Quadra FNX to use Xstrata Nickel mine shaft, company hit by lower prices

Quadra FNX Mining Ltd. (TSX:QUX) struck a deal Friday to use a mine shaft owned by Xstrata Nickel, saving Quadra $20 million and helping to increase production at its Levack mine in northern Ontario.

The company, which also warned that weaker copper prices will affect its third-quarter sales, said the 1,500-metre shaft at the nearby Craig mine will significantly improve flexibility and provide more access to the ore.

Quadra FNX estimated that using the shaft, which is already connected to the deposit, will save the company roughly $20 million in capital costs and allow it to increase the rate of ore produced from the Morrison deposit by 15 to 25 per cent.

Chief operating officer Michael Winship said the infrastructure at the Craig mine shaft is modern and offers many advantages including improved ventilation, additional power and safer operations.

"All this leads to a bottom line where we'll expect to have higher production and lower our capital that we'd otherwise planned to spend," he told a conference call with financial analysts.

Winship said the company will now look to increase the size of reserves for the Morrison deposit by mining deeper areas that weren't easily accessible without the Craig shaft.

"With the geometry we had on our side, it was difficult to delineate this," he said. "We weren't perhaps reflecting the upside that we feel about this deposit."

For Xstrata Nickel, the deal with Quadra FNX allows it to keep the infrastructure at the former Falconbridge's Craig mine, which closed in 2009, in working order.

Under the deal, Quadra FNX will pay US$10 million during the first year of operation and a $2 million a year after that, plus a sliding scale amount for each ton of ore hoisted to the surface using the shaft.

The agreement came as Quadra FNX said its 2011 copper production will come in at the low end of its guidance for about 240 million pounds of copper, plus or minus 10 per cent.

As well, the company said lower copper prices will take a US$6 million bite out of the company's revenues in the third quarter and it will have to repay about US$20 million for provisional payments received from customers.

Vancouver-based Quadra FNX said Friday that production from its Robinson Mine in Nevada will range from 95 million to 100 million pounds, down from an earlier forecast of 105 million to 120 million pounds because of issues which affected operations and prevented access to higher grade ores.

The company said that it would not be able to mine the higher grade areas until the beginning of 2011, instead of the fourth quarter of this year as it has hoped.

"We certainly expect to do better than this year going forward," said Paul Blythe, president and chief executive.

Despite the problems, the company produced 60 million pounds of copper, 26,000 ounces of precious metals and three million pounds of nickel in the third quarter.

RBC Capital Markets analyst Patrick Morton had an "outperform" rating on the company with "above average risk."

"We see this as a low cost, near-term solution to significantly grow production capacity at the mine, and should result in cost saving," Morton wrote in a note to clients about the Xstrata Nickel deal.

Quadra FNX is a mid-tier miner that produces copper, nickel, gold and silver and employs about 2,500 people in North and South America.

In addition to the Robinson and Levack mines, the company has mines in Nevada, Arizona, and northern Chile. It also has two big development projects: the Sierra Gorda copper-molybdenum prospect in Chile, and the Victoria project in Sudbury.

Quadra FNX shares were up 17 cents to close at $10.39 Friday on the Toronto Stock Exchange.