Despite strong fourth-quarter operating results,
The zinc giant reported a loss, after special items, of $23 million (or 27 cents per share) in 1998, compared with a net loss of $74 million (87 cents per share) in 1997. Special items included $23 million of writedowns (primarily against the Cerattepe gold property in Turkey) and an $11-million gain on the sale of the company’s interest in Global Stone.
Excluding the writedowns and unusual profits in the two years, Cominco lost $11 million (12 cents per share) in 1998, versus earnings of $74 million (87 cents per share) in 1997.
Last year’s production and sales volumes exceeded 1997 levels on all fronts, with the exception of lead products, which were adversely affected by the operating performance of Kivcet for most of the year. The higher sales volume in 1998 generated an additional $194 million of revenue, though this was more than offset by a $215-million reduction in revenue resulting from lower metal prices. The average London Metal Exchange (LME) prices for zinc, lead and copper were 23%, 14% and 27% lower than their respective prices in 1997.
The weaker Canadian dollar, which partially offset lower metal prices, resulted in an additional $45 million in costs related to the revaluation of Cominco’s U.S. dollar-denominated borrowings and hedging program.
Sales revenue totalled $1.63 billion in 1998, compared with $1.65 billion a year ago.
Cominco posted fourth-quarter earnings of $11 million (13 cents per share) before taking $23 million in writedowns, compared with a loss of $16 million (18 cents per share) before special items in 1997.
“This was our best quarter of the year,” says Cominco President David Thompson. “We made $40 million against the total operating profit for the year of $100 million.” By comparison, the previous year’s operating profit was $252 million.
The operating performance of the Kivcet lead smelter for the first nine months of the year took its toll on Trail’s 1998 operating profit of $30 million, down $35 million from 1997. In July, the smelter was closed so that modifications could be made. Since completion of the work, throughput at Kivcet has improved steadily each month, averaging 81% of design capacity over the last five months of the year, and in December reaching 99%. Trail’s earnings were $15 million for the fourth quarter, versus a third quarter-loss of $1 million.
At the Red Dog zinc mine in northern Alaska, profits rose to $26 million during the fourth quarter, compared with $21 million in the third quarter. For the year ended 1998, Red Dog had an operating profit of $60 million, down substantially from $102 million the previous year.
Red Dog produced 799,000 tonnes of zinc concentrate and 123,000 tonnes of lead concentrate in 1998, against 610,000 tonnes of zinc concentrate and 113,000 tonnes of lead concentrate in 1997. The increase resulted from an expansion of production that achieved full design capacity on a sustainable basis in September. Annual production is expected to exceed 900,000 tonnes of zinc concentrate and 150,000 tonnes of lead concentrates. The at-mine costs are continuing to decline as expected, down 14% from the corresponding period last year.
The Cajamarquilla zinc refinery, near Lima, Peru, generated an operating profit of $23 million in 1998, versus $32 million for the previous year. Refined zinc production was 10% higher than the same period in 1997 at 113,000 tonnes. The increase was mainly due to the completion of the first phase of an expansion program that was commissioned in the second quarter of 1998.
Meanwhile, the Highland Valley Copper mine in the Kamloops region of B.C. is preparing to suspend operations on May 15, 1999, throwing more than 1,000 people out of work. Cominco owns a half-interest in the mine, with the remainder divided among
Cominco realized a $16-million profit from Highland Valley in 1998, which included $15 million in hedging gains on copper forward sales that averaged US87 cents per lb. Thompson says the actual operating loss, before the hedging gain, was about $3 million on Cominco’s account.
“The loss occurred principally in December, when prices were declining quite steeply. We are budgeting US65 cents per lb. or below for the year, and at those levels, Highland Valley would make a significant operating loss without any hedging. As a result, we decided it would be prudent for us to close this mine.” Thompson added: “If the LME inventories continue to increase at the pace they have been in recent months, we could see prices lower than we have experienced even to date, and therefore the losses could become quite substantial.”
Highland Valley still has 10 years of reserves left and it is believed the mine’s life will extend beyond that base. Thompson says the economics of the mine tend to improve in later years as stripping ratios decline.
Cominco and its partners are seeking to negotiate cost reductions with the utilities, suppliers, governments, employees and the union in an attempt to keep the mine profitable at today’s copper prices.
“We do want to operate this mine at a loss, so if we were able to get ourselves into a profitable position, then we would continue to run,” said Thompson.
Cash flow from operations, before working capital changes, was $131 million ($1.53 per share) for the year, compared with capital expenditures after disposal of $142 million. Capital expenditures in 1999 are projected to fall between $60 million and $70 million. If a decision is made to go ahead with a second phase of expansion at Cajamarquilla, a further US$100-120 million would be required this year.
At Dec. 31, 1998, Cominco had working capital of $446 million. Net debt was $820 million, or 36% of net debt plus equity. The company has 85.4 million shares outstanding.
In terms of the outlook for zinc, Thompson said “The market doesn’t seem to have quite the fire that it had, say six or nine months ago, but it is still fairly steady.”
Southeast Asia is fairly slow, but quite steady. “We haven’t seen any further deterioration in the past few months, with the exception of Japan, which declined sharply in the second half of last year and hasn’t yet shown evidence of any form of recovery.”
The Thailand and Korean markets are both showing some evidence of strength, says Thompson, but other markets, such as Malaysia, the Philippines and Indonesia, are way down from a year ago.
Thompson says Western Europe and North American markets are steady, but not as strong as last year.
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