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CMA CANADA
PROFESSIONAL PROGRAMS
February 2012 Board Report
Brightstar Mining Company
Any resemblance between the names of the fictitious players in the following scenario and those of actual persons, corporations or products is purely coincidental.
Please note: In order to remain consistent with industry standards, the standard units of measure used in the case are stated in imperial units.
Within this document, all imperial measures (distance, area, volume and weight) have been rounded. Brightstar Mining Company 2012 Board Report
CMA Canada 1
BRIGHTSTAR MINING COMPANY
Organizational Background
Brightstar Mining Company (BMC) is a publicly traded, Canadian company that is engaged in the development and operation of mineral properties in North America.
Currently, BMC operates two copper mines and one zinc mine, extracts and mills the ore and sells it to customers in concentrate form. The company was founded 15 years ago by Charles Stuart and is listed on the Toronto Stock Exchange.
Stuart worked for many years in a large, diversified mining company as a geologist specializing in copper exploration. His position required him to spend a significant amount of time travelling to mining sites all over the world, and this began to have an adverse affect on his family life. In order to spend more quality time with his family, he decided to establish his own mining company. In 1997, he founded BMC.
As President and CEO, Stuart began operations with the purchase of a copper mine in
British Columbia, naming it the Tayton Mine after his favourite skiing spot. He hired an operations manager, Robert Fournier, and an accountant, Ritesh Tejani, as well as an engineer to oversee the construction of the mine.
In late 2004, Stuart decided to expand the mineral holdings of the company but needed additional financial resources to do so. The initial public offering of 200 million shares was very successful, and BMC used the proceeds to purchase the Saloon Mine, a zinc operation in Alaska.
In May 2008, BMC acquired the Pearson Mine in the Yukon. With the addition of this operation, the company’s annual copper capacity increased to 74 million pounds. The ore is of very high grade (2% copper), and both its production and refining costs are below average for the industry.
At the beginning of 2012, Stuart decided to step down as President and CEO but remain as a member of the Board. As a result, the Board established a selection committee and recently completed the process of hiring a new CEO, Roger MacLean.
Current Strategy
Historically, BMC has operated in the base metals industry as a producer of copper and zinc, with gold and silver by-products. The mineral rights for its three mining sites were acquired once reserves were proven. The Saloon Zinc Mine has an expected and planned depletion date of 2018, and the two copper mines, Tayton and Pearson, will be depleted in 2025 and 2022 respectively. Consequently, the company needs to gain access rights to other proven reserves to ensure its long-term viability.
At present, there are several business models within the base metals industry. Some companies focus on one type of metal and either remain an exploration and/or mining Brightstar Mining Company 2012 Board Report
CMA Canada 2 company or expand into other operations along the value chain, such as smelting, fabrication and recycling. Other companies decide to diversify into several types of metals, adopting a strategy of extracting a variety of minerals and producing high-quality metals in a cost-effective manner.
MacLean would like BMC to focus on copper mining and production rather than continue as a diversified mining company. He strongly supports the theory of asset portfolio management, whereby a company divests itself of non-core assets and increases its investment in assets that take advantage of its skills and experience.
Accordingly, because BMC is very competitive in copper production, MacLean believes that this is where the company should concentrate its efforts with respect to growth opportunities and new investment. The new CEO also believes that the future is brighter for copper than for zinc. Therefore, in his view, a focused copper strategy will give the company a competitive advantage and maximize shareholder returns. If BMC adopts this position, the company will be in a stronger position than more diversified competitors when copper prices are high, but at a competitive disadvantage when copper prices are depressed.
Recently, BMC announced that its short-term goals were to increase its accessible, proven copper reserves by at least 50% over the next two fiscal years to about
450 million pounds of copper and to ensure a minimum 10% rate of return on all new investment. However, the CEO’s objectives for the coming year include maintaining a strong financial position and a long-term debt-to-asset ratio of 20% or less. Together with a low cost structure, this approach has enabled BMC to weather past downturns in copper prices.
Appendix A provides financial information for the years 2008 to 2011. The increase in earnings over the last four years has been due in part to the company’s investment in a new mining site and increases in commodity prices.
Board of Directors
BMC’s Board meets at least quarterly and deals with all corporate matters. The current
Board consists of the CEO and 8 directors, although the articles of incorporation state that there should be 10 directors in addition to the CEO.
Brad Godham, a mining engineer, has been a director since 2006 and was appointed
Chairman of the Board in 2011. He recently served as Chairman of a large, diversified mining company involved in the exploration, development and processing of a variety of metals. It is headquartered in Toronto.
Pierre Mercier, Secretary of the Board, has been a director since 2007. He is a tax manager with a large chartered accounting firm specializing in the mining sector and has many clients that operate worldwide. Brightstar Mining Company 2012 Board Report
CMA Canada 3
Allister Ballantyne, a director since 2007, is a financial consultant to the mining industry.
Previously, he was a partner in a large, Canadian chartered accounting firm.
Colin Newman joined the Board in 2009 and is Operations Manager for a large mine in
China. He has worked at mining sites around the world and has been involved in many labour and government negotiations.
Natasha Lyakhovsky has been a member of the Board since 2010 and holds an M.B.A. with a specialty in strategy. She has worked as a business development officer for a number of junior mining companies in Canada.
Karen Meindl, a director since 2009, is a senior mining analyst in a small firm of investment advisors. She holds a master’s degree in engineering and worked for many years as a site manager before obtaining her current position.
Muneeb Shah joined the Board in 2011 and recently retired from a large Canadian bank. His area of expertise was corporate lending, primarily to resource-based companies. Shah also sits on various other boards of directors.
MacLean, Stuart’s replacement as President and CEO, joined BMC in late 2011. He holds an engineering degree and has worked for several large, diversified mining companies, most recently as Vice-President, Operations, at an Australia-based firm that operates extensively in South America. In his prior postings, MacLean was responsible for expanding operations; in his most recent position, he grew the Australian company from three operating mines to six in just five years, and, because the new mines were in
South America, gained valuable experience in managing global operations. The selection committee selected MacLean because of his impressive track record in growing mining companies.
The Board has three standing committees that meet monthly:
1. Audit Committee – composed of Ballantyne (Chair), Meindl and Shah. The committee oversees BMC’s financial systems and reporting obligations, monitors the internal control systems and meets with the auditors. In addition, the committee reviews the quarterly and annual financial statements, management’s discussion and analysis, and earnings press releases.
2. Human Resources and Corporate Governance Committee – composed of Meindl
(Chair), Stuart and Shah. The committee makes recommendations to the Board with respect to the compensation paid to BMC’s executive officers and directors as well as the stock options granted to officers, directors and employees.
3. Health, Safety, Environment and Sustainability Committee – composed of
Newman (Chair), Mercier and Lyakhovsky. The committee develops, implements and monitors company practices with respect to employee health and safety, the environment and sustainability. Brightstar Mining Company 2012 Board Report
CMA Canada 4
Directors’ Compensation
BMC strives to ensure that its compensation package motivates its directors to achieve the company’s strategic goals and is comparable to that offered by other mining companies of similar size. Compensation for directors is included in general and administration expenses, and consists of the following:
1. Annual retainer – $30,000 per director;
2. Chair of the Board fee – $30,000;
3. Chair of committee fee – $10,000 per Chair;
4. Board meeting attendance fee – $1,200 per director per meeting attended;
5. Committee meeting attendance fee – $1,200 per committee member per meeting attended; 6. Additional compensation for special services beyond the normal scope of work required; and
7. Stock options – 50,000 options per director for the first year of service and 21,000 options per director for every year thereafter. The options have a five-year term and vest over a three-year period, one-third each year. The exercise price for each option is set at the market price of one BMC share on the date of the grant. To date, the directors own a total of 1,200,000 options, of which 330,000 have vested.
Organizational Structure
BMC has a centralized structure, with all decisions being made by the head office in
Toronto. A detailed organizational chart is provided in Appendix B. The company has approximately 2,000 employees, and all of the salaries and compensation outlined below are included in general and administration expenses.
As President and CEO, MacLean is responsible for liaising with the Board and for driving and implementing the strategy of the company. His goal—and his commitment to the Board on signing his contract—is to grow the company significantly over the next few years. MacLean and his team will determine both the strategic direction required to position BMC for rapid growth and the best way to secure the additional financing needed to fund growth opportunities.
Robert Fournier, Senior Vice-President and Chief Operating Officer (COO), holds an engineering degree and has been with the company since inception. He has held several positions in operations and business development, including that of site manager at the Tayton Mine, and has been Stuart’s right-hand man for the past
10 years.
As Senior Vice President and Chief Operating Officer, Fournier is responsible for the mining operations at all three sites. Reporting directly to him are the site managers:
Tom Rooney (Tayton), Charles Schwab (Pearson) and Rudy Coreson (Saloon). Each site manager earns approximately $175,000 and oversees the personnel required for Brightstar Mining Company 2012 Board Report
CMA Canada 5 that particular location: the site supervisor, the site accountant, maintenance staff, engineering and technical staff, and the mine workers. Salaries for these employees range from $56,000 for mine work to $130,000 for various levels of management.
Also reporting to Fournier is Bert Becker, Manager of Health, Safety and Sustainability.
Becker has a staff of 20 whose primary function is to monitor and address health and safety issues, and manage sustainable development initiatives. Becker earns $180,000, and the average salary of the people reporting to him is $65,000.
Ritesh Tejani, Chief Financial Officer (CFO), has also been with the company since inception. As a certified management accountant (CMA) who is well respected in the accounting community, Tejani has served on many committees dedicated to the development of accounting standards for the Canadian mining sector. Under his guidance, BMC converted to IFRS in 2008, three years earlier than most Canadian companies. Tejani is responsible for negotiating all sales contracts with the copper processors. Reporting to Tejani is the controller, Sherry Molevski. She manages the typical accounting functions (accounts receivable, accounts payable and payroll) as well as human resources and information technology (IT). In total, about 40 employees report to
Molevski, each earning between $50,000 and $150,000.
Suzanne Chen, Vice-President, Business Development, joined the company in late
2010. She is a geologist who has spent many years exploring copper deposits for small,
Canadian exploration companies operating primarily in Peru and Brazil. Chen is responsible for finding growth opportunities for the company to consider. Working with the CFO, Chen prepares studies and presents them to the president. Each member of her staff of five has substantial experience in the mining industry and earns approximately $150,000.
Executive Compensation
BMC wants to attract and retain highly experienced, talented managers and motivate them to achieve the company’s strategic objectives, thereby increasing shareholder value. Accordingly, the Human Resources and Corporate Governance Committee conducts marketplace research to determine the appropriate levels and mix of executive compensation, given that BMC must compete with companies of similar size in the mining industry.
Executive compensation is included in general and administration expenses, and consists of the following:
1. Base salary – $500,000 for the president and CEO, $300,000 for each of the
CFO and COO, and $250,000 for the vice-president, business development. Brightstar Mining Company 2012 Board Report
CMA Canada 6
2. Annual bonus – based on company and individual performance measured against predetermined goals. Individual target bonuses, determined annually by the Human Resources and Corporate Governance Committee, vary from 10% to
40% of base pay for all executives, although the president’s bonus may be as high as 60%. Performance goals for 2012 are to increase the copper reserves by
50% and to earn a rate of return on all new investment of at least 10%— objectives that the company has announced publicly—with the added constraint of maintaining a long-term debt-to-asset ratio of 20% or less.
3. Stock options – 150,000 options annually for each executive officer, under the same conditions as those offered to the directors. Options have a five-year term, vest one-third per year and have an exercise price equal to the market price on the date of the grant, fair valued using the Black Scholes pricing formula. At present, the executives own a total of 1,500,000 options, which are recognized as an expense over the vesting period.
Shareholdings
The 200 million outstanding shares of BMC are widely held, generally as part of a portfolio in minerals, oil and gas. Managers and directors hold shares and options as follows: Shares Options
Charles Stuart Founder and Director 15,000,000 531,000
Brad Godham Director 20,000 134,000
Allister Ballantyne Director 50,000 115,000
Colin Newman Director 30,000 92,000
Natasha Lyakhovsky Director 20,000 71,000
Pierre Mercier Director 50,000 115,000
Karen Meindl Director 30,000 92,000
Muneeb Shah Director 20,000 50,000
Roger MacLean President and CEO 100,000 150,000
Robert Fournier Senior Vice President and COO
3,000,000 600,000
Ritesh Tejani Chief Financial Officer 3,000,000 600,000
Suzanne Chen Vice President, Business
Development
20,000 150,000
Total 21,340,000 2,700,000
Historically, the price of BMC shares has fluctuated with the price of copper. Currently, shares are trading at $4.90, which is approximately 14 times earnings per share. BMC has never paid dividends but has always reinvested earnings in the company. Brightstar Mining Company 2012 Board Report
CMA Canada 7
Industry Background
Copper Production
The rock that is mined through digging or blasting is typically between 0.5% and 2% copper. The ore is measured in metric tonnes (1,000 kilograms equal one tonne)1 and includes a significant amount of clay and non-copper-bearing minerals.2 The rock is crushed, milled to a powder and concentrated into a slurry. Then, chemicals are used to further concentrate the copper and remove the waste. At the end of this stage, the copper concentrate generally contains 15% to 35% copper as well as trace amounts of other minerals such as gold and silver, but lower concentrations may result.3 The waste, known as tailings or gangue, is pumped into ponds and allowed to dry.4 The amount of copper produced by each mine will vary, depending on the type and grade of ore mined and the desired level of purity in the concentrate.
Copper Processing
Processors turn the copper concentrate into pure copper cathode by one of two methods: smelting or electrolytic refining. Smelting services, referred to as treatment charges, are priced in US dollars per tonne of concentrate treated, and refining charges, in US dollars per pound produced.5 In 2010, these costs were US$50 per tonne and
US$0.50 per pound. In 2011, the amounts increased to US$80 per tonne of concentrate treated and US$0.80 per pound produced.6 The low treatment charges in 2010 were driven by the low amount of concentrate received at the smelters and the correspondingly low capacity that was used.
In some cases, the mining company is large enough to own its own smelter. In other cases, it sells its copper concentrate to a processor as an intermediate product at a spot price. It is also possible for the processor to sell the copper metal produced on behalf of the mining company, using the London Metal Exchange price on the date of sale less the treatment and refining charges.7 Longer-term contracts can be negotiated to set the selling price at some future date.8
1 http://resources.schoolscience.co.uk/CDA/14-16/cumining/copch2pg2.html , accessed February 3,
2012.
2 http://www.madehow.com/Volume-4/Copper.html , accessed February 3, 2012.
3 Ibid .
4 Ibid .
5 http://www.theaustralian.com.au/business/asian-copper-smelters-extract-fee-rise-from-miners/storye6frg8zx-
1225994496596 , accessed February 3, 2012.
6 Ibid .
7 Ibid .
8 Ibid .
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CMA Canada 8
Copper End Products
The cathodes produced by either smelting or refining are shipped to mills and foundries.
Copper wire mills produce electrical conductors, such as copper wire and cable for electric power transmission. Brass mills produce alloys for the manufacture of plumbing accessories, air conditioning tubes, automotive radiators and roofing sheets. Foundries use copper in the casting of many industrial products, including valves and plumbing products, bearings and cylinders.9 The cathodes may also be cast into wire rods, billets, cakes or ingots.10
Demand for Copper
Copper has many uses because it is extremely versatile, corrosion resistant, thermally conductive and available in abundance. At present, consumers are primarily from the construction and automotive industries. In the future, demand is expected to increase significantly. Historically, copper sales have been driven by the construction of residential and commercial buildings in North America, where the metal is used extensively in plumbing and ventilation. However, because copper wire and cable are required for electric power transmission, future sales are expected to be driven by the growing demand for electricity in emerging markets and the increasing need to connect renewable energy sources to the existing power grid.11
In addition, the number of applications for the metal is expanding so that copper is now used in ship hulls, off-shore platform sheathing, electric vehicles, solar energy systems, canisters for nuclear waste disposal12 and antimicrobial products.13
Copper Prices
Copper prices are set in US dollars and, as with any other commodity, vary according to worldwide supply and demand. Supply can be impacted by improved mining techniques, the discovery of new copper reserves, the reopening of old mines,14 the development of new mines, mine closures and the size of the stockpiles maintained by producers and other players in the value chain. Demand is influenced by patterns of consumption, trends in the housing and automotive sectors, economic and industrial growth rates, the availability and applicability of substitute products, and speculation activity. Copper prices can also be affected by anticipated rates of inflation and currency fluctuations.15 9 http://www.copper.org/education/production.html , accessed February 3, 2012.
10 Ibid .
11 Ibid .
12 http://www.copper.org/education/history/g_fact_future.html , accessed February 3, 2012.
13 http://www.copperinfo.co.uk/antimicrobial/ , accessed February 3, 2012.
14 Companies will close mines if the cost of producing is higher than the selling prices of the copper produced. When prices increase, the mines will be reopened.
15 2010 Annual Information Form for Capstone Mining Corporation, March 2011, www.sedar.com.
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CMA Canada 9
Copper Prices – 2006 to 201116
Copper prices declined significantly in 2009 to approximately US$1.50 per pound. In
2011, prices rose to US$4.50 per pound, as demand increased with the global economic recovery and rapid growth in the Asian, European and US markets.17 In
Canada, the demand for copper remained relatively flat. Going forward, many analysts expect demand to exceed supply and copper prices to fluctuate between US$3.75 and
US$4.00 per pound until 2014, and then decline to a long-term average of US$2.00 per pound as supply catches up to demand.18
Copper Industry in Canada19
The Canadian copper industry accounts for 6.9% of copper production in the Americas.
In 2010, Canada produced 539.1 thousand tonnes of copper, down from a high of 607.1 thousand tonnes in 2008.
The Canadian industry tends to be dominated by the large, diversified multinational corporations who can achieve economies of scale, often driven by consolidation. Each mining venture is a large-scale operation that requires significant capital outlays upfront for infrastructure and access to reserves. Throughout the life of the mine, high fixed operating costs are incurred, particularly for transportation and energy. Copper production is a cyclical industry, dependent on copper prices, consumption levels and energy costs.
16 http://www.infomine.com , accessed February 3, 2012.
17 http://www.icsg.org/images/stories/pdfs/icsg_press_release_-_2011_04__forecast.pdf , accessed
February 3, 2012.
18 “Capstone Mining Corporation,” RBC Capital Markets Equity Research, Thomson Reuters Investext,
March 3, 2011.
19 This section is adapted from “Copper in Canada,” Datamonitor Industry Profile, www.datamonitor.com,
March 2011.
Brightstar Mining Company 2012 Board Report
CMA Canada 10
Zinc Industry
The first step in zinc production is to crush and treat the ore in a splintering process to remove the sulphur and produce zinc oxide. At the smelting stage, the zinc oxide is mixed with coke and blasted with hot air in a furnace to produce zinc. The end result can then be used to produce galvanized steel or mixed with copper to make brass and other alloys.
The demand for zinc depends heavily on the demand for steel, which is driven by activity in the construction and automotive industries. During 2010, prices for zinc increased from 2008-2009 levels and varied from a low of US$0.80 per pound to a high of US$1.20 per pound.20
Zinc Prices – 2007 to 201121
Risk
The mining industry is subject to more risks than the manufacturing or service sectors.
These risks are summarized below.22
1. Operational risk – Operations can be interrupted by power outages, labour disruptions, fires, floods, explosions, landslides and the breakdown of machinery.
2. Energy risk – Fuel (for transportation) and electricity (for production) are significant input costs in the mining process and can vary greatly in a short period of time. The power input may be hydroelectric, wind or solar.
20 http://www.kitcometals.com/ , accessed February 3, 2012.
21 http://www.infomine.com/ChartsAndData/ChartBuilder.aspx?g=127671&df=20070101&dt=
20110515&vt=2&ty=Commodity , accessed February 3, 2012.
22 2010 Annual Information Form for Capstone Mining Corporation, March 2011, www.sedar.com.
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CMA Canada 11
3. Market risk – The selling price of the metal mined varies with supply and demand and is affected by foreign exchange rates.
4. Resource risk – Mineral reserves are only estimates; therefore, the actual amount of product may be quite different from the projected reserve for a given mine. In addition, the amount produced each year may vary, as well as the grade of the ore and the value of the end product.
5. Environmental risk – Mining operations change the landscape, increase noise levels and create vibrations in the earth, all of which disrupts wildlife and the surrounding communities. Mining also generates a lot of waste water, dust and other emissions and discharges. As a result, governments seek to protect the environment and promote clean, efficient and sustainable operations by imposing legal restrictions on many aspects of mining operations. Companies often decide to take a proactive approach by developing their own ways of ensuring minimal disruption to, and sustainable use of, the environment. In Canada, environmental stewardship and sustainable development are important issues.
6. Political, legal and social risk – Conditions vary from country to country. In some areas, the risk of doing business is higher because of the level of political unrest, terrorist activity, economic uncertainty, opposition to mining, restrictions on foreign ownership or government intervention. Governments may provide tariffs, subsidies and low-cost loans, but may also enforce stringent laws and regulations concerning exploration, development, operations, taxes, labour standards, health and safety, management and disposal of toxic substances, land use, water use and land claims. These laws and regulations are constantly changing. Acquiring ownership of the mineral reserves may require negotiations with landowners, governments and other regulatory bodies, and legal title to prospective mining properties is sometimes difficult to determine. In Canada, the land claims of the First Nations and aboriginal peoples have a significant impact on the mining industry.
Facilities
BMC rents four floors of a building in Toronto for its head office. There are three years remaining in the lease and an option to renew for another five years. Monthly payments are currently $45,000 and increase annually, according to the terms of the inflation escalation clause.
The company has developed facilities and infrastructure at its three mining sites, as described below. Brightstar Mining Company 2012 Board Report
CMA Canada 12
Operations
BMC extracts copper and zinc from three mines in North America—two in Canada and one in Alaska. The company sells the copper concentrate to smelters and the zinc concentrate to zinc processors. The small traces of gold and silver that are by-products of the copper-mining process are sold for credit against the treatment charges paid to the smelters.23
BMC does not engage in exploration activities. Instead, the company buys or leases the rights to proven mineral reserves and then develops the infrastructure required for extraction and production. This infrastructure includes buildings, equipment and disposal systems at the mine as well as transportation routes and power transmission to the site. The development of this infrastructure usually takes about two or three years to complete, provided there are no setbacks related to permits or other regulatory difficulties. The Tayton Mine produces high-grade copper at low cost with traces of gold and silver as by-products. Located in British Columbia, the mine is an open-pit operation that commenced production in 2000. Since then, the company has upgraded its equipment continuously in order to make use of the best technology available. In 2011, Tayton produced 34.1 million pounds of copper which, at an average realized price of
CAN$3.42 per pound during the year, generated revenue of $117 million. With an estimated reserve of 442 million pounds and average annual production of 34 million pounds, the mine is expected to be viable for another 13 years.
The Pearson Mine also produces primarily high-grade copper at low cost with traces of gold and silver as by-products. Located in the Yukon, this open-pit mine was purchased in 2008 and commenced operations in 2010. Here too, BMC has upgraded equipment continuously to the best current technology. Nevertheless, operating in the North means that no product can be shipped from October to April; product is stockpiled during these months and moved by train and truck when shipping resumes. In 2011, Pearson produced 39 million pounds of copper and generated gross sales of $133 million. With an estimated reserve of 435 million pounds and average annual copper production of
40 million pounds, the mine should have 10 years of life remaining.
Located in Alaska, the open-pit Saloon Mine commenced operations in 2007 and primarily produces zinc. BMC has maintained the original equipment in pristine condition but has not invested in any new technology since the acquisition of the mine.
Saloon is situated on land owned by an aboriginal group to whom a royalty of 12% of revenues is paid annually for the right to extract the zinc. The northern climate makes mining extremely difficult, and severe weather can hamper production; operations are limited to six months of the year and transportation for the product is only by oceangoing vessels during the months of July through October. At present, the cost of
23 When traces of gold and silver are found while processing the copper, these amounts can be sold by the processor for proceeds. As a result, the processor will deduct the value of these by-products from the treatment fees charged to the producer.
Brightstar Mining Company 2012 Board Report
CMA Canada 13 producing zinc at Saloon is higher than the industry average. In 2011, Saloon produced
228 million pounds of zinc and generated revenues of $223 million, based on an average price of CAN$0.98 per pound. With an estimated reserve of 1,610 million pounds, the mine is expected to last another 7 years if annual production remains at approximately 230 million pounds.
Operational data for each mine appear in the table below (all dollar amounts are in
Canadian dollars).
Tayton Copper
Mine
British Columbia
Pearson Copper
Mine
Yukon
Saloon Zinc
Mine
Alaska
Initial operation (year) 2000 2010 2007
Total remaining reserves, estimated 442 million pounds of copper
435 million pounds of copper
1,610 million pounds of zinc
Annual production, estimated 34 million pounds of copper
40 million pounds of copper
230 million pounds of zinc
Expected mine depletion
(year) 2025 2022 2018
2011 Results
Ore mined (tonnes) 1,600,000 1,500,000 1,200,000
Ore milled (tonnes) 858,250 915,000 714,000
Ore grade, estimated 2.1% 2.2% 18%
Average recovery rate 86% 90% 82%
Concentrate produced
(tonnes) 126,300 144,600 117,000
Saleable product, estimated (Note 1)
34.1 million pounds of copper
39.039 million pounds of copper
228 million pounds of zinc
Average selling price per pound (CAN$) $3.42 $3.42 $0.98
Total gross revenue $117 million $133 million $223 million
Treatment and refining costs after credits from sale of by-products
$12 million $14 million $23 million
Operating costs $45 million $60 million $59 million
Transportation and distribution costs (Note 2) $3 million $8 million $29 million
Royalty payable $27 million
Depreciation (Note 3) $18 million $20 million $13 million
Annual capital expenditures $10 million $15 million $5 million Brightstar Mining Company 2012 Board Report
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Note 1: Sample calculation of quantity of saleable metal produced: 858,250 tonnes milled x 1,000 (conversion from tonnes to kilograms) x 2.1% (estimated ore grade) x 86% (average recovery rate) x 2.2 (conversion from kilograms to pounds) = 34,100,000 pounds of copper. The exact quantity of saleable product will depend on the actual grade of copper and amount of waste, as well as the desired level of purity in the final product.
Note 2: Transportation and distribution costs are incurred in transporting the product to the delivery point by truck, train or ocean-going vessel. Rail and ocean transport must be outsourced via contract.
Note 3: Mining operations are depreciated using the units-of-production method. All other equipment and vehicles are depreciated on a straight-line basis over the asset’s useful life.
BMC sells most of its concentrate on the global market, at market prices, and uses intermediaries to deliver the product to customers worldwide. Sales are recognized when the product is delivered. However, the price is determined two or three months later, once an assay has been conducted and a final determination of the weight of the metal has been made.
Fifty percent of the company’s sales of copper concentrate is covered by off-take agreements of between 12 and 36 months’ duration. In this type of contract, the buyer agrees to purchase a guaranteed amount of a producer’s future production at the current London Metal Exchange price for copper. Similar contracts exist for zinc concentrate. BMC does not use derivatives to hedge the selling price of any part of its production.
Management has always believed that the concentrate should be sold at spot prices, since shareholders invest in the company because of its exposure to commodity pricing.
Sales and operating costs for each metal for the past four years are summarized in the table below.
2011 2010 2009 2008
Copper
Total sales (pounds) 73.139 million 69 million 34 million 32 million
Average selling price per pound (CAN$) $3.42 $3.52 $2.67 $3.37
Total sales $250 million $243 million $91 million $108 million
Operating costs $105 million $112 million $43 million $42 million
Zinc
Total sales (pounds) 228 million 225 million 231 million 225 million
Average selling price per pound (CAN$) $0.98 $1.01 $0.86 $0.91
Total sales $223 million $227 million $199 million $205 million
Operating costs $59 million $58 million $60 million $57 million Brightstar Mining Company 2012 Board Report
CMA Canada 15
In the mining industry, no costs are truly fixed because many elements change with production and capacity.24 Operating costs vary from one year to the next, depending on ore grade, production level and costs of labour, fuel and energy. BMC’s operating costs are distributed as follows:25
Load and hauling – equipment, fuel, tools, repair and maintenance
(R&M), and labour
27%
Drilling – equipment, fuel, consumables and labour 4%
Blasting – explosives, transport and services 8%
Management and technical – planning, surveying, engineering, supervising and grade control
6%
Crushing – fuel, power, liners, consumables, R&M and labour 4%
Grinding – power, liners, consumables, R&M and labour 19%
Other 32%
Total 100%
Ownership of Mineral Properties
Given that ownership of the reserves is one of the most important success factors for a mining company, BMC has always used legal professionals to search the title of prospective mineral properties. However, since past transfers of ownership are often vague and undocumented, it is difficult to determine valid ownership at the time of purchase. BMC has investigated and verified that, to the best of its knowledge, it has legal title to all of its mineral properties.
Costs incurred to acquire mineral properties are capitalized (see Appendix A –
Statement of Financial Position). These costs are tracked by property and amortized on the units-of-production basis. Each mine is treated as a separate cash-generating unit.
Asset Retirement Obligations
When a mine is developed, the costs of closing the site and remediating the environment are estimated and recorded. The engineering experts hired by BMC to forecast these costs reviewed existing environmental legislation as well as management’s public announcements of the decommissioning work that would be completed for each mine. The engineers also accounted for the fact that BMC’s copper mines contain ore of a very high grade and, therefore, have a lower impact on the environment than mines with lower-grade ore.
Based on the engineering studies, the estimated retirement obligation for each mine, discounted at 6%, is as follows:
24 “Costs and Cost Estimations,” SME Mining Engineering Handbook, Volume 1, second edition by
Seeley W. Mudd Memorial Fund of AIME, Society for Mining, Metallurgy, and Exploration (U.S.),
H. Howard Senior Editor, 1992, p. 413.
25 “Achieving high performance in mining,” Accenture Brochure, Accenture, 2009.
Brightstar Mining Company 2012 Board Report
CMA Canada 16
1. Tayton – $6.6 million in 2011 ($15 million will be required in 2025);
2. Pearson – $6.5 million in 2011 ($12 million will be required in 2022); and
3. Saloon – $14.7 million in 2011 ($22 million will be required in 2018).
In each quarterly reporting period, the company reviews these estimates of future obligations and makes adjustments, since the provisions will increase over time at the rate used to discount the obligation to present value. In addition, every two years, the engineering reports are updated. The company believes that the decommissioning costs currently projected will not be a burden at the time of depletion.
Human Resources
BMC is committed to its employees, and there is no union at any of the mines.
Nevertheless, there is some concern surrounding the company’s ability to attract the right skill sets to remote areas, and to provide accommodation and other amenities for employees working at those locations.
The manager of human resources is also responsible for all health and safety issues.
Following an accident at the Tayton Mine in 2010, BMC implemented a safety program known as ZSI (Zero Safety Incidents) that requires the participation of every employee and contractor working at the mining sites. The ZSI process entails ensuring that each task is properly planned and safely executed. In addition, employees are obligated to remain watchful and report unsafe practices to any level of management without adverse consequences. As part of the ZSI initiative, the company examines all incidents that suggest potential safety issues in order to take corrective action and train employees with respect to the new protocol. Since the beginning of the ZSI program, there have been no other accidents.
Environmental Responsibility
BMC is committed to minimizing the negative impacts that mining has on the environment and has gained a reputation for being a responsible producer at all of its mines. The company is also committed to working with local communities to ensure that the people support the mining effort and view it as a desirable activity. This requires planning, coordination and education.
All three mines operate in accordance with provincial or state regulations and environmental requirements. However, the company would like to become more proactive in this area by setting goals and taking actions that go beyond the minimum legal requirements. BMC recently formed a Sustainability Working Group (SWG) that will review the company’s current position and make recommendations for changes in the future. There are four points for this group to consider: energy conservation, efficient use of water and land, impact on ecosystems and sustainable management of materials. Brightstar Mining Company 2012 Board Report
CMA Canada 17
Financing
The company uses the Bank of Montreal for all banking matters. At present, excess cash is invested in short-term deposits maturing within three months of purchase, mostly in the form of treasury bills. There are no loan covenants. With respect to projects, the company uses a 10% cost of capital, after taxes. The company would like to maintain a minimum cash balance of $80 million.
BMC has total long-term debt of $187 million, consisting of the following:
1. Loan from the Bank of Montreal for $50 million bearing interest at prime plus 3.5% and secured by the production from the Tayton Mine. The loan matures in 2012;
2. Loan from the Resource Development Department of the Yukon for $75 million for the development of the Pearson Mine. Secured by the mine itself and bearing interest at 6%, the loan matures in 2015 but may be renegotiated at similar rates; and 3. Private Term loan for $62 million due in 2019, with interest at 5.7% payable semiannually on January 15 and June 15. The note is callable if the company chooses to pay the greater of two amounts: the principal plus accrued interest, and the present value of the principal and interest discounted at a comparable yield plus 1.5%. The private loan was advanced by an unrelated party, WCIN Limited, that manages a pension portfolio on behalf of a group of companies.
New Financing
To finance any new growth opportunities required, the company must maintain a maximum long-term debt-to-asset ratio of 20%. In addition, the Board has mandated that no new equity be issued in the coming year. As a result, any new investments must be financed with internal equity generated from operations or additional debt allowed within the limit of the 20% ratio.
The bank is usually the first source of financing and has historically been willing to provide financing up to 30% of the investment costs. If the loan is for mineral properties, the bank will also require 50% of the annual production to be hedged to fix the selling price to ensure that the company has enough cash to pay back any loans.
Foreign Exchange Exposure
All financial reports are prepared in Canadian dollars, which is the functional currency of the company. However, all products are sold in US dollars, which must be translated into Canadian dollars for reporting purposes. In addition, operating costs for the mine in
Alaska are incurred in US dollars, which acts as a natural hedge for these revenues; however, costs for the Canadian mines are in Canadian dollars. Consequently, the Brightstar Mining Company 2012 Board Report
CMA Canada 18 company is affected by fluctuations in the exchange rate between US and Canadian dollars. BMC reports net exchange gains or losses annually but does not actively hedge against this foreign exchange exposure. A chart showing historical fluctuations in the CAD/USD exchange rate appears below.26
Canadian Dollar to US Dollar Exchange Rates
Legal Matters
The company uses Procter and Stewart (P&S), a law firm that specializes in the mining sector, for all legal matters. P&S reviews all acquisition and sales contracts, interprets the environmental regulations that pertain to the various mining sites, and searches the title of all mineral properties prior to purchase. Annual legal fees fluctuate between
$1 million and $3 million, all of which are expensed for accounting purposes.
Financial Reporting and Budgeting
In 2008, the company converted to IFRS. Appendix A provides financial statements for the years 2008 to 2011.
BMC uses the Integrated Mining System for its accounting records, thereby tracking operating volumes as well as costs. The system keeps a perpetual inventory of consumable parts and supplies, ore stockpiles and ore concentrates. Costs allocated to consumable parts and supplies are accounted for at average cost. Costs allocated to ore stockpiles and ore concentrates are accounted for at average cost that includes an appropriate share of direct mining costs such as direct labour costs, consumables, mining site overhead, depletion and amortization.
26 http://www.bankofcanada.ca/rates/exchange/cad-selected-currencies/#IEXM0102 , accessed
December 19, 2011.
1.1
1.0
0.9
0.8
0.7
0.6
1 Dec 1 Dec 1 Dec 1 Dec 1 Dec 1 Dec 1 Dec 1 Dec 1 Dec
2002 2003 2004 2005 2006 2007 2008 2009 2010 Brightstar Mining Company 2012 Board Report
CMA Canada 19
Annual budgets are prepared in October for the following year. Mine production will vary from time to time depending on metal prices and the balance between supply and demand. However, the company has decided to use the following assumptions when preparing forecasts:
1. Constant annual production in each mine, consistent with 2011 volumes;
2. A copper price of $3.00 per pound;
3. A zinc price per pound of $1.13 for 2012, $1.18 for 2013, $1.00 for 2014, and $0.95 for 2015 and thereafter;
4. A Canadian dollar that is at par with the US dollar; and
5. An income tax rate of 25%.
Other Issues
At a recent management meeting, a number of issues were brought forward for discussion. Environmental Liability
Becker reported that the engineering studies for site remediation at the property in the
Yukon had been updated. According to the most recent report, there has been more ground seepage of waste than had been anticipated. Although the amount is still within the regulatory guidelines, the territorial government is currently reviewing the limits and is expected to revise them downwards in 2013. At that point, BMC would be in violation of the revised regulations.
The engineers have suggested that the company fix the problem immediately at an estimated cost of $6 million. At present, this is not a legal obligation, since the regulatory changes have not yet been passed. However, if action is postponed, the seepage could worsen. The engineers cannot predict at what rate this might occur, nor what the future cost to the company might be.
Outsourcing Possibility
Rooney has been examining ways to reduce operating costs at the Tayton Mine and proposed that some of the maintenance on the grinding machines be outsourced. The machines range in age from five to seven years. To ensure that they continue to operate, BMC must have spare parts and replacement lifters and liners on hand. Given normal production volumes, ongoing maintenance is needed at least once every month and requires each machine to be down for one entire processing day.
The annual direct costs related to this in-house maintenance are as follows: Brightstar Mining Company 2012 Board Report
CMA Canada 20
Working capital investment in spare parts, lifters and liners inventory $2,000,000
Administrative labour costs for purchasing items, tracking inventory, and planning and supervising maintenance
$200,000
Direct labour to perform maintenance $1,100,000
Total $3,300,000
These costs have fluctuated from a low of $2.5 million to a high of $4 million over the past few years. In addition, the company spends time training new personnel on the maintenance of the grinding machines. BMC purchases the spare parts and consumables—all of the supplies required to run these machines—from SystemOutCo, the company that also provides technical support for the machines when required.
Under the proposed three-year contract, SystemOutCo would be responsible for the maintenance planning, spare parts availability and actual replacement of the lifters and liners,27 and BMC would pay a total of $9 million: $4 million upon signing the contract,
$4 million at the beginning of Year 2, and the remaining $1 million at the beginning of
Year 3. SystemOutCo’s expertise has the potential of reducing downtime by 30%, which could translate into savings of a maximum of $500 thousand.
Currently, the company spends approximately $20 million on the grinding process at the two copper mines. Fournier believes that this outsourcing agreement would result in cost savings.
Compensation and Reward Plans
Tejani reported that he and MacLean have discussed changing the compensation plan for key managers to include share appreciation rights rather than stock options. In addition, he suggested that the company implement a system to reward employees for innovative ideas that reduce costs. Tejani was tasked with summarizing the advantages and disadvantages of share appreciation rights, along with drafting a proposal outlining the form that such a reward system would take.
Mining Rights Dispute
Fournier brought the other managers up-to-date on the recent dispute over mining rights in the Yukon. When BMC purchased the rights to the Pearson Mine from Mr. Peters, the title search supported the claim that Peters was the sole owner. In late 2011, a Mr.
Jones informed the company that he had not been compensated properly for his share of the mining rights to the Pearson site. He stated that, originally, these mining rights had been part of a partnership between his father and Peters’ father, and produced a letter signed by Peters’ father indicating that the mining rights were jointly owned by the two men. The lawyers at P&S maintain that, according to their research, Peters was the sole registered owner of the property.
27 http://www.metso.com/corporation/articles_eng.nsf/WebWID/WTB-060420-2256F-
9F81D?OpenDocument , accessed February 3, 2012.
Brightstar Mining Company 2012 Board Report
CMA Canada 21
At the time of purchase, BMC paid $5 million to Peters; Jones contests that his share is worth $10 million in today’s dollars. P&S believes that BMC has a strong case refuting his claim, but substantial legal fees would be saved if the issue could be settled out of court. The lawyers have estimated various amounts that the company might have to pay and the probability associated with each outcome, as follows:
Probability Potential Payout
10% $10 million
10% $5 million
25% $2 million
55% $0 million
Community Image
MacLean announced that he would like BMC to enhance its reputation as a mining company that cares about the environment and sustainability. The management committee agreed to set aside $2 million in 2012 to design and implement a campaign to improve the company’s profile in the communities near the three mining sites.
Becker was instructed to have the members of the Sustainability Working Group consider how best to spend this money and to bring their proposal to the next management meeting. Becker suggested that updating the company website should be part of this initiative.
Board of Directors
The Board is in need of 2 additional members in order to reach the required number of
10. Tejani was tasked with determining what type of expertise is missing from the Board at present. He was also instructed to ensure that the current compensation package for directors is in line with that of similar companies in the industry.
Copper Sales Contract
The company’s current five-year contract to sell copper at a fixed price will expire in the next few months. Tejani was given the responsibility of drafting the terms and conditions of a replacement contract, including the length of the agreement, as well as determining whether or not it would be better to use a floating price with minimums and maximums.
Maturing Bank Loan
The company’s bank loan matures in 2012, and the bank is willing to renew the loan with similar terms and conditions for another 10 years. The Board could decide to seek private financing instead.
An investment fund has suggested a 10-year, unsecured loan for $50 million with an interest rate tied to the price of copper. The note would bear interest at 5%, with an Brightstar Mining Company 2012 Board Report
CMA Canada 22 added premium of 1% when copper prices are at or below US$2.50 per pound, 2% when copper prices are between US$2.50 and US$3.50 per pound, and 3% when copper prices are above US$3.50 per pound.
Currency Risk Management
Historically, the company has not hedged any of its exposure to commodity pricing or
CAD/USD exchange rates. Instead, BMC has allowed its cash flows to fluctuate with trends in the market. Tejani strongly believes that management should reconsider this policy. Pending Lawsuit
In 2010, a wall collapsed in one of the mining pits at the Tayton site. An employee was injured and is now on lifetime disability, unable to work. Although the company paid the medical bills, the employee has commenced legal action for lost wages over the remainder of his working life. Since he was 33 years old at the time of the accident, he alleges that he would have been able to earn in excess of $2.5 million over the next
32 years and is pressing the company to pay this amount.
Tejani is reluctant to set a precedent with this type of settlement. BMC is self-insured and Tejani feels that the company has already paid more than was expected.
Recent Developments
Excerpts from the management meeting held in early 2012 appear below.
MacLean: I would really like to increase our copper reserves. Do any of you have any ideas on how to achieve this objective?
Chen: My team has been working on this. There is a copper reserve in northern Ontario that presents us with a very promising acquisition opportunity. The mining company in question, DKL Inc., has run into a major roadblock in negotiations with the local Cree and Ojibway communities about the development of the site. My sources indicate that the company is running low on cash and is having trouble securing more funds. We have assembled some numbers and additional information for you to review (see
Appendix C).
Tejani: Although we have some experience with this type of negotiation, do we really want the risk? Last time it took quite a while to come to an agreement that was supported by everyone. Are there no other opportunities that might be less risky?
Chen: We do have another opportunity that could give us access to a huge copper reserve in South America and help us to diversify geographically. GeoCopper Co., an exploration company, is looking for investors to help fund its exploration activities. We have been hearing a lot about South American copper deposits, and this could be a Brightstar Mining Company 2012 Board Report
CMA Canada 23 great investment for a small amount upfront. We have gathered information on this, and it looks really exciting (see Appendix D).
MacLean: This sounds very interesting. I particularly like the idea of getting into exploration. Fournier: Are you sure we should take that step? Historically, we have stayed away from exploration and concentrated on developing sites where reserves have been found. We could be pouring money into exploration for a long time with little or no return, and I am not sure how the market would react to this type of diversification. I would rather see us invest downstream in a copper smelter and have some control over our treatment and refining costs. I believe that we could even reduce our costs if we owned our own smelter.
Tejani: But a smelter would have a much larger capacity than our current level of production. How would we use this excess operating capacity?
Chen: Well, we could either provide capacity for other copper producers or invest in additional copper reserves close enough to use this smelter.
MacLean: Fournier, do you have any numbers prepared for this?
Fournier: Yes. We have put together some preliminary information (see Appendix E).
The site managers are very excited about this opportunity.
MacLean: As discussed in our last meeting, I really want to get rid of the zinc operations in Alaska. What are your thoughts on this?
Fournier: I am against selling the zinc mine. There are only a few years left in the reserve, so why not just continue to mine and sell the zinc? This would give us the benefit of some annual cash inflows.
Tejani: I agree with Fournier. Keeping the zinc mine would give us some exposure to zinc and help us avoid having all of our income tied to copper.
Chen: But we could use the proceeds from the sale to help finance some of the proposals that my team has been assessing. I did some investigating to see what we could expect to receive for the mine (see Appendix F).
Tejani: I wanted to let you know that I was approached by BC Hydro last week concerning the possibility of a joint venture. In place of our current agreement to purchase power, we could invest in the new generating station that BC Hydro is building. We would have a 5%-10% ownership in the power generated and we could sell back any power that we did not use. This would certainly give us a method to control our power costs, which seem to be increasing every year. I asked Fournier to look at the proposal. Brightstar Mining Company 2012 Board Report
CMA Canada 24
Fournier: My team has examined our power usage and prepared some background information regarding this venture (see Appendix G). I think that it might work in our favour. Many mining companies are trying to keep their power costs in line by owning the power-generating assets.
MacLean: It certainly sounds as though everyone has been thinking about where we should take the company next. Let’s examine these suggestions in more detail. At the next meeting, I want to hear some concrete recommendations as to what strategic direction we should follow in the coming year and how we should finance it.
REQUIRED:
It is now February 2012. BMC is in the process of finalizing its 2011 year-end reports before submitting them to the Board for approval. The company recently hired Anna
Mason, CMA, as Director, Special Assignments, reporting directly to the President and
CEO. As outside consultants working for Mason, develop an integrated report for BMC’s
Board of Directors advising them on the strategic direction that should be taken, including recommendations and an implementation plan, and addressing other issues and concerns requiring the Board’s attention. Brightstar Mining Company 2012 Board Report
CMA Canada 25
Appendix A
Brightstar Mining Company
Statement of Financial Position as at December 31
($millions)
2011 2010 2009 2008
Assets
Cash and cash equivalents $108 $ 40 $ 75 $ 20
Accounts receivable 51 51 31 34
Inventory 48 49 30 29
Prepaid expenses 3 2 1 1
210 142 137 84
Property, plant and equipment 564 610 438 445
Mineral property costs 189 194 156 159
Total Assets $963 $946 $731 $688
Liabilities
Accounts payable and accrued liabilities $ 34 $ 36 $ 22 $ 21
Taxes payable 6 6 2 4
Current portion of long-term debt 50 – – –
Total current liabilities 90 42 24 25
Long-term debt 137 240 124 108
Asset retirement obligations 28 26 18 17
Total Liabilities $255 $308 $166 $150
Shareholders’ Equity
Share capital $250 $250 $250 $250
Retained earnings 458 388 315 288
Total Shareholders’ Equity $708 $638 $565 $538
Total Liabilities and Shareholders’ Equity $963 $946 $731 $688 Brightstar Mining Company 2012 Board Report
CMA Canada 26
Appendix A (continued)
Brightstar Mining Company
Statement of Comprehensive Income for the Years Ended December 31
($millions, except where otherwise indicated)
2011 2010 2009 2008
Average copper price per pound (CAN$) $3.42 $3.52 $2.67 $3.37
Average zinc price per pound (CAN$) $0.98 $1.01 $0.86 $0.91
Gross sales $473 $470 $290 $313
Treatment costs (49) (47) (29) (32)
Total net sales 424 423 261 281
Operating costs – copper 105 112 43 42
Operating costs – zinc 59 58 60 57
Distribution costs 40 39 32 33
Royalty costs 27 27 24 25
Depreciation 51 50 30 29
Mining taxes paid to the Yukon 5 5 4 4
Total operating costs 287 291 193 190
Profit from mining operations 137 132 68 91
Other expenses
General and administration 22 21 19 18
Interest expense 17 11 13 14
Stock options 3 3 2 2
Foreign exchange loss (gain) 2 (1) (2) 1
Total other expenses 44 34 32 35
Net earnings before taxes 93 98 36 56
Income taxes (23) (25) (9) (14)
Comprehensive Income for the Year $ 70 $ 73 $ 27 $ 42
Earnings per share (in dollars) $0.35 $0.37 $0.14 $0.21
Number of shares outstanding (millions) 200 200 200 200 Brightstar Mining Company 2012 Board Report
CMA Canada 27
Appendix A (continued)
Brightstar Mining Company
Partial Statement of Changes in Equity as at December 31
($millions)
2011 2010 2009 2008
Retained earnings – opening $388 $315 $288 $246
Comprehensive income for the year 70 73 27 42
Retained Earnings – Closing $458 $388 $315 $288 Brightstar Mining Company 2012 Board Report
CMA Canada 28
Appendix B
Brightstar Mining Company
Organizational Chart
December 31, 2011
Site
Supervisor
Accountant
Maintenance
Engineering
and
Technology
Site
Supervisor
Accountant
Maintenance
Engineering and Technology
Site
Supervisor
Accountant
Maintenance
Engineering
and
Technology
Site
Manager
Tayton
Rooney
Site
Manager
Pearson
Schwab
Site
Manager
Saloon
Coreson
Manager,
Health,
Safety and
Sustainability
Becker
Senior VP and Chief
Operating Officer
Fournier
VP, Business
Development
Chen
Human
Resources
IT
Chief Financial
Officer
Tejani
Controller
Molevski
Shareholders
President and CEO
MacLean
Board of Directors Brightstar Mining Company 2012 Board Report
CMA Canada 29
Appendix C
Growth Opportunity
DKL Inc.
Recently, Chen’s business development group found a small mining company, DKL
Inc., which is interested in selling a copper mine in the James Bay area of Northern
Ontario. The site has not been developed because of the low price of copper in recent years, the company’s lack of financial resources, and its three-year dispute over the mineral rights with the local First Nation communities, both Cree and Ojibway.28
The property is of ecological importance because it has the capacity to store large amounts of carbon, provides habitat for caribou and migratory birds, and contains a large marine ecosystem. The Cree community is particularly concerned with waste disposal. Talks between the two parties have been completely stalled for the past two years. There appears to be little appetite for reconciliation, and DKL’s president has likely caused the relationship to deteriorate further by making derogatory public comments. Chen’s group believes that, with BMC’s reputation as a responsible producer and its focus on sustainability, there may be a way to work with the Cree and Ojibway communities in order to gain access to the reserves at a competitive price. For the
Saloon site in Alaska, BMC was able to negotiate an agreement to share the proceeds of the mine with the local native peoples to the benefit of all stakeholders. To this day, all parties have been very satisfied with the arrangement.
Chen approached Tom Beardy, a P&S lawyer who is of aboriginal descent and has had extensive experience in this type of negotiation. Based on informal discussions with the local Band leaders, Beardy strongly believes that, with the proper approach and the right personalities, some agreement can be reached. He also believes that both the
Cree and Ojibway Bands would be interested in some type of co-ownership, since many local people are out of work. Beardy suggests that an annual royalty fee of approximately 2% of sales be offered to the Bands.
Based on Chen’s research and several discussions with the company, she has reached the following conclusions:
1. The mineral reserves are estimated at 23 million tonnes of 2.01% copper of average grade;
2. Based on the production levels achieved at the Tayton Mine, which has a similar grade of copper and an average recovery rate of 87%, annual production is
28 http://www.miningwatch.ca/en/ring-fire-growing-concerns-about-violations-aboriginal-rightsenvironmental- damage , accessed February 3, 2012.
Brightstar Mining Company 2012 Board Report
CMA Canada 30 expected to be 34.7 million pounds of copper with traces of gold and silver.
Therefore, the life expectancy of the DKL mine is 25 years;29
3. Pre-production capital costs are estimated at $220 million over the next two years; annual capital costs are expected to be $15 million for the first seven years and $5 million thereafter. These capital investments qualify for Class 41
CCA which has a rate of 25%. The mine would be fully operational by 2014;
4. Treatment and refining costs (net of all by-product credits from trace gold and silver) are estimated at 10% of gross sales;
5. Operating costs are expected to be US$0.85 per saleable pound of copper.
These costs include all labour, supplies and energy required to run the mining operation; 6. Transportation costs are estimated at $6 million per year; and
7. The asset retirement obligation is expected to be $54 million.
At the DKL site, infrastructure for ground transportation would have to be built and upgrades to the electric power grid would have to be made, but a rail corridor is already in place. Fournier feels that buying a partially developed property is a good idea, since
BMC can then complete the process incorporating the up-to-date technology already in place at its existing copper mines. This includes using more remote-controlled equipment and managing water usage more efficiently.
Chen believes that DKL would sell the property, mining rights and capital infrastructure built to date for a total of $20 million. If the dispute can be resolved, Tejani favours this acquisition, since the price is quite low.
29 Based on total ore available of 23 million tonnes, the calculation of total production is: 23 million tonnes x 1,000 (kg/tonne) x 2.01% (ore grade) x 87% (recovery rate) x 2.2 (pounds/kg) = 885 million pounds. With annual production of 34.7 million pounds, it should take 25.5 years to deplete the reserve. Brightstar Mining Company 2012 Board Report
CMA Canada 31
Appendix D
Upstream Integration Opportunity
GeoCopper Co.
Chen’s business development group has also proposed the purchase of a small company that acquires and explores optioned mineral sites30 for copper. GeoCopper
Co. is privately owned by its founding shareholder, Steven Bonson, who is interested only in exploration. Bonson has 20 years of experience and a history of finding copper deposits. His strategy has been to partner with mining companies that will be able to develop a site, once reserves are proven. GeoCopper Co. began operations in 2007 but has earned no revenue to date. Bonson is currently looking for private funding to expand his exploration activities in Peru.
There is a growing trend among mining companies based in Canada and elsewhere to undertake exploration in higher-risk areas of the world, given the potential of discovering larger deposits.31 The challenge is to find these deposits with minimal impact on the environment.32 Generally, there are three types of exploration activities:33
1. Searching for previously unknown mineral deposits;
2. Appraising newly discovered deposits, to determine if production is feasible; and
3. Increasing the known size of an existing reserve and preparing the site for production. GeoCopper is involved in the first two activities in Peru and has not yet determined that there are economically recoverable reserves at any of its optioned mineral properties.
The company uses up-to-date techniques that include GPS surveying, threedimensional maps, airborne technologies and down-hole seismic imaging.34 These newer technologies allow the company to search for copper deposits more effectively and efficiently, and with a lower impact on the environment.
During 2011, GeoCopper completed 65,000 metres of drilling at a cost of $18 million.
Exploration at this site is in the early stages, and the information available is incomplete.
However, recent studies appear to indicate the following:35
30 Optioned mineral sites are sites where the company has an option from the owner to acquire an interest in the project, often paying the owner a percentage of the earnings once production commences. 31 http://www.mining.ca/www/media_lib/MAC_Documents/Publications/2010/
Facts_and_Figures_2010_English.pdf , accessed February 3, 2012.
32 Ibid .
33 Ibid .
34 Ibid .
35 Adapted from the AQM Copper Inc. Annual Report, 2011.
Brightstar Mining Company 2012 Board Report
CMA Canada 32
1. Measured and indicated resources36 of 250 million tonnes of 0.53% copper (a productive life of 30 to 40 years); and
2. Additional inferred resources37 of 45 million tonnes of 0.42% copper.
The site is at a moderate elevation, 150 km from an ocean port, and 97 km from available power.38 The company expects to find higher-grade copper at modest depths and, in 2012, plans to initiate exploration of new targets identified by its geologists in
2011. Exploration costs are expected to be $20 million annually.
Bonson is willing to give up 50% ownership in his company in return for an investment of $50 million. Chen has determined that the price is reasonable, in light of recent, comparable transactions involving private companies about the size of GeoCopper.
Chen has heard one of Bonson’s presentations and is impressed with the breadth and depth of experience of the company’s geologists. MacLean has given his full support to the investigation of this type of investment since he would like to see the company diversify its mineral reserves outside Canada.
Fournier is strongly against becoming involved with Bonson’s company. He recalls that, in the early days, BMC made a small investment in an exploration company that ended up in financial difficulties and feels that there is just too much risk in exploration. Since
BMC’s strength is as a developer of mines, Fournier has suggested that Chen’s group look for other mineral properties in South America that have proven reserves.
The financial statements of GeoCopper, prepared under IFRS, are provided below.
36 The following definition is taken from CIM Definition Standards on Mineral Resources and Reserves, prepared by the CIM Standing Committee on Reserve Definitions , adopted by CIM Council on
November 27, 2010:
An “Indicated Mineral Resource ” is that part of a Mineral Resource for which quantity, grade or quality, densities, shape and physical characteristics can be estimated with a level of confidence sufficient to allow the appropriate application of technical and economic parameters, to support mine planning and evaluation of the economic viability of the deposit. The estimate is based on detailed and reliable exploration and testing information gathered through appropriate techniques from locations such as outcrops, trenches, pits, workings and drill holes that are spaced closely enough for geological and grade continuity to be reasonably assumed.
37 The following definition is taken from CIM Definition Standards on Mineral Resources and Reserves, prepared by the CIM Standing Committee on Reserve Definitions , adopted by CIM Council on
November 27, 2010:
An “Inferred Mineral Resource ” is that part of a Mineral Resource for which quantity and grade or quality can be estimated on the basis of geological evidence and limited sampling and reasonably assumed, but not verified, geological and grade continuity. The estimate is based on limited information and sampling gathered through appropriate techniques from locations such as outcrops, trenches, pits, workings and drill holes.
38 Adapted from the AQM Copper Inc. Annual Report, 2011.
Brightstar Mining Company 2012 Board Report
CMA Canada 33
Appendix D (continued)
GeoCopper Co.
Statement of Financial Position as at December 31
2011 2010
Assets
Cash $ 6,124,052 $ 9,601,176
Prepaid expenses 150,329 125,369
Equipment 165,789 146,275
Investment and expenditures on optioned mineral properties 12,409,831 13,749,302
Total Assets $18,850,001 $23,622,122
Liabilities
Accounts payable and accrued liabilities $ 1,189,451 $ 985,671
Shareholders’ Equity
Share capital 33,639,597 33,639,597
Contributed surplus 3,567,230 3,567,230
Deficit (19,546,277) (14,570,376)
Total Liabilities and Shareholders’ Equity $ 18,850,001 $ 23,622,122 Brightstar Mining Company 2012 Board Report
CMA Canada 34
Appendix D (continued)
GeoCopper Co.
Statement of Comprehensive Loss for the Years Ended December 31
2011 2010
Gross sales − −
General and administrative expenses:
Accounting and legal $ 453,298 $ 498,651
Bank charges and interest 15,822 15,520
Consulting 42,989 50,279
Depreciation 51,298 50,986
Insurance 15,610 14,897
Licenses, fees and taxes 35,233 38,547
Office and administration 119,817 115,784
Rent 86,690 86,591
Salaries and benefits 685,498 645,388
Stock-based compensation 1,567,200 1,027,800
Communication 38,654 31,925
Travel 274,321 303,897
Writedown of optioned mineral properties 1,589,471 589,644
Total Expenses $ 4,975,901 $ 3,469,909
Comprehensive Loss for the Year $(4,975,901) $(3,469,909) Brightstar Mining Company 2012 Board Report
CMA Canada 35
Appendix E
Downstream Integration Opportunity
Copper Smelter
In order for BMC to capture more of the downstream production related to copper,
Fournier and his operations team have been examining the feasibility of building a copper smelter. Such a facility could help the company reduce treatment costs and improve margins. A smelter located on the west coast would serve both of BMC’s copper mines but would have to process copper concentrate from other producers as well. Since this is a new area of business for the company, BMC would require at least a 15% return on its initial investment. Assumptions related to the smelter are as follows:
1. The smelter would be built to process 600 thousand tonnes of copper concentrate annually, with the possibility of increasing capacity in the future. BMC produces about 270.9 thousand tonnes of concentrate from Tayton and Pearson together
(126.3 thousand tonnes and 144.6 thousand tonnes, respectively), which the smelter would transform into 73 million pounds of copper product. The remaining amount of concentrate would have to come from other producers. At full capacity, the smelter should produce approximately 162 million pounds of copper product annually;39
2. Selling prices charged would be set at current levels: treatment fees of US$80 per tonne of concentrate and refining fees of US$0.80 per pound produced;
3. For BMC, the transportation cost from mine to smelter would be the same as the cost incurred at present to reach smelting operations;
4. The smelter would cost approximately $230 million to build and have a life expectancy of 25 years; and
5. Operating profits before tax are expected to be 25% of sales, and annual capital investment for maintenance is estimated at $7 million. All capital asset investments are eligible for Class 41, CCA, which has a rate of 25%.
Tejani is concerned that it might be very difficult to fill the excess capacity of the smelter and that BMC would have to contract with its competitors to do so. In addition, treatment charges have fluctuated significantly over the past few years.
39 The actual amount of copper produced depends on the grade of copper in the concentrate and the desired level of purity in the final product.
Brightstar Mining Company 2012 Board Report
CMA Canada 36
Appendix F
Divestiture and Focus Strategy
MacLean is very determined to have the company focus on copper and expand in areas related to copper production. As a result, he sees the zinc-producing Saloon Mine as a non-core asset that should be disposed of as soon as possible. A large, diversified mining company with existing operations near the Saloon site has offered CAN$320 million for the mine.
Fournier wants BMC to keep the zinc mine for the remaining seven years of its life and use the cash flows it generates to support new property investments. In addition, he is concerned about the Saloon employees, believing that the potential buyer, with whom he is familiar, will replace the existing managers with its own people already working at the nearby mine. For most of the Saloon managers, there are severance agreements in place that would amount to $1.5 million if paid in total.
Tejani has concerns about the loss of diversification for the company, although he believes that the price is fair. Also, at present, some head office functions are shared with the Saloon Mine.
Tejani has determined how the purchase price of $320 million would be allocated for tax purposes. This information appears in the table below.
Saloon Mine
Asset/Liability
Purchase Price
Allocation
($millions)
Associated Tax Base
($millions)
Accounts receivable 24 24
Inventories 17 17
Property, plant and equipment 220 UCC = 50
(original cost: $275)
Mineral property rights 86 UCC = 10
(original cost: $50)
Accounts payable (12) 12
Asset retirement obligation (15) 15
Total 320 Brightstar Mining Company 2012 Board Report
CMA Canada 37
Appendix G
Joint Venture Opportunity
Hydroelectric Plant
BC Hydro is building a new generating station in close proximity to the Tayton Mine and has approached the company about becoming a joint owner of this hydroelectric plant.
BMC would gain ownership of 5% of the power generated, and this could be increased to 10%. Any part of BMC’s share of the power that the company does not use can be sold through the transmission system to customers in British Columbia and the United
States at current market prices.
BMC’s mining operations require a large amount of electricity. For example, the Tayton
Mine alone spends about $5 million annually on electricity. In 2010, the company signed a ten-year power purchase agreement with BC Hydro that requires BMC to purchase a yearly minimum of $3 million of power, up to a yearly maximum of $12 million of power.
The price is fixed for each year, starting at $0.0781 per kilowatt hour and increasing by
3% annually; for 2012, the rate is $0.084 per kilowatt hour.
Fournier’s team has assembled the following financial data with respect to this venture:
1. The cost of a 5% ownership in the joint venture would be $125 million; another $125 million would be required if BMC wanted to purchase a 10% ownership;
2. The plant would generate 7,400 gigawatt hours of electricity annually; BMC’s portion would be 370 gigawatt hours;
3. BMC currently consumes 64 gigawatt hours annually; and
4. BMC would have to set aside 10% of the sales of the surplus power to pay for operating costs.
Tejani is very excited about this opportunity. He sees it as a way to hedge the cost of power and, at the same time, acquire some revenue diversification. It is likely that there will always be a market for the excess power and, in his view, the only risk is the value that BMC would receive upon selling its ownership share. Certainly the price of electricity fluctuates less than that of base metals. In addition, this venture has some relevance for the smelter proposal, since smelting also requires large amounts of
electricity.