Teck Unplugged: plunging power profits take their toll

Vancouver — The second quarter of 2002 was not a good one for the world’s largest zinc producer as low commodity prices and weaker revenues from power sales drove down earnings.

Teck Cominco (TEK-T) recorded a profit of $8 million, or 4 per share in the latest quarter ended June 30, down considerably from the $23 million, or 22 per share posted in the corresponding period of 2001. Cash flow from operations came in at $46 million, a marked dropped from the $99 million hit in the second quarter last year.

Revenues fell to $521 million, from $582 million in the year ago period. The revenue short fall is being attributed to a big drop in power sales profits. Power prices averaged US$16 per megawatt hour in the second quarter, compared with the US$232 per megawatt hour in the second quarter of 2001 when prices were artificially boosted by energy sales to the western United States, which was hit by a power shortage. The end results was power sales revenue plunging to $8 million, from the $97 million tallied in the same period last year.

The company’s bottom line also felt the impact of historical low zinc prices, which averaged US36 a pound during the quarter, down 14% from 42 a year ago.

Despite the drop in earnings, the base metal miner increased production levels at most of its key operations.

The Trail smelter and refineries in southern British Columbia cranked out 71,500 tonnes of zinc and 21,400 tonnes of lead in the second quarter, up from 53,400 tonnes of zinc and 22,600 tonnes of lead in the same period last year. Operating profit came in at $9 million, compared with $62 million recorded in the second quarter of 2001. The increase in production and drop in operating profit is due to the return to normal production levels after it was curtailed last year to concentrate on power generation.

Cajamarquilla, near Lima, Peru, produced 19,000 tonnes of refined zinc in the second quarter, down from 27,800 tonnes in the same period last year due to a three-month shutdown that began in June. Operating profit hit $1 million, down from $5 million in the same period last year. The US$103.4 million loan drawn on the project for the planned stage 2 plant expansion were repaid to the banks, as the company elected not to ramp up production at this time.

The base metal miner’s flagship mine, the Red Dog operation in Alaska produced 136,200 tonnes of zinc in concentrate in the second quarter, up from 130,100 tonnes in the second quarter of 2001. Sales rang in at 86,700 tonnes, compared with 92,800 tonnes last year. The mine recorded an operating loss of $4 million, compared to an operating profit of $3 million a year earlier.

Its Polaris mine in Nunavut produced 28,100 tonnes of zinc in concentrate in the second quarter, down from 31,200 tonnes a year ago. Polaris is set to close next month after the ore is depleted.

Teck Cominco’s 63.9% share of production at Highland Valley Copper in British Columbia was 30,300 tonnes of copper in concentrate in the second quarter, up 9% due to higher throughput.

The Antamina copper-zinc mine in Peru, which began production late last year, produced 340,000 tonnes of copper concentrate during the quarter and 90,000 tonnes of zinc concentrate. The company owns a 22.5% stake in the project.

Even an improving gold price failed to boost the company’s bottom line. Teck Cominco’s share of production from the David Bell and Williams mines in Hemlo, Ontario dropped to 61,600 oz at a cash operating cost of US$245 per oz, compared with 75,800 oz at a cash operating cost of US$193 in the second quarter of 2001. Operating profit was duly impacted, falling to $3 million, from $7 million last year. The production short fall is attributed to ground control problems leading to the mining of lower grade material from the open pit. The major expects gold production in improve in the second half of the year as higher-grade material is mined.

Coal production continues to be a bright spot for the miner. Coal sales for the company’s Elkview and Bullmoose mines in British Columbia climbed to 1.9 million tonnes, up from 1.7 million tonnes for the same time last year. Operating profits surged to $31 million, up significantly from the $18 million tallied in the second quarter of 2001. Driving the increase was a 30% jump in production at the Elkview operation and an 8% increase in the price of coal to US$42 a tonne.

On the development front, the Pend Oreille zinc project in Washington state is on track to begin production early in 2004. Development costs are expected to hit US$74 million.

In Alaska, permitting and feasibility study is progressing on the company’s high-grade Pogo gold project. A preliminary draft environmental impact study is expected to be hand by the end of the third quarter.