a) Provisional pricing and derivative contracts
A portion of the Company's metal sales is sold on a provisional pricing basis whereby sales are recognized at prevailing metal prices when title transfers to the customer and final pricing is not determined until a subsequent date, typically two months later. The difference between final price and provisional invoice price is recognized in net earnings. In order to mitigate the impact of these adjustments on net earnings, the Company enters into derivative contracts to directly offset the pricing exposure on the provisionally priced contracts. The provisional pricing gains or losses and offsetting derivative gains or losses are both recognized as a component of cost of sales. Derivative assets are presented in other assets and derivative liabilities are presented in other liabilities with the exception of copper, gold and nickel embedded derivatives which are included within accounts receivable.
As at March 31, 2013, substantially all of the metal sales contracts of Kansanshi, Guelb Moghrein, Ravensthorpe and Kevitsa, subject to pricing adjustments, were hedged by offsetting derivative contracts.
At the date of this report, the Company has 590,836,559 shares outstanding. The increase in common shares since the date of the annual report relate to the issuance of shares to Inmet shareholders as part of the acquisition.
The Government of the Republic of Zambia ("GRZ") announced in January 2008 a number of proposed changes to the tax regime in the country in relation to mining companies. The Company, through some of its Zambian subsidiaries, is party to Development Agreements with the GRZ for its existing operations which provide an express right to full and fair compensation for any loss, damages or costs (including interest) incurred by the Company by reason of the government's failure to comply with the tax stability guarantees set out in the Development Agreements and rights of international arbitration in the event of any dispute. The Company's Zambian subsidiaries have complied with the GRZ's new tax regime without prejudice to its rights under the Development Agreement.
Following the change of government in 2011, the first Budget of the new government introduced a further increase in the copper mineral royalty tax from 3% to 6%, effective April 2012, in breach of the Development Agreements.
In the 2013 Budget, delivered in October 2012, the GRZ has decreased the rate of Capital Allowances from 100% per annum to 25% per annum. This will impact the timing of the tax benefit from the Company's significant capital programs at Kansanshi and Sentinel.
Until resolved differently with the GRZ, the Company is recognizing and paying taxes in excess of the Development Agreement, resulting in an effective tax rate of approximately 43% at Kansanshi.
On Behalf of the Board of Directors of First Quantum Minerals Ltd.
G. Clive Newall, President
Listed in Standard and Poor's
Certain statements and information herein, including all statements that are not historical facts, contain forward-looking statements and forward-looking information within the meaning of applicable securities laws. These forward-looking statements are principally included in the Development activities section and are also disclosed in other sections of the document. The forward looking statements include estimates, forecasts and statements as to the Company's expectations of production and sales volumes, expected timing of completion of project development at Kansanshi, Sentinel, Enterprise and Cobre Panama, the impact of ore grades on future production, the potential of production disruptions, capital expenditure and mine production costs, the outcome of mine permitting, the outcome of legal proceedings which involve the Company, information with respect to the future price of copper, gold, cobalt, nickel, zinc, pyrite, PGE, and sulphuric acid, estimated mineral reserves and mineral resources, our exploration and development program, estimated future expenses, exploration and development capital requirements, the Company's hedging policy, and our goals and strategies. Often, but not always, forward-looking statements or information can be identified by the use of words such as "plans", "expects" or "does not expect", "is expected", "budget", "scheduled", "estimates", "forecasts", "intends", "anticipates" or "does not anticipate" or "believes" or variations of such words and phrases or statements that certain actions, events or results "may", "could", "would", "might" or "will" be taken, occur or be achieved.
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