SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
40-F
[
] REGISTRATION STATEMENT PURSUANT TO SECTION 12 OF THE
SECURITIES
EXCHANGE ACT OF 1934
[X]
ANNUAL REPORT PURSUANT TO SECTION 13(a) OR 15(d) OF THE
SECURITIES
EXCHANGE ACT OF 1934
|
For
the fiscal year ended December 31,
2005
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Commission
File Number
001-31704
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FNX
Mining Company Inc.
(Exact
name of Registrant as specified in its charter)
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Ontario
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1000,
1098
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Not
Applicable
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(Province
or other
Jurisdiction
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(Primary
Standard
Industrial
|
(I.R.S.
Employer
|
|
of
Incorporation or
Organization)
|
Classification
Code
Number)
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Identification
No..)
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55
University Avenue
Suite
700, Toronto, Ontario
M5J
2H7
(416)
628-5929
(Address
and telephone number of Registrants' principal executive
offices)
CT
Corporation System
111
Eighth Avenue
New
York, NY 10011
(212)
894-8940
(Name,
address (including zip code) and telephone number
(including
area code) of agent for service in the United States)
____________________________________________________
Securities
registered or to be registered pursuant to Section 12(b) of the
Act.
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Title
of each class
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Name
of each Exchange on which Registered:
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Common
Shares, No Par Value
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American
Stock Exchange
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Securities
registered or to be registered pursuant to Section 12(g) of the
Act.
None
Securities
for which there is a reporting obligation pursuant to Section 15(d) of the
Act.
None
For
annual reports, indicate by check mark the information filed with this
Form:
|
[X]
Annual information form
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[X]
Audited annual financial
statements
|
Indicate
the number of outstanding shares of each of the issuer's classes of capital
or
common stock as of the close of the period covered by this annual
report.
The
Registrant had 83,529,972 Common Shares
outstanding
as at December 31, 2005
Indicate
by check mark whether the Registrant by filing the information contained in
this
Form is also thereby furnishing the information to the Commission pursuant
to
Rule 12g3-2(b) under the Securities Exchange Act of 1934 (the "Exchange Act").
If "Yes" is marked, indicate the filing number assigned to the registrant in
connection with such Rule.
|
Yes
___________
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82 - __________ |
No
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____X____ |
Indicate
by check mark whether the Registrant (1) has filed all reports required to
be
filed by Section 13 or 15(d) of the Exchange Act 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.
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Yes
_____X_____
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No
___________
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DOCUMENTS
FILED UNDER COVER OF THIS FORM
Document
No. 3: Management's
Discussion and Analysis of Financial Condition and
Results of Opera-tions for
Document
No. 1
ANNUAL
INFORMATION FORM
FOR
THE YEAR ENDED DECEMBER 31, 2005
MARCH
30, 2006
TABLE
OF CONTENTS
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A-1
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B-1
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-i-
This
Annual Information Form and the documents incorporated herein by reference
contain forward-looking statements. Such forward-looking statements include,
but
are not limited to, statements about drill results, commodity prices and
core
intersection lengths, in that they constitute estimates, based on certain
assumptions of mineralization that may be encountered if a deposit were to
be
mined. In some cases, forward-looking statements can be identified by the
use of
words or phrases such as “expects” or “does not expect”, “is expected”,
“anticipates” or “does not anticipate”, “plans”, “estimates” or “intends”, or
stating that certain actions, events or results “may”, “could”, “would”,
“might”, or “will” be taken, occur or be achieved or other variations of these
words or phrases, or other comparable words or phrases.
By
their
nature, forward-looking statements involve known and unknown risks,
uncertainties and other factors which may cause the actual results, performance
or achievements of the Corporation, or industry results, to be materially
different from any future results, performance or achievements expressed
or
implied by such forward-looking statements. Such factors include, among others,
the following:
| · |
risks
and uncertainties relating to the interpretation of drill results,
the
geology, grade and continuity of mineral deposits and conclusions
of
economic evaluations;
|
| · |
results
of initial feasibility, pre-feasibility and feasibility studies,
and the
possibility that future exploration, development or mining results
will
not be consistent with the Corporation’s
expectations;
|
| · |
risks
relating to possible variations in reserves, grade, planned mining
dilution and ore loss, or recovery rates and changes in project
parameters
as plans continue to be refined;
|
| · |
mining
and development risks, including risks related to accidents, equipment
breakdowns, labour disputes (including work stoppages and strikes)
or
other unanticipated difficulties with or interruptions in exploration
and
development;\the potential for delays in exploration or development
activities or the completion of feasibility
studies;
|
| · |
the
Corporation’s dependence on Dynatec Corporation for mining services until
December 31, 2007;
|
| · |
risks
related to the inherent uncertainty of production and cost estimates
and
the potential for unexpected costs and
expenses;
|
| · |
risks
related to commodity price and foreign exchange rate
fluctuations;
|
| · |
the
Corporation relies on Inco Ltd. (“Inco”)
for ore processing;
|
| · |
the
uncertainty of profitability based upon the cyclical nature of
the
industry in which the Corporation
operates;
|
| · |
risks
related to failure to obtain adequate financing on a timely basis
and on
acceptable terms or delays in obtaining governmental approvals
or in the
completion of development or construction
activities;
|
| · |
risks
related to environmental regulation and
liability;
|
-1-
| · |
political
and regulatory risks associated with mining and exploration;
and
|
| · |
other
risks and uncertainties related to the Corporation’s prospects, properties
and business strategy.
|
A
discussion of these and other factors that may affect the Corporation’s actual
results, performance, achievements or financial position is contained in
“Risk
Factors” and elsewhere in this Annual Information Form and other documents
incorporated or deemed to be incorporated in this Annual Information Form.
This
list in not exhaustive of the factors that may affect the forward-looking
statements, These and other factors should be considered carefully by
prospective investors, who should not place undue reliance on such
forward-looking statements. Forward-looking statements are made based upon
management’s beliefs, estimates and opinions on the date the statements are
made, which management believes are reasonable, and the Corporation undertakes
no obligation to update forward-looking statements if these beliefs, estimates
and opinions or other circumstances should change, except as otherwise required
by applicable law.
-2-
FNX
Mining Company Inc. (the “Corporation”)
was
incorporated under the Business
Corporations Act
(Ontario) on June 26, 1984 as Fort Knox Gold Resources Inc. The name of the
Corporation was changed to FNX Mining Company Inc. by articles of amendment
effective June 20, 2002.
The
Corporation became a reporting issuer in the Province of Ontario following
the
filing of an exchange offering prospectus dated November 26, 1984. The
Corporation is also a reporting issuer in the Provinces of British Columbia,
Alberta, Manitoba and Quebec.
The
registered office of the Corporation is located at 200 King Street West,
Suite
2300, Toronto, Ontario, M5H 3W5 and the principal office of the Corporation
is
located at 55 University Avenue, Suite 700, Toronto, Ontario M5J
2H7.
The
Corporation has one material subsidiary, Aurora Platinum Corp. (“Aurora”).
Aurora was continued under the Business
Corporations Act
(Ontario) and is wholly-owned by the Corporation.
Sudbury
Basin Properties
The
Corporation is a growing nickel-copper-platinum-palladium-gold-cobalt producer,
developer and explorer, with operations based primarily in Canada’s Sudbury
Basin mining camp. The Corporation applies exploration expertise to mineral
properties with demonstrated exploration potential and/or past production.
The
objective of the Corporation is to add value to properties through focused
exploration and development, with the ultimate objective of bringing the
properties into commercial production. Consistent with its objective, the
Corporation has evolved beyond its original inception as an exploration company
to become a more fully-integrated mining business involved in mining
exploration, development and operations. See “- Trends” below.
On
November 29, 2001 the Corporation entered into a definitive agreement (the
“Option
to Purchase Agreement”)
with
Inco to acquire a 100% interest in the mineral rights to five Inco mineral
properties located in the Sudbury Basin, Ontario (collectively, the
“Properties”),
and
the right to use such part of the surface rights and on-site facilities as
are
required to permit exploration, development and mining operations to be
conducted on the Properties. The Option to Purchase Agreement became effective
January 10, 2002 (the “Effective
Date”).
The
Corporation entered into an agreement (the “Dynatec
Joint Venture Agreement”)
with
Dynatec which also became effective on the Effective Date, pursuant to which
Dynatec acquired 25% of the Corporation’s interest, rights and obligation in the
Option to Purchase Agreement and Dynatec and the Corporation, on the Effective
Date, formed a joint venture known as the “Sudbury Joint Venture” (the
“SJV”).
All
requirements to exercise the Option to Purchase Agreement were met and the
option to acquire the mineral rights for the Properties (the “Option”)
was
exercised by the Corporation and Dynatec on December 1, 2003 resulting in
the
acquisition Corporation and Dynatec of a 100% interest in the mineral rights
to
the Properties, as well as the right to access and use such part of the surface
rights and on-site facilities as are specified from time to time to permit
exploration, development facilities and mining to be completed in, on or
under
the Properties.
-3-
On
October 21, 2005, the Corporation acquired Dynatec’s 25% interest in the
Properties and the SJV was terminated pursuant to the Dynatec Transaction
(as
defined below). Accordingly, the Corporation now holds a 100% interest in
the
Properties. See “- Dynatec Transaction” below.
The
Option to Purchase Agreement includes the following additional terms that
continue to apply:
| · |
If
the Corporation discovers a New Deposit (as defined in the Option
to
Purchase Agreement) on any of the Properties and elects to complete
a
bankable feasibility study on such New Deposit recommending production,
and should such New Deposit contain mineral resources having a
value
(based on then current metal prices) of at least 600 million pounds
of
nickel equivalent at the time of such bankable feasibility study,
Inco has
a right to re-acquire a 51% interest in such a New Deposit but
not the
Properties (the “Back-in
Right”)
by bringing the New Deposit into commercial production without
financial
recourse to the Corporation. Until Inco achieves payback, it shall
receive
80% of net revenues from production from the New Deposit. If Inco
re-acquires a 51% interest in a New Deposit, Inco and the Corporation
will
form a joint venture, with Inco as the operator, to hold and operate
the
New Deposit.
|
| · |
Inco
continues to be responsible for all environmental liabilities existing
on
the Properties at the Effective Date. The SJV, prior to the completion
of
the Dynatec Transaction, and now the Corporation, is responsible
for all
environmental liabilities incurred on the Properties that result
from the
actions taken after the Effective Date. Processing environmental
obligations cease upon delivery of ore to
Inco.
|
| · |
Inco
has a right of first offer to purchase any interest in the Properties
that
the SJV proposes to sell to an arm’s-length third party (the “Right
of First Offer”).
Inco’s Right of First Offer did not apply to the transfer of interest
in
the Properties between the Corporation and Dynatec. See “- Dynatec
Transaction” below.
|
On
the
Effective Date, the Corporation and Inco agreed to a form of off-take agreement
(the “Off-take
Agreement”)
which
forms the basis of separate Off-take Agreements to be entered into with Inco
upon the commencement of mining of any deposits found on the Properties.
As of
March 30, 2006, an Off-take Agreement had been entered into with Inco for
Phase
1 of the McCreedy West Property.
Under
each Off-take Agreement: (a) Inco is granted the right (the “Purchase
Right”)
to
purchase all ores produced by the Corporation on the Properties; (b) Inco
is
required to pay the Corporation for recovered accountable metals derived
from
the Properties, less applicable milling, smelting and refining charges; (c)
with
regard to precious metals produced by the Corporation on the Properties,
the
Corporation has the right to receive gold, platinum and palladium as product
in
kind in lieu of a cash payment by Inco; and (d) Inco has the right to refuse
to
purchase any ores that are unsuitable for treatment or if Inco does not have
sufficient processing capacity to handle such ores, in which case, the
Corporation is entitled to have such ores removed from the Properties and
processed by a third party whereby Inco will be entitled to be paid a 2%
net
smelter royalty for nickel, copper and cobalt and a net smelter royalty ranging
from 2.5% to 5% for precious and platinum group metals.
Surface
facilities were installed and the mine portal was opened at the McCreedy
West
property in July 2002. Phase 1 Production at the McCreedy West mine was
initiated in the second quarter of 2003, with commercial production declared
November 1, 2003. Production during 2004 ramped-up from a few hundred tons
per
day at the beginning of the year and achieved its production target of 1,000
tons per day in April 2004, approximately three months ahead of schedule.
Approximately $22 million of mining capital was invested for Phase 1 Mining
at
the McCreedy West mine. Based on pre-production proceeds of $4 million and
the
2004 cash operating margin of $24 million, this mining capital was paid back
within the first 12 months of commercial production. In 2005, the Corporation
sustained production from the Phase 1 McCreedy West Mine,
and
ore
sold
from the PM Deposit at the McCreedy West Mine was included in revenue in
the
statement of operations commencing with May 2005.
-4-
With
regard to the area of the Properties known as the Levack Footwall Deposit,
the
available data are insufficient to determine resources/reserves to date,
although strong borehole UTEM (University of Toronto Electromagnetic) and
RIM
(Radio Imaging Method) anomalies indicate that the deposit extends beyond
the
boundaries of the area drilled to date. The Levack Footwall Deposit bears
many
similarities, particularly the geological setting and mineralogy, with other
currently producing footwall-type deposits in the Sudbury mining district.
Three
other footwall zones in proximity to the Levack Footwall Deposit are being
drilled and their relationship to the Levack Footwall Deposit is being
investigated. A great deal of additional drilling is required to determine
the
deposit’s size and economic potential. Access options to the Levack Footwall
Deposit are being considered. The drilling on the Properties will continue
throughout 2006.
A
$15.5
million advanced exploration program was initiated in 2002 consisting of
extensive surface and underground drilling at the McCreedy West, Victoria
and
Podolsky properties. In 2003, another $22.0 million was expended on exploration,
primarily in detailed underground drilling on the PM deposit and surface
drilling at the Podolsky 2000 and North deposits. In addition, Measured and
Indicated mineral resources totalling 5.0 million tons were delineated at
the
Levack mine, plus another million tons in the Inferred category. See “General
Development of the Business - Technical Report”. Exploration expenditures
totalling approximately $12.5 million were completed in 2004 with a focus
on
mineral reserve and resource definition and mine planning support. The 2005
exploration budget was $11.4 million. Slightly more that half of the 2005
budget
was committed to exploration for new footwall deposits in the North Range
and on
the Podolsky property. See “General Development of the Business - Three Year
History - Technical Report”.
Also
in
2004, a bulk sample program was initiated at the McCreedy West PM deposit
and
the Corporation commenced the construction of a $30 million exploration shaft
at
the Podolsky deposit. In addition, service and surface rights agreements
were
entered into by the Corporation in connection with the Levack property in
2004.
Surface reconditioning on the Levack No. 2 shaft was completed in 2005.
Acquisition
of Aurora
On
July
1, 2005, the Corporation acquired all of the issued and outstanding common
shares of Aurora (a then-publicly traded company, whose common shares were
listed on the TSX Venture Exchange) by way of a plan of arrangement, in exchange
for the issuance of 4,270,803 Common Shares to the former security holders
of
Aurora. Immediately following the acquisition of Aurora, the Corporation
transferred all of the common shares of Aurora to its wholly-owned subsidiary,
Aurora Holdings Limited, which was incorporated to hold such common shares,
and
sold 50% of the common shares of Aurora Holdings Limited and, accordingly,
a 50%
indirect interest in Aurora, to Dynatec, in exchange for 7,716,594 common
shares
of Dynatec and $12,246,528 in cash. Pursuant to the Dynatec Transaction,
on
October 21, 2006, the Corporation re-acquired the 50% of the common shares
of
Aurora that it had previously sold. Aurora was subsequently amalgamated with
Aurora Holdings Limited, as a result of which Aurora is currently a direct
wholly-owned subsidiary of the Corporation.
Aurora
has interests in nickel-copper-platinum-palladium mineral properties and,
through portfolio investments, in diamond and precious metal properties,
located
in Ontario and Quebec. Aurora holds a significant land position in the Sudbury,
Ontario mining camp and optioned properties in the Belleterre-Angliers
Greenstone belt in the Témiscamingue region of Quebec.
-5-
All
of
Aurora’s properties are in the exploration stage and there can be no assurance
that commercially viable mineral deposits or reserves exist
thereon.
Aurora’s
most material asset is its interest in the Footwall and Foy properties
(individually, the “Foy Property”
and
the
“Falconbridge
Footwall Property”
and,
collectively, the “Falconbridge
Properties”)
located in Sudbury, Ontario pursuant to a joint venture (the “Falconbridge
Joint Venture”)
with
Falconbridge Limited (“Falconbridge”).
As at
December 31, 2005, Aurora and Falconbridge held a 70% interest
and a 30%
interest, respectively, in the Falconbridge Properties (other than the Canhorn
Property in which Aurora holds a 70% interest in Falconbridge’s 50% interest
therein). Aurora’s interest in the Falconbridge Properties is in respect of
their mining rights, with Falconbridge holding the surface rights.
On
August
28, 2000, Aurora and Falconbridge entered into an option and joint venture
agreement (the “Falconbridge
Agreement”)
regarding the Falconbridge Properties. A portion of the Falconbridge Properties
(the “Canhorn
Property”)
is
subject to an agreement dated October 30, 1998 between Falconbridge, Canhorn
Chemical Corporation (“Canhorn”)
and
United Reef Limited (“United”),
whereby Falconbridge purchased from Canhorn and United a 100% beneficial
interest in the Canhorn Property, subject to a 1% net smelter returns royalty
payable as to 0.5% to Canhorn and as to 0.5% to United, up to a maximum of
$750,000. The net smelter royalty can be purchased by Falconbridge for $250,000
payable to each of Canhorn and United. Falconbridge subsequently transferred
50%
of its 100% beneficial interest in the Canhorn Property to Inco.
Under
the
terms of the Falconbridge Agreement Aurora earned an initial 60% interest
in the
Falconbridge Properties from Falconbridge by expending $6 million on exploration
over three years. Aurora is the operator of the Falconbridge Joint
Venture.
Under
the
terms of the Falconbridge Agreement, at least 30 days before the beginning
of
each calendar year, the operator of the Falconbridge Joint Venture is required
to submit a program to the management committee of the Falconbridge Joint
Venture for its approval, covering a period of up to 12 months. If the
non-operator does not elect to participate in a program, then its interest
is
diluted in the ratio that its expenditures in the Falconbridge Joint Venture
is
of the total expenditures of both parties. Falconbridge declined to participate
in the 2005 program. Accordingly, its interest in the Falconbridge Joint
Venture
decreased to 30% by December 31, 2005.
Each
party to the Falconbridge Joint Venture has a right of first refusal to purchase
all or any part of the other party’s interest in the Falconbridge Properties or
under the Falconbridge Agreement. However, Falconbridge can, without the
consent
of Aurora, assign the Falconbridge Agreement, provided that the assignee
delivers to Aurora a written undertaking to be bound by the terms and conditions
of the Falconbridge Agreement. If the interest of either party is reduced
to 10%
then that party’s interest is extinguished and converted to a 5% net proceeds of
production royalty.
The
parties to the Falconbridge Joint Venture may designate one or more claims
within the Falconbridge Properties as a “Specific Project”, at which point a
joint venture is formed in respect of the Specific Project. Falconbridge,
in its
discretion, may also designate any area as a Specific Project.
Aurora
currently also holds 13,300,000 common shares of Lake Shore Gold Corp., a
Toronto Stock Exchange (“TSX”)
listed
company engaged in gold and base metals exploration in Ontario and Quebec.
Lake
Shore Gold Corp. owns 100% of the Timmins Gold Project and has a number of
properties within the Sudbury, Ontario mining camp.
-6-
Aurora
also holds 6,860,715 common shares of Superior Diamonds Inc., a TSX Venture
Exchange (“TSXV”)
listed
company with properties in the Superior Craton area of Ontario and in Quebec.
These properties are operated both independently by Superior Diamonds Inc.
and
through joint ventures.
Dynatec
Transaction
On
October 21, 2005, the Corporation purchased Dynatec’s 50% indirect interest in
Aurora by acquiring all of the common shares of Aurora Holdings Limited held
by
Dynatec and acquired Dynatec’s 25% interest in the Properties and the Sudbury
Joint Venture (the “Dynatec
Transaction”).
As a
result of the Dynatec Transaction, Aurora become an indirect wholly-owned
subsidiary of the Corporation, the Corporation consolidated its interest
in the
Properties at 100% and the SJV was terminated.
The
Dynatec Transaction is part of the Corporation’s on-going strategy to expand
beyond exploration activities and into the development and operating of its
mining properties and increase its land position and prospects in the Sudbury
Basin.
The
Dynatec Transaction was completed on the following terms:
| (a) |
the
Corporation issued 20,500,000 Common Shares to
Dynatec;
|
| (b) |
the
Corporation and Dynatec entered into the following ongoing
agreements:
|
| (i) |
a
voting trust agreement with a term of three years pursuant to which
votes
attached to the Common Shares held by Dynatec will be voted in
line with
recommendations of the board of directors of the Corporation on
various
fundamental changes and initiatives (including, among other matters,
mergers, acquisitions and the nomination of directors to the Corporation’s
board of directors), such agreement ceasing to be in effect should
Dynatec’s ownership stake in the Corporation fall below 10% on a
fully-diluted basis;
|
| (ii) |
a
standstill agreement having a three year term that restricts Dynatec’s
ability to buy additional Common Shares which would result in Dynatec
acquiring more than 19.9% of the outstanding Common Shares, subject
to
certain exceptions; and
|
| (iii) |
a
mining services agreement pursuant to which Dynatec will provide
contractor mining services at the Properties until December 31,
2007,
subject to the Corporation having approval, control and direction
over the
services provided by Dynatec in exchange for a fee on a cost reimbursement
basis that includes a fixed and a variable
component;
|
| (c) |
the
Corporation was provided with a right of first refusal in the event
that
Dynatec wishes to distribute any of the Common Shares that it holds,
which
will permit the Corporation to designate the purchasers of Common
Shares
to be sold by Dynatec for a period of 10 business days at a price
acceptable to Dynatec (net of commissions) which, in the event
of a sale
by way of a prospectus, shall not exceed 95% of the volume weighted
average of the trading prices of the Common Shares on the Toronto
Stock
Exchange for the five trading days immediately prior to receipt
of written
notice from Dynatec of its election to sell such Common Shares
(the
“VWAP”)
and, in the event of a sale that will not be done by way of a prospectus,
shall not exceed the VWAP, and if the Corporation elects not to
exercise
its right of first refusal or is unable to arrange for the sale
of the
Common Shares
|
-7-
|
in
accordance with terms attaching thereto, Dynatec may, for a period
of 90
days thereafter, enter into an underwriting agreement to sell such
Common
Shares through a public distribution in Canada and, if a prospectus
is
required in connection with such sale, the Corporation will take
such
reasonable steps, at Dynatec’s cost, as are necessary to qualify by
prospectus in Canada the distribution of such Common Shares;
and
|
| (d) |
Dynatec
was provided with representation on the Corporation’s board of directors
that is the greater of two nominees and that number of nominees
that is
equal to Dynatec’s fully diluted ownership position, for a period of three
years (such representation being dependent upon Dynatec maintaining
an
ownership stake in the Corporation of at least 10% on a fully-diluted
basis).
|
Other
Developments
The
Corporation listed its common shares (the “Common
Shares”)
on the
American Stock Exchange (the “AMEX”)
in
July, 2003 and was added to the S&P/TSX Composite Index in December, 2003.
The
Corporation reported its first year of profitable operations in 2004 as a
result
of mining at the McCreedy West property. The Corporation has changed its
accounting policy with respect to revenue recognition and the costing of
broken
ore underground. Revenue is now recognized at the time the ore is shipped,
which
is also the time that title transfers. The ore is sold under contracts that
provide for final prices that are determined by quoted market prices in a
period
subsequent to the date of sale. Variations from the provisionally priced
sales
are recognized as revenue adjustments as they occur until the price is
finalized. Revenue was previously recognized two months after shipment, being
the date that the nickel and copper components were settled. The Corporation
has
also changed its accounting policy with respect to broken ore underground.
In-process inventory will now be recognized only in respect of broken ore
on
surface reflecting the fact that the ore is not available for use until it
reaches the surface. The Corporation feels that these changes better align
its
accounting policies with its industry peers, and are more reflective of its
continuing evolution from a development stage enterprise to a mid tier producer.
Both changes have been adopted retroactively in the Corporation’s 2005 financial
statements. As a result of the change in accounting policy for revenue
recognition, the Corporation’s revenues and, therefore, net earnings will be
more volatile in 2006 and beyond as the impact of changing metal prices on
provisionally priced sales is recorded in the subsequent periods.
On
November 28, 2005, the Corporation closed a bought deal financing pursuant
to
which it issued an aggregate of 7,500,000 Common Shares at a price of $13.60
per
share for aggregate gross proceeds of $102,000,000. GMP Securities Ltd.,
BMO
Nesbitt Burns Inc., CIBC World Markets Inc., Dundee Securities Corporation,
Orion Securities Inc. and Toll Cross Securities Inc. acted as underwriters
in
connection with the financing.
Technical
Reports
Dr.
James
M. Patterson, BA (Hons. Geology), Ph.D., P. Geo., DIC. (“Patterson”)
prepared a report (the “Property
Report”)
for
the Corporation dated March 29, 2006, relating to the Properties and the
Falconbridge Properties, entitled “Technical Report on Mineral Properties in the
Sudbury Basin, Ontario for FNX Mining Company Inc.”. Set forth as Appendix B to
this Annual Information Form is a summary of the Property Report which has
been
prepared under the authority, and with the consent of Patterson and in some
cases is an extract from the Property Report. The full text of the Property
Report is available at www.sedar.com.
-8-
The
Corporation is a mid-tier Canadian mining company focused on mining, developing
and exploring its nickel, copper, cobalt and precious metal mineral properties
in Sudbury, Ontario. The Corporation has put deposits into production at
its
McCreedy West Mine in each of 2004 and 2005 and subject to positive feasibility
studies plans to initiate mining at its Levack property in 2006 and at its
Podolsky property in 2007. In addition, the Corporation considers its Sudbury
mineral properties to have excellent exploration potential and is conducting
detailed drill testing at its Levack Footwall Deposit discovery. The Corporation
has been profitable since it achieved full production in 2004 and as at March
30, 2006 has approximately $200 million in cash and liquid assets and no
debt.
The
Corporation’s operations are impacted by the price of certain metals. The cash
settlement price of nickel on the London Metal Exchange (“LME”)
fluctuated considerably in 2005, having opened the year at US$6.37 per pound,
reaching a high of US$8.05 per pound on May 12, 2005 and a low of US$5.22
per
pound on November 1, 2005 and closing the year at US$6.07 per pound. The
LME
nickel price averaged US$5.73 per pound in the fourth quarter of 2005, compared
to an average of US$6.61 per pound in the third quarter of 2005 and US$6.39
per
pound in the fourth quarter of 2004, respectively. The LME cash settlement
price
on December 31, 2005 was US$6.07 per pound and averaged US$6.68 for the 2005
year, compared to an average price of US$6.28 per pound in 2004. The LME
average
cash settlement price per pound of nickel has been higher year over year
for the
past five consecutive years increasing as follows: 2001 - US$2.70; 2002 -
US$3.07; 2003 - US$4.37; 2004 - US$6.28; and 2005 - US$6.68. Nickel prices
have
increased in the first quarter of 2006 and averaged US$6.70 per pound during
January and February 2006 and closed at US$6.88 per pound on March 28,
2006.
Nickel
prices remained well above historical levels in 2005 due to the growing
importance of Chinese nickel demand, signs of improving world economy and
a
shortage of primary nickel sources. Long-term drivers are expected to be
the
sustainability of Chinese nickel demand growth, the global supply deficit,
a
declining US dollar and continuing high energy prices. In addition, AME Mineral
Economics has stated that the depletion of scrap resources is expected to
affect
the price of nickel as such sources accounted for approximately 40% of available
nickel in 2004 but have since been depleted due to the increase in nickel
prices. World consumption of nickel grew by 2.8% in 2004 to 1.25 million
tonnes.
In 2005, consumption growth was severely constricted by a supply shortage,
resulting in increasing prices. Growth in 2005 was concentrated in China,
with
China accounting for 60% of the total increase in world consumption between
1999
and 2004.
Management
continues to be of the view that the LME average cash settlement price for
nickel will continue to be volatile but strong. Each US$1.00 change in the
price
per pound of nickel is expected to generate a change in the Corporation’s
pre-tax earnings and cash flow from operating activities by approximately
$9.7
million.
The
LME
average cash settlement price per pound of copper nickel has been higher
year
over year for the past five consecutive quarters increasing as follows: 2004Q4
-
US$1.40; 2005Q1 - US$1.48; 2005Q2 - US$1.54; 2005Q3 - US$1.70; and 2005Q4
-
US$1.95. The LME cash settlement price for copper has continued to increase
in
the first quarter of 2006 and averaged US$2.24 per pound from January 1 to
March
28, 2006, closing that day at US$2.43 per pound. Each US$0.50 change in the
price per pound of copper is expected to generate a change in the Corporation’s
pre-tax earnings and cash flow from operating activities by approximately
$5.9
million. Management is of the view that the LME average cash settlement price
for copper will remain strong relative to historic prices.
The
Corporation produces by-product platinum, palladium, gold and cobalt. The
price
of platinum was US$859, US$968 and US$1,065 per ounce on December 31, 2004,
2005
and March 28, 2006,
-9-
respectively.
The price of palladium was US$183, US$254 and US$330 per ounce on December
31,
2004, 2005 and March 28, 2006, respectively. The price of gold was US$438,
US$517 and US$567 per ounce on December 31, 2004, 2005 and March 28, 2006,
respectively. The price of cobalt was US$18.50, US$14.75 and US$14.25 per
pound
on December 31, 2004, 2005 and March 28, 2006 respectively.
The
contribution to the Corporation’s revenues from the sale of platinum, palladium
and gold is expected to increase in 2006, compared to 2005, as the Corporation
produced 10,040 ounces of combined platinum, palladium and gold in 2005 and
is
budgeting to produce 40,000 ounces in 2006. Cobalt production in 2005 totalled
98,410 pounds and is budgeted at 55,000 pounds in 2006.
The
US
dollar weakened against the Canadian dollar during 2005, with the Canadian
dollar starting at approximately US$0.83 and ending the year at approximately
US$0.86. Many analysts are not expecting significant changes in the US/Canadian
exchange rate in 2006 due to Bank of Canada comments that a strong dollar
relative to the US dollar would hamper economic growth in Canada.
The
Corporation has no assurance that future commodity prices or exchange rates
will
be at a level sufficient to make mining operations viable. While exploration
in
a proven mining camp in known geological environments with the benefit of
a
large historic database has certain advantages, future exploration success
still
contains a significant degree of risk. See “Risk Factors” and “Special Note
Regarding Forward-Looking Statements”.
The
Corporation’s current business is conducted primarily in Ontario, Canada. As at
the date hereof, the Properties and the Falconbridge Properties constitute
the
only material properties of the Corporation. See “General Development of the
Business - Three Year History”.
During
2003, the Corporation liquidated its mineral properties other than the
Properties. Such other mineral properties were not considered material to
the
Corporation. Other assets of the Corporation (that are not cash or marketable
securities) consist of the royalty interest (See “- Gunsite Property, Alaska”
below) and other investments described below.
Gunsite
Property, Alaska
During
2003, the Corporation disposed of its 100% interest in the 7,560 acre Gunsite
property located approximately 90 miles north of Anchorage, Alaska and retained
a 1.5% net smelter royalty.
Guinea,
West Africa
The
Corporation holds an option to acquire an interest in a property located
in
Guinea, West Africa. This interest is not considered to be material to the
Corporation as of March 30, 2006. See “Risk Factors -Foreign
Countries”.
Other
Investments
The
Corporation holds 3,150,230 common shares and 2,347,866 share purchase warrants
of International Nickel Ventures Corporation (TSX:NVC), representing
approximately 14.9% of all issued and
outstanding
common shares of INV as of March 30, 2006, on a fully diluted basis or
approximately 9.9% of the issues and outstanding common shares of INV as
of
March 30, 2006 on a non-diluted basis. INV holds directly and through an
option,
interests in nickel laterite properties located in the Goias, state of
Brazil.
The
Corporation also holds 13,300,000 common shares of Lake Shore Gold Corp.
(TSX:LSG) and 6,860,715 common shares of Superior Diamonds Inc. (TSXV:SUP).
See
“General Development of the Business - Three Year History - Acquisition
of
Aurora”.
See
“Interest of Management and Others in Material Transactions” and “Risk Factors -
Foreign Countries”.
The
Corporation has purchased term deposits in the amount of $1.2
million related
to its share of environmental and closure costs in connection with the
McCreedy
West and Podolsky properties. These term deposits are expected by the
Corporation to fund its share of all such environmental and closure costs.
Approximately $0.3 million of the $1.2 million worth of reclamation deposits
relates to the Corporation’s share of Phase 1 operations on such properties. The
remaining $0.9 million relates to the Corporation’s share of the Podolsky
property reclamation costs. Amortization of the Phase 1 closure cost amounts
to
approximately $0.30 per ton of reserves compared to total cash and non-cash
production costs of approximately $133 per ton in 2004. The effect of the
Podolsky closure costs on the financial position of the Corporation cannot
be
determined until the proposed exploration program on the Podolsky property
is
completed, and reserve tons are known. This information is expected to
be
available in 2006 at the earliest.
-10-
The
Corporation has established a Safety, Health and Environmental Committee,
which
has in turn adopted a Safety, Health and Environmental Policy concerning
the
Corporation’s treatment of environmental matters. A copy of the Safety, Health
and Environmental Policy is available for review on the Corporation’s website at
www.fnxmining.com. For further information concerning the Safety, Health
and
Environmental Committee, see “Narrative Description of the Business - Corporate
Governance”.
The
Corporation had 81 full-time employees as at December 31, 2005. The Corporation
also engages independent contractors and consultants from time to time to
carry
on business. The Corporation may hire additional people as
required.
The
mineral exploration and mining business is competitive in all phases of
exploration, development and production. The Corporation competes with a
number
of other entities in the search for and the acquisition of productive mineral
properties. As a result of this competition, much of which is with companies
with greater financial resources than the Corporation, the Corporation may
be
unable to acquire attractive properties in the future on terms it considers
acceptable. As well, the Corporation competes with other companies for the
recruitment and retention of qualified employees. Finally, the Corporation
competes with other resource companies, many of whom have greater financial
resources and/or more advanced properties, in attracting equity and other
capital.
The
ability of the Corporation to acquire properties depends on its ability
to
continue to develop its present properties and on its ability to select,
acquire
and bring to production suitable properties or prospects for mineral exploration
and development. Factors beyond the control of the Corporation may affect
the
marketability of base metals and precious metals mined or discovered by
the
Corporation. Base metal and precious metal prices have historically been
subject
to fluctuations and are affected by numerous factors beyond the control
of the
Corporation. See “Risk Factors” and “General Development of the Business -
Trends”.
The
Corporation has established four committees of the board of directors as
follows: the Audit Committee; the Corporate Governance and Nominating Committee;
the Safety, Health and Environment Committee; and the Compensation
Committee.
-11-
The
members of the Audit Committee are currently Messrs. Robert B. Low, J. Duncan
Gibson and Donald Ross, each of whom are independent and financially literate
within the meaning of applicable securities legislation. Each of Messrs.
Low,
Gibson and Ross is familiar with accounting principles, financial statements
and
financial reporting requirements as a result of (i) Mr. Low’s experience as a
principal of LECG Canada, Ltd., a business valuation/damages quantification
consulting firm, as well as his education which includes a Bachelor of Commerce
degree and Chartered Accountant designation; (ii) Mr. Gibson’s experience as a
senior bank executive which consists of a 27 year career with the
Toronto-Dominion Bank, including nine years in Corporate Banking, USA Division,
and as Vice-Chairman with responsibility for the Commercial Banking Division,
as
well as his education which includes a Bachelor of Commerce degree and a
Masters
of Business Administration degree; and (iii) Mr. Ross’ role as Chairman of the
board of directors of Jones, Gable & Company Limited, his experience which
includes over 50 years in the investment industry and service on various
committees of the Toronto Stock Exchange (including the Stock List Committee),
as well as his education which consists of an undergraduate degree from the
University of Toronto.
The
Audit
Committee has adopted a written charter setting out its mandate and
responsibilities, a copy of which is set forth at Schedule “A” to this
management information circular.
For
further information on each of the Audit Committee, the Corporate Governance
and
Nominating Committee, the Safety, Health and Environment Committee, and the
Compensation Committee of the Corporation, please see the Corporation’s
management information circular in respect of its upcoming annual and special
meeting of shareholders. See “Additional Information”. In addition, all
charters, policies and mandates of the Board and its committees are available
on
the Corporation’s website at www.fnxmining.com.
The
following chart summarizes the aggregate fees billed by the external auditors
of
the Corporation for professional services rendered to the Corporation during
the
fiscal years ended December 31, 2005 and 2004 for audit and non-audit related
services:
-12-
|
Type
of Work
|
Year
Ended Dec. 31, 2005
|
Year
Ended Dec. 31, 2004
|
|
Audit
fees(1)
|
$164,000
|
$97,000
|
|
Audit-related
fees(2)
|
$158,387
|
$49,000
|
|
Tax
advisory fees(3)
|
$38,911
|
$25,000
|
|
All
other fees
|
$Nil
|
$Nil
|
|
Total
|
$361,298
|
$171,000
|
___________________________________
Notes
| (1) |
Aggregate
fees billed for the Corporation’s annual financial statements and services
normally provided by the auditor in connection with the Corporation’s
statutory and regulatory filings.
|
| (2) |
Aggregate
fees billed for assurance and related services that are reasonably
related
to the performance of the audit or review of the Corporation’s financial
statements and are not reported as “Audit fees”, including: assistance
with aspects of tax accounting, attest services not required by
state or
regulation and consultation regarding financial accounting and
reporting
standards.
|
| (3) |
Aggregate
fees billed for tax compliance, advice, planning and assistance
with tax
for specific transactions.
|
RISK
FACTORS
An
investment in Common Shares entails certain risk factors, which should be
considered carefully, including those set out below.
Mining
Industry
The
exploration for, development and mining of mineral deposits involves significant
risks which even a combination of careful evaluation, experience and knowledge
may not eliminate. While the discovery of an ore body may result in substantial
rewards, few properties which are explored are ultimately developed into
producing mines. Major expenses may be required to establish ore reserves,
to
develop metallurgical processes and to construct mining and processing
facilities at a particular site. It is impossible to ensure that the current
exploration programs planned by the Corporation will result in a profitable
commercial mining operation.
Whether
a
mineral deposit will be commercially viable depends on a number of factors,
including the particular attributes of the deposit, such as size, grade and
proximity to infrastructure, as well as metal prices which are highly cyclical
and government regulations, including regulations relating to prices, taxes,
royalties, land tenure, land use, importing and exporting of minerals and
environmental protection. The exact effect of these factors cannot be accurately
predicted, but the combination of these factors may result in the Corporation
not receiving an adequate return on invested capital.
Mining
operations generally involve a high degree of risk. The Corporation’s operations
are subject to most of the hazards and risks normally encountered in the
exploration, development and production of ore, including unusual and unexpected
geology formations, rock bursts, cave-ins, flooding and other conditions
involved in the drilling and removal of material, any of which could result
in
damage to, or destruction of, mines and other producing facilities, damage
to
life or property, environmental damage and possible legal liability. Although
the Corporation does not operate processing facilities or tailings disposal
areas, the Corporation does utilize third party facilities and adequate
precautions to minimize risk will be taken. Milling operations are subject
to
hazards such as equipment failure or failure of retaining dams around tailings
disposal areas which may result in environmental pollution and consequent
liability.
-13-
The
Corporation’s activities are directed towards the search, evaluation,
development and mining of mineral deposits. Some of the mineral properties
in
which the Corporation has an interest contain no known body of commercial
ore
and any exploration programs thereon are exploratory searches for ore, other
properties in which the Corporation has an interest are subject to preliminary
stages of exploration and development programs only, while other properties
in
which the Corporation holds an interest are in the production stage. There
is no
certainty that the expenditures to be made by the Corporation as described
herein will result in discoveries of commercial quantities of ore. There
is
aggressive competition within the mining industry for the discovery and
acquisition of properties considered to have commercial potential. The
Corporation will compete with other interests, many of which have greater
financial resources than it will have for the opportunity to participate
in
promising projects. Significant capital investment is required to achieve
commercial production from successful exploration efforts.
Reliance
Upon Contracts
The
Corporation does not own the facilities used to process the ore mined. Although
access to the Inco facilities is regulated by contract, there is no guarantee
that future access will be available to the Corporation.
In
addition, the Corporation is reliant upon Dynatec to
provide contractor mining services at the Properties until December 31, 2007.
Although these services are governed by contract and the Corporation has
retained approval, control and direction over the services provided by Dynatec
in this regard, it remains reliant upon Dynatec for the actual provision
of such
services until December 31, 2007.
Uncertainty
of Reserve and Resource Estimates
The
figures for reserves and resources presented herein are estimates and no
assurance can be given that the anticipated tonnages and grades will be achieved
or that the expected level of recovery will be realized. The ore grade actually
recovered may differ from the estimated grades of the reserves and resources.
Such figures have been determined based upon assumed metal prices and operating
costs. Future production could differ dramatically from reserve estimates
for,
among other reasons:
| · |
mineralization
or formations could be different from those predicted by drilling,
sampling and similar examinations;
|
| · |
increases
in operating mining costs and processing costs could adversely
affect
reserves;
|
| · |
the
grade of the reserves may vary significantly from time to time
and there
is no assurance that any particular level of metals may be recovered
from
the ore; and
|
| · |
declines
in the market price of the metals may render the mining of some
or all of
the reserve uneconomic.
|
Any
of
these factors may require the Corporation to reduce its reserves estimates
or
increase its costs. Short-term factors, such as the need for the additional
development of a deposit or the processing of new different grades, may impair
the Corporation’s profitability. Should the market price of the metals fall, the
Corporation could be required to materially write down its investment in
mining
properties or delay or discontinue production or development of new
projects.
-14-
Government
Regulation
The
exploration and development activities of the Corporation are subject to
various
federal, provincial and local laws governing prospecting, development,
production, taxes, labour standards and occupational health, mine safety,
toxic
substance and other matters. Exploration, development and mining activities
are
also subject to various federal, provincial and local laws and regulations
relating to the protection of the environment. These laws mandate, among
other
things, the maintenance of air and water quality standards, and land
reclamation. These laws also set forth limitations on the generation,
transportation, storage and disposal of solid and hazardous waste. Although
the
Corporation’s exploration, development and mining activities are currently
carried out in accordance with all applicable rules and regulations, no
assurance can be given that new rules and regulations will not be enacted
or
that existing rules and regulations will not be applied in a manner which
could
limit or curtail production or development. Amendments to current laws and
regulations governing operations and activities of exploration and development,
mining and milling or more stringent implementation thereof could have a
substantial adverse impact on the Corporation.
Government
approvals and permits are currently, and may in the future be, required in
connection with the Corporation’s operations. To the extent such approvals are
required and not obtained, the Corporation may be curtailed or prohibited
from
proceeding with planned exploration or development of mineral
properties.
Failure
to comply with applicable laws, regulations and permitting requirements may
result in enforcement actions thereunder, including orders issued by regulatory
or judicial authorities causing operations to cease or be curtailed, and
may
include corrective measures requiring capital expenditures, installation
of
additional equipment, or remedial actions. Parties engaged in mining operations
may be required to compensate those suffering loss or damage by reason of
the
mining activities and may have civil or criminal fines or penalties imposed
for
violations of applicable laws or regulations.
Amendments
to current laws, regulations and permits governing operations and activities
of
mining companies, or more stringent implementation thereof, could have a
material adverse impact on the Corporation and cause increases in exploration
expenses, capital expenditures or production costs or reduction in levels
of
production at producing properties or require abandonment or delays in
development of new mining properties.
Foreign
Countries
The
Corporation holds direct or indirect interests in properties located in
countries other than Canada, currently in Guinea, West Africa and may, in
the
future, acquire other properties outside of Canada. Mineral exploration and
mining activities in these countries as well as elsewhere may be affected
in
varying degrees by political and financial instability, inflation and changes
in
government regulations relating to the mining industry. Any changes in
regulations or shifts in political or financial conditions are beyond the
control of the Corporation and may adversely affect its business. Operations
may
be affected in various degrees by laws and regulations with respect to, among
other things, restrictions on production, price controls, export controls,
exchange controls, income taxes, expropriation of property, social and
environmental matters and mine safety.
Permits
and Licences
The
exploitation and development of mineral properties may require the Corporation
to obtain regulatory or other permits and licences from various governmental
licensing bodies. There can be no assurance that the Corporation will be
able to
obtain all necessary permits and licences that may be required to carry out
planned exploration, development and mining operations on its
properties.
-15-
Environmental
Risks and Hazards
All
phases of the Corporation’s operations are subject to environmental regulation
in the various jurisdictions in which it operates. Environmental legislation
is
evolving in a manner which will require stricter standards and enforcement,
increased fines and penalties for non-compliance, more stringent environmental
assessments of proposed projects and heightened degree of responsibility
for
companies and their officers, directors and employees. There is no assurance
that future changes in environmental regulation, if any, will not adversely
affect the Corporation’s operations. Environmental hazards may exist on the
properties on which the Corporation holds interests which are unknown to
the
Corporation at present which have been caused by previous or existing owners
or
operators of the properties. The Corporation may become liable for such
environmental hazards caused by previous owners and operators of the properties
even where it has attempted to contractually limit its liability.
Production
of mineral properties may involve the use of dangerous and hazardous substances.
While all steps will be taken to prevent discharges of pollutants into the
ground water the environment, the Corporation may become subject to liability
for hazards that cannot be insured against.
Commodity
Prices
The
profitability of the Corporation will be significantly affected by changes
in
the market price for nickel and by changes in the US: Canadian exchange rate.
During 2005, a US$1 per pound change in the price of nickel is expected to
generate a CDN$9.7 million (pre-tax) change in the Corporation’s profit as
reported on its statement of operations, and each $0.05 change in exchange
rates
is expected to generate a pre-tax change of approximately 2.1 million in
the
Corporation’s profit as reported on its statement of operations.
The
Corporation has not entered into any hedging agreements in respect of metal
or
foreign exchange at this time. Such contracts would prevent losses in situations
when the price changed adversely and would prevent gains in situations where
the
price changed favourably.
The
level
of interest rates, the rate of inflation, world supply and demand of base
metals
and precious metals and stability of exchange rates can all cause significant
fluctuations in base metal and precious metal prices. Such external economic
factors are in turn influenced by changes in international investment patterns
and monetary systems and political developments. The price of base metals
and
precious metals has fluctuated widely in recent years, and future serious
price
declines could cause continued commercial production to be impracticable.
Depending on the price of base metals and precious metals, cash flow from
mining
operations may not be sufficient to cover operating costs. Any figures for
reserves presented by the Corporation will be estimates and no assurance
can be
given that the anticipated tonnages and grades will be achieved or that the
indicated level of recovery will be realized. Market fluctuations and the
price
of base metals and precious metals may render reserves uneconomical. Moreover,
short-term operating factors relating to the reserves, such as the need for
orderly development of the ore bodies or the processing of new or different
grades of ore, may cause a mining operation to be unprofitable in any particular
accounting period.
-16-
Uninsured
Risks
The
Corporation carries insurance to protect against certain risks in such amounts
as it considers adequate. Risks not insured against include environmental
pollution or other hazards against which the Corporation cannot insure or
against which it elects not to insure.
Conflicts
of Interest
Certain
of the directors of the Corporation also serve as directors and/or significant
shareholders of other companies involved in natural resource exploration
and
development and consequently there exists the possibility for such directors
to
be in a position of conflict. In the event that a director or executive officer
has a material interest in any transaction being considered by the Corporation,
any such conflict will be subject to and governed by procedures prescribed
by
the Business
Corporations Act
(Ontario) (the “OBCA”)
which
require a director or officer of a corporation experiencing such a conflict
to
disclose his interest and refrain from voting on any such matter unless
otherwise permitted by the OBCA. In addition, Section 134 of the OBCA provides
that every director must act honestly and in good faith with a view to the
best
interests of the Corporation. Section 134 is a formalization of the fundamental
fiduciary duty that a director has to the corporation and encompasses, among
other obligations, a duty of loyalty and a duty of confidentiality. As a
fiduciary, a director may not interfere with, or take advantage of, any
opportunities that rightfully belong to the Corporation. That a director
may
represent a specific shareholder of the Corporation does not relieve the
director from fulfilling his fiduciary duty to the Corporation. If such director
was to take any action which preferred the interests of a third party to
the
interests of the Corporation, such director would be liable to the Corporation
for a breach of his fiduciary duty, regardless of any legal duties which
such
director may have to the third party.
See
“Interests of Management and Others in Material Transactions”.
Land
Title
Although
title to the Properties has been reviewed by or on behalf of the Corporation
and
title opinions were delivered to the Corporation, no assurances can be given
that there are no title defects affecting the Properties. Title insurance
generally is not available for mining claims in Canada, and the Corporation’s
ability to ensure that it has obtained secure claim to individual mineral
properties or mining concessions may be severely constrained. The Corporation
has not conducted surveys of the claims in which it holds direct or indirect
interests; therefore, the precise area and location of such claims may be
in
doubt. Accordingly, the Properties may be subject to prior unregistered liens,
agreements, transfers or claims, including native land claims, and title
may be
affected by, among other things, undetected defects. In addition, the
Corporation may be unable to operate the Properties as permitted or to enforce
its rights with respect to its Properties.
Joint
Venture
The
Corporation may enter into one or more joint ventures in the future. See
“General Development of the Business - Three Year History.” Any failure of any
joint venture partner to meet its obligations could have a material adverse
affect on such joint ventures. In addition, the Corporation may be unable
to
exert influence over strategic decisions made in respect to properties subject
of such joint ventures.
Corporate
Governance
Management
and the Board of Directors (the “Board”)
of the
Corporation recognize the value of good corporate governance and the need
to
adopt best practices. The Corporation’s corporate governance
-17-
practices
over the last three years have advanced rapidly as a result of the Corporation’s
growth from a junior mining corporation to a member of the S&P/TSX Composite
Index and changing rules and guidelines and best practices. The Corporation is
committed to continuing to improve its corporate governance practices in
light
of its stage of development and evolving best practices and regulatory
guidance.
The
Board
has adopted a Board Mandate outlining its responsibilities and defining its
duties. The Board has four committees (the Audit, Compensation, Safety Health
and Environment, and Corporate Governance and Nominating Committees). Each
Board
committee has an approved a committee charter, which outlines the committees’
mandate, procedures for calling a meeting, and provides access to outside
resources.
The
Board
has also approved a Code of Ethics, which governs the ethical behaviour of
all
employees, management and directors. Separate trading blackout and disclosure
policies are also in place, as well as formal position descriptions for each
of
the Lead Director, Chairman/Chief Executive Officer and chairs of each of
the
committees of the Board. A whistle blowing procedure was adopted and all
relevant policies, charters, mandates, codes and procedures are posted in
the
corporate governance section of the Corporation’s website at www.fnxmining.com.
For more details on the Corporation’s corporate governance practices, please
refer to its website.
The
Corporation’s directors have expertise in exploration, mining, accounting,
banking, legal, financing and the securities industry. See “Narrative
Description of the Business - Corporate Governance”. The Board meets at least
four times a year and Committees generally meet before full board meetings
and
as required. At every full Board meeting, the independent directors meet
in
camera.
The
Lead Director of the Corporation chairs the meeting of independent directors
held at the end of every regular Board meeting. While the Corporation is
subject
to both the provisions of the Sarbanes-Oxley
Act
in the
United States as a foreign issuer and Canadian regulatory provisions, the
Board
and management incorporate strong corporate governance practices in the belief
that such practices provide protection for its investors and add value to
the
Corporation.
Annual
Financial Information
The
following table sets forth, in summary form, certain financial information
of
the Corporation, as reported in the audited financial statements of the
Corporation for the year ended December 31, 2005, with comparative information
for the years ended December 31, 2004 and 2003.
|
Years
Ended (1)
(2)
|
|||
|
December
31,
2005
|
December
31,
2004
|
December
31,
2003
|
|
|
Statement
of Operations Data:
|
|||
|
Mine
operating revenues
|
$84,602
|
$60,411
|
$6,321
|
|
Mine
operating expenses
|
60,252
|
41,925
|
3,482
|
|
Corporate
administration
|
5,226
|
3,398
|
2,384
|
|
Exploration
administration
|
2,915
|
1,970
|
1,741
|
|
Non-controlling
interest
|
4,738
|
4,282
|
226
|
|
Income
and resource taxes
|
4,721
|
2,500
|
666
|
|
Net
earnings (loss)
|
4,597
|
5,997
|
(8,306)
|
|
Basic
and diluted earnings (loss) per share
|
0.08
|
0.12
|
(0.17)
|
-18-
|
2005
|
2004
|
2003
|
|
|
Cash
|
$152,460
|
$56,774
|
$52,536
|
|
Current
assets
|
172,104
|
71,351
|
61,841
|
|
Current
liabilities
|
18,861
|
908
|
2,715
|
|
Property,
plant and equipment
|
531,266
|
69,921
|
47,662
|
|
Non-controlling
interest
|
-
|
19,075
|
14,618
|
|
Future
income and resource taxes
|
155,404
|
2,706
|
621
|
|
Shareholders’
equity
|
555,957
|
118,713
|
91,549
|
______________________________
Notes:
| (1) |
Amounts
are in thousands of Canadian dollars, except per share
amounts.
|
| (2) |
As
restated to reflect changes in accounting
policies.
|
The
following tables set forth, in summary form, certain unaudited financial
information of the Corporation for each of the eight most recently completed
quarters ending at December 31, 2005.
|
Three
Months Ended (1)
|
||||
|
Dec.
31/05
|
Sept.
30/05(2)
|
June
30/05(2)
|
March
31/05(2)
|
|
|
Revenue
from Operations
|
$19,057
|
$21,087
|
$21,923
|
$15,084
|
|
Net
Earnings (Loss)
|
2,484
|
(1,022)
|
3,094
|
728
|
|
Earnings
(Loss) per Share
|
0.05
|
(0.02)
|
0.06
|
0.01
|
|
Three
Months Ended (1)
(2)
|
||||
|
Dec.
31/04
|
Sept.
30/04
|
June
30/04
|
March
31/04
|
|
|
Revenue
from Operations
|
$16,653
|
$16,140
|
$13,624
|
$9,511
|
|
Net
Earnings (Loss)
|
3,359
|
1,641
|
178
|
1,311
|
|
Earnings
(Loss) per Share
|
0.07
|
0.03
|
-
|
0.03
|
_____________________________
Notes:
| (1) |
Amounts
are in thousands of Canadian dollars, except per share
amounts.
|
| (2) |
As
restated to reflect changes in accounting
policies.
|
The
Corporation does not currently have a policy of declaring or paying dividends
on
its Common Shares and intends to retain cash from operations, if any, for
use in
its business. Any determination to pay any future dividends will remain at
the
discretion of the Board and will be made based on the Corporation’s financial
condition and other factors deemed relevant by the Board. The Corporation
has
not paid any dividends since its incorporation.
The
Corporation is a growing nickel-copper-platinum-palladium-gold-cobalt producer,
developer and explorer, with operations based primarily in Canada’s Sudbury
Basin mining camp. The Corporation applies exploration expertise to mineral
properties with demonstrated exploration potential and/or past
production.
The objective of the Corporation is to add value to properties through focused
exploration and development and mining, with the ultimate objective of bringing
its properties into commercial production. Consistent with its objective,
the
Corporation has evolved beyond its original inception as an exploration company
to become a more fully-integrated mining business involved in mining
exploration, development and operations. See “General Development of the
Business - Three Year History” and “Narrative Description of the Business -
Principal Properties”. The Corporation intends to seek joint venture partners to
manage or fund exploration on certain of its properties that are not in Sudbury,
Ontario.
Management’s
Discussion and Analysis is contained in the Corporation’s Annual Report for the
year ended December 31, 2005 available at www.sedar.com and the Corporation’s
website, www.fnxmining.com, and is hereby incorporated by reference. See
“Additional Information”.
The
Common Shares are listed and posted for trading on the Toronto Stock Exchange
(“TSX”)
and on
the AMEX under the symbol “FNX”.
The
table
below sets forth the high and low trading prices and volumes for the Common
Shares traded through the TSX on a monthly basis for the period commencing
on
January 1, 2005, and ending on December 31, 2005.
|
High
|
Low
|
Volume
|
||||
|
January
2005
|
$
5.10
|
$
4.46
|
3,500,171
|
|||
|
February
2005
|
$
4.75
|
$
4.56
|
14,212,903
|
|||
|
March
2005
|
$
9.36
|
$
6.99
|
24,861,081
|
|||
|
April
2005
|
$
8.99
|
$
7.50
|
12,353,044
|
|||
|
May
2005
|
$12.24
|
$
8.40
|
15,138,572
|
|||
|
June
2005
|
$12.79
|
$10.85
|
8,357,802
|
|||
|
July
2005
|
$12.80
|
$11.13
|
2,873,017
|
|||
|
August
2005
|
$14.75
|
$11.85
|
6,466,156
|
|||
|
September
2005
|
$15.65
|
$13.28
|
6,539,250
|
|||
|
October
2005
|
$15.44
|
$12.85
|
6,500,396
|
|||
|
November
2005
|
$14.85
|
$12.86
|
11,837,936
|
|||
|
December
2005
|
$13.25
|
$12.92
|
11,923,598
|
-19-
As
of
March 30, 2006, the directors and officers of the Corporation, as a group,
beneficially own, directly or indirectly, or exercised control or direction
over
an aggregate of 878,687 Common Shares, representing approximately 10.5% of
the
total issued and outstanding Common Shares as at such date.
The
following table sets forth the name, municipality of residence, office held
with
the Corporation, date on which each first become a director (if applicable)
and
principal occupation during the last five years of each of the directors
and
officers of the Corporation.
-20-
|
Name
and Municipality of
Residence
|
Position
with
Corporation
|
Period
of Service
as
a Director
|
Present
Occupation if Different f
rom
Office Held (1)
|
|
A.
Terrance MacGibbon
Oakville,
Ontario, Canada
|
President,
Chief Executive Officer and Director
|
Since
1997
|
N/A
|
|
Donald
M. Ross (2)
(7)
Toronto,
Ontario, Canada
|
Director
|
Since
1984
|
Chairman
of the Board of Jones, Gable & Company Limited (securities
dealer)
|
|
James
Ashcroft (4)
(5)
Sudbury,
Ontario, Canada
|
Director
|
Since
2001
|
Consulting
Mining Engineer
|
|
John
Lydall (3)
Oakville,
Ontario, Canada
|
Director
|
Since
2003
|
Mining
Engineer and Corporate Director
|
|
J.
Duncan Gibson (2)
(5)(8)
Toronto,
Ontario, Canada
|
Director
|
Since
2003
|
Retired
Bank Executive
|
|
Daniel
Innes(4)
(5)
West
Vancouver, British Columbia, Canada
|
Director
|
Since
2005
|
President,
D.. Innes & Associates, consulting firm
|
|
Bruce
Walter(3)
Toronto,
Ontario, Canada
|
Director
|
Since
2005
|
President
and Chief Executive Officer, Dynatec
|
|
John
Lill(4)
Toronto,
Ontario, Canada
|
Director
|
Since
2005
|
Vice
President and Chief Operating Officer, Dynatec
|
|
Robert
B. Low(2)
(3)
Oakville,
Ontario, Canada
|
Director
|
Since
2005
|
Director
of LECG Canada, Ltd., an expert services consulting
firm
|
|
James
Patterson (6)
Oakville,
Ontario, Canada
|
Vice
President and Executive Consultant
|
N/A
|
N/A
|
|
Ronald
P. Gagel
Mississauga,
Ontario, Canada
|
Vice
President and Chief Financial Officer
|
N/A
|
N/A
|
|
Roland
Horst
Campbellville,
Ontario, Canada
|
Vice
President, Business Development
|
N/A
|
President
and Chief Executive Officer, INV
|
|
Tony
Makuch
Richmond
Hill, Ontario, Canada
|
Senior
Vice President and Chief Operating Officer
|
N/A
|
Vice
President, Operations, Dynatec
|
|
Gord
Morrison
Sudbury,
Ontario, Canada
|
Vice
President, Exploration
|
N/A
|
N/A
|
_____________________
Notes:
| (1) |
All
of the foregoing directors and officers have held their present
position(s) with the same or associated firms or organizations
during the
past five years except as follows:
|
| (a) |
Mr.
Lydall retired as Managing Director of the Mining Investment Banking
Group
at National Bank Financial during October, 2003. Prior to his appointment
as Managing Director of the Mining Investment Banking Group at
National
Bank Financial, he held various positions at National Bank Financial
and
its predecessor company, First Marathon ranging from mining analyst
to
senior investment banker;
|
| (b) |
during
November, 2001, Mr. Gibson retired as Vice Chairman of the Commercial
Banking Group of a Canadian chartered bank, a position which he
held from
1999;
|
-21-
| (c) |
Mr.
Patterson was a consultant to the Corporation from October 2001
to April
2002 and from 1999 to 2001 was Vice President Exploration and a
director
of Crowflight Minerals Inc. and Hornby Bay Exploration Ltd., each
a
mineral exploration company;
|
| (d) |
Mr.
Gagel is a Chartered Accountant. He was Vice President and Chief
Financial
Officer of Aur Resources Inc., a mining company, from 1999 to 2004.
Prior
to his appointment as Vice President and Chief Financial Officer,
he held
various other positions at Aur Resources Inc. including Treasurer
and Vice
President, Finance. Mr. Gagel also currently serves as Vice President
and
Chief Financial Officer of INV;
|
| (e) |
Mr.
Innes has also served as (i) Vice President Exploration and a director
for
Southwestern Resources Corp, a mineral exploration company; (ii)
President, Chief Executive Officer, Chairman and a director of
Lake Shore
Gold Corp., a mineral exploration company; and (iii) President,
Chief
Executive Officer and a director of
Aurora;
|
| (f) |
prior
to 2004, Mr. Low served as Principal of Low Rosen Taylor Soriano,
a
business valuation/damages quantification consulting
firm;
|
| (g) |
prior
to 2004, Mr. Horst served as Chief Executive Officer and director
of
Aeroquest Limited (an airborne geophysical surveying company) and
as Chief
Executive Officer and director of Scintrex Limited (a geophysical
instrumentation firm);
|
| (h) |
Mr.
Walter previously served as Vice-Chairman of Dynatec and as Managing
Director and Co-Head Media of the Telecom and Technology Group,
BMO
Nesbitt Burns Inc.;
|
| (i) |
Mr.
Lill previously served as President and Chief Operating Officer
of BHP
Billiton Base Metals, as Chief Operating Officer of Copper Operations
for
Billiton plc, and as Vice-President, Mining Operations for Rio
Algom
Limited; and
|
(j) Mr.
Morrison previously served as a Senior Geologist for Inco Ltd., a mining
company.
| (2) |
Member
of the Audit Committee
|
| (3) |
Member
of the Corporate Governance and Nominating
Committee
|
| (4) |
Member
of the Safety, Health and Environment
Committee
|
| (5) |
Member
of the Compensation Committee.
|
| (6) |
Mr.
Patterson was a director of Mispec Resources Inc. which, in January,
2000
became subject to a cease trade order for failing to file financial
statements.
|
| (7) |
Mr.
Ross paid a fine of $7,500 in 2001 for charges of failing to file
insider
and early warning reports in the province of Alberta, paid a fine
of
$10,000 in 1991 for charges of failing to properly disclose certain
information regarding short sales of securities and paid a fine
of $14,000
in 1982 for charges of operating an option account without proper
documentation on file.
|
| (8) |
Mr.
Gibson paid a fine for charges relating to the late filing of an
insider
trading report in the province of
Ontario.
|
Each
of
the foregoing directors has held of the office of director since the time
indicated above, and will hold office until the next annual meeting or until
his
successor is duly elected unless his office is earlier vacated in accordance
with the by-laws of the Corporation.
Please
see the disclosure under the heading “General Development of the Business -
Three Year History” for a description of the Corporation’s acquisition of Aurora
and the Dynatec Transaction. In connection with the Corporation’s acquisition of
Aurora, Daniel Innes, the President, Chief Executive Officer and a director
of
Aurora was appointed a director of the Corporation. In connection with the
Dynatec
Transaction,
Bruce Walter and John Lill who are officers and directors of Dynatec were
appointed directors of the Corporation.
See
also
“Risk Factors -Conflicts of Interest”.
The
transfer agent and registrar for the Common Shares is CIBC Mellon Trust Company
in Toronto, Ontario, and CIBC Mellon Trust in the United States.
The
Corporation is authorized to issue an unlimited number of Common Shares of
which
83,689,472 Common Shares are issued and outstanding as fully paid and
non-assessable as at March 30, 2006.
Each
Common Share entitles the holder thereof to receive notice of and vote at
each
meeting of the holders of Common Shares on the basis of one vote per Common
Share. The holders of Common Shares are entitled to receive dividends to
the
extent declared by the directors of the Corporation, and to participate in
the
distribution of any assets upon the dissolution or winding-up of the
Corporation, subject in each case to the rights attaching to any securities
which have priority over the Common Shares.
-22-
Other
than contracts entered into in the ordinary course of business, the Dynatec
Acquisition Agreement and related standstill agreement and voting trust
agreement (see “General Development of the Business - Three Year History -
Dynatec Transaction” above), the Shareholder Rights Plan of the Corporation and
the Arrangement Agreement dated May 3, 2005 relating to the acquisition by
the
Corporation of its 100% interest in Aurora, are the only contracts that are
material to the Corporation that were entered into either (i) within the
most
recently completed financial year of the Corporation; or (ii) after January
1,
2002 and before the most recently completed financial year of the Corporation
and which are still in effect as of March 30, 2006.
See
“General Development of the Business - Three Year History”.
Patterson
has prepared a property report dated November 7, 2005 which was filed during
the
most recently completed financial year of the Corporation in addition to
the
Property Report. Both (i) as of November 7, 2005; and (ii) at all times from
November 7, 2005 to March 30, 2006, Patterson has held Common Shares
representing less than 1% of all of the issued and outstanding Common
Shares.
Mr.
Lionel Winter has prepared a report (the “Aurora
Property Report”)
for
Aurora dated February 28, 2005, relating to the Falconbridge Properties,
entitled “Falconbridge-Aurora Joint Venture, Footwall and Foy Properties,
Sudbury, Ontario” which was filed during the most recently completed financial
year of the Corporation. Both (i) as of February 28, 2005, the original date
of
the Aurora Property Report; and (ii) at all times from February 28, 2005
to
March 30, 2006, Mr. Winter has not held any Common Shares.
Roscoe
Postle Associates Inc. (“RPA”),
an
independent geological and mining consulting company, has completed several
independent audits of the Corporation’s in-house resource/reserve estimates from
March 5, 2003 to March 30, 2006. To the knowledge of the Corporation, both
(i)
as of March 5, 2003; and (ii) at all times from March 5, 2003 to March 30,
2006,
RPA has not held any Common Shares.
Additional
information relating to the Corporation filed under its continuous disclosure
obligations is available on SEDAR (the System for Electronic Document Analysis
and Retrieval, which has been established by the Canadian Securities
Administrators) at www.sedar.com.
-23-
Upon
request to the Corporation, the Corporation will provide to any person or
company
| (a) |
when
the securities of the Corporation are in the course of a distribution
under a preliminary short form prospectus or a short form
prospectus,
|
| (i) |
one
copy of the Annual Information Form of the Corporation, together
with one
copy of any document, or the pertinent pages of any document, incorporated
by reference in the Annual Information
Form;
|
| (ii) |
one
copy of the comparative financial statements of the Corporation
for its
most recently completed financial year for which financial statements
have
been filed together with the accompanying report of the auditor
and one
copy of the most recent interim financial statements of the Corporation
that have been filed, if any, for any period after the end of its
most
recently completed financial year;
|
| (iii) |
one
copy of the information circular of the Corporation in respect
of its most
recent annual meeting of shareholders that involved the election
of
directors or one copy of any annual filing prepared instead of
that
information circular, as appropriate,
and
|
| (iv) |
one
copy of any other documents that are incorporate by reference into
the
preliminary short form prospectus to the short form prospectus
and are not
required to be provided under clauses (i), (ii) or (iii);
or
|
| (b) |
at
any other time, one copy of any documents referred to in clauses
(a)(i),
(ii) and (iii), provided that the Corporation may require the payment
of a
reasonable charge if the request is made by a person or company
who is not
a shareholder of the Corporation.
|
Additional
information, including directors’ and officers’ remuneration and indebtedness,
principal holders of the Corporation’s securities, options to purchase
securities and interests of insiders in material transactions, where applicable,
is contained in the Corporation’s management information circular for its most
recent annual meeting of shareholders that involved the election of directors,
and additional financial information is provided in the Corporation’s financial
statements and management’s discussion and analysis contained in the
Corporation’s Annual Report for its most recently completed financial
year.
A
copy of
such documents may be obtained, upon request, from the Corporation. The
Corporation may require the payment of a reasonable charge from a person
or
Corporation who is not a holder of securities of the Corporation.
For
additional copies of this annual information form please contact:
FNX
Mining Company Inc.
7th
Floor,
55 University Avenue
Toronto,
Ontario M5J 2H7
Tel: (416)
628-5929
Fax: (416)
360-0550
Email:
info@fnxmining.com
-24-
Charter
of the Audit Committee of the Board of Directors
1.
PURPOSE
The
Audit
Committee (the “Committee”)
is
appointed by the Board of Directors (the “Board”)
of FNX
Mining Company Inc. (the “Corporation”)
to
assist the Board in fulfilling its oversight responsibilities relating to
financial accounting and reporting process and internal controls for the
Corporation. The Committee’s primary duties and responsibilities are
to:
| · |
conduct
such reviews and discussions with management and the independent
auditors
relating to the audit and financial reporting as are deemed appropriate
by
the Committee;
|
| · |
assess
the integrity of internal controls and financial reporting procedures
of
the Corporation and ensure implementation of such controls and
procedures;
|
| · |
ensure
that there is an appropriate standard of corporate conduct including,
if
necessary, adopting a corporate code of ethics for senior financial
personnel;
|
| · |
review
the quarterly and annual financial statements and management’s discussion
and analysis of the Corporation’s financial position and operating results
and report thereon to the Board for approval of
same;
|
| · |
select
and monitor the independence and performance of the Corporation’s outside
auditors (the “Independent
Auditors”),
including attending at private meetings with the Independent Auditors
and
reviewing and approving all renewals or dismissals of the Independent
Auditors and their remuneration;
and
|
| · |
provide
oversight to related party transactions entered into by the
Corporation.
|
The
Committee has the authority to conduct any investigation appropriate to its
responsibilities, and it may request the Independent Auditors as well as
any
officer of the Corporation, or outside counsel for the Corporation, to attend
a
meeting of the Committee or to meet with any members of, or advisors to,
the
Committee. The Committee shall have unrestricted access to the books and
records
of the Corporation and has the authority to retain, at the expense of the
Corporation, special legal, accounting, or other consultants or experts to
assist in the performance of the Committee’s duties.
The
Committee shall review and assess the adequacy of this Charter annually and
submit any proposed revisions to the Board for approval.
In
fulfilling its responsibilities, the Committee will carry out the specific
duties set out in Part III of this Charter.
2.
AUTHORITY
OF THE AUDIT COMMITTEE
The
Committee shall have the authority to:
| (a) |
engage
independent counsel and other advisors as it determines necessary
to carry
out its duties;
|
-1-
| (b) |
set
and pay the compensation for advisors employed by the Committee;
and
|
| (c) |
communicate
directly with the internal and external
auditors.
|
3.
COMPOSITION
AND MEETINGS
| (a) |
The
Committee and its membership shall meet all applicable legal and
listing
requirements, including, without limitation, those of the Toronto
Stock
Exchange (“TSX”), the Business Corporations Act (Ontario), all applicable
securities regulatory authorities, and if applicable, the American
Stock
Exchange (“AMEX”), the Securities and Exchange Commission (the “SEC”), and
the Sarbanes-Oxley Act of 2002 (“SOX”). Each member of the Committee shall
be financially literate.
|
| (b) |
The
Committee shall be composed of three or more directors as shall
be
designated by the Board from time to time. The members of the Committee
shall appoint from among themselves a member who shall serve as
Chair.
|
| (c) |
Each
member of the Committee shall be “independent” (as defined under the AMEX
Company Guide and under SOX) and “unrelated” (as defined under the TSX
Guidelines) and shall be remunerated only in accordance with SEC
rules and
SOX.
|
| (d) |
The
Committee shall meet at least quarterly, at the discretion of the
Chair or
a majority of its members, as circumstances dictate or as may be
required
by applicable legal or listing requirements. A minimum of two and
at least
50% of the members of the Committee present either in person or
by
telephone shall constitute a
quorum.
|
| (e) |
If
within one hour of the time appointed for a meeting of the Committee,
a
quorum is not present, the meeting shall stand adjourned to the
same hour
on the second business day following the date of such meeting at
the same
place. If at the adjourned meeting a quorum as hereinbefore specified
is
not present within one hour of the time appointed for such adjourned
meeting, such meeting shall stand adjourned to the same hour on
the second
business day following the date of such meeting at the same place.
If at
the second adjourned meeting a quorum as hereinbefore specified
is not
present, the quorum for the adjourned meeting shall consist of
the members
then present.
|
| (f) |
If
and whenever a vacancy shall exist, the remaining members of the
Committee
may exercise all of its powers and responsibilities so long as
a quorum
remains in office.
|
| (g) |
The
time and place at which meetings of the Committee shall be held,
and
procedures at such meetings, shall be determined from time to time
by, the
Committee. A meeting of the Committee may be called by letter,
telephone,
facsimile, email or other communication equipment, by giving at
least 48
hours notice, provided that no notice of a meeting shall be necessary
if
all of the members are present either in person or by means of
conference
telephone or if those absent have waived notice or otherwise signified
their consent to the holding of such
meeting.
|
-2-
| (h) |
Any
member of the Committee may participate in the meeting of the Committee
by
means of conference telephone or other communication equipment,
and the
member participating in a meeting pursuant to this paragraph shall
be
deemed, for purposes hereof, to be present in person at the
meeting.
|
| (i) |
The
Committee shall keep minutes of its meetings which shall be submitted
to
the Board. The Committee may, from time to time, appoint any person
who
need not be a member, to act as a secretary at any
meeting.
|
| (j) |
The
Committee may invite such officers, directors and employees of
the
Corporation and its subsidiaries as it may see fit, from time to
time, to
attend at meetings of the
Committee.
|
| (k) |
The
Board may at any time amend or rescind any of the provisions hereof,
or
cancel them entirely, with or without
substitution.
|
| (l) |
Any
matters to be determined by the Committee shall be decided by a
majority
of votes cast at a meeting of the Committee called for such purpose.
Actions of the Committee may be taken by an instrument or instruments
in
writing signed by all of the members of the Committee, and such
actions
shall be effective as though they had been decided by a majority
of votes
cast at a meeting of the Committee called for such purpose. All
decisions
or recommendations of the Audit Committee shall require the approval
of
the Board prior to implementation.
|
4.
RESPONSIBILITIES
A
Financial
Accounting and Reporting Process and Internal Controls
| 1. |
The
Committee shall review the annual audited financial statements
to satisfy
itself that they are presented in accordance with generally accepted
accounting principles (“GAAP”) and report thereon to the Board and
recommend to the Board whether or not same should be approved prior
to
their being filed with the appropriate regulatory authorities.
The
Committee shall also review the interim financial statements. With
respect
to the annual audited financial statements, the Committee shall
discuss
significant issues regarding accounting principles, practices,
and
judgments of management with management and the Independent Auditors
as
and when the Committee deems it appropriate to do so. The Committee
shall
satisfy itself that the information contained in the annual audited
financial statements is not significantly erroneous, misleading
or
incomplete and that the audit function has been effectively carried
out.
|
| 2. |
The
Committee shall review management’s internal control report and the
evaluation of such report by the Independent Auditors, together
with
management’s response.
|
| 3. |
The
Committee shall review the financial statements, management’s discussion
and analysis relating to annual and interim financial statements,
annual
and interim earnings press releases and any other public disclosure
documents that are required to be reviewed by the Committee under
any
applicable laws before the Corporation publicly discloses this
information.
|
| 4. |
The
Committee shall be satisfied that adequate procedures are in place
for the
review of the Corporation’s public disclosure of financial information
extracted or derived from the Corporation’s financial statements, other
than the public disclosure referred to in subsection (3), and periodically
assess the adequacy of these
procedures.
|
| 5. |
The
Committee shall meet no less frequently than annually with the
Independent
Auditors and the Chief Financial Officer or, in the absence of
a Chief
Financial Officer, with the officer of the Corporation in charge
of
financial matters, to review accounting practices, internal controls
and
such other matters as the Committee, Chief Financial Officer or,
in the
absence of a Chief
|
-3-
|
Financial
Officer, with the officer of the Corporation in charge of financial
matters, deems appropriate.
|
| 6. |
The
Committee shall inquire of management and the Independent Auditors
about
significant risks or exposures, both internal and external, to
which the
Corporation may be subject, and assess the steps management has
taken to
minimize such risks.
|
| 7. |
The
Committee shall review the post-audit or management letter containing
the
recommendations of the Independent Auditors and management’s response and
subsequent follow-up to any identified
weaknesses.
|
| 8. |
The
Committee shall ensure that there is an appropriate standard of
corporate
conduct including, if necessary, adopting a corporate code of ethics
for
senior financial personnel.
|
| 9. |
The
Committee shall establish procedures
for:
|
| (a) |
the
receipt, retention and treatment of complaints received by the
Corporation
regarding accounting, internal accounting controls or auditing
matters;
and
|
| (b) |
the
confidential, anonymous submission by employees of the Corporation
of
concerns regarding questionable accounting or auditing
matters.
|
| 10. |
The
Committee shall provide oversight to related party transactions
entered
into by the Corporation.
|
B
Independent
Auditors
| 1. |
The
Committee shall be directly responsible for the selection, appointment,
compensation and oversight of the Independent Auditors and the
Independent
Auditors shall report directly to the
Committee.
|
| 2. |
The
Committee shall be directly responsible for overseeing the work
of the
external auditors, including the resolution of disagreements between
management and the external auditors regarding financial
reporting.
|
| 3. |
The
Committee shall pre-approve all audit and non-audit services not
prohibited by law to be provided by the Independent
Auditors.
|
| 4. |
The
Committee shall monitor and assess the relationship between management
and
the Independent Auditors and monitor, confirm, support and assure
the
independence and objectivity of the Independent Auditors. The Committee
shall establish procedures to receive and respond to complaints
with
respect to accounting, internal accounting controls and auditing
matters.
|
| 5. |
The
Committee shall review the Independent Auditor’s audit plan, including
scope, procedures and timing of the
audit.
|
| 6. |
The
Committee shall review the results of the annual audit with the
Independent Auditors, including matters related to the conduct
of the
audit.
|
-4-
|
The
Committee shall obtain timely reports from the Independent Auditors
describing critical accounting policies and practices, alternative
treatments of information within GAAP that
were
|
| 7. |
discussed
with management, their ramifications, and the Independent Auditors’
preferred treatment and material written communications between
the
Corporation and the Independent
Auditors.
|
| 8. |
The
Committee shall review fees paid by the Corporation to the Independent
Auditors and other professionals in respect of audit and non-audit
services on an annual basis.
|
| 9. |
The
Committee shall review and approve the Corporation’s hiring policies
regarding partners, employees and former partners and employees
of the
present and former auditors of the
Corporation.
|
| 10. |
The
Committee shall monitor and assess the relationship between management
and
the external auditors, and monitor and support the independence
and
objectivity of the external
auditors.
|
COther
Responsibilities
The
Committee shall perform any other activities consistent with this Charter
and
governing law, as the Committee or the Board deems necessary or
appropriate.
-5-
Dr.
James
M. Patterson, BA (Hons. Geology), Ph.D., P.Geo., DIC, (“Patterson”)
has
prepared a report (referred to as the “Property
Report”)
for FNX
Mining Company Inc. ( the “Corporation”,
the “Company” or
“FNX”)
and
dated 29 March, 2006, and is a qualified person as such term is defined in
National
Instrument 43-101 - Standards
of Disclosure for Exploration and Development and Mining Properties (NI
43-101”). This
Schedule B to the annual information form of the Corporation dated 30 March,
2006 contains a summary of the Property Report. The full text of the Property
Report will be available on SEDAR at www.sedar.com
INTRODUCTION
On
10
January, 2002, Fort Knox Gold Resources Inc., the predecessor company to
FNX
Mining Company Inc.,
signed
an Option to Purchase Agreement with Inco Limited (“Inco”)
by
which FNX could acquire a 100% interest in five Sudbury Basin mineral properties
for which, as previously indicated, Inco had no current mining or development
plans (the “Option”).
The
property package includes former producing mines known as the Victoria, McCreedy
West, Levack, Whistle (Podolsky Property) and Kirkwood mines (Figure 1).
The
Option required continuing exploration and, if warranted, development of
the
subject properties under a 52 month program within which the Company must
spend
$30.0 million to earn its interest. Upon signing the agreement with Inco,
the
Company formed the Sudbury Joint Venture with Dynatec Corporation (“Dynatec”).
This
joint venture, owned as to 75% by the Company and as to 25% by Dynatec, was
formed to explore, develop and, if economically appropriate, mine these
properties.
The
Sudbury Joint Venture (“SJV”),
having exceeded the required $30.0 million in expenditures on the Properties
by
December 1, 2003, vested at that date and owned 100% interest in the mineral
rights to the five Properties. On 21 October, 2005, FNX acquired Dynatec’s 25%
interest in the SJV and now owns 100% interest in the Sudbury Properties.
The
following Table demonstrates the mining history on the properties
acquired.
TABLE
1: Sudbury
Project Properties - Production History
|
%
|
oz/t
|
g/t
|
|||||||
|
Property
|
Years
|
Tons
|
Cu
|
Ni
|
Pt
|
Pd
|
Au
|
TPM
|
TPM
|
|
Victoria
|
1900-23
1973-78
Total
|
890,000
650,000
1,540,000
|
2.99
1.26
2.26
|
2.12
0.83
1.57
|
na
na
na
|
na
na
na
|
na
na
na
|
na
0.07
+0.061
|
+2.0
|
|
McCreedy
West
|
1974-98
|
15,800,000
|
1.70
|
1.44
|
0.02
|
0.02
|
0.01
|
0.05
|
1.5
|
|
Levack
|
1915-29
1937-97
|
na
60,000,000
|
1.31
|
2.00
|
0.02
|
0.02
|
0.01
|
0.05
|
1.5
|
|
Podolsky2
|
1988-91
1994-97
|
na
5,710,000
|
0.33
|
0.95
|
na
|
na
|
na
|
0.01
|
0.3
|
|
Kirkwood
Open
Pit
|
1914-16
1969-76
1970-72
Total
|
71,600
2,488,000
134,800
2,694,400
|
1.53
0.99
0.96
1.00
|
2.81
0.87
0.53
0.90
|
na
na
na
na
|
na
na
na
na
|
na
na
na
na
|
na
na
na
na
|
|
Notes:
1 Total
PMs
estimated in line with production data from 1973-1978 (JMP)
2
Podolsky
was formerly known as Norman and production data are from the Whistle Mine.
na:
Not
assayed or assays unavailable for these elements
During
2005 FNX acquired Aurora Platinum Corp. (“Aurora”),
which
company’s assets included a large property package in the Sudbury Basin (Fig. 1
and Table 2) (“Aurora
Property”)
and
which is considered highly favourable exploration ground. Much of this ground
is
joint ventured with Falconbridge Limited (“Falconbridge”)
and
the program completed by FNX during 2005 was that proposed by the former
Aurora
management and agreed with Falconbridge. There has been significant production
from the Falconbridge Main and Falconbridge East Mines and, though both mines
have now ceased production, there is residual non classified mineralization
in
that part of the Falconbridge Mine which is included in the Aurora Property.
1
| i. |
|
2
TABLE
2: Aurora
Property
|
Property
|
Production
|
Tons
|
Cu%
|
Ni%
|
%
Interest
|
Ha
|
Title
|
|
Falconbridge
- Main
|
1929
- 83
|
36,439,000
|
0.89
|
1.58
|
70
|
1601
|
Patents
|
|
Falconbridge
- East
|
1951
- 90
|
9,612,000
|
0.76
|
1.15
|
Patents
|
||
|
Foy
- Offset Dyke
|
|
|
|
|
70
|
1,341
|
Patents
Leases Staked
|
|
Nickel
Lake
|
|
|
|
|
70
|
71
|
Patents
|
|
Canhorn
|
|
|
|
|
35
|
628
|
Patents
|
|
North
Range
|
|
0
|
0
|
0
|
100
|
6,832
|
Staked
|
|
Cartier
|
|
0
|
0
|
0
|
100
|
475
|
Staked
|
|
TOTALS
|
|
46,051,000
|
0.86
|
1.49
|
|
10,948
|
The
Falconbridge Main and East property, referred to as the Footwall Property,
is
located in Falconbridge and Garson townships some 15 km northeast of downtown
Sudbury. The 16 sq km property is held under Patent and following the completion
of the 2005 exploration program, to which Falconbridge did not contribute,
is
owned as to approximately 70% by FNX and 30% by Falconbridge.
The
Foy
property, comprising 20 sq km on and around the Foy Offset on the North Range,
is located in Bowell, Foy, Tyrone and Harty townships. The ground is held
as
follows: 1036 ha under patents; 361 ha under 21 year mining leases; 16 ha
in one
staked claim; 628 ha comprising the “Canhorn Property” which is a 50/50 joint
venture between Falconbridge and Inco. With the dilution of Falconbridge’s
interest through their non-participation in the 2005 exploration program
and
assuming the 70/30 split FNX/Falconbridge, FNX now owns 70% of the half interest
held by Falconbridge.
The
North
Range Property, comprising 6,832 ha (43 claims) was staked by Aurora and
is an
early stage property owned 100% by Aurora. The property, which adjoins the
Foy
Property on the north and east sides, extends along the northern footwall
of the
Sudbury Basin within Bowell and Wisner townships for approximately 10 km
along
strike and is up to four km wide.
The
Cartier Property comprises three claims (45 units) staked by Aurora in January
2004 and is located approximately five km west of the FNX McCreedy West Mine.
2.
THE
SUDBURY AREA
The
properties covered by this report, (FNX % ownership shown in Tables 1 & 2)
are located in close proximity to the City of Greater Sudbury, in northeastern
Ontario, and approximately 400 km north of Toronto. Access to the advanced
properties is by wheeled vehicle on a 12-month basis with access to more
remote
properties being by bush road and/or ATV or snowmobile. With a population
of
some 165,000, Sudbury is the major centre in northeastern Ontario for mining,
medicine, education, business and commerce, and government
administration.
The
development history of the area together with the physiography and climate
have
been described previous FNX Technical Reports dated 2001, 2002, 2003, 2004,
2005
(“FNX
annual technical reports”)
and
available on SEDAR.
3.
GEOLOGY
OF THE SUDBURY AREA
3
All
of
the project areas lie within the confines or peripheral to the Sudbury Structure
(Figure 1). This structure straddles the boundary between the Archean Superior
Province and the Early Proterozoic Southern Province. The Late Proterozoic
Grenville Province and its northern limit, the Grenville Front, lie some
10 km
south of the Sudbury Structure.
The
Superior Province Archean rocks to the north of the Sudbury Structure consist
mainly of granitic plutons and gneisses and minor volcanic rocks of the Levack
Gneiss Complex which has been dated at approximately 2700 Ma and which were
deformed and exposed to peak metamorphic conditions by a 2640 Ma tectonic
event.
South
of
the Superior Province is the Early Proterozoic Southern Province of metavolcanic
and metasedimentary rocks deposited between 2490 and 2200 Ma. These rocks
are
extensively intruded by sills and dykes of Nipissing Diabase dated at
approximately 2200 Ma.
A
complete description of the regional geology and the three important
lithological components of the structure have been described in the above
listed
FNX annual technical reports, referenced in the bibliography and filed on
SEDAR.
3.2
Mineral
Deposits
The
orebodies associated with the Sudbury Structure constitute the largest known
concentration of nickel-copper sulphides in the world. Total reserves and
production are estimated at approximately 1.6 billion tonnes of ore. Metal
production to date from these deposits exceeds 8.5 million tonnes of nickel
and
8.4 million tons of copper. By-products from this production include cobalt,
platinum, palladium, gold, silver, osmium, iridium, rhodium and ruthenium.
The
bulk
of sulphides in the Sudbury ores consist essentially of varying proportions
of
pyrrhotite, chalcopyrite and pentlandite with varying amounts of other Cu-,
Ni-,
Co-, PGM-bearing minerals and gold.
The
three
main types of ore deposits recognized in the Sudbury Basin are referred to
as
Contact, Offset Dyke and Footwall deposits. Fuller descriptions of these
deposit
types are contained in earlier reports which are incorporated by
reference.
4.
SOURCES,
HANDLING AND VERIFICATION OF DATA
| 4.1 |
Data
Sources
|
The
initial stages of the program were based on the vast amount of data (over
8,000
boreholes) Inco had accumulated during their exploration and mining of the
subject properties. Since the original Patterson Report (dated November,
2001)
FNX has pursued intensive exploration of the subject properties with the
result
that an increasing amount of the information has now been generated by FNX
and
dependence on the Inco data, which are still an integral part of the database,
is lessening. The database on the new properties brought by Aurora (referred
to
as the “Aurora Database”) was generated both by Aurora and Falconbridge for the
majority of the Aurora Property. A small part of the Aurora Property package
involves an area joint ventured with Inco.
As
previously described FNX and its consultants independently verified the historic
drill assay data received from Inco. The SJV exploration program generated
a
significant amount of new data. From inception in March 2002 to 31 December
2005, a total of 1,218,944 ft of diamond drilling was completed in 1,024
drill
holes with 608 holes (832,155 ft) being from surface platforms and 1,024
holes
(386,789 ft) from underground locations..
Surface
drilling was initiated on some of the properties acquired as a result of
the
Aurora acquisition in mid year. Sixteen holes (36,597 ft) were completed
on the
Aurora Property
4
As
previously noted the imperial system of measurement has been retained due
to the
large database inherited from Inco. Historic Inco assays for precious metals
(Pt, Pd, Au and Total Precious Metals) were reported in troy ounces/short
ton.
Precious Metal assays for the current FNX program are reported by the laboratory
in grams/metric tonne and these are maintained as such in the database.
Conversion is made to Imperial Units for consistency during resource estimation.
|
4.2
|
Data
Verification; Sampling Method and Approach; Sample Preparation
&
Security; Sample Preparation; Digestion & Analyses; Assay Quality
Assurance/Quality Control; Sample Security; Assay Data
Verification
|
Previous
FNX annual technical reports as listed above and noted in the bibliography,
have
detailed the data verification process. Roscoe Postle Associates Inc.
(“RPA”),
an
independent geological and mining consulting company, has completed several
independent audits of the FNX in-house resource/reserve estimates as part
of
reports on the McCreedy West and Levack resource/reserve inventory. These
audit
reports dated March 5, 2003, August 22, 2003 and October 3, 2003 and a letter
report March 22, 2005 to National Instrument 43-101 standards, and referenced
in
the bibliography included a review of sample preparation and laboratory
practices and procedures. The RPA reports have been filed with SEDAR. The
RPA
reports also include details of surveying procedures, both surface and
down-hole; core logging procedures; sampling methods; chain of custody;
shipping; sample crushing and grinding; laboratory procedures, including
lab
controls; check samples by FNX; core storage and other quality assurance
/
quality control practices.
In
this
report the term PGM refers to Platinum Group Metals and includes Platinum
(Pt),
Palladium (Pd), which comprise the major part of the PGMs, +
Ruthenium, Rhodium, Osmium and Iridium. The term TPM refers to Total Precious
Metals and includes the PGMs + gold. All intersection lengths referred to
in
this report are lengths of drill core and should not be interpreted as being
true widths.
Due
diligence of the Aurora data was carried out by FNX personnel as part of
the
acquisition of Aurora. Subsequently these data have been incorporated into
the
FNX format and subsequent work has confirmed the validity of these data.
| 5. |
FNX
MINING - SUDBURY PROJECT
|
5.1
Infrastructure
& Staffing
Following
the signing of the agreements with Inco and Dynatec on January 10, 2002,
an
office was opened in Sudbury in March 2002 and the exploration staff grew
rapidly to the current level of 43 comprising 24 geoscientists 11 technicians
and 8 support staff. This staff is now dispersed between three
locations. The
main
office, at Kelly Lake Road in Sudbury, handles local administration together
with the Podolsky, Victoria and Kirkwood projects. The exploration office
at
Levack services the exploration at the McCreedy West and Levack mines and
the
North Range Footwall project. Four geologists are located at the McCreedy
West
minesite and one at the Levack Mine. Geological services to the Podolsky
Project
are provided by personnel from the Kelly Lake Road office.
Upon
purchasing the 25% interest in the Sudbury Joint Venture held by Dynatec,
FNX
assumed direction and control of all its activities in the Sudbury Basin.
Twenty
four mining personnel transferred from our former mining operator as FNX
built
up its mining team. As part of the acquisition of Dynatec’s 25% interest,
Dynatec has been retained as mining contractor for a two year period. Fully
equipped mine offices are located at McCreedy West, Levack and the Podolsky
Advanced Exploration project.
Complete
support and mining infrastructure (offices, drys, warehouse, machine shops
and
other required facilities) have been established at the McCreedy West Mine
site
where some 160 persons are employed. At the adjacent Levack Mine rehabilitation
of the hoist, all electrical systems and headframe was completed and new
offices
and drys were built. Shaft rehabilitation began in first Quarter 2005 and
to
December 31, Phase 1 (surface infrastructure, headframe and shaft rehabilitation
to 2200 ft.) had been completed. Level rehabilitation began in November,
2005
and diamond drilling from underground platforms began in December. Currently
71
persons are employed at Levack.
5
The
Podolsky Project advanced with the completion of the shaft collar to 140
ft.,
the installation of the sinking stage (Galloway) and shaft sinking to 1,775
ft
by year end. A station has been excavated for 32 ft at the 1750 Level.
Completion of the shaft is scheduled for the first half of 2006. The portal
for
the decline to the Podolsky North Deposit was also completed. A fully serviced
operation has been established at Podolsky to support the completion of the
Podolsky shaft so as to permit continuing exploration of the 2000 Deposit
from
underground and to take a bulk sample from the 2450 Level as part of the
Feasibility Study. At December 31, 2005 there were 67 personnel on site
The
two
core logging and sampling facilities continue with that at Kelly Lake Rd.,
in
Sudbury, now dedicated to Podolsky, Kirkwood and Victoria core, and that
at
Levack handling the core from the McCreedy West and Levack mines together
with
core from the Levack Footwall exploration projects. All exploration and mine
site offices are equipped with the necessary computer software and hardware
required to manage the aggressive exploration and mining programs being
undertaken by the Corporation.
The
FNX
corporate head office remains at 55 University Avenue, Toronto and currently
accommodates a staff of 13 persons, four of whom are technical professionals.
| 5. 2 |
Exploration
Statistics
|
Table
3
shows the cumulative drilling completed to December 31, 2005 since project
inception. As access has been gained to the underground workings, more of
the
drilling at the McCreedy West and Levack mines has been carried out from
underground locations. Access to underground drill platforms at Falconbridge’s
Craig Mine has permitted more cost and time efficient testing of the Levack
Footwall Deposit (approximately 37,000 ft. in 29 holes) and which was discovered
in early 2005. Three underground rigs operate from the Craig Mine with a
further
three from surface. The complement of rigs varied during the year on the
different projects with footage drilled as shown in Table 3. FNX’s surface
drilling operations are carried out by Major Drilling., with three rigs on
the
North Range Footwall Project, while Boart Longyear carry out the underground
drilling from the Craig Mine (3 rigs) and one to two rigs operating at the
McCreedy West Mine and one underground at Levack
During
the year drilling began on the properties acquired in the Aurora transaction.
A
total of 37,478 ft. of drilling was completed in 16 holes on these
properties Three
deep holes (12,675 ft.) were drilled on the Falconbridge property and 13
holes
(24,803 ft.) on the Foy Property on the North Range. These programs were
carried
out by Boart Longyear with three surface rigs.
Table
3:
Drilling Statistics: From Inception to 31 December, 2005
|
SURFACE
|
UNDERGROUND
|
TOTALS
|
||||
|
|
#
Holes
|
Ft
|
#
Holes
|
Ft
|
#
Holes
|
Ft
|
|
McCreedy
West
|
76
|
129,241
|
974
|
332,409
|
1,050
|
461,650
|
|
Levack
|
61
|
126,618
|
21
|
17,386
|
82
|
144,004
|
|
Podolsky
|
221
|
274,475
|
|
|
221
|
274,475
|
|
Victoria
|
167
|
101,079
|
|
|
167
|
101,079
|
|
North
Range F/W
|
61
|
161,125
|
29
|
36,994
|
90
|
198,119
|
|
Kirkwood
|
6
|
2,139
|
|
|
6
|
2.139
|
|
Aurora
Properties
|
16
|
37,478
|
|
|
16
|
37,478
|
|
TOTALS
|
608
|
832,155
|
1,024
|
386,789
|
1,632
|
1,218,944
|
Approximately
30,000 samples were sent for assay during 2005 for a total since inception
of
approximately 94,000 samples.
6
6.
SAFETY,
HEALTH & ENVIRONMENT
The
directors, management, employees and contractors of FNX Mining place the
highest
priority on ensuring the best practices of safety, health, environment and
community relations are practiced in every Company activity. Together with
mining contractor Dynatec, FNX constantly reviews performance in these areas
and
takes all necessary steps to ensure a safe and healthy workplace, meeting
or
exceeding all regulatory standards and maintaining open communication with
the
communities in which we work. At December, 2005 FNX had recorded no lost
time
accidents in our exploration activities and our contractors had, reflecting
the
increased mining activity at McCreedy West, Levack and Podolsky, incurred
three
lost time accidents (at McCreedy West) since inception of the project. FNX
and
all contractors remain vigilant in order to provide the required safety training
and to instill best practices.
FNX
Mining’s safety, health, environment and community relations programs improved
in 2005. First was the commitment by senior management to upgrade the Safety,
Health & Environmental Management System to be compatible with the
internationally recognized standard ISO 14001 Environmental and OHSAS 18001
Health & Safety Management Systems. These Management Systems provide an
organized framework for developing best practices, managing compliance with
regulatory requirements and working toward continuous improvement.
The
safety record at the Levack and Podosky properties boasted zero lost-time
accidents in 2005, thereby maintaining a zero lost-time accident performance
over the life of both projects. At McCreedy West, however, three lost-time
accidents during the year led to the implementation of Liberty Mutual’s
proprietary Managing Vital Performance (“MVP”)
program. This program which focuses on positive behaviors that increase safety
performance in the work place to reduce the occurrence of injury. The MVP
program yielded immediate results resulting in 128 days accident-free from
the
implementation date to the end of the year.
Recognizing
the growth of the Company’s operations in Sudbury, FNX appointed a Director for
Environmental Affairs in April 2005 to direct all environmental activities
undertaken at the Sudbury operations. In June 2005, an independent Environmental
Technical Advisory committee comprised of senior environmental professionals
with experience in industry, government and academia was established to guide
and monitor the Company’s environmental program and performance. In addition two
full-time Environmental Coordinators were hired with one being responsible
for
the McCreedy West/Levack Properties and the second having responsibility
for the
Podolsky Property.
Following
FNX’s acquisition of 100% of the Sudbury assets in October 2005, the Director’s
position was enhanced to include Health and Safety in addition to Environment.
The Health & Safety team increased from one to two full-time Safety and
Training Coordinators in addition to the two Environmental Coordinators
Public
consultations were continued with the local communities in which we operate.
Over 100 people attended a meeting in Levack in November 2005 to receive
an
update on activities at the McCreedy West and Levack minesites. Matters of
concern raised at the meeting by locals residents were subsequently addressed
by
third party studies and the implementation of appropriate mitigative measures.
At the evening’s conclusions a number of participants expressed appreciation for
the quality and straightforwardness of the information presented.
At
Podolsky liaison with the Wahnapitae First Nation (WFN) continued under the
terms of a 2004 Memorandum of Understanding (MOU) relating to the development
and eventual operation of the mine. A joint Liaison Committee, formed under
the
MOU, signed a “Terms of Reference” in June 2005, outlining the function and
objectives of the Liaison Committee. A Work Program was developed and
implemented to include drafting a framework for an Impact Benefit Agreement
(IBA). This IBA will serve to formalize the cooperation between FNX and WFN
during the development, operation and eventual closure of Podolsky.
7
At
the
end of 2005, all necessary environmental leases, licenses and approvals were
in
place and in compliance at the McCreedy West, Levack and Podolsky Properties.
During the year an amendment was requested and received from the Ontario
Provincial Government to upgrade the Podolsky high efficiency water treatment
plant which has met all regulatory requirements since commissioning in April
2005. Quarterly compliance reports are submitted to the Ministry of
Environment.
The
scientific environmental baseline study at Podolsky was completed in 2005.
Environmental water quality monitoring programs were also completed during
the
year at the Podoslky, Levack, McCreedy West, Kirkwood and Victoria Properties.
The results of these monitoring programs will be used to track the progress
of
FNX’s environmental protection programs at each site.
Waste
rock from the shaft development at Podolsky is being disposed of subaqueously
in
the closed and flooded Moose Mountain Mine pit, thus preventing oxidation
of
sulphide minerals.
FNX
continues its employee training and holds regular meetings with contractors
in
order to promote sound work practices and compliance with Company Policy.
As a
minimum, field staff receive general orientation from the Northern Center
for
Advanced Technology (NORCAT), standard Workplace Hazardous Materials Information
System (WHMIS) training and Emergency First Aid training.
FNX is
continually updating its Orientation Program and indoctrinates new personnel
and
new contractors with the objective of increasing awareness of safety, health
and
environmental issues. Procedures are reviewed with employees on a monthly
basis.
Requirements and standard operating procedures are outlined in the Safety,
Health and Environmental Orientation Manual, which is updated on an annual
basis.
FNX
implemented a medical surveillance program with a third party health-care
provider to monitor the condition of employees and ensure employees are fit
for
the work that they have been hired to perform. The program includes regular
examinations and testing to monitor the capabilities of employees prior to
hire,
at appropriate intervals after employment commences and prior to returning
to
work after an injury or illness.
7.
RESOURCES
AND RESERVES
7.1
Resource
Methodology
The
methodology employed in resources/reserves estimations has been described
in
earlier reports as referenced in the attached bibliography. FNX’s mineral
resource and reserve estimates are completed by FNX personnel at year-end
using
3-dimensional computer block modeling and inverse distance grade interpolation
with Datamine software. The resource estimates are converted to reserve by
the
mine staff after the application of mining parameters and costs. When required,
these estimates are subsequently reviewed or audited by RPA, an independent
consultant, and conform to NI 43-101.
7.2
McCreedy
West/Levack
Further
drilling during the reporting period has continued to link up the individual
areas previously designated as separate deposits and the various components
of
the Inter Main Deposit (SW Inter Main, Northern Extension and West Inter
Main)
are all now referred to as the Inter Main Deposit. More detailed drilling
of the
Footwall Deposits allied with the information gained from the PM exploration
ramp and FNX’s increased geological understanding of the footwall environment
have supported the long held belief that the McCreedy West footwall deposits
show a progression from the sharp walled massive chalcopyrite veins of the
700
Deposit, down through the previously labeled 950 Deposit and into the much
larger PM Deposit.
Mineral
resource estimates are completed in-house using 3-dimensional computer block
modeling and inverse distance grade interpolation using Datamine software.
Resource estimation summary reports are produced describing the model parameters
used, including number of drill holes, assay and composite statistics, estimate
methodology and interpolation parameters, and volume-tonnage validation.
Resource estimations for the McCreedy West Inter Main, Upper Main, East Main
and
Levack 1300, 1900 and No. 7 deposits were completed using this methodology.
The
700 Footwall Vein resource estimation was based
8
on
updating and modifying the 2004 reserve estimate using the cross sectional
polygon method. Previous reports reference several different areas related
to
the McCreedy West Inter Main deposit, but subsequent infill exploration and
production diamond drilling during have shown the McCreedy West contact deposits
to be comprised of several discrete mineralized bodies within the SIC contact
environment.
7.3
Resources
and Reserves Updated to 31 December 2005
During
the current reporting period updated resource estimations for the McCreedy
West
Inter Main, 700 Footwall and Levack 1300 deposits were compiled to reflect
current geological interpretations and additional diamond drilling. Production
is currently from the nickel-contact deposits (Inter Main and East Main),
the
700 Footwall Deposit and the PM Footwall Deposit. Stope access and associated
underground mapping have significantly enhanced our understanding of the
McCreedy West contact environment and the geological controls on the
mineralization.
Resources
are converted to reserves where they meet or exceed economic parameters of
metal
price, off-take, and mining cost after applying appropriate mine planning
and
dilution associated with the mining methods.
McCreedy
West Mine
Table
4: McCreedy West Mine: Summary of Mineral Reserves (at December 31,
2005)
|
Tons
|
Ni
|
Cu
|
Pt
|
Pd
|
Au
|
TPM
|
|||
|
Category
|
Deposit
Type
|
millions
|
%
|
oz/ton
|
|||||
|
Probable
|
Contact
Deposits
|
1.21
|
1.65
|
0.19
|
-
|
-
|
-
|
-
|
|
|
|
Footwall
Deposits - 700
|
0.12
|
0.69
|
6.04
|
0.04
|
0.07
|
0.04
|
0.15
|
|
|
|
Footwall
Deposits - PM
|
0.66
|
0.27
|
1.03
|
0.06
|
0.07
|
0.02
|
0.16
|
|
|
TOTAL
|
|
1.99
|
|
|
|
|
|
|
|
|
Notes
to Reserves Table:
|
||||||||
|
· All
reserve estimates are based on estimates of long-term metal prices
of
($US): Cu=$1.50/lb., Ni=$5.00/lb., Pt=$800/oz., Pd=$250/oz., Au=$400/oz.
and a Canadian dollar of U.S. $0.85.
|
||||||||
|
· Reserves
are the mineable economic portion of the resources. Contact deposit
reserve estimates include mining dilution at grades assumed to
be zero, as
noted in the text above, and include mining recovery of
about 85%. Mining cut-off for reserves was determined from net
smelter
return (NSR) based on the Inco Off-Take Agreement metal accountability
and
feasibility study estimated mining costs. Ni equivalent cut-off
grades
range from 1% to 1.4% depending on mining method.
|
||||||||
|
· The
700 Deposit reserve estimate is based on the fully diluted resource
and
used the same NSR-mining cut-off approach as for the contact deposits,
which approximates a cut-off grade of 1.4% Ni equivalent, with
a recovery
of 85%.
|
||||||||
|
· PM
Deposit reserves are based on pre-feasibility metal prices of ($US):
Cu=$1.50/lb., Ni=$5.00/lb., Pt=$800/oz., Pd=$250/oz., Au=$400/oz.
and a
Canadian dollar of U.S. $0.85 and a $36 NSR cut-off based on the
Inco
Off-Take Agreement metal accountability and a 68% mining
recovery.
|
||||||||
|
· TPM
= Pt+Pd+Au
|
9
Table
5:
McCreedy West Mine:
Summary
of Mineral Resources (at
December 31, 2005)
|
|
Tons
|
Ni
|
Cu
|
Pt
|
Pd
|
Au
|
TPM
|
|
|
Category
|
Deposit
Type
|
millions
|
%
|
oz/ton
|
||||
|
Indicated
|
Contact
|
1.15
|
2.04
|
0.27
|
-
|
-
|
-
|
-
|
|
|
Footwall
-
700
|
0.15
|
0.65
|
5.94
|
0.04
|
0.08
|
0.04
|
0.16
|
|
|
Footwall
-PM
|
2.66
|
0.26
|
1.17
|
0.07
|
0.08
|
0.02
|
0.17
|
|
TOTAL
|
|
3.96
|
|
|
|
|
|
|
|
Inferred
|
Contact
|
0.37
|
1.63
|
0.33
|
-
|
-
|
-
|
-
|
|
|
Footwall
-700
|
0.01
|
0.78
|
6.01
|
0.07
|
0.11
|
0.06
|
0.24
|
|
|
Footwall
- PM
|
1.06
|
0.28
|
1.11
|
0.08
|
0.11
|
0.03
|
0.21
|
|
TOTAL
|
1.44
|
|||||||
|
· The
Indicated Mineral Resources are inclusive of those Mineral Resources
modified to produce the Mineral Reserves.
|
|||||||||
|
· Contact
deposit resource estimates are based on 1% Ni cut-off grade and
a minimum
8 ft true width.
|
|||||||||
|
· The
700 Deposit resource estimate is based on 1.4% Ni equivalent cut
off grade
and a minimum true mining width of 6 ft. or 7 ft., depending on
vein dip.
The Indicated resource are those blocks above $77/ton NSR as based
on the
700 Deposit Inco Off-Take Agreement metal
accountability.
|
|||||||||
|
· The
PM deposit resource estimate is based on a 0.058 oz/ton TPM
cut-off.
|
|||||||||
|
· The
Upper PM (950) resource volume is based on a 0.75% Ni equivelent
cut-off
grade and a minimum 8 ft. true width. Nickel equivalency is based
on
estimates of long-term metal prices of ($US): copper=$0.70/lb.,
nickel=$3.50/lb., platinum=$600/oz., palladium=$250/oz., Gold=$340/oz.
and
a Canadian dollar of US$0.67. The Indicated resource are those
blocks
above $87/ton NSR as based on the 700 Deposit Inco Off-Take Agreement
metal accountability.
|
|||||||||
|
· The
700 Deposit resource estimate includes internal and external mining
and
sill dilution; estimates for the contact deposits and the PM and
Upper PM
(950) deposits include internal dilution.
|
|||||||||
|
· TPM
= Pt+Pd+Au
|
Levack
Mine
Table
6 :
Levack
Mine : Summary of Mineral Resources (at
December 31, 2005)
|
Tons
|
Ni
|
Cu
|
Pt
|
Pd
|
Au
|
TPM
|
||
|
Category
|
Deposit
Type
|
millions
|
%
|
oz/ton
|
||||
|
Measured
|
Contact
|
2.41
|
2.11
|
1.07
|
-
|
-
|
-
|
-
|
|
Indicated
|
Contact
|
2.53
|
1.96
|
0.94
|
-
|
-
|
-
|
-
|
|
TOTAL
|
Contact
|
4.94
|
2.03
|
1.00
|
-
|
-
|
-
|
-
|
|
Inferred
|
Contact
|
0.73
|
1.91
|
0.88
|
-
|
-
|
-
|
-
|
|
· Resource
estimates for the 1900 Zone are based on a 1% Ni equivalent cut-off
grade
and a minimum eight ft true width. Nickel equivalency is based
on
estimates of long-term metal prices of ($US): copper=$0.80/lb.,
nickel=$3.75/lb., platinum=$525/oz., palladium=$225/oz., Gold=$325/oz.
and
a Canadian dollar of US$0.67.
|
|||||||||
|
· Resource
estimates for the Levack 1300, No. 7 and No. 7 extension deposits
are
based on a 1% nickel cut-off grade and a minimum 8 ft. true
width.
|
|||||||||
|
· The
remaining Levack resource estimates produced from the INCO MRI
are based
on either a 1% Ni or 1% Ni equivalent cut-off. Nickel equivalency
is based
on metal prices of ($US): copper=$0.78/lb., nickel=$3.95/lb.,
platinum=$650/oz., palladium=$185/oz., Gold=$350/oz. and a Canadian
dollar
of US$0.70.
|
|||||||||
|
· Re-interpretation
and block model resource estimation resulted in the removal of
the No. 7
Zone resources from the INCO MRI during
2005.
|
|||||||||
10
8. PROPERTIES
All
of
the original FNX properties are located within 35 km of Sudbury (Figure 1),
and
the mineral rights are owned 100% owned by FNX (Table 1). Ownership is primarily
by patent but two are mining leases renewable in 2007. The Aurora properties
are
joint ventured primarily with Falconbridge but also with Inco. The interests,
production data (where applicable), size and title are shown in Table
2.
8.1 McCreedy
West Mine Property
Location,
History, Infrastructure & Environment
The
McCreedy West Mine project area, comprising 804.24 acres (325.4 ha) of mining
rights contained in seven mining patents, is located 34 km northwest of Sudbury
in Levack Township. Road access is excellent and the rail spur to the Levack
Mine is adjacent to the site.
The
history of discovery, exploration and mining of this property has been described
in detail in previous FNX annual technical reports, as referenced in the
bibliography.
As
infrastructure has been refurbished and production has ramped up at McCreedy
West, environmental monitoring at the site has been structured to meet
compliance, monitoring and due diligence requirements. Existing liabilities
(i.e. metal concentrations in soil) that could be impacted by the current
activities were characterized prior to resumption of production by FNX.
Monitoring of local air and surface water quality is performed to supplement
the
existing monitoring programs being carried out by Inco and Falconbridge as
part
of their approvals for neighbouring mines.
The
annual Public Information Session regarding the McCreedy West/Levack operations
was held in November 2005 in the community of Levack to update the community
regarding the Joint Venture’s activities at both McCreedy West and the
immediately adjacent Levack property.
Property
Geology
The
McCreedy West Mine occurs at the western limit of an extensively mineralized
8.5
km long portion of the North Range of the SIC. This part of the North Range
encompasses all of the major Inco and Falconbridge past and current producing
mines of the North Range (Strathcona, Coleman, Levack, McCreedy East, Onaping,
McCreedy West, Craig and Hardy).
The
geological setting, deposit types and the local geological controls of the
deposits have been described in previous FNX annual technical reports as
referenced.
Deposit
Types
The
various deposit types in the Sudbury Basin have been described in previous
reports. FNX production at the McCreedy West Mine has been predominantly
from
Contact
Deposits
(Inter
Main, Upper Main, and East Main deposits, (Figure 2)),
which
occupy embayment structures and traps that often penetrate into the footwall
of
the SIC. Mining has been completed on the Upper Main with the continuing
production being primarily from the Inter Main with some from the East
Main.
The
Footwall
Type
Cu-Ni-PGM vein deposits
are represented by the 700 Vein Complex; and the PM Deposit. These deposits
represent a progression from sharp-walled, massive chalcopyrite veins in
the 700
Deposit passing down through the Upper PM to the PM Deposit where mineralization
occurs both within veins and as matrix fill within the Sudbury Breccia. An
increasing amount of Cu - PGM ore reflects increased tonnage from the PM
Deposit
for which commercial production was declared during 2005.
Contact-Type
Ni-Cu Deposits
11
As
previously described the Upper
Main Deposit
comprises two mineralized lenses; each consisting of disseminated to massive
pyrrohotite-pentlandite-chalcopyrite-pyrite predominately hosted within granite
breccia. During 2005, 17,700 tons were mined and mining has now ceased in
this
deposit. Total production from the Upper Main was 53,000 tons grading 0.36%
Cu
and 1.24% Ni. This lower than estimated reserve grade reflects the mining
of
incremental ore (27,000 tons) during the period of increased nickel
prices.
The
Inter
Main Deposit
(Figure
3) is the main source of nickel ore currently being mined at McCreedy West.
The
geological setting and controls to this deposit have been described in previous
FNX annual technical reports. The reserve model of the Inter Main suggests
that
mineralization occurs over a strike extent of at least 1,100 ft and down
dip for
800 ft. Recent drilling has shown the potential for significant additions
to the
reserve tonnage. Though the dominant mineralization is associated with physical
traps at the base of the SIC however, mineable hanging-wall lenses occur
throughout the ore body. The dominant host rock for both contact and
hanging-wall environments is granite breccia.
Drilling
has resulted in a more constrained interpretation of the Inter Main Deposit
while expanding the deposit to include areas previously thought to be isolated
from the Inter Main. This has resulted in a greater degree of confidence
in the
resource/reserve estimate to end December 2005.
The
initial reserve statement (July, 2003) of 1,070,000
tons
grading
0.21
% Cu and 1.88 % Ni
was
independently verified and audited by consultants RPA (22 August, 2003).
Since
inception of mining in 2003 to end December 2005 a total of, 551,943 tons
grading
0.3%
Cu, 1.7% Ni
has been
mined from the Inter Main., with 2005 production amounting to 305,253 tons
grading 0.3% Cu, 1.7% Ni. The mined nickel grade is somewhat lower than the
reserve grade due to mining of incremental material which was classified
as ore
due to the escalation in the nickel price. As at 31 December, 2005 the Inter
Main ore reserve was estimated as 1.17 million tons grading 0.20% Cu and
1.63%
Ni.
The
East
Main Deposit
occurs
to the east of the main ramp between surface and 920 Level, and consists
of
semi-massive to massive pyrrhotite-pentlandite-chalcopyrite-pyrite contact-style
mineralization.
Mining
of
the East Main commenced in 2003 and to 31 December, 2005 approximately
46,850
tons
grading 0.36%
Cu and 1.85% Ni
were
mined.
As
with
the Inter Main and Upper Main, the mining of incremental ore due to the increase
in the price of nickel caused the mined grade to be lower than the reserve
grade. At 31 December, 2005 the reserves in the probable category in the
East
Main amount to 0.04 million tons grading 0.34% Cu, 2.42% Ni.
No
exploration is planned in the East Main for 2006 but a geotechnical study
is
being considered to evaluate the potential for reducing the height of the
Crown
Pillar.
12
13
The
exploration in 2005 at the Inter Main Deposit, successfully replaced the
ore
mined during the year and at year end the probable reserve of nickel ore
at
McCreedy West amounted to 1.21 million tons grading 0.20% Cu and 1.65% Ni
with
93% being in the Inter Main Deposit. The program proposed for 2006 will
endeavour to replace the ore mined during 2006 by drilling in the Inter Main
and
Boundary deposits while continuing to test new areas for expansion of the
known
deposits
Footwall-Type
Cu-PGM Deposit Targets
As
previously described, footwall deposits of the Sudbury Basin are emplaced
within
zones of Sudbury Breccia adjacent to, or in the general vicinity of, contact
ore
environments. The Sudbury Breccia zones are usually much larger than the
footwall ore deposits themselves
and
exploration
to date has shown the presence of significant mineralization proximal to
the
contact-type deposits at McCreedy West. The
14
Footwall
Type
Cu-
(+Ni)
-PGM
deposits are represented at McCreedy West by the 700 Deposit and the PM
Deposit..
Mineralization
within the 700
Deposit
is
restricted to sharp walled veins which cross cut both the Sudbury Breccia
matrix
and clasts. Individual veins, ranging in thickness from several inches up
to 13
ft, are composed of massive chalcopyrite with accessory pentlandite, millerite
and pyrrhotite, and have strike and dip lengths ranging from 25 to 350 ft.
Mining
of
the veins by narrow vein mining methods commenced early in 2003. Production
during 2005 amounted to 27,700 tons with total production since inception
amounting to 51,146
tons
grading
6.93%
Cu, 0.63% Ni, 3.9 g/t TPM.
At
31
December, 2005 the reserves in the probable category in the 700 Deposit amount
to 0.12 million tons grading 6.04% Cu, 0.69% Ni and 0.15oz/t TPM.
The
PM
Deposit
is a
large mineralized body measuring 1,500 ft by 1,000 ft and more than 150 ft
thick. The upper part of the PM Deposit (Figures 2 & 4) is located to the
east and down plunge from the 700 Deposit described above. This deposit
comprises two distinct styles of mineralization: (i) massive chalcopyrite,
pentlandite and millerite veins ranging in thickness from 3 inches to 3.0
ft,
and (ii) a broader zone of irregular stringers and disseminated chalcopyrite
blebs.
The
main
part of the PM Deposit is located below the 1450 Level and within a broad
package of footwall Sudbury Breccia (Figure 4). Mineralization typically
consists of chalcopyrite ± millerite ± pendlandite + PGM (Pt+Pd Bismuth
Tellurides) + gold within a mineralized envelope which generally dips 38° to the
southeast.
The
morphology and internal structure of the PM has been described in detail
in
previous reports. The character of the PM Deposit is defined by a series
of
stacked veins (the largest rarely greater than 2 ft thick) and vein sets
which
occur at steeper angles (40° to 50°) than the overall dip of the deposit (35°).
The orientation of these veins is locally disrupted by large clasts (typically
>20 ft in diameter). Veins will tend to wrap large clasts on one side, or
bifurcate and surround them. In areas where the vein sets are proximal to
one
another, stockworks have developed between the veins, forming ‘lode’ zones which
are well mineralized for tens to hundreds of feet along strike and
dip.
Mineralization
within the PM Deposit typically consists of chalcopyrite +/- millerite +
PGM
(Pt+Pd bismuth tellurides) veins, veinlets, stockworks and disseminations
within
a mineralized envelope which generally dips -35o
to the
southeast. Seven styles of mineralization have been recognized and previously
described in detail.
In
mid
2005 the exploration ramp from the 1550 Level to access the PM with the
objectives of creating drill platforms, permit mapping to develop a better
understanding of the mineralization controls and to take bulk samples was
completed. Approximately 102,450 tons of development and production ore grading
1.1% Cu, 0.3% Ni, 5.4 g/t TPM were produced from the PM in 2005. Some 27,000
tons of this material was development ore with the balance of 75,450 tons
being
mined following the declaration of commercial production in May, 2005. A
resource estimate completed by FNX in January 2005 showing an Indicated Resource
for the PM of 2.25 million tons averaging 1.11% Cu, 0.26% Ni, 6.5 g/t TPM
(0.19
oz/st)). An additional Inferred Resource totalled 1.06 million tons grading
1.11% Cu, 0.28% Ni, 7.5 g/t TPM (0.22 oz/st). This resource estimate, which
is
NI 43-101 compliant, was audited by Independent Consultants, RPA, March 22,
2005
letter report available on SEDAR.
An
in-house resource estimate dated December 31, 2005 for part of the PM Deposit
showed 2.66
million tons grading 1.17% Cu, 0.26% Ni, 0.17 oz/t TPM. Reserves
were generated from this resource and at the end of December, 2005 these
were
reported as 0.66
million tons grading 1.03% Cu, 0.27% Ni, 0.16 oz/t TPM.
15
Figure
4
PM
Mining
Figure
4
shows the trace of the ramp development through the PM Deposit and the areas
from which initial mining took place. As noted above, the total delivered
to the
mill was 103,450 tons grading 1.1% Cu, 0.3% Ni, 5.4 g/t ( 0.16 oz/st) TPM
.
Commercial production was declared in July 2005. An initial reserve was
established for a portion of the deposit and at December 31, 2005. This reserve,
in the probable category, was stated
as 0.66 million tons grading 1.03% Cu, 0.27% Ni, 0.16 oz/t TPM.
Details
of the reserve are presented in Table 4 together with assumptions.
PM
Deposit Development and Exploration in 2006
In
addition to the current production the Deposit will again be the focus of
significant exploration in 2006 with the objective of converting the higher
grade inferred resource to indicated and by drilling to expand the resource.
Approximately 10,000 ft of drilling have been allocated for this program
with a
total budget of $589,500.
Mining
The
underground mine operations at the McCreedy West Mine are accessed via a
-20%
decline extending from surface to the 1600 Level. Emergency egress from the
mine
is via a raise ladderway system extending to the 1600 Level. Access to the
PM
Deposit was achieved by a decline from the 1550 Level and commercial mining
in
the PM was initiated in May 2005.
16
The
details of the mining methods at McCreedy West have been described in previous
referenced reports and mining continues in all deposits with exception of
the
Upper Main where reserves have been depleted.
For
calendar year 2005 a total of 437,367 tons of ore was delivered to the custom
mill. This ore was mined from contact nickel and footwall Cu-PGM deposits.,
with
the majority, approximately 326,700 tons, being nickel ore grading 0.3% Cu,
1.7%
Ni. The 700 Deposit, which was the only source of copper ore in previous
years,
has now been augmented with higher tonnages from the lower grade PM Deposit
which is amenable to longhole mining. This resulted in a significant increase
in
Cu/PGM ore with a total of 110,716 tons being delivered, 75% of which came
from
the PM Deposit. A further 20,444 tons of PM material was delivered as
pre-production ore.
Details
of management of the environmental aspects of the McCreedy West operations
have
been described in previous FNX annual technical reports as noted in the
bibliography. In summary, the objective of the McCreedy West Mine site
environmental management plan is to provide for “walk-away” closure. The
potential for acid rock drainage from the mine activity is limited to materials
placed and processed on the stockpile pad. At closure, the stockpile pad
will be
transported underground. There is no water discharge from the site. There
are
presently no tailings ponds or waste treatment facilities on the McCreedy
West
Mine site, and none are planned.
The
installation of a new crusher building was completed in 2004, and the Ministry
of Northern Development and Mines (“MNDM”) approved an amendment to the
Levack-Onaping Closure Plan
to cover
this additional infrastructure.
Recommended
Work Program and Budget
The
primary objective of the 2006 program is to continue to expand the resource
and
reserve base at McCreedy West Mine by delineation diamond drilling, additional
testing of known targets together with exploration drifting and associated
underground mapping and sampling.
The
program includes drilling to ensure the continuation of nickel production
at
1000 tpd by further infill and expansion of the Inter Main Deposit and to
continue to push the limits of the deposits east towards the Levack Property
and
southwards towards the Property boundary. A drill program will focus on
delineating the Boundary Deposit.
As
previously noted the SIC between the McCreedy West Inter Main Deposit and
the
Levack Mine is a prime target area with some local indications suggesting
the
potential for mineralized zones but which is only sparsely (300 ft - 400
ft
spacing) drilled. The associated footwall is also relatively untested.
This
nickel exploration program is budgeted at $1.26 million.
The
2006
program will also focus on upgrading the resources in the PM Deposit, increasing
the reserve base and drilling to expand the Deposit . This program is budgeted
at $0.59 million.
The
total
budget for the 2006 McCreedy West exploration program is $1.85 million.
8.2
Levack
Mine Property
Location,
History, Infrastructure & Environment
The
Levack Mine property, comprising 811.37 acres in six mining patents, is located
34 km northwest of Sudbury (Figure 1) in Levack Township and immediately
adjacent to the McCreedy West property described above. Access is via a year
round highway and a rail spur passes through the property.
17
The
Levack Mine, the first deposit discovered on the North Range (1887) operated
continuously from 1937 until closing in 1997. The total ore production was
60,000,000
tons grading 1.31% Cu, 2.00% Ni, 1.5 g/t TPM.
FNX
began
exploration on the Levack property in March,
2002 and in late 2003 released an indicated and measured resource of
4.6
million tons at 1.03% Cu, and 2.06% Ni from
a
detailed review of the Historic Mineral Inventory. The total inferred resources
were stated as 1.0
million tons at 0.9% Cu, and 2.0% Ni.
These
resource estimates, completed in-house by FNX personnel and consultants,
were
reviewed and audited by independent consultants RPA in a report dated October
3,
2003 and available on SEDAR. As previously reported continuing definition
drilling from underground platforms promoted much of the 1300 Deposit resource
to the indicated category.
Much
of
the infrastructure at Levack Mine remains accessible. By the end of 2005,
the
No. 2 Shaft, a multi-compartment vertical shaft to a depth of 3,970 ft and
the
main production shaft for the previous mining activity, had been reconditioned
to 2,000 ft.with the target for shaft rehabilitation being the 2650 L. Access
has been re-established on the 1200, 1300, 1500 and 1800 Levels. Initial
pre-production is planned in late 2006 from nickel contact deposits as follows:
the 1300
Deposit
extending from the 1000 to 1500 Level and estimated to have an indicated
resource of 274,000 tons grading 2.2% Ni, 0.7% Cu; the partially mined
#7
Deposit
located
to the west and down-dip from the historic Levack Main Orebody containing
an
indicated resource of 335,300 tons grading 2.1% Ni, 0.5% Cu; the #7
Extension Deposit
at the
SIC contact between the Main Orebody and the #7 Deposit and containing an
indicated resource of 487,000 tons grading 1.5% Ni, 0.3% Cu; and the
1900
Deposit
in
proximity to the 1300 Deposit and containing an inferred resource of 176,500
tons grading 2.3% Ni, 1.9% Cu.
The
work
force at Levack at 31 December, 2005, was 71 personnel.
The
Levack Mine is covered by the same joint Inco-Falconbridge environmental
Closure
Plan as the McCreedy West Mine. Details of the environmental management have
been given previously (FNX annual technical reports). During the year a new
Certificate of Approval (Air) was received for the site and this authorizes
the
discharge of emissions to air from stationary and mobile equipment and addresses
noise and dust issues associated with mine activity.
The
annual Public Information session addressing the Levack Mine operations was
held
in November 2005 in the community of Levack and provided an update to the
community on FNX’s activities at both the Levack Mine and the adjacent McCreedy
West Mine.
Property
Geology & Mineralization
The
Levack Mine is located on the northwest margin of the SIC and adjoins the
McCreedy West Property on the east side. It is situated within the Levack
Trough, an 8.5 km long structure that generally strikes northeast, dips at
40-45° southeast and contains all of the major North Range sulphide deposits
(Figure 1).
The
regional and local geology have been described in previous FNX annual technical
reports.
Deposits
The
Ni-rich
deposits
of interest at Levack Mine (Figure 5) are represented by the 1300, No. 7
and the
No. 7 Extension (7X) Deposits. The 1900 Deposit can be regarded as a
hybrid-type
exhibiting features of both Ni-rich
and
Cu-Ni-PGE - rich
types
and as previously noted, mineralization within this deposit may be transitional
from Ni-rich sections to more Cu enriched zones.
18
The
other
prime target area at the Levack Mine is the large expanse of footwall rock
extending north from the SIC contact. This setting is the host a to number
of
high grade Cu-Ni PGM vein-type deposits on the North Range, immediately adjacent
to the FNX ground. As described in Section 8.3, FNX announced a significant
discovery in this footwall environment in late February 2005, and subsequent
news releases in May, August and October, 2005 with a further news release
dated
27 February, 2006 documented the expanding significance of this discovery.
The
1300
Deposit
is more
or less typical of the contact-style mineralization observed on the North
Range.
This 250 ft x 650 ft deposit extends from the 1000 Level to the 1500 Level
of
the Levack Mine, and is defined by a sub-horizontal lower portion and a sub
vertical upper portion. The results of the drilling undertaken to October
31,
2005 have been presented in previous FNX annual technical reports as referenced
.
The
proposed 2005 exploration program for Levack identified the 1300 Deposit
as the
focus of much of the 2005 underground exploration drilling program. However,
delays in rehabilitation of the infrastructure and the requirement to make
safe
all working places delayed the commencement of this program.
The
No.7
Deposit & 7 Extension (7X) area
of
Ni-Cu contact-type mineralization is located down dip and to the west of
the
Levack Main Orebody (Figure 5 ). Partially mined prior to the Levack Mine
shutdown, the #7 contact deposit contains significant resources and will
be an
initial focus for production. The dominant host rocks for the
pyrrhotite-pentlandite-chalcopyrite-pyrite mineralization are the granite
breccia and the sublayer norite and this, together with the style, mode of
occurrence and significant intersections of this mineralization, have been
described in previous FNX annual technical reports.
In
addition to the partially mined portions of the deposit, an undeveloped
exploration area to the east of this deposit has significant potential. This
area, known as the No.
7 Extension (No. 7X),
has
similar geology and ore mineralogy to the No. 7 Deposit, but is less intensely
drilled. The mineralization appears to be associated with an elongate,
trough-like zone approximately 200 ft wide and extending 1,000 ft down dip.
Thirty-seven historical boreholes with 48 intersections, 26 of which are
greater
than 10 ft, cut the zone, and assays (previously reported) show that Ni values
exceed copper values by a ratio of at least 2:1 with negligible PGE values.
In
2005,
10,000 ft of underground drilling had been planned for the No. 7 and No.
7
Extension. However,
as with the 1300 Deposit, delays in rehabilitation of the infrastructure
and the
requirement to make safe all working places, caused this program to be deferred
to 2006.
The
1900
Deposit
is
located down dip from the mined Intermediate Deposit, (Figure 5) and is regarded
as a hybrid of the Ni-rich and Cu-Ni-PGE-rich deposit types. This 650 ft
by 150
ft deposit is hosted in a mixed unit of granite breccia with Sudbury Breccia,
and is overlain by a 450 ft wide meta-gabbroic-ultramafic block, upon which
the
1300 Deposit is positioned. Below the deposit, the footwall rocks are composed
of granodiorite gneiss and Sudbury Breccia. Mineralization and drilling results
from this deposit have been described previously (FNX annual technical reports).
No drilling was carried out on this target in 2005.
19
Figure
520
The
Company has previously announced a resource estimate of 4.6
million tons
grading
2.06%
Ni, 1.03% Cu
in the
measured and indicated resource categories and an additional 0.98
million tons
grading
1.97%
Ni, 0.86% Cu
in the
inferred resource category. As noted above, details of this resource estimate,
audited by independent consultants RPA, have previously been reported as
referenced in the bibliography. The resource to December 2005, (4.94
million tons grading 2.03% Ni and 1.0% Cu)
reflects
the promotion of part of the 1300 Deposit to Indicated from Inferred. .
Table
7:
Levack
Mine -Summary of Mineral Resources (as at December 31, 2005)
|
LEVACK
MINE
|
||||||||
|
Tons
|
Ni
|
Cu
|
Pt
|
Pd
|
Au
|
TPM
|
||
|
millions
|
%
|
oz/ton
|
||||||
|
Measured
|
Contact
Deposits
|
2.41
|
2.11
|
1.07
|
-
|
-
|
-
|
-
|
|
Indicated
|
Contact
Deposits
|
2.53
|
1.96
|
0.94
|
-
|
-
|
-
|
-
|
|
TOTAL
|
Contact
Deposits
|
4.94
|
2.03
|
1.00
|
-
|
-
|
-
|
-
|
|
Inferred
|
Contact
Deposits
|
0.73
|
1.91
|
0.88
|
-
|
-
|
-
|
-
|
The
2006
recommended work program of delineation and definition drilling from underground
platforms is included within the Levack Mine mining budget.
8.3
NORTH RANGE FOOTWALL EXPLORATION
Geological
Setting & Concept
As
previously noted (FNX annual technical reports), all of the major Inco and
Falconbridge past and current producing mines of the North Range (Strathcona,
Coleman, Levack, McCreedy East, Onaping, McCreedy West, Craig, Hardy) occur
within an extensively mineralized 8.5 km-long portion of the SIC (Figure
6). The
McCreedy West Mine and Levack Mine properties cover some 4 km of this strike
and
limited exploration by FNX in the footwall rocks to the north of the mines
had
demonstrated potential for this belt to host similar deposits.
Within
the McCreedy West property, previous wide-spaced drilling had indicated
favourable zones of Sudbury Breccia with trace Cu-Ni-PGM sulphide
mineralization. On the adjacent Levack property, the brecciated footwall
rocks
had been tested by a small drilling program and surface mapping had identified
large zones of favourable footwall Sudbury Breccia.
The
Footwall Discoveries
Upon
completion of surface mapping in 2003 and initial drill testing in early
2004,
the footwall to the Levack Main Orebody became the focus of much of the footwall
program for the remainder of 2004. Surface mapping of these footwall rocks
identified areas of significant, locally weakly mineralized,
21
Sudbury
Breccia showing characteristics suggestive of proximity to mineralization.
Five
holes drilled in 2004 tested these surface exposures. In the period 1 March,
2004 to 28 February, 2005, 24 footwall holes were completed on the Levack
and
McCreedy West properties for a total of 43,000 ft. The results of this drilling
have been described previously (FNX annual technical report to 28 February,
2005).
In
the
period from January 1, to December 31, 2005 a total of 51 holes (119,025
ft) was
drilled in the footwall program. Twenty-three surface holes (82,360 ft) were
drilled in the 12 month period with a further 28 holes (36,665 ft.) from
underground locations between May and December, 2005. This drilling has resulted
in the discovery of three deposits to date: the Levack
Footwall Deposit,
the
Lower
Levack Footwall Zone,
and the
previously known Rob’s
Zone (Figure
7). A series of news releases (May, August and October, 2005) chronicled
the
progress of this program and currently (March 2006) there are three surface
rigs
and three underground rigs following up this important discovery. A further
news
release in February 2006 updated progress and continued to expand the most
significant high grade Footwall Deposit Deposit which is still open in all
directions
Because
of the depth to target (>5,000 ft) and the requirement to keep holes on
target by wedging, each hole from surface takes a long time to complete.
FNX has
gained access to underground drill platforms at the adjacent Craig Mine of
Falconbridge from which three rigs are currently operating. These holes require
less footage to reach the target (1,500 - 2,000 ft) thereby permitting more
rapid and cost efficient testing of the deposit. It will be noted that in
the
underground drilling program from the Craig Mine, 28 holes were completed
in
eight months as opposed to 23 holes from surface in the 12 month period.
All
drill
intersections are included in the Technical Report dated 31 March, 2006 and
in
the above noted news releases which have been filed on SEDAR.
A
schematic cross section (Figure 7) shows the relationships of the deposits,
their proximity to existing mining infrastructure and the underground drill
platforms in the Craig Mine.
In
addition, Figure 8 shows the pierce points of all drillholes through the
three
zones.
In
November 2004, the decision was made to deepen FNX 6010 which had originally
been collared in February 2003 and terminated at 2,550 ft in April 2003.
The
decision to reenter this hole was based upon a better understanding of the
geology of the footwall allied with a borehole UTEM survey which suggested
a
favourable conductive environment at greater depth. This hole (FNX6010B)
was
drilled beneath the Main Orebody and intersected variably mineralized Sudbury
Breccia throughout its length until 5,000 ft down-hole, at which depth narrow
veins, blebs and disseminations of bornite-chalcopyrite-millerite and native
silver were encountered. Below 5,152 ft, no further significant mineralization
was encountered until 5,357.2 ft down hole, where two large massive sulfide
veins were intersected with the following results:
5,357.2
- 5,367.4 ft 26.2%
Cu,
3.0% Ni, 14.5 g/t (0.42 oz) Pt+Pd+Au / 10.2 ft.
5,395.0
- 5,411.4 ft 26.2%
Cu, 3.7% Ni, 15.4 g/t (0.45 oz) Pt+Pd+Au / 16.4 ft
In
addition to these significant intersections of mineralization, this hole
also
identified one of the largest and best quality borehole geophysical responses
yet encountered by FNX on any of the FNX Sudbury propeties.
The
follow up hole (FNX6045) drilled approximately 210 ft southwest from the
discovery hole confirmed the discovery by intersecting similar grades over
longer core lengths as follows:
4151.0
- 4179.2 ft 10.6%
Cu, 3.6% Ni, 12.2 g/t (0.36 oz) Pt+Pd+Au / 28.2 ft
4213.6
- 4253.8 ft 22.5%
Cu,
3.8% Ni, 28.3 g/t (0.45 oz) Pt+Pd+Au / 40.2 ft
The
geological environment, mineralogy, and geophysical response suggested that
these veins were part of a larger system of mineralization which could be
similar in style to those currently being mined by Inco at Coleman 153 and
Falconbridge at Fraser-Strathcona Deep Copper. The Sudbury Breccia unit that
hosts
22
this
mineralization is extensive and is untested for 2,000 ft towards the East,
800
ft towards the west, down dip towards the property boundary, and poorly tested
up dip.
23
Figure
6
24
Figure
725
26
In
addition to this increased drill program FNX also carried out Borehole UTEM
and
Radio Imaging Method (RIM) surveys.
Borehole
UTEM-4
surveys
are undertaken in order to seek extensions of intersected mineralization
and
also to check for potential responses from off-hole sulphide mineralization,
The
system can “see” varying distances from the borehole platforms, depending on the
characteristics of the mineralization. It was this method, allied with
geological input, that led to the Footwall Discovery.
Increasingly
the focus of geophysical surveys in the Levack Footwall Discovery has shifted
to
the use of Radio
Imaging Method (RIM),
as a
delineation tool (a technique successfully used by Falconbridge at the Nickel
Rim South Footwall Discovery), to better optimize drill geometry and planning.
The theory behind this technique has been described in the technical reported
dated 7 November and filed on SEDAR.
An
updated tomogram (Figure 10) from the February 2006 news release indicates
that
the sulphide distribution associated with Levack Footwall discovery is
considerably more extensive than that drill tested to date and that it extends
for 2000 ft along plunge. In addition, a very large, strong RIM anomaly extends
from below the Levack Footwall deposit to the bottom of the surveyed boreholes
and onto Falconbridge property. As noted above, deeper extensions of several
of
the Levack Footwall boreholes have returned intersections through parts of
the
anomaly but at less than suitable orientations. The areas of conductivity
in the
image can be used to approximate the location of sulphides within the
image.
27
28
These
borehole geophysical survey methods “BH UTEM” and “RIM” have identified
numerous, very strong anomalies in the Levack Mine footwall rocks from Rob’s
Footwall Deposit (about the 2,900 ft level) to the current limits of the
survey
(about 5,000 ft level). The geophysics and drilling to date indicate the
possible continuum of mineralization of the Levack Footwall Discovery has
a
plunge length of over 2,000 feet and is open at depth. The relationship of
this
mineralization with the Keel Zone (around 600 ft level and previously reported)
will require investigation.
29
Within
the Levack Footwall the Sudbury Breccia is known to extend for over 2,000
ft
along strike, is 1,000 ft thick and is know downplunge for 6,000 ft. Three
additional zones have been identified to date and may be briefly summarized
as
follows (Figure 7):
In
a
January 21, 2005 news release FNX announced drill intersections from an area
close to surface (Keel
Zone) and
now
known to be up dip from the Levack Footwall Deposit. The results of this
drilling confirmed a zone of mineralization with significant copper grades,
locally significant nickel grades and TPM values to 11.4 g/t. This discovery
confirmed the results of historic drilling (previously reported) and will
be
followed up in 2006.
Rob’s
Footwall Zone
(formerly called #7 Footwall Zone) was previously tested by five historical
boreholes, all of which intersected massive sulphides containing Cu-Ni-Pt-Pd-Au
mineralization over significant widths. The recently established drill platforms
in Falconbridge’s Craig Mine have facilitated drill testing of the Zone and
recent FNX drilling, 300 feet east of the historic drilling, has intersected
high-grade Cu-Ni-Pt-Pd-Au mineralization over similar widths and
has
expanded Rob’s Footwall Zone along strike and to depth. The zone is open in all
directions and the possibility exists that it may join with the Levack Footwall
Deposit
\The
mineralization with significant Pt-Pd-Au is typical of that referred to as
Transitional Deposit styles of mineralization in Sudbury. This may represent
a
transition from the nickel-dominant Levack Contact Deposits to the Cu-Pt-Pd-Au
dominant Levack Footwall Deposits characterized by massive veins and
semi-massive sulphide zones rich in nickel and copper with elevated amounts
of
Pt-Pd-Au.
Drilling
from underground platforms is continuing from Falconbridge’s Craig Mine using
old drifts onto FNX’s Levack Mine Property. These boreholes are relatively short
as the exploration drift is only a few hundred feet from the zone. The pierce
points of drillholes into Rob’s and the assays from recent holes were reported
in the February 27, 2006 news release.
The
Levack Footwall Deposit boreholes are routinely extended through the Deposit
into the lower portion of the host Sudbury Breccia package, which is considered
to have potential to host Low-Sulphide Cu-Ni-Pt-Pd-Au mineralization similar
to
the McCreedy West PM Deposit. The Lower
Levack Footwall Zone
sulphide
mineralization varies from massive chalcopyrite-rich veins with very high
metal
values (e.g.
31.8% Cu, 2.8% Ni and 48.2 g/t of Pt+Pd+Au over 2.0 ft.) to
stringer and disseminated sulphides with high Pt-Pd-Au tenors (3.45%
Cu, 0.3% Ni, 9.2 g/t Pt+Pd+Au over 20.9 ft).
This
style of mineralization is similar to the ‘Low Sulphide’ type characteristic of
FNX’s McCreedy West PM Deposit and which FNX brought into production in mid
2005.
This
type
of low-sulphide mineralization tends to show weaker BH-UTEM responses, but
responds very well to RIM surveys. RIM surveys were conducted using boreholes
from both the Levack and Craig mines to better position the Levack Footwall
Deposit and other possible mineral zones (Figure 10). The RIM surveys detected
a
very large, intense anomaly extending from below the Levack Footwall Deposit
to
the bottom of the surveyed boreholes and to the property boundary. The
mineralized zone has not yet been investigated by drilling designed to optimize
testing of the RIM anomaly and has only been tested by scattered drill
intersections over a small part of the anomaly.
Figure
8
shows the relationship of the drilling patterns (projected onto one vertical
plane) for Rob’s Footwall Zone, the Levack Footwall Deposit and the Lower Levack
Footwall Zone. It is apparent that much additional drilling will be required
to
test the very significant potential of these targets and to understand their
interrelationships.
Drilling
of the Lower Levack Footwall Zone continues from both surface and underground
platforms.
Recommended
Work Program & Budget
Because
of the success of this 2005 Footwall Program the 54,500 ft allocated to the
Footwall in the 2005 budget was easily surpassed. Thus in addition to
reallocating footage and moneies from other projects a supplementary
budget
of
$2.6 million was added to the approved 2005 Budget
of $2.66 million giving a total Footwall Project budget of $5.26 million.
30
The
recommended 2006 work program for the Levack Footwall Project is budgeted
at
$5.4 million. This program allocates $4.1 million for surface and underground
drilling to expand and delineate the Footwall deposits as currently known;
$0.5
million to drilling the Keel Deposit; $0.7 to test for new footwall targets
and
approximately $0.1 million for metallurgical testwork.
8.4
Podolsky
Property
Location,
History, Infrastructure & Environment
The
Podolsky property (formerly known as the Norman Property), comprising 1,111.33
acres (449.8 ha), is located in Norman Township 32 km north-northeast of
Sudbury
(Figure 1). The mining rights are held under ten-year mining and surface
rights
leases, 287 and 288, and are renewable April 1, 2007. Excellent road access
is
available and the main Ontario line of the CNR passes approximately 6.5 km
west
of the project site.
The
history of discovery and production from the Whistle Mine (5.7
million tons grading 0.33% Cu, 0.95% Ni, 0.034% Co) and
which
ceased operations in 1997 has been detailed in previous FNX annual technical
reports.
The
former Whistle open pit mine site is currently being reclaimed by Inco under
a
conceptually approved Closure Plan. FNX has implemented monitoring programs
at
the property in order to collect the data required to support operational
permit
applications, define existing environmental liabilities and establish baselines
for the current advanced exploration program. This program involves the sinking
of a 2,650 ft deep, 17 ft diameter shaft to access the 2000 Deposit in order
to
acquire a bulk sample and create platforms for detailed underground drilling.
This program will assist in determining the nature and continuity of the
deposit
and will lead to a feasibility study. Shaft sinking began in March 2005 and
at
31, December the shaft was at a depth of 1,770 ft.
All
necessary permits have been obtained for the shaft development area.
Consultation with Wahnapitae First Nation has been on-going and economic
opportunities for the community are being jointly explored.
Property
Geology & Mineralization
The
Podolsky Property is located (Figure 1) at the northeast apex of the SIC
where
the strike of the SIC changes from the east-west direction of the North Range
to
the north-south direction of the East Range. The property includes the Whistle
embayment and the southern portion of the Whistle Offset dyke.
The
Offset extends north-eastward from the Whistle embayment into the gneissic
footwall rocks as a steeply dipping dyke varying in thickness from 50 ft.
to
greater than 300 ft., and consisting of irregular, discontinuous lenses of
quartz diorite, inclusion quartz diorite and metabreccia.
Deposits
and Targets
Within
the Podolsky Property, multiple zones of PGM-Cu-Ni mineralization have been
discovered along the Whistle Offset (Figures 11 & 12). These include the
known Podolsky
2000
and
North
Deposits
as well
as the South
Zone.
Other
targets include unexplored portions of the Whistle Offset, the SIC contact
and
Sudbury Breccia belts. These deposits, together with drill intersections,
have
been described in detail in previous FNX annual technical reports filed on
SEDAR
and listed in the bibliography.
The
portal for the decline into the North Deposit has been completed and further
development of this ramp has been postponed pending completion of the shaft
on
the Podolsky 2000 Deposit.
31
32
Figure
7
33
The
2000
Deposit
(Figures
12) lies within the Offset at a vertical depth of 1,700 to 2,500 ft from
surface
and immediately below the mineralization mined in the Whistle Open Pit. The
2000
Deposit consists of a steeply-dipping mineralized envelope (1000 ft x 450
ft)
sandwiched between the eastern wall of the northeast-striking Whistle Offset
Dyke and a large gabbroic xenolith trapped within the Dyke. The dominant
host
rock for the mineralization is metabreccia.
Mineralization
is characterized by sulphide veins, stringers, and patches of disseminated
to
blebby sulfides. It typically contains a mixture of chalcopyrite, pendlandite,
millerite and pyrrhotite. The high grade core of the deposit is subdivided
into
a 75º dipping upper portion and a 40º dipping lower cusp. Outside of this core
the hangingwall gabbro xenolith also contains a significant halo of veins
and
veinlets.
Following
the definition of a significant deposit by previously documented and reported
surface drilling, an advanced exploration underground program was initiated
in
mid-2004. This program includes sinking a 17 ft diameter shaft to 2,688 ft
and
driving an access drift on the 2450 Level to the 2000 Deposit to facilitate
delineation underground drilling and bulk sampling. The data collected from
this
advanced exploration program, scheduled for completion in 2006, will form
the
basis of a feasibility study of proceeding with mine development with production
likely to begin in 2007. This is the main focus of the activity at Podolsky
for
2006 and early access to the high grade 2000 Deposit is a priority.
As
previously reported two lenses of contact type nickel-copper mineralization
are
present below the Whistle Pit. Lenses
A and B
are a
set of bifurcating contact type (Ni-Cu) semi-massive sulphide lenses (Figure
12), occurring near the interface between the SIC contact and the Whistle
Offset. Lens
A
is 200
ft east and 200 ft beneath the Whistle Open Pit, whereas Lens
B
extends
600 ft down dip from the mine horizon of the Whistle Open Pit. Previously
reported historical and FNX drilling has confirmed Lens A as a 350 ft X 200
ft
breccia sulfide to massive sulfide lens striking northeast and dipping southeast
at 25-50°. The Lens ranges in thickness from 7.3 to 64.7 ft with nickel grades
from 1.5 to 3.0%. These lenses may be further investigated from the underground
infrastructure in the future.
As
part
of continuing exploration outside the immediate target areas, FNX has carried
out surface mapping and follow up of previously known subtle aeromag anomalies.
Towards the southeast part of the property an outcrop of brecciated sulphides
was discovered in sublayer norite and, though the assays received show
uneconomic mineralization, (0.59% Ni / 14.3 ft), further follow up is warranted.
Further
to the east in the vicinity of Selwyn
Lake,
a 5ft
wide by 15 ft long lens of pyrrhotite-pyrite-chalcopyrite was located within
footwall granite breccia. Two channels, located 8 ft apart, on the massive
sulphide lens in this footwall granite breccia returned 2.7% Ni, 0.2%Cu and
1.7
g/t TPM over 8.4 ft with 1.3% Ni, 0.3% Cu and 2.3 g/t TPM over 4.6 ft in
the
second channel. These will require follow up.
In
an
attempt to test below the North and 2000 Deposits an inclined hole was drilled
from NE towards the SW and within the offset dyke. Drilling difficulties
caused
abandonment of the hole prior to reaching its desired depth. No mineralization
was intersected and the hole will be used as a platform fro UTEM and RIM
surveys
during 2006.
Recommended
Exploration Program and Budget
Exploration
on Podolsky during 2006 will be focused on completing the shaft, drifting
to the
2000 Deposit on the 2450 Level, establishing drill drifts and completion
of the
drill program and collection of the bulk sample for metallurgical testwork.
All
these activities are budgeted within the Podolsky Mine budget.
The
total
non 2000 Deposit exploration budget, set at $0.22 million, permits a low
level
of activity and includes geophysical surveying of the longitudional hole
along
the dyke and a limited amount of diamond drilling.
34
8.5
VICTORIA
PROPERTY
Location,
History, Infrastructure & Environment
The
Victoria Property, comprising
1,282.9 acres (519.3 ha) of mining rights contained in two patented mining
parcels, is located 30 km southwest of Sudbury in Denison Township (Figure
1).
Access is via paved roads and a rail spur from the main CPR line is located
2.5
km south of the property.
The
history, infrastructure and environmental aspects have been described in
previous FNX annual technical reports as have details of mining activity
and
previous FNX exploration activity. This information is included by reference
in
this report.
Property
Geology & Mineralization
The
Victoria property is situated (Figure 13) at the junction of the SIC and
the
Worthington quartz diorite Offset Dyke, approximately 6.5 km northeast of
Inco’s
Totten property. Other mineralized locations are known along the Worthington
Offset between the Victoria property and the Totten Deposit. Two of these,
the
adjacent McIntyre deposit and the AER/Kidd Copper property, located 3 km
further
southwest from the Victoria property, were the objects of small mining
operations.
The
Cu-Ni-PGM sulphide mineralization at the Victoria property is characterized
by a
complex assemblage of irregular lenses of chalcopyrite, pentlandite and
pyrrhotite. The lenses dip and plunge steeply and are typically pipe-like..
The
complex structural features of the property have caused remobilization of
the
sulphides and control the lateral extent and dimensions of the
mineralization
The
main
focus of the FNX exploration program has been the shallow, previously unmined
portions of the No.
1
and
No.
2 West Zone,
the
Far
West Zone,
and the
down-plunge potential of the No.
4 Zone.
In
addition, limited exploration has been completed on the numerous quartz diorite
offset dykes bodies on the property, resulting in the discovery of the
Powerline
Zone
in late
2002. These targets have been described in previous FNX annual technical
reports
(as noted in the bibliography) and the information is included by reference.
Recommended
Work Program and Budget….
As
noted
above the Victoria property is in-board from the Totten deposit which is
also on
the Worthington Offset dyke.and which has been reported to contain resources
in
excess of 10
million tonnes
and
grading approximately 2.0%
Cu; 1.5% Ni and 4.8 g/t PGM.
Though
no
drilling was undertaken during 2005 the Victoria Property is regarded as
having
potential. The 2006 exploration program is primarily a holding program pending
availability of personnel from other projects with higher ranked priorities
at
this stage.
A
budget
of $0.1 million has been allocated for the 2006 Victoria program.
35
Figure
13
|
8.6
|
KIRKWOOD
PROPERTY
|
Location,
History, Infrastructure & Environment
The
Kirkwood property, comprising 473.0 acres in three patented mining
parcels,
is
located in Garson Twp., some 11 km northeast of Sudbury, (Figures 1). The
property is easily accessible by road and a rail line passes approximately
1.0
km south of the project area.
Details
of discovery, historical activity, infrastructure and environment have been
reported previously in FNX annual technical reports and are hereby incorporated
by reference.
Property
Geology & Mineralization
The
Kirkwood property is located towards the southeast end of the Sudbury Basin
at
the contact between the SIC and the Elsie Mountain metavolcanics. The contact
strikes east-west and dips steeply to the south. The footwall norite is
medium-grained and generally sheared at and adjacent to the contact. The
hangingwall consists of a series of metamorphosed sediments and volcanics
with
minor schist zones.
36
An
east-trending quartz diorite dyke occurs south of the norite contact within
a
zone of Sudbury breccia, which parallels the norite contact.
As
described in previous Technical Reports targets have been identified based
on
the historic Cu-Ni-PGM sulphide mineralization which has been defined in
six
distinct zones
FNX
Activity in 2005
The
original 2005 Budget did not provide for any significant exploration on the
property with a budget of $65,000 being allocated primarily for property
maintenance.
However,
with the acquisition of Aurora in mid year it was decided to explore the
property more aggressively as it is occurs
within the very prolific South Range of the Sudbury Basin (Figure 14). This
south-east part of the South Range hosts the Frood Mine, the Stobie Mine,
the
Little Stobie Mine, the Kirkwood Mine, the Garson Mine, the Falconbridge
Mine
and the East Mine. Inco currently operating Garson Mine is located contiguous
to
and midway between the Kirkwood and the Falconbridge Mine Properties. This
property, containing some 8 km of footwall to the former Falconbridge Main
and
East Mines (approximately 46.0 million tons grading 1.5% Ni, 0.9% Cu, 1 g/t
Pt+Pd+Au), represents a prime target for Cu-Ni-Pt-Pd-Au footwall
deposits.
A
geological mapping and prospecting program was initiated on the Kirkwood
Property as a lead in to exploring the Falconbridge Mine Property. Initial
work
discovered a previously undocumented two inch wide vein of massive sulphides
containing high-grade Cu-Ni-Pt-Pd-Au values, approximately 2,000 ft behind
the
Kirkwood Mine
Subsequent
work, including geological mapping, airborne geophysical follow-up, beepmat
prospecting, surface stripping, trenching and channel sampling revealed the
two
inch vein to be connected to a 53 ft long lens of massive sulphide, dominated
by
pyrrhotite with minor chalcopyrite, within mineralized Sudbury Breccia and
quartz diorite. The highest precious metal values are within the massive
sulphide lens and are dominated by palladium with significant platinum and
gold.
FNX
completed six shallow drillholes (2,139 ft), with significant Cu-Ni-Pt-Pd-Au
mineralization being intersected in three holes (Table 8 and Figure 14 (from
August 2005 NR). This mineralized zone was named the Segway
Deposit.
The
three drill holes that intersected the sulphide lens have tested the
mineralization to 250 ft beneath the trench (Figure 15).
A
drillhole 100 ft to the west and two drillholes 100 ft to the east intersected
the favourable breccia horizon, but did not intersect massive sulphides or
the
associated quartz diorite (Figure 15). Though the plunge of the mineralization
remains open at depth its strike length appears to be limited near
surface.
37
Table
8 : Kirkwood Property - Segway Deposit - FNX Drillhole
Assays
|
Feet
|
%
|
(g/t)
|
(oz/st)
|
||||||||||||
|
Hole
No.
|
East
|
North
|
Az
|
Dip
|
From
|
To
|
Length
|
Cu
|
Ni
|
Pt
|
Pd
|
Au
|
TPM
|
TPM
|
|
|
FNX8000
|
436086
|
422274
|
360
|
-45
|
117.8
|
138.9
|
21.1
|
2.3
|
0.5
|
0.9
|
4.9
|
0.8
|
6.6
|
0.19
|
|
|
incl.
|
|
|
|
|
124.0
|
138.9
|
14.9
|
3.1
|
0.6
|
1.1
|
5.4
|
1.0
|
7.5
|
0.22
|
|
|
incl.
|
|
|
|
|
133.5
|
138.9
|
5.4
|
2.4
|
1.2
|
1.4
|
2.5
|
0.2
|
4.1
|
0.12
|
|
|
FNX8001
|
436086
|
422190
|
360
|
-45
|
205.6
|
231.2
|
25.6
|
5.4
|
0.8
|
3.3
|
11.4
|
2.0
|
16.7
|
0.49
|
|
|
incl
|
|
|
|
|
205.6
|
216.0
|
10.4
|
6.1
|
0.7
|
5.9
|
22.7
|
4.2
|
32.8
|
0.96
|
|
|
incl
|
|
|
|
|
219.4
|
231.2
|
11.8
|
6.3
|
1.1
|
0.5
|
1.9
|
4.0
|
6.4
|
0.19
|
|
|
FNX8002
|
436088
|
422096
|
360
|
-45
|
333.7
|
335.4
|
1.7
|
3.8
|
0.9
|
1.3
|
4.9
|
7.9
|
14.1
|
0.41
|
|
38
39
Expenditures
on the Kirkwood property during 2005 amounted to $198,500 against a budgeted
$65,000. The additional expenditures were covered by reallocating some of
the
drill footage assigned to the Victoria property.
As
with
Victoria the 2006 Work Program & Budget budget of $0.1 million proposed for
Kirkwood reflects the emphasis placed on the other projects for 2006 and
represents a holding budget.
40
8.7
Aurora
Platinum Properties in Sudbury
The
Aurora properties in the Sudbury Basin have been described in a NI43-101
Report
entitled “Falconbridge - Aurora Joint Venture - Footwall and Foy Properties,
Sudbury, Ontario, by L.D.S. Winter, P.Geo. This report, dated 28 February,
2005
was filed on SEDAR on 20 May, 2005.
FNX
completed the acquisition of Aurora on July 1, 2005, thereby assuming Aurora’s
role in the Footwall and Foy Joint Venture agreement with Falconbridge. Aurora
initially acquired a 60% undivided interest in the mining rights to the
Falconbridge Footwall property in 2004 under the terms of an Option/Joint
Venture Agreement with Falconbridge Limited. Aurora has since increased its
ownership in the mining rights to approximately 70%, by Falconbridge electing
not to participate in the 2005 JV Agreement Work Program. Upon FNX acquiring
Aurora on July 1, 2005 the exploration program as approved by Aurora’s previous
management and Falconbridge was continued. FNX personnel, as part of the
acquisition due diligence, were familiar with the technical data gathered
previously and agreed with the proposed program. It should be noted that
the
ownership by Aurora extends only to the mineral rights and surface access
rights
but not to surface rights. Falconbridge retains liability for any historic
environmental damage.
FNX’s
approach to the program was to integrate the new information with the historic
data, evaluate the results within the framework of FNX’s evaluation matrix,
carry out orientation drilling during 2005 and propose a focused work program
and budget for 2006.
Falconbridge
Footwall Project
Location,
History, Infrastructure & Environment
The
Footwall Property, comprising 1601 hectares of patented mining claims, is
approximately 15 kilometres east-northeast of Sudbury within Falconbridge
and
Garson townships (Figures 1and 16).
It
includes part of the southeastern corner of the
nickel-copper-platinum-palladium-rich SIC contact, which hosts 10 historic
and
operating mines.(Figure 14). The property includes part of the past-producing
Falconbridge and East mines. The Falconbridge Mine was in operation from
1929 to
1983 and produced 36.4 million tons at an average grade of 1.58% nickel and
0.89% copper. The East Mine was in operation from 1951 to 1990 and produced
9.6
million tons at an average grade of 1.15% nickel and 0.76% copper. Nickel
and
copper ore was mined in contact deposits which occurred in structural traps
and
embayments located along the base of the SIC. The orebodies in this part
of the
Basin display more structural controls than similar deposits on the North
Range.
The
Falconbridge Mine property contains over eight kilometers of favorable,
relatively underexplored, SIC footwall environment. Like most SIC footwall
environments situated behind large nickel contact deposits, this area has
excellent potential for high-grade, copper-nickel-platinum-palladium-gold
footwall deposits, such as those historically mined at Garson, Frood, Creighton
and Vermilion mines. Further analogies can be drawn with the 8.5 km long
Levack
Embayment on the North Range which has hosted 16 former and current producers
and where the footwall to these deposits carry some of the richest orebodies
in
the Sudbury Basin.
Footwall
shears that host high copper values are documented in both the Falconbridge
and
East mines. These shears are interpreted to be possible conduits for footwall
mineralization and may either host potential sulphide mineralization or feed
a
depositional environment. Footwall areas that contain the intersection of
two or
more shears, have a major change in rock type, are coincident with BHUTEM-4
or
surface geophysical anomalies, and/or occur within or near known Sudbury
Breccia, are considered high priority targets for the 2006 program.
41
42
Figure
17
43
The
above
noted discovery by FNX of the Segway deposit 2,000 ft into the footwall at
the
nearby Kirkwood Property lends further support to the potential for such
deposits on the Falconbridge Property.
During
2005 Aurora drilled 12,675ft (3864m) in three surface drillholes collared
several hundred feet from the SIC contact. All were utilized as BHUTEM-4
platforms. These holes targeted footwall copper-nickel-platinum-palladium
mineralization and focused on regional and localized shears splaying off
well-mineralized areas of the SIC contact. No significant Cu-Ni-PGE
mineralization was intersected. Expenditures for the Falconbridge Footwall
Project for the period of July 1 to December 31, 2005 were completed and
the
approved budget of $837,375 was expended. These data will be integrated with
all
FNX data in this part of the South Range including that from Kirkwood.
The
2006
work program will consist of detailed three-dimensional reconstructions of
each
of the Falconbridge and East mine environments, Re-interpretation of the
Falconbridge footwall geology will follow, with 25,000 feet of drilling
allocated to test targets generated from this re-interpretation
exercise.
This
program is budgeted at $2.0 million.
Foy
Properties
Location,
History, Infrastructure & Environment
The
Foy
Properties
are
located approximately 30 kilometres north-northwest of Sudbury within parts
of
Bowell, Foy, Tyrone, and Harty townships (Figures 1 & 17). The Foy
Properties, comprising 2,041hectares are centered on the Foy Offset Dyke
which
radiates from the North Rim of the Sudbury Basin. Mineralization (some of
it
significant in terms of grade) is know at several areas along this dyke..
Small
mining activity has taken place (Nickel Offsets) but no sustained mining
has
occurred.
The
Foy
joint venture
(“Foy
JV”) (an original 60/40 joint venture between Aurora and Falconbridge) has a
100% interest in 1,413 hectares held under patented mining claims (1,036
hectares), 21-year mining leases (361 hectares), and one staked (unpatented)
mining claim (16 hectares). The Foy JV has a 50% beneficial interest in the
remaining 628 hectares of patented mining claims, the remaining 50% interest
being held by Inco on the “Canhorn” ground. At December 31, 2005 Aurora had
earned an interest of approximately 70% in the Foy JV thus giving it a 35%
interest in the Canhorn Property. Aurora is the operator on all
projects.
The
Nickel
Lake joint venture
(“Nickel
Lake JV”) was formed early in 2005, when Aurora earned a 60% interest in the
property from Inco by incurring exploration expenditures totaling $2,000,000
over a four-year period. The Nickel Lake JV property covers a 1.4 km segment
of
the Foy Offset Dyke, 1.3 km northwest of the northwestern margin of the SIC.
The
property encompasses five patented claims totaling 71 hectares, surrounding,
but
not including, a claim defined by the shoreline of Nickel Lake (ground beneath
Nickel Lake falls under the Foy JV agreement).
Between
2000 and 2004, Aurora identified three zones (the Nickel Lake, Wisner and
Crazy
Creek zones) of nickel-copper-platinum group metal (Ni-Cu-PGM) mineralization
associated with the Foy Offset Dyke within the Nickel Lake JV property. In
2005,
exploration drilling also commenced in the South Grid area.
The
North
Range
property
is an early exploration stage property 100% owned by Aurora. Geophysical
surveying and geological mapping of the property by Aurora generated targets
for
a short drill program in 2005.
Topographically
the Sudbury area is typical of the southern Canadian Shield with moderate,
rugged relief, 350 to 450 m above sea level. The area is forested mainly
with
pine, spruce, birch, poplar and alder. Swampy lower-lying areas alternate
with
hummocky rock outcrops forming the higher ground to give an irregular
topography. Small lakes and rivers trending mainly north-northwest due to
the
structural trends are also influenced by the southwest-oriented Pleistocene
glacial trends to form a complex, immature drainage pattern.
The
Foy
JV and North Range properties are located on a southward-sloping plateau
dissected by small streams, ponds and muskeg-filled depressions created by
the
Pleistocene glacial erosion. Relief is typically low, but the topography
is
locally rugged. The trends of the main creeks are controlled by glacial features
and by faults. Vegetation is sparse in rocky upland areas, where birch, poplar
and jackpine predominate.
44
Access
to
these Aurora North Range properties is limited to seasonal logging roads
and
all-terrain vehicle (ATV) trails. The eastern part of the area is accessed
by
driving north from Sudbury on Highway 69N (Regional Road 80) to the Nelson
Lake
Road turn-off. Travel north for 6.5 kilometres along this serviced road to
Pigeon Lake Road, a non-serviced gravel road that runs north between Nelson
Lake
and Joe Lake. Internal parts of the properties are best accessed by a rugged
ATV
trail that runs easterly along the trace of the offset dyke.
Nickel
mineralization hosted by the Foy Offset Dyke was discovered at what became
the
Nickel Offsets Mine near the end of the 19th
century.
It should be noted that though the Nickel Offsets Mine is not held by the
Foy
JV, The mine is located approximately 9.5 km west of the mouth of the Foy
Offset
Dyke, west of the main Foy claim group, and is thus of significance as an
adjacent property.
In
1938,
Nickel Offsets Limited carried out geophysical surveys and diamond drilling
and
outlined some 360,000 tons of Ni-Cu mineralization on the Foy Offset Dyke
in
central Foy Township. Two vertical, three compartment shafts, about 3,000
feet
apart, were sunk to 1,599 feet (484.5 metres) and 1,106 feet (335 metres)
with
lateral development on four levels at each shaft. In 1943, 10,390 tons were
shipped to the Copper Cliff Smelter of the International Nickel Company of
Canada Limited. A concentrator of 300 tons per day capacity was put into
production in 1953 and there was additional underground development. Between
1953 and 1957, 208,551 tons of ore at a recovered grade of 1.09% Ni and 0.80%
Cu
were produced.
Subsequently,
both Falconbridge and Inco have carried out exploration programs in the area
of
the Foy Offset Dyke.with work programs entailing prospecting, surface geological
mapping, geophysical surveys, and diamond drilling.
By
1987,
United Reef Petroleum Limited (50%) and Canhorn Mining Corp. (50%) (Canhorn
Option) held 60 patented claims that now comprise most of the Foy JV claim
group. In 1987 and 1988, United Reef carried out an exploration program over
the
claims consisting of line-cutting, magnetometer, VLF-EM and detailed IP surveys,
geological mapping and two phases of drilling in 63 holes totaling 35,055
feet
(10,622.7 metres). Eleven mineralized zones of interest were outlined by
this
work.
In
1989,
55 patented claims of the United Reef Petroleums Ltd.-Canhorn Mining Corp.
(“Canhorn
Option”)
Property were optioned to Inco. Inco carried out three-dimensional modeling
of
the offset dyke from the old mine records, selective geological mapping,
shallow
drilling and the drilling of three deep holes, followed by borehole geophysics
in 1990. Drilling totaled 17,195 feet (5,210.6 metres) in six holes. Significant
sulphide concentrations were not encountered but a UTEM borehole survey was
recommended. During the 1991 field season, the area between the old No. 1
and
No. 2 shafts of the Nickel Offsets Mine was mapped in detail. Four drill
holes
in the No. 2 shaft area totaling 11,786 feet (3,571.5 metres) were completed
with no significant intersections. UTEM surveys of the boreholes failed to
indicate any conductors of note and no further work was
recommended.
In
1948,
Falconbridge drilled some shallow, small diameter holes within the area of
the
Wisner Zone. In 1971, six deeper holes were drilled in the same area as the
shallow hole with only minor sulphides of no significance encountered.
Magnetometer and IP surveys were conducted in the Foster Lake area by
Falconbridge in 1970.
At
the
Foy properties, previous work by Inco to the southeast (WD-150 claim) and
current work by Aurora have indicated a 2 km long section of the Foy Offset
Dyke
that is mineralized. This mineralized section extends from Inco's WD-150
Ni-Cu
sulphides deposit in the southeast, through the Aurora discoveries on the
northeast and north sides of Nickel Lake to the mineralization further
west-northwest at Foster
Lake.
Results
to date indicate that further drilling is required to fully evaluate the
offset
dyke and to advance known zones of mineralization to the development stage.
The
Dollard claim group is located in the extreme northwest corner of Foy Township
along the extension of the Foy Offset Dyke. Prior to 1950, there was surface
exploration consisting of trenching, pitting, sampling and geological and
geophysical surveys. The property was optioned by Falconbridge in 1952, and
over
the next 19 years various programs of line-cutting, geological and geophysical
surveys and diamond drilling were carried out. In 1971, Falconbridge purchased
the property, which now forms part of the Foy JV ground (the “Northwest
Foy”).
45
Geology
of the Foy Offset
The
Foy
Offset Dyke is the largest of the known radial offset dykes. Emanating from
the
base of the SIC (a region referred to as the “mouth”) along a west-northwest
trajectory, it extends for at least 28 kilometres to Tyrone Township and
possibly beyond.
The
mouth
of the Foy Offset Dyke is located in south-central Bowell Township. At the
mouth, the dyke is approximately 400 metres wide, but narrows to 210 metres
at
Nickel Lake 1.5 kilometres to the northwest. Further west, within the joint
venture property, dyke width ranges between 150 metres and 250 metres,
ultimately narrowing to about 75 metres within the Northwest Foy claim
group..
Mineralization
Previous
work to the southeast, and current work by Aurora has indicated a section
of the
Foy Offset Dyke that is mineralized over a length of about 2 km. The section
extends from Inco's WD-150 Ni-Cu sulphide deposit in the southeast, through
the
Aurora discoveries on the northeast and north sides of Nickel Lake, to the
mineralization further west at Foster Lake. The Wisner and Crazy Creek zones
are
mineralized areas 1 km and 3 km further west along the dyke,
respectively.
Mineralization
in the Foy Offset Dyke occurs as pods, lenses and veins of massive and
semi-massive sulphide minerals, mainly pyrrhotite, pentlandite and chalcopyrite.
The Wisner zone is a one-kilometer section of the Foy Offset Dyke containing
anomalous sulphide mineralization in outcrop, primarily on the upper surface
of
country rock protrusions within the hangingwall of the offset dyke. The
Crazy
Creek
zone
consists of stringers and blebs of chalcopyrite, pyrrhotite, and pyrite within
breccia lithologies in a section of stripped outcrop. Shallow historical
drilling programs were conducted in both the Wisner
and
Crazy Creek zones.
A
small
embayment of the footwall contact of the Sudbury Igneous complex at the southern
margin of the South Grid area of the Foy Joint Venture property contains
stringers and blebs of contact-style pyrrhotite, pyrite, and chalcopyrite.
Mineralization in the embayment is hosted primarily by granite breccia or
by
metamorphosed Sudbury breccia, although norite with minor disseminations
of
pyrite and pyrrhotite outcrops on the south side of the southern property
boundary.
Small
surface gossans (10 by 10 m area) in the WD-38 claim consist of inclusion
quartz
diorite with a sulphide matrix in sublayer rocks at the contact with late
granite breccia.
Mineralization
observed to date on the large North
Range Property
is
restricted to fine disseminations of (mainly) pyrite within gneiss, diabase,
and
(rarely) Sudbury Breccia. In the adjacent property immediately to the south,
Wallbridge Mining Company has reported veins and disseminations of Cu-PGE
- rich
chalcopyrite (the Broken Hammer zone) and has recently (November 2005) announced
a resource of 2541,000 tonnes grading 1.0% Cu, 0.10% Ni, 3.8 g/t TPM. This
demonstrates the presence of significant mineralization in this environment
on
immediately adjacent ground.
2005
Exploration
The
FNX
2005 Foy exploration drilling program commenced on July 11th,
2005
and was comprised of geological mapping, geophysics, limited pitting to follow
up anomalies and diamond drilling. The main objective was to gain a better
understanding of the geology and potential of the properties and to confirm
earlier work. Drilling programs were conducted in 2005 on the North Range,
Foy
JV, and Nickel Lake JV properties. Drilling in the first half of 2005 was
supervised , directed and logged by Aurora personnel prior to the FNX
acquisition while that in the second half of the year was under the direction
of
FNX personnel.
46
All
drilling in the 2005 drill programs was completed by the end of November,
2005.
Core from the FNX supervised programs was treated in the manner described
previously. All core was NQ-size and all breccia and altered, mineralized,
and
sampled core drilled for FNX is stored at the FNX long-term storage facility
at
Stobie Mine property, Sudbury. All core from Aurora drill programs (pre-June
2005) was kept, and is securely stored in Sudbury. This work focused on the
following areas:
North
Range Footwall
This
ten-borehole program completed prior to the FNX acquisition and totaling
2985 ft
(910 m) tested shallow ground conductivity targets generated by geological
mapping and geophysical surveying programs conducted by Aurora in 2004 and
2005.
No significant assay results were reported.
Nickel
Lake
One
hole
tested the Foy Offset Dyke at depths of 2500 to 4000 ft, thereby constraining
(or extending) the western extent of the Nickel Lake North zone. A 3.8 ft
zone
of massive pyrrhotite containing minor chalcopyrite was intersected at 2563
ft.
BH-UTEM 4 surveys of this hole indicate moderate to strong electromagnetic
anomalies between 2550 and 2700 ft depth, which correlate with sulphide
intersections. Following compilation of all data this will be followed up
in
2006.
Foy
Joint Venture
The
2005
Foy Joint Venture work program focused on three areas namely the South Grid,
Crazy Creek, and Foster Lake areas. The Foster Lake drill program was started
in
December 2004. The South Grid and Crazy Creek drill programs, as well as
the
final hole in the 2005 Foster Lake program, were carried out by FNX, beginning
in July 2005. Two boreholes totaling 8320 ft were drilled for Aurora in the
winter of 2004/2005 and a further 13 boreholes totaling 24,803 ft were drilled
for FNX in the second half of 2005.
Borehole
UTEM surveys were conducted on seven holes in the Foster Lake and South Grid
areas, and on four additional holes in the Crazy Creek and Foster Lake areas.
South
Grid:
Five
holes totaling 8,530 ft (2,600 m) were drilled in the South Grid area to
investigate a previously untested but prospective footwall environment along
the
northwestern boundary of the Sudbury Igneous Complex. Small amounts of blebby
and stringer mineralization were encountered in several of these holes
BH-UTEM
4
surveys of all five South Grid holes detected no electromagnetic
anomalies.
Crazy
Creek
Six
boreholes totaling 10,485 ft (3196 m) were completed. Three of these tested
chargeability anomalies revealed by a deep IP survey conducted in winter
2004/2005. No significant mineralization was encountered at the target depths,
although rare stringers and veins of chalcopyrite were intersected. Two holes
tested the area of the Foy Offset Dyke below the zone of exposed mineralization
at Crazy Creek with one intersecting trace blebby chalcopyrite and pyrrhotite
mineralization. A further hole targeted a shallow surface UTEM conductive
trend
extending into the hangingwall north of the offset dyke. This hole did not
encounter any mineralization and the source of the anomaly was not
apparent.
Foy
Foster Lake
47
The
2005
Foster Lake three-hole drill program was begun in December 2004, and completed
by FNX Mining in the second half of 2005.
The
first
hole tested a low-conductance BH-UTEM response detected from an earlier hole.
Pyrrhotite and chalcopyrite stringers and blebs were encountered (up to 10%
by
volume) over a 15 ft interval at 4130 ft depth.
The
second hole was designed to serve as a BH-UTEM platform that would provide
geophysical coverage over a relatively untested segment of the Foy offset
dyke
at the western end of Foster Lake. No significant mineralization was
encountered.
The
final
hole was a vertical hole to test the potential down-dip extension onto the
Foy
JV ground of the Nickel Lake North zone on Nickel Lake Joint Venture ground
to
the southeast. Chalcopyrite and pyrrhotite stringers and blebs were encountered
throughout the offset dyke from 4568 to 5294 ft
2006
Exploration Program & Budget
The
proposed program on the Foy JV properties in 2006 will include diamond drilling,
borehole geophysics and assaying. This program is budgeted at $1.1 million.
9.
CONCLUSIONS
FNX
has
exercised its option to acquire five highly regarded mineral properties (all
former producers) in the Sudbury Mining Camp and, having recently bought
out its
former partner in the SJV and now owns 100% interest in the mineral rights
on
the properties.
The
Company acquired Aurora and also owns 100% of these assets having bought
back
the 50% interest held by our former partner in the SJV. This acquisition
increased the Company’s property holdings in Sudbury four-fold with these
properties having excellent potential for further discoveries.
The
potential of these properties is illustrated by the fact ore production
commenced at the McCreedy West mine in May 2003, only 14 months after
commencement of the exploration program and for a second deposit (the PM
Deposit) at McCreedy West in mid 2005.
The
infrastructure available in the Sudbury Area (mills, smelters and refineries)
together with the mining culture and ready availability of all services required
by an exploration and mining company enhances the value of these acquisitions
and supports more efficient and cost effective mine development.
The
high
value of Sudbury ores together with the variety of metals is more beneficial
than reliance on one or two metals. The precious metal content of the Sudbury
ores is also attractive.
Since
inception of field operations in 2002 the Company has completed 832,155 ft
of
diamond drilling in 608 holes from surface and a further 386,789 ft in 1,632
holes from underground locations. Approximately 94,000 samples have been
sent
for assay.
The
discovery of a high grade Cu-Ni-PGM deposit in the footwall of the Levack
Mine,
first announced in February 2005, has been expanded to the stage where a
very
significant mineral deposit can be said to have been discovered. This underlines
the value of the Footwall deposits and an aggressive exploration program
is
continuing with three surface and three underground rigs.
Mine
production at McCreedy West has maintained approximately 1800 tpd and activities
at the Levack Mine and the Podolsky Advanced Exploration program are progressing
rapidly.
The
total
exploration budget for 2006 is $14.0 million.
48
REFERENCES
FNX
Mining Company Inc.
| · |
Confidential Records and Files from February 2002 to December,
2005
|
| · |
Public News Releases
|
| · |
SEDAR Filings
|
Inco
Limited
| · |
Confidential
Corporation Files
|
Ontario
Geological Survey
| · |
The
Geology and Ore Deposits of the Sudbury Structure,
|
Special
Volume 1, 603 pages. 1984
Patterson,
James M.
| · |
Technical Report on Mineral Properties in the Sudbury Basin, Ontario,
for
FNX Mining Company Inc., 7 November,
2005
|
| · |
Technical Report on Mineral Properties in the Sudbury Basin, Ontario,
for
FNX Mining Company Inc., An Update to 28 February,
2005
|
| · |
Technical Report on Mineral Properties in the Sudbury Basin, Ontario,
for
FNX Mining Company Inc., An Update to 23 March, 2004 : 14 May,
2004
|
| · |
Technical Report on Mineral Properties in the Sudbury Basin, Ontario,
for
FNX Mining Company Inc., An Update to 30 April, 2003 : 9 May,
2003
|
| · |
An Update to Technical Report on Mineral Properties in the Sudbury
Basin,
Ontario, for Fort Knox Gold Resources Inc. : 31 May,
2002
|
| · |
Technical Report on Mineral Properties in the Sudbury Basin, Ontario,
for
Fort Knox Gold Resources Inc.: 7 November,
2001
|
Roscoe
Postle Associates Inc
| · |
Letter Report on the PM Deposit Resource Estimate, McCreedy West
Mine,
Sudbury Area, Ontario; Prepared for FNX Mining Company Inc., 22
March,
2005
|
| · |
Review of the Mineral Resources of the Levack Mine Property, Sudbury
Area,
Ontario; Prepared for FNX Mining Company Inc., 3 October, 2003
(Filed on
SEDAR)
|
| · |
Review of the Mineral Resources & Mineral Reserves of the McCreedy
West Mine Property, Sudbury Area, Ontario; Prepared for FNX Mining
Company
Inc., 22 August, 2003 (Filed on
SEDAR)
|
| · |
Review of the Mineral Resources of the McCreedy West Mine Property,
Sudbury Area, Ontario; Prepared for FNX Mining Company Inc.,
|
5
March, 2003. (Filed on SEDAR)
49
CONSOLIDATED
FINANCIAL STATEMENTS
Years
ended December 31, 2005 and 2004
(Expressed
in thousands of Canadian dollars except where otherwise
noted)
1
Management’s
Responsibility for Financial Reporting
All
information in the Annual Report, including the consolidated financial
statements and management’s discussion and analysis of the consolidated
financial position and results of operation (“MD&A”)
of the
Company, is the responsibility of the management of the Company and has been
approved by its Board of Directors. The consolidated financial statements
and
MD&A were prepared by management in accordance with accounting principles
and disclosure requirements generally accepted in Canada.
The
preparation of financial statements and MD&A requires the selection of
appropriate generally accepted accounting principles and the use of estimates
and judgment by management to present fairly and consistently the consolidated
financial position and the results of operations of the Company. Estimates
are
necessary when transactions affecting the current accounting period cannot
be
finalized with certainty until future periods. In management’s opinion, such
estimates have been properly reflected in the consolidated financial statements
and MD&A. Systems of internal accounting controls are designed and
maintained by management in order to provide reasonable assurance, on a cost
effective basis, of the reliability of this financial information.
The
Board
of Directors is responsible for ensuring that management fulfills its
responsibilities for financial reporting and is ultimately responsible for
reviewing and approving the consolidated financial statements and MD&A. The
Board carries out this responsibility principally through its Audit Committee
composed of three independent directors. The committee meets periodically
with
management and the Company’s independent auditors to discuss internal controls
over the financial reporting process, auditing matters and financial reporting
issues and to review the Annual Report, the consolidated financial statements
and MD&A and the independent auditors’ report to the shareholders. The
Committee reports its findings to the Board for consideration when approving
the
annual consolidated financial statements and MD&A for issuance to
shareholders. The Committee also considers, for review by the Board and approval
by the shareholders, the engagement or re-appointment of the Company’s
independent auditors.
The
consolidated financial statements have been audited on behalf of the
shareholders by the Company’s independent auditors, KPMG LLP, in accordance with
generally accepted auditing standards. The auditors’ report outlines the scope
for their examination and their opinion on the consolidated financial
statements.
Signed
Signed
“Terry
MacGibbon” “Ronald
P. Gagel”
President
and Chief Executive Officer
Vice
President and Chief Financial Officer
March
30,
2006
2
Auditors’
Report
To
the Shareholders of FNX Mining Company Inc.
We
have
audited the consolidated balance sheets of FNX Mining Company Inc. as at
December 31, 2005 and 2004 and the consolidated statements of operations,
deficit and cash flow for the years then ended. These consolidated financial
statements are the responsibility of the Company’s management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We
conducted our audits in accordance with Canadian generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurance whether the consolidated financial statements are free
of
material misstatements. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the consolidated financial statements.
An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall consolidated
financial statement presentation.
In
our
opinion, the consolidated financial statements present fairly, in all material
respects, the financial position of the Company as at December 31, 2005 and
2004
and the results of its operations and cash flow for the years then ended
in
accordance with Canadian generally accepted accounting principles.
Comments
for U.S. readers on Canada - U.S. reporting differences
In
the
United States, reporting standards for auditors require the addition of an
explanatory paragraph (following the opinion paragraph) when there is a change
in accounting principles that has a material effect on the comparability
of the
Company's financial statements, such as the change described in notes 3 and
21
to the consolidated financial statements as at December 31, 2005 and for
the
years then ended. Our report to the shareholders dated March 30, 2006 is
expressed in accordance with Canadian reporting standards, which do not require
a reference to such a change in accounting principles in the auditors' report
when the change is properly accounted for and adequately disclosed in the
financial statements.
Signed
“KPMG
LLP”
Chartered
Accountants
Toronto,
Ontario
March
30,
2006
3
|
Consolidated
Balance Sheets
|
|||||||
|
(in
thousands of Canadian dollars)
|
2005
|
2004 | |||||
|
$
|
|
$
|
|||||
|
Assets
|
Restated
(note
3
|
)
|
|||||
|
Current
|
|||||||
|
Cash
and cash equivalents
|
152,460
|
56,774
|
|||||
|
Accounts
receivable
|
18,562
|
14,126
|
|||||
|
In-process
inventory (note 4)
|
867
|
132
|
|||||
|
Prepaid
and other assets (note 5)
|
215
|
319
|
|||||
|
172,104
|
71,351
|
||||||
|
Investments
(note 6)
|
29,384
|
-
|
|||||
|
Property,
plant and equipment
(note 7)
|
531,266
|
69,921
|
|||||
|
Reclamation
and other deposits (note
8)
|
3,630
|
1,230
|
|||||
|
736,384
|
142,502
|
||||||
|
Liabilities
|
|||||||
|
Current
|
|||||||
|
Accounts
payable and accrued liabilities
|
11,631
|
908
|
|||||
|
Current
portion of deferred payment obligation
(note
17(b)and 17(c))
|
7,230
|
-
|
|||||
|
18,861
|
908
|
||||||
|
Deferred
payment obligation (note
17(b) and 18(c))
|
7,000
|
-
|
|||||
|
Mine
closure and site restoration (note
9)
|
1,162
|
1,100
|
|||||
|
Future
income and resource taxes (note
10)
|
155,404
|
2,706
|
|||||
|
Non-controlling
interest (note
11)
|
-
|
19,075
|
|||||
|
163,566
|
22,881
|
||||||
|
182,427
|
23,789
|
||||||
|
Subsequent
events
(note 16)
|
|||||||
|
Shareholders’
equity
|
|||||||
|
Share
capital (note 12)
|
558,947
|
126,415
|
|||||
|
Contributed
surplus - stock-based compensation (note 13)
|
5,677
|
7,562
|
|||||
|
Deficit
|
(10,667
|
)
|
(15,264
|
)
|
|||
|
555,957
|
118,713
|
||||||
|
736,384
|
142,502
|
||||||
The
accompanying notes are an integral part of these consolidated financial
statements.
Signed
on
behalf of the Board of Directors:
“Robert
B. Low” “Duncan
Gibson”
Director Director
4
|
Consolidated
Statements of Operations
|
|||
|
(in
thousands of Canadian dollars
except
earnings per share)
|
|||
|
2005
|
2004
|
||||||
|
$
|
|
$
|
|||||
|
|
Restated
(note
3)
|
||||||
|
Mine
operating revenues
|
84,602
|
60,411
|
|||||
|
Mine
operating expenses
|
|||||||
|
Mining,
excluding depreciation and amortization
|
51,484
|
35,510
|
|||||
|
Depreciation
and amortization
|
8,768
|
6,415
|
|||||
|
60,252
|
41,925
|
||||||
|
24,350
|
18,486
|
||||||
|
Expenses
|
|||||||
|
Corporate
administration
|
5,226
|
3,398
|
|||||
|
Exploration
administration
|
2,915
|
1,970
|
|||||
|
Capital
taxes (note 10)
|
1,135
|
186
|
|||||
|
Depreciation
|
89
|
101
|
|||||
|
Stock-based
compensation (note 13)
|
1,068
|
874
|
|||||
|
Loss
on disposition of Aurora (note 18(b))
|
2,600
|
-
|
|||||
|
Other
expenses (income) (note 14)
|
(2,739
|
)
|
(822
|
)
|
|||
|
10,294
|
5,707
|
||||||
|
Earnings
before taxes and non-controlling interest
|
14,056
|
12,779
|
|||||
|
Income
and resource taxes (note
10)
|
(4,721
|
)
|
(2,500
|
)
|
|||
|
Earnings
before non-controlling interest
|
9,335
|
10,279
|
|||||
|
Non-controlling
interest
(note 11)
|
(4,738
|
)
|
(4,282
|
)
|
|||
|
Net
earnings for the year
|
4,597
|
5,997
|
|||||
|
Basic
and diluted earnings per share (note
12(b))
|
0.08
|
0.12
|
|
Consolidated
Statements of Deficit
(in
thousands of Canadian dollars)
|
|||||||
|
2005
|
2004
|
||||||
|
$
|
$
|
||||||
|
Deficit
- beginning of year
|
|||||||
|
As
previously stated
|
(16,543
|
)
|
(23,032
|
)
|
|||
|
Change
in accounting policies (note 3)
|
1,279
|
1,771
|
|||||
|
As
restated
|
(15,264
|
)
|
(21,261
|
)
|
|||
|
Net
earnings for the year
|
4,597
|
5,997
|
|||||
|
Deficit
- end of year
|
(10,667
|
)
|
(15,264
|
)
|
|||
The
accompanying notes are an integral part of these consolidated financial
statements.
5
|
Consolidated
Statements of Cash Flow
(in
thousands of Canadian dollars)
|
|||||||
|
2005
|
2004
|
||||||
|
$
|
|
$
|
|||||
|
Operating
activities
|
Restated
(note
3)
|
||||||
|
Net
earnings for the year
|
4,597
|
5,997
|
|||||
|
Non-cash
items
|
|||||||
|
Mine
depreciation and amortization
|
8,768
|
6,415
|
|||||
|
Depreciation
|
89
|
101
|
|||||
|
Mine
closure and site restoration (note 9)
|
62
|
20
|
|||||
|
Stock-based
compensation (note 13)
|
1,068
|
874
|
|||||
|
Future
income and resource taxes
|
3,941
|
2,500
|
|||||
|
Loss
on disposition of Aurora (note 18(b))
|
2,600
|
-
|
|||||
|
Other
(note 16)
|
(1,342
|
)
|
-
|
||||
|
Non-controlling
interests (note 11)
|
4,738
|
4,282
|
|||||
|
24,521
|
20,189
|
||||||
|
Net
change in non-cash working capital (note 15)
|
2,650
|
(7,918
|
)
|
||||
|
27,171
|
12,271
|
||||||
|
Financing
activities
|
|||||||
|
Common
shares issued (note 12)
|
101,859
|
19,833
|
|||||
|
Non-controlling
interest, net (note 11)
|
1,972
|
175
|
|||||
|
103,831
|
20,008
|
||||||
|
Investing
activities
|
|||||||
|
Proceeds
on disposition of Aurora (note 18(b))
|
11,005
|
-
|
|||||
|
Acquired
on acquisition of Aurora, net (note 18(a))
|
2,438
|
-
|
|||||
|
Acquired
on acquisition of SJV, net (note 18(c))
|
410
|
-
|
|||||
|
Investments
(note 6)
|
(310
|
)
|
-
|
||||
|
Property,
plant and equipment
|
(46,459
|
)
|
(28,041
|
)
|
|||
|
Deposit
with mine contractor
|
(2,400
|
)
|
-
|
||||
|
(35,316
|
)
|
(28,041
|
)
|
||||
|
Change
in cash and cash equivalents for the year
|
95,686
|
4,238
|
|||||
|
Cash
and cash equivalents - beginning of year
|
56,774
|
52,536
|
|||||
|
Cash
and cash equivalents - end of year
|
152,460
|
56,774
|
|||||
The
accompanying notes are an integral part of these consolidated financial
statements.
6
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
For
the two years ended December 31, 2005 and 2004
(amounts
in thousands of Canadian dollars except where otherwise
noted)
1. Nature
of
operations
FNX
Mining Company Inc. (“FNX”
or
the
“Company”)
is a
Canadian company active in the mineral resource business which includes the
acquisition, exploration, development and mining of mineral properties. FNX’s
mineral properties are primarily located in the Sudbury mining district of
Canada from which the Company currently produces and sells nickel, copper,
platinum, palladium, gold and cobalt, with nickel being the most significant
for
the Company to December 31, 2005. The Company, through a subsidiary, also
holds
base and precious metal exploration properties in various locations in Ontario
and Quebec.
2. Significant
accounting policies
The
consolidated financial statements have been prepared in accordance with
accounting principles generally accepted in Canada (“GAAP”).
Summarized below are those policies considered significant to the Company.
These
policies and accounting principles conform in all material respects with
accounting principles generally accepted in the United States (“US
GAAP”)
except
as described in note 21.
(a) Basis
of presentation
The
consolidated financial statements include the accounts of FNX Mining Company
Inc., its wholly owned subsidiaries, Aurora Holdings Limited (“AHL”)
and
Aurora Platinum Corp. (“ARP”)
(AHL
and ARP collectively “Aurora”),
and
the accounts of the Sudbury Joint Venture ("SJV").
The
SJV was an unincorporated joint venture with Dynatec Corporation (“Dynatec”),
in
which the Company held a 75% controlling interest until October 21, 2005.
As
each of FNX and Dynatec had acquired a 50% interest in Aurora on July 1,
2005,
the consolidated financial statements include a proportionate share of the
accounts of Aurora from July 1, 2005 to October 20, 2005. On October 21,
2005,
FNX acquired the remaining 25% interest of the SJV and 50% interest in Aurora
from Dynatec and the consolidated financial statements include from October
21,
2005, 100% of the consolidated accounts of Aurora and a 100% interest in
the
accounts of the former SJV (see note 18).
Certain
comparative figures for 2004 have been reclassified to conform to the
presentation adopted for the current period.
(b) Use
of estimates
The
preparation of financial statements requires management to make estimates
and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the year.
Significant estimates and assumptions relate to the recoverability of mining
properties and mineral exploration properties. While management believes
that
these estimates and assumptions are reasonable, actual results could vary
significantly.
7
(c) Revenue
recognition and receivables
Revenue
is recognized at the time that the crushed ore is shipped, which is also
the
time that title transfers. The contained metal in the crushed ore shipped
is
assayed and, pursuant to sales contracts, the appropriate negotiated amount
of
recoverable metal contained therein (the “accountable metal”), including those
metals considered to be by-products, is recorded in revenue. The crushed
ore is
sold under contracts that provide for final prices that are determined by
quoted
market prices in a period subsequent to the date of sale. Variations from
the
provisionally priced sales are recognized as revenue adjustments as they
occur
until the price is finalized. Provisional pricing is based upon market prices
in
the month of recognition. During the year, FNX changed its revenue recognition
policy with respect to revenue recognition (see note 3).
(d) Cash
and cash equivalents
Cash
and
cash equivalents include cash on deposit, term deposits and other interest
bearing investments that have maturities of less than 90 days from the date
of
acquisition.
(e) Marketable
securities
Marketable
securities are carried at the lower of cost or quoted market value and, due
to
the immaterial amounts involved, are included with prepaids and other assets
on
the balance sheet.
(f) Investments
Investments
are stated at cost. When the Company believes there is an impairment in value
that is other than temporary, the loss is recognized as an expense in the
period.
(g) In-process
inventory
In-process
inventory includes ore mined and brought to surface but not yet shipped and
is
valued at the lower of cost and net realizable value. Cost of production
includes costs to mine and crush ore and any depreciation charges associated
with mining activities. Cost is determined on a first-in, first-out basis.
During the year, the Company changed its accounting policy with respect to
broken ore underground (see note 3).
(h) Property,
plant and equipment
(i) Property
Acquisition,
exploration and development costs associated with mineral exploration properties
are deferred until the property achieves commercial production, at which
time
accumulated costs to date are transferred to mining properties. Commercial
production occurs when an asset or property is substantially complete and
ready
for its intended use. Any income from production prior to commercial production
is offset against development costs. Accumulated costs are amortized into
the
in-process inventory, using a unit-of-production basis over the expected
life of
the mine.
(ii) Plant
and equipment
Expenditures
for plant and equipment additions, major replacements and improvements are
recorded at cost. Plant and equipment assets are amortized, once commercial
production is achieved, on either a unit-of-production or a straight-line
basis
over the lesser of estimated useful life or expected life of the mine.
8
The
estimated useful life of equipment that is depreciated on a straight-line
basis
is as follows:
| Mobile equipment | 7 years |
| Furniture and fixtures | 5 years |
| Computer Hardware | 4 years |
| Computer Software | 3 years |
(iii) Impairment
of long-lived assets
FNX
reviews and evaluates the carrying value of its operating mines and mineral
exploration and development properties for impairment when events or
circumstances indicate that the carrying amounts of related assets or groups
of
assets may not be recoverable. If the total estimated future cash flows on
an
undiscounted basis for mining properties are less than the carrying amount
of
the asset, an impairment loss is measured and assets are written down to
fair
value, which is normally the discounted value of future cash flows, with
a
provision being charged to operations. Future cash flows are estimated based
on
estimated future recoverable mine production, expected sales prices (considering
current and historical prices, price trends and related factors), production
levels, cash costs of production, capital and reclamation costs, all based
on
life of mine plans. Future recoverable mine production is determined from
proven
and probable reserves and measured, indicated and inferred mineral resources
after taking into account estimated dilution and recoveries during mining,
and
the accountable amount of metal to be recovered from ore processing and
treatment. Estimates of recoverable production from measured, indicated and
inferred mineral resources are based on management’s confidence in converting
such resources to proven and probable reserves. Assumptions underlying future
cash flow estimates are subject to risks and uncertainties. It is possible
that
changes in estimates could occur which may affect the expected recoverability
of
FNX’s investments in mineral properties.
The
accumulated costs for properties that are abandoned are charged to operations
when the property is abandoned.
(iv) Corporate
and other assets
Corporate
and other assets relate to equipment not used in mining operations. Corporate
and other assets are recorded at cost less accumulated amortization.
Amortization is calculated on a straight-line basis over a three to five
year
period.
(i) Mine
closure and site restoration
The
fair
value of a liability for mine closure and site restoration, also known as
an
asset retirement obligation, is recognized in the period in which it is
incurred. When a liability is initially recorded, a corresponding increase
to
the carrying amount of the related asset is recorded. The asset is amortized
on
a unit-of-production basis over the estimated life of the mine and the liability
is increased, through accretion, by the interest factor that was applied
in the
initial measurement of fair value. FNX makes periodic assessments as to the
reasonableness of its mine closure and site restoration obligation estimates
and
revises those estimates accordingly. Any revision to those estimates results
in
the respective asset and liability balances being adjusted, with a related
increase or decrease in the amounts expensed for amortization or accretion
in
future periods.
9
The
long-term mine closure and site restoration obligation is based on environmental
plans in compliance with the current environmental and regulatory requirements.
Due to uncertainties concerning environmental remediation, the ultimate cost
to
the Company of future mine closure and site restoration could differ from
the
amounts provided. The estimate of the total liability of future mine closure
and
site restoration costs is subject to change based on amendments to laws and
regulations and as new information concerning the Company's operations becomes
available. FNX is not able to determine the impact on its financial position,
if
any, of environmental laws and regulations that may be enacted in the future
due
to the uncertainty surrounding the form that these laws and regulations may
take.
(j) Flow-through
shares
FNX
financed a portion of its exploration and development activities through
the
issuance of flow-through common shares. Under the terms of these share issues,
the tax attributes of the related expenditures are renounced to subscribers
at
the time the renunciation is made. Share capital is reduced and future income
tax liabilities are increased by the estimated income tax benefits renounced
by
the Company to the subscribers, except to the extent that FNX has unrecorded
loss carryforwards and tax pools in excess of book value available for
deduction.
(k) Income
taxes
FNX
uses
the asset and liability method of accounting for income and mining taxes.
Under
this method of tax allocation, future income and mining tax assets and
liabilities are determined based on differences between the financial statement
carrying amounts of existing assets and liabilities and their respective
income
and mining tax basis (temporary differences). Future income and mining tax
assets and liabilities are measured using enacted or substantively enacted
tax
rates expected to be in effect in the years in which those temporary differences
are expected to be recovered or settled. The effect on future income and
mining
tax assets and liabilities of a change in tax rates is recognized in earnings
in
the year in which the change is enacted or substantively enacted. The amount
of
future income and mining tax assets recognized is limited to the amount that
is
more likely than not to be realized.
The
Federal Large Corporations Tax, (“LCT”)
which
is a tax based on a corporation’s taxable capital, (as defined in the Income Tax
Act (Canada)) as at the corporation’s taxation year end. As this capital based
tax is creditable against federal income surtaxes and is not a deductible
expense for the determination of taxable income, accounting rules require
the
LCT to be included in the provision for income and resource taxes on the
statement of operations. Many provincial jurisdictions, including the Province
of Ontario, also charge a tax based on a corporation’s taxable capital. This
expense, however, is a deductible expense in the determination of taxable
income
and is separately disclosed in the statement of operations.
(l) Stock-based
compensation
FNX’s
stock-based compensation plans are described in note 13. FNX accounts for
all
stock-based compensation using the fair value-based method. Under this method,
compensation cost attributable to options or deferred share units granted
is
measured at fair value at the grant date. Any consideration received upon
the
exercise of a stock option is credited to share capital. The expense for
stock
options is recognized over the vesting period of the stock-based award, while
the expense for deferred share units is recognized in the period for which
the
service was rendered.
10
(m) Earnings
per share
Basic
earnings per share are computed by dividing the earnings for the year by
the
weighted average number of common shares outstanding for the year. Diluted
earnings per share are similar to basic earnings per share, except that the
denominator is increased to include the number of additional common shares
that
would have been outstanding if the dilutive potential common shares had been
issued using the treasury stock method.
(n) Foreign
exchange
The
Canadian dollar is the functional currency of the Company. Revenues and certain
expenses are denominated in United States dollars. Monetary assets and
liabilities are translated at period end exchange rates and non-monetary
assets
and liabilities are translated at historical rates. Gains and losses on
translation of monetary assets and liabilities are recorded in
earnings.
3. Change
in
accounting policies
With
the
acquisition of Dynatec’s interest in the former SJV and FNX acquiring 100%
ownership and control of its Sudbury based assets, the Company has changed
its
accounting policy with respect to revenue recognition and the costing of
broken
ore underground. Revenue will now be recognized at the time the ore is shipped,
which is also the time that title transfers. The ore is sold under contracts
that provide for final prices that are determined by quoted market prices
in a
period subsequent to the date of sale. Variations from the provisionally
priced
sales are recognized as revenue adjustments as they occur until the price
is
finalized. Revenue was previously recognized two months after shipment, being
the date that the nickel and copper components were settled. FNX has also
changed its accounting policy with respect to broken ore underground. In-process
inventory will now be recognized only in respect of broken ore on surface
reflecting the fact that the ore is not available for use until it reaches
the
surface. Both changes have been adopted retroactively in the Company’s 2005
financial statements. As a result of these changes in accounting policies,
there
was an increase in mine operating revenue of $7,900 (2004 - $4,500), an increase
in mine operating expenses of $6,200 (2004 - $4,200). The significant impacts
on
the balance sheet as a result of these changes was an increase in accounts
receivable of $13,000 (2004 - $6,800) and a decrease in ore-in-process inventory
of $8,500 (2004 - $4,800).
4. In-process
inventory
|
2005
|
2004
|
||||||
|
$
|
|
$
|
|||||
|
Cash
costs
|
715
|
100
|
|||||
|
Non-cash
costs
|
152
|
32
|
|||||
|
867
|
132
|
In-process
inventory represents the cost of ore that has been mined and brought to surface
but has not been shipped to Inco Limited (“Inco”)
for
concentrating, smelting and refining as at the balance sheet date. Cash costs
include mining costs and all costs up to and including crushing but not haulage
to the concentrator. Non-cash costs represent the amount of mine depreciation
and amortization capitalized to in-process inventories as at the balance
sheet
date. The mine depreciation and amortization included in the carrying value
of
in-process inventories will be charged to the mine depreciation and amortization
expense category of the statement of operations once the ore is shipped to
Inco.
11
5.
Prepaid
and other assets
|
2005
|
2004
|
||
|
$
|
$
|
||
|
Prepaid
|
156
|
260
|
|
|
Marketable
securities
|
59
|
59
|
|
|
215
|
|
319
|
The
Company holds the following portfolio of marketable securities in other assets
at December 31, 2005 and 2004:
|
2005
|
2004
|
||||||
|
Shares
|
Amount
|
Shares
|
Amount
|
||||
|
#000s
|
$
|
#000s
|
$
|
||||
|
Platinum
Group Metals Ltd.
|
15
|
3
|
15
|
3
|
|||
|
Nevada
Star Resource Corp.
|
200
|
55
|
200
|
55
|
|||
|
Nevada
Star Resource Corp. (warrants)
|
300
|
1
|
300
|
1
|
|||
|
59
|
59
|
||||||
During
2003, the Company sold its interest in the Canwell, Alaska property to Nevada
Star Resource Corp. (“Nevada
Star”)
for
150,000 Nevada Star shares, an additional 150,000 Nevada Star shares over
the
next three years, and 300,000 Nevada Star share purchase warrants with a
three-year term. During 2003, the Company sold its interest in the Larder
Lake,
Ontario properties to NFX Gold Inc. for 2,000,000 shares of NFX Gold Inc.
The
value of the shares received was credited to exploration expense. During
2004,
the company sold 2,000,000 shares of NFX Gold Inc. for $500.
The
market value of marketable securities on December 31, 2005 was $93 (2004
-
$89).
6.
Investments
|
2005
|
2004
|
||||||
|
Shares
|
Amount
|
Shares
|
Amount
|
||||
|
#
000s
|
$
|
#
000s
|
$
|
||||
|
Dynatec
Corporation.
|
7,717
|
10,032
|
-
|
-
|
|||
|
Lake
Shore Gold Corp.
|
13,300
|
14,630
|
-
|
-
|
|||
|
Superior
Diamonds Inc.
|
6,860
|
3,070
|
-
|
-
|
|||
|
INV1
(common shares)
|
2,320
|
960
|
-
|
-
|
|||
|
INV
(common share purchase warrants)
|
2,348
|
692
|
-
|
-
|
|||
|
29,384
|
|
|
|
-
|
|||
1International
Nickel Ventures Corporation (“INV”)
(see
note 6).
The
market value of the investments on December 31, 2005 was $49,094 (2004 -
nil).
12
7.
Property,
plant and equipment
|
2005
|
||||||||||
|
|
Cost
|
Accumulated
amortization
|
Net
|
|||||||
|
$
|
|
$
|
|
$
|
||||||
|
Mining
|
||||||||||
|
McCreedy
West
|
||||||||||
|
Property
and development
|
62,923
|
11,451
|
51,472
|
|||||||
|
Plant
and equipment
|
14,176
|
4,452
|
9,724
|
|||||||
|
77,099
|
15,903
|
61,196
|
||||||||
|
Exploration
|
469,991
|
-
|
469,991
|
|||||||
|
Corporate
|
365
|
286
|
79
|
|||||||
|
547,455
|
16,189
|
531,266
|
||||||||
|
2004
|
||||||||||
|
|
Cost
|
Accumulated
amortization
|
Net
|
|||||||
|
$
|
$
|
$
|
||||||||
|
Mining
|
||||||||||
|
McCreedy
West
|
||||||||||
|
Property
and development
|
21,360
|
4,766
|
16,594
|
|||||||
|
Plant
and equipment
|
10,624
|
2,258
|
8,366
|
|||||||
|
31,984
|
7,024
|
24,960
|
||||||||
|
Exploration
|
44,816
|
-
|
44,816
|
|||||||
|
Corporate
|
477
|
332
|
145
|
|||||||
|
77,277
|
7,356
|
69,921
|
||||||||
(a)
Sudbury
basin properties option agreement
On
November 29, 2001, FNX entered into a definitive agreement (the “Option
to Purchase Agreement”)
with
Inco to acquire a 100% interest in the mineral rights to five Inco mineral
properties located in the Sudbury Basin, Ontario (Kirkwood, Levack, McCreedy
West, Podolsky and Victoria, collectively, the “Properties”),
and
the right to use such part of the surface rights and on-site facilities as
are
required to permit exploration, development and mining operations to be
conducted on the Properties. The Option to Purchase Agreement became effective
January 10, 2002 (the “Effective
Date”).
FNX
entered into an agreement (the “SJV
Agreement”)
with
Dynatec, which also became effective on the Effective Date, pursuant to which
Dynatec acquired 25% of FNX’s interest, rights and obligations in the Option to
Purchase Agreement. Accordingly, on the Effective Date, FNX and Dynatec formed
a
joint venture known as the SJV, with FNX holding a 75% interest and Dynatec
a
25% interest. FNX managed exploration activities relating to the SJV and
Dynatec
managed mining operations.
On
October 21, 2005, FNX acquired Dynatec’s 25% interest in the Properties and the
SJV (which was terminated) pursuant to the Dynatec Transaction (see note
18(c)).
Accordingly, FNX now holds a 100% interest in the Properties.
13
The
Option to Purchase Agreement includes the following additional
terms:
|
•
|
If
FNX discovers a New Deposit (as defined in the Option to Purchase
Agreement) on any of the Properties and elects to complete a bankable
feasibility study on such New Deposit recommending production,
and should
such New Deposit contain mineral resources having a value (based
on then
current metal prices) of at least 600 million pounds of nickel
or nickel
equivalent at the time of such bankable feasibility study, Inco
has a
right to re-acquire a 51% interest in such a New Deposit but not
the
Properties (the “Back-in
Right”)
by bringing the New Deposit into commercial production without
financial
recourse to FNX. Until Inco achieves payback, it shall receive
80% of net
revenues from production from the New Deposit. If Inco re-acquires
a 51%
interest in a New Deposit, Inco and FNX will form a joint venture,
with
Inco as the operator, to hold and operate the New
Deposit.
|
|
•
|
Inco
continues to be responsible for all environmental liabilities existing
on
the Properties at the Effective Date. The Company is responsible
for all
environmental liabilities incurred on the Properties that result
from the
actions taken after the Effective Date. Processing environmental
obligations cease upon delivery of ore to
Inco.
|
|
•
|
Inco
has a right of first offer to purchase any interest in the Properties
that
the SJV proposes to sell to an arm’s-length third party but does not apply
to the transfer of interest in the Properties between FNX and
Dynatec.
|
On
the
Effective Date, the Corporation and Inco agreed to a form of off-take agreement
(the “Off-take
Agreement”),
which
forms the basis of separate Off-take Agreements to be entered into with Inco
upon the commencement of mining of any deposits found on the Properties.
As of
March 30, 2003, an Off-take Agreement had been entered into with Inco for
Phase
1 of the McCreedy West Property. Under each Off-take Agreement Inco is granted
the right to purchase all ores produced on the Properties for recovered
accountable metals derived from the Properties, less applicable milling,
smelting and refining charges. Inco also has the right to refuse to purchase
any
ores that are unsuitable for treatment or if Inco does not have sufficient
processing capacity to handle such ores, in which case, FNX is entitled to
have
such ores processed by a third party whereby Inco will be entitled to be
paid a
2% net smelter royalty for nickel, copper and cobalt and a net smelter royalty
ranging from 2.5% to 5% for precious and platinum group metals.
(b)
McCreedy
West
Commercial
production from the Inter Main deposit at the McCreedy West mine was achieved
on
November 1, 2003 and the scheduled mining rate of 1,000 tons per day was
reached
in April 2004. McCreedy West is located in the Sudbury Basin region of
Ontario.
Commencing
May 2005, revenues and expenses from ore mined and shipped from the McCreedy
West PM Deposit have been included in the statement of operations. The $14,900
of accumulated mineral property and exploration capital costs to date, net
of
$3,600 of pre-production revenue credits, were transferred from mineral
exploration properties to McCreedy West mining property and development
($13,600) and plant and equipment ($1,300).
As
at
December 31, 2005, FNX held a 100% interest in McCreedy West.
14
(c)
Mineral
exploration properties
The
carrying value of the mineral exploration properties represents the accumulated
costs to date for the acquisition of and exploration costs incurred by FNX
on
its non-producing mineral exploration properties. Mineral exploration properties
are not being amortized. FNX’s active mineral exploration properties are located
in the Sudbury mining district, and are comprised as follows:
|
2005
|
2004
|
||||||
|
$
|
|
$
|
|||||
|
Aurora
properties (note 18)
|
92,123
|
-
|
|||||
|
Kirkwood
|
1,600
|
200
|
|||||
|
Levack
|
81,509
|
7,554
|
|||||
|
Levack
Footwall
|
219,188
|
2,614
|
|||||
|
McCreedy
West PM Deposit
|
-
|
13,472
|
|||||
|
Podolsky
|
69,396
|
18,085
|
|||||
|
Victoria
|
6,175
|
2,891
|
|||||
|
469,991
|
44,816
|
As
at
December 31, 2005, FNX held a 100% interest in the Kirkwood, Levack (including
the Levack Footwall), Podolsky and Victoria mineral properties, all of which
are
located in the Sudbury Basin region of Ontario.
The
Aurora properties are located in the Sudbury Basin region, Timmins, and in
north
western Ontario and the Temiscamingue region of Quebec. All of Aurora’s
properties are in the exploration stage and there can be no assurance that
commercially viable mineral deposits or reserves exist on them. The most
material mineral properties that are included in the Aurora properties are
located in the Sudbury Basin region and are pursuant to a joint venture
agreement (the “Falconbridge
Joint Venture”)
with
Falconbridge Limited (“Falconbridge”).
As at
December 31, 2005, the Company and Falconbridge held a 70% and 30% interest,
respectively, in the Falconbridge Joint Venture. The Company is the operator
of
the Falconbridge Joint Venture. FNX holds between 50% and 100% interests
in the
remaining mineral exploration properties included in the Aurora properties.
(d)
Corporate
Corporate
assets consist of office equipment, furniture and fixtures at the Toronto
head
office and the Sudbury exploration office.
| 8. |
Reclamation
and other deposits
|
|
2005
|
2004
|
||||||
|
$
|
|
$
|
|||||
|
Reclamation
term deposits
|
1,230
|
1,230
|
|||||
|
Deposit
with mine contractor
|
2,400
|
-
|
|||||
|
3,630
|
1,230
|
Reclamation
deposits include various amounts with government agencies in the Province
of
Ontario in connection with the McCreedy West, Levack and Podolsky
properties.
15
Deposit
with mine contractor relates to amounts advanced to Dynatec as a deposit
on
mining contractor services to be provided by Dynatec in connection with the
Mining Services Agreement entered into on October 21,
2005
(see
note 18(c)). The deposit will be applied against Dynatec’s invoice for December
2007.
9. Mine
closure and site restoration
FNX’s
asset retirement obligations relate to the final mine closure and site
reclamation costs of its currently operating mine and advanced exploration
mineral properties.
|
2005
|
2004
|
||||||
|
$
|
|
$
|
|||||
|
Balance
- beginning of year
|
1,100
|
326
|
|||||
|
Accretion
expense
|
62
|
20
|
|||||
|
Revisions
to estimated obligations
|
-
|
754
|
|||||
|
Balance
- end of year
|
1,162
|
1,100
|
FNX
estimates the total future mine closure and site reclamation costs associated
with the Sudbury operations to be approximately $1,600 (2004 - $1,600). These
estimates are formally reviewed by technical personnel every year or more
frequently if required by regulatory agencies. A credit adjusted risk free
rate
of 6.0% has been utilized to determine the mine closure and site restoration
obligation recorded in the consolidated balance sheets. Management anticipates
that such obligations will substantially be settled one year after the closure
of its mining operations.
The
cost
estimates of future mine closure and site restoration obligations are based
on
reclamation standards that meet current regulatory requirements. In view
of the
uncertainties concerning environmental remediation, the ultimate cost of
the
mine closure and site restoration obligations could differ materially from
the
estimated amounts provided. The estimate of the total liability for asset
retirement costs is subject to change based upon amendments to laws and
regulations and as new information concerning the Company’s operations becomes
available. Future changes, if any, to the estimated total liability as a
result
of amended regulations, laws and operating assumptions may be significant
and
would be recognized prospectively as a change in accounting estimate when
applicable. Environmental laws are continually evolving and FNX is not able
to
determine the impact, if any, of environmental laws and regulations that
may be
enacted in the future on its results of operations or financial position
due to
the uncertainty surrounding the ultimate form that such future laws and
regulations may take.
16
| 10. |
Income
taxes
|
Future
income tax liability at December 31 is comprised of the following:
|
2005
|
2004
|
||||||
|
$
|
|
$
|
|||||
|
Future
income tax assets
|
|||||||
|
Mining
contractor services
|
5,777
|
-
|
|||||
|
Share
issue costs
|
2,377
|
1,275
|
|||||
|
Non-capital
losses
|
1,881
|
1,145
|
|||||
|
10,035
|
2,420
|
||||||
|
Future
income tax liability
|
|||||||
|
Mineral
properties
|
163,734
|
5,126
|
|||||
|
Investments
|
1,705
|
-
|
|||||
|
165,439
|
5,126
|
||||||
|
155,404
|
2,706
|
Income
tax expense differs from the amount that would have been computed by applying
the combined federal and provincial statutory income tax rate of 34% (2004
-
34%) to earnings before income taxes. The reasons for the differences are
a
result of the following:
|
2005
|
2004
|
||||||
|
$ |
|
$
|
|||||
|
Earnings
before income taxes and non-controlling interest
|
14,056
|
12,779
|
|||||
|
Computed
expected tax at statutory rates
|
4,779
|
4,345
|
|||||
|
Non-controlling
interest
|
(1,611
|
)
|
(1,010
|
)
|
|||
|
Resource
allowance (deduction)
|
(1,436
|
)
|
(466
|
)
|
|||
|
Loss
on sale of AHL to Dynatec
|
1,574
|
-
|
|||||
|
Reduction
in valuation allowance
|
-
|
(1,108
|
)
|
||||
|
Non-deductible/(non-taxable)
income
|
675
|
(464
|
)
|
||||
|
Ontario
mining duties
|
22
|
1,224
|
|||||
|
Federal
large corporation tax
|
718
|
(21
|
)
|
||||
|
4,721
|
2,500
|
||||||
As
a
result of the issuance of 20,500,000 common shares to Dynatec (see note 18(c))
and 7,500,000 common shares under public offering, the Company’s taxable capital
for both federal LCT and provincial capital taxes increased significantly.
Accordingly, FNX incurred $718 of LCT, which is included in the provision
for
income and resource taxes and $1,135 of provincial capital taxes charged
to the
statement of operations.
All
non-capital losses expire between 2006 and 2015.
17
11. Non-controlling
interest
|
2005
|
2004
|
||||||
|
$
|
|
$
|
|||||
|
Balance
- beginning of year
|
19,075
|
14,618
|
|||||
|
SJV
net earnings
|
4,738
|
4,282
|
|||||
|
Cash
contributions
|
15,314
|
12,678
|
|||||
|
Cash
distributions
|
(13,342
|
)
|
(12,503
|
)
|
|||
|
Dynatec
transaction (note 18(c))
|
(25,785
|
)
|
-
|
||||
|
Balance
- end of year
|
-
|
19,075
|
Non-controlling
interest represented Dynatec’s 25% interest in the SJV to October 2005, at which
time, FNX acquired Dynatec’s interest in the SJV (see note 18(c)).
12.
Share
capital and earnings per share
| (a) |
Common
shares issued and outstanding (i)
|
|
2005
|
2004
|
||||||
|
Shares
|
Amount
|
Shares
|
Amount
|
||||
|
#
000s
|
$
|
#
000s
|
$
|
||||
|
Balance
- beginning of year
|
50,266
|
126,415
|
47,415
|
106,073
|
|||
|
Stock
options exercised
|
993
|
4,959
|
351
|
364
|
|||
|
From
contributed surplus (note 13)
|
-
|
2,953
|
-
|
49
|
|||
|
Income
tax benefits renounced to flow-through shareholders (ii)
|
-
|
(8,533)
|
-
|
-
|
|||
|
Flow-through
shares (ii)
|
-
|
-
|
2,500
|
19,929
|
|||
|
Acquisition
of Aurora (note 18(a))
|
4,271
|
49,712
|
-
|
-
|
|||
|
Acquisition
of 100% of Sudbury assets and Aurora
|
20,500
|
284,950
|
-
|
-
|
|||
|
Public
offering (iv)
|
7,500
|
98,491
|
-
|
-
|
|||
|
Balance
- end of year
|
83,530
|
558,947
|
50,266
|
126,415
|
|||
| (i) |
FNX
is authorized to issue an unlimited number of common
shares.
|
| (ii) |
On
June 17, 2004, FNX issued 2.5 million flow-through common shares
for gross
proceeds of $20,600. Financing costs of $1,200 and a future income
tax
asset of $500 resulted in a net amount of $19,900. During the three
month
period ended March 31, 2005, FNX renounced the associated income
tax
deductions to the flow-through shareholders. The estimated tax benefit
of
$8,533 related to the $20,600 of flow-through shares was charged
to share
capital with a corresponding increase in the related future income
tax
liability.
|
| (iii) |
Effective
April 18, 2005, FNX approved a Shareholder Rights Plan (the “Rights
Plan”),
which was subsequently ratified by independent shareholders at a
meeting
of shareholders held on May 19, 2005. Under the terms of the Rights
Plan,
one right (“Right”) was attached to each existing common share and each
common share subsequently issued will have one Right attached to
it. The
Rights will separate from the common shares and become exercisable
following a bid, other than a bid which meets certain criteria as
a
permitted bid (“Permitted
Bid”),
for 20% or more of the common shares of FNX. In the event of a bid
which
is not a Permitted Bid, each Right, other than the Rights attached
to
common shares held by the party making the bid, would permit the
holder
the right to purchase common shares effectively at 50% of the price
at
that time. In the event of a Permitted Bid, the Rights will be deemed
to
be redeemed at $0.00001 per Right. The Rights plan effectively allows
FNX
60 days to assess a bid and, if more than 50% of the common shares
held by
independent shareholders are tendered within that 60 day period,
requires
a public announcement of that fact by the bidder who must allow an
additional 10 days from that date for additional shareholders to
tender
their shares.
|
18
| (iv) |
On
November 28, 2005, FNX closed a bought deal financing pursuant to
which it
issued an aggregate of 7,500,000 common shares at a price of $13.60
per
share for aggregate gross proceeds of $102,000. Costs of $5,100 and
a
future income tax asset of $1,591 resulted in a net amount of
$98,491.
|
|
(b)
|
Earnings
per share
|
|
2005
|
2004
|
||
|
Net
earnings available to shareholders ($)
|
|||
|
Basic
and diluted
|
4,597
|
5,997
|
|
|
Weighted
average shares outstanding (#000s)
|
|||
|
Basic
|
57,657
|
49,160
|
|
|
Effect
of dilutive stock options
|
502
|
968
|
|
|
Diluted
|
58,159
|
50,128
|
|
|
Stock
options excluded from dilution
|
658
|
1,060
|
|
|
Earnings
per share
|
|||
|
Basic
and diluted
|
$0.08
|
$0.12
|
13.
Contributed
surplus - stock-based compensation
Until
March 16, 2005, FNX had only one stock-based compensation plan, a stock option
plan. Effective March 16, 2005, the Board of Directors implemented a policy
requiring all directors to hold a minimum of 5,000 common shares and/or deferred
share units (“DSUs”)
within
five years of their appointment to qualify for membership on the
Board.
The
following table summarizes information regarding FNX's contributed surplus
-
stock-based compensation as at and for the years ended December 31, 2005
and
2004:
|
2005
|
2004
|
||||||
|
$
|
|
$
|
|||||
|
Balance
- beginning of year
|
7,562
|
6,737
|
|||||
|
Stock-based
compensation expense
|
1,068
|
874
|
|||||
|
Transfer
of exercised options to share capital
|
(2,953
|
)
|
(49
|
)
|
|||
|
Balance
- end of year
|
5,677
|
7,562
|
19
(a)
Stock
option plan
The
stock
option plan (the “Option
Plan”)
is for
directors, officers, employees and certain individuals that provide ongoing
services to FNX. Under the Option Plan, options are typically granted for
a five
year period and in such numbers as reflects the level of responsibility of
the
particular optionee and his or her contribution to the business and activities
of FNX. Options granted under the Plan prior to 2004 vested at the discretion
of
the Board of Directors, while options granted in 2004 vest 50% after one
year
from the date of grant with the balance vesting after two years from the
date of
grant. Effective January 1, 2005, options granted under the Option Plan have
a
five year term and vest 33.3% on the anniversary date of each of the first
three
years following the grant date. Except in specified circumstances, options
are
not assignable and terminate upon the optionee ceasing to be employed by
or
associated with FNX. The terms of the Option Plan further provide that the
price
at which shares may be issued under the Option Plan cannot be less than the
market price of the shares when the relevant options are granted.
FNX's
common shares are listed on the Toronto Stock Exchange and the American Stock
Exchange. The following table summarizes information regarding FNX’s outstanding
and exercisable stock options as at December 31, 2005:
|
Outstanding
|
Exercisable
|
|||||||||
|
Range
of
exercise
prices
per
share
|
Shares
|
Weighted
average
months
remaining
|
Weighted
average
exercise
price
per
share
|
Shares
|
Weighted
average
exercise
price
per
share
|
|||||
|
CDN$
|
#
000s
|
#
|
$
|
#
000s
|
$
|
|||||
|
0.50
to 4.95
|
341
|
13
|
1.72
|
341
|
1.72
|
|||||
|
5.04
to 6.85
|
718
|
29
|
6.34
|
650
|
6.41
|
|||||
|
7.40
|
350
|
47
|
7.40
|
-
|
-
|
|||||
|
8.15
to 10.99
|
668
|
40
|
9.26
|
470
|
8.58
|
|||||
|
13.00
|
324
|
60
|
13.00
|
-
|
-
|
|||||
|
13.75
|
160
|
57
|
13.75
|
-
|
-
|
|||||
|
2,561
|
|
|
|
7.02
|
|
1,461
|
|
6.01
|
||
20
The
following table summarizes information regarding FNX's stock options as at
and
for the years ended December 31, 2005 and 2004:
|
2005
|
2004
|
||||||
|
Shares
|
Weighted
average
exercise
price
per
share
|
Shares
|
Weighted
average
exercise
price
per
share
|
||||
|
#
000s
|
|
$
|
|
#
000s
|
|
$
|
|
|
Balance
- beginning of year
|
2,523
|
|
5.60
|
|
2,993
|
|
5.31
|
|
Granted
|
1,063
|
10.72
|
138
|
5.63
|
|||
|
Exercised
|
(993)
|
4.99
|
(351)
|
1.04
|
|||
|
Cancelled
|
(32)
|
7.65
|
-
|
-
|
|||
|
Expired
|
-
|
-
|
(257)
|
8.43
|
|||
|
Balance
- end of year
|
2,561
|
|
|
|
2,523
|
||
For
purposes of stock-based compensation, the fair value of each option was
estimated on the date of grant using the Black-Scholes option pricing model
with
the weighted average assumptions used for grants as follows: dividend yield
of
0.0% (2004 - 0%), expected volatility of 49% (2004 - 49%), risk-free interest
rate of 4.0% (2004 - 3.0%) and expected life of 36 months (2004 - 24
months).
(b) Deferred
share units plan
On
March
16, 2005, the Board of Directors approved the implementation of a deferred
share
unit plan (the “DSU
Plan”),
effective July 1, 2005. The purpose of the DSU Plan is to promote a greater
alignment of interests between shareholders and Directors by linking a portion
of Director compensation to the future value of FNX’s common shares. The DSU
Plan is only eligible to Directors of FNX and is to allow Directors the choice
to receive, in increments of 25%, up to 100% of their compensation in the
form
of DSUs rather than by way of cash. Under the terms of the DSU Plan, the number
of DSUs granted is based upon the fair market value of FNX’s common shares at
that time. DSUs are only converted into common shares upon the Director’s death
or resignation from the Board.
Included
in stock-based compensation expense in 2005 is $28 related to 1,974 common
shares that are reserved for issuance under the DSU Plan.
21
14. Other
expenses (income)
|
2005
|
2004
|
||||||
|
|
$
|
|
$
|
|
|||
|
Interest
income
|
(1,816
|
)
|
(1,118
|
)
|
|||
|
Shares
and warrants received for
management
services to INV (note 16)
|
(1,343
|
)
|
-
|
||||
|
Management
fees
|
(165
|
)
|
-
|
||||
|
Foreign
exchange
|
514
|
620
|
|||||
|
Miscellaneous
|
71
|
(324
|
)
|
||||
|
(2,739
|
)
|
(822
|
)
|
||||
15. Supplementary
cash flow information
|
2005
|
2004
|
||||||
|
$
|
|
$
|
|||||
|
Net
change in non-cash working capital
|
|||||||
|
Accounts
receivables
|
(6,724
|
)
|
(6,479
|
)
|
|||
|
In-process
inventory
|
(735
|
)
|
(2
|
)
|
|||
|
Prepaids
and other assets
|
104
|
370
|
|||||
|
Accounts
payable and accrued liabilities
|
10,005
|
(1,807
|
)
|
||||
|
2,650
|
(7,918
|
)
|
|||||
|
Other
information
|
|||||||
|
Interest
paid
|
12
|
8
|
|||||
|
Income
and resource taxes paid
|
-
|
-
|
16. Related
party transactions
In
2004,
FNX invested $200 of funds in INV, which at that time was a private mineral
prospecting company. The President and Chief Executive Officer (who is a
director of FNX and a director of INV), two other directors and two senior
officers of FNX also invested in INV in 2004. In 2005, FNX invested a further
$60 of funds in INV, resulting in FNX holding 920,230 common shares of INV.
In
December 2005, as part of a planned Initial Public Offering by INV, FNX was
issued 500,000 common shares for cash consideration of $250 and an additional
900,000 common shares with an ascribed value of $450 in payment of past
administrative services and financial support provided by FNX to INV from
November 2003 to December 2005. Also in December 2005, FNX was issued common
share purchase warrants, with an ascribed value of $691, in exchange for
FNX
foregoing its right of first option to acquire any property interest of INV.
Each of the 2,347,886 share purchase warrants entitles the holder to acquire
one
common share of INV at a price of $1.40 until December 7, 2010. Subsequent
to
year end FNX purchased an additional 830,000 common shares of INV for cash
consideration of $996.
Under
the
terms of an agreement between FNX and INV, dated January 1, 2006, FNX has
agreed
to provide certain administrative services and facilities to INV for a fee
of
$10 per month commencing January 1, 2006. These services include providing
office facilities and communication equipment in addition to the non-exclusive
services of certain FNX personnel (limited to 20% each per week), including
the
Vice President and Chief Financial Officer of FNX, who serves as the Vice
President and Chief Financial Officer of INV, and accounting and administrative
personnel as required by the Vice President and Chief Financial Officer of
INV.
In addition to the $10 monthly fee, the Corporation will reimburse FNX for
the
non-exclusive services of the Vice President Business Development of FNX,
who
serves as the President and Chief Executive Officer of INV, and the Investor
Relations Officer of FNX, who is also the Director of Investor Relations
for
INV. Such reimbursement shall be calculated as an amount equal to the salaries
and benefits paid to such individuals, multiplied by the percentage of their
respective time spent providing services to INV.
22
On
March
17, 2006, INV completed an Initial Public Offering (“IPO”)
of
18,500,000 common shares at a price of $1.20 per common share and was listed
on
the Toronto Stock Exchange. As part of the IPO, FNX purchased 830,000 common
shares of INV for cash consideration of $996. As at March 24, 2006, FNX owned
3,150,230 common shares of INV, representing 9.9% of the issued and outstanding
common shares of INV, and 2,347,886 share purchase warrants at an exercise
price
of $1.40 per common share.
| 17. |
Commitments
and other
|
(a)
Operating leases
The
Company is committed to payments under operating leases for office space
and
equipment in the total amount of approximately $800. Annual payments are
as
follows:
|
$
|
||||
|
2006
|
200
|
|||
|
2007
|
200
|
|||
|
2008
|
200
|
|||
|
2009
|
200
|
|||
|
2010
|
-
|
|||
|
800
|
||||
| (b) |
Deferred
payment obligation
|
The
Company is committed to two future payments to Dynatec, discounted at the
risk-free rate, as follows (see note 18(c)):
| $ | ||||
|
2006
|
7,500
|
|||
|
2007
|
7,500
|
|||
|
15,000
|
||||
|
Less:
Interest
component
|
(770
|
)
|
||
|
Current
portion
|
(7,230
|
)
|
||
|
7,000
|
23
18. Business
acquisitions and disposition
(a)
Acquisition of Aurora
On
May 4,
2005, the Company announced it had entered into an agreement with ARP whereby
FNX agreed to acquire all of the issued and outstanding common shares of
ARP,
and immediately transfer this investment into a wholly owned subsidiary AHL,
in
exchange for common shares of FNX. The transaction to acquire Aurora closed
on
July 1, 2005. FNX issued 4,270,803 common shares with an ascribed value for
accounting purposes of $11.64 per common share (based upon the volume weighted
average trading price of FNX’s shares for the day of, the two trading days
before and the two trading days after June 15, 2005, the date the number
of
shares that FNX was to issue was determined). Accordingly, the share
consideration totaled $49,712 plus $729 costs of the transaction for a total
of
$50,441. The principal assets of Aurora acquired by FNX were 13,300,000 common
shares of Lake Shore Gold Corp. (“LSG”),
6,860,715 common shares of Superior Diamonds Inc. (“SUP”),
an
interest in a joint venture with Falconbridge Limited in the Sudbury mining
district and various other mineral exploration properties located in Ontario
and
Quebec. The ascribed value of the mineral properties acquired from ARP was
greater than the mineral properties tax values. Accordingly, a future income
tax
liability of $17,194 was accrued. The allocation of the purchase price as
at
July 1, 2005, based on the consideration paid for the acquisition of Aurora,
is
summarized below:
|
|
Purchase
of
100%
of Aurora
|
|||
| $ | ||||
|
Net
assets acquired:
|
||||
|
Cash
and cash equivalents
|
3,167
|
|||
|
Accounts
receivable
|
635
|
|||
|
Investments
|
12,663
|
|||
|
Property,
plant and equipment
|
51,321
|
|||
|
Current
liabilities
|
(151
|
)
|
||
|
Future
income taxes
|
(17,194
|
)
|
||
|
50,441
|
||||
|
Consideration
paid:
|
||||
|
Common
shares
|
49,712
|
|||
|
Cash
|
729
|
|||
|
50,441
|
(b)
Disposition of 50% of Aurora to Dynatec
In
a
related but independent transaction, FNX and Dynatec entered into an agreement
dated May 18, 2005, whereby FNX agreed to sell to Dynatec on July 1, 2005
a 50%
interest in Aurora for $12,247 in cash plus that number of common shares
of
Dynatec equal to the number of FNX shares issued to the common shareholders
of
ARP times 1.806825. The number of common shares of Dynatec so issued totaled
7,716,594. The value of Dynatec’s shares on July 1, 2005 was $1.30 per common
share. Accordingly, the total consideration received by FNX from Dynatec
was
valued for accounting purposes at $22,621. As 50% of FNX’s interest in Aurora
was valued for accounting purposes at $25,221, the sale to Dynatec resulted
in a
pre-tax, non-recurring, non-cash loss for accounting purposes of $2,600.
In
addition, as a result of a difference between the values of the Dynatec shares
for accounting and tax purposes, a further future income tax expense of $687
was
charged to earnings. Accordingly, the total non-recurring, non-cash loss
for
accounting purposes as a result of the disposition of a 50% interest in Aurora
to Dynatec was $3,287. This loss was recorded on July 1, 2005. The following
table summaries the disposition to Dynatec of 50% of the net assets of Aurora
acquired on July 1, 2005 and the resultant loss for accounting purposes on
this
transaction:
|
Sale
of 50%
of
Aurora
to
Dynatec
|
||||
| $ | ||||
|
Net
assets sold:
|
||||
|
Cash
and cash equivalents
|
1,584
|
|||
|
Accounts
receivable
|
317
|
|||
|
Investments
|
6,331
|
|||
|
Property,
plant and equipment
|
25,661
|
|||
|
Current
liabilities
|
(75
|
)
|
||
|
Future
income taxes
|
(8,597
|
)
|
||
|
25,221
|
||||
|
Consideration
received:
|
||||
|
Cash
and cash equivalents
|
12,247
|
|||
|
Cash
for reimbursement of costs
|
342
|
|||
|
Common
shares of Dynatec
|
10,032
|
|||
|
22,621
|
||||
|
Loss
before tax
|
2,600
|
|||
|
Future
income tax expense
|
687
|
|||
|
Loss
on disposition
|
3,287
|
|||
As
a
result of the two transactions described above, each of FNX and Dynatec held
a
50% interest in Aurora throughout the third quarter of 2005. FNX accounted
for
its interest in Aurora using the proportionate consolidation method for the
third quarter of 2005. Subsequent to the end of the third quarter of 2005,
FNX
reacquired the 50% interest in Aurora it had sold to Dynatec (see
below).
(c)
The Dynatec transaction
On
October 5, 2005, FNX announced that it had entered into an agreement with
Dynatec (the “Dynatec
Transaction”)
whereby FNX would increase its ownership to 100% of the Sudbury assets for
total
purchase consideration of $299,180, plus corporate transaction costs of $1,101.
The transaction closed on October 21, 2005. The material terms of the
transaction are as follows:
| (i) |
FNX
acquired Dynatec’s 25% interest in the SJV and 50% interest in
Aurora;
|
| (ii) |
FNX
issued 20,500,000 common shares to
Dynatec;
|
| (iii) |
FNX
and Dynatec entered into a Voting Trust agreement with a term of
three
years pursuant to which votes attached to the common shares held
by
Dynatec will be voted in line with recommendations of the board of
directors of FNX on various fundamental changes and initiatives
(including, among other matters, mergers, acquisitions and the nomination
of directors to the FNX board), such agreement ceasing to be in effect
should Dynatec’s ownership stake in FNX decline below 10% on a
fully-diluted basis;
|
24
| (iv) |
FNX
was provided with a right of first refusal in the event that Dynatec
wishes to distribute any of the common shares that it holds, which
will
permit FNX to designate the purchasers of common shares to be sold
by
Dynatec for a period of 10 business days at a price acceptable to
Dynatec
(net of commissions) which, in the event of a sale by way of a prospectus,
shall not exceed 95% of the volume weighted average of the trading
prices
of the common shares on the Toronto Stock Exchange for the five trading
days immediately prior to receipt of written notice from Dynatec
of its
election to sell such common shares (the “VWAP”)
and, in the event of a sale that will not be done by way of a prospectus,
shall not exceed the VWAP, and if FNX elects not to exercise its
right of
first refusal or is unable to arrange for the sale of the common
shares in
accordance with terms attaching thereto, Dynatec may, for a period
of 90
days thereafter, enter into an underwriting agreement to sell such
common
shares through a public distribution in Canada and, if a prospectus
is
required in connection with such sale, FNX will take such reasonable
steps, at Dynatec’s cost, as are necessary to qualify by prospectus in
Canada the distribution of such common
shares;
|
| (v) |
Dynatec
was provided with representation on FNX’s board of directors that is the
greater of two nominees and that number of nominees that is equal
to
Dynatec’s fully diluted ownership position, for a period of three years
(such representation being dependent upon Dynatec maintaining an
ownership
stake in FNX of at least 10% on a fully-diluted basis);
|
| (vi) |
FNX
agreed to purchase, at the option of Dynatec, $10,000 of Dynatec’s common
shares in the next Dynatec offering of common shares to the public
at the
issue price of the offering, provided that the offering is for a
minimum
of $100,000 and is completed before October 21, 2006; however, Dynatec
subsequently completed a common share offering of in excess of $100,000
without exercising their option and, accordingly, the Dynatec option
described herein has fallen away; and
|
| (vii) |
Dynatec
will provide contractor mining services at the Sudbury properties
until
December 31, 2007, subject to FNX having approval, control and direction
over the services provided by Dynatec. Under the mining services
agreement, Dynatec will be paid a fee of 7% on a cost reimbursement
basis.
In addition, Dynatec is to be paid $7,500 on each of December 31,
2006 and
2007.
|
The
total
purchase consideration of $300,281 was satisfied by the issuance of 20,500,000
common shares of FNX, the future payment to Dynatec of $7,500 on each of
December 31, 2006 and 2007, plus cash transaction costs of $1,101. The
20,500,000 common shares issued by FNX to Dynatec had an ascribed value for
accounting purposes of $13.90 per common share (based upon the volume weighted
average trading price of FNX’s shares for the day of, the two trading days
before and the two trading days after October 5, 2005, the date of the
announcement of the transaction). Accordingly, the share consideration totaled
$284,950. The discounted value, at 3.6%, of the two $7,500 payments to Dynatec
is $14,230. An independent valuation of the mining and mineral exploration
properties was completed and the purchase price was accordingly allocated
to the
mineral properties. The ascribed value of the mineral properties acquired
was
greater than the mineral properties tax values. Accordingly, a future income
tax
liability of $133,218 was accrued. The allocation of the purchase price as
at
October 21, 2005, based on the consideration paid for the acquisition of
Dynatec’s interest in the SJV and Aurora, is summarized below:
25
|
Purchase
of SJV and Aurora
|
||||
| $ | ||||
|
Net
assets acquired:
|
||||
|
Cash
and cash equivalents
|
1,511
|
|||
|
Accounts
receivable
|
(2,606
|
)
|
||
|
Investments
|
11,368
|
|||
|
Property,
plant and equipment
|
398,083
|
|||
|
Current
liabilities
|
(642
|
)
|
||
|
Non-controlling
interest
|
25,785
|
|||
|
Future
income taxes
|
(133,218
|
)
|
||
|
300,281
|
||||
|
Consideration
paid:
|
||||
|
Common
shares
|
284,950
|
|||
|
Deferred
payment obligation
|
14,230
|
|||
|
Cash
|
1,101
|
|||
|
300,281
|
19.
Fair
value of financial instruments
The
carrying amount of cash and cash equivalents, accounts receivable and current
liabilities approximate their fair value due to the short-term maturities
of
these instruments. The company has a future payment liability to its mine
contractor, which is carried at fair market value (see note 18(c)), as the
discount rate on the acquisition date approximates the current discount rate.
FNX does not currently have any commodity or foreign exchange hedging or
other
derivative instruments.
20.
Segmented
information
The
Company operates in one geographic location, Sudbury, Ontario, Canada, and
one
segment, mineral exploration, development and mining.
The
Company sells all of its ore produced to Inco under the terms of the Off-take
Agreement and, accordingly, Inco is currently FNX’s sole customer. Inco has
agreed to concentrate, smelt and refine all of FNX’s ore produced through to
December 31, 2007.
26
21.
Significant
differences between Canadian and United States generally accepted accounting
principles
The
consolidated financial statements of the Company have been prepared in
accordance with Canadian GAAP which differs in certain material respects
from US
GAAP.
|
If US GAAP were employed, the net earnings (loss) for the years
would be
adjusted as follows:
|
|
2005
|
2004
|
|||
|
$
|
$
|
|||
|
Net
earnings per Canadian GAAP
|
4,597
|
6,489
|
||
|
Exploration
and acquisition costs (a)
|
(38,110)
|
(21,000)
|
||
|
Start-up
activities (b)
|
1,084
|
441
|
||
|
Effect
on depletion, depreciation and amortization of different mining
assets
(a)
|
2,430
|
2,139
|
||
|
Tax
adjustments, including flow-through shares (c)
|
14,327
|
2,434
|
||
|
Non-controlling
interest on above adjustments
|
5,636
|
4,107
|
||
|
Loss
for the year per US GAAP before change in accounting
policies
|
(10,036)
|
(5,390)
|
||
|
Change
in accounting policies per US GAAP (f)
|
1,726
|
-
|
||
|
Loss
for the year per US GAAP
|
(8,310)
|
(5,390)
|
||
|
Basic
and diluted loss per share per US GAAP before change in accounting
policies
|
(0.17)
|
(0.11)
|
||
|
Basic
and diluted change in accounting policy impact per share per US
GAAP
|
0.03
|
-
|
||
|
Basic
and diluted loss per share per US GAAP
|
(0.14)
|
(0.11)
|
||
|
2005
|
2004
|
|||
|
$
|
$
|
|||
|
Deficit
per Canadian GAAP
|
10,667
|
16,543
|
||
|
Cumulative
exploration and development costs (a)
|
82,926
|
44,816
|
||
|
Pre-feasibility
study mine development costs
|
8,431
|
8,431
|
||
|
Cumulative
flow-through share premium income (c)
|
(8,374)
|
(2,124)
|
||
|
Flow
through premium (c)
|
-
|
6,250
|
||
|
Share
capital (c)
|
-
|
(6,250)
|
||
|
Effect
on depletion, depreciation and amortization
of
different mining assets (a)
|
(4,569)
|
(2,139)
|
||
|
Start-up
activities (b)
|
(2,018)
|
(934)
|
||
|
Stock-based
compensation (d)
|
(3,159)
|
(3,159)
|
||
|
Non-controlling
interest on above adjustments
|
(15,034)
|
(9,398)
|
||
|
Tax
adjustments on above (e)
|
(10,511)
|
(2,434)
|
||
|
Net
effect of change in accounting policies
per
US GAAP (f)
|
(447)
|
-
|
||
|
Deficit
per US GAAP
|
57,912
|
|
49,602
|
27
|
(a)
|
Exploration
and development
|
|
Under
Canadian GAAP, all costs related to the acquisition, exploration
and
development of non-producing mineral properties are capitalized.
Under US
GAAP, mining companies are permitted to capitalize acquisition,
exploration and development costs only upon the determination of
a
commercially mineable deposit. As at January 1, 2005, the Company
has
proven and probable reserves for the PM Deposit of the McCreedy
West Mine.
All PM Deposit costs prior to this date have been written off.
Due to
differences in asset bases for Canadian and US GAAP, the annual
depreciation, amortization and depletion will
differ.
|
(b)
Start-up
activities
Under
US
GAAP, the Company is required to expense the cost of start-up activities
once
product is produced in saleable form; these costs were capitalized under
Canadian GAAP, prior to commercial production. Start-up activities at the
PM Deposit included sales revenues of $2,480 and costs incurred of $1,396
that
have been capitalized under Canadian GAAP.
|
(c)
|
Flow-through
shares
|
Under
US
GAAP, when flow-through shares are issued, the proceeds are allocated between
the issue of the shares and the sale of tax benefits. The allocation is made
based on the difference between the quoted price of the existing shares and
the
amount that the investor pays for the shares. The shareholders’ equity is
reduced and a liability is recognized for this difference. This liability
is
reversed once the expenditures are incurred.
(d)
Stock-based
compensation plans
Under
Canadian GAAP, the Company has expensed the fair value of all options granted
after January 1, 2002. Under US GAAP, the Company has adopted the prospective
transition method of Statements of Financial Accounting Standards Board
(“SFAS”)
148
and expensed the fair value of all options granted after January 1,
2003.
(e) Income
taxes related to the above adjustments
Accounting
for income taxes under Canadian and US GAAP is similar, except that income
tax
rates of enacted or substantively enacted tax law must be used to calculate
future income tax assets and liabilities under Canadian GAAP, whereas only
income tax rates of enacted tax law can be used under US GAAP. The Company
has
accumulated losses for income tax purposes, and as such, no recognition of
the
tax implications have been recorded on the US GAAP earnings.
(f)
Change
in accounting policies
The
Company has changed its accounting policies with respect to revenue recognition
and the costing of broken ore underground. Revenue will now be recognized
at the
time the ore is shipped, which is also the time that title transfers. The
ore is
sold under contracts that provide for final prices that are determined by
quoted
market prices in a period subsequent to the date of sale. Variations from
the
provisionally priced sales are recognized as revenue adjustments as they
occur
until the price is finalized. Revenue was previously recognized two months
after
shipment, being the date that the nickel and copper components were settled.
FNX
has also changed its accounting policy with respect to broken ore underground.
In-process inventory will now be recognized only in respect of broken ore
on
surface reflecting the fact that the ore is not available for use until it
reaches the surface. The impact on net earnings of these changes in accounting
policies under US GAAP was $1,726.
28
(g)
Comprehensive
income
Comprehensive
income is recognized and measured under US GAAP pursuant to SFAS 130, Reporting
Comprehensive Income. This standard defines comprehensive income as all changes
in equity other than those resulting from investments by owners and
distributions to owners. Comprehensive income is comprised of two components,
net income and other comprehensive income (“OCI”).
OCI
refers to amounts that are recorded as an element of shareholders’ equity but
are excluded from net income because these transactions or events were
attributed to changes from non-owner sources. The following is a summary
of the
Company’s comprehensive income as measured under SFAS 130:
|
2005
|
2004
|
|||
|
$
|
$
|
|||
|
Income
(loss) under US GAAP
|
(8,310)
|
(5,390)
|
||
|
Other
comprehensive income (loss)
|
||||
|
Mark
to market of available for sale securities, net of tax
|
16,344
|
89
|
||
|
Comprehensive
income (loss) based on US GAAP
|
8,034
|
(5,301)
|
||
|
Basic
and diluted comprehensive income (loss) per share per US
GAAP
|
0.14
|
(0.11)
|
(h) Permitted
disclosures
Under
US
GAAP, the subtotal of “operating activities” on the consolidated statement of
cash flows prior to the increase in non-cash working capital is not a permitted
disclosure.
(i) Recent
US accounting pronouncements
| (i) |
In
June 2005, the FASB issued Statement 154,
Accounting Changes and Error Corrections
which replaces APB opinion 20 and FASB Statement 3. Statement 154
changes
the requirements for the accounting and reporting of a change in
accounting principle. Opinion 20 previously required that most voluntary
changes in accounting principles be recognized by including the cumulative
effect of the new accounting principle in net income of the period
change.
In the absence of explicit transition provisions provided for in
new or
existing accounting pronouncements, Statement 154 now requires
retrospective application of changes in accounting principle to prior
period financial statements, unless it is impracticable to do so.
The
statement is effective for fiscal years beginning after December
15, 2005.
The Company does not expect this statement to have a material impact
on
the financial statements.
|
| (ii) |
In
December 2004, the FASB issued SFAS 123 (Revised 2004), “Share-Based
Payment”, which requires all share-based payments to employees, including
grants of employee stock options, to be recognized as compensation
expense
in the consolidated financial statements based on their fair values.
In
2005, the FASB released several related Staff Positions (“FSPs”) to help
clarify and interpret this new guidance. The new rules modify certain
measurement and expense recognition provisions of SFAS No. 123,
“Accounting for Stock-Based Compensation”, including the requirement to
estimate employee forfeitures each period when recognizing compensation
expense and requiring that the initial and subsequent measurement
of the
cost of liability-based awards each period be based on fair value
(instead
of the intrinsic value) of the award. SFAS No.123 (R) also requires
the
benefits of tax deductions in excess of recognized compensation cost
to be
reported as a financing cash flow, rather than as an operating cash
flow
as required under current literature. This requirement will reduce
net
operating cash flows and increase net financing cash flows in the
periods
after adoption. The Company previously elected to expense employee
stock-based compensation using the fair value method prospectively
for all
awards granted or modified on or after January 1, 2003. The Company
is
assessing the impact of the adoption on its consolidated financial
position and results of operation, but it does not expect it to be
material.
|
29
| (iii) |
SFAS
153, Exchanges of Non-monetary Assets, was issued in December 2004
as an
amendment to Accounting Principles Board (APB) Opinion No. 29. SFAS
153
provides guidance on the measurement of exchanges on non-monetary
assets,
with exceptions for exchanges that do not have commercial substance.
Under
SFAS 153, a non-monetary exchange has commercial substance if, as
a result
of the exchange, the future cash flows of an entity are expected
to change
significantly. Under SFAS 153, a non-monetary exchange is measured
based
on the fair values of the assets exchanged. If fair value is not
determinable, the exchange lacks commercial substance or the exchange
is
to facilitate sales to customers, a non-monetary exchange is measured
based on the recorded amount of the non-monetary asset relinquished.
SFAS
153 will be effective for non-monetary exchanges that occur in fiscal
periods beginning after June 15, 2005, and is not expected to have
a
material impact on the Company’s consolidated financial
statements.
|
| (iv) |
In
November 2005, the FASB issued FSP FAS 115-1 and FAS 124-1, “The Meaning
of Other-Than-Temporary Impairment and Its Application to Certain
Investments”, which nullified 2004 guidance issued by the EITF on
determining whether an impairment is other-than-temporary, and effectively
reverted back to previous guidance in this area. The FSP generally
encompasses guidance for determining when an investment is impaired,
how
to measure the impairment loss and what disclosures should be made
regarding impaired securities. This FSP is effective for the first
quarter
of 2006.
|
| (v) |
In
September 2005, the EITF reached a consensus on issue No. 04-13,
Accounting
for Purchases and Sales of Inventory with the Same
Counterparty.
This issue addresses the question of when it is appropriate to measure
purchase and sales of inventory at a fair value and record them in
cost of
sales and revenues and when they should be recorded as exchanges
measured
at the book value of the item sold. The EITF concluded that in certain
circumstances purchases and sales of inventory with the same counterparty
that are entered into in contemplation of one another should be combined
and recorded as exchanges measured at the book value of the item
sold. The
consensus should be applied to new arrangements entered into, and
modifications or renewals of existing agreements, beginning with
the
second quarter of 2006. The Company does not expect the adoption
of this
statement will have a material impact on our results of operations
or
financial position.
|
| (vi) |
SFAS
151, Inventory Costs, was issued in November 2004 as an amendment
to
Accounting Research Bulletin (ARB) No. 43. SFAS 151 specifies the
general
principles applicable to the pricing and allocation of certain costs
to
inventory. Under SFAS 151, abnormal amounts of idle facility expense,
freight, handling costs and wasted materials are recognized as current
period charges rather than capitalized to inventory. SFAS 151 also
requires that the allocation of fixed production overhead to the
cost of
inventory be based on the normal capacity of production facilities.
SFAS
151 will be effective for inventory costs incurred beginning in the
Company’s 2006 fiscal year. The Company is presently evaluating the impact
of SFAS 151 on the Company’s consolidated financial
statements.
|
30
MANAGEMENT’S
DISCUSSION AND ANALYSIS
Fourth
Quarter and Year Ended December 31, 2005
The
following management’s discussion and analysis of the financial condition and
results of operations (“MD&A”) of FNX Mining Company Inc. (“FNX” or the
“Company”) was prepared to enable a reader to assess material changes in the
financial condition and results of operations of FNX as at and for the three
month period and year ended December 31, 2005, in comparison to the
corresponding prior-year periods. This MD&A is prepared as at March 30,
2006, and is intended to supplement and complement the audited consolidated
financial statements of FNX for the years ended December 31, 2005 and 2004,
which are prepared in accordance with Canadian generally accepted accounting
principles (“GAAP”). This MD&A should also be read in conjunction with the
most recent Annual Information Form (“AIF”) on file with the Canadian provincial
securities regulatory authorities. This MD&A contains certain forward
looking statements based on management’s current expectations (please see
“Cautionary Note Regarding Forward Looking Statements” below). All references to
dollars herein are in Canadian dollars unless otherwise specified. The Company
has changed various accounting policies as outlined in “Financial Results -
Change in accounting policies”. As a result, all financial information related
to 2004 and earlier within the AIF has been restated.
Contents
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38
|
1
Acquisitions
and major developments
Following
FNX’s acquisition on July 1, 2005 of 100% of Aurora Platinum Corp.
(“Aurora”)
and
immediate subsequent disposition of 50% of Aurora to Dynatec Corporation
(“Dynatec”)
(collectively the “Aurora
Transactions”),
FNX
completed two other major transactions in the fourth quarter of 2005 - the
October 21, 2005 acquisition of Dynatec’s interests in Sudbury, thereby
increasing FNX’s ownership in its Sudbury properties to 100%, and the November
28, 2005 closing of a bought deal financing pursuant to which FNX issued
7,500,000 common shares for gross proceeds of $102.0 million. These transactions
have transformed the Company by quadrupling the size of the balance sheet,
adding sufficient cash resources to permit FNX to undertake its capital
exploration and development program in 2006 and allowing the Company to obtain
100% benefit from any future opportunities in the Sudbury Basin of
Ontario.
On
October 5, 2005, FNX announced that it had entered into an agreement with
Dynatec whereby FNX would consolidate 100% ownership of its Sudbury assets
(the
“Dynatec
Transaction”).
On
October 21, 2005, the Dynatec Transaction closed and FNX acquired Dynatec’s 25%
interest in the Sudbury Joint Venture (the “SJV”)
and
its 50% interest in Aurora for the issuance by FNX of 20,500,000 of its common
shares to Dynatec. The agreement also contains other terms including significant
restrictions on the FNX common shares issued to Dynatec, including a three
year
voting trust, standstill and right of first refusal plus a requirement for
broad
distribution on the sale of the FNX shares. In addition, FNX has entered
into a
mine contractor services agreement whereby Dynatec will provide FNX with
mine
contractor services on the Sudbury properties until December 31, 2007. Dynatec
will be paid a fee for such services. Management is of the view that the
consolidation of these assets allows FNX to streamline and optimize its Sudbury
assets and provides greater flexibility for FNX to pursue growth opportunities
in the Sudbury mining district.
With
the
acquisition of Dynatec’s interest in the former SJV and FNX acquiring 100%
ownership and control of its Sudbury assets, the Company changed its accounting
policy with respect to revenue recognition to better align FNX’s accounting
policies with its industry peers and is more reflective of the Company’s
evolvement from a developing stage enterprise to a mid-tier producer. The
change
in accounting policy was applied retroactively and financial results and
positions for all periods presented in the annual consolidated financial
statements for 2005 and discussed in this MD&A have been restated in
accordance with the changes in accounting policies which are more fully
described below under Change in Accounting Policies.
Operations
FNX
mined
and sold more tons of ore and produced more pounds of nickel and copper in
the
fourth quarter of 2005 than in either the fourth quarter of 2004 or the third
quarter of 2005. The Company mined 124,169 tons of ore and shipped and sold
131,404 tons of ore resulting in the sale of 2.2 million pounds of nickel
during
the fourth quarter of 2005. FNX realized revenues of US$5.77 per pound of
nickel
sold and had cash costs, net of by-product credits, of US$3.11 per pound
of
nickel sold. The revenue per ton of ore sold was $173 at a cash cost of $122
per
ton resulting in a cash operating margin per ton of ore sold of $51. Nickel
sales, along with significant by-product revenues from copper, platinum,
palladium, gold and cobalt, resulted in
2
operating
revenues of $22.7 million. Mine cash operating costs for the quarter totaled
$16.0 million, providing a cash operating margin of $6.7 million.
For
2005,
FNX mined and sold more tons of ore and produced more pounds of nickel and
copper than in 2004. The Company mined 442,886 tons of ore and sold 437,376
tons
of ore resulting in the sale of 8.0 million pounds of nickel and 6.2 million
pounds of copper. In 2005, FNX realized revenues of $6.56 per pound of nickel
sold and had cash costs, net of by-product credits, of US$3.17 per pound
of
nickel sold. The revenue per ton of ore sold was $193 at a cash cost of $118
per
ton resulting in a cash operating margin per ton of ore sold of $76. Nickel
sales, along with significant by-product revenues from copper, platinum,
palladium, gold and cobalt, resulted in operating revenues of $84.6 million
and
mine cash operating costs for 2005 totaled $51.5 million, providing a cash
operating margin of $33.1 million.
As
a
result of a non-cash loss of $3.3 million on the sale of a 50% interest in
Aurora to Dynatec, FNX’s net earnings for the year were reduced by $3.3 million,
or $0.06 per share. Adjusting for this unusual item, FNX reports Adjusted
Earnings of $7.9 million for the year, equal to $0.14 per share. Cash balances
and working capital were $152.5 million and $153.2 million, respectively,
at
December 31, 2005 and the Company continued to be debt free.
The
main
focus of the FNX exploration program during the quarter continued to be the
high
grade copper-nickel-platinum-palladium-gold discoveries in the footwall of
the
Levack Mine. Drilling from surface (3 drills) and underground platforms (3
drills) during the fourth quarter of 2005 continued to expand the Levack
Footwall Deposit, first reported in February 2005. Press releases in 2005
documented the progress of this program and suggested that a potentially
significant deposit has been discovered. Updated information was released
subsequent to year end and further results will be released on a continuing
basis. While the available data are insufficient to determine resources/reserves
of the Levack Footwall Deposit, strong borehole UTEM (University of Toronto
Electromagnetic) and RIM (Radio Imaging Method) anomalies indicate that the
deposit extends beyond the boundaries of the area drilled to date. The Levack
Footwall Deposit bears many similarities, particularly the geological setting
and mineralogy, with other currently producing footwall-type deposits in
the
Sudbury mining district. Three other footwall zones in proximity to the Levack
Footwall Deposit are being drilled and their relationship to the Footwall
Deposit is being investigated. A great deal of additional drilling is required
to determine the deposit’s size and economic potential. Access options to the
Footwall Deposit are being considered. The drilling on the Aurora properties
was
initiated and will continue in 2006.
Mining
at
the Inter Main and PM Deposits of the McCreedy West mine continued in the
fourth
quarter. Ore sold from the PM Deposit at McCreedy West was included in revenue
in the statement of operations starting with May 2005. The rehabilitation
of the
#1 and #2 shaft compartments at Levack has been completed to the 1860 level
with
rehabilitation done on four levels. A decision has been made to rehabilitate
the
shaft to the 2650 level. Shaft sinking at Podolsky continued with 373 feet
of
advance in the quarter and the shaft reached a depth of 1,772 feet by the
end of
the year. Excavation of the 1750 level station reached 32 feet by the end
of the
year.
There
were no lost time accidents in the fourth quarter of 2005 at McCreedy West
and
the Levack and Podolsky projects were lost time incident free. In light of
the
increased number of personnel, a second full-time health and safety coordinator
was hired. A public information session was held in November to update local
residents on the activities at both the McCreedy West and Levack mine sites.
Over 100 local residents attended this meeting and the Company
3
was
complimented on its openness. Liaison as part of our memorandum of understanding
is continuing on a regular basis with the Whanapitae First Nation at Podolsky.
There were no reportable environmental incidents in the quarter. During 2005,
McCreedy West initiated the development of an ISO 14001 compatible Environmental
Management System and an OHSAS 18001 compatible Health and Safety Management
System with an implementation date of December 2006.
FNX’s
financial performance has been and is expected to continue to be closely
linked
to the price of nickel and, to a lesser extent, the price of copper and other
metals (platinum, palladium, gold and cobalt) produced by the Company. Nickel
accounted for approximately 64% of the Company’s mine operating revenues in the
fourth quarter of 2005, a decline from the 77% in the third quarter of 2005
and
96% in the fourth quarter of 2004. Copper accounted for 22% of revenues in
the
fourth quarter of 2005 an increase of 15% from the fourth quarter of 2004
as
production continues to ramp up from the PM Deposit. The balance of FNX’s
revenues comes from the by-product production of platinum, palladium, gold
and
cobalt. These by-products contributed 14% of FNX’s revenues in the fourth
quarter of 2005 and 9% for the year, compared to 3% and 5% for the fourth
quarter and year 2004.
Nickel
The
cash
settlement price of nickel on the London Metal Exchange (“LME”) fluctuated
considerably in 2005, having opened the year at US$6.37 per pound, reaching
a
high of US$8.05 per pound on May 12, 2005 and a low of US$5.22 per pound
on
November 1, 2005 and closing the year at US$6.07 per pound. The LME nickel
price
averaged US$5.73 per pound in the fourth quarter of 2005, compared to an
average
of US$6.61 per pound in the third quarter of 2005 and US$6.39 per pound in
the
fourth quarter of 2004, respectively. The LME cash settlement price on December
31, 2005 was US$6.07 per pound and averaged US$6.68 for the 2005 year, compared
to an average price of US$6.28 per pound in 2004. The LME average cash
settlement price per pound of nickel has been higher year over year for the
past
five consecutive years increasing as follows: 2001 - US$2.70; 2002 - US$3.07;
2003 - US$4.37; 2004 - US$6.28; and 2005 - US$6.68. Nickel prices have increased
in the first quarter of 2006 and averaged US$6.70 per pound during January
and
February 2006 and closed at US$6.88 per pound on March 28, 2006.
Nickel
prices remained well above historical levels in 2005 due to the growing
importance of Chinese nickel demand, signs of improving world economy and
a
shortage of primary nickel sources. Long-term drivers are expected to be
the
sustainability of Chinese nickel demand growth, the global supply deficit,
a
declining US dollar and continuing high energy prices. In addition, AME Mineral
Economics has stated that the depletion of scrap resources is expected to
affect
the price of nickel as such sources accounted for approximately 40% of available
nickel in 2004 but have since been depleted due to the increase in nickel
prices. World consumption of nickel grew by 2.8% in 2004 to 1.25 million
tonnes.
In 2005, consumption growth was severely constricted by a supply shortage,
resulting in increasing prices. Growth in 2005 was concentrated in China,
with
China accounting for 60% of the total increase in world consumption between
1999
and 2004.
Management
continues to be of the view that the LME average cash settlement price for
nickel will continue to be volatile but strong. Each US$1.00 change in the
price
per pound of nickel is expected to generate a change in the Company’s pre-tax
earnings and cash flow from operating activities by approximately $9.7
million.
4
Copper
The
LME
average cash settlement price per pound of copper nickel has been higher
year
over year for the past five consecutive quarters increasing as follows: 2004Q4
-
US$1.40; 2005Q1 - US$1.48; 2005Q2 - US$1.54; 2005Q3 - US$1.70; and 2005Q4
-
US$1.95. The LME cash settlement price for copper has continued to increase
in
the first quarter of 2006 and averaged US$2.24 per pound from January 1 to
March
28, 2006, closing that day at US$2.43 per pound. Each US$0.50 change in the
price per pound of copper is expected to generate a change in the Company’s
pre-tax earnings and cash flow from operating activities by approximately
$5.9
million. Management is of the view that the LME average cash settlement price
for copper will remain strong relative to historic prices.
Precious
and other metals
FNX
produces by-product platinum, palladium, gold and cobalt. The price of platinum
was US$859, US$968 and US$1,065 per ounce on December 31, 2004, 2005 and
March
28, 2006, respectively. The price of palladium was US$183, US$254 and US$330
per
ounce on December 31, 2004, 2005 and March 28, 2006, respectively. The price
of
gold was US$438, US$517 and US$567 per ounce on December 31, 2004, 2005 and
March 28, 2006, respectively. The price of cobalt was US$18.50, US$14.75
and
US$14.25 per pound on December 31, 2004, 2005 and March 28, 2006 respectively.
The
contribution to FNX’s revenues from the sale of platinum, palladium and gold is
expected to increase in 2006, compared to 2005, as the Company produced 10,040
ounces of combined platinum, palladium and gold in 2005 and is budgeting
to
produce 40,000 ounces in 2006. Cobalt production in 2005 totaled 98,410 pounds
and is budgeted at 55,000 pounds in 2006.
Foreign
exchange
FNX
reports its financial results in Canadian dollars. While the Company’s minesite
operating costs and most exploration and administration costs are in Canadian
dollars, revenues from metal sales and concentrating, smelting and refining
costs are in US dollars. The Canadian dollar has appreciated relative to
the US
dollar during the quarter as the average rate for the fourth quarter of 2005
was
$1.17/US$, compared to $1.18/US$ in the third quarter of 2005. The exchange
rate
for the fourth quarter of 2004 was $1.22/US$. The Canadian dollar has
outperformed most major currencies in 2005. Many analysts are not expecting
significant changes in the $/US$ exchange rate in 2006 due to Bank of Canada
comments that a strong dollar relative to the US dollar would hamper economic
growth in Canada. Each $0.05 change in exchange rates is expected to generate
a
change in the Company’s pre-tax earnings and cash flow from operating activities
by approximately $2.1 million.
5
FNX
has
changed its accounting policy with respect to revenue recognition and the
costing of broken ore underground. Revenue is now recognized at the time
the ore
is shipped, which is also the time that title transfers. The ore is sold
under
contracts that provide for final prices that are determined by quoted market
prices in a period subsequent to the date of sale. Variations from the
provisionally priced sales are recognized as revenue adjustments as they
occur
until the price is finalized. Revenue was previously recognized two months
after
shipment, being the date that the nickel and copper components were settled.
FNX
has also changed its accounting policy with respect to broken ore underground.
In-process inventory will now be recognized only in respect of broken ore
on
surface reflecting the fact that the ore is not available for use until it
reaches the surface. The Company feels that these changes better align FNX’s
accounting policies with its industry peers, and are more reflective of FNX’s
continuing evolution from a development stage enterprise to a mid tier producer.
Both changes have been adopted retroactively in the Company’s 2005 financial
statements. As a result of the change in accounting policy for revenue
recognition, FNX’s revenues and, therefore, net earnings will be more volatile
in 2006 and beyond as the impact of changing metal prices on provisionally
priced sales is recorded in the subsequent periods.
The
following table presents a summary of and changes between FNX's Consolidated
Statements of Operations for the periods ended December 31, 2005 and
2004.
|
Three
months ended
|
Year
ended
|
||||||||||||||||||
|
2005
|
2004
|
Change
|
2005
|
2004
|
Change
|
||||||||||||||
|
$000s
|
$000s
|
$000s
|
$000s
|
$000s
|
$000s
|
||||||||||||||
|
Mine
operating revenues
|
22,726
|
16,345
|
6,381
|
84,602
|
60,411
|
24,191
|
|||||||||||||
|
Mine
operating expenses (1)
|
(16,032
|
)
|
(9,641
|
)
|
(6,391
|
)
|
(51,484
|
)
|
(35,510
|
)
|
(15,974
|
)
|
|||||||
|
Margin
|
6,694
|
6,704
|
(10
|
)
|
33,118
|
24,901
|
8,217
|
||||||||||||
|
Mine
amortization
|
(3,205
|
)
|
(1,802
|
)
|
(1,403
|
)
|
(8,768
|
)
|
(6,415
|
)
|
(2,353
|
)
|
|||||||
|
Mining,
net
|
3,489
|
4,902
|
(1,413
|
)
|
24,350
|
18,486
|
5,864
|
||||||||||||
|
Non-controlling
interest
|
-
|
(1,141
|
)
|
1,141
|
(4,738
|
)
|
(4,282
|
)
|
(456
|
)
|
|||||||||
|
Earnings
from operations
|
3,489
|
3,761
|
(272
|
)
|
19,612
|
14,204
|
5,408
|
||||||||||||
|
Corporate
administration
|
(1,744
|
)
|
(686
|
)
|
(1,058
|
)
|
(5,226
|
)
|
(3,398
|
)
|
(1,828
|
)
|
|||||||
|
Exploration
administration
|
(856
|
)
|
(642
|
)
|
(214
|
)
|
(2,915
|
)
|
(1,970
|
)
|
(945
|
)
|
|||||||
|
Capital
taxes
|
(1,135
|
)
|
(21
|
)
|
(1,114
|
)
|
(1,135
|
)
|
(186
|
)
|
(949
|
)
|
|||||||
|
Depreciation
|
(31
|
)
|
(27
|
)
|
(4
|
)
|
(89
|
)
|
(101
|
)
|
12
|
||||||||
|
Stock-based
compensation
|
(342
|
)
|
(10
|
)
|
(332
|
)
|
(1,068
|
)
|
(874
|
)
|
(194
|
)
|
|||||||
|
Loss
on disposition
|
-
|
-
|
-
|
(2,600
|
)
|
-
|
(2,600
|
)
|
|||||||||||
|
Taxes
|
(1,314
|
)
|
(851
|
)
|
(463
|
)
|
(4,721
|
)
|
(2,500
|
)
|
(2,221
|
)
|
|||||||
|
Other
(expenses) income
|
2,410
|
804
|
1,606
|
2,739
|
822
|
1,917
|
|||||||||||||
|
Net
earnings (loss)
|
477
|
2,328
|
(1,851
|
)
|
4,597
|
5,997
|
(1,400
|
)
|
|||||||||||
|
Basic
and diluted EPS
|
$
|
0.01
|
$
|
0.05
|
($0.04
|
)
|
$
|
0.08
|
$
|
0.12
|
($0.04
|
)
|
|||||||
(1) Mine
operating expenses exclude mine depreciation and amortization.
6
Operating
revenues were $22.7 million in the fourth quarter of 2005, 39% higher than
in
the fourth quarter of 2004, and were $4.1 million, or 22%, higher than in
the
third quarter of 2005. FNX had net earnings of $0.5 million, equal to $0.01
per
share for the quarter, compared to net earnings of $2.3 million or $0.05
per
share for the same quarter last year. FNX’s cash position at December 31, 2005
was $152.5 million, $95.0 million more than at September 30, 2005 and $95.7
million more than at December 31, 2004. Working capital was $153.2 million,
an
increase of $73.9 million from September 30, 2005 and $82.8 million from
December 31, 2004.
Operating
revenues were $84.6 million for the year, approximately 40% higher than in
2004.
Net earnings were $4.6 million, equal to $0.08 per share for the year, compared
to $6.0 million, or $0.12 per share, of net earnings in 2004. Cash flow from
operating activities was $27.2 million, equal to $0.47 per share for the
year,
and was 109% higher than the $13.0 million, or $0.26 per share in 2004.
Aurora
transactions
On
July
1, 2005, FNX completed the acquisition of all of the issued and outstanding
common shares of Aurora, pursuant to an agreement announced on May 4, 2005.
FNX
issued 4,270,803 common shares to acquire a 100% interest in Aurora. Aurora’s
principal assets are its 70% joint venture interest in the Falconbridge Mine
Property located in the Sudbury mining district, interests in two publicly
listed, junior mining corporations, Lake Shore Gold Corp. (“Lake Shore”) and
Superior Diamonds Inc. (“Superior”), and its nickel-copper-platinum group metals
exploration properties in northwestern Quebec, northwestern Ontario and the
Timmins area of Ontario. In a related but independent transaction that also
closed on July 1, 2005, pursuant to an agreement dated May 18, 2005 with
FNX’s
Sudbury Joint Venture (“SJV”) partner, Dynatec, FNX agreed to sell to Dynatec
50% of the Company’s interest in Aurora for cash proceeds of $12.2 million and
the issuance by Dynatec to FNX of 7,716,594 common shares of Dynatec. Management
is of the view that the mineral properties held by Aurora in the Sudbury
mining
district have significant exploration potential for the discovery of nickel-rich
contact-type deposits and copper-nickel-platinum-palladium-gold footwall-type
deposits similar to the mineralization discovered by FNX at Levack Footwall.
Notwithstanding
that the acquisition of a 100% interest in Aurora on July 1, 2005 and the
immediate subsequent disposition of a 50% interest in Aurora to Dynatec were
essentially simultaneous transactions, accounting rules require these
transactions to be handled separately.
For
purposes of the acquisition of 100% of Aurora the weighted average fair value
price of the shares of FNX was $9.27 as at May 4, 2005, the date the agreement
of the transaction was announced, which would have resulted in an ascribed
fair
value for accounting purposes of $39.6 million as at that time. Purchase
accounting rules, however, require FNX to fair value the 4,270,803 common
shares
issued to shareholders of Aurora at $11.64 per share, being the weighted
average
share price of FNX for the day of, the two business days before and the two
business days after the date of determination of the ultimate number of shares
of FNX to be issued, which date was June 15, 2005. Accordingly, for accounting
purposes, the fair value of the shares of FNX issued was $49.7 million,
excluding transaction costs of $0.7 million. This fair value amount was ascribed
to the net assets acquired.
7
Also
on
July 1, 2005, FNX sold to Dynatec a 50% interest in Aurora with an accounting
cost base of $25.2 million, being half of the fair value of the FNX shares
issued to acquire Aurora as described above. The consideration received from
Dynatec was $12.2 million in cash and 7,716,594 common shares of Dynatec.
As the
Dynatec transaction was independent of the acquisition of Aurora, for accounting
purposes, the fair value of the shares received from Dynatec at the date
the
transaction closed was $1.30 per share for a total fair value of $10.0 million.
The fair value of cash and share proceeds received from Dynatec, therefore,
totaled $22.6 million. Accordingly, for accounting purposes, FNX recorded
a
one-time, pre-tax, non-cash loss on the sale to Dynatec, of $2.6 million,
being
the difference between the $22.6 million of fair value proceeds received
and
FNX’s $25.2 million of fair value costs. In addition, as a result of the
difference between the values of the Dynatec shares for accounting and tax
purposes, a further future income tax expense of $0.7 million was charged
to
earnings.
The
following table presents a reconciliation of and changes between FNX's
Consolidated Adjusted Earnings, a non-GAAP performance measure (please see
discussion under Non-GAAP Performance Measures below), for the three month
periods and years ended December 31, 2005 and 2004, whereby FNX’s GAAP earnings
are adjusted for the one-time, non-cash loss resulting from the sale in July
2005 of a 50% interest in Aurora to Dynatec.
|
Table
2
|
Three
months ended
December
31
|
Year
ended
December
31
|
|||||||||||||||||
|
2005
|
2004
|
Change
|
2005
|
2004
|
Change
|
||||||||||||||
|
|
$000s
|
$
|
000s
|
$
|
000s
|
$
|
000s
|
$
|
000s
|
$
|
000s
|
||||||||
|
Net
earnings
|
477
|
2,328
|
(1,851
|
)
|
4,597
|
5,997
|
(1,400
|
)
|
|||||||||||
|
Loss
on disposition
|
-
|
-
|
-
|
2,600
|
-
|
2,600
|
|||||||||||||
|
Tax
on loss on disposition
|
-
|
-
|
-
|
687
|
-
|
687
|
|||||||||||||
|
Adjusted
net earnings
|
477
|
2,328
|
(1,851
|
)
|
7,884
|
5,997
|
1,887
|
||||||||||||
|
Adjusted
Basic EPS
|
$
|
0.01
|
$
|
0.05
|
($0.04
|
)
|
$
|
0.14
|
$
|
0.12
|
$
|
0.02
|
|||||||
As
per
the above, FNX’s Adjusted Earnings show an improvement from 2004 to 2005 as
strong growth in the Company’s production levels resulted in higher year over
year Adjusted Earnings.
The
Dynatec Transaction
On
October 5, 2005, FNX announced the Dynatec Transaction. The transaction closed
on October 21, 2005. The material terms of the transaction are as
follows:
| (i) |
FNX
acquired Dynatec’s 25% interest in the SJV and 50% interest in
Aurora;
|
| (ii) |
FNX
issued 20,500,000 common shares to
Dynatec;
|
| (iii) |
FNX
and Dynatec entered into a Voting Trust agreement with a term of
three
years pursuant to which votes attached to the common shares held
by
Dynatec will be voted in line with recommendations of the board
of
directors of FNX on various fundamental changes and initiatives
(including, among other matters, mergers, acquisitions and the
nomination
of directors to the FNX board), such agreement ceasing to be in
effect
should Dynatec’s ownership stake in FNX decline below 10% on a
fully-diluted basis;
|
8
| (iv) |
FNX
was provided with a right of first refusal in the event that Dynatec
wishes to distribute any of the common shares that it holds, which
will
permit FNX to designate the purchasers of common shares to be sold
by
Dynatec for a period of 10 business days at a price acceptable
to Dynatec
(net of commissions) which, in the event of a sale by way of a
prospectus,
shall not exceed 95% of the volume weighted average of the trading
prices
of the common shares on the Toronto Stock Exchange for the five
trading
days immediately prior to receipt of written notice from Dynatec
of its
election to sell such common shares (the “VWAP”)
and, in the event of a sale that will not be done by way of a prospectus,
shall not exceed the VWAP, and if FNX elects not to exercise its
right of
first refusal or is unable to arrange for the sale of the common
shares in
accordance with terms attaching thereto, Dynatec may, for a period
of 90
days thereafter, enter into an underwriting agreement to sell such
common
shares through a public distribution in Canada and, if a prospectus
is
required in connection with such sale, FNX will take such reasonable
steps, at Dynatec’s cost, as are necessary to qualify by prospectus in
Canada the distribution of such common
shares;
|
| (v) |
Dynatec
was provided with representation on FNX’s board of directors that is the
greater of two nominees and that number of nominees that is equal
to
Dynatec’s fully diluted ownership position, for a period of three years
(such representation being dependent upon Dynatec maintaining an
ownership
stake in FNX of at least 10% on a fully-diluted basis);
|
| (vi) |
FNX
agreed to purchase, at the option of Dynatec, $10.0 million of
Dynatec’s
common shares in the next Dynatec offering of common shares to
the public
at the issue price of the offering, provided that the offering
is for a
minimum of $100.0 million and is completed before October 21, 2006;
however, Dynatec subsequently completed a common share offering
of in
excess of $100.0 million without exercising their option and, accordingly,
the Dynatec option described herein has fallen away;
|
| (vii) |
Dynatec
will provide contractor mining services at the Sudbury properties
until
December 31, 2007, subject to FNX having approval, control and
direction
over the services provided by Dynatec. Under the mining services
agreement, Dynatec will be paid a fee of 7% on a cost reimbursement
basis;
and
|
| (viii) |
Dynatec
is to be paid $7.5 million on each of December 31, 2006 and 2007
as
deferred payment obligations.
|
The
total
purchase consideration of $300.3 million was satisfied by the issuance of
20,500,000 common shares of FNX, the deferred payment obligations to Dynatec
of
$7.5 million on each of December 31, 2006 and 2007, plus cash transaction
costs
of $1.1 million. The 20,500,000 common shares issued by FNX to Dynatec had
an
ascribed value for accounting purposes of $13.90 per common share (based
upon
the volume weighted average trading price of FNX’s shares for the day of, the
two trading days before and the two trading days after October 5, 2005, the
date
of the announcement of the transaction). Accordingly, the share consideration
totaled $285.0 million. The discounted value of the two $7.5 million payments
to
Dynatec is $14.2 million. An independent valuation of the mining and mineral
exploration properties was completed and the purchase price was accordingly
allocated to the mineral properties. The ascribed value of the mineral
properties acquired was greater than the mineral properties’ tax values.
Accordingly, a future income tax liability of $133.2 million was accrued.
9
The
following table presents a summary of FNX's metal production and sales
information for the periods ended December 31, 2005 and 2004.
|
Table
3
|
Year
ended
|
||||||||||||
|
2005
|
2004
|
2005
|
2004
|
||||||||||
|
Ore
(tons)
|
|||||||||||||
|
Mined
|
124,751
|
82,213
|
442,866
|
304,797
|
|||||||||
|
Sold
|
|||||||||||||
|
Nickel
ore
|
84,358
|
78,740
|
326,651
|
291,780
|
|||||||||
|
Copper
ore
|
47,046
|
3,552
|
110,716
|
14,988
|
|||||||||
|
Total
ore
|
131,404
|
82,292
|
437,367
|
306,768
|
|||||||||
|
Grade
of ore sold
|
|||||||||||||
|
Nickel
ore (%Ni)
|
1.6
|
1.7
|
1.7
|
1.6
|
|||||||||
|
Copper
ore (%Cu)
|
2.1
|
5.1
|
2.6
|
5.7
|
|||||||||
|
Payable
metal sold (000s lbs)
|
|||||||||||||
|
Nickel
|
2,151
|
1,843
|
8,018
|
6,587
|
|||||||||
|
Non-controlling
interest
|
-
|
(461
|
)
|
(1,467
|
)
|
(1,647
|
)
|
||||||
|
Net
to FNX
|
2,151
|
1,382
|
6,551
|
4,940
|
|||||||||
|
Copper
|
2,053
|
638
|
6,211
|
2,643
|
|||||||||
|
Non-controlling
interest
|
-
|
(160
|
)
|
(1,040
|
)
|
(661
|
)
|
||||||
|
Net
to FNX
|
2,053
|
478
|
5,171
|
1,982
|
|||||||||
|
Metal
sales revenue
|
|||||||||||||
|
Average
Ni price (US$/lb)
|
5.77
|
6.53
|
6.56
|
6.21
|
|||||||||
|
Average
Cu price (US$/lb)
|
2.07
|
1.45
|
1.73
|
1.34
|
|||||||||
|
$/US$
exchange rate
|
1.17
|
1.22
|
1.21
|
1.30
|
|||||||||
|
Total
revenue ($000s)
|
22,726
|
16,345
|
84,602
|
60,411
|
|||||||||
|
Revenue
($/ton of ore sold)
|
173
|
199
|
193
|
197
|
|||||||||
|
Cash
cost of metals sold
|
|||||||||||||
|
Mining
($000s)
|
16,031
|
9,641
|
32,973
|
35,510
|
|||||||||
|
Cash
cost (US$/lb of Ni sold)
|
3.11
|
3.54
|
3.17
|
3.28
|
|||||||||
|
Cash
cost ($/ton of ore sold)
|
118
|
117
|
122
|
116
|
|||||||||
|
Notes:
|
1.
|
All
production figures are shown on a 100% basis with Dynatec’s 25% interest
shown as non-controlling interest.
|
||||||||
|
2.
|
Mined
relates to ore that was mined from McCreedy West and brought to
surface
during the three month and twelve month periods ended December
31, 2005
and 2004, respectively, and includes 83,860 tons of ore mined from
the PM
Deposit at McCreedy West from May to December 2005.
|
|||||||||
|
3.
|
Tons
of ore, grade and payable metal sold relate to ore that was mined
from
McCreedy West, was shipped to Inco and was, accordingly, recognized
in
revenue during the three month and twelve month periods ended December
31,
2005 and 2004, respectively, and includes 83,010 tons of ore from
the PM
Deposit at McCreedy West sold from May to December
2005.
|
|||||||||
|
4.
|
Cash
operating cost per pound of nickel sold excludes mine depreciation
and
amortization and includes mining, milling, smelting, refining,
haulage and
marketing costs and is net of by-product credits.
|
|||||||||
|
5.
|
Copper
grades reflect a blend of lower grade PM Deposit ore with higher
grade
ores from other zones.
|
|||||||||
10
Metal
sales
Nickel
sales in the fourth quarter of 2005 were 308,000 pounds more, or 17% higher,
than in the same period of 2004, and were 353,000 pounds more than in the
third
quarter of 2005. The 17% increase in pounds of nickel sold in this quarter
compared to 2004 was due to more tons of nickel ore being sold at a higher
grade. The 353,000 more pounds of nickel sold in the fourth quarter as compared
to the third quarter of 2005 was due to 19,609 more tons of combined nickel
and
copper ores being sold, which more than offset the lower nickel grades. Copper
sales in the fourth quarter were 1,415,000 pounds more than in the same period
in 2004, and were 709,000 pounds higher than in the third quarter of 2005.
The
222% increase in pounds of copper sold in this quarter compared to 2004 was
due
to more tons of copper ore being sold which more than offset the lower average
copper grades. The 53% increase in pounds of copper sold in the fourth quarter
as compared to the third quarter of 2005 was due to 9,867 more tons of copper
ore being sold at higher average copper grade. More tons of ore were sold
in the
fourth quarter of 2005 than in the fourth quarter of 2004, as the McCreedy
West
Mine was still in the process of ramping up production from the Inter Main
Deposit in 2004. Production of ore in the fourth quarter of 2005 was higher
than
in the third quarter of 2005 as production from the PM Deposit continues
to ramp
up at McCreedy West.
Nickel
sales for the year ended December 31, 2005 were 1,431,000 pounds higher than
in
2004. The 22% increase in pounds of nickel sold was due to 34,871 more tons
of
nickel ore being sold this year. Copper sales for 2005 were 1,943,000 pounds
higher than in the same period in 2004. The 112% increase in pounds of copper
sold this year was due to a combination of 29,704 more tons of copper ore
being
sold along with lower average copper grades from the PM Deposit. Production
levels were higher in 2005 than in 2004 for the reasons discussed
above.
FNX
plans
to ship 635,000 tons of production and pre-production ore in 2006, 38% higher
than in 2005, and to have payable metal production of 8.1 million pounds
of
nickel, 9.7 million pounds of copper, 55,000 pounds of cobalt and 40,000
combined ounces of platinum, palladium and gold.
Metal
sales revenue
The
nickel and copper contained in the ore that FNX sells to Inco for further
processing each month is priced at and ultimately paid to FNX on the basis
of
the lower of the month’s average LME cash settlement price and the monthly
average LME three month seller price. FNX’s average realized nickel price was
US$5.77 per pound and US$6.28 per pound of nickel sold in the fourth quarter
and
year 2005, respectively, compared to US$6.39 per pound and US$6.56 per pound,
respectively, last year. As discussed in the Executive Summary section of
this
MD&A, management is of the view that nickel prices will be volatile but
should remain high in 2006 relative to historic averages.
The
realized nickel price in the fourth quarter of 2005 was lower than that realized
in the fourth quarter of 2004 and the third quarter of 2005. The 8% appreciation
in the value of the Canadian dollar relative to the US dollar resulted in
lower
nickel sales revenue in Canadian dollars than would otherwise have been
realized. More pounds of nickel were sold in all the comparable periods listed
in the table below. The decline in the nickel prices from the third quarter
to
the fourth quarter of this year resulted in $1.7 million less sales revenue
in
the fourth quarter, while for the year resulted in $0.6 million less sales
revenue.
11
The
following table shows the increase (decrease) in FNX’s nickel sales revenue (in
Canadian dollars) as a result of an increase (decrease) in the quantity of
nickel sold and the price of nickel earned by comparing the fourth quarter
and
year 2005 to previous periods.
|
Q4-2005
compared
to
Q4-2004
|
YTD-2005
compared
to
YTD-2004
|
Q4-2005
c
ompared
to
Q3-2005
|
|||
|
$000s
|
$000s
|
$000s
|
|||
|
Increase
(decrease) in nickel sold:
|
|||||
|
Number
of pounds sold (000s lbs)
|
308
|
1,432
|
353
|
||
|
Change
in revenue due to quantity
|
2,537
|
11,510
|
2,672
|
||
|
Price
per pound sold (US$/lb) (1)
|
(0.76)
|
(0.38)
|
(0.52)
|
||
|
Change
in revenue due to price
|
(2,205)
|
(574)
|
(1,706)
|
||
|
Net
change in sales revenue
|
332
|
10,936
|
966
|
(1) The
price
of nickel is quoted in US dollars. FNX, however, reports revenue in Canadian
dollars. As a result of the approximately 8% appreciation in the Canadian
dollar
compared to the US dollar from the fourth quarter of 2004 to the fourth quarter
of 2005, the increase in the price per pound of nickel in Canadian dollar
terms
has not been as large as the increase in US dollar terms. The effect of changes
in the Canadian dollar-US dollar exchange rate realized by FNX has not been
separately identified in the table above.
Mining
cost of sales
Mine
operating expenses excluding mine depreciation and amortization costs (“cash
operating costs”) were $16.0 million in the fourth quarter of 2005, compared to
$9.6 million in the fourth quarter of 2004. FNX’s cash operating cost per pound
of nickel sold, a non-GAAP performance measure (please see discussion under
non-GAAP Performance Measures below), was US$3.11 for the quarter, US$0.43
per
pound lower than in the fourth quarter of 2004 and US$0.24 per pound lower
than
in the third quarter of 2005. Cash operating costs were $6.4 million higher
in
the fourth quarter of 2005 compared to 2004 due to the significantly higher
number of pounds of nickel and copper sold as a result of the higher number
of
tons of ore in 2005. The cash operating cost per pound benefited from higher
by-product credits in 2005 as well.
Mine
cash
operating costs were $51.5 million for the year 2005, compared to $35.5 million
in 2004. FNX’s cash operating cost per pound of nickel sold was US$3.17 per
pound for the full year 2005, US$0.11 per pound lower than in 2004. Mine
cash
operating costs were $16.0 million higher in 2005 compared to 2004 due to
the
significantly higher number of tons of ore sold this year compared to last
year.
The unit costs were lower, however, due to the higher number of pounds of
nickel
sold and much higher by-product credits.
12
|
Table
5
|
Three
months ended
December
31, 2005
|
Three
months ended
December
31, 2004
|
||||||||||||||||
|
|
C$000s
|
$
|
US000s
|
$
|
US/lb
|
C$000s
|
$
|
US000s
|
$
|
US/lb
|
||||||||
|
Operating
expenses (1)
|
16,031
|
13,663
|
6.35
|
9,641
|
7,901
|
4.29
|
||||||||||||
|
By-product
credits:
|
||||||||||||||||||
|
Copper
|
(4,984
|
)
|
(4,248
|
)
|
(1.97
|
)
|
(1,122
|
)
|
(920
|
)
|
(0.50
|
)
|
||||||
|
Other
(2)
|
(3,193
|
)
|
(2,721
|
)
|
(1.27
|
)
|
(554
|
)
|
(454
|
)
|
(0.25
|
)
|
||||||
|
Cash
operating costs
|
7,854
|
6,694
|
3.11
|
7,965
|
6,527
|
3.54
|
||||||||||||
|
Nickel
sold (000s lbs)
|
2,151
|
1,843
|
||||||||||||||||
|
Table
6
|
Year
ended
December
31, 2005
|
Year
ended
December
31, 2004
|
||||||||||||||||
|
C$000s
|
$
|
US000s
|
$
|
US/lb
|
C$000s
|
$
|
US000s
|
$
|
US/lb
|
|||||||||
|
Operating
expenses (1)
|
51,483
|
42,513
|
5.30
|
35,510
|
27,372
|
4.16
|
||||||||||||
|
By-product
credits:
|
||||||||||||||||||
|
Copper
|
(12,930
|
)
|
(10,677
|
)
|
(1.33
|
)
|
(4,574
|
)
|
(3,526
|
)
|
(0.54
|
)
|
||||||
|
Other
(2)
|
(7,779
|
)
|
(6,424
|
)
|
(0.80
|
)
|
(2,876
|
)
|
(2,217
|
)
|
(0.34
|
)
|
||||||
|
Cash
operating costs
|
30,774
|
25,412
|
3.17
|
28,060
|
21,629
|
3.28
|
||||||||||||
|
Nickel
sold (000s lbs)
|
8,018
|
6,587
|
||||||||||||||||
(1) Operating
expenses exclude mine depreciation and amortization.
(2) Platinum,
palladium, gold and cobalt.
(3) Canadian
dollars have been translated into US dollars using the average rate realized
by
FNX for the relevant period.
Total
operating costs are expected to rise during 2006 as a result of increasing
quantities of ore mined due to production from the PM Deposit. The PM Deposit’s
relatively higher copper and precious metals by-product content should result
in
higher by-product credits.
Mine
depreciation and amortization expense was $3.2 million in the fourth quarter
of
2005, compared to $1.8 million in 2004, as both the property, plant and
equipment balance and number of tons of ore shipped to Inco were higher this
year. Additional mine depreciation charges were incurred as a result of the
significant increase in the carrying value of the McCreedy West mine from
the
Dynatec Transaction.
Mine
depreciation and amortization expense will increase in 2006 with the increase
in
production rates as a result of the continuing ramping up of the PM Deposit
and
the additional amortization associated with higher carrying value of the
McCreedy west mine from the Dynatec Transaction.
Cash
operating margin per ton of ore sold
Cash
operating margin per ton of ore sold, a non-GAAP performance measure (please
see
discussion under Non-GAAP Performance Measures below), was $51 per ton in
the
fourth quarter of 2005, compared to $82 per ton in 2004 and $119 per ton
and $74
per ton in the second and first quarters of 2005, respectively. While higher
tonnages of ore were sold in the
13
third
quarter compared to the second quarter of 2005, they were at a lower realized
Canadian dollar metal price, thereby contributing to the reduced cash operating
margin per ton of ore sold.
|
Table
7
|
Three
months ended
December
31
|
Year
ended
December
31
|
|||||||||||
|
2005
|
2004
|
2005
|
2004
|
||||||||||
|
$
|
/ton
|
$
|
/ton
|
$
|
/ton
|
||||||||
|
$/ton
|
|||||||||||||
|
Mine
operating revenue
|
173
|
199
|
193
|
197
|
|||||||||
|
Mine
operating expenses (2)
|
(122
|
)
|
(117
|
)
|
(118
|
)
|
(116
|
)
|
|||||
|
Cash
operating margin per ton of ore sold
|
51
|
82
|
75
|
81
|
|||||||||
(1) Components
of the cash operating margin per ton of ore sold are calculated by dividing
each
of mine operating revenue and mine operating expenses, as per the statements
of
operations, by tons of ore sold.
(2) Mine
operating expenses exclude mine depreciation and amortization.
With
metal prices continuing to be high, grades forecasted to remain stable and
increasing tonnages of lower margin ore mined from the PM Deposit, FNX
anticipates that the cash operating margin per ton of ore sold will continue
to
be volatile.
Corporate
and exploration administration
Corporate
administration expenses were $1.7 million and $5.3 million in the fourth
quarter
and year 2005, respectively, compared to $0.7 million and $3.4 million,
respectively, in 2004. Due to the nature of exploration activities, exploration
administration expenses are somewhat more volatile than corporate administration
expenses and were $0.9 million and $2.9 million in the fourth quarter and
year
2005, respectively, compared to $0.6 million and $2.0 million, respectively,
in
2004. Corporate and exploration administration expenses were higher in the
fourth quarter of 2005, primarily due to the addition of personnel to assist
in
facilitating the growth of FNX’s business in 2005 and for bonuses accrued for
exceeding corporate objectives for the year including the encouraging
exploration results from the Levack Footwall discovery.
Depreciation
Depreciation
expenses for the Toronto head office and Sudbury exploration office equipment,
furniture and fixtures were not significant.
Stock-based
compensation
Stock-based
compensation expense was $0.3 million and $1.1 million in the fourth quarter
and
year 2005, respectively, compared to $0.0 million and $0.9 million in the
quarter and year 2004. In the fourth quarter of 2005, 324,000 stock options
were
granted while nil were granted in the fourth quarter of 2004. With the growth
in
FNX’s business in 2005 and the addition of personnel, 1,063,000 stock options
were granted in 2005 compared to 138,000 in 2004. The stock-based compensation
expense was approximately the same this year as last year as a
14
result
of
the increase in the time period to vest, and hence the recognition of the
expense, for stock options granted in 2005.
Other
expenses (income)
Other
expenses (income) resulted in net income of $2.4 million and $2.7 million
in the
fourth quarter and year 2005, respectively, compared to net income of $0.8
million and $0.8 million, respectively, in 2004. Other income primarily consists
of interest income on cash and term deposits of the Company and shares and
warrants received from International Nickel Ventures Corporation (“INV”)
in
December 2005 (see Investments and Related Party Transactions).
Provision
for income and resource taxes and provincial capital taxes
Provision
for taxes was $1.3 million and $4.7 million in the fourth quarter and year
2005,
respectively, compared to $0.9 million and $2.5 million, respectively, in
2004.
No cash income taxes or resource taxes were payable in either year as the
Company continues to have sufficient income and resource tax deductions
available to reduce cash taxes to nil. The higher future income and resource
tax
expense in 2005 is due to higher earnings before taxes and non-controlling
interest this year compared to last year and a $0.7 million one-time, non-cash
future tax liability charged to earnings as a result of the disposition of
a 50%
interest in Aurora as described above.
The
Federal Large Corporations Tax, (“LCT”)
which
is a tax based on a corporation’s taxable capital (as defined in the Income Tax
Act (Canada)), as at the corporation’s taxation year end. As this capital based
tax is creditable against federal income surtaxes and is not a deductible
expense for the determination of taxable income, accounting rules require
the
LCT to be included in the provision for income and resource taxes on the
statement of operations. Many provincial jurisdictions, including the Province
of Ontario, also charge a tax based on a corporation’s taxable capital. This
expense, however, is a deductible expense in the determination of taxable
income
and is separately disclosed in the statement of operations. As a result of
the
issuance of 20,500,000 common shares to Dynatec and 7,500,000 common shares
under a public offering, both of which occurred in the fourth quarter of
2005,
the Company’s taxable capital for both federal LCT and provincial capital taxes
increased significantly. Accordingly, FNX accrued in the fourth quarter of
2005,
an $0.8 million LCT expense, which is included in the provision for income
and
resource taxes, and a $1.1 million provincial capital tax expense, which
is
separately disclosed on the statement of operations. Both the LCT and provincial
capital taxes were not significant in 2004.
Non-controlling
interest
Non-controlling
interest expenses, related to Dynatec’s interest in the SJV, were $nil and $4.7
million in the fourth quarter and year 2005, respectively, compared to $1.1
million and $4.3 million, respectively, in 2004. As a result of the Dynatec
Transaction in October 2005, there will no longer be a non-controlling interest
expense for any period subsequent to that date as the SJV was
terminated.
Hedging
FNX
does
not currently have any commodity or foreign exchange hedging or other derivative
instruments and there are currently no plans to enter into any such
contracts.
15
Adjusted
earnings before interest, taxes and depreciation and amortization (“Adjusted
EBITDA”), a non-GAAP performance measure (please see discussion under non-GAAP
Performance Measures below), was $1.6 million higher than in the fourth quarter
of 2004. The Adjusted EBITDA for the year ended December 31, 2005 was $4.7
million higher than the same period in 2004.
The
following table presents the calculation of Adjusted EBITDA for the periods
indicated.
|
Table
8
|
Three
months ended
December
31
|
Year
ended
December
31
|
|||||||||||
|
2005
|
2004
|
2005
|
2004
|
||||||||||
|
$000s
|
$
|
000s
|
$
|
000s
|
$
|
000s
|
|||||||
|
Mine
operating revenue
|
22,726
|
16,345
|
84,602
|
60,411
|
|||||||||
|
Mine
operating expenses (1)
|
(16,032
|
)
|
(9,641
|
)
|
(51,484
|
)
|
(35,510
|
)
|
|||||
|
Cash
operating margin
|
6,694
|
6,704
|
33,118
|
24,901
|
|||||||||
|
Corporate
administration
|
(1,744
|
)
|
(686
|
)
|
(5,226
|
)
|
(3,398
|
)
|
|||||
|
Exploration
administration
|
(856
|
)
|
(642
|
)
|
(2,915
|
)
|
(1,970
|
)
|
|||||
|
Other
(expenses) income (2)
|
819
|
(382
|
)
|
995
|
(296
|
)
|
|||||||
|
Non-controlling
interest (3)
|
-
|
(1,676
|
)
|
(8,280
|
)
|
(6,225
|
)
|
||||||
|
Adjusted
EBITDA
|
4,913
|
3,318
|
17,692
|
13,012
|
|||||||||
(1) Mine
operating expenses exclude mine depreciation and amortization.
(2) Excludes
interest income and interest expense.
(3) Calculated
as 25% of cash operating margin, except for the three months ended December
31,
2005.
Cash
flow
from operating activities totaled $27.2 million in 2005, respectively, compared
to $13.0 million in 2004. The higher cash flows for the year 2005 were due
to
the sale of more nickel and copper from the higher quantities of ore sold.
Financing
activities resulted in net cash inflows of $103.8 million for the year,
primarily as a result of the issuance of 7.5 million common shares at $13.60
per
common share in November 2005. Options to purchase 0.2 million and 0.9 million
common shares were exercised under the Company’s stock option plan in the three
months and year periods ended December 31, 2005, respectively, for cash proceeds
of $0.9 million and $5.0 million, respectively. As a result of the high level
of
exploration and development activities undertaken during the quarter and
year to
date 2005, the non-controlling interests’ cash contributions from Dynatec to the
SJV exceeded the cash distributions by $1.9 million for the year
2005.
Investing
activities for 2005 resulted in net cash outflows of $48.9 million for net
exploration, development and equipment expenditures that were capitalized
as
property, plant and equipment, offset somewhat by $13.8 million of cash as
partial consideration for the Dynatec Transaction and the Aurora
Transactions.
16
The
net
change in cash balances as a result of operating, financing and investing
activities was a net cash inflow of $95.7 million since December 31, 2004.
FNX
remains debt free and the Company’s cash position of $152.5 million at December
31, 2005, is sufficient to meet all planned cash expenditures in
2006.
Working
capital
Working
capital increased $73.9 million during the fourth quarter of 2005, primarily
as
a result of the $98.5 million of net proceeds received on the issuance of
7,500,000 common shares on November 28, 2005, pursuant to a bought deal
financing. Working capital also increased $82.8 million for the year to date,
primarily as a result of the above mentioned bought deal and the receipt
from
Dynatec of $12.2 million of cash as partial consideration for the sale to
Dynatec of a 50% interest in Aurora, partially offset by relatively high
levels
of cash expenditures on property, plant and equipment in the Sudbury mining
district.
Reclamation
and other deposits
Reclamation
deposits remained at $1.2 million throughout the year and include various
amounts with government agencies in the Province of Ontario in connection
with
the McCreedy West, Levack and Podolsky properties. Reclamation deposits are
subject to change based upon changes in the underlying mine reclamation and
site
restoration obligation as a result of updated environmental plans and changes
in
environmental laws and regulations.
In
October 2005, a $2.4 million deposit was advanced to Dynatec as a deposit
for
mining contractor services to be provided by Dynatec in connection with the
Mining Services Agreement entered into on October 21, 2005 (see note 18(c)).
The
deposit will ultimately be applied against Dynatec’s invoice for December
2007.
Investments
As
a
result of the Aurora Transactions and the Dynatec Transaction, FNX owns
7,716,594 million common shares of Dynatec, 13,300,000 million common shares
of
Lake Shore Gold Corp. and 6,860,715 common shares of Superior Diamonds Inc.,
all
three of which are publically traded corporations. The combined purchase
price
was $27.7 million. In addition, FNX holds 3,150,230 common shares and 2,347,886
common share purchase warrants of INV, a recently listed publically traded
corporation (see Related Party Transactions and Subsequent Events) with a
combined cost base at December 31, 2005 of $1.7 million. The total market
value
of these long-term investments as at December 31, 2005 was $49.1
million.
(i)
Summary
Acquisition
costs and expenditures on property, plant and equipment totaled approximately
$470.2 million for the year 2005. The cash expenditures consisted of exploration
drilling, underground exploration/development, including shaft sinking at
Podolsky and shaft rehabilitation at Levack, and the purchase of certain
mining
equipment. The acquisition expenditures on property, plant and equipment
totaled
$423.7 million as a result of $25.7 million of net property, plant and equipment
acquired in the Aurora Transactions in July 2005 and $398.1 million of property,
plant and equipment acquired from the Dynatec Transaction in
17
October
2005. The following table shows the additions to the respective mineral
properties as a result of these two transactions.
|
Table
9
|
Dynatec
Transaction
|
Aurora
Transactions
|
|
|
$000s
|
$000s
|
||
|
McCreedy
West
|
20,466
|
-
|
|
|
Aurora
properties
|
64,480
|
25,661
|
|
|
Kirkwood
|
1,200
|
-
|
|
|
Levack
|
63,203
|
-
|
|
|
Levack
Footwall
|
210,429
|
-
|
|
|
Podolsky
|
35,055
|
-
|
|
|
Victoria
|
3,250
|
-
|
|
|
398,083
|
25,661
|
The
following table shows the net increase (decrease) in property, plant and
equipment expenditures for 2005 by property location.
|
Table
10
|
Year
ended
December
31, 2005
|
Three
months ended
December
31, 2005
|
Three
months ended
September
30, 2005
|
|||||||
|
$000s
|
$
|
000s
|
$
|
000s
|
||||||
|
Aurora
|
92,123
|
76,357
|
26,653
|
|||||||
|
McCreedy
West (1)
|
31,643
|
23,714
|
3,233
|
|||||||
|
Kirkwood
|
1,400
|
1,222
|
59
|
|||||||
|
Levack
|
73,955
|
66,250
|
2,739
|
|||||||
|
Levack
Footwall
|
216,574
|
212,015
|
1,725
|
|||||||
|
Podolsky
|
51,311
|
36,730
|
4,031
|
|||||||
|
Victoria
|
3,284
|
3,266
|
12
|
|||||||
|
470,290
|
419,554
|
38,452
|
||||||||
|
Corporate
|
(112
|
)
|
(128
|
)
|
13
|
|||||
|
470,178
|
419,426
|
38,465
|
||||||||
(1) Pre-production
revenue credits from the McCreedy West PM Deposit totaled $3.6
million.
FNX’s
total capital expenditure budget on property, plant and equipment for 2006
is
$97 million (including $12 million for exploration). In 2006, FNX is budgeting
$14 million to acquire equipment and further develop the PM Deposit at the
McCreedy West mine. Capital expenditures at Levack in 2006 are budgeted at
$47
million (including exploration on the Levack Footwall Deposit) and will focus
on
continuing dewatering and shaft rehabilitation, installing ore handling
infrastructure and development work to reach future production targets. No
bulk
samples are currently planned to be extracted from Levack in 2006. Capital
expenditures at Podolsky in 2006 are budgeted at $28 million and will involve
further shaft sinking to reach the final planned depth of 2,650 feet,
installation of ore handling infrastructure, development into the 2000 Deposit
to extract a bulk sample in early 2007 and the construction of certain
environmental and other surface infrastructures including a water treatment
plant. Capitalized exploration expenditures on the rest of FNX’s properties,
including the Aurora properties, is budgeted at approximately $5 million
in
2006. The Company has sufficient cash resources on
18
hand
and
will generate additional cash flow from operating activities to fund its
capital
expenditure program in 2006.
(iii)
Sudbury Basin properties option agreement
On
November 29, 2001, FNX entered into a definitive agreement (the “Option
to Purchase Agreement”)
with
Inco to acquire a 100% interest in the mineral rights to five Inco mineral
properties located in the Sudbury Basin, Ontario (Kirkwood, Levack, McCreedy
West, Podolsky and Victoria, collectively, the “Properties”),
and
the right to use such part of the surface rights and on-site facilities as
are
required to permit exploration, development and mining operations to be
conducted on the Properties. The Option to Purchase Agreement became effective
January 10, 2002 (the “Effective
Date”).
FNX
entered into an agreement (the “SJV
Agreement”)
with
Dynatec, which also became effective on the Effective Date, pursuant to which
Dynatec acquired 25% of FNX’s interest, rights and obligations in the Option to
Purchase Agreement. Accordingly, on the Effective Date, FNX and Dynatec formed
a
joint venture known as the SJV, with FNX holding a 75% interest and Dynatec
a
25% interest. FNX managed exploration activities relating to the SJV and
Dynatec
managed mining operations. The option to acquire the Properties was exercised
by
FNX and Dynatec on December 1, 2003.
On
October 21, 2005, FNX acquired Dynatec’s 25% interest in the Properties and the
SJV (which was terminated) pursuant to the Dynatec Transaction (see note
18(c)).
Accordingly, FNX now holds a 100% interest in the Properties.
The
Option to Purchase Agreement includes the following additional
terms:
|
•
|
If
FNX discovers a New Deposit (as defined in the Option to Purchase
Agreement) on any of the Properties and elects to complete a bankable
feasibility study on such New Deposit recommending production,
and should
such New Deposit contain mineral resources having a value (based
on then
current metal prices) of at least 600 million pounds of nickel
equivalent
at the time of such bankable feasibility study, Inco has a right
to
re-acquire a 51% interest in such a New Deposit but not the Properties
(the “Back-in
Right”)
by bringing the New Deposit into commercial production without
financial
recourse to FNX. Until Inco achieves payback, it shall receive
80% of net
revenues from production from the New Deposit. If Inco re-acquires
a 51%
interest in a New Deposit, Inco and FNX will form a joint venture,
with
Inco as the operator, to hold and operate the New
Deposit.
|
|
•
|
Inco
continues to be responsible for all environmental liabilities existing
on
the Properties at the Effective Date. The Company is now responsible
for
all environmental liabilities incurred on the Properties that result
from
the actions taken after the Effective Date. Processing environmental
obligations cease upon delivery of ore to
Inco.
|
|
•
|
Inco
has a right of first offer to purchase any interest in the Properties
that
the SJV proposes to sell to an arm’s-length third party but does not apply
to the transfer of interest in the Properties between FNX and
Dynatec.
|
On
the
Effective Date, the Corporation and Inco agreed to a form of off-take agreement
(the “Off-take
Agreement”),
which
forms the basis of separate Off-take Agreements to be entered into with Inco
upon the commencement of mining of any deposits found on the Properties.
Under
each Off-take Agreement Inco is granted the right to purchase all ores produced
on the Properties for recovered accountable metals derived from the Properties,
less applicable milling,
19
smelting
and refining charges. Inco also has the right to refuse to purchase any ores
that are unsuitable for treatment or if Inco does not have sufficient processing
capacity to handle such ores, in which case, FNX is entitled to have such
ores
processed by a third party whereby Inco will be entitled to be paid a 2%
net
smelter royalty for nickel, copper and cobalt and a net smelter royalty ranging
from 2.5% to 5% for precious and platinum group metals. Inco has agreed to
concentrate, smelt and refine all of FNX’s ore produced through to December 31,
2007.
Much
of
Inco’s labour force in Sudbury is unionized and the term of the collective
agreement ends May 31, 2006. In 2003, a strike at Inco’s operations in Sudbury
resulted in Inco declaring force majeure for the three month period until
the
strike was resolved. FNX was unable to ship ore to Inco during that period
of
time. Should a similar situation occur, shipments of ore would be adversely
affected. Management is looking into alternatives to mitigate this situation
should it arise.
(iii)
McCreedy West
Commercial
production from the Inter Main deposit at the McCreedy West mine was achieved
on
November 1, 2003 and the scheduled mining rate of 1,000 tons per day was
reached
in April 2004. Commencing May 2005, revenue and expenses from ore mined and
shipped from the McCreedy West PM Deposit have been included in the statement
of
operations. The $14.9 million of accumulated mineral property and exploration
capital costs to date, net of $3.6 million of pre-production revenue credits,
were transferred from mineral exploration properties to McCreedy West mining
property and development ($13.6 million) and plant and equipment ($1.3 million).
As at December 31, 2005, FNX held a 100% interest in McCreedy West.
(iv)
Exploration
The
carrying value of the mineral exploration properties represents the accumulated
costs to date for the acquisition of and exploration costs incurred by FNX
on
its non-producing mineral exploration properties (see Note 18). Mineral
exploration properties are not being amortized. FNX’s active mineral exploration
properties are located in the Sudbury mining district, and are comprised
as
follows:
|
Table
11
|
2005
|
2004
|
|||||
|
$000s
|
$
|
000s
|
|||||
|
Aurora
properties
|
92,123
|
-
|
|||||
|
Kirkwood
|
1,600
|
200
|
|||||
|
Levack
|
81,509
|
7,554
|
|||||
|
Levack
Footwall
|
219,188
|
2,614
|
|||||
|
McCreedy
West PM Deposit
|
-
|
13,472
|
|||||
|
Podolsky
|
69,396
|
18,085
|
|||||
|
Victoria
|
6,175
|
2,891
|
|||||
|
469,991
|
44,816
|
||||||
As
at
December 31, 2005, FNX held a 100% interest in the Kirkwood, Levack (including
the Levack Footwall), Podolsky and Victoria mineral properties, all of which
are
located in the Sudbury Basin region of Ontario.
20
The
Aurora properties are located in the Sudbury Basin region, Timmins, and in
north-western Ontario and the Temiscamingue region of Quebec. All of Aurora’s
properties are in the exploration stage and there can be no assurance that
commercially viable mineral deposits or reserves exist on them. The most
material mineral properties that are included in the Aurora properties are
located in the Sudbury Basin region and are pursuant to a joint venture
agreement (the “Falconbridge
Joint Venture”)
with
Falconbridge Limited (“Falconbridge”).
As at
December 31, 2005, the Company and Falconbridge held a 70% and 30% interest,
respectively, in the Falconbridge Joint Venture. The Company is the operator
of
the Falconbridge Joint Venture. FNX holds between 50% and 100% interests
in the
remaining mineral exploration properties included in the Aurora properties.
During
the fourth quarter, FNX drilled 86,541 feet of diamond drilling in 127 holes.
The following table details the drilling by property.
|
Table
12
|
Three
months ended
December
31, 2005
|
Year
ended
December
31, 2005
|
|||||||||||
|
#
Holes
|
#
Feet
|
#
Holes
|
#
Feet
|
||||||||||
|
Aurora
|
16
|
37,478
|
16
|
37,478
|
|||||||||
|
Kirkwood
|
0
|
0
|
5
|
2,139
|
|||||||||
|
Levack
|
0
|
0
|
3
|
4,746
|
|||||||||
|
McCreedy
West - Phase 1
|
79
|
12,364
|
258
|
59,206
|
|||||||||
|
McCreedy
West - PM Deposit
|
12
|
1,705
|
154
|
45,193
|
|||||||||
|
McCreedy
West - Other
|
1
|
1,237
|
5
|
13,406
|
|||||||||
|
Levack
Footwall
|
18
|
30,555
|
51
|
119,025
|
|||||||||
|
Podolsky
|
1
|
3,202
|
21
|
15,595
|
|||||||||
|
Victoria
|
0
|
0
|
0
|
0
|
|||||||||
|
127
|
86,541
|
513
|
296,788
|
||||||||||
The
drilling at McCreedy West during the fourth quarter of 2005 was a continuation
of delineation and definition drilling in the Inter Main, East Main and PM
Deposits, primarily from underground together with one surface drill hole
to
test for extensions of the Inter Main towards the southwest. The long drill
hole
started at Podolsky in the third quarter to test the areas within the offset
under both the North and 2000 deposits was completed. Drilling that had
previously been scheduled to recommence at Levack from suitable platforms
in the
underground workings was deferred later in to 2006 pending access.
The
main
focus of drilling remains the Levack Footwall Deposit and, as reported in
a
press release subsequent to the end of the quarter, results continue to be
very
positive and confirm the grade and potential of this deposit. Twelve of the
18
holes completed in the quarter have been from underground platforms within
Falconbridge’s Craig mine.
The
2005
drilling program on the Aurora properties, initiated by FNX since July 1,
2005,
was completed during the fourth quarter. Three of these holes were on the
past
producing Falconbridge Mine property with the remaining 13 holes being on
the
Foy-Bowell property, both of which are located in the Sudbury
Basin.
Mine
closure and site restoration
FNX estimates the total future mine closure and site
reclamation costs (also known as asset retirement obligations) associated
with
the Sudbury operations to be $1.6 million,
21
unchanged
from 2004. These estimates are formally reviewed by technical personnel every
year or more frequently if required by regulatory agencies. A credit adjusted
risk free rate of 6.0% has been utilized to determine the mine closure and
site
restoration obligation recorded in the consolidated balance sheets. Management
anticipates that such obligations will substantially be settled at or near
the
closure of its mining operations.
The
cost
estimates of mine closure and site restoration obligations are based on
reclamation standards that meet current regulatory requirements. In view
of the
uncertainties concerning environmental remediation, the ultimate cost of
the
mine closure and site restoration obligations could differ materially from
the
estimated amounts provided. The estimate of the total liability for mine
closure
and site restoration costs is subject to change based upon amendments to
laws
and regulations and as new information concerning the Company’s operations
becomes available. Future changes, if any, to the estimated total liability
as a
result of amended regulations, laws and operating assumptions may be significant
and would be recognized prospectively as a change in accounting estimate
when
applicable. Environmental laws are continually evolving and FNX is not able
to
determine the impact, if any, of environmental laws and regulations that
may be
enacted in the future on its results of operations or financial position
due to
the uncertainty surrounding the ultimate form that such future laws and
regulations may take.
Non-controlling
interest
Net
cash
payments from non-controlling interest totaled $nil million and $15.3 million,
respectively, in the fourth quarter and year 2005, compared to net cash payments
to Dynatec of $nil million and $12.7 million, respectively, in 2004. Cash
expenditures by the SJV for property, plant and equipment exceeded the cash
flow
generated by the SJV’s mining operations in 2005 as a result of increased levels
of spending on property, plant and equipment compared to 2004. The
non-controlling interest was eliminated in October 2005 as a result of the
Dynatec Transaction.
On
November 28, 2005, FNX issued 7,500,000 common shares under a bought deal
financing at $13.60 per common share, generating $102.0 million of gross
proceeds and, after deducting $5.1 million of share issue expenses and
recognizing a future income tax asset of $1.6 million associated with those
share issue costs, resulted in net credit to share capital of $98.5 million.
FNX
entered into this financing in order to facilitate its aggressive capital
expenditure program in 2006 to advance development of its existing and future
mining properties.
As
at
December 31, 2005, FNX had 83.5 million common shares issued and outstanding
an
increase of 28.2 million shares from September 30, 2005, primarily as a result
of the issuance of 20.5 million shares, with an ascribed value of $285.0
million, for the Dynatec Transaction and the 7.5 million shares for the bought
deal financing.
As
at
December 31, 2005, stock options to purchase 2.6 million common shares at
a
weighted average price of $7.02 per share were outstanding. From December
31,
2005 to March 30, 2006, 25,000 stock options have been granted, and as of
March
30, 2005, an additional 159,500 stock options were exercised for cash proceeds
of $0.6 million. The number of common shares issued and outstanding as at
March
30, 2006 totals 83.7 million. The number of stock options outstanding at
March
30, 2006 represents 2.9% of the issued and outstanding common shares at that
time.
22
For
the
year 2005, share capital has increased by $432.5 million from $126.4 million
to
$558.9 million as a result of the $334.7 million ascribed to the shares issued
pursuant to the Aurora Transactions and the Dynatec Transaction, plus $98.5
million for the bought deal financing, plus $5.0 million upon the exercise
of
993,000 stock options, less $8.5 million to recognize a future tax liability
associated with the renunciation of $20.6 million of Canadian Exploration
Expenses (“CEE”) to flow-through common shareholders. An interest expense of
$0.1 million was charged to other expenses for the year to date as required
under the Income Tax Act (Canada) for prescribed interest related to unexpended
flow-through share balances. All $20.6 million of flow-through funds were
expended on CEE in 2005.
Effective
July 1, 2005, FNX implemented a deferred share units plan (the “DSU Plan”) for
Directors to promote a greater alignment of interests between shareholders
and
Directors by potentially linking a portion of Director compensation to the
future value of FNX’s common shares. Directors have the choice to receive, in
increments of 25%, up to 100% of their compensation in the form of deferred
share units rather than by way of cash. Included in stock-based compensation
expense is $28,000 related to 1,974 common shares that were earned in 2005
and
are reserved for issuance under the DSU Plan.
Post-retirement
benefits
FNX
does
not currently have any post-retirement benefit plans for its employees, officers
and directors. The Company does, however, match contributions made by employees
and officers to their registered retirement savings plans to a maximum of
the
lesser of 5% of salary and the maximum permitted by regulation.
During
the current reporting period updated resource estimations for the McCreedy
West
Inter Main, 700 Footwall and Levack 1300 deposits were compiled to reflect
current geological interpretations and additional diamond drilling. Production
is currently from the nickel-contact deposits (Inter Main and East Main),
the
700 Footwall Deposit and the PM Footwall Deposit. Stope access and associated
underground mapping have significantly enhanced our understanding of the
McCreedy West contact environment and the geological controls on the
mineralization.
Resources
are converted to reserves where they meet or exceed economic parameters of
metal
price, off-take, and mining cost after applying appropriate mine planning
and
dilution associated with the mining methods. Reflecting the significant increase
in metal prices changes, have been made in the prices used to convert resources
to reserves. As reserves will be mined in the near term, metal prices have
been
adjusted upwards. The price assumptions for resource estimates remain the
same
as those previously used in 2004.
23
McCreedy
West
|
Table
13 - Summary of reserves at McCreedy West
|
|||||||||
|
Category
|
Deposit
Type
|
Tons
|
Ni
|
Cu
|
Pt
|
Pd
|
Au
|
TPM
|
|
|
millions
|
%
|
(oz/ton)
|
|||||||
|
Probable
|
Contact
Deposits
|
1.21
|
1.65
|
0.19
|
|||||
|
Footwall
Deposits - 700
|
0.12
|
0.69
|
6.04
|
0.04
|
0.07
|
0.04
|
0.15
|
||
|
Footwall
Deposits - PM
|
0.66
|
0.27
|
1.03
|
0.06
|
0.07
|
0.02
|
0.16
|
||
|
1.99
|
|||||||||
|
Notes
to Reserves Table:
|
||||||||
|
· All
reserve estimates are based on estimates of long-term metal prices
in US$:
Cu=$1.50/lb., Ni=$5.00/lb., Pt=$800/oz., Pd=$250/oz., Au=$400/oz.
and a
Canadian dollar exchange rate of $1/US$0.85.
|
||||||||
|
· Reserves
are the mineable economic portion of the resources. Contact Deposit
reserve estimates include mining dilution at grades assumed to
be zero, as
noted in the text above, and include mining recovery of about 85%.
Mining
cut-off for reserves was determined from net smelter return (NSR)
based on
the Inco Off-take Agreement metal accountability and feasibility
study
estimated mining costs. Ni equivalent cut-off grades range from
1% to 1.4%
depending on mining method.
|
||||||||
|
· The
700 Deposit reserve estimate is based on the fully diluted resources
and
used the same NSR-mining cut-off approach as for the contact deposits,
which approximates a cut-off grade of 1.4% Ni equivalent, with
a recovery
of 85%.
|
||||||||
|
· PM
Deposit reserves are based on pre-feasibility metal prices of US$:
Cu=$1.50/lb., Ni=$5.00/lb., Pt=$800/oz., Pd=$250/oz., Au=$400/oz.,
a
Canadian dollar exchange rate of $1/US$0.85, a $36 NSR cut-off
based on
the Inco Off-take Agreement metal accountability and a 68% mining
recovery.
|
||||||||
|
· TPM
= Pt+Pd+Au
|
|
Table
14 - Summary of resources at McCreedy West
|
|||||||||
|
Category
|
Deposit
Type
|
Tons
|
Ni
|
Cu
|
Pt
|
Pd
|
Au
|
TPM
|
|
|
millions
|
%
|
oz/ton
|
|||||||
|
Indicated
|
Contact
|
1.15
|
2.04
|
0.27
|
-
|
-
|
-
|
-
|
|
|
Footwall -
700
|
0.15
|
0.65
|
5.94
|
0.04
|
0.08
|
0.04
|
0.16
|
||
|
Footwall
- PM
|
2.66
|
0.26
|
1.17
|
0.07
|
0.08
|
0.02
|
0.17
|
||
|
|
3.96
|
|
|
||||||
|
|
|||||||||
|
Inferred
|
Contact
|
0.37
|
1.63
|
0.33
|
|||||
|
Footwall
- 700
|
0.01
|
0.78
|
6.01
|
0.07
|
0.11
|
0.06
|
0.24
|
||
|
Footwall
- PM
|
1.10
|
0.28
|
1.11
|
0.08
|
0.11
|
0.02
|
0.21
|
||
|
|
1.48
|
||||||||
|
Notes
to Resources Table:
|
|||||||||
|
· The
indicated mineral resources are inclusive of those mineral resources
modified to produce the mineral reserves.
|
|||||||||
|
· Contact
Deposit resource estimates are based on 1% Ni cut-off grade and
a minimum
8 ft. true width.
|
|||||||||
|
· The
700 Deposit resource estimate is based on 1.4% Ni equivalent cut-off
grade
and a minimum true mining width of 6 ft. or 7 ft., depending on
vein dip.
The indicated resource are those blocks above $77/ton NSR as based
on the
700 Deposit Inco Off-take Agreement metal
accountability.
|
|||||||||
|
· The
PM deposit resource estimate is based on a 0.058 oz/ton TPM
cut-off.
|
|||||||||
|
· The
Upper PM (950) resource volume is based on a 0.75% Ni equivalent
cut-off
grade and a minimum eight ft true width. Nickel equivalency is
based on
estimates of long-term metal prices of ($US): Cu=$0.70/lb., Ni=$3.50/lb.,
Pt=$600/oz., Pd=$250/oz., Au=$340/oz. and a Canadian dollar exchange
rate
of $1/US$0.67. The indicated resources are those blocks above $87/ton
NSR
as based on the 700 Deposit Inco Off-Take Agreement metal
accountability.
|
|||||||||
|
· The
700 Deposit resource estimate includes internal and external mining
and
sill dilution. Estimates for the Contact Deposits and the PM and
Upper
PM(950) Deposits include internal dilution.
|
|||||||||
|
· TPM
= Pt+Pd+Au
|
|||||||||
24
The
following table presents FNX’s contractual obligations as at December 31,
2005.
|
Table
15
|
Total
|
2006
|
2007-9
|
2010-11
|
>2012
|
|||||||||||
|
$000s
|
$
|
000s
|
$
|
000s
|
$
|
000s
|
$
|
000s
|
||||||||
|
Operating
leases
|
800
|
200
|
600
|
-
|
-
|
|||||||||||
|
Deferred
payment (1)
|
15,000
|
7,500
|
7,500
|
-
|
-
|
|||||||||||
|
Mine
closure & restoration
|
1,600
|
-
|
-
|
-
|
1,600
|
|||||||||||
|
17,400
|
7,700
|
8,100
|
-
|
1,600
|
(1) The
deferred payment obligation is described in the Dynatec
Transaction.
In
2004,
FNX invested $0.2 million of funds in INV, which at that time was a private
mineral prospecting company. The President and Chief Executive Officer (who
is a
director of FNX and a director of INV), two other directors and two senior
officers of FNX also invested in INV in 2004. In 2005, FNX invested a further
$0.6 million of funds in INV, resulting in FNX holding 920,230 common shares
of
INV. In December 2005, as part of a planned Initial Public Offering by INV,
FNX
was issued 500,000 common shares for cash consideration of $0.3 million and
an
additional 900,000 common shares with an ascribed value of $0.4 million in
payment of past administrative services and financial support provided by
FNX to
INV from November 2003 to December 2005. Also in December 2005, FNX was issued
common share purchase warrants, with an ascribed value of $0.7 million) in
exchange for FNX foregoing its right of first option to acquire any property
interest of INV. Each of the 2,347,886 share purchase warrants entitles the
holder to acquire one common share of INV at a price of $1.40 until December
7,
2010. Subsequent to year end FNX purchased an additional 830,000 common shares
of INV for cash consideration of $1.0 million.
25
Under
the
terms of an agreement between FNX and INV, dated January 1, 2006, FNX has
agreed
to provide certain administrative services and facilities to INV for a fee
of
$10,000 per month commencing January 1, 2006. These services include providing
office facilities and communication equipment in addition to the non-exclusive
services of certain FNX personnel (limited to 20% each per week), including
the
Vice President and Chief Financial Officer of FNX, who serves as the Vice
President and Chief Financial Officer of INV, and accounting and administrative
personnel as required by the Vice President and Chief Financial Officer of
INV.
In addition to the $10,000 monthly fee, the Corporation will reimburse FNX
for
the non-exclusive services of the Vice President Business Development of
FNX,
who serves as the President and Chief Executive Officer of INV, and the Investor
Relations Officer of FNX, who is also the Director of Investor Relations
for
INV. Such reimbursement shall be calculated as an amount equal to the salaries
and benefits paid to such individuals, multiplied by the percentage of their
respective time spent providing services to INV.
On
March
17, 2006, INV completed an Initial Public Offering (“IPO”)
of
18,500,000 common shares at a price of $1.20 per common share and was listed
on
the Toronto Stock Exchange. As part of the IPO, FNX purchased 830,000 common
shares of INV for cash consideration of $996. As at March 24, 2006, FNX owned
3,150,230 common shares of INV, representing 9.9% of the issued and outstanding
common shares of INV, and 2,347,886 share purchase warrants at an exercise
price
of $1.40 per common share.
Cash
operating margin per ton of ore sold, cash operating cost per pound of nickel
sold, Adjusted Earnings and Adjusted EBITDA are included in this MD&A
because these statistics are key performance measures that management uses
to
monitor performance. Management uses these statistics to assess how well
the
Company is performing compared to plan and to assess the overall effectiveness
and efficiency of mining operations. Management believes that the inclusion
of
these statistics in the MD&A helps an investor to assess performance
“through the eyes of management” and that certain investors use these statistics
to assess the Company’s performance. These performance measures do not have a
meaning within GAAP and, therefore, amounts presented may not be comparable
to
similar data presented by other mining companies. The data 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
GAAP.
The
preparation of financial statements in accordance with Canadian GAAP requires
management to make estimates and judgements that affect the reported amounts
of
assets, liabilities, revenues and expenses. Management evaluates the estimates
periodically including those considered to be critical: mineral reserve and
resource determinations; impairment; future income and resource taxes; and
mine
closure and site restoration obligations. Actual results may differ from
these
estimates by material amounts.
Mineral
reserves and mineral resources
Mineral
reserves and resources are estimated to determine future recoverable mine
production based on assessment of geological, engineering and metallurgical
analyses, estimates of future production costs, capital costs, mine closure
and
site restoration costs as well as metal prices and foreign exchange rates.
The
costs of mineral properties are capitalized and amortized by the
unit-of-production basis based on related proven and probable mineral reserves.
26
Impairment
The
carrying value of FNX’s operating mines and mineral properties is periodically
reviewed for impairment when events or changes in circumstances indicate
that
the carrying amounts may not be recoverable. If total estimated future cash
flows on an undiscounted basis from an operating mine is less than the carrying
amount of the asset, an impairment loss is measured and recorded to write
down
the asset to its fair value.
Future
income and resource tax liabilities
FNX
uses
the liability method of tax allocation for accounting for income and resource
taxes. Under the liability method, future tax assets and liabilities are
determined on differences between the financial reporting and tax bases of
assets and liabilities. Future income and resource tax assets and liabilities
are measured using enacted or substantially enacted tax rates expected to
be in
effect in the years in which those temporary differences are expected to
be
recovered or settled.
Mine
closure and site restoration obligations
Mine
closure and site restoration obligations (also know as asset retirement
obligations) are estimated based on environmental plans in compliance with
current environmental and regulatory requirements. Mine closure and site
restoration costs are estimated and provided for along with an identical
asset,
when the Company makes any physical changes to the environment at one of
its
mineral properties and the liability can be reasonably estimated. The asset
is
amortized on a unit-of-production basis over the life of the mine. The accrued
obligation is increased by an annual interest component such that at the
end of
the asset’s life the provision is equal to the balance estimated to be paid at
that time. In view of the uncertainties regarding these future obligations,
the
ultimate timing and cost of mine closure and site restoration may differ
materially from these estimates.
In
January, the Canadian Institute of Chartered Accountants
(“CICA”)
issued
Section 1530 of the CICA Handbook, “Comprehensive Income”, Section 3251,
“Equity”, Section 3855, “Financial Instruments - Recognition and Measurement”
and Section 3865, “Hedges”. The following new standards increase harmonization
with US GAAP and will require the following:
| 1. |
Financial
assets will be classified as either held-to-maturity, held-for-trading
or
available-for-sale. Held-to-maturity classification will be restricted
to
fixed maturity instruments that the Company intends and is able
to hold to
maturity and will be accounted for at amortized costs. Held-for-trading
instruments will be recorded at fair value with realized and unrealized
gains and losses reported in net earnings. The remaining financial
assets
will be classified as available-for-sale and will be recorded at
fair
value with unrealized gains and losses reported in a new category
of the
consolidated statement of financial position under shareholders’ equity
called other comprehensive income (“OCI”).
|
| 2. |
Derivatives
will be classified as held-for-trading unless designated as hedging
instruments. All derivatives, including embedded derivatives that
must be
separately
accounted
for, will be recorded at fair value on the consolidated statement
of
financial position. For derivatives that hedge the changes in
fair value
of an asset or liability, changes in the derivatives’ fair value will be
reported in net earnings and be substantially offset by changes
in the
fair value if the hedged asset or liability attributable to the
risk being
hedged. For derivatives that hedge variability in cash flows,
the
effective portion of the changes in the derivatives’ fair value will be
initially recognized as OCI and the ineffective portion will
be recorded
in net earnings. The amounts temporarily recorded in OCI will
subsequently
be reclassified to net earnings in the periods when net income
is affected
by the variability in the cash flows of the hedged
item.
|
27
The
above
guidance will apply for interim and annual financial statements relating
to
fiscal years beginning on or after October 1, 2006. Earlier adoption will
be
permitted only as of the beginning of a fiscal year. The impact of implementing
these new standards is not yet determinable as it is highly dependent on
the
fair values, outstanding positions and hedging strategies at the time of
adoption.
In
November 2005, the Emerging Issues Committee (“EIC”)
of the
CICA issued Abstract Number 159, “Conditional Asset Retirement Obligations”, to
clarify the accounting treatment for a legal obligation to perform an asset
retirement activity in which the timing and/or method of settlement are
conditional on a future event that may or may not be within the control of
the
entity. Under the EIC, an entity is required to recognize a liability for
the
fair value of a conditional asset retirement obligation if the fair value
of the
liability can be reasonably estimated. The guidance is effective for the
second
quarter of 2006 and is to be applied retroactively, with restatement of prior
periods. The implementation of this EIC is not expected to have a material
impact on the Company’s consolidated financial statements.
|
Table
16
|
Q1
|
Q2
|
Q3
|
Q4
|
Total
|
|||||||||||
|
$000s
|
$
|
000s
|
$
|
000s
|
$
|
000s
|
$
|
000s
|
||||||||
|
2005
|
||||||||||||||||
|
Revenue
|
19,057
|
24,231
|
18,588
|
22,726
|
84,602
|
|||||||||||
|
Net
earnings (loss)
|
2,484
|
3,855
|
(2,218
|
)
|
477
|
4,597
|
||||||||||
|
Basic
and diluted EPS
|
$
|
0.05
|
$
|
0.08
|
($0.04
|
)
|
$
|
0.01
|
$
|
0.08
|
||||||
|
2004
|
||||||||||||||||
|
Revenue
|
12,007
|
16,738
|
15,321
|
16,345
|
60,411
|
|||||||||||
|
Net
earnings
|
1,778
|
1,048
|
842
|
2,328
|
5,997
|
|||||||||||
|
Basic
and diluted EPS
|
$
|
0.04
|
$
|
0.02
|
$
|
0.02
|
$
|
0.05
|
$
|
0.12
|
||||||
|
2003
(1)
|
||||||||||||||||
|
Revenue
|
-
|
-
|
-
|
6,321
|
6,321
|
|||||||||||
|
Net
earnings (loss)
|
(1,560
|
)
|
(1,487
|
)
|
(3,010
|
)
|
(2,249
|
)
|
(8,306
|
)
|
||||||
|
Basic
and diluted EPS
|
($0.05
|
)
|
($0.03
|
)
|
($0.08
|
)
|
($0.05
|
)
|
($0.17
|
)
|
||||||
(1)
The
first year of commercial production for the Company.
FNX
declared commercial production at its first mine, McCreedy West, on November
1,
2003, thereby making comparisons to prior periods somewhat difficult. The
quarterly trend since November 2003 has generally been towards increasing
revenues (subject to metal price fluctuations) and net earnings as a result
of
higher levels of ore mined and the resultant metal
sales.
With the inclusion of ore mined from the PM Deposit the Company’s revenues
should continue to increase.
28
|
2005
|
Q1
|
Q2
|
Q3
|
Q4
|
|||||||||
|
Ore
(tons)
|
|||||||||||||
|
Mined
|
847,467
|
109,479
|
124,169
|
124,751
|
|||||||||
|
Pre-production
ore
|
15,875
|
6,118
|
-
|
-
|
|||||||||
|
Sold
|
|||||||||||||
|
Nickel
ore
|
78,915
|
78,762
|
74,616
|
84,358
|
|||||||||
|
Copper
ore
|
4,421
|
22,070
|
37,179
|
47,046
|
|||||||||
|
Total
ore
|
83,336
|
110,832
|
111,795
|
131,404
|
|||||||||
|
Grade
of ore sold
|
|||||||||||||
|
Nickel
ore (%Ni)
|
1.7
|
1.7
|
1.9
|
1.6
|
|||||||||
|
Copper
ore (%Cu)
|
9.6
|
3.6
|
1.8
|
2.1
|
|||||||||
|
Payable
metal sold (000s lbs)
|
|||||||||||||
|
Nickel
|
1,798
|
2,271
|
1,798
|
2,151
|
|||||||||
|
Non-controlling
interest
|
(450
|
)
|
(568
|
)
|
(450
|
)
|
-
|
||||||
|
Net
to FNX
|
1,348
|
1,703
|
1,348
|
2,151
|
|||||||||
|
Copper
|
1,095
|
1,719
|
1,344
|
2,053
|
|||||||||
|
Non-controlling
interest
|
(274
|
)
|
(430
|
)
|
(336
|
)
|
-
|
||||||
|
Net
to FNX
|
821
|
1,289
|
1,008
|
2,053
|
|||||||||
|
Metal
sales revenue
|
|||||||||||||
|
Average
Ni price (US$/lb)
|
7.46
|
6.83
|
6.28
|
5.77
|
|||||||||
|
Average
Cu price (US$/lb)
|
1.48
|
1.45
|
1.73
|
2.07
|
|||||||||
|
$/US$
exchange rate
|
1.23
|
1.49
|
1.20
|
1.17
|
|||||||||
|
Total
revenue ($000s)
|
19,057
|
24,231
|
18,588
|
22,726
|
|||||||||
|
Revenue
($/ton of ore sold)
|
228
|
219
|
166
|
173
|
|||||||||
|
Cash
cost of metals sold
|
|||||||||||||
|
Mining
($000s)
|
10,564
|
12,634
|
12,254
|
16,032
|
|||||||||
|
Cash
cost (US$/lb of Ni sold)
|
3.61
|
2.73
|
3.35
|
3.11
|
|||||||||
|
Cash
cost ($/ton of ore sold)
|
127
|
114
|
110
|
122
|
|||||||||
|
Notes:
|
1.
|
All
production figures are shown on a 100% basis with Dynatec’s 25% interest
shown as non-controlling interest.
|
|||||||||||||
|
2.
|
Mined
relates to ore that was mined from McCreedy West and brought to
surface
during the period.
|
||||||||||||||
|
3.
|
Tons
of ore, grade and payable metal sold relate to ore that was mined
from
McCreedy West, and shipped to Inco and was, accordingly, recognized
in
revenue during the period.
|
||||||||||||||
|
4.
|
Cash
operating cost per pound of nickel sold excludes mine depreciation
and
amortization and includes mining, milling, smelting, refining,
haulage and
marketing costs and is net of by-product credits.
|
||||||||||||||
|
5.
|
Copper
grades reflect a blend of lower grade PM Deposit ore with higher
grade
ores from other zones.
|
||||||||||||||
29
Table
18 Quarterly Metal Production and Sales Statistics
|
2004
|
Q1
|
Q2
|
Q3
|
Q4
|
|||||||||
|
Ore
(tons)
|
|||||||||||||
|
Mined
|
57,821
|
89,259
|
75,504
|
82,213
|
|||||||||
|
Pre-production
ore
|
-
|
3,930
|
4,717
|
||||||||||
|
Sold
|
|||||||||||||
|
Nickel
ore
|
55,484
|
82,481
|
75,075
|
78,740
|
|||||||||
|
Copper
ore
|
2,377
|
2,953
|
6,106
|
3,552
|
|||||||||
|
Total
ore
|
57,861
|
85,434
|
81,181
|
82,292
|
|||||||||
|
Grade
of ore sold
|
|||||||||||||
|
Nickel
ore (%Ni)
|
1.6
|
1.7
|
1.5
|
1.7
|
|||||||||
|
Copper
ore (%Cu)
|
5.7
|
6.2
|
5.9
|
5.1
|
|||||||||
|
Payable
metal sold (000s lbs)
|
|||||||||||||
|
Nickel
|
1,224
|
1,940
|
1,580
|
1,843
|
|||||||||
|
Non-controlling
interest
|
(306
|
)
|
(485
|
)
|
(395
|
)
|
(461
|
)
|
|||||
|
Net
to FNX
|
918
|
1,455
|
1,185
|
1,382
|
|||||||||
|
Copper
|
448
|
617
|
940
|
638
|
|||||||||
|
Non-controlling
interest
|
(112
|
)
|
(154
|
)
|
(235
|
)
|
(160
|
)
|
|||||
|
Net
to FNX
|
336
|
463
|
705
|
478
|
|||||||||
|
Metal
sales revenue
|
|||||||||||||
|
Average
Ni price (US$/lb)
|
6.44
|
5.65
|
6.33
|
6.53
|
|||||||||
|
Average
Cu price (US$/lb)
|
1.52
|
1.14
|
1.30
|
1.45
|
|||||||||
|
$/US$
exchange rate
|
1.32
|
1.36
|
1.31
|
1.22
|
|||||||||
|
Total
revenue ($000s)
|
12,007
|
16,738
|
15,321
|
16,345
|
|||||||||
|
Revenue
($/ton of ore sold)
|
207
|
196
|
189
|
199
|
|||||||||
|
Cash
cost of metals sold
|
|||||||||||||
|
Mining
($000s)
|
6,552
|
10,081
|
9,236
|
9,641
|
|||||||||
|
Cash
cost (US$/lb of Ni sold)
|
3.06
|
3.13
|
3.35
|
3.54
|
|||||||||
|
Cash
cost ($/ton of ore sold)
|
113
|
118
|
114
|
117
|
|||||||||
|
Notes:
|
1.
|
All
production figures are shown on a 100% basis with Dynatec’s 25% interest
shown as non-controlling interest.
|
|||||||||||||
|
2.
|
Mined
relates to ore that was mined from McCreedy West and brought to
surface
during the period.
|
||||||||||||||
|
3.
|
Tons
of ore, grade and payable metal sold relate to ore that was mined
from
McCreedy West, and shipped to Inco and was, accordingly, recognized
in
revenue during the period.
|
||||||||||||||
|
4.
|
Cash
operating cost per pound of nickel sold excludes mine depreciation
and
amortization and includes mining, milling, smelting, refining,
haulage and
marketing costs and is net of by-product credits.
|
||||||||||||||
|
5.
|
Copper
grades reflect a blend of lower grade PM Deposit ore with higher
grade
ores from other zones.
|
||||||||||||||
30
|
2005
|
Q1
|
Q2
|
Q3
|
Q4
|
Total
|
||||||||||
|
$000s
|
$
|
000s
|
$
|
000s
|
$
|
000s
|
$
|
000s
|
|||||||
|
Mine
operating revenues
|
19,057
|
24,231
|
18,588
|
22,726
|
84,602
|
||||||||||
|
Mine
operating expenses
|
|||||||||||||||
|
Mining
|
10,564
|
12,634
|
12,254
|
16,032
|
51,484
|
||||||||||
|
Depreciation
and amortization
|
1,605
|
1,828
|
2,130
|
3,205
|
8,768
|
||||||||||
|
12,169
|
14,462
|
14,384
|
19,237
|
60,257
|
|||||||||||
|
Expenses
|
|||||||||||||||
|
Corporate
administration
|
1,069
|
1,497
|
916
|
1,744
|
5,226
|
||||||||||
|
Exploration
administration
|
855
|
708
|
496
|
856
|
2,915
|
||||||||||
|
Capital
taxes
|
-
|
-
|
-
|
1,135
|
1,135
|
||||||||||
|
Stock-based
compensation
|
102
|
259
|
365
|
342
|
1,068
|
||||||||||
|
Depreciation
|
17
|
16
|
25
|
31
|
89
|
||||||||||
|
Loss
on disposition of Aurora
|
-
|
-
|
2,600
|
-
|
2,600
|
||||||||||
|
Other
expenses (income)
|
(37
|
)
|
(227
|
)
|
(65
|
)
|
(2,410
|
)
|
(2,739
|
)
|
|||||
|
4,882
|
7,516
|
(133
|
)
|
1,791
|
14,056
|
||||||||||
|
Income
and resource taxes
|
(865
|
)
|
(1,375
|
)
|
(1,166
|
)
|
(1,314
|
)
|
(4,721
|
)
|
|||||
|
Non-controlling
interest
|
(1,533
|
)
|
(2,286
|
)
|
(919
|
)
|
-
|
(4,738
|
)
|
||||||
|
Net
earnings (loss)
|
2,484
|
3,855
|
(2,218
|
)
|
477
|
4,597
|
|||||||||
|
Earnings
(loss) per share
|
$
|
0.05
|
$
|
0.08
|
(0.04
|
)
|
$
|
0.01
|
$
|
0.08
|
|||||
|
2004
|
Q1
|
Q2
|
Q3
|
Q4
|
Total
|
||||||||||
|
$000s
|
$
|
000s
|
$
|
000s
|
$
|
000s
|
$
|
000s
|
|||||||
|
Mine
operating revenues
|
12,007
|
16,738
|
15,321
|
16,345
|
60,411
|
||||||||||
|
Mine
operating expenses
|
|||||||||||||||
|
Mining
|
6,552
|
10,081
|
9,236
|
9,641
|
35,510
|
||||||||||
|
Depreciation
and amortization
|
1,190
|
1,654
|
1,769
|
1,802
|
6,415
|
||||||||||
|
7,742
|
11,735
|
11,005
|
11,443
|
41,925
|
|||||||||||
|
Expenses
|
|||||||||||||||
|
Corporate
administration
|
732
|
1,262
|
718
|
686
|
3,398
|
||||||||||
|
Exploration
administration
|
433
|
371
|
524
|
642
|
1,970
|
||||||||||
|
Capital
taxes
|
25
|
50
|
90
|
21
|
186
|
||||||||||
|
Stock-based
compensation
|
18
|
495
|
351
|
10
|
874
|
||||||||||
|
Depreciation
|
24
|
25
|
25
|
27
|
101
|
||||||||||
|
Other
expenses (income)
|
(373
|
)
|
3
|
352
|
(804
|
)
|
(822
|
)
|
|||||||
|
3,406
|
2,797
|
2,256
|
4,320
|
12,779
|
|||||||||||
|
Income
and resource taxes
|
(654
|
)
|
(562
|
)
|
(434
|
)
|
(851
|
)
|
(2,500
|
)
|
|||||
|
Non-controlling
interest
|
(974
|
)
|
(1,187
|
)
|
(980
|
)
|
(1,141
|
)
|
(4,282
|
)
|
|||||
|
Net
earnings
|
1,778
|
1,048
|
842
|
2,328
|
5,997
|
||||||||||
|
Earnings
per share
|
$
|
0.04
|
$
|
0.02
|
$
|
0.02
|
$
|
0.05
|
$
|
0.12
|
|||||
31
Mining
Industry
The
exploration for, development and mining of mineral deposits involves significant
risks which even a combination of careful evaluation, experience and knowledge
may not eliminate. While the discovery of an ore body may result in substantial
rewards, few properties which are explored are ultimately developed into
producing mines. Major expenses may be required to establish ore reserves,
to
develop metallurgical processes and to construct mining and processing
facilities at a particular site. It is impossible to ensure that the current
exploration programs planned by the Corporation will result in a profitable
commercial mining operation.
Whether
a
mineral deposit will be commercially viable depends on a number of factors,
including the particular attributes of the deposit, such as size, grade and
proximity to infrastructure, as well as metal prices which are highly cyclical
and government regulations, including regulations relating to prices, taxes,
royalties, land tenure, land use, importing and exporting of minerals and
environmental protection. The exact effect of these factors cannot be accurately
predicted, but the combination of these factors may result in the Company
not
receiving an adequate return on invested capital.
Mining
operations generally involve a high degree of risk. The FNX’s operations are
subject to most of the hazards and risks normally encountered in the
exploration, development and production of ore, including unusual and unexpected
geology formations, rock bursts, cave-ins, flooding and other conditions
involved in the drilling and removal of material, any of which could result
in
damage to, or destruction of, mines and other producing facilities, damage
to
life or property, environmental damage and possible legal liability. Although
the Company does not operate processing facilities or tailings disposal areas,
FNX does utilize third party facilities and adequate precautions to minimize
risk will be taken. Milling operations are subject to hazards such as equipment
failure or failure of retaining dams around tailings disposal areas which
may
result in environmental pollution and consequent liability.
FNX’s
activities are directed towards the search, evaluation, development and mining
of mineral deposits. Some of the mineral properties in which the Company
has an
interest contain no known body of commercial ore and any exploration programs
thereon are exploratory searches for ore, other properties in which the Company
has an interest are subject to preliminary stages of exploration and development
programs only, while other properties in which the Company holds an interest
are
in the production stage. There is no certainty that the expenditures to be
made
by the Company as described herein will result in discoveries of commercial
quantities of ore. There is aggressive competition within the mining industry
for the discovery and acquisition of properties considered to have commercial
potential. FNX will compete with other interests, many of which have greater
financial resources than it will have for the opportunity to participate
in
promising projects. Significant capital investment is required to achieve
commercial production from successful exploration efforts.
Ore
Processing
FNX
does
not own the facilities used to process the ore mined. Although access to
the
Inco facilities is regulated by contract, there is no guarantee that future
access will be available to the Company.
32
Mining
Contractor Services
FNX
is
dependent upon Dynatec to provide mining contractor services until December
31,
2007. Although these services are regulated by contract, there is no guarantee
that Dynatec will be able to complete the contract with the
Company.
Uncertainty
of Reserve and Resource Estimates
The
figures for reserves and resources presented herein are estimates and no
assurance can be given that the anticipated tonnages and grades will be achieved
or that the expected level of recovery will be realized. The ore grade actually
recovered may differ from the estimated grades of the reserves and resources.
Such figures have been determined based upon assumed metal prices and operating
costs. Future production could differ dramatically from reserve estimates
for,
among other reasons:
| · |
mineralization
or formations could be different from those predicted by drilling,
sampling and similar examinations;
|
| · |
increases
in operating mining costs and processing costs could adversely
affect
reserves;
|
| · |
the
grade of the reserves may vary significantly from time to time
and there
is no assurance that any particular level of metals may be recovered
from
the ore; and
|
| · |
declines
in the market price of the metals may render the mining of some
or all of
the reserve uneconomic.
|
Any
of
these factors may require FNX to reduce its reserves estimates or increase
its
costs. Short-term factors, such as the need for the additional development
of a
deposit or the processing of new different grades, may impair the Company’s
profitability. Should the market price of the metals fall, FNX could be required
to materially write down its investment in mining properties or delay or
discontinue production or development of new projects.
Government
Regulation
The
exploration and development activities of the Company are subject to various
federal, provincial and local laws governing prospecting, development,
production, taxes, labour standards and occupational health, mine safety,
toxic
substance and other matters. Exploration and development activities are also
subject to various federal, provincial and local laws and regulations relating
to the protection of the environment. These laws mandate, among other things,
the maintenance of air and water quality standards, and land reclamation.
These
laws also set forth limitations on the generation, transportation, storage
and
disposal of solid and hazardous waste. Although FNX’s exploration and
development activities are currently carried out in accordance with all
applicable rules and regulations, no assurance can be given that new rules
and
regulations will not be enacted or that existing rules and regulations will
not
be applied in a manner which could limit or curtail production or development.
Amendments to current laws and regulations governing operations and activities
of exploration and development, mining and milling or more stringent
implementation thereof could have a substantial adverse impact on the Company.
33
Government
approvals and permits are currently, and may in the future be, required in
connection with Company’s operations. To the extent such approvals are required
and not obtained,
the Company may be curtailed or prohibited from proceeding with planned
exploration or development of mineral properties.
Failure
to comply with applicable laws, regulations and permitting requirements may
result in enforcement actions thereunder, including orders issued by regulatory
or judicial authorities causing operations to cease or be curtailed, and
may
include corrective measures requiring capital expenditures, installation
of
additional equipment, or remedial actions. Parties engaged in mining operations
may be required to compensate those suffering loss or damage by reason of
the
mining activities and may have civil or criminal fines or penalties imposed
for
violations of applicable laws or regulations.
Amendments
to current laws, regulations and permits governing operations and activities
of
mining companies, or more stringent implementation thereof, could have a
material adverse impact on the Company and cause increases in exploration
expenses, capital expenditures or production costs or reduction in levels
of
production at producing properties or require abandonment or delays in
development of new mining properties.
Foreign
Countries
FNX
holds
direct or indirect interests in properties located in countries other than
Canada, currently in Guinea, West Africa and may, in the future, acquire
other
properties outside of Canada. Mineral exploration and mining activities in
these
countries as well as elsewhere may be affected in varying degrees by political
and financial instability, inflation and changes in government regulations
relating to the mining industry. Any changes in regulations or shifts in
political or financial conditions are beyond the control of the Company and
may
adversely affect its business. Operations may be affected in various degrees
by
laws and regulations with respect to, among other things, restrictions on
production, price controls, export controls, exchange controls, income taxes,
expropriation of property, social and environmental matters and mine
safety.
Permits
and Licences
The
exploitation and development of mineral properties may require FNX to obtain
regulatory or other permits and licences from various governmental licensing
bodies. There can be no assurance that the in the future will be able to
obtain
all necessary permits and licences that may be required to carry out planned
exploration, development and mining operations on its properties.
Environmental
Risks and Hazards
All
phases of FNX’s operations are subject to environmental regulation in the
various jurisdictions in which it operates. Environmental legislation is
evolving in a manner which will require stricter standards and enforcement,
increased fines and penalties for non-compliance, more stringent environmental
assessments of proposed projects and heightened degree of responsibility
for
companies and their officers, directors and employees. There is no assurance
that future changes in environmental regulation, if any, will not adversely
affect the Company’s operations. Environmental hazards may exist on the
properties on which FNX holds interests which are unknown to the in the future
at present which have been caused by previous or existing owners or operators
of
the properties. FNX may become liable for such environmental hazards caused
by
previous owners and operators of the properties even where it has attempted
to
contractually limit its liability.
34
Production
at mineral properties may involve the use of dangerous and hazardous substances.
While all steps will be taken to prevent discharges of pollutants into the
ground water and the environment, the Company may become subject to liability
for hazards that cannot be insured against.
Commodity
Prices
The
profitability of the Company will be significantly affected by changes in
the
market price for nickel and copper and by changes in the exchange rate of
the
United States dollar relative to the Canadian dollar. During 2006, a US$1
per
pound change in the price of nickel, or a US$0.50 per pound change in the
price
of copper, is expected to generate a $9.7 million change and a $5.9 million
change, respectively, in the Company’s pre-tax profit and cash flow from
operating activities as reported on its statement of operations and on its
statement of cash flow. Each $0.05 change in foreign exchange rates is expected
to generate a pre-tax change of approximately $2.1 million in FNX’s profit as
reported on its income statement.
FNX
has
not entered into any hedging agreements in respect of metal or foreign exchange
at this time. Such contracts would prevent losses in situations when the
price
changed adversely and would prevent gains in situations where the price changed
favourably.
The
level
of interest rates, the rate of inflation, world supply and demand of base
metals
and precious metals and stability of exchange rates can all cause significant
fluctuations in base metal and precious metal prices. Such external economic
factors are in turn influenced by changes in international investment patterns
and monetary systems and political developments. The price of base metals
and
precious metals has fluctuated widely in recent years, and future serious
price
declines could cause continued commercial production to be impracticable.
Depending on the price of base metals and precious metals, cash flow from
mining
operations may not be sufficient to cover operating costs. Any figures for
reserves presented by the Company will be estimates and no assurance can
be
given that the anticipated tonnages and grades will be achieved or that the
indicated level of recovery will be realized. Market fluctuations and the
price
of base metals and precious metals may render reserves uneconomical. Moreover,
short-term operating factors relating to the reserves, such as the need for
orderly development of the ore bodies or the processing of new or different
grades of ore, may cause a mining operation to be unprofitable in any particular
accounting period.
Uninsured
Risks
FNX
carries insurance to protect against certain risks in such amounts as it
considers adequate. Risks not insured against include environmental pollution
or
other hazards against which the Company cannot insure or against which it
elects
not to insure.
Conflicts
of Interest
Certain
of the directors of FNX also serve as directors and/or significant shareholders
of other companies involved in natural resource exploration and development
and
consequently there exists the possibility for such directors to be in a position
of conflict. In
the
event that a director or executive officer has a material interest in any
transaction being considered by the Company,
any
such conflict will be subject to and governed by procedures prescribed by
the
Business
Corporations Act
(Ontario) (the "OBCA")
which
require a director or officer of a corporation experiencing such a conflict
to
disclose his interest and refrain from voting on any such matter
35
unless
otherwise permitted by the OBCA. In
addition, Section 134 of the OBCA provides that every director must act honestly
and in good faith with a view to the best interests of the Company. Section
134
is a formalization of the fundamental fiduciary duty that a director has
to the
corporation and encompasses, among other obligations, a duty of loyalty and
a
duty of confidentiality. As a fiduciary, a director may not interfere with,
or
take advantage of, any opportunities that rightfully belong to the Company.
That
a director may represent a specific shareholder of the Company does not relieve
the director from fulfilling his fiduciary duty to FNX. If such director
was to
take any action which preferred the interests of a third party to the interests
of the Company, such director would be liable to FNX for a breach of his
fiduciary duty, regardless of any legal duties which such director may have
to
the third party.
Land
Title
Although
title to the Company’s mineral properties has been reviewed by or on behalf of
FNX and title opinions were delivered to the Company, no assurances can be
given
that there are no title defects affecting the properties. Title insurance
generally is not available for mining claims in Canada, and FNX’s ability to
ensure that it has obtained secure claim to individual mineral properties
or
mining concessions may be severely constrained. The Company has not conducted
surveys of the claims in which it holds direct or indirect interests; therefore,
the precise area and location of such claims may be in doubt. Accordingly,
the
properties may be subject to prior unregistered liens, agreements, transfers
or
claims, including native land claims, and title may be affected by, among
other
things, undetected defects. In addition, the Company may be unable to operate
the properties as permitted or to enforce its rights with respect to its
properties.
Joint
Venture
FNX
may
enter into one or more joint ventures in the future. Any failure of any joint
venture partner to meet its obligations could have a material adverse affect
on
such joint ventures. In addition, the Company may be unable to exert influence
over strategic decisions made in respect to properties subject of such joint
ventures.
Management
and the Board of Directors (the “Board”)
of FNX
recognize the value of good corporate governance and the need to adopt best
practices. The Company’s corporate governance practices over the last three
years have advanced rapidly as a result of the Company’s growth from a junior
mining corporation to a member of the S&P/TSX Composite Index and changing
rules and guidelines and best practices. FNX is committed to continuing to
improve its corporate governance practices in light of its stage of development
and evolving best practices and regulatory guidance.
The
Board
has adopted a Board Mandate outlining its responsibilities and defining its
duties. The Board has four committees (the Audit, Compensation, Safety Health
and Environment, and Corporate Governance and Nominating Committees). Each
Board
committee has an approved a committee charter, which outlines the committees’
mandate, procedures for calling a meeting, and provides access to outside
resources.
36
The
Board
has also approved a Code of Ethics, which governs the ethical behaviour of
all
employees, management and directors. Separate trading blackout and disclosure
policies are also in place, as well as formal position descriptions for each
of
the Lead Director, Chairman/Chief Executive Officer and chairs of each of
the
committees of the Board. A whistle blowing procedure was adopted and all
relevant policies, charters, mandates, codes and procedures are posted in
the
corporate governance section of FNX’s website at www.fnxmining.com. For more
details on the Company’s corporate governance practices, please refer to its
website.
FNX’s
directors have expertise in exploration, mining, accounting, banking, legal,
financing and the securities industry. The Board meets at least four times
a
year and Committees generally meet before full board meetings and as required.
At every full Board meeting, the independent directors meet in camera. The
Lead
Director of the Company chairs the meeting of independent directors held
at the
end of every regular Board meeting. While the Company is subject to both
the
provisions of the Sarbanes-Oxley Act in the United States as a foreign issuer
and Canadian regulatory provisions, the Board and management incorporate
strong
corporate governance practices in the belief that such practices provide
protection for its investors and add value to the Company.
As
of
December 31, 2005, management evaluated the Company’s disclosure controls and
procedures as defined in the rules under the Canadian Securities Administrators
and the US Securities and Exchange Commission. This evaluation was carried
out
under the supervision and participation of management, including the President
and Chief Executive Officer and the Vice President and Chief Financial Officer.
Based on that evaluation, the President and Chief Executive Officer and the
Vice
President and Chief Financial Officer concluded that the design and operation
of
these disclosure controls and procedures were effective. No changes were
made in
our internal control over financial reporting during the year ended December
31,
2005, that have materially affected or are reasonably likely to materially
affect the Company’s internal control over financial reporting.
37
Certain
statements in this document constitute “forward-looking statements” within the
meaning of Section 27A of the US Securities Act of 1933 and Section 21E
of the
US Securities Exchange Act of 1943. These forward looking statements are
based
on current expectations and involve risks and uncertainties, referred to
above
and/or in FNX's AIF dated March 30, 2006 and filed with Canadian provincial
securities regulatory authorities, that could cause actual events or results
to
differ materially from estimated or anticipated events or results reflected
in
the forward looking statements.
Examples
of such forward looking statements include statements regarding financial
results and expectations for 2006, including, but not limited to, interpretation
of drill results, the geology, grade and continuity of mineral deposits and
conclusions of economic evaluations, forecast levels of production of ore
and/or
metals, metal prices, demand for metals, currency exchange rates, cash operating
margins, cash operating cost per pound of nickel sold, costs per ton of ore,
expenditures on property, plant and equipment, increases and decreases in
production, reserves and/or resources and anticipated grades and recovery
rates
and are or may be based on assumptions and/or estimates related to future
economic, market and other conditions. Factors that could cause actual results,
developments or events to differ materially from those anticipated include,
among others, the factors described or referred to elsewhere herein and/or
the
AIF, and include unanticipated and/or unusual events. Many of such factors
are
beyond FNX’s ability to control or predict. Actual results may differ materially
from those anticipated. Readers of this MD&A are cautioned not to put undue
reliance on forward looking statements due to their inherent uncertainty.
FNX
disclaims any intent or obligation to update publicly any forward looking
statements, whether as a result of new information, future events or results
or
otherwise. These forward looking statements should not be relied upon as
representing management’s views as of any date subsequent to the date of this
MD&A.
Additional
information, including quarterly and annual consolidated financial statements,
AIF, Management Information Circular and other disclosure documents, may
also be
examined and/or obtained through the Internet by accessing FNX’s website at
www.fnxmining.com or by accessing the Canadian System for Electronic Document
Analysis and Retrieval (SEDAR) website at www.sedar.com.
38
| A. |
Disclosure
Controls and Procedures
|
Disclosure
controls and procedures are defined by the Securities and Exchange Commission
as
those controls and other procedures that are designed to ensure that information
required to be disclosed by FNX Mining Company Inc. (the "Registrant") in
reports filed or submitted by it under the Securities Exchange Act of 1934,
as
amended, is recorded, processed, summarized and reported within the time periods
specified in the Commission's rules and forms. The Registrant's Chief Executive
Officer and Chief Financial Officer have evaluated the Registrant's disclosure
controls and procedures as of the end of the period covered by this Annual
Report on Form 40-F and have determined that such disclosure controls and
procedures are effective.
| B. |
Changes
in Internal Control Over Financial
Reporting
|
Since
the
most recent evaluation of the Registrant's internal control over financial
reporting, there has not been any significant change in the Registrant's
internal control over financial reporting or in other factors that has
materially affected, or is reasonably likely to materially affect, the
Registrant's internal control over financial reporting.
| C. |
Notice
of Pension Fund Blackout Period
|
The
Registrant was not required by Rule 104 of Regulation BTR to send any notice
to
any of its directors or executive officers during the fiscal year ended December
31, 2005.
| D. |
Audit
Committee Financial Expert
|
While
the
Registrant's board of directors has determined that all of the members of its
audit committee are independent, as that term is defined under the rules and
regulations of the American Stock Exchange, the Registrant's board of directors
has determined that Mr. Robert Low, an individual serving on the audit
committee of the Registrant's board of directors, is an audit committee
financial expert, as that term is defined in General Instruction B8(a) of Form
40-F. All of the members of the audit committee are "financially
literate" as required by Canadian securities laws under Multilateral Instrument
52-110 Audit
Committees.
| E. |
Code
of Ethics
|
The
Registrant has adopted a code of ethics that applies to all directors, officers
and employees. The Registrant will provide a copy of the code of ethics without
charge to any person that requests a copy by contacting Natalie Frame, at the
address on the cover of this Form 40-F.
| F. |
Principal
Accountant Fees and
Services
|
Audit
Fees
The
aggregate fees billed or to be billed KPMG LLP, the Registrant's principal
accountants (the "Outside Auditors"), for the fiscal years ended December 31,
2005 and 2004 for professional services rendered by the Outside Auditors for
the
audit of the Registrant's annual financial statements or services that are
normally provided by the Outside Auditors in connection with statutory and
regulatory filings or engagements for such years were Cdn$164,000 and
Cdn$97,000, respectively.
Audit-Related
Fees
The
aggregate fees billed by the Outside Auditors for the fiscal years ended
December 31, 2005 and 2004 for assurance and related services rendered by it
that are reasonably related to the performance of the audit or review of the
Registrant's financial statements and are not reported above as audit fees
were
Cdn$158,387 and Cdn$49,000 respectively. Professional services provided included
aggregate fees billed for assurance and related services that are reasonably
related to the performance of the audit or review of the Corporation’s financial
statements and are not reported as “Audit fees”, including: assistance with
aspects of tax accounting, attest services not required by state or regulation
and consultation regarding financial accounting and reporting
standards.
Tax
Fees
The
aggregate fees billed by the Outside Auditors for the fiscal years ended
December 31, 2005 and 2004 for professional services rendered by it for tax
compliance, tax advice, tax planning and other services were Cdn$38,911 and
Cdn$25,000, respectively. Tax services provided included aggregate fees billed
for tax compliance, advice, planning and assistance with tax for specific
transactions.
All
Other Fees
The
aggregate fees billed by the Outside Auditors for the fiscal years ended
December 31, 2005 and 2004 for products and services provided by the Outsider
Auditors, other than the services reported in the preceding three paragraphs,
were nil and nil, respectively.
Audit
Committee Pre-Approval Policies
All
audit
and non-audit services performed by the Registrant's auditor are pre-approved
by
the audit committee of the Registrant.
| G. |
Off-Balance
Sheet Arrangements
|
The
Registrant is not a party to any off-balance sheet arrangements that have or
are
reasonably likely to have a current or future effect on its financial condition,
changes in financial condition, revenues or expenses, results of operations,
liquidity, capital expenditures or capital resources that is material to
investors.
| H. |
Tabular
Disclosure
of Contractual Obligations
|
The
following table sets out the Registrant’s known contractual obligations for its
long-term liabilities and lease commitments as of the fiscal year ended
December
31, 2005.
|
(Canadian
dollars in thousands)
|
Payments
due by period
|
Total
|
Less
than
1
year
|
1
to 3
years
|
4
to 5
years
|
Thereafter
|
|
|
Long-term
debt (excluding capital lease obligations)
|
$
|
$
|
$
|
$
|
$
|
|
Capital
lease obligations
|
-
|
-
|
-
|
-
|
-
|
|
Operating
Lease Obligations
|
800
|
200
|
600
|
-
|
-
|
|
Purchase
Obligations
|
15,000
|
7,500
|
7,500
|
-
|
-
|
|
Other
Long-Term Liabilities
|
1,600
|
-
|
-
|
-
|
1,600
|
|
Total
contractual obligations
|
$
|
$
|
$
|
$
|
$
|
Dynatec
Corporation is to be paid $7.5 million on each of December 31, 2006 and 2007
as
deferred payment obligations relating to the acquisition by the Company of
Dynatec’s interest in the Sudbury Joint Venture and Aurora Platinum Corp. all as
more fully described in the Company’s financial statements and MD&A for the
year ended December 31, 2005.
Other
long-term liabilities is the estimated total future mine closure and site
restoration costs associated with the Company’s Sudbury operation.
| I. |
Critical
Accounting Policies
|
A
discussion of the Registrant's critical accounting policies can be found in
its
Management's Discussion and Analysis for the year ended December 31, 2005 filed
with the Securities and Exchange Commission as Document 3 herein.
| J. |
Audit
Committee Members
|
The
audit
committee is comprised of three independent directors. The audit committee
meets
a minimum of once per quarter and the audit committee charter is available
on
the Company’s website. The
Registrant's board of directors has determined that Mr. Robert Low, an
individual serving on the audit committee of the Registrant's board of
directors, is an audit committee financial expert, as that term is defined
in
General Instruction B8(a) of Form 40-F. Mr. Duncan Gibson an individual serving
on the audit committee and Mr. Donald M. Ross an individual serving on the
audit
committee are determined by the Registrant’s board of directors to be
"financially literate" as required by Canadian securities laws under
Multilateral Instrument 52-110 Audit
Committees.
UNDERTAKING
AND CONSENT TO SERVICE OF PROCESS
| A. |
Undertaking
|
The
Registrant undertakes to make available, in person or by telephone,
representatives to respond to inquiries made by the Commission staff, and to
furnish promptly, when requested to do so by the Commission staff, information
relating to: the securities in relation to which the obligation to file an
annual report on Form 40-F arises; or transactions in said
securities.
| B. |
Consent
to Service of Process
|
The
Registrant has previously filed with the Commission a Form F-X in connection
with its Common Shares.
SIGNATURE
Pursuant
to the requirements of the Exchange Act, the Registrant certifies that it meets
all of the requirements for filing on Form 40-F and has duly caused this annual
report to be signed on its behalf by the undersigned, thereto duly
authorized.
FNX
MINING COMPANY INC.
Dated:
March 30, 2006 By: /s/
A.
Terrance MacGibbon
By: A.
Terrance MacGibbon
Title: President
and Chief Executive Officer
EXHIBIT
INDEX
Number Document