Cominco’s copper profits increasing in importance

When Canadian Pacific Enterprises sold its control position in Cominco Ltd. to a consortium headed by Teck Corp., employees of both mining companies greeted the news with considerable apprehension. “Would Teck re-make Cominco in its own image or vice versa,” was the question on everybody’s mind.

The jury is still out on that particular question but the evidence suggests a definite change at Cominco from its traditionally conservative past; historically its business style was more akin to that of its former parent, varied business interests of which at the time included a railway and a major airline.

Today, however, the ties that bind Cominco and its new major shareholder are much stronger and for very good reason. For one thing, both entities are mining companies and each of them wants to grow bigger. As Cominco President Robert Hallbauer told The Northern Miner in a year-end interview: “We want to grow in the mining business and we will be looking at anything than can make money for us.”

Emphasizing that zinc is still Cominco’s primary metal, Hallbauer said he could see “copper getting ahead of zinc in terms of profitability,” something he argued mining analysts have so far failed to appreciate. He noted that Cominco’s share of copper production from its Highland Valley operation in central British Columbia is approximately 180 million lb and production costs are among the lowest in the world.

Copper’s recent strength has surprised everyone including Cominco which, along with Lornex Mining, the company’s joint venture partner in the Highland Valley project, forecast much lower prices for the upcoming year. Incidentally, every 1 cents increase in the copper price adds about $3.7 million(US) to the joint venture’s bottom line and prices have more than doubled in the past year. So it’s not hard to imagine the impact it will have on Cominco and Lornex.

Reviewing the company’s progress during 1987, Hallbauer noted that Cominco reduced its debt load further “by selling assets.” The debt reduction scheme included the sale of the Con mine at Yellowknife and the controversial sale of West Kootenay Power & Light to an American utility for $80 million. Hallbauer questioned the popular perception that by selling its main gold mining asset (Con), Cominco was getting out of the precious metals business.

He emphasized that money- making assets only are attractive to buyers and Con was one of them. The Buckhorn mine in Nevada was put into Cominco Resources International, an exploration subsidiary, because the company needed a revenue-producing property to make it attractive to investors. Cominco Resources was formed because “Cominco was spending more than it could afford on exploration,” he added.

By the end of September, Cominco’s outstanding debt was just over $300 million, low enough to secure funding for its Red Dog deposit in Alaska. “In a way we have tried to get our debt down so we can get it up again,” he conceded.

Consolidated earnings for the 9-month period ended Sept 30 were $92.6 million which included an extraordinary gain of $66.1 million from the sale of a subsidiary and shares of Cominco Resources International.

In the third quarter, the company’s integrated metals business segment earned an operating profit of $42.7 million compared to $9.5 million a year earlier. The improvement was attributed to higher metal prices for lead and copper and greater sales volumes for zinc and copper. Funded by debt/equity

Hallbauer said that Red Dog will probably be funded by debt and equity similar to Cominco’s Hellyer deposit in Australia. He predicted that Red Dog concentrate shipments would begin in mid-1990. About half the mine’s concentrates will be shipped to the Trail smelter and the remainder mostly to Europe and Japan. He confirmed that most of the mine’s concentrate has been sold and “it’s pretty well distributed around the world.”

A road has been pushed through to the mine site where construction work will begin in earnest this January. Individual contracts have been let for mill modules, service buildings and other key items. Because the mine site is located only 55 miles from tidewater “from a transportation point of view it will be one of the lowest costs,” he said.

Hallbauer said there are advantages to doing business in the north if you are close to tidewater; this is especially the case for base metals where concentrates must be shipped out to smelters. There are some negatives though, including a limited shipping season which for Red Dog will be about 3-4 months.

Pointing out the company’s nitrogen assets in the United States have been up for sale for some time now, Hallbauer said they “haven’t been able to come up with a satisfactory deal yet.” The company’s retail sales division has been sold, however. Hallbauer doubted that Cominco will be able to sell all its U.S. fertilizer assets and predicted they would be taken off the market. Fertilizer prices improved

Fertilizer prices have been improving and he said the company wants to make this particular sector “as efficient and productive as possible so we can make money from it.”

What’s ahead for 1988? Hallbauer predicted that “metal prices would stay relatively good,” but he expressed specific reservations about copper. The fundamentals for zinc are also good but he said that lead markets have reached a critical stage. Mine closures have played a major role in lead’s performance, he added.

Hallbauer said the strike at Trail “hurt to a certain extent” but he claimed “other things helped offset it.” (An obvious reference to higher prices for its metal inventory which to some extent resulted from the smelter closure.) The first phase of the new lead smelter will be completed in 1989, making the metallurgical complex one of the most modern and production cost- competitive in the world.

According to Hallbauer, Cominco’s principal objective this year is to “finance and develop more mines.” The company will be actively exploring for minerals throughout Canada and Alaska and developing a potential new gold mine in the Stewart area of B.C.”We will be pursuing our snip property very quickly now and by spring we will either have a mine there or not,’ he said.

Should the deposit be economic (which appears to be the case), Hallbauer said Cominco will “develop it as fast as we can.” He also noted the property had “plenty of exploration potential yet.” Cominco can back in for 60% of the project with Vancouver-based Delaware Resource Corp. holding the remainder. Reserves are currently 1.2 million tons grading 0.75 oz gold, representing over 800,000 of recoverable metal.