Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

 

FORM 10-Q

 

x      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 2010

 

or

 

o         TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from             to                   

 

Commission File Number:  001-33783

 

THOMPSON CREEK METALS COMPANY INC.

(Exact name of registrant as specified in its charter)

 

British Columbia, Canada

 

98-0583591

(State or other jurisdiction of incorporation or organization)

 

(I.R.S. Employer Identification No.)

 

 

 

26 West Dry Creek Circle, Suite 810, Littleton, CO

 

80120

(Address of principal executive offices)

 

(Zip Code)

 

(303) 761-8801

(Registrant’s telephone number, including area code)

 

 

(Former name, former address and former fiscal year, if changed since last report)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.   x Yes o No

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  x Yes o No

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer x

 

Accelerated filer o

 

 

 

Non-accelerated filer o
(Do not check if a smaller reporting company)

 

Smaller reporting company o

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).   o Yes x No

 

As of November 4, 2010 there were of record 164,315,150 shares of Common Stock, no par value, outstanding.

 

 

 



Table of Contents

 

TABLE OF CONTENTS

 

 

Page

 

 

Part I. Financial Information

 

 

 

Item 1. Financial Statements:

 

 

 

Consolidated Balance Sheets (Unaudited)

3

 

 

Consolidated Statements of Operations (Unaudited)

4

 

 

Consolidated Statements of Cash Flows (Unaudited)

5

 

 

Consolidated Statement of Shareholders’ Equity (Unaudited)

6

 

 

Notes to Consolidated Financial Statements (Unaudited)

7

 

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

22

 

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

46

 

 

Item 4. Controls and Procedures

47

 

 

Part II. Other Information

47

 

 

Item 1. Legal Proceedings

47

 

 

Item 1A. Risk Factors

48

 

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

57

 

 

Item 3. Defaults Upon Senior Securities

57

 

 

Item 4. (Removed and Reserved)

57

 

 

Item 5. Other Information

58

 

 

Item 6. Exhibits

59

 

 

Exhibit Index

 

 

 

Signatures

60

 

2



Table of Contents

 

THOMPSON CREEK METALS COMPANY INC.

 

CONSOLIDATED BALANCE SHEETS

 

(Unaudited)

 

 

 

September 30,
2010

 

December 31,
2009

 

 

 

(in millions, except share data)

 

ASSETS

 

 

 

 

 

Current assets

 

 

 

 

 

Cash and cash equivalents

 

$

457.9

 

$

158.5

 

Short-term investments

 

35.1

 

353.0

 

Accounts receivable—trade

 

63.8

 

32.4

 

Accounts receivable—related parties

 

9.6

 

10.3

 

Product inventory

 

66.0

 

43.5

 

Material and supplies inventory

 

33.0

 

34.5

 

Prepaid expense and other current assets

 

3.2

 

6.0

 

Income tax receivable

 

6.7

 

4.8

 

 

 

675.3

 

643.0

 

Property, plant and equipment, net

 

735.4

 

605.7

 

Restricted cash

 

19.9

 

16.8

 

Reclamation deposits

 

26.7

 

30.3

 

Goodwill

 

47.0

 

47.0

 

Other assets

 

0.5

 

1.8

 

 

 

$

1,504.8

 

$

1,344.6

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

Current liabilities

 

 

 

 

 

Accounts payable and accrued liabilities

 

$

59.4

 

$

29.9

 

Income and mining taxes payable

 

 

3.6

 

Current portion of long-term debt

 

2.9

 

3.7

 

Deferred income tax liabilities

 

6.7

 

6.7

 

 

 

69.0

 

43.9

 

Long-term debt

 

7.0

 

9.2

 

Other liabilities

 

25.4

 

24.6

 

Asset retirement obligations

 

26.2

 

24.8

 

Common stock warrant derivatives

 

85.6

 

115.4

 

Deferred income tax liabilities

 

136.4

 

141.3

 

 

 

349.6

 

359.2

 

Commitments and contingencies (Note 8)

 

 

 

 

 

Shareholders’ equity

 

 

 

 

 

Common stock, no-par, 139,844,091 and 139,511,257 shares issued and outstanding, as of September 30, 2010 and December 31, 2009, respectively

 

700.4

 

697.1

 

Additional paid-in capital

 

49.4

 

45.7

 

Retained earnings

 

391.5

 

232.8

 

Accumulated other comprehensive income

 

13.9

 

9.8

 

 

 

1,155.2

 

985.4

 

 

 

$

1,504.8

 

$

1,344.6

 

 

See accompanying notes to consolidated financial statements.

 

3



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THOMPSON CREEK METALS COMPANY INC.

 

CONSOLIDATED STATEMENTS OF OPERATIONS

 

(Unaudited)

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

 

 

2010

 

2009

 

2010

 

2009

 

 

 

(in millions, except per share
amounts)

 

REVENUES

 

 

 

 

 

 

 

 

 

Molybdenum sales

 

$

157.1

 

$

111.8

 

$

426.6

 

$

258.6

 

Tolling, calcining and other

 

4.7

 

2.6

 

11.4

 

8.6

 

Total revenues

 

161.8

 

114.4

 

438.0

 

267.2

 

COSTS AND EXPENSES

 

 

 

 

 

 

 

 

 

Operating expenses

 

89.8

 

62.5

 

239.9

 

173.2

 

Selling and marketing

 

2.3

 

1.9

 

5.6

 

4.6

 

Depreciation, depletion and amortization

 

12.7

 

11.6

 

35.6

 

32.0

 

Accretion expense

 

0.4

 

0.3

 

1.2

 

1.0

 

General and administrative

 

7.7

 

4.5

 

21.9

 

17.6

 

Exploration

 

3.3

 

1.2

 

6.8

 

4.9

 

Total costs and expenses

 

116.2

 

82.0

 

311.0

 

233.3

 

OPERATING INCOME

 

45.6

 

32.4

 

127.0

 

33.9

 

OTHER (INCOME) AND EXPENSE

 

 

 

 

 

 

 

 

 

Change in fair value of common stock warrants

 

20.5

 

15.7

 

(29.8

)

99.0

 

Loss (gain) on foreign exchange

 

(6.7

)

6.8

 

(8.0

)

10.7

 

Interest (income) expense, net

 

(0.1

)

(0.4

)

(0.4

)

(0.8

)

Other

 

(0.4

)

 

(0.7

)

(0.4

)

Total other (income) and expense

 

13.3

 

22.1

 

(38.9

)

108.5

 

Income (loss) before income and mining taxes

 

32.3

 

10.3

 

165.9

 

(74.6

)

Income and mining tax expense

 

1.2

 

11.7

 

7.2

 

7.4

 

NET INCOME (LOSS)

 

$

31.1

 

$

(1.4

)

$

158.7

 

$

(82.0

)

NET INCOME (LOSS) PER SHARE

 

 

 

 

 

 

 

 

 

Basic

 

$

0.22

 

$

(0.01

)

$

1.14

 

$

(0.66

)

Diluted

 

$

0.22

 

$

(0.01

)

$

1.08

 

$

(0.66

)

Weighted average number of common shares

 

 

 

 

 

 

 

 

 

Basic

 

139.8

 

125.9

 

139.7

 

123.5

 

Diluted

 

142.9

 

125.9

 

146.5

 

123.5

 

 

See accompanying notes to consolidated financial statements.

 

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THOMPSON CREEK METALS COMPANY INC.

 

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

(Unaudited)

 

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

 

 

2010

 

2009

 

2010

 

2009

 

 

 

(in millions)

 

OPERATING ACTIVITIES

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

31.1

 

$

(1.4

)

$

158.7

 

$

(82.0

)

Items not affecting cash:

 

 

 

 

 

 

 

 

 

Change in fair value of common stock warrants

 

20.5

 

15.7

 

(29.8

)

99.0

 

Depreciation, depletion and amortization

 

12.7

 

11.6

 

35.6

 

32.0

 

Accretion expense

 

0.4

 

0.3

 

1.2

 

1.0

 

Stock-based compensation

 

1.6

 

0.9

 

5.8

 

6.3

 

Deferred income tax benefit

 

5.5

 

2.5

 

2.6

 

(8.7

)

Unrealized loss on derivative instruments

 

(0.6

)

(0.8

)

0.7

 

0.9

 

Change in working capital accounts (Note 13)

 

(12.2

)

(4.6

)

(49.0

)

19.2

 

Cash generated by operating activities

 

59.0

 

24.2

 

125.8

 

67.7

 

INVESTING ACTIVITIES

 

 

 

 

 

 

 

 

 

Short-term investments

 

233.9

 

9.6

 

319.5

 

(172.2

)

Capital expenditures

 

(56.8

)

(13.1

)

(147.3

)

(54.4

)

Restricted cash

 

(0.7

)

(0.1

)

(3.2

)

(1.9

)

Reclamation deposits

 

3.7

 

 

3.7

 

(2.6

)

Cash generated (used) in investing activities

 

180.1

 

(3.6

)

172.7

 

(231.1

)

FINANCING ACTIVITIES

 

 

 

 

 

 

 

 

 

Proceeds from issuance of common shares, net

 

0.2

 

199.8

 

2.3

 

203.5

 

Repayment of long-term debt

 

(0.7

)

(1.3

)

(3.1

)

(4.0

)

Cash generated (used) by financing activities

 

(0.5

)

198.5

 

(0.8

)

199.5

 

EFFECT OF EXCHANGE RATE CHANGES ON CASH

 

3.7

 

6.9

 

1.7

 

9.4

 

INCREASE IN CASH AND CASH EQUIVALENTS

 

242.3

 

226.0

 

299.4

 

45.5

 

Cash and cash equivalents, beginning of period

 

215.6

 

77.5

 

158.5

 

258.0

 

Cash and cash equivalents, end of period

 

$

457.9

 

$

303.5

 

$

457.9

 

$

303.5

 

Supplementary cash flow information (Note 13)

 

 

 

 

 

 

 

 

 

 

See accompanying notes to consolidated financial statements.

 

5



Table of Contents

 

THOMPSON CREEK METALS COMPANY INC.

 

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY and COMPREHENSIVE INCOME

 

Nine Months Ended September 30, 2010

 

(Unaudited)

 

 

 

Common Stock

 

Paid-in

 

Retained

 

Accumulated
Other
Comprehensive

 

 

 

 

 

Shares

 

Amount

 

Capital

 

Earnings

 

Income

 

Total

 

 

 

(in millions, except share data in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balances at January 1, 2010

 

139,511

 

$

697.1

 

$

45.7

 

$

232.8

 

$

9.8

 

$

985.4

 

Amortization of stock-based compensation

 

 

 

4.7

 

 

 

4.7

 

Stock option exercises

 

333

 

3.3

 

(1.0

)

 

 

2.3

 

Comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

158.7

 

 

158.7

 

Foreign currency translation

 

 

 

 

 

4.1

 

4.1

 

Total comprehensive income

 

 

 

 

 

 

162.8

 

Balances at September 30, 2010

 

139,844

 

$

700.4

 

$

49.4

 

$

391.5

 

$

13.9

 

$

1,155.2

 

 

See accompanying notes to consolidated financial statements.

 

6



Table of Contents

 

THOMPSON CREEK METALS COMPANY INC.

 

Notes to the Consolidated Financial Statements — Unaudited

 

(US dollars in millions, except per share amounts)

 

1. Basis of Presentation

 

The accompanying unaudited consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q.  In compliance with those instructions, certain information and footnote disclosures normally included in consolidated financial statements prepared in accordance with generally accepted accounting principles in the United States (“US GAAP”) have been condensed or omitted. This report should be read in conjunction with Thompson Creek Metals Company Inc.’s (“TCM” or the “Company”) consolidated financial statements and notes contained in its 2009 Annual Report on Form 10-K, as amended on Form 10-K/A (the “2009 Form 10-K”) filed with the Securities and Exchange Commission. The information furnished herein reflects all adjustments which are, in the opinion of management, necessary for a fair statement of the results for the interim periods reported.  Operating results for the three-month and nine-month periods ended September 30, 2010 are not necessarily indicative of the results that may be expected for the year ending December 31, 2010.

 

The preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. TCM bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances.  Accordingly, actual results may differ significantly from these estimates under different assumptions or conditions.

 

The consolidated financial statements include the accounts of TCM and its subsidiaries, and intercompany accounts and transactions have been eliminated in consolidation.  Financial amounts are presented in United States (“US”) dollars unless otherwise stated.  References to C$ are Canadian dollars.

 

2. Healthcare Legislation

 

On March 30, 2010, the President of the United States signed the Health Care and Education Reconciliation Act of 2010, which is a reconciliation bill that amends the Patient Protection and Affordable Care Act that was signed by the President on March 23, 2010 (collectively the “Acts”).  As a result of this legislation, the tax treatment related to the Medicare Part D subsidy has changed requiring companies to determine the financial impact, if any.  TCM has evaluated the change in tax treatment for Medicare Part D and has determined that there was no impact on TCM’s consolidated financial statements.  TCM is continuing to evaluate the other provisions of the Acts and is not able to determine at this time the potential impact the Acts may have on the consolidated financial statements.

 

3. Inventory

 

The carrying value of product inventory is as follows:

 

 

 

September 30,
2010

 

December 31,
2009

 

Finished product

 

$

48.6

 

$

27.7

 

Work-in-process

 

12.2

 

13.2

 

Stockpiled ore

 

5.2

 

2.6

 

 

 

$

66.0

 

$

43.5

 

 

As of September 30, 2010 and December 31, 2009, the market value of TCM’s inventory exceeded the carrying value.  For the nine months ended September 30, 2009, TCM recorded a lower of cost or market adjustment of $0.8 million in its consolidated statements of operations.

 

7



Table of Contents

 

4. Property, Plant and Equipment

 

Property, plant and equipment is comprised of the following:

 

 

 

September 30,
2010

 

December 31,
2009

 

Mining properties

 

$

323.8

 

$

320.2

 

Mining equipment

 

254.9

 

213.3

 

Processing facilities

 

120.8

 

113.9

 

Construction in progress

 

202.7

 

86.2

 

Other

 

5.9

 

2.7

 

 

 

908.1

 

736.3

 

Less: Accumulated depreciation, depletion and amortization

 

(172.7

)

(130.6

)

 

 

$

735.4

 

$

605.7

 

 

The construction in progress balance included $168.6 million and $63.9 million related to the mill expansion project at the Endako Mine as of September 30, 2010 and December 31, 2009, respectively.

 

5. Derivative Financial Instruments

 

TCM enters into various derivative financial instruments in its normal course of operations.  None of TCM’s derivative instruments are treated as hedges, and all are recorded on the consolidated balance sheet at fair value with changes in fair value recorded to the consolidated statements of operations, except those contracts for which TCM has elected to apply the normal purchases and normal sales scope exception. TCM is exposed to credit loss when counterparties with which it has entered into derivative transactions are unable to pay. To reduce counterparty credit exposure, TCM deals only with a group of large credit-worthy financial institutions and limits credit exposure to each. TCM believes the counterparties to the contracts to be credit-worthy entities, and; therefore, TCM believes credit risk of counterparty non-performance is relatively low.  For information regarding the nature and types of TCM’s derivatives, see the references noted in the following tables.

 

The following table summarizes the location and fair value amounts of all derivative financial instruments in the consolidated balance sheets:

 

 

 

 

 

Fair Value

 

Derivative Type

 

Balance Sheet Classification

 

September 30,
2010

 

December 31,
2009

 

Derivative assets

 

 

 

 

 

 

 

Provisionally-priced sales (a)

 

Accounts receivable—trade

 

$

 

$

(0.1

)

Fixed-priced contracts—current (b)

 

Prepaid expense and other current assets

 

1.4

 

0.9

 

Fixed-priced contracts—noncurrent (b)

 

Other assets

 

0.5

 

1.7

 

Forward currency contracts (c)

 

Prepaid expense and other current assets

 

0.5

 

 

Total derivative assets

 

 

 

$

2.4

 

$

2.5

 

Derivative liabilities

 

 

 

 

 

 

 

Fixed-priced contracts (b)

 

Accounts payable and accrued liabilities

 

$

0.1

 

$

0.8

 

Common stock warrant derivatives (d)

 

Common stock warrant derivatives

 

85.6

 

115.4

 

Total derivative liabilities

 

 

 

$

85.7

 

$

116.2

 

 

The following table sets forth the gains (losses) on derivative instruments for the three and nine months ended September 30, 2010 and 2009:

 

 

 

 

 

Gain/(loss)
for the Three Months Ended

 

Gain/(loss)
for the Nine Months Ended

 

Derivative
Type

 

Statement of Operations
Classification

 

September 30,
2010

 

September 30,
2009

 

September 30,
2010

 

September 30,
2009

 

Provisionally-priced sales (a)

 

Molybdenum sales

 

$

 

$

(0.1

)

$

(0.9

)

$

0.2

 

Provisionally-priced purchases (a)

 

Operating expenses

 

0.1

 

(0.3

)

(2.3

)

(1.6

)

Fixed-priced contracts (b)

 

Molybdenum sales

 

0.1

 

(0.1

)

(0.1

)

(1.0

)

Forward currency contracts (c)

 

(Loss) gain on foreign exchange

 

2.8

 

0.3

 

2.8

 

0.5

 

Common stock warrant derivatives (d)

 

Change in fair value of common stock warrants

 

(20.5

)

(15.7

)

29.8

 

(99.0

)

 

 

 

 

$

(17.5

)

$

(15.9

)

$

29.3

 

$

(100.9

)

 

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Table of Contents

 

(a)          Provisionally-Priced Contracts

 

As described in Note 2 of the financial statements in TCM’s 2009 Form 10-K under “Revenue Recognition”, certain molybdenum sales contracts provide for provisional pricing as specified in the contract.  These sales contain an embedded derivative related to the provisional pricing mechanism, which is bifurcated and accounted for as a derivative.

 

TCM also enters into provisionally-priced molybdenum purchase contracts that also contain an embedded derivative, which is bifurcated and accounted for as a derivative.  Changes to the fair values of the embedded derivatives related to provisionally-priced molybdenum purchases are included in operating expenses in the consolidated statements of operations as the product is sold.

 

The following table sets forth TCM’s outstanding provisionally-priced contracts as of September 30, 2010, which all mature in 2010:

 

 

 

Pounds to be
Sold/Purchased
(000’s lb)

 

Provisionally-priced sales

 

497

 

Provisionally-priced purchases

 

630

 

 

(b)                               Fixed-Priced Contracts

 

TCM’s earnings and operating cash flows are affected by changes in market prices for molybdenum. To mitigate a portion of this risk, TCM enters into certain molybdenum sales contracts where it sells future molybdenum production at fixed prices. These fixed prices may be different than published market prices at the date of sale.

 

Beginning October 1, 2009, TCM elected to apply the normal purchases and normal sales scope exception to its fixed-priced contracts in accordance with derivative and hedge accounting guidance.  The mark-to-market net asset of $3.5 million, as of September 30, 2009, is being amortized to molybdenum sales revenue as TCM makes the physical deliveries related to those contracts.  As of September 30, 2010 and December 31, 2009, the remaining unamortized net balance was $1.8 million and $1.8 million, respectively.  Since December 31, 2009, the amortization has resulted in no change in the net balance due to offsetting asset and liability positions.

 

The following table sets forth TCM’s outstanding fixed-priced molybdenum sales contracts as of September 30, 2010:

 

 

 

2010

 

2011

 

Molybdenum committed (000’s lb)

 

265

 

459

 

Average price ($/lb)

 

$

16.53

 

$

20.49

 

 

(c)                                Forward Currency Contracts

 

As a company operating in North America, TCM transacts business in various currencies in the normal course of its operations and for capital expenditures.  Foreign currency transactions at TCM’s Canadian operations increase its risk as exchange rates can change between the time agreements are made and the time foreign currency transactions are settled.  TCM uses foreign currency forward contracts to mitigate the exchange risk of US dollars for foreign currency dollars at future dates. The terms of these contracts are typically less than one year.  As of September 30, 2010, in anticipation of the Terrane acquisition, TCM had open forward currency contracts to purchase $175 million Canadian dollars at a weighted-average US dollar to Canadian dollar exchange rate of 1 to 1.03, which all settle during the fourth quarter of 2010.  At December 31, 2009, TCM had no open forward currency contracts.

 

(d)                               Common Stock Warrant Derivatives

 

As described in Note 3 of the financial statements in TCM’s 2009 Form 10-K under “Common stock warrant derivatives”, TCM is required to account for its common stock warrants as derivative liabilities with changes in fair value recorded to earnings.  As of September 30, 2010, TCM had 24.5 million warrants outstanding.   There were nil and 501 warrant exercises during the nine months ended September 30, 2010 and 2009, respectively.

 

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6. Fair Value Measurement

 

US GAAP accounting standards define fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The standards establish a fair value hierarchy that distinguishes between (1) market participant assumptions developed based on market data obtained from independent sources (observable inputs) and (2) an entity’s own assumptions about market participant assumptions developed based on the best information available in the circumstances (unobservable inputs). The fair value hierarchy consists of three broad levels, which gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). The three levels of the fair value hierarchy are described below:

 

Level 1

 

Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.

Level 2

 

Quoted prices in markets that are not active or inputs that are observable, either directly or indirectly, for substantially the full term of the asset or liability.

Level 3

 

Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (supported by little or no market activity).

 

The following table sets forth TCM’s financial assets and liabilities measured at fair value by level within the fair value hierarchy. As required, assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.

 

 

 

Fair Value at September 30, 2010

 

 

 

Total

 

Level 1

 

Level 2

 

Level 3

 

Assets:

 

 

 

 

 

 

 

 

 

Provisionally-priced sales

 

$

 

$

 

$

 

$

 

Fixed-priced contracts—current

 

1.4

 

 

 

1.4

 

Fixed-priced contracts—noncurrent

 

0.5

 

 

 

0.5

 

Foreign currency contracts

 

0.5

 

 

0.5

 

 

 

 

$

2.4

 

$

 

$

0.5

 

$

1.9

 

Liabilities:

 

 

 

 

 

 

 

 

 

Common stock warrant derivatives

 

$

85.6

 

$

85.6

 

$

 

$

 

Fixed-priced contracts—current

 

0.1

 

 

 

0.1

 

 

 

$

85.7

 

$

85.6

 

$

 

$

0.1

 

 

 

 

Fair Value at December 31, 2009

 

 

 

Total

 

Level 1

 

Level 2

 

Level 3

 

Assets:

 

 

 

 

 

 

 

 

 

Provisionally-priced sales

 

$

(0.1

)

$

 

$

(0.1

)

$

 

Fixed-priced contracts—current

 

0.9

 

 

 

0.9

 

Fixed-priced contracts—noncurrent

 

1.7

 

 

 

1.7

 

 

 

$

2.5

 

$

 

$

(0.1

)

$

2.6

 

Liabilities:

 

 

 

 

 

 

 

 

 

Common stock warrant derivatives

 

$

115.4

 

$

115.4

 

$

 

$

 

Fixed-priced contracts—current

 

0.8

 

 

 

0.8

 

 

 

$

116.2

 

$

115.4

 

$

 

$

0.8

 

 

The following table sets forth a summary of the fair value of TCM’s Level 3 financial assets and liabilities for the nine months ended September 30, 2010:

 

 

 

Fixed-
Priced
Contracts

 

Balance at January 1, 2010

 

$

1.8

 

Unrealized and realized (loss)

 

 

Balance at September 30, 2010

 

$

1.8

 

 

As of September 30, 2010 and December 31, 2009, the carrying values of TCM’s financial assets and liabilities are not significantly different from their fair values.

 

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7. Long-term Debt

 

Effective February 2, 2010, TCM voluntarily terminated its $35 million revolving line of credit that was secured by a significant amount of TCM’s assets.  At the time of termination, TCM had no amount outstanding on this revolving line of credit.

 

8. Commitments and Contingencies

 

In the normal course of operations, TCM may be subject to litigation.  As of September 30, 2010, there are no material litigation matters.  In May 2010, TCM received notification of a petition filed in the Supreme Court of British Columbia by the Stellat’en First Nation claiming that the British Columbia Ministry of Energy, Mines and Petroleum Resources has not fulfilled its duty to consult with or accommodate Stellat’en’s asserted aboriginal rights and title interests in relation to the mill expansion project at the Endako Mine.  The petition names TCM, a 75% owner of the Endako Mine, as one of the parties involved but does not cite TCM in any of its claims regarding the lack of consultation.

 

In the normal course of operations, TCM enters into agreements for the purchase of molybdenum. As of September 30, 2010, TCM had commitments to purchase approximately 2.1 million pounds of molybdenum sulfide concentrate throughout the remainder of 2010, to be priced at a discount to the market price for molybdenum oxide at the time of purchase.

 

As of September 30, 2010, TCM had contractual obligations related to the mill expansion project at the Endako Mine of $43.0 million (75% share).

 

On December 9, 2009, TCM entered into a credit support agreement with British Columbia Hydro and Power Authority (“BC Hydro”) related to the mill expansion project at the Endako Mine. Under this agreement, TCM is required to post financial assurance in an amount equal to BC Hydro’s estimated out-of-pocket costs for work on the expansion project, estimated at C$16.5 million.  Subsequent to the commissioning of the new mill and subject to annual measurements of BC Hydro’s incremental revenues following the mill’s commissioning, some or all of this financial assurance may, thereafter, be released in amounts equal to the incremental revenues generated until such time as the full amount of financial assurance has been released or until such time as the expiration period has been reached. The new mill facility is currently scheduled for completion in late 2011. The amount of the guarantee as of September 30, 2010 was C$16.5 million. As part of the financial guarantee, TCM provided a surety bond for C$11.2 million for additional financial assurance to BC Hydro.  The surety bond can be drawn down in the event of a shortfall in incremental revenues after the commissioning of the new mill facility, as discussed above.  At this time, TCM does not anticipate having to post any additional financial assurance with respect to the BC Hydro credit support agreement.

 

As of September 30, 2010, a shortfall in Endako’s future electric power usage that would result in incremental payments to BC Hydro cannot be determined and is not deemed to be probable. As such, no accrual has been recorded. An accrual for any expected shortfall will be recorded if and when it is determined that a shortfall is probable and a reasonable estimate can be made.

 

9. Income and Mining Taxes

 

Income and mining taxes for the three and nine months ended September 30, 2010 were an expense of $1.2 million and $7.2 million, respectively.  For the three and nine months ended September 30, 2009, income and mining taxes were an expense of $11.7 million and $7.4 million, respectively.

 

The 2010 effective tax rate differs from the amount that would result from applying the Canadian federal and provincial income tax rates to earnings before income taxes primarily due to a non-taxable change in the fair value of common stock warrants; a $10.7 million net refund of certain state income taxes related to prior year tax returns; a reduction in the current year alternative minimum tax (“AMT”) credit and the respective valuation allowance related to a current-year tax election of development costs; and an out-of-period adjustment of $3.8 million.  The out-of-period adjustment relates to a difference between the 2009 income tax provision and the 2009 tax return, whereby TCM realized an additional net operating loss carry-back.   Management does not believe that the out-of-period adjustment is material to the period affected or the periods presented in this Form 10-Q.

 

The 2009 effective tax rate differs from the amount that would result from applying the Canadian federal and provincial income tax rates to earnings before income taxes primarily due to changes in the enacted provincial statutory income tax rates and the impact of the common stock warrants.

 

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10. Stock-Based Compensation

 

On May 6, 2010, TCM’s shareholders approved the 2010 Long-Term Incentive Plan (“LTIP”) and the 2010 Employee Stock Purchase Plan (“ESPP”).  Under the LTIP, TCM can grant stock options, share appreciation rights, restricted shares, restricted share units, performance share units, or shares granted as bonus compensation.  The number of common shares available for awards under the LTIP plan is 2.5 million plus those shares still remaining under the previous stock option plan.  As of September 30, 2010, TCM has granted stock options and approved performance share units and restricted share units under the LTIP, as discussed below.

 

TCM does not realize a tax benefit for stock-based awards granted to Canadian employees under the current Canadian tax law.

 

a)            Stock Options

 

The expiration date and vesting provisions of options granted are established at the time an award is made. Options may be exercised by the holder upon vesting of the grant. When an option is exercised, TCM issues the requisite shares from authorized but unissued common stock (new shares). The exercise price of option grants awarded is the greater of: (i) the weighted-average trading price of the underlying shares over the five consecutive trading days immediately before the grant date and (ii) if the award date occurs in a trading black-out period, the weighted-average trading price over the five consecutive trading days immediately after the black-out period has been lifted.

 

The following table summarizes stock option activity during the nine months ended September 30, 2010:

 

 

 

Shares (000’s)

 

Weighted Average
Exercise Price (C$)

 

Stock options outstanding at January 1, 2010

 

6,314

 

$

10.89

 

Granted

 

203

 

12.18

 

Exercised

 

(333

)

6.71

 

Canceled/expired

 

(362

)

18.65

 

Stock options outstanding at September 30, 2010

 

5,822

 

$

10.59

 

 

The following table presents the weighted-average assumptions used in the pricing model for the 2010 grants and the resulting weighted-average grant date fair value of the stock options granted:

 

Expected volatility

 

73.9%

Risk-free interest rate

 

1.01%

Expected life (years)

 

2.95

Exercise price

 

$

 10.95

Grant date fair value

 

$

 4.77

 

For the three and nine months ended September 30, 2010, TCM recorded expense related to stock options of $1.3 million and $5.2 million, respectively.

 

For the three and nine months ended September 30, 2009, TCM recorded expense related to stock options of $0.9 million and $6.3 million, respectively.  In June 2009, TCM completed a voluntary stock option surrender program offered to all holders of stock options with an exercise price of C$16.19 per share and above. Under the terms of the surrender program, options to acquire an aggregate of 2,414,500 common shares were voluntarily surrendered, effective June 22, 2009. A non-cash compensation charge of approximately $2.8 million, representing the remaining unamortized stock-based compensation cost for the surrendered options, was recorded in the nine months ended September 30, 2009.

 

b)            Performance Share Units

 

                On May 6, 2010, TCM approved a total of 240,000 performance share units (“PSUs”), which were granted to eligible executives on July 22, 2010. The vesting of the PSUs is contingent upon employee service and a market condition based on the performance of TCM’s share price.  To determine whether or not this market condition is achieved and the PSUs vest, TCM establishes an award price.  At each anniversary date during the vesting period (three years for the May 2010 awards), if the per share closing price of TCM’s common stock on such date is at or higher than the award price, then the awards will vest one-third on each anniversary date, and the requisite shares will be issued from authorized but unissued common stock.  If the closing price is less than

 

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the award price, and, therefore, the market condition is not achieved, then those PSUs do not vest and are carried forward to the following anniversary date.  Any PSUs not vested at the end of the three-year vesting period year will expire.

 

PSUs granted are accounted for at fair value using a Monte Carlo simulation valuation model on the date of grant.  The Monte Carlo model is based on random projections of stock price paths.  Expected volatility was calculated using a weighted-average of historical daily volatilities and implied volatility and represents the extent to which TCM’s stock price performance is expected to fluctuate during each of the three calendar periods of the award’s anticipated term ending May 6, 2013.

 

The estimated fair value of the PSUs granted on July 22, 2010 is $6.68 per unit, and TCM established an award price of $11.88.  For the three and nine months ended September 30, 2010, TCM recorded $0.4 million of expense related to the PSUs in its consolidated statements of operations.

 

c)             Restricted Stock Units

 

On May 6, 2010, TCM approved 209,050 restricted stock units (“RSUs”), which were granted to certain eligible employees and directors on July 22, 2010.  TCM accounts for RSUs at fair value, which is based on the market value of TCM’s common shares on the day of grant.  The total fair value is recognized over the vesting period of three years.  Upon vesting, TCM will issue the requisite shares from authorized but unissued common stock.  The market value of TCM’s stock on July 22, 2010 was $9.13 per share, which resulted in TCM recording $0.2 million of expense related to the RSUs granted for the three and nine months ended September 30, 2010.  At September 30, 2010, unrecognized compensation expense related to restricted stock and restricted stock units totaled $1.8 million.  Such unrecognized expense will be recognized on a straight-line basis over a weighted-average period of 2.8 years.

 

d)            Employee Stock Purchase Plan

 

The ESPP plan provides an opportunity for TCM’s employees to purchase its common shares at 85% of the closing price at the beginning of the offering period or at the end of the offering period, whichever is lower.  The ESPP has two six-month offering periods beginning on the first day of January and on the first day of July.  There are 1.0 million shares available for purchase by TCM’s employees under the ESPP plan.  The first offering period for 2010 was July 1.  Compensation expense is measured based on the fair value using the Black Scholes model of the employees’ option to purchase shares of common stock at the grant date and is recognized over the future periods in which the related employee service is rendered.  TCM estimated a fair value of employee options to purchase shares under the ESPP of $2.75 per share.  TCM recorded $0.1 million of expense related to the ESPP plan for the three and nine months ended September 30, 2010.

 

11. Net Income per Share

 

The following is a reconciliation of net income and weighted-average common shares outstanding for purposes of calculating diluted net income per share for the three and nine months ended September 30, 2010 and 2009:

 

 

 

For the Three Months Ended
September 30,

 

For the Nine Months Ended
September 30,

 

 

 

2010

 

2009

 

2010

 

2009

 

Net income

 

$

31.1

 

$

(1.4

)

$

158.7

 

$

(82.0

)

Basic weighted-average number of shares outstanding

 

139.8

 

125.9

 

139.7

 

123.5

 

Effect of dilutive securities stock options

 

0.9

 

 

1.1

 

 

Common stock warrants

 

2.1

 

 

5.6

 

 

Restricted stock units

 

0.1

 

 

0.1

 

 

Diluted weighted-average number of shares outstanding

 

142.9

 

125.9

 

146.5

 

123.5

 

Net income per share

 

 

 

 

 

 

 

 

 

Basic

 

$

0.22

 

$

(0.01

)

$

1.14

 

$

(0.66

)

Diluted

 

$

0.22

 

$

(0.01

)

$

1.08

 

$

(0.66

)

 

For the three and nine months ended September 30, 2010, approximately 2.8 million stock options were excluded from the computation of diluted weighted-average shares as the exercise prices exceeded the average price of TCM’s common stock for the period.  In addition, 0.2 million performance share units have been excluded from the computation of diluted weighted-average shares as the award price exceeded the closing price of TCM’s common stock as of September 30, 2010.

 

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For the three and nine months ended September 30, 2009, 2.5 million and 4.0 million stock options, respectively, were excluded from the computation of diluted weighted-average shares as their effect would have been anti-dilutive.

 

For the three and nine months ended September 30, 2009, 15.9 million and 23.7 million common stock warrants, respectively, were excluded from the computation of diluted weighted-average shares as their effect would have been anti-dilutive.

 

12. Related Party Transactions

 

Total sales to members of a group of companies affiliated with the other participant in the Endako Mine joint venture were $44.9 million and $126.7 million for the three and nine months ended September 30, 2010, respectively. This represented 28% and 29% of TCM’s total revenues for the three and nine months ended September 30, 2010, respectively.

 

Total sales with the other participant in the Endako Mine joint venture were $33.5 million and $57.7 million for the three and nine months ended September 30, 2009, respectively.  This represented 29% and 22% of TCM’s total revenues for the three and nine months ended September 30, 2009, respectively.

 

For the three and nine months ended September 30, 2010, TCM recorded management fee income of $0.1 million and $0.3 million, respectively, and selling and marketing expenses of $0.1 million and $0.6 million, respectively, from this group of companies.

 

For the three and nine months ended September 30, 2009, TCM recorded management fee income of $0.1 million and $0.2 million, respectively, and selling and marketing expenses of $0.2 million and $0.4 million, respectively, from this group of companies.

 

As of September 30, 2010 and December 31, 2009, TCM’s accounts receivable included $9.6 million and $10.3 million, respectively, owing from this group of companies.

 

13. Supplementary Cash Flow Information

 

 

 

For the Three Months Ended
September 30,

 

For the Nine Months Ended
September 30,

 

 

 

2010

 

2009

 

2010

 

2009

 

Change in working capital accounts:

 

 

 

 

 

 

 

 

 

Accounts receivable

 

$

(13.2

)

$

(17.9

)

$

(30.5

)

$

(0.1

)

Product inventory

 

7.5

 

(0.4

)

(22.2

)

11.6

 

Material and supplies inventory

 

0.7

 

1.4

 

1.7

 

2.7

 

Prepaid expense and other current assets

 

(0.3

)

1.7

 

2.8

 

3.4

 

Income tax receivable

 

(0.6

)

(0.7

)

(1.8

)

(1.5

)

Accounts payable and accrued liabilities

 

(2.5

)

5.5

 

4.6

 

2.8

 

Income and mining taxes payable

 

(3.8

)

5.8

 

(3.6

)

0.3

 

 

 

$

(12.2

)

$

(4.6

)

$

(49.0

)

$

19.2

 

Cash interest paid

 

$

0.4

 

$

0.2

 

$

0.7

 

$

0.6

 

Cash income taxes paid

 

$

0.4

 

$

3.4

 

$

10.6

 

$

18.3

 

 

In addition, a $13 million refund of certain state income taxes related to prior year tax returns was received in the second quarter of 2010.  This refund was offset by a tax payment of $4 million, of which $1.7 million was accrued as of December 31, 2009.

 

14. Concentration of Credit Risk

 

TCM is exposed to counterparty risk from its cash and cash equivalent balances, its short-term cash investments, and its reclamation deposits held by financial institutions and governmental entities. TCM monitors its positions with, and the credit quality of, the financial institutions in which it invests its cash, cash equivalents and short-term investments, and that hold its reclamation deposits. Counterparties to cash balances, money market instruments, government treasury securities and its reclamation deposits are US and Canadian institutions and the US and Canadian governments. TCM’s investment policy limits investments to government-backed financial instruments, other than balances maintained in various bank operating accounts.

 

TCM manages its credit risk from its accounts receivable through established credit monitoring activities. As of September 30, 2010, TCM had four customers which owed TCM more than $3.0 million and accounted for approximately 38% of all receivables outstanding. There were another nine customers having balances greater than $1.0 million but less than $3.0 million that accounted for approximately 20% of total receivables. All of these balances were compliant with credit terms and scheduled payment dates.

 

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TCM’s maximum credit risk exposure is the carrying value of its accounts receivable. The carrying amounts of accounts receivable, accounts payable and accrued liabilities, and fixed rate debt approximate fair value as of September 30, 2010.

 

15. Segment Information

 

TCM has two reportable segments: US Operations and Canadian Operations. The US Operations segment includes all mining, milling, mine site administration, roasting and sale of molybdenum products from the Thompson Creek Mine and the Langeloth Facility, as well as all roasting and sales of third-party purchased material. The Canadian Operations segment includes all mining, milling, mine site administration, roasting and sale of molybdenum products from the 75% owned Endako Mine. The Inter-segment represents the revenue and cost of sales elimination of product transported from the Canadian Operations to the US Operations for processing.  TCM’s chief operating decision makers (Chief Executive Officer and Chief Operating Officer) evaluate segment performance based on segment revenue less costs of sales. TCM attributes other income and expenses to the reporting segments if the income or expense is directly related to segment operations, as described above. TCM does not allocate corporate expenditures such as general and administrative, exploration, and interest income and expense items to its reporting segments.  Segment information for the three and nine months ended as of September 30, 2010 and 2009 is as follows:

 

For the three months ended September 30, 2010

 

 

 

US Operations

 

Canadian
Operations

 

Inter-
segment

 

Total

 

Revenues

 

 

 

 

 

 

 

 

 

Molybdenum sales

 

$

130.5

 

$

27.2

 

$

(0.6

)

$

157.1

 

Tolling, calcining and other

 

4.7

 

 

 

4.7

 

 

 

135.2

 

27.2

 

(0.6

)

161.8

 

Costs of sales

 

 

 

 

 

 

 

 

 

Operating expenses

 

73.3

 

17.3

 

(0.8

)

89.8

 

Selling and marketing

 

1.8

 

0.8

 

(0.3

)

2.3

 

Depreciation, depletion and amortization

 

6.8

 

5.3

 

 

12.1

 

Accretion expense

 

0.4

 

 

 

0.4

 

 

 

82.3

 

23.4

 

(1.1

)

104.6

 

Segment revenue less costs of sales

 

52.9

 

3.8

 

0.5

 

57.2

 

Other segment expenses:

 

 

 

 

 

 

 

 

 

Loss (gain) on foreign exchange

 

 

(2.4

)

 

(2.4

)

Segment income before income and mining taxes

 

$

52.9

 

$

6.2

 

$

0.5

 

$

59.6

 

 

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For the three months ended September 30, 2009

 

 

 

US Operations

 

Canadian
Operations

 

Inter-
segment

 

Total

 

Revenues

 

 

 

 

 

 

 

 

 

Molybdenum sales

 

$

84.9

 

$

26.9

 

$

 

$

111.8

 

Tolling, calcining and other

 

2.6

 

 

 

2.6

 

 

 

87.5

 

26.9

 

 

114.4

 

Costs of sales

 

 

 

 

 

 

 

 

 

Operating expenses

 

50.1

 

12.4

 

 

62.5

 

Selling and marketing

 

1.5

 

0.4

 

 

1.9

 

Depreciation, depletion and amortization

 

7.5

 

4.1

 

 

11.6

 

Accretion expense

 

0.3

 

 

 

0.3

 

 

 

59.4

 

16.9

 

 

76.3

 

Segment revenue less costs of sales

 

28.1

 

10.0

 

 

38.1

 

Other segment expenses:

 

 

 

 

 

 

 

 

 

Loss (gain) on foreign exchange

 

 

6.8

 

 

6.8

 

Segment income before income and mining taxes

 

$

28.1

 

$

3.2

 

$

 

$

31.3

 

 

For the nine months ended September 30, 2010

 

 

 

US Operations

 

Canadian
Operations

 

Inter-
segment

 

Total

 

Revenues

 

 

 

 

 

 

 

 

 

Molybdenum sales

 

$

345.0

 

$

89.0

 

$

(7.4

)

$

426.6

 

Tolling, calcining and other

 

11.4

 

0.1

 

(0.1

)

11.4

 

 

 

356.4

 

89.1

 

(7.5

)

438.0

 

Costs of sales

 

 

 

 

 

 

 

 

 

Operating expenses

 

197.1

 

50.1

 

(7.3

)

239.9

 

Selling and marketing

 

4.1

 

2.7

 

(1.2

)

5.6

 

Depreciation, depletion and amortization

 

19.6

 

15.4

 

 

35.0

 

Accretion expense

 

1.0

 

0.2

 

 

1.2

 

 

 

221.8

 

68.4

 

(8.5

)

281.7

 

Segment revenue less costs of sales

 

134.6

 

20.7

 

1.0

 

156.3

 

Other segment expenses:

 

 

 

 

 

 

 

 

 

Loss (gain) on foreign exchange

 

 

(4.1

)

 

(4.1

)

Segment income before income and mining taxes

 

$

134.6

 

$

24.8

 

$

1.0

 

$

160.4

 

 

For the nine months ended September 30, 2009

 

 

 

US Operations

 

Canadian
Operations

 

Inter-
segment

 

Total

 

Revenues

 

 

 

 

 

 

 

 

 

Molybdenum sales

 

$

194.4

 

$

64.2

 

$

 

$

258.6

 

Tolling, calcining and other

 

8.6

 

 

 

8.6

 

 

 

203.0

 

64.2

 

 

267.2

 

Costs of sales

 

 

 

 

 

 

 

 

 

Operating expenses

 

138.8

 

34.4

 

 

173.2

 

Selling and marketing

 

3.3

 

1.3

 

 

4.6

 

Depreciation, depletion and amortization

 

20.6

 

11.4

 

 

32.0

 

Accretion expense

 

0.8

 

0.2

 

 

1.0

 

 

 

163.5

 

47.3

 

 

210.8

 

Segment revenue less costs of sales

 

39.5

 

16.9

 

 

56.4

 

Other segment expenses:

 

 

 

 

 

 

 

 

 

Loss (gain) on foreign exchange

 

 

10.9

 

 

10.9

 

Segment income before income and mining taxes

 

$

39.5

 

$

6.0

 

$

 

$

45.5

 

 

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Reconciliation of segment income to net income

 

 

 

For the Three Months Ended
September 30,

 

For the Nine Months Ended
September 30,

 

 

 

2010

 

2009

 

2010

 

2009

 

Segment income

 

$

59.6

 

$

31.3

 

$

160.4

 

$

45.5

 

Other (income) expense

 

 

 

 

 

 

 

 

 

Change in fair value of common stock warrants

 

20.5

 

15.7

 

(29.8

)

99.0

 

General and administrative

 

7.7

 

4.5

 

21.9

 

17.6

 

Exploration

 

3.3

 

1.2

 

6.8

 

4.9

 

Interest (income) expense, net

 

(0.1

)

(0.4

)

(0.4

)

(0.8

)

Loss (gain) on foreign exchange

 

(4.3

)

 

(3.9

)

(0.2

)

Depreciation

 

0.6

 

 

0.6

 

 

Other

 

(0.4

)

 

(0.7

)

(0.4

)

Income (loss) before income and mining taxes

 

32.3

 

10.3

 

165.9

 

(74.6

)

Income and mining taxes

 

1.2

 

11.7

 

7.2

 

7.4

 

Net income (loss)

 

$

31.1

 

$

(1.4

)

$

158.7

 

$

(82.0

)

 

Other segment information regarding capital expenditures, assets and liabilities, including the assets and liabilities attributed to corporate operations, is as follows:

 

As of September 30, 2010

 

US
Operations

 

Canadian
Operations

 

Corporate

 

Total

 

Capital expenditures

 

$

47.5

 

$

96.4

 

$

3.4

 

$

147.3

 

Capital assets

 

$

284.4

 

$

443.7

 

$

7.3

 

$

735.4

 

Goodwill

 

$

47.0

 

$

 

$

 

$

47.0

 

Assets

 

$

548.4

 

$

605.5

 

$

350.9

 

$

1,504.8

 

Liabilities

 

$

105.6

 

$

123.7

 

$

120.3

 

$

349.6

 

 

As of September 30, 2009

 

US
Operations

 

Canadian
Operations

 

Corporate

 

Total

 

Capital expenditures

 

$

24.0

 

$

27.5

 

$

2.9

 

$

54.4

 

Capital assets

 

$

261.8

 

$

333.4

 

$

0.4

 

$

595.6

 

Goodwill

 

$

47.0

 

$

 

$

 

$

47.0

 

Assets

 

$

634.0

 

$

590.9

 

$

89.2

 

$

1,314.1

 

Liabilities

 

$

143.7

 

$

107.0

 

$

123.1

 

$

373.8

 

 

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16. Reconciliation to Canadian Generally Accepted Accounting Principles

 

TCM’s consolidated financial statements have been prepared according to US GAAP, which differs in certain respects from those principles that TCM would have followed had the consolidated financial statements been prepared in accordance with Canadian generally accepted accounting principles (“Canadian GAAP”). The significant differences between US GAAP and Canadian GAAP and their effect on the consolidated financial statements are detailed below.

 

 

 

 

 

September 30, 2010

 

December 31, 2009

 

 

 

 

 

US GAAP

 

Canadian
GAAP

 

US GAAP

 

Canadian
GAAP

 

Assets

 

 

 

 

 

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

 

 

$

457.9

 

$

457.9

 

$

158.5

 

$

158.5

 

Short-term investments

 

 

 

35.1

 

35.1

 

353.0

 

353.0

 

Accounts receivable

 

 

 

73.4

 

73.4

 

42.7

 

42.7

 

Product inventory

 

(a)

 

66.0

 

65.3

 

43.5

 

40.6

 

Material and supplies inventory

 

 

 

33.0

 

33.0

 

34.5

 

34.5

 

Prepaid expense and other current assets

 

 

 

3.2

 

3.2

 

6.0

 

6.0

 

Income tax receivable

 

 

 

6.7

 

6.8

 

4.8

 

4.8

 

 

 

 

 

675.3

 

674.7

 

643.0

 

640.1

 

Property, plant and equipment, net

 

(a)

 

735.4

 

820.9

 

605.7

 

680.0

 

Restricted cash

 

 

 

19.9

 

19.9

 

16.8

 

16.8

 

Reclamation deposits

 

 

 

26.7

 

26.7

 

30.3

 

30.3

 

Goodwill

 

 

 

47.0

 

47.0

 

47.0

 

47.0

 

Other assets

 

 

 

0.5

 

0.5

 

1.8

 

1.8

 

 

 

 

 

$

1,504.8

 

$

1,589.7

 

$

1,344.6

 

$

1,416.0

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

 

 

 

 

Accounts payable and accrued liabilities

 

 

 

$

59.4

 

$

59.4

 

$

29.9

 

$

29.9

 

Income and mining taxes payable

 

 

 

 

 

3.6

 

3.6

 

Current portion of long-term debt

 

 

 

2.9

 

2.9

 

3.7

 

3.7

 

Deferred income tax liabilities

 

 

 

6.7

 

6.7

 

6.7

 

6.7

 

 

 

 

 

69.0

 

69.0

 

43.9

 

43.9

 

Long-term debt

 

 

 

7.0

 

7.0

 

9.2

 

9.2

 

Other liabilities

 

 

 

25.4

 

25.4

 

24.6

 

24.6

 

Asset retirement obligations

 

 

 

26.2

 

26.2

 

24.8

 

24.8

 

Common stock warrant derivatives

 

(b)

 

85.6

 

 

115.4

 

 

Deferred income tax liabilities

 

(a,c)

 

136.4

 

170.4

 

141.3

 

168.0

 

 

 

 

 

349.6

 

298.0

 

359.2

 

270.5

 

Shareholders’ Equity

 

 

 

 

 

 

 

 

 

 

 

Common stock

 

 

 

700.4

 

698.8

 

697.1

 

695.5

 

Common stock warrants

 

(b)

 

 

35.0

 

 

35.0

 

Additional paid-in-capital

 

 

 

49.4

 

49.4

 

45.7

 

45.7

 

Retained earnings

 

(a,b,c)

 

391.5

 

494.6

 

232.8

 

359.5

 

Accumulated other comprehensive income

 

 

 

13.9

 

13.9

 

9.8

 

9.8

 

 

 

 

 

1,155.2

 

1,291.7

 

985.4

 

1,145.5

 

 

 

 

 

$

1,504.8

 

$

1,589.7

 

$

1,344.6

 

$

1,416.0

 

 

18



Table of Contents

 

The following table reconciles the consolidated net income (loss) and consolidated comprehensive income as reported under US GAAP with that which would have been reported under Canadian GAAP:

 

 

 

For the Three Months Ended
September 30,

 

For the Nine Months Ended
September 30,

 

 

 

2010

 

2009

 

2010

 

2009

 

Net income (loss)—US GAAP

 

$

31.1

 

$

(1.4

)

$

158.7

 

$

(82.0

)

Reconciling items:

 

 

 

 

 

 

 

 

 

Change in fair value of common stock warrants

 

20.5

 

15.7

 

(29.8

)

99.0

 

Stripping costs incurred during production (net of amortization)

 

7.6

 

4.9

 

13.3

 

14.0

 

Income tax effect of above adjustments

 

(3.1

)

0.5

 

(7.1

)

(0.5

)

Net income—Canadian GAAP

 

$

56.1

 

$

19.7

 

$

135.1

 

$

30.5

 

Net income per share—Canadian GAAP

 

 

 

 

 

 

 

 

 

Basic

 

$

0.40

 

$

0.16

 

$

0.97

 

$

0.25

 

Diluted

 

$

0.39

 

$

0.14

 

$

0.92

 

$

0.24

 

Net income—Canadian GAAP

 

$

56.1

 

$

19.7

 

$

135.1

 

$

30.5

 

Foreign currency translation adjustment

 

3.1

 

26.9

 

(4.1

)

43.9

 

Comprehensive income—Canadian GAAP

 

$

59.2

 

$

46.6

 

$

131.0

 

$

74.4

 

 

For the three months ended September 30, 2010 and 2009, under Canadian GAAP, cash flows from operating activities would increase by $5.7 million and $4.4 million, respectively, and cash flows from investing activities would decrease by $5.7 million and $4.4 million, respectively, due to stripping costs incurred during production.

 

For the nine months ended September 30, 2010 and 2009, under Canadian GAAP, cash flows from operating activities would increase by $18.3 million and $18.8 million, respectively, and cash flows from investing activities would decrease by $18.3 million and $18.8 million, respectively, due to stripping costs incurred during production.

 

Current Differences in Accounting Principles

 

a)                                      Stripping Costs Incurred During Production

 

Under US GAAP, capitalization of stripping costs after a mine has entered its production phase is not permitted, and stripping costs are accounted for as a variable production cost to be included in the costs of inventory.

 

Effective January 1, 2007, for Canadian GAAP purposes, TCM prospectively adopted EIC-160 “Stripping Costs Incurred in the Production Phase of a Mining Operation”. Under EIC-160, stripping activity at operating mines that represents a betterment is capitalized to property, plant and equipment and amortized on a unit-of-production basis over the related proven and probable reserves. Betterment occurs when the stripping activity increases future output of the mine by providing additional sources of mineral reserves.

 

Accordingly, for the three months ended September 30, 2010 and 2009, costs and expenses for Canadian GAAP purposes would decrease by $7.6 million and $4.9 million, respectively.  For the nine months ended September 30, 2010 and 2009, costs and expenses for Canadian GAAP purposes would decrease by $13.3 million and $14.0 million, respectively.

 

As of September 30, 2010, property, plant and equipment would increase by $85.5 million (net of amortization) and product inventory would decrease by $0.7 million.

 

b)                                     Common Stock Warrant Derivatives

 

In June 2008, the EITF reached a conclusion that an equity-linked financial instrument would not be considered indexed to TCM’s own stock if the strike price is denominated in a currency other than the issuer’s functional currency, for fiscal years beginning on or after December 15, 2008. Given that the functional currency of TCM is the US dollar and the common stock warrant exercise price is denominated in the Canadian dollar, these warrants are required to be treated as a derivative liability under US GAAP with changes in fair value recorded to earnings. This guidance was adopted by TCM under US GAAP on January 1, 2009.

 

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Table of Contents

 

Under Canadian GAAP, TCM’s common stock warrants are treated as equity. Accordingly, for the three months ended September 30, 2010 and 2009, the change in fair value of common stock warrants would decrease by $20.5 million and decrease by $15.7 million, respectively, under Canadian GAAP.  For the nine months ended September 30, 2010 and 2009, the change in fair value of common stock warrants would increase by $29.8 million and decrease by $99.0 million, respectively, under Canadian GAAP.

 

As of September 30, 2010, common stock warrant derivatives would decrease by $85.6 million and common stock warrants would increase by $35.0 million under Canadian GAAP.

 

c)                                      Realization of Deferred Tax Asset for Stock Compensation

 

For US GAAP purposes, a deferred tax asset is recognized for the temporary difference related to share options based on the stock-based compensation recognized for financial statement purposes. The deferred tax asset is recognized in the period that the stock-based compensation expense is recorded. At each reporting period, the deferred tax asset is reduced by a valuation allowance if it is more likely than not that some or all of the deferred tax asset will not be realized.

 

For Canadian GAAP purposes, a deferred tax asset is recognized for the temporary difference related to share options based on the stock-based compensation recognized for financial statement purposes. However, at each reporting period, if there is a decline in the market price of TCM’s common stock below the option strike price, this factor is taken into account in determining whether recoverability of the deferred tax asset is considered more likely than not.

 

Under Canadian GAAP, TCM recorded a valuation allowance of $2.9 million for the three and nine months ended September 30, 2010.  In 2009, TCM recorded a benefit of $2.3 million and $4.7 million related to the release of the valuation allowance for the three and nine months ended September 30, 2009, respectively.

 

17.  Reclamation Bonds

 

TCM is required by US federal and state laws and Canadian provincial laws to provide financial assurance sufficient to allow a third party to implement approved closure and reclamation plans if TCM is unable to do so. These laws are complex and vary from jurisdiction to jurisdiction. The laws govern the determination of the scope and cost of the closure and reclamation obligations and the amount and forms of financial assurance.

 

As of September 30, 2010, TCM has provided the appropriate regulatory authorities in the US and Canada with $32.2 million in reclamation financial assurance for mine closure obligations in the various jurisdictions in which TCM operates.

 

TCM purchased a Mine Reclamation Costs Policy, effective July 31, 2002 through July 31, 2022 (the “Policy”), from an AIG Commercial Insurance Group, Inc. subsidiary (“AIG”). The Policy secured the future reclamation obligations at the Thompson Creek Mine and was uniquely tailored to cover the requirements of the regulatory authorities and TCM’s anticipated reclamation cost exposures. The Policy provided an aggregate limit of $35 million for such reclamation costs at the mine. The insurance component provided coverage for increases in reclamation costs due to changes in regulatory requirements and cost increases. As of July 30, 2007, the insurance component was “paid up” in full. No further payments were required under the Policy for the insurance component.

 

AIG also provided reclamation bonds to the regulatory authorities for the Thompson Creek Mine totaling $23.2 million as of June 30, 2010. In order for AIG to provide reclamation bonds, TCM funded a commutation account (“Commutation Account”). As of June 30, 2010, the accumulated Commutation Account balance was $22.2 million, which represented a deposit.

 

During the third quarter of 2010, TCM concluded on an agreement and settlement with AIG regarding the Policy, which resulted in a settlement payment from AIG, TCM’s release of AIG from the insurance components of the Policy, the return from AIG of TCM’s Commutation Account, and AIG continuing to provide reclamation bonding to regulatory authorities for the Thompson Creek Mine of $25.5 million, up to an aggregate limit of $35 million through July 31, 2022.   The current reclamation bonding of $25.5 million is 75% collateralized by cash investments of $19.1 million, included in reclamation deposits, with a third-party bank escrow agent, which may increase to 100% based on certain criteria included in the settlement agreement.  The remaining funds in reclamation deposits relate to cash investments required for reclamation bonds for the Endako Mine and Davidson Project.

 

20



Table of Contents

 

18.  Subsequent Events

 

On October 20, 2010, TCM acquired all of the issued and outstanding equity of Terrane Metals Corp. (“Terrane”) by way of a plan of arrangement (the “Arrangement”) pursuant to a definitive agreement dated July 15, 2010 and amended on August 20, 2010 (the “Arrangement Agreement”).  Upon consummation of the Arrangement, Terrane became a wholly-owned subsidiary of TCM.  TCM also concurrently entered into a purchase and sale agreement with a subsidiary of Royal Gold, Inc. (“RG”) that provides for, among other things, the purchase by RG of 25% of the payable gold (the “Gold Stream Transaction”) produced by Terrane’s Mt. Milligan Copper-Gold Project ( “Mt. Milligan”).  In acquiring Terrane, TCM acquired Mt. Milligan, as well as the Berg, Howards Pass and Maze Lake exploration properties.  TCM acquired Terrane to diversify its current asset base of primary molybdenum deposits to include contributions from copper and gold subsequent to the start up of Mt. Milligan, which is expected in 2013.

 

Upon closing of the Terrane acquisition, the holders of Terrane outstanding common shares received C$0.90 in cash and 0.052 of a TCM common share per Terrane share.  As a result, TCM paid cash consideration of $410.5 million (C$420.5 million using the Bank of Canada noon rate on the date of closing), and issued 24.3 million shares at a fair value of $268.7 million based on the closing price of TCM’s stock on the date of closing.

 

In addition, pursuant to the Arrangement Agreement, 63.2 million of outstanding Terrane warrants (collectively referred to as the “Warrants”) will remain outstanding, of which 45.4 million expire on April 16, 2011 (the “2011 Warrant”) and 17.8 million expire on June 21, 2012 (the “2012 Warrant”).  Each Warrant remains outstanding, and, on its existing terms, entitles the holder (until the expiry of such Warrant) to receive upon its exercise the same share consideration and the cash consideration for each Terrane share that such holder would have received had such Warrants been exercised immediately before the effective time of the Arrangement.  TCM has entered into supplemental indentures for the Warrants (other than those originally issued to Goldcorp Canada Ltd.), which provide for an offset of the Warrant’s exercise price against the cash consideration that would otherwise be payable to the holders upon exercise of a Warrant.  Upon exercise of the Warrants, holders follow the same procedures that would have been followed prior to the effective date of the Arrangement except that: (i) in the case of the 2011 Warrants, which have an exercise price of C$1.50 (the “2011 Exercise Price”), the payment of the 2011 Exercise Price will be partially satisfied by offsetting the cash consideration otherwise payable to an exercising holder; and (ii) in the case of the 2012 Warrants, which have an exercise price of C$0.85 (the “2012 Exercise Price”), the payment of the 2012 Exercise Price will be satisfied by offsetting the cash consideration otherwise payable to such holder. Accordingly, upon valid exercise of (i) the 2012 Warrants, holders will not be required to deliver cash in satisfaction of the 2012 Exercise Price and will be entitled to receive cash in the amount of C$0.05 and the 0.052 TCM common share consideration for each 2012 Warrant exercised, and (ii) the 2011 Warrants, holders will be required to deliver C$0.60 cash in satisfaction of the 2011 Exercise Price and will be entitled to receive the 0.052 TCM common share consideration for each 2011 Warrant exercised. If all of the Warrants are exercised, this would result in net cash proceeds to TCM of C$