Variety adds spice to Teck

While analysts tend to prefer so-called “pure” metal plays, Teck‘s (TEK-T) emphasis on product diversification has smoothed out much of the impact that cyclical price swings have on single commodity producers.

In the second half of 1999, it was zinc that galvanized investor attention, with Teck’s equity interest in stellar-performing Cominco (CLT-V) contributing $39 million to its bottom line. Last November, Teck acquired another 3,048,500 shares of Cominco for approximately $79.3 million ($26 per share), raising its equity interest to approximately 44%.

For the year ended Dec. 31, 1999, Teck reported net earnings of $39 million (or 36 per share) before extraordinary items, including a $30-million gain from its share of tax adjustments accruing to Cominco and a $24-million writedown at the Bullmoose coal mine. Coal, which ranked second in the company’s revenue stream last year (behind gold but ahead of base and other metals), continues to be the toughest segment in its overall product mix.

Cominco’s major contribution to Teck’s fiscal 1999 earnings was the result of higher zinc prices, record production from the Red Dog mine in Alaska and the Cajamarquilla zinc refinery in Peru, and the improved performance of Cominco’s Kivcet lead smelter at Trail, B.C. Earlier this month, Cominco announced plans to optimize production at Red Dog to 1.1 million tonnes of zinc concentrate per year, up from 940,000 tonnes in 1999.

Red Dog is increasingly being viewed as the granddaddy of all zinc camps, with proven and probable reserves of 47.6 million tonnes grading 19.2% zinc, 5.2% lead and more than 3 oz. silver reported at the end of 1998. A discovery made last year, 6 miles north of the Red Dog mine, included one intercept grading 20% zinc and 5% lead across 240 ft., suggesting that the high-grade reserves are not confined to the main discovery area.

Zinc is expected to remain firm in 2000, and London Metal Exchange inventories were equivalent to 5.5 weeks of consumption at the end of the year, just over a 7-year low. Asian markets have entered a cyclical recovery phase and key markets in North America and Western Europe appear to be following suit.

Teck’s earnings from operations before equity accounting (and excluding the writedown at Bullmoose) were $4 million, compared with $17 million a year earlier. The company says the drop in earnings “was the result of lower sales volumes and price for coal operations, which more than offset an increase in the contribution from the gold mines.” With gold prices showing some signs of life and the longer-term prospects for base metals, especially zinc, becoming more bullish, Teck’s commodity mix (with the exception of coal) could represent a potent earnings cocktail.

While it’s no Barrick or Placer Dome in the gold sector, Teck has significant leverage to the price of gold, having produced 537,000 oz. in 1999. Virtually all of that was from primary gold producers, including the David Bell and Williams mines in Hemlo, Ont., and Tarmoola in Australia. Average cash operating costs were US$192 per oz. in 1999, a drop of US$16 from the year before. The company realized an average gold price (including hedging gains) of US$317 for the year — a reduction of US$12 from 1988.

So far, Teck has resisted pressure to put its gold mining assets into a separate public vehicle. However, the strong likelihood of increased production from new discoveries in Alaska and Australia should make the idea more attractive. Pure gold plays tend to attract higher price earnings multiples than mixed metal producers, and, when the price is right, they often behave like the “dotcoms” of the commodities sector. Mind you, it has been a while since we’ve seen this type of behaviour.

New projects in far-flung parts of the world are certain to increase Teck’s leverage to higher gold prices. At the Pogo gold project in Alaska, reserves have been upgraded to 9.7 million tonnes with an average grade of 0.53 oz. per tonne, earmarking it as a potential low-cost producer. Teck can earn a 40% interest in the project. Other gold mining projects with significant new production potential include the advanced-stage Carosue Dam and Chariot projects in Australia.

“Consumer demand for gold continues to exceed mine production, and central bank sales and the level of producer hedging will continue to be the primary determinants of the price of gold,” says a spokesman for Teck.

With sentiment towards copper, the poor sister in the base metals sector, turning slightly more positive, Teck is proceeding with its massive Antamina mine project in central Peru. At full production in 2002, the US$2.29-billion project is expected to be the seventh-largest copper mine, the third-largest zinc mine, and the third-largest concentrate producer in the world. It will produce 600 million lbs. copper and 360 million lbs. zinc annually over its 20-year mine life. Noranda and Rio Algom are partners in the joint venture.

Many analysts have questioned the timing of the investment, citing the excess copper capacity currently on hand and the delicate supply-demand balance in the zinc industry.

The recent consolidation of a good portion of the North American copper industry, including the takeover of Cyprus Amax by Phelps Dodge (PD-N) and the acquisition of Asarco by Grupo Mexico, is expected to render the market even more competitive. In addition, there has been a definite shift away from the mining and processing of conventional sulphide deposits to oxide ores that are amenable to low-cost solvent extraction-electrowinning.

By the end of 1999, Teck had spent US$145 million on the Antamina project out of a total budget of US$224 million, net of third-party financing. According to Teck, “the company’s principal challenge will be to work with [its] partners to continue to keep the Antamina project on budget and on schedule.”