Black gold offsets red ink for Teck

Vancouver — Low zinc and copper prices, combined with lower production at the company’s refineries, took their toll on Teck Cominco (TEK-T) in the third quarter. However, the diversified miner managed to stay in the black as coal production offset operating losses.

Teck Cominco earned $5 million (or 2 per share) on revenue of $540 million in the 3-month period, compared with a loss $105 million (62 per share) on revenues of $598 million in the third quarter of 2001. (The year-earlier loss occurred after asset writedowns of $122 million.)

“Prices of zinc and copper were the lowest we’ve seen this year,” says Chief Executive Officer David Thompson, “and this is obviously having an impact on our major base metals operations.”

The company realized average zinc and copper prices of US34 and US67 per lb., respectively, during the quarter.

For the first nine months of the year, the company made a profit of $15 million (7 per share) on revenue of $1.56 billion, compared with a loss of $27 million (23 per share) on revenue of $1.85 billion in the corresponding period of 2001. (Again, the year-earlier loss occurred after asset writedowns of $122 million.)

The dip in revenue reflects the closure of Teck Cominco’s refinery operations during the third quarter, as well as the sale of the Tarmoola and Carosue Dam gold mines in Australia.

Partially offsetting the fall in revenue were higher sales volumes at the Red Dog zinc mine in Alaska and at the Elkview and Bullmoose coal mines in British Columbia.

Elkview produced 1.4 million tonnes of coal during the quarter. However, this was below the target rate of 1.5 million tonnes, owing to a planned 10-day maintenance shutdown in September. The wholly owned mine showed an operating profit of $29 million during the 3-month period.

Teck Cominco’s 61%-owned Bullmoose mine produced 560,000 tonnes, compared with 522,000 tonnes in the third quarter of last year. The operation, which is slated to shut down in early 2003, showed a profit of $9 million.

Total cash flow from Teck Cominco’s operations amounted to $46 million during the quarter, compared with $75 million a year earlier. The corresponding 9-month figure was $131 million, compared with $365 million. The decrease reflects reduced power sales.

At the end of the third quarter, net debt (total debt less cash) was $994 million, or 28% of net debt plus equity (this figure exludes Inco exchangeable debentures).

During the 3-month period, Teck Cominco completed the issue of US$200 million (C$317 million) in 7% notes that mature in September 2012. Proceeds were used to repay various debts. At Sept. 30, the corporation had a cash balance of $21 million. It has bank credit facilities aggregating $990 million in total commitments, 82% of which mature in 2005 and beyond. Unused credit lines under these facilities total $900 million.

Teck Cominco’s smelter and refinery operations posted an operating loss of $2 million in the quarter. The Trail smelter in British Columbia incurred a loss of $3 million, which was partially offset by a $1-million profit at the Cajamarquilla zinc refinery, near Lima, Peru.

“Zinc production at the two refineries occurred at only 57% of capacity, and this accounts for a large change in the profitability of our refining division,” says Thompson.

Trail produced 49,900 tonnes zinc, 11,300 tonnes lead, 3 million oz. silver and 21,000 oz. gold during the quarter, compared with year-earlier output of 4,200 tonnes, 2,100 tonnes, 1.1 million oz. and 9,000 oz. Also, Trail sold 192 gigawatt-hours of surplus power, compared with 444 GW-hours a year earlier.

The loss at Trail also reflects the fact that the plant was shut down for maintenance in August.

At 82%-owned Cajamarquilla, production shortfalls were attributed to the market-related shutdown of the plant from June to August. The refinery lost $1 million in the quarter before realizing a favourable revenue adjustment of $2 million, owing to sales in previous quarters. Cajamarquilla produced 11,600 tonnes zinc during the 3-month period.

In Alaska, the Red Dog mine cranked out 143,200 tonnes zinc-in-concentrate, compared with 133,000 tonnes in the third quarter of 2001. Grades were slightly higher at 20.9%, compared with 20% last year, and zinc recovery improved to 87.4% from 81.5%. Yet despite these improvements, the mine incurred a loss of $10 million, owing to low metals prices.

“The bulk of our sales for Red Dog occurred in August and September,” Thompson explains. “In those two months, average zinc prices were just over US 34 per pound. Red Dog needs at least US 35 per pound to allow us to break even.”

This year, the mine expects to ship 1.04 million tonnes zinc-in-concentrate and 193,000 tonnes lead-in-concentrate.

Polaris

Farther north, at the Polaris mine on Little Cornwallis Island, quarterly production rang in at 22,000 tonnes zinc-in-concentrate. The mill head grade was 10.9% and recovery was pegged at 97.2%.

The mine closed in early Septembe, having exhauted its ore after 20 years of operations (T.N.M., Nov. 4-10/02). Inventory on hand was 75,000 tonnes zinc-in-concentrate at the end of the third quarter.

The mine, a favourite with European smelters because of its high-purity zinc and lead concentrates, produced 4.4 million tonnes zinc and 900,000 tonnes lead from 21 million tonnes of ore between 1981 and 2002. With its main portal and mill right on tidewater, and a huge concentrate warehouse sporting the world’s largest Canadian flag, it was a major landmark in the Arctic Islands.

Teck had already reserved about $60 million to decommission and rehabilitate the site.

Under the rehabilitation plan, Teck will be burying the surface structures, including the mill, and some of the mill equipment and mining fleet. Teck is spending about $2 million to remove the deep-water dock at Polaris, which served the ships that brought in supplies and carried out concentrate; the property’s airstrip will remain in place.

Parts of the 2,800-tonne-per-day mill will still see service: a part of the flotation circuit is going to the Antamina zinc mine in Chile, and other mill equipment will be sent to the Pend Oreille mine in Washington state.

A 15-million-tonne tailings disposal problem was solved neatly by a nearby lake, which has been found to be stratified. Anoxic conditions in waters near the lake bottom will prevent any sulphides in the tailings from being oxidized, and the lower-level water is not exchanged with the upper-level water, meaning the lake will remain uncontaminated on top.

Teck Cominco’s 22.5% stake in the Antamina mine in Peru earned the company $2 million during the recent quarter, which is $3 million less than a year earlier, reflecting lower copper prices.

Antamina produced 78,800 tonnes copper-in-concentrate and 64,000 tonnes zinc-in-concentrate during the quarter. Mill head grades were 1.33% copper and 1.28% zinc, with recoveries of 89.5% copper and 86.4% zinc.

Antamina entered commercial production in late 2001, and in the recent quarter it was milling 73,851 tonnes per day, close to the operating plan.

Back in British Columbia, the 63.9%-owned Highland Valley copper mine produced 45,900 tonnes copper-in-concentrate, down from 49,600 in the third quarter of 2001. The average millhead grade between the two periods fell to 0.40% copper from 0.43%., while copper recovery slipped to 88.5% from 90.2%. However, the operating profit was $9 million, $1 million more than last year, thanks to higher sales volume and prices for molybdenum, a significant byproduct.

Hemlo mines

At the Hemlo camp in Ontario, Teck Cominco produced 31,300 oz. gold at the David Bell mine. The mill head grade was 10.9 grams gold per tonne and the recovery was 95.6%, contributing to an operating profit of $1 million. The nearby Williams mine produced 95,400 oz. gold from ore grading 4.2 grams gold per tonne, with mill recoveries of 95.6%. The operating profit there was $4 million.

The Williams mine suffered a production shortfall in the first half of 2002, owing to ground control problems. However, production improved in August and September.

Both David Bell and Williams continue to monitor and address geotechnical conditions and implement new mining procedures accordingly. A paste-backfill system, designed to improve underground mining efficiency and help stabilize ground conditions, is expected to be installed in the second quarter of 2003.

The company’s exploration expenditures during the recent quarter amounted to $9 million, compared with $18 million a year earlier. Capital expenditures amounted to $70 million, including $26 million at Trail, $18 million at Antamina and $9 million on Pend Oreille.

Pend Oreille

At Pend Oreille, the mine shaft and hoist are expected to be completed before year-end. Underground development is ongoing, and construction of the process facilities should begin in early 2003. Startup is slated for early 2004, and overall capital costs will likely end up in the US$74-million range.

Meanwhile, at the Pogo gold project in Alaska, a preliminary draft environmental impact statement was issued by the Environmental Protection Agency in late August.

“We’re hopeful we can have the EIS completed by the middle of next year,” says Thompson. “If we can get the permits in place before the end of 2003, the mine would probably come into production in the second half of 2005.”

Condemnation and infill drilling was completed in the third quarter, and the results will be used to update the resource model.

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