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2008 marked an important step forward in First Quantum's progress towards building an international mining company. Total copper production rose over 47% from the previous year to total 334,415 tonnes as the Frontier mine completed its first full year of commercial operations, benefits of recent capacity expansions at the Kansanshi mine were realized and another strong operating year was recorded at the Guelb Moghrein mine. On the project level, the Kolwezi project reached 50% completion and the capacity expansion at Guelb Moghrein was well advanced. Additionally, the acquisition of the Kevitsa project in Scandinavia was a significant first step in our strategy to diversify both geographically and across commodity lines. While our due diligence prior to the acquisition indicated a robust project, subsequent work suggests even greater potential. We are confident that, when developed, Kevitsa will be a meaningful operation in First Quantum's asset base.
While the Company made great progress and achieved several objectives during the year, we were not immune to the effects of the severe global recession that took hold in the second half of 2008. The market price for our main product, copper, traded as high as $4.02 per pound during the first quarter of the year then started a sharp decline in the third quarter to close 2008 at $1.31 per pound. The price for gold however, of which we sold almost 122,000 ounces in 2008, was strong over the year with an average price of $872 per ounce. This compares to an average of $697 for 2007.
For the year, the Company generated revenues of $1.7 billion, operating cash flow, before working capital changes of $637 million and net earnings of $300 million before impairment charges on investments. These impairment charges are non-cash, do not affect the core of our business and are meant to adjust the value of listed and other investments to fair market value.
First Quantum is committed to sustainable development and is ever mindful of its responsibility towards the communities in which it operates. Over the years we summarized in the Annual Report the work we do in this regard however, this year I am very proud that we have produced our first ever Sustainable Development Report. The report is available on our website and I encourage you to access it and learn about our activities and progress.
As I note every year, our achievements over the last several years are a credit to the qualities of our excellent team of technical professionals and management. Without high quality people, even the richest deposit cannot be developed successfully. Therefore, we will continue with our long-term policy of recruiting, developing and motivating the best people in the industry. Our performance is a testament to the value of this policy and our success in achieving it.
Meeting the challenges of a global recession
Each year in my letter to shareholders, I try to provide some insight into the challenges faced by the Company. As can be expected, this year's discussion is dominated by the effects of the global economic recession and the weakness in financial markets, which have created a challenging environment for every industry, and our action plan to meet those challenges. Fortunately for First Quantum, this downturn has come at a time when we are able to benefit from low-cost projects either underway or recently completed and are able to implement mine planning and processing changes in a timely manner.
Following the sharp fall in the copper price in the second half of 2008, we initiated a review of all parts of the business to identify prudent measures to protect the Company's core activities and financial resources, improve its operating cost profile and emerge stronger when economic conditions improve.
As a result of the review, we have adjusted each mine's operating plan, renegotiated supply contracts, improved supplier credit terms, tightened working capital management, and deferred some exploration and capital expenditure. I am pleased to report that these measures are producing the desired results and the capability of all of First Quantum's mines to generate cash in a low copper price environment has been enhanced.
While we believe these measures are adequate to ensure the long-term integrity and success of the Company, we also recognize that the current operating and financial environment is uncertain and volatile and further action may be required. Together, management and the Board have developed action plans for various possible scenarios and we are prepared to initiate them should conditions warrant.
The commitment to the strength and success of First Quantum is strong throughout the Company and well evidenced by the lead taken by senior management and the Board in a 20% reduction in their salaries and board fees. Although modest in the context of the overall revenues and costs of the business, this action is indicative of the strength of that commitment and belief in the quality of the asset base.
By all indications, 2009 will be a challenging year but we are prepared to meet those challenges with the same flexibility and discipline that have underpinned First Quantum's success to date.
We are confident that First Quantum has a sound platform for expansion when global commodities markets recover from the current severe recessionary environment. As a low cost producer with brownfield expansion opportunities at Kansanshi, Frontier and Guelb Moghrein plus new projects under development at Kolwezi and Kevitsa, we are well positioned to bring additional production on stream quickly by bringing forward projects that are currently deferred.
Review of operations
Kansanshi Copper-Gold Mine
Kansanshi had a strong operating year with a 31% increase in copper production mainly as a result of capacity expansions completed during 2007 and 2008.
The 12-million tonne per year sulphide expansion operated consistently at design rates, with improved metallurgical performance across both old and new sulphide circuits obtained as consistency in operations improved. Output from the High Pressure Leach operations improved particularly in the fourth quarter as material and equipment improvements took effect. This facility along with the recently installed 35,000-tonne per year electrowinning tankhouse and the four million tonne per year concentrator expansion all give Kansanshi considerable operating flexibility and ability to manage costs of production.
Frontier Copper Mine
Frontier's operations ramped up to design levels and completed its first full year of commercial operations in 2008. The mine's workforce was tested in the beginning of the year with the heavy rains of its first wet season which hampered mining activities. The operation recovered well and achieved its highest quarterly output in the fourth quarter during the 2008/2009 wet season. Frontier's production accounted for approximately 24% of the Company's total output.
Guelb Moghrein Copper-Gold Mine
Guelb Moghrein recorded another solid operating year with 15% higher production and an average unit cost of production of $0.70 per pound of copper.
Several initiatives that are expected to make a substantial difference to Guelb Moghrein's future operations were started or completed in 2008. These include the plant expansion to 3.8 million tonnes per year which is on track for commissioning in the third quarter of 2009, an upgrade to a more fuel efficient mining fleet, the project to switch to the use of heavy fuel only and the completion of the gold plant. As a result of these projects, Guelb Moghrein's production capacity will be higher and its cost structure significantly lower. The mine is also expected to be able to exploit lower grade ore, and hence considerably increase the reserves.
Kolwezi Copper-Cobalt Project
Development of the Kolwezi project was advanced to almost 50% completion by the end of 2008. As a consequence of the prolonged review of mining contracts, the economic downturn and resulting decline in the copper price, development was slowed beginning in the fourth quarter. Commissioning is now scheduled for the third quarter of 2010 and construction is well on-track to meet this new timetable. The Company and the contributing partners in the project are optimistic that a satisfactory conclusion will eventually be reached in the review of its mining contract and project financing will then be obtained. This optimism is based on the knowledge that the Kolwezi contract is valid, binding and all terms have been complied with. Kolwezi will have an operating life of over 20 years at the expanded production rate and the level of investment is indicative of First Quantum's long-term commitment to the Democratic Republic of Congo as investors in the mining sector.
Outlook
We expect First Quantum's production growth to continue in 2009 supplemented by low-cost projects either recently completed or close to completion. This provides a strong platform for First Quantum to ride out the current recessionary environment and to bring additional organic growth projects on line quickly as market conditions improve. In addition, the Company is on track to become a more meaningful gold producer as the gold recovery circuits at Guelb Moghrein and Kansanshi are enhanced. Copper production is expected to rise almost 15% to 380,000 tonnes and gold production to double to 240,000 ounces.
Over the 2010 to 2013 period, copper production from the existing operations is expected to increase further to 397,000 tonnes. This does not include the estimated average yearly production from Kolwezi of 70,000 tonnes and the yet undetermined volumes from Kevitsa.
From the start, First Quantum has been a cost-efficient operator and we are working to stay that way. The changes implemented across all aspects of our activities to optimize the cost structure are being supplemented by price reductions for several key process inputs. Most notably, the prices for diesel and sulphur have declined significantly from levels in mid-2008. In 2009, we are targeting $0.80 per pound of copper as the average cash cost of production, net of proceeds from the sale of our gold production. This is very competitive under every price estimate by industry analysts that we are aware of.
Much of the Company's success has come from being opportunistic, focused and conservative in its acquisitions. We intend to continue in this vein as we assess some excellent opportunities that have become available as a result of the economic downturn. These will be carefully weighed against the Company's existing prospects and evaluated on how we can add value through our sound financial position and technical expertise.
Objectives for 2009
Our objectives for 2009 are demanding and as always, would not be achievable without the skills and enthusiasm of our employees:- Health, Safety and the Environment -- continue to promote the health, safety and development of our employees and to enrich the environment and communities in which we operate
- Kolwezi - advance the project towards completion and finalize debt financing taking into consideration the revisitation process, global economic conditions and availability of debt financing
- Guelb Moghrein - complete the production capacity expansion
- Kevitsa - fully explore the potential of this project and complete a detailed conceptual design and capital cost estimate to refine the development schedule and construction requirements
- Exploration - focus on high grade/high value mineralization with near-term production potential
- Zambian tax matters - continue constructive discussions with the Zambian Government with regards to the mining tax regime
- Acquisitions - pursue opportunities to diversify both geographically and across commodity lines
Thank you
I thank the many people, governments, organizations and partners in the industry who have contributed to the First Quantum's success in 2008. While our employees, with their management and technical expertise, have been the main engine for our growth, we also acknowledge the important role of the governments of Zambia, the DRC, Mauritania and Finland.
Finally, I thank the members of the Board for their diligence, support and enthusiasm.
Philip K. R. Pascall
Chairman & CEO
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