Cominco on straight, narrow

Burdened with a massive debt load and the high servicing charges associated with it, Cominco was eventually taken over by a consortium led by Teck Corp. (TSE).

It has been said that timing is everything in the mining business and the Cominco takeover is probably a good example. In retrospect, the deal was a good one for Teck but, as things worked out, not so good for Canadian Pacific; it sold the control position it held for approximately 80 years at what proved to be a bargain-basement price. Although a game plan was in place to get Cominco back on the straight and narrow before the takeover, Teck-appointed management implemented the program and orchestrated what has proven to be a remarkable turnaround-with of course some help from metal markets.

In the driver’s seat at Cominco is Robert Hallbauer whose ability to play the ball consistently down the middle of the fairway on most golf courses might at least partly explain why Cominco has moved back on the straight and narrow with such aplomb.

In a wide-ranging interview with The Northern Miner, the jovial and pragmatic Hallbauer discussed Cominco’s plans and its concerns for the future.

In terms of earnings, Cominco’s primary commodity is zinc and this year’s output is expected to be about 7% of world mine production. Warburg Securities analyst, Jens Schneider, noted in a recent buy report that “Cominco’s shares are strongly geared to the zinc price, with an earnings sensitivity of 60 cents (C) per share for every 10 cents rise in the zinc price.” Copper and lead are also important and to a much lesser extent, fertilizers.

The majority of Cominco’s zinc production goes to the United States and lesser amounts to Canada where it’s used primarily for galvanizing steel. Zinc inhibits rust and car manufacturers are naturally big consumers. For the immediate future anyway, Hallbauer predicted that zinc markets will remain strong based on current demand and production.

“We don’t see any new production coming on but we can’t forecast when the next recession will occur,” he said.

Red Dog in Alaska is the biggest thing on Cominco’s plate at the moment and he conceded the company “wouldn’t have much zinc without it.” Echoing the sentiments of Cominco Chairman, Norman Keevil Jr, Hallbauer argued that Canada could soon face a shortage of base metals, including zinc.

Cominco has arranged a $300 million(US) loan to develop Red Dog but exactly how much of this will be drawn down is still unknown.

“The exact amount will depend on our cash flow.” Concentrate shipments from Red Dog should begin in 1990. However, because of the limited shipping season the mine will have to be in production in late 1989.

Half of Red Dog’s concentrate will go to Trail and the rest to Europe and Japan. Concentrates will be off-loaded in Vancouver and shipped by rail to the smelting complex at Trail.

Discussing the prolific Sullivan mine at Kimberley, B.C. he pointed out that reserves there are sufficient for 10-15 years of production but he emphasized it was not “a low cost mine and it’s going to get worse.”

Some exploration is being done around Sullivan mine and elsewhere in Western Canada to find additional feed for the Trail smelter which gets most of its concentrate from Canadian sources. A small amount of feed is pre sently coming from outside sources including the United States and Latin America. Historically, Cominco has always made a committment to take feed from outside sources, particularly small Canadian-based situations.

Despite its location (roughly 250 miles from the coast), the Trail smelting complex is very competitive because the company generates its own power.

“Without that power, there wouldn’t be a smelter there,” he concluded. When the new lead smelter is completed next fall, Trail will be among the largest and most modern zinc-lead smelting and refining complexes in the world. The new lead smelter “will lower costs, add capacity, and satisfy environmental concerns,” Hallbauer said.

Like so many other companies, Cominco has been surprised by lead’s relative strength which he said was based on strong demand. And with winter on hand, that demand should improve and could be reflected in higher prices.

Much has been written about companies forming strategic blocks including Cominco, Teck, MIM Holdings, and Metallgesellschaft. The last three are part of a consortium which controls Cominco although Teck holds the largest single share position. Hallbauer insisted that the “cartel concept was overblown” and he emphasized that no cartel has ever successfully cornered any market, OPEC being an example. (Tin is probably another good one).

He admitted that there was some coordination between the four companies but each had their own interests and they “wouldn’t be deterred from doing their own thing.” The relationship also provides opportunities for Cominco and Teck in other countries.

The stronger Canadian dollar has hurt Cominco because many of its commodities, including fertilizers, are sold in U.S. dollars.

“If we had previous years prices and the Canadian dollar at current levels we would have been out of business,” he admitted.

Hallbauer pointed out that fertilizers “were a disaster in past years,” because of drought conditions in Canada and the United States. But he did see some improvement in the coming year.

“We plan to stay in the fertilizers business,” he added.

Minerals commodities have not been effected much by tariffs but, nevertheless, the Free Trade Agreement with the United States will have a significant impact on mining, he said. As an example, the 19.5% duty on alloyed zinc will eventually come off and there will be a better mechanism for settling disputes, he insisted.

“United States mining companies were against free trade, suggesting an advantage to Canadian producers,” he added. Over half of Cominco’s refined production is shipped into the United States and that includes metals and fertilizers.

Discussing new projects other than Red Dog, he said that a number of financing scenarios are being considered for the SNIP gold project in northwestern British Columbia including internal financing or a gold loan. He denied widespread reports that Cominco’s 60% interest in the SNIP project was for sale. Although the company sold its Con gold mine a few years ago, suggesting it was pulling out of the gold sector, Hallbauer emphasized that mining, regardless of the commodity, was their core business. About 40-50% of the company’s exploration budget is being spent on gold exploration, however.

Copper is also a big part of Cominco’s business. The company owns 50% of Highland Valley Copper in southeastern British Columbia which operates one of the largest copper mines in the world.

“We were pessimistic about copper a year ago but are not surprised at recent prices.” Indeed, he predicted that copper would remain strong and he insisted that “$1 copper would still be good.” In relative terms he said the price of copper wasn’t really that high, certainly not at levels seen in the 1970s. This also applies to zinc which costs less than a loaf of bread, he noted.

Discussing operating profits in his recent report Schneider predicted the Trail Smelter and Sullivan mine should “jointly contribute $150 million or 45% of the company’s operating profits this year. Highland Valley is the second most important source of earnings with anticipated profits of $100 million this year,” he said.

“Red Dog will have a dramatic effect on earnings, with an initial contribution of $50 million during 1990, rising to over $200 million, or 40% of operating profits by 1992 (based on a conservative zinc price of 45 cents .”

Cominco recently sold its Electronic Materials division which was small but profitable.

“We were plowing all our profits back into the
business,” he said, adding that “to make a go of it we would have had to spent a lot more.” Johnson Matthey PLC will continue to operate the plant at Trail and they will buy germanium concentrate from Cominco. The operation will remain in Cominco’s existing plant and Johnson Matthey will have a 125 year lease on the premises, he said. Cominco will provide services and existing staff will join the new company.

]]>