Diversification boosts Teck Cominco (April 22, 2003)

Vancouver An improved operating performance at the Trail smelter in British Columbia combined with an 18% jump in the price of bullion propelled the World’s largest zinc producer to a profit in the first quarter of 2003.

Teck Cominco (TEK-T) earned $11 million (or 6 per share) on revenue of $574 million in the 3-month period, compared with a $2 million (1 per share) profit on revenues of $501 million in the first quarter of 2001.

"Each product group has increased its earnings for the period," says Chief Executive Officer, David Thompson, "the operating earnings for zinc went from $8 to $11 million, copper from $4 to $9 million, gold from a $1 million loss to $6 million and coal from $22 million to $26 million."

Despite being highly leveraged to the zinc price, which remained flat at US$0.36 per lb. during the first quarter, copper prices jumped to US$0.77 per lb., from US$0.71 per lb., gold prices soared to US$347 per oz from US$294 per oz and coal prices increased to US$44 per tonne from US$41 per tonne a year earlier.

The increase in commodity prices propelled cash flow from operations, before changes to non-cash working capital items, to $51 million, compared with $39 million in the same period last year.

"The two major drivers were the improvements at Trail by $8 million and the increase in the gold (unit) by a net $7 million," adds Thompson.

Teck Cominco’s smelter and refinery operations posted an operating gain of $17 million in the quarter. The Trail smelter led the gain by tallying an operating profit of $12 million, compared to $4 million in the first quarter last year, while the 82%-owned Cajamarquilla zinc refinery, near Lima, Peru posted a $5 million operating profit, up from $4 million last year.

Trail produced 71,200 tonnes zinc, 22,900 tonnes lead, 4.66 million oz. silver and 26,000 oz. gold during the quarter, compared with year-earlier output of 72,500 tonnes, 23,300 tonnes, 4.5 million oz. and 42,000 oz. Also, Trail sold 180.7 gigawatt-hours of surplus power, compared with 176.8 GW-hours a year earlier.

Driving the improved profit was higher zinc and lead sales, as well as improved power prices and cost reductions. The average realized power price was US$38 per MWh in the first quarter compared with US$23 per MWh last year.

At Cajamarquilla, production continued above its design capacity in the first quarter, cranking out 31,500 tonnes of refined zinc compared with the design rate of 30,000 tonnes. Operating profit in the first quarter was higher than a year ago due mainly to higher sales volume.

In Alaska, the Red Dog mine cranked out 144,000 tonnes zinc-in-concentrate, compared with 141,700 tonnes in the third quarter of 2001. Grades and recovery rates remained basically unchanged at 21.2%, and 84.3% respectively. Low zinc prices pushed the operation to a loss of $6 million, from a $3 million shortfall in last year’s quarter. The company, through a combination of cutting costs and facing lower smelting charges, believes that the mine can turn the financial corner later this year.

"When a mine like Red Dog is unable to make a profit," says Thompson, "this is an unsustainable situation, we expect at US$0.35 per lb. (of zinc), Red Dog will continue to have losses in the second and third quarter, swinging to a profit in the fourth quarter."

Teck Cominco’s 22.5% stake in the Antamina mine in Peru earned the company $6 million during the recent quarter, which is $2 million more than a year earlier, reflecting higher copper prices.

Antamina produced 72,500 tonnes copper-in-concentrate and 71,600 tonnes zinc-in-concentrate during the quarter. Mill head grades were 1.32% copper and 1.54% zinc, with recoveries of 90.5% copper and 82.5% zinc.

Back in British Columbia, the 63.9%-owned Highland Valley copper mine produced 40,700 tonnes copper-in-concentrate, down from 43,900 in the first quarter of 2002. The average mill head grade between the two periods fell to 0.40% copper from 0.42%, while copper recovery slipped to 87.3% from 89.2%. However, the operating profit was $8 million, $3 million more than last year, thanks to higher sales volume and increased prices for both copper and molybdenum, a significant byproduct.

At the Hemlo camp in Ontario, Teck Cominco produced 31,000 oz. gold at the David Bell mine. The mill head grade was 9.79 grams gold per tonne and the recovery was 95%, contributing to an operating profit of $1 million.

The nearby Williams mine produced 105,000 oz. gold from ore grading 4.79 grams gold per tonne, with mill recoveries of 95%. The operating profit there was $5 million, a marked improvement from the $2 operating loss tallied in last year’s quarter. Driving the turn around was higher grades and recoveries, as well as a higher gold price.

Coal operations continued to be a revenue driver for the diversified miner. The Elkview operation in British Columbia produced 824,000 tonnes of coal during the quarter. However, this was below the target rate of 1.5 million tonnes, owing to a planned 7-day maintenance shutdown in Jan. The wholly owned mine showed an operating profit of $14 million during the 3-month period.

Teck Cominco’s 61%-owned Bullmoose mine, which shut down its operations in early April, produced 479,000 tonnes, compared with 495,000 tonnes in the first quarter of last year. The operating profit came in at $4 million, compared to $5 million last year. Additional sales were recorded in the quarter as a result of spot sales of coal in excess of tonnage under the long-term contract. The profit of $3.4 million related to the spot sales was mostly offset by a revaluation of the coal inventory to a lower U.S. dollar exchange rate and additional port charges.

A newly formed coal partnership contributed $8 million in operating profit for the major during the quarter on production of 1.93 million tonnes. Under a deal, , involving Fording , Westshore Terminals Income Fund (WTE.UN-T), Sherritt International (S-T) and Ontario Teachers’ Pension Plan, Teck Cominco contributed $125 million and its metallurgical coal assets for a 35% interest in the partnership. The company’s interest in the partnership will increase by up to 5% if the partnership achieves certain specified operational and marketing synergies by March 31, 2007. The miner also put down $150 million for a 9.1% interest in the Fording Canadian Coal Trust (FDG.UN-T), which owns the remaining 65% of the partnership. Accordingly, the company’s direct and indirect interest in the coal partnership is 41%, with the potential of increasing to approximately 46%.The deal closed in Feb.

Teck Cominco reported a drop in capital expenditures for the quarter to $29 million from $40 million a year earlier.

"The next major capital expenditure will be the Pogo deposit," adds Thompson, "where we expect to spend $100 million over two years from 2004-2005."

Permitting for the 5.6 million oz Alaskan gold deposit is expected to be complete late this year, with a winter road going to the project in 2004.

At the end of the first quarter, Teck Cominco had a net debt (total debt less cash) of $1.08 billion, or 30% of net debt plus equity, compared with $868 million or 26% of net debt plus equity at the end of 2002 (this figure excludes Inco exchangeable debentures).