Cominco clarifies Sullivan mine shutdown

Serious operating losses brought about by high production costs and falling zinc prices were cited by Cominco (TSE) as the reason for its decision to suspend mining operations at the aging Sullivan mine near Kimberley, B.C. In a release to clarify its position, the major company said the Sullivan mine had been a marginal producer for the past several years and the decision to shut down for an indefinite period “should not come as a complete surprise.”

Cominco said its employees were warned as early as April, 1989, of the need to lower production costs. This came in the form of meetings between employees and Mick Henningson, Cominco’s general manager of operation at Kimberley, to outline the status of the operation in April, and again in a company newsletter in October noting the mine “would be in serious trouble” if zinc prices fell below US70 cents .

Cominco said 113 employees were laid off in November when it again verbally advised union presidents of the problem with the cost of production. The Sullivan has been mined for over 80 years, and Cominco said the silver content of the ore had declined (about 50% in recent years) with depth, making it more sensitive to zinc prices.

The company noted other factors affecting profitability — the high value of the Canadian dollar, increased labor and maintenance costs and the escalating cost of ground support to maintain access at the lower levels. Also noted were the increasing difficulty and higher cost to separate the lead and zinc in the ore.

But the situation was greatly exacerbated when an underground incentive plan was cancelled by the contract miners effective Nov. 1. Ralph Eastman, a spokesman from Cominco, told The Northern Miner that the plan contained a clause allowing either party to open the agreement for re-negotiation.

“The union notified us last summer that they wanted to re-negotiate the agreement,” he said. “But we could not reach an agreement which led to the plan being cancelled by the contract miners.”

Eastman said Cominco was prepared to enter into an agreement with the union to extend the then- present plan to the end of 1989 in order to allow negotiations to continue toward a new incentive system, but this was refused by the union.

While Mike Park, president of the United Steel Workers Local 651, agreed that Cominco did in fact make this offer, he insisted it was made “if we discuss their proposal only.”

“It was an all or nothing situation,” he said. “They wanted a wholesale change in the plan and that just doesn’t happen over night.”

With the miners paid only a daily rate, ore production is reported to have averaged 33% of the previous rate, development fell to 23%, blast- hole drilling to 39% and rock bolting to 37%.

And the major company said there was little, if any, change in productivity even after the Industrial Relations Council declared the actions of the contract miners to be an illegal strike in late December.

In the meantime, the average price of zinc on the London Metal Exchange fell to about US57 cents per lb. in January from about US82 cents in August and to US68 cents in December. A slowdown in the automobile industry and worries of a broadly based economic downturn, particularly in North America, are cited by metals analysts as the underlying fundamentals for the weakening of the zinc market.

Cominco noted that average cost per ton of produced concentrate for January to October 1989 rose to $263 per ton, an increase of 54% from the $171 average cost per ton of produced concentrate for 1987. In December the concentrate production costs were more than double the average costs from January to October last year.

The company said the combined effect of all factors turned what previously might have been a manageable loss into “an economic hemorrhage.”

With losses totalling $4.9 million for the last two months of 1989, and the anticipated loss of $3 million for January, the company estimated it would lose over $35 million a year if it continued to operate the mine at this rate.

“One of the facts here is that a mine of the magnitude of Sullivan needs an incentive plan to operate,” said Park, who admitted he was somewhat surprised by Cominco’s decision to suspend production. “If they got their act together and gave me a call and said let’s negotiate and really meant it, we could be back at work.”

The Sullivan mine has about 10 years of reserves, but Cominco said it would operate only if production costs “can be greatly reduced” and with favorable metal prices. The company is maintaining readiness of mine and mill facilities to permit startup “when the necessary elements are favorable.”

Last summer, Cominco and its partners in Highland Valley Copper made what Cominco President Robert Hallbauer called an “expensive settlement” with the United Steel Workers to end the strike halting production at the open pit copper mines near Kamloops, B.C.

“(The settlement) will have an impact on the mine’s competitive position should copper prices drop to the levels we have experienced in the past,” he noted in an October 1989 report to shareholders.

Although Cominco has regained its financial strength, it was burdened by massive debt when taken over in 1986 by an international consortium led by Teck (TSE). The loss in that year was $151.6 million, but the financial picture has since been improved by an austere debt reduction plan aimed at selling off non-core assets and by a timely upswing in base metal prices.