How is Copper sold?
Copper is sold by mining companies in two ways, concentrate sales (impure copper powder) and cathode metal sales (pure copper) depending on the type of ore deposit processed.
Concentrate sales
Concentrate producers sell a concentrate powder containing 24%- 40% copper metal content to a smelter and refiner. The concentrate is sold using a formula that is unique to each smelter but general terms are as follows:
The smelter pays the producer about 96 % of the metal value based on metal content contained in the concentrate and based on a future average price know as the quotational price less the treatment charges ("Tcs") and refining charges ("Rcs"). Historically the smelters and refiners have participated in price upside via an arrangement known as "price participation" in which the smelters and refiners share in 10% of the value of the copper above a certain threshold, historically approximately 90 cents per pound of payable copper metal. Currently, price participation terms are not included in most smelter sales contracts. Tcs are charged on a $ per tonne of concentrate treated and Rcs on a $ per pound of metal refined. The charges fluctuate with the market but are often fixed on an annual basis. By-product metals such as gold and silver have separate refining charges. In addition, the smelters and refiners require concentrate specifications that limit the amount of impurities allowable in the concentrate (an example would be the amount of allowable arsenic) and these limits vary from smelter to smelter. If the concentrate producer does not meet these specifications financial penalties are levied. Normally third party assayers take samples of the concentrate during the shipping of concentrate to a smelter and determine the level of payable metal, moisture and impurities in the concentrate. If there are disagreements between the concentrate producer and the smelter as to the assay results they are usually settled by a third party umpire.
The timing of the quotation pricing, payments and final price settlement between the concentrate producer and the Smelter Refiner generally works as follows.
| Concentrate is produced |
Date of Production ("DOP") |
| Concentrate is shipped to smelter |
DOP + 1-2 months |
| Provisional payment made by smelter* |
DOP + 2 months |
| Quotation period (final month of pricing)** |
DOP + 5-6 months |
| Umpire settlements if necessary |
DOP + 7-8months |
| Final settlement payment |
DOP + 6-9 months |
* Based on spot prices and 90% of estimated metal content
** Usually the average metal exchange price during the quotation month
As result of the long time period between mine concentrate production and final settlement payments most concentrate producers have a significant working capital element.
Concentrate Sales - Provisional Pricing 101
The Robinson Mine produces a copper concentrate that contains approximately 25% copper, as well as gold. The concentrate is shipped to smelters in Asia where the material is processed to recover the nearly pure metallic copper and gold.
Quadra transports the concentrate material (via truck and train) to the port in Vancouver, Washington where it is loaded onto ships that deliver the product to smelters in Asia. The customer takes legal title to the concentrate when it is loaded on a ship, and Quadra recognizes revenue at this time. However, it takes several months from this point before final saleable copper can be produced by the smelter and final settlement of the price is made.
Smelters generally act as a 'toll' business and do not want to risk their profit margin on a changing copper price. As a result, the concentrate market has evolved so that the concentrate producers (the mines) assume this price risk. In Quadra's case, the final price of the copper concentrates is not determined until approximately 3-4 months after the product has been delivered to the customer at the port.
For accounting purposes, the revenue is recognized at the time of delivery based on the LME quoted copper prices at that time (the "provisional price"). At each quarter-end, this provisionally priced copper is revalued based on the quarter-end forward copper price for the expected date of final settlement and this accounting revaluation creates "provisional price adjustments".
In terms of cashflow, Quadra receives an initial payment at the time the product is loaded onto a ship at the port. This initial "provisional payment" is calculated based on 90% of the estimated contained metal in the concentrate, using the LME quoted copper price at the time of delivery. After the final pricing has been established (3-4 months after initial delivery) a final invoice is issued and the initial provisional payment is adjusted for the final copper price. In the case of a significant price decline, Quadra would have to refund the customer a portion of the initial provisional payment.
Example case - Ship #xxx:
The following table shows revenues and cashflows from the sale of copper on an example shipment in September 2008:
|
|
Revenues |
Cashflow |
September 2008 |
Concentrate material is produced at Robinson and shipped by truck/rail to the Port of Vancouver, Washington. |
- |
- |
Oct.22, 2008 |
Ship leaves Port of Vancouver, WA with 10,000 dry tons of copper concentrate (containing 26.8% copper) (assume no gold by-product)
Customer takes legal title and makes initial payment based on current copper price of $2.40/lb. |
+ $12.4M |
+ $11.1M
(90% provisional payment) |
Nov. 15, 2008 |
Ship arrives at customer's port in China |
- |
- |
Dec. 31, 2008 |
Receivables are revalued for accounting purposes based on quarter-end copper price of $1.32/lb. |
-($5.6 M) |
- |
March 2009 |
Final invoice is prepared based on average metal copper price during Feb 2009 (3 months after month of arrival), $1.50/lb copper and final weights and assays. Final invoice was calculated at $12million |
+ $0.9M |
-($3.4M) |
|
TOTALS = |
$7.7M |
$7.7M |
Quarterly Revenues:
As shown in the above example, provisional pricing adjustments can have a significant impact on quarterly revenues. In some cases, there are two quarter-end revaluations done between when a shipment is initially made and when the final pricing is established.
There are three main components of quarterly revenues:
- Revenues from shipments made during a quarter - provisional pricing adjustments for these shipments are recorded at quarter-end, based on copper prices at quarter-end. As there are generally 3-4 months between the shipping date and the final pricing period, all shipments made during a quarter are revalued, for accounting purposes, based on quarter-end copper prices (ie. it is rare for a shipment to be finally priced in the same period that it is shipped).
- Revenues from shipments made during the previous quarter, and subject to final pricing during the current quarter - price adjustments are recorded to adjust from the quarter-end copper price to the final established metal prices.
- Revenues from shipments made during the previous quarter, and not yet subject to final pricing - price adjustments are recorded to adjust from the prior quarter-end metal prices to the current quarter-end prices.
Example estimate of quarterly copper revenues:
Assumptions:
* of this amount, assume that 40.4M was settled during the quarter, with the remainder still provisionally priced at end of Q3 2008. Assume no volume adjustments for final weight/assays at smelter.
Revenue estimate:
- Shipments made during the quarter: 40.4M lbs. * $2.91/lb = $118M
- Shipments made during the previous quarter, and subject to final pricing during the current quarter: 41.7M lbs. * ($3.44 - $3.91) = - ($20M)
Shipments made during the previous quarter, and not yet subject to final pricing: (51.8 - 41.7) * ($2.91 - $3.91) = - ($10M)
Estimate of Q3 revenue from Copper = $118M - ($20M) - ($10M) = $88M*
* excludes revenues from gold and molybdenum by-products
Cathode Sales
Cathode producers sell metal exchange quality cathode to potential buyers on a near market price basis. Depending on the location of the cathode freight adjustments, price premiums are often negotiated as part of the sales arrangement.
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