INVESTMENT COMMENTARY — Cominco’s turnaround timed for recovering zinc markets

Resolving technical glitches and achieving full production should mean “sharply higher earnings and cash flows” in coming years for zinc producer Cominco (CLT-T), according to a research report by First Marathon Securities.

Following a recent visit to the Trail metallurgical plant in British Columbia, analyst John Lydall rates Cominco shares a “buy,” with a target price of $30. His prediction is based on the company’s resolution of production problems at the Trail smelter and the Red Dog mine in Alaska, and the expansion of the Cajamarquilla zinc refinery in Peru.

“The company is now in a position to be fully recognized for its important role in the zinc industry and, more importantly, as one of the world’s most profitable integrated mining companies,” he writes.

The Trail complex has been plagued by major technical problems for the last decade. A new lead smelter replaced an aging one in 1989, but start-up problems led to a shutdown in 1993. A plant designed on the principles of the Russian Kivcet smelting process opened in 1997, but also experienced teething pains. Only now is it operating close to its design capacity.

Difficulties in the plant’s lead production stream affected zinc production, but recent improvements signal that Trail can now operate at or near full capacity for the first time since the old lead smelter shut its doors.

Additionally, stockpiled smelter slag and other wastes can now be moved into the processing stream, providing additional metal at the loading dock. As a result, Lydall writes, the complex should post significantly higher operating profits.

Red Dog, in northwestern Alaska, was recently expanded and can now produce about 500,000 tonnes of zinc per year in 900,000 tonnes of concentrate. Capital spending has prevented Red Dog from recording large operating profits in the 10 years it has operated, but, with the expansion, Lydall estimates operating profits of $110 million in 1999 and $170 million in 2000.

Red Dog has proven and probable reserves of 47.6 million tonnes grading 19.6% zinc and 5.2% lead, with a further 72.9 million tonnes grading 13.6% zinc and 3.7% lead in the “possible reserves” category. Another 22.6 million tonnes grading 16.2% zinc and 4.6% lead are classified as resources. The project has a mine life that stretches into the second half of the next century.

An expansion program at Cajamarquilla, in which Cominco has an 82% interest, has boosted annual production capacity to 120,000 tonnes of refined zinc. A second expansion, which would have doubled current capacity, has been postponed until zinc markets improve.

Cominco’s copper operations include the Highland Valley mine in British Columbia, recently closed in response to low copper prices, and Chile’s Quebrada Blanca mine, in which the company has a 47.25% interest. Quebrada Blanca is breaking even at current prices, and Lydall believes that copper’s contribution to earnings in the near term will be negligible.

Cominco shares, currently priced at just under $25, value the company at only 1.6 times book value and 45 times estimated 1999 earnings. Higher earnings — which could come from a higher zinc price, as well as from better production numbers — could boost shares higher over the next year.