAP is consistent with the requirements under IFRS; therefore, no adjustment is required at the Transition Date.

Accounting for income taxes – Under IAS 12 "Income Taxes" ("IAS 12"), the accounting for deferred taxes for the acquisition of assets that do not constitute a business combination is different from Canadian GAAP. As such, on transition to IFRS, the Company may be required to adjust deferred tax assets related to the acquisition of asset. The Company is currently accessing the impact. Another significant difference from Canadian GAAP is the deferred tax liability arising from the QuadraFNX warrants. If the warrant expires, the entity will incur a taxable capital gain, and the deferred tax liability should reflect the tax consequences that QuadraFNX expects at the end of the reporting period. The Company will increase the deferred tax liability upon transition to reflect current market value of the warrants. There are also certain differences arising from the measurement of assets and liabilities under IFRS as compared to Canadian GAAP which has a tax impact on the financial statements. These would include Share-Based Payments, and Provision for Asset Retirement Obligations.

Business Activities

The impact of the IFRS conversion project on our compensation arrangements will be reviewed during the first quarter of 2011. Such arrangements are calculated based on financial information disclosed in the financial statements. The plan is to ensure that all compensation arrangements are amended for the applicable IFRS changes in accordance with compensation policies. The Company does not anticipate a significant impact to existing compensation arrangements due to the IFRS conversion project. The Company's budgeting and forecasting models will be amended to reflect the IFRS changes in accounting policies, reclassifications, and measurements of applicable financial statement line items.

Controls and Procedures

Based on the work done so far, the Company does not expect that the conversion to IFRS will have a significant impact on its internal controls (including information technology systems), and accounting processes. However, the extent of change in accounting framework has required the Company to update its internal controls, disclosure controls and procedures to ensure they are appropriately designed and operated effectively for reporting under IFRS. These would include: training/communication – to ensure IFRS knowledge is transferred from subject matter experts to entire organization; documentation – to ensure corporate accounting policies are updated for IFRS, and transitional analysis and decisions are adequately supported; and review – to ensure segregation of duties in the review and approval of IFRS information from preparer to management, and ultimately by the Audit Committee. As a result of these incremental internal control enhancements, the impact of the conversion from Canadian GAAP to IFRS on the Company's risk management or other business activities are reduced.

Ongoing Activities

The completion of the Implementation and commencement of Post-Implementation phases will involve continuous monitoring of the changes implemented to date to ensure completeness and accuracy of our IFRS financial reporting. There are processes in place to ensure that significant standard setting projects that may result in additional differences between Canadian GAAP and IFRS in the future are monitored and evaluated.

The following table summarizes the operating results of the most recent eight quarters (unaudited):

SUMMARY OF QUARTERLY OPERATING RESULTS
 
  2010 2009
 
  Q4 Q3 Q2 Q1 Q4 Q3 Q2 Q1
Robinson                
Cu produced in concentrate (Mlbs) 26.6 26.7 23.7 32.0 29.3 33.6 22.9 36.7
Ore milled (Mt) 3.5 3.3 3.6 3.3 3.4 3.6 3.2 3.4
Au production (kozs) 15.7 15.3 15.2 26.8 25.1 21.1 18.0 34.6
Cu grade (%) 0.46 0.49 0.40 0.59 0.59 0.75 0.58 0.65
Au grade (g/t) 0.26 0.25 0.20 0.31 0.31 0.26 0.25 0.42
Cu recovery (%) 75.4 75.3 73.5 72.2 65.9 57.4 56.3 75.4
Au recovery (%) 53.3 58.2 66.3 78.1 73.1 71.4 70.4 75.4
Cu sales (Mlbs) 24.7 28.5 26.6 27.8 31.7 21.1 24.2 34.5
Average final settlement price ($/lb) $3.79 $3.19 $3.19 $3.37 $3.02 $2.42 $2.14 $1.56
Cash cost per pound of copper produced ($/lb) $1.80 $1.58 $1.60 $1.10 $1.47 $1.07 $1.54 $0.57
 
Carlota                
Cu production (Mlbs) 6.6 7.3 7.4 8.2 8.0 6.6 6.8 6.6
Total Cu grade (%) 0.7 0.77 0.39 0.35 0.61 0.45 0.34 0.30
Ore placed (Mt) 1.5 2.3 1.6 1.0 2.6 1.4 1.3 1.7
Cu sales (Mlbs) 7.7 6.6 7.7 9.5 6.4 6.5 7.5 5.9
Average realized price ($/lb) $3.88 $3.29 $3.13 $3.25 $3.01 $2.63 $2.10 $1.53
Cash cost per pound of copper sold ($/lb) $1.84 $1.74 $1.89 $1.76 $1.61 $1.88 $1.89 $1.54
 
Franke                
Cu production (Mlbs) 7.8 10.1 10.4 8.9 9.4 4.1 - -
Ore placed (Mt) 0.7 0.9 0.8 0.8 0.8 0.5 - -
Total Cu grade (%) 0.86 0.77 0.86 0.91 0.85 0.80 - -
Cu sales (Mlbs) 10.3 12.8 7.8 10.3 6.9 - - -
Average realized price ($/lb) $3.97 $3.23 $3.24 $3.25 $3.03 - - -
Cash cost per pound of copper sold ($/lb) $2.60 $2.60 $2.60 $1.99 $2.07 - - -
 
Morrison                
Cu ore sold (kt) (1) 39.7 29.3 20.0 12.7 3.1 - - -
Cu grade (%) 9.5 11.2 9.1 5.8 8.2 - - -
Payable Cu sold (Mlbs) 7.1 6.3 3.5 1.6 0.7 - 0.1 0.1
Payable Ni sold (Mlbs) 1.5 1.2 0.9 0.9 0.3 - 0.2 0.1
Payable TPM sold (kozs) (2) 4.1 3.0 1.9 0.9 0.8 - 0.1 0.1
Average realized price ($/lb) $4.37 $3.67 $2.89 $3.49 $3.17 - $3.29 $3.02
Cash cost per pound of copper sold ($/lb) -$0.34 -$0.04 -$2.70 -$7.39 $0.36 - -$5.07 $5.10
 
Podolsky                
Cu ore sold (kt) (1) 118.0 97.2 128.9 71.3 167.5 6.2 58.1 83.8
Cu grade (%) 3.7 3.2 3.7 2.6 4.2 3.5 4.5 6.0
Payable Cu sold (Mlbs) 8.1 5.4 8.6 3.2 13.0 0.4 5.4 9.4
Payable Ni sold (Mlbs) 0.4 0.3 0.6 0.3 0.8 0.03 0.3 0.8
Payable TPM sold (kozs) (2) 10.6 5.4 11.5 5.3 15.1 0.9 7.8 3.9
Average realized price ($/lb) $4.36 $3.82 $2.88 $3.63 $3.17 $3.32 $2.58 $1.73
Cash cost per pound of copper sold ($/lb) $0.74 $1.67 $1.07 $1.69 $1.16 $1.17 $0.55 $1.11
 
McCreedy West                
Cu ore sold (kt) (1) 76.1 72.6 67.5 67.3 154.5 2.3 89.2 7.5
Cu grade (%) 0.8 0.8 1.1 1.1 1.1 0.8 1.3 1.4
Payable Cu sold (Mlbs) 1.1 1.2 1.2 1.3 3.3 0.03 2.4 0.4
Payable Ni sold (Mlbs) 0.2 0.2 0.2 0.2 0.6 0.01 1.2 0.4
Payable TPM sold (kozs) (2) 8.3 8.1 8.3 7.7 18.8 0.1 8.8 3.5
Average realized price ($/lb) $4.46 $3.69 $2.84 $3.25 $3.17 $30.92 $2.37 $2.82
Cash cost per pound of copper sold ($/lb) $1.55 $2.83 $3.15 $1.23 $1.77 -$5.46 $1.23 -$6.94
(1) Converted into metric tonne from original short ton
(2) Total precious metal, including gold, platinum and palladium
(3) Production and operating statistics in this table are reported for historical periods for all of the Company's mines, including periods prior to the merger of Quadra and FNX on May 20, 2010

The quarterly performance of Robinson varies as a result of changes in head grade, metal recovery and waste stripping requirements. Due to the complex nature of the Robinson ore body, volatility in metal prices, and industry cost pressures the results have varied from quarter to quarter and this is expected to continue in the future.

SELECTED ANNUAL INFORMATION

  2010 2009 2008
Statement of operations      
Revenues 958 479 505
Earnings 172.5 80.5 38.6
Basic earnings per share $1.11 $0.89 $0.61
Diluted earnings per share $1.10 $0.89 $0.60
 
Financial positions      
Total assets 2,834 1,247 859
Total long-term financial liabilities 473 79 46
Dividends n/a n/a n/a

NON-GAAP FINANCIAL MEASURES

The cash cost per pound of copper, and onsite costs and offsite costs are non-GAAP financial measures that do not have a standardized meaning under Canadian Generally Accepted Accounting Principles ("GAAP"), and as a result may not be comparable to similar measures presented by other companies. Management uses these statistics to monitor operating costs and profitability. Onsite costs include mining costs, equipment operating lease costs, mill costs, mine site general and administration costs, environmental costs and royalties. Offsite costs include the costs of transportation, smelting and refining of concentrate, and treatment costs for ores. By-product revenues from the Sudbury Operations reflect the actual cash price earned from sales of precious metals to Gold Wheaton. Costs of sales, as reported on the statement of operations, is different that the costs of production because of changes in concentrate inventory levels. The following table shows a reconciliation of these non-GAAP financial measures to the consolidated statements of operations:

To view the table of Reconciliation of Non-GAAP Financial Measures to the Consolidated Statements of Operations, please visit the following link: http://media3.marketwire.com/docs/qux228_table_03.pdf

  Three months ended   Three months ended
  December 31, 2010   December 31, 2009
  Robinson Carlota Franke     Robinson Carlota Franke  
                   
Cost of sales 62.3 12.7 26.8     66.1 9.3 14.2  
Adjustment for change in inventory 3.2 11.1 (1.0 )   0.5 9.8 8.7  
Capitalized stripping costs - - -     - - -  
Royalties 4.5 1.5 -     5.1 1.0 -  
Total onsite and offsite costs 70.0 25.3 25.8     71.7 20.1 22.9  
                   
  Year ended   Year ended  
  December 31, 2010   December 31, 2009  
  Robinson Carlota Franke     Robinson Carlota Franke  
                   
Cost of sales 251.8 51.7 100.9     209.7 43.9 14.2  
Adjustment for change in inventory 1.0 40.5 (2.40 )   13.4 27.6 8.7  
Royalties 15.2 5.4 -     12.1 3.2 -  
Total onsite and offsite costs 268.0 97.6 98.5     235.2 74.7 22.9  
 
Note: onsite and offsite costs at Morrison, Podolsky and Levack Complex (excluding Morrison) equal to cost of sales as inventory movement at these mines is minimal.

Cash flow from operating activities (before working capital changes) is also not a defined term under GAAP, and consists of cash provided from operating activities less net changes in non-cash working capital.

Adjusted earnings and adjusted earnings per share are non-GAAP measures which determine the performance of the Company, excluding certain impacts which the Company believes are either non-recurring, or recurring, but of a nature which are not reflective of the Company's underlying performance, such as the impact of gain and loss on derivatives, gains and losses from marketable securities and investments, foreign exchange gains and losses on translation of future income tax liabilities, inventory write down (reversal), merger costs, and adjustments of prior year taxes. Management believes that these measures provide investors with ability to better evaluate underlying performance. The following table provides a reconciliation of earnings to adjusted earnings for the periods presented:

  Three months ended     Three months ended  
  December 31, 2010     December 31, 2009  
(All amounts in millions of United States dollars except per share amounts)
               
Net earnings - GAAP   57.9       46.5  
   
Adjusting items:              
  Loss on derivatives   22.0       14.8  
  Gain on marketable securities   (0.6 )     (5.8 )
  Accounting gains from investment in Gold Wheaton   (1.5 )     -  
  Foreign exchange loss on translation of future income tax liabilities   4.5       -  
  Inventory write down at Carlota   33.4       -  
  Tax impact of the above items   (13.3 )     (2.8 )
  Taxes in respect of prior years   2.7       (1.7 )
    47.2       4.5  
Net earnings - Adjusted   105.1       51.0  
   
Weighted-average number of shares outstanding - basic   189.9       99.4  
Earnings per share - adjusted $ 0.55     $ 0.51  
   
  Year ended     Year ended  
  December 31, 2010     December 31, 2009  
(All amounts in millions of United States dollars except per share amounts)
   
Net earnings - GAAP   172.5       80.5  
   
Adjusting items:              
  Loss on derivatives   34.0       54.5  
  Gain on marketable securities   (8.1 )     (6.7 )
  Transaction costs for FNX merger   7.2       -  
  Accounting gains from investment in Gold Wheaton   (10.3 )     -  
  Foreign exchange loss on translation of future income tax liabilities   13.5       -  
  Inventory write down (reversal) at Carlota   33.4       (9.7 )
  Tax impact of the above items   (18.9 )     (9.1 )
  Taxes in respect of prior years   2.1       0.6  
    52.9       29.6  
Net earnings - Adjusted   225.4       110.1  
   
Weighted-average number of shares outstanding - basic   154.9       90.0  
Earnings per share - adjusted $ 1.45     $ 1.22  

February 25, 2011

FORWARD-LOOKING INFORMATION

This Press Release that includes the MD&A contains "forward-looking information" that is based on Quadra FNX's expectations, estimates and projections as of the dates as of which those statements were made. This forward-looking information includes, among other things, statements with respect to the Company's business strategy, plans, outlook, financing plans, long-term growth in cash flow, earnings per share and shareholder value, projections, targets and expectations as to reserves, resources, results of exploration (including targets) and related expenses, property acquisitions, mine development, mine operations, mine production costs, drilling activity, sampling and other data, estimating grade levels, future recovery levels, future production levels, capital costs, costs savings, cash and total costs of production of copper, gold and other minerals, expenditures for environmental matters, projected life of Quadra FNX's mines, reclamation and other post closure obligations and estimated future expenditures for those matters, completion dates for the various development stages of mines, availability of water for milling and mining, future copper, gold, molybdenum and other mineral prices (including the long-term estimated prices used in calculating Quadra FNX's mineral reserves), end-use demand for copper, currency exchange rates, debt reductions, use of future tax assets, timing of expected sales and final pricing of concentrate sales, the percentage of anticipated production covered by option contracts or agreements, anticipated outcome of litigation and anticipated impact of converting to IFRS,. Generally, this forward-looking information can be identified by the use of forward-looking terminology such as "outlook", "anticipate", "project", "target", "believe", "estimate", "expect", "intend", "should", "scheduled", "will", "plan" and similar expressions. Forward-looking information is subject to known and unknown risks, uncertainties and other factors that may cause Quadra FNX's actual results, level of activity, performance or achievements to be materially different from those expressed or implied by such forward-looking information, and developed based on assumptions about such risks, uncertainties and other factors set out herein, including but not limited to:

  • risks associated with the mineralogy and block model assumptions at all mines and projects including, in particular the complex Robinson mine;
  • uncertainties related to the extent to which historical mining activities at Robinson have removed mineral material expected to be present;
  • uncertainties related to the impact of the 2010 storm event at the Carlota Mine and uncertainty relating to the leaching rate achieved at Carlota;
  • risks related to maintaining current operating parameters at Podolsky;
  • uncertainties related to actual capital costs, operating costs, production schedules and economic returns associated with the ramp- up of the Morrison deposit;
  • risks associated with Quadra FNX's off-take agreement with Vale Inco, including the risk of potential adjustment to final payable metal and processing cost terms;
  • uncertainties relating to availability of updated equipment, the leaching rate and the transition to owner mining at Franke;
  • uncertainties related to the construction quality and structural design at Franke;
  • risks associated with the development of the Sierra Gorda project, a large project with significant capital expenditure, permitting and infrastructure requirements;
  • risks relating to the preliminary nature of the testwork underlying the scoping study described in the Sierra Gorda 2009 Technical Report;
  • risks associating with ongoing litigation at Sierra Gorda and with potential future litigation at Sierra Gorda and other projects;
  • risks relating to Quadra FNX's ability to find a suitable partner or obtain project financing for Sierra Gorda;
  • uncertainties related to the amount of funding required to achieve full production levels at Franke and Carlota and at the Morrison deposit;
  • uncertainties related to Quadra FNX's ability to expand or replace depleted reserves;
  • uncertainties related to the possible recalculation or reduction of the Company's mineral reserves and resources;
  • risks that Quadra FNX's title to its property could be challenged, including potential challenges from First Nations with respect to the Sudbury operations;
  • risks associated with Quadra FNX's dependence on transportation facilities and infrastructure;
  • risk associated with labour relations;
  • risks related to Quadra FNX's shareholder rights plan;
  • risk related to derivative contracts and exposure to the credit risk of counterparties;
  • risks associated with taxation;
  • conflicts of interest;
  • risks associated with fluctuations in costs of operating supplies and other inputs;
  • uncertainties related to actual capital costs, operating costs and expenditures, production schedules and economic returns from the Company's mining projects;
  • inherent hazards and risks associated with mining operations;
  • inherent uncertainties associated with mineral exploration;
  • risks associated with Quadra FNX being subject to government regulation, including changes in regulation;
  • risks associated with Quadra FNX being subject to extensive environmental laws and regulations, including change in regulation;
  • risks associated with Quadra FNX's need for governmental license and permits;
  • political and country risk;
  • Quadra FNX's need to attract and retain qualified personnel;
  • risks related to the need for reclamation activities on Quadra FNX's properties, including the nature of reclamation required and uncertainty of costs estimates related thereto;
  • risk of water shortages and risks associated with competition for water;
  • increases in off-site transportation and concentrate processing costs;
  • risks related to the stability of mine pit walls;
  • uncertainties related to fluctuations in copper and other metal prices;
  • uncertainties related to the current global financial conditions; and
  • uncertainties related to fluctuation in foreign currency exchange rates.

A discussion of these and other factors that may affect Quadra FNX's actual results, performance, achievements or financial position is contained in the filings by Quadra FNX with the Canadian provincial securities regulatory authorities, including Quadra FNX's Annual Information Form and the Annual Information Form filed by FNX prior to the merger between Quadra and FNX. Forward- looking statements are based on assumptions management believes to be reasonable, including but not limited to the continued operation of Quadra FNX's mining operations, no material adverse change in the market price of commodities, that the mining operations will operate in accordance with Quadra FNX's public statements and achieve its stated production outcomes, and such other assumptions and factors as set out herein. Although Quadra FNX has attempted to identify important factors that could cause actual results to differ materially from those contained in forward-looking statements, there may be other factors that cause results not to be as anticipated, estimated or intended. There can be no assurance that forward-looking statements will prove to be accurate. Accordingly, readers should not place undue reliance on forward-looking statements. Quadra FNX disclaims any intent or obligations to update or revise publicly any forward-looking statements whether as a result of new information, estimates or options, future events or results or otherwise, unless required to do so by law.

Contact Information

  • Media and Investor Relations Contact:
    Quadra FNX Mining Ltd.
    Derek White
    Executive Vice President, Corporate Development
    (604) 699-3063
    or
    Quadra FNX Mining Ltd.
    Nawojka Wachowiak
    Vice President, Investor Relations
    (416) 985-8317
    www.quadrafnx.com