Teck banks on diversification Investment Commentary

Turbulent metal markets made for a difficult year, but better times are predicted for Teck (TEK-T), one of Canada’s largest diversified mining companies.

Mining analyst Tanya Jakusconek of National Bank Financial has issued a “buy” recommendation for the major, citing its mines in Canada, Chile and Australia, plus its 44%-equity interest in Cominco (CLT-T), a leading zinc producer.

In 1999, Teck increased its ownership in Cominco by 10%, or 8.7 million shares, and Jakusconek believes it will continue to do so.

In her report, she sets a 12-month target of $19 for Teck, which currently trades at $14 for B shares and $13.70 for A shares. The major has 107 million shares outstanding, with A shares carrying the right to 100 votes per share and B shares 1 vote per share but accounting for 95% of all shares outstanding.

The company boasts three gold producers: the David Bell and Williams mines in Ontario’s Hemlo camp, and Tarmoola in Western Australia. Combined, these are expected to crank out 515,000 oz. gold in 2000 at an average cash cost of under US$200 per oz.

Its most advanced gold project is the wholly owned Carosue Dam deposit, 200 km southeast of Tarmoola, which could add 130,000-150,000 oz. to Teck’s annual production as early as 2001. Coinciding with that startup will be the completion of a feasibility study on the Pogo project in Alaska, which has a resource of 8.3 million tonnes grading 19.54 grams gold per tonne. Teck operates and holds a 40% interest in that project.

Yet another feather in Teck’s cap is its 22.5% stake in the huge Peruvian copper-zinc deposit known as Antamina, which the company is developing with partners Rio Algom (ROM-T), Noranda (NOR-T) and Mitsubishi of Japan.

Starting in 2002 on an annual basis, Antamina will begin churning out 600 million lbs. copper, 360 million lbs. zinc, 5.7 million lbs. molybdenum and 6.2 million oz. silver. Life-of-mine cash costs are projected at US35 per lb. copper (net of byproduct credits).

Proven and probable reserves stand at 494 million tonnes grading 1.3% copper, 1% zinc and 0.03% moly, plus 12 grams silver. The reserves are part of a larger resource of 900 million tonnes.

Financing for the US$2.3-billion project was secured last autumn, and, by Sept. 30, Teck had covered US$141 million of the total cost. It is required to provide an additional US$83 million.

Jakusconek’s “buy” recommendation is partly based on a target for Cominco of $35, with every $1 change in that company’s share price affecting her valuation by about 35. Jakusconek’s colleague, Ian Howat, predicts zinc prices will rise in 2000 in response to depressed warehouse inventories. He cautions, however, that Cominco remains susceptible to price fluctuations. “Changes in environmental and other governmental regulations could also cause problems, but [the company] has managed this risk in the past,” he adds.