Dundee Precious Metals Inc. | 1 Dundee Precious Metals Reports Fourth Quarter 2010 and Year-End Results and Updated Chelopech Mineral Reserves and Resources
DUNDEE PRECIOUS METALS REPORTS FOURTH QUARTER 2010 AND YEAR-END RESULTS AND UPDATED CHELOPECH MINERAL RESERVES AND RESOURCES (All monetary figures are expressed in U.S dollars unless otherwise stated)
Toronto, Ontario, February 23, 2011 – Dundee Precious Metals Inc. (“DPM” or the “Company”) (TSX: DPM; DPM.WT; DPM.WT.A) today announced its unaudited results for the fourth quarter ended December 31, 2010. DPM reported fourth quarter of 2010 net earnings attributable to equity shareholders of the Company of $20.9 million (basic net earnings per share of $0.17 and diluted net earnings per share of $0.15). This compares with fourth quarter of 2009 net earnings attributable to equity shareholders of the Company of $3.5 million (basic and diluted net earnings per share of $0.04).
For the year 2010, the Company had net earnings attributable to equity shareholders of the Company of $23.5 million (basic net earnings per share of $0.20 and diluted net earnings per share of $0.19). This compares with net earnings attributable to equity shareholders of the Company of $5.1 million (basic and diluted net earnings per share of $0.05) for the year 2009.
"2010 was an important year for DPM," said Jonathan Goodman, President and Chief Executive Officer. "In addition to reaching the one million tonne a year production milestone at Chelopech and securing downstream processing for our Chelopech concentrate through the smelter purchase, we achieved a 25% increase in gross profit, year over year. With Deno Gold operating at its expanded annual capacity of 600,000 tonnes and Chelopech completing its mill expansion, we expect that 2011 will prove to be even more profitable for our shareholders."
The following table summarizes the Company’s financial and operating results for the periods indicated:
Three Months Twelve Months $ millions, except per share amounts
| Ended December 31, | 2010 | 2009 | 2010 | 2009 |
| Net Revenue | $ 61.4 $ | 42.1 | $ 201.8 $ | 137.5 |
| Cost of Sales | 43.8 | 29.5 | 150.1 | 96.8 |
| Gross Profit | 17.6 | 12.6 | 51.7 | 40.7 |
| Investment and Other Income | 12.6 | 0.4 | 51.4 | 1.4 |
| Net Impairment Provisions | (3.6) | (0.3) | (54.6) | (4.4) |
| Exploration Expense | (3.2) | (1.3) | (7.3) | (4.8) |
| Administrative and Other Expenses | (5.1) | (4.5) | (15.7) | (15.4) |
| Net Earnings | 19.4 | 3.5 | 20.5 | 5.1 |
Net Earnings Attributable to Equity Shareholders of
| the Company | 20.9 | 3.5 | 23.5 | 5.1 | ||
| Basic Net Earnings per Share | $ | 0.17 $ | 0.04 | $ | 0.20 $ | 0.05 |
| Diluted Net Earnings per Share | $ | 0.15 $ | 0.04 | $ | 0.19 $ | 0.05 |
| Net Cash Provided by Operating Activities | 28.8 | 22.3 | 50.3 | 21.2 | ||
| Net Cash Used in Investing Activities | (43.3) | (23.5) | (88.7) | (31.6) | ||
| Net Cash Provided by (Used in) Financing Activities | 26.1 | (1.6) | 103.9 | (4.7) | ||
| Net Increase (Decrease) in Cash | $ | 11.6 $ | (2.8) $ | 65.5 $ | (15.1) |
Concentrate Produced (mt)
| Chelopech | 20,259 | 15,634 | 75,278 | 71,657 |
| Deno | 6,969 | 3,999 | 20,757 | 10,144 |
| NCS - concentrate processed (mt) | 37,635 | - | 119,557 | - |
Cash Cost per tonne Ore Processed ($/t)1
1 Cash cost per tonne ore processed is a non-GAAP measure. A reconciliation of the Company’s cash cost per tonne ore processed to cost of sales under Canadian GAAP for the years 2010 and 2009 is shown in the table entitled “Non-GAAP Financial Measures.”
DUNDEE PRECIOUS METALS INC. | 1
Chelopech (excluding royalties) $ 56.34 $ 65.26 $ 51.54 $ 55.23 Deno Gold (excluding royalties) $ 63.66 $ 72.01 $ 66.33 $ 72.27
DUNDEE PRECIOUS METALS INC. | 2
FOURTH QUARTER 2010 AND YEAR-END - FINANCIAL HIGHLIGHTS
- In the fourth quarter of 2010, the Company recorded net earnings attributable to equity shareholders of $20.9 million compared to $3.5 million in the corresponding prior year period. The period over period increase in net earnings attributable to equity shareholders was primarily due to unrealized favourable mark-to-market adjustments of $11.6 million in the Company’s holdings of Sabina Gold & Silver Corp. (“Sabina”) special warrants and higher gross profit from mining and processing operations.
- DPM recorded a gross profit from mining and processing operations of $17.6 million in the fourth quarter of 2010 compared to $12.6 million in the corresponding prior year period. The period over period increase was due primarily to higher metal prices partially offset by lower gold in concentrate sold. Deliveries of concentrates in the fourth quarter of 2010 of 23,346 tonnes were marginally higher than the corresponding prior year period deliveries of 23,009 tonnes but contained 20,469 ounces of gold compared to 25,540 ounces in the corresponding prior year period due to a drawdown of 2,157 tonnes of high grade gold concentrate inventory in the fourth quarter of 2009.
- In the twelve months of 2010, the Company recorded net earnings attributable to equity shareholders of $23.5 million compared to $5.1 million in the corresponding prior year period. The higher, period over period, net earnings attributable to equity shareholders was due primarily to unrealized favourable mark-to-market adjustments of $49.7 million in the Company’s holdings of Sabina special warrants and higher gross profit from mining and processing operations partially offset by a $54.0 million impairment provision taken against the metals processing facility (“MPF”) at Chelopech. The write-down in the carrying value of the MPF project to its estimated fair value was partially offset by the reversal of $3.4 million of royalties accrued in respect of the MPF project. In view of the Bulgarian court’s final decision to revoke the MPF environmental impact assessment (“EIA”), it is unlikely that the MPF project will proceed. In addition, the July 2008 amendments to Chelopech’s mining concession contract with the Bulgarian government, as they relate to the royalty provisions, no longer apply and no excess royalty above the 1.5% fixed rate is required to be accrued. As a result, the excess royalty accrual above the 1.5% was reversed in the first quarter of 2010 and applied against the MPF property impairment provision.
- DPM recorded a gross profit from mining and processing operations of $51.7 million in the twelve months of 2010 compared to $40.7 million in the corresponding prior year period. The period over period increase was due primarily to higher gold, copper and zinc prices and an increase in concentrate deliveries partially offset by unfavourable mark-to-market adjustments and final settlements on provisional sales and lower gold in concentrate sold. In the twelve months of 2010, gold in concentrate sold totalled 80,352 ounces compared to 104,314 ounces in the corresponding prior year period. The decrease in gold in concentrate sold was primarily due to lower gold grades at Chelopech in 2010 relative to 2009 and lower gold recoveries, which were adversely impacted by the processing of high sulphur to copper ratio ore (Block 151) in 2010. Chelopech ore mined in 2009 contained lower sulphur to copper ratio ore resulting in higher gold recoveries. Deliveries of concentrates in the twelve months of 2010 of 91,157 tonnes were 4,982 tonnes higher than the corresponding prior year period deliveries of 86,175 tonnes due primarily to increased production of concentrates at Deno Gold in 2010.
- As at December 31, 2010, DPM had cash and cash equivalents of $96.2 million (including Avala’s cash and cash equivalents of $16.9 million) and short-term investments of $13.2 million. Investments at fair value totalled $174.5 million at December 31, 2010 compared to $34.4 million at December 31, 2009.
DUNDEE PRECIOUS METALS INC. | 3
SIGNIFICANT ITEMS AND 2011 OUTLOOK
Chelopech
- In the year 2010, Chelopech continued to advance its mine and mill expansion project to approximately double its annual concentrate production capacity to 150,000 tonnes. The commissioning of the new paste fill plant was successfully completed in the third quarter of 2010 and the commissioning of the new semi-autogenous grinding (“SAG”) mill was completed successfully in January 2011. Construction of the mine and mill expansion is expected to be completed in the fourth quarter of 2011.
- On December 3, 2010, DPM and Chelopech finalized a $66.75 million long-term loan agreement with the European Bank for Reconstruction and Development (“EBRD”) and Unicredit Bulbank (“UCB”). The proceeds from this loan agreement are to be used to assist in the financing of the Chelopech mine and mill expansion and to refinance existing debt. As of December 31, 2010, $44.25 million had been drawn under the facility, of which $16.25 million was used to refinance existing EBRD debt. The loan, which is guaranteed by DPM and secured by a first ranking charge over the shares of Chelopech, is repayable in ten equal semi-annual instalments, commencing June 2013 and bears interest at a rate of LIBOR plus 3.25% until completion of the Chelopech mine and mill expansion and LIBOR plus 2.80% thereafter.
- In compliance with its obligations under its Concession Contract, on November 15, 2010, Chelopech delivered a $25 million insurance policy/performance bond to the Bulgarian Ministry of Economy, Energy and Tourism (“MoEET”) to ensure the performance of Chelopech’s obligations for the planned or pre-term closure and rehabilitation of the Chelopech operations.
- Under the terms of its loan agreement with the EBRD and UCB, the Company is required to provide metal price protection on 15% of Chelopech’s 2012, 2013 and 2014 projected payable copper production. In fulfillment of this obligation, in January 2011, the Company entered into monthly settled forward sales contracts to fix 2,868 tonnes of the year 2012 projected payable copper production at a fixed price of $9,224/tonne ($4.18/lb), 3,036 tonnes of the year 2013 projected payable copper production at a fixed price of $8,814/tonne ($4.00/lb) and 3,264 tonnes of the year 2014 projected payable copper production at a fixed price of $8,386/tonne ($3.80/lb). All gains and losses on these contracts will be reported through the income statement.
Acquisition of Tsumeb Smelter Assets and Related Business
- On March 24, 2010, DPM completed the acquisition of NCS from Weatherly International plc (“WTI”) through the purchase of 100% of the shares of NCS. The total consideration paid to WTI for NCS was $33.0 million consisting of: (i) $18.0 million in cash and (ii) the issuance of 4,446,420 fully paid common shares of DPM.
- On May 26, 2010, DPM completed its agreement with Louis Dreyfus Commodities Metals Suisse SA (“LDC”) to settle approximately $11.4 million of financial obligations owed by NCS to LDC, through a cash payment of $2.0 million and the issuance of 2,903,525 common shares of DPM. LDC will continue to have exclusive rights to purchase the Chelopech concentrate for toll processing through NCS (including return of blister copper to LDC) and to source the balance of the concentrate for the Tsumeb smelter through to and including 2020.
Sale of Serbian Assets
- In July 2010, DPM concluded its agreement with PJV Resources Inc. (“PJV”) and Rodeo Capital Corp. (now Avala Resources Ltd.) wherein it received a 50.3% direct controlling interest in Avala, 36.7 million share purchase warrants exercisable at Cdn$0.50 per share and $1.6 million cash in exchange for Dundee Plemeniti Metali d.o.o. (“Metali”). DPM was also issued Special Rights to
DUNDEE PRECIOUS METALS INC. | 4
acquire an aggregate of 50,000,000 additional Avala common shares for no additional consideration, of which 25,000,000 are issuable upon a positive decision to proceed to a feasibility study on all or part of the projects and an additional 25,000,000 are issuable upon a positive decision to bring all or part of the projects into production. As at December 31, 2010, DPM held 50.9% of Avala common shares.
- Pursuant to the certificates and indenture governing certain of the Avala warrants issued on July 30, 2010, Avala had the right to accelerate the expiry date of such warrants any time after October 25, 2010 if the closing price of its common shares is above Cdn$1.00 for 20 consecutive trading days. On December 13, 2010, having met this precondition, Avala issued notification of its decision to accelerate the expiry date of this portion of the share purchase warrants to January 14, 2011. In response, DPM exercised 2,428,500 full warrants to purchase the same number of Avala common shares at Cdn$0.50 per share in December 2010. Avala also has the right to accelerate the expiry date on the 34,290,179 common share purchase warrants issued to DPM on July 30, 2010, as part of the consideration for its acquisition of Metali, any time after January 26, 2011 if the closing price of its common share is above Cdn$1.00 for 20 consecutive trading days. Upon notification of acceleration, the Company will have 30 days to exercise such warrants.
Krumovgrad
- On February 9, 2011, it was announced that the Council of Ministers of the Republic of Bulgaria had approved the granting of a 30 year concession to BMM to develop the Khan Krum Deposit in Krumovgrad. The council of Minister’s resolution is subject to publication in the State Gazette of the Republic of Bulgaria. The Council of Minister’s resolution was published in the State Gazette on February 18, 2011. Exercise of the concession rights by the Company is also subject to a positive EIA resolution being issued by the Bulgarian Minister of Environment and Waters (“MoEW”).
- In January 2011, the MoEW delivered a “positive grade” to both the EIA and the Natura 2000 Compatibility Assessment Report for the Krumovgrad Gold Project proposal, which had been submitted in October 2010, meaning that all information required under the EIA regulation is complete. Based on this positive assessment of the quality of the submissions, and in compliance with the requirements under the Bulgarian environmental legislation, DPM has commenced the public dissemination of the EIA documentation which will culminate with organized public hearings with the municipality of Krumovgrad and other potentially affected municipalities or villages.
2011 Outlook
- Total capital expenditures for the year 2011 are expected to range between $155 million and $165 million, including $62 million to complete the mine and mill expansion at Chelopech, $35 million for environmental and plant optimizations projects at NCS and $25 million at Deno Gold to further enhance underground operations and advance the proposed open pit project. This current estimate is about $15 million higher than the guidance provided in November 2010 due to additional expenditures for environmental and operating improvements at NCS. Pending completion of the definitive feasibility study for the Krumovgrad project in Bulgaria and receipt of approvals of its EIA, the Company also expects to move forward with the construction of this project.
- For the year 2011, mine output at Chelopech is expected to range between 1.2 million and 1.3 million tonnes of ore, in line with its planned ramp up to an annualized production rate of two million tonnes of ore. At this level, Chelopech is expected to produce approximately 100,000 tonnes of concentrate. Following completion of its mine/mill expansion to 600,000 tonnes of ore in 2010, Deno Gold is expected to produce between 25,000 and 30,000 tonnes of concentrate.
DUNDEE PRECIOUS METALS INC. | 5
- The Company’s estimated metals in concentrate produced for the year 2011 is set forth in the following table:
Metals in Concentrate Produced: Chelopech Deno Gold Total
Gold (ounces) 90,000 – 92,000 30,000 – 33,000 120,000 – 125,000 Copper (million pounds) 32.5 – 35.5 3.0 – 3.5 35.5 – 39.0 Zinc (million pounds) – 21.0 – 23.0 21.0 – 23.0 Silver (ounces) 150,000 – 160,000 500,000 – 530,000 650,000 – 690,000
- Unit cash cost per tonne of ore processed, excluding royalties, at Chelopech for the year 2011 is expected to be approximately 5% lower than the year 2010 average unit cash cost of ore processed assuming current exchange rate Euro to U.S. dollar. Unit cash cost per tonne of ore processed, excluding royalties, at Deno Gold for the year 2011 is expected to be comparable to the fourth quarter of 2010 average cash cost per tonne of ore processed.
A complete set of DPM’s Consolidated Financial Statements, Notes to the Consolidated Financial Statements and Management’s Discussion and Analysis for the twelve months ended December 31, 2010 will be posted on the Company’s website at www.dundeeprecious.com and will be filed on Sedar at www.sedar.com.
CONFERENCE CALL
DPM will be holding an analyst call on Thursday, February 24, 2010 at 8.30 a.m. (EST).
The call will be webcast live (audio only) at: http://www.gowebcasting.com/2181. Listen only call 416-340- 2220 or toll free 866-542-4237.
The audio webcast for this conference call will be archived and available on the Company’s website at www.dundeeprecious.com.
OVERVIEW
DPM is a Canadian-based, international mining company engaged in the acquisition, exploration, development, mining and processing of precious metals properties. Its common shares and share purchase warrants (symbols: DPM; DPM.WT; DPM.WT.A) are traded on the Toronto Stock Exchange (“TSX”). DPM’s business objectives are to identify, acquire, finance, develop and operate low-cost, long-life mining properties.
The Company’s operating interests include its 100% ownership of Chelopech Mining EAD (“Chelopech”), its principal asset being the Chelopech mine, a gold, copper, silver concentrates producer, located approximately 70 kilometres east of Sofia, Bulgaria, 100% ownership of Namibia Custom Smelters (Pty) Ltd. (“NCS”), a copper concentrate processing facility located in Tsumeb, Namibia, and a 100% interest in Deno Gold Mining Company CJSC (“Deno Gold”), its principal asset being the Kapan mine, a gold, copper, zinc, silver concentrates producer located about 320 kilometres south east of the capital city of Yerevan in Southern Armenia. DPM’s interests also include a 100% interest in the Krumovgrad development stage gold property located in south eastern Bulgaria, near the town of Krumovgrad, and certain exploration and exploitation properties in Serbia. The Company also presently holds a 50.9% controlling interest in Avala Resources Ltd., a TSX Venture Exchange (“TSXV”) listed company (TSXV:AVZ) focused on the exploration and development of the Timok and Potoj Cuka copper and gold projects in Serbia. In July 2010, the Company established DPM Assurance (Barbados) Inc. (“DPMA”), a qualifying insurance company in Barbados, principally to provide reinsurance coverage for surety risks originating from its affiliates.
DUNDEE PRECIOUS METALS INC. | 6
SUMMARIZED FINANCIAL RESULTS
Net revenue
Net revenue of $61.4 million in the fourth quarter of 2010 was $19.3 million higher than the corresponding prior year period net revenue of $42.1 million due primarily to a 24% increase in gold prices and 30% increase in copper prices partially offset by lower gold in concentrate sold. The drawdown and sale of higher grade gold concentrate in the fourth quarter of 2009 contributed to the relative reduction in gold in concentrate sold in the fourth quarter of 2010. Also contributing to the period over period increase in net revenue was the inclusion of NCS’s revenue following its acquisition by DPM in March 2010. Net unfavourable mark-to-market adjustments and final settlements of $0.5 million, related to the open positions of provisionally priced concentrate sales, were recorded in the fourth quarter of 2010 compared to net favourable mark-to-market adjustments and final settlements of $0.4 million in the fourth quarter of 2009.
Deliveries of concentrates produced at Chelopech of 17,883 tonnes in the fourth quarter of 2010 were comparable to the fourth quarter of 2009 deliveries of 17,791 tonnes. Gold in concentrate sold in the fourth quarter of 2010 of 13,076 ounces was 31% lower than the corresponding prior year period. Copper in concentrate sold of 6.1 million pounds was comparable to the corresponding prior year period.
Deliveries of copper and zinc concentrates produced at Deno Gold of 1,828 tonnes and 3,635 tonnes in the fourth quarter of 2010 were, respectively, 194 tonnes and 51 tonnes higher than the corresponding prior year period. Gold in concentrate sold in the fourth quarter of 2010 of 7,393 ounces was 10% higher than the corresponding prior year period. Copper and zinc in concentrate sold in the fourth quarter of 2010 of 0.8 million pounds and 4.1 million pounds were, respectively, 2% and 6% higher than the corresponding prior year period.
Net revenue of $201.8 million in the twelve months of 2010 was $64.3 million higher than the corresponding prior year period net revenue of $137.5 million due to a 26% increase in gold prices, a 46% increase in copper prices, a 31% increase in zinc prices and higher deliveries of concentrates partially offset by lower gold in concentrate sold. Net unfavourable mark-to-market adjustments and final settlements of $3.3 million, related to the open positions of provisionally priced concentrate sales, were recorded in the twelve months of 2010 compared to net favourable mark-to-market adjustments and final settlements of $6.5 million in the twelve months of 2009. In the twelve months of 2010, DPM recorded net losses on its copper and zinc derivatives of $0.2 million, compared to net losses on copper derivatives of $4.4 million in the twelve months of 2009. Also contributing to the period over period increase in net revenue was the inclusion of NCS’s revenue following its acquisition by DPM in March 2010.
Deliveries of concentrates produced at Chelopech of 73,061 tonnes in the twelve months of 2010 were 3% lower than the corresponding prior year period deliveries of 75,542 tonnes.Gold in concentrate sold in the twelve months of 2010 of 58,065 ounces was 38% lower than the corresponding prior year period. Copper in concentrate sold of 25.0 million pounds was 4% lower than the corresponding prior year period.
Deliveries of copper and zinc concentrates produced at Deno in the year 2010 of 5,478 tonnes and 12,618 tonnes were, respectively, 2,921 tonnes and 4,542 tonnes higher than the corresponding prior year period due to operational improvements and the ramp-up of the mine/mill expansion. In addition, Deno Gold was on care and maintenance in the first quarter of 2009. Gold in concentrate sold in the twelve months of 2010 of 22,287 ounces was 98% higher than the corresponding prior year period. Copper in concentrate sold in the twelve months of 2010 was 2.4 million compared to 1.2 million pounds in the corresponding prior year period. Zinc in concentrate sold in the twelve months of 2010 of 14.3 million pounds was 62% higher than the corresponding prior year period.
DUNDEE PRECIOUS METALS INC. | 7
The average London Bullion gold price2 in the fourth quarter of 2010 of $1,369 per ounce was 24% higher than the fourth quarter of 2009 average price of $1,102 per ounce. The average London Metal Exchange (“LME”) cash copper price2 in the fourth quarter of 2010 of $3.92 per pound was 30% higher than the fourth quarter of 2009 average price of $3.02 per pound. The average LME cash zinc price2 in the fourth quarter of 2010 of $1.05 per pound was 5% higher than the fourth quarter of 2009 average price of $1.00 per pound.
The average London Bullion gold price2 in the twelve months of 2010 of $1,224 per ounce was 26% higher than the corresponding prior year period average price of $973 per ounce. The average LME cash copper price2 in the twelve months of 2010 of $3.42 per pound was 46% higher than the corresponding prior year period average price of $2.34 per pound. The average LME cash zinc price2 in the twelve months of 2010 of $0.98 per pound was 31% higher than the corresponding prior year period average price of $0.75 per pound.
Cost of sales
Cost of sales of $43.8 million and $150.1 million in the fourth quarter and twelve months of 2010 were $14.3 million and $53.3 million higher than the corresponding prior year periods cost of sales of $29.5 million and $96.8 million, respectively, due primarily to the inclusion of expenses related to the processing of concentrates at NCS.
Cash cost per tonne of ore processed1, excluding royalties, at Chelopech in the fourth quarter of 2010 of $56.34 was 14% lower than the corresponding prior year period cash cost per tonne of ore processed1, excluding royalties, of $65.26 due to higher volume of material mined and processed, the favourable impact of an 8% depreciation of the Euro relative to the U.S. dollar period over period and lower cement usage in backfill activities partially offset by higher consumption of and prices for power and diesel, higher employment expenses and increased maintenance costs. Cash cost per tonne of ore processed1, including royalties, at Chelopech in the fourth quarter of 2010 of $61.66 was 14% lower than fourth quarter of 2009 cash cost per tonne of ore processed1, including royalties, of $71.61.
Cash cost per tonne of ore processed1, excluding royalties, at Chelopech in the twelve months of 2010 of $51.54 was 7% lower than the corresponding prior year period cash cost per tonne of ore processed1, excluding royalties, of $55.23 due primarily to higher volume of material mined and processed, the favourable impact of a weaker Euro relative to the U.S. dollar, period over period and lower cement usage in backfill activities partially offset by higher pending on supplies and services, higher employment expenses and increased prices for and consumption of power and fuels. Cash cost per tonne of ore processed1, including royalties, at Chelopech in the twelve months of 2010 of $56.22 was 8% lower than the corresponding prior year period cash cost per tonne of ore processed1, including royalties, of $61.00.
Cash cost per tonne of ore processed1, excluding royalties, at Deno Gold in the fourth quarter and twelve months of 2010 of $63.66 and $66.33 were, respectively, 12% and 8% lower than the corresponding prior year periods cash cost per tonne of ore processed1, excluding royalties, of $72.01 and $72.27 due to higher volume of material processed partially offset by higher maintenance costs, higher vein drive development costs to access additional working spaces and higher employment expenses. Cash cost per tonne of ore processed1, including royalties, at Deno Gold in the fourth quarter and twelve months of 2010 were $69.87 and $70.31, respectively. Deno Gold did not pay a profit based royalty in 2009.
11 Cash cost per tonne ore processed is a non-GAAP measure. A reconciliation of the Company’s cash cost per tonne ore processed to cost of sales under Canadian GAAP for the years 2010 and 2009 is shown in the table entitled “Non-GAAP Financial Measures.”
2 Refer to the Average Metal Prices section for the average metal prices used to illustrate the Company’s average metal price exposure based on its key reference prices.
DUNDEE PRECIOUS METALS INC. | 8
Gross profit
The following table shows the breakdown of gross profit (loss) by location:
Three Months Twelve Months $ thousands
| Ended December 31, | 2010 | 2009 | 2010 | 2009 | ||
| Chelopech | $ 14,444 $ | 9,698 | $ 41,214 $ 41,594 | |||
| Deno Gold | 6,865 | 2,888 | 13,558 | (865) | ||
| NCS | (3,682) | - | (3,132) | - | ||
| Total gross profit | $ 17,627 $ 12,586 | $ 51,640 $ 40,729 |
In December 2010, a year-to-date charge of $2.1 million on the net value of the metals in concentrate held by the smelter and smelter fee advances, as per the tolling agreement between LDC and NCS, was reclassified from financing costs to net revenue, resulting in a reduction in net revenue. Included in the NCS gross loss in the fourth quarter and twelve months of 2010 was a depreciation expense of $1.4 million and $2.4 million, respectively, on the intangible assets identified as part of the finalization of the purchase price allocation for the acquisition of NCS which was completed in the fourth quarter.
Investment and other income
Investment and other income were $12.6 million and $51.4 million in the fourth quarter and twelve months of 2010, respectively, compared to investment and other income of $0.4 million and $1.4 million in the corresponding prior year periods. Included in the fourth quarter and twelve months of 2010 were unrealized favourable mark-to-market adjustments related to the Sabina Special Warrants, which are held for trading, of $11.6 million and $49.7 million, respectively.
Income tax expense
In the fourth quarter of 2010, DPM reported an income tax recovery of $5.1 million at an effective tax recovery rate of 36% on earnings before income taxes of $14.3 million. At a 31% statutory tax rate for 2010, the expected income tax expense was $4.4 million. The variance was due primarily to the lower rates on foreign earnings and the non-taxable portion of unrealized gains on warrants.
For the year ended December 31, 2010, DPM reported an income tax recovery of $9.5 million at an effective tax recovery rate of 86% on earnings before income taxes of $11.0 million. At a 31% statutory tax rate for 2010, the expected income tax expense was $3.4 million. The variance was due primarily to the reversal of the tax valuation allowance and the non-taxable portion of capital gains and unrealized gains on special warrants, partially offset by an unrecognized tax benefit relating to foreign losses. The valuation allowance was reversed since it is more likely than not that DPM will be able to recognize future tax assets against future taxable income.
Summary of Operating Cash Flow, Investing and Financing Activities
The following table summarizes the Company’s cash flow activities for the periods indicated:
| $ thousands | Three Months | Twelve Months | ||
|---|---|---|---|---|
| Ended December 31, | 2010 | 2009 | 2010 | 2009 |
| Net cash provided by operating activities | $ 28,821 $ 22,325 | $ 50,287 $ 21,233 | ||
| Net cash used in investing activities | (43,333) | (23,522) | (88,725) (31,639) | |
| Net cash provided by (used in) financing activities 26,064 | (1,631) | 103,894 | (4,741) | |
| Increase (decrease) in cash and cash equivalents | 11,552 | (2,828) | 65,456 | (15,147) |
| Cash and cash equivalents at beginning of period | 84,673 | 33,034 | 30,769 | 42,169 |
| Change due to conversion to U.S. dollar reporting | - | 563 | - | 3,747 |
| Cash and cash equivalents at end of period | $ 96,225 $ 30,769 | $ 96,225 $ 30,769 |
DUNDEE PRECIOUS METALS INC. | 9
Operating Activities
Cash provided by operating activities in the fourth quarter of 2010 was $28.8 million compared to $22.3 million in the fourth quarter of 2009. The increase in cash provided by operating activities, period over period, was due to improved gross profit from mining and processing operations resulting from stronger metal prices partially offset by lower gold in concentrate sold.
Cash provided by operating activities in the twelve months of 2010 was $50.3 million compared to $21.2 million in the corresponding prior year period. The period over period increase in cash provided by operating activities was due primarily to improved gross profit from mining and processing operations resulting from stronger metal prices and higher deliveries of concentrates partially offset by lower gold in concentrate sold.
Investing Activities
Cash used in investing activities in the fourth quarter and twelve months of 2010 was $43.3 million and $88.7 million, respectively, compared to cash used in investing activities of $23.5 million and $31.6 million in the corresponding prior year periods.
Proceeds on sale of short-term investments totalled $31.6 million in the twelve months of 2010 compared to $3.8 million in the corresponding prior year period. Short-term investments include bankers’ acceptances and treasury bills with original maturities between three months and less than one year at the time the investment is made.
In the twelve months of 2010, there was an increase in restricted cash of $15.1 million due primarily to the funding of DPMA, a qualifying insurance company established to provide reinsurance coverage for surety risks originating from DPM’s affiliates.
On December 22, 2010, DPM, through a wholly owned subsidiary company, purchased the remaining five percent interest in Vatrin it did not own, resulting in DPM holding a 100% equity interest, for net cash consideration of $1.5 million and the elimination of all associated third party indebtedness. Vatrin holds 100% of Deno Gold.
In August 2010, DPM purchased 1,539,713 common shares of Sabina for $4.0 million (Cdn$4.2 million).
In April 2010, the Company subscribed for 4,857,000 units of PJV Resources at a unit price of Cdn$0.35 per unit for total cash consideration of $1.7 million (Cdn$1.7 million). Each unit consisted of one common share of PJV and one half of one common share purchase warrant. Each full warrant was exercisable to purchase a common share of Avala at Cdn$0.50 per share. The shares of PJV were converted to shares of Avala as part of the July 2010 business combination between PJV, Avala and Dundee Plemeniti Metali d.o.o. (“Metali”) and are eliminated on consolidation.
On March 24, 2010, the Company completed the acquisition of NCS from WTI through the purchase of 100% of the shares of NCS. The cash consideration provided to WTI by DPM was $17.0 million, net of cash acquired of $1.0 million.
Prior to its acquisition of NCS in March 2010, DPM advanced $3.0 million to NCS in accordance with the binding letter of intent signed in January 2010 with WTI for the purchase of NCS. In the twelve months ended December 31, 2009, DPM advanced $4.0 million to NCS in accordance with the agreement DPM signed with NCS in December 2008.
In June 2009, DPM completed the sale of its Back River exploration project in Nunavut to Sabina for a cash payment of $6.2 million (Cdn $7.0 million), 17 million Sabina common shares and 10 million Sabina special warrants.
DUNDEE PRECIOUS METALS INC. | 10
The following table provides a summary of the Company’s capital expenditures:
Three Months Twelve Months $ thousands
| Ended December 31, | 2010 | 2009 | 2010 | 2009 | |
| Chelopech | $ (17,562) $ (9,510) | $ (47,495) $ (27,347) | |||
| Deno Gold | (4,344) | (1,861) | (18,894) | (6,067) | |
| NCS | (3,407) | - | (8,357) | - | |
| BMM | (1,776) | (909) | (4,650) | (1,001) | |
| Other | (27) | (136) | (334) | (356) | |
| Total capital expenditures | $ (27,116) $ (12,416) | $ (79,730) $ (34,771) |
Capital expenditures at Chelopech in the fourth quarter and twelve months of 2010 were, respectively, 85% and 74% higher than the corresponding prior year periods due to the ramp-up of the mine and mill expansion project in 2010. Capital expenditures at Deno Gold in the fourth quarter and twelve months of 2010 were significantly higher than the corresponding prior year periods due to the mine and mill expansion and land acquisition in 2010.
Financing Activities
Cash provided by financing activities in the fourth quarter and twelve months of 2010 totalled $26.1 million and $103.9 million, respectively, compared to cash used in financing activities of $1.6 million and $4.7 million in the corresponding prior year periods.
In the twelve months of 2010, debt and leases repayments were $2.4 million and $3.8 million, respectively, compared to $3.6 million and $1.1 million in the corresponding prior year period.
On December 3, 2010, DPM and Chelopech finalized a $66.75 million long-term loan agreement with the EBRD and UCB. The proceeds from this loan financing are to be used to refinance existing EBRD debt and to assist in the financing of the Chelopech mine and mill expansion. As of December 31, 2010, $44.25 million had been drawn under the facility, of which $16.25 million was used to refinance the existing EBRD debt. The proceeds from debt financing, net of fees and expenses, were $27.1 million.
On July 30, 2010, DPM concluded its previously announced agreement with PJV and Avala wherein it received a 50.3% direct controlling interest in Avala, 36.7 million warrants (including the April 2010 subscription of shares and warrants), $1.6 million in cash as well as Special Rights to acquire an additional 50 million Avala common shares for no additional consideration, if certain events occur, in exchange for DPM’s Serbian subsidiary, Metali. Net proceeds on the sale of DPM’s interest in Metali were $20.9 million.
In the first quarter of 2010, the Company completed an equity financing for gross proceeds of $64.8 million (Cdn$66.0 million). The equity financing consisted of the sale of 20,000,000 common shares at Cdn$3.30 per share. The proceeds, net of expenses and fees, were $62.0 million (Cdn$63.1 million).
AVERAGE METAL PRICES
The following table, summarizing the average metal prices for the London Bullion Market Association (“LBMA”) gold, LME copper Grade A, LME special high grade (“SHG”) zinc and LBMA silver prices, is used to illustrate the Company’s average metal price exposures based on its key reference prices for the periods indicated.
| Average | Three Months | Twelve Months | ||||
|---|---|---|---|---|---|---|
| Ended December 31, | 2010 | 2009 | 2010 | 2009 | ||
| London Bullion gold($/oz) | $ | 1,369 $ | 1,102 | $ | 1,224 $ | 973 |
| LME settlement copper($/lb) | 3.92 | 3.02 | 3.42 | 2.34 | ||
| LME settlement SHG zinc($/lb) | 1.05 | 1.00 | 0.98 | 0.75 | ||
| LBMA spot silver($/oz) | $ | 26.43 $ | 17.58 | $ | 20.16 $ | 14.65 |
DUNDEE PRECIOUS METALS INC. | 11
NON-GAAP FINANCIAL MEASURES
Reference is made to cash cost per tonne of ore processed because it is understood that certain investors use this information to assess the Company’s performance and also determine the Company’s ability to generate cash flow for investing activities. This measurement captures all of the important components of the Company’s production and related costs. In addition, management utilizes this metric as an important management tool to monitor cost performance of the Company’s operations. This measurement, which is a non-GAAP measure, has no standardized meaning under Canadian GAAP and is therefore unlikely to be comparable to similar measures presented by other companies. This measurement is intended to provide additional information and should not be considered in isolation or as a substitute for measures of performance prepared in accordance with Canadian GAAP.The following table provides, for the periods indicated, a reconciliation of the Company’s cash cost measure and Canadian GAAP cost of sales:
$ thousands, unless otherwise indicated
For the year ended December 31, 2010 Chelopech Deno Gold Other Total Ore processed (mt) 1,000,781 428,865 Cost of sales $ 72,579 $ 32,743 $ 44,833 $ 150,155 Add/(deduct):
| Amortization | (12,960) | (5,374) |
| Reclamation costs and other | (1,337) | (788) |
| Change in concentrate inventory | (2,018) | 3,572 |
Total cash cost of production $ 56,264 $ 30,153 Cash cost per tonne of ore processed, including royalties $ 56.22 $ 70.31 Cash cost per tonne of ore processed, excluding royalties $ 51.54 $ 66.33
$ thousands, unless otherwise indicated
For the year ended December 31, 2009 Chelopech Deno Gold Total Ore processed (mt) 980,928 218,235 Cost of sales $ 75,647 $ 21,197 $96,844 Add/(deduct):
| Amortization | (12,401) | (3,170) |
| Reclamation costs and other | (1,841) | (752) |
| Care and maintenance costs | - | (3,074) |
| Change in concentrate inventory | (419) | 1,696 |
| Foreign exchange | (1,148) | (125) |
Total cash cost of production $ 59,838 $ 15,772 Cash cost per tonne of ore processed, including royalties $ 61.00 $ N/A Cash cost per tonne of ore processed, excluding royalties $ 55.23 $ 72.27
DUNDEE PRECIOUS METALS INC. | 12