Permit issue dogs Red Dog but otherwise Teck is flying

Vancouver – Red Dog, the world’s largest zinc mine, has been operating for more than 20 years. Now its ability to keep pumping out more than 1 billion lbs. of zinc annually is under threat because an appeal against the mine’s newly renewed water discharge permit might prevent owner Teck Resources (TCK.B-T, TCK-N) from tapping into the mine’s next major deposit in time.

For the last 20 years the Red Dog mine in northwest Alaska has worked through ore from the Main deposit, in a truck and shovel operation that mills more than 3 million tonnes of ore annually. The resources at the Main deposit, however, will run out in 2011. Luckily for Teck and its partner at Red Dog, the NANA Regional Corporation owned by the Native people of northwest Alaska, there is a second significant zinc-lead deposit directly adjacent to Main. The Aqqaluk deposit is home to 51.6 million tonnes of proven and probable reserves grading 16.7% zinc and 4.4% lead.

In order to maintain production at its usual rate, Teck’s plan at Red Dog is to start developing Aqqaluk in May and start supplementing the mill feed with Aqqaluk ore before the end of the year.

The plan is now in jeopardy. To develop the open pit at Aqqaluk Teck needed to modify and renew Red Dog’s water discharge permit, known officially as the National Pollution Discharge Elimination System permit. The United States Environmental Protection Agency (EPA) recently issued the renewed permit, which was to have come into effect on March 1.

In mid-February, however, several environmental groups appealed the EPA’s decision. Until the EPA issues a notice clarifying which specific provisions of the permit are subject to appeal, the entire new permit is stayed.

Teck expects the EPA will issue its clarifying notice within 30 days of the appeal, or by mid-March. Once the notice is issued the provisions not involved in the appeal will come back into effect. Until then the permit is null and, more importantly, Teck does not know whether and to what extent its Aqqaluk plans will be affected by the appeal.

Teck says if permit delays extend beyond May, the Red Dog transition plan will be disrupted and the mine’s production curtailed starting in October. Production would then not resume until the appeal is resolved and the mine restarted, which could take up to 18 months.

The groups behind the appeal are the same groups that last month challenged a State of Alaska decision certifying that the same water discharge permit complied with state water quality standards.

Teck received most other state and local permits needed to develop Aqqaluk in late 2009 and the appeal period for those permits has expired. The only outstanding agency authorization is a wetlands permit from the Army Corp of Engineers, which is currently undergoing final agency review. Teck warns that an appeal of the wetlands permit or of the Supplemental Environmental Impact Statement could also delay access to the Aqqaluk deposit.

Red Dog concerns aside, Teck is doing phenomenally well. A year ago the company was literally on the brink of disaster, about to collapse under a US$9.8-billion debt load incurred on the eve of the global financial crisis. The debt stemmed primarily from CEO Don Lindsay’s 2008 decision to pay $14 billion to buy Fording Canadian Coal at the top of the coal market. In February the Canadian major’s share price had falling as far as $3.35, from highs of $50 six months earlier.

A year later, Teck’s share price has regained most of what it lost, adding some 1,200% to reach $40. Lindsay managed the remarkable turnaround, inking deals, arranging financings, and rearranging debts to ensure the company’s survival. And according to Teck’s 2009 results, the company is not just surviving but thriving.

The company earned a record $1.8 billion or $3.42 per share during the year. Before depreciation, Teck’s operating profit was roughly $3.7 billion. Lindsay attributed the record revenues to “strong performances across the company, including record production of copper at Quebrada Blanca and zinc at both Red Dog and Antimina.”

The mines mentioned are three of Teck’s key operations. Quebrada Blanca is an open pit, heap leach copper mine in northern Chile that produces copper cathodes at a solvent extraction-electrowinning plant; Teck owns 76.5% of Quabreda Blanca with the rest split between a private Chilean company and a Chilean government corporation. Red Dog is, of course, the zinc-lead mine in Alaska. And Antimina is a large copper-zinc mine in northern Peru; it is a joint venture amongst BHP Billiton (BHP-N), Xstrata (XTA-L, XSRAF-O), Teck, and Mitsubishi Corporation.

Teck also owns the open pit Highland Valley copper-molybdenum mine in southern British Columbia, the open pit Carmen de Andacollo copper mine in north-central Chile, and the underground Duck Pond copper-zinc mine in central Newfoundland. In addition the company owns and operates six metallurgical coal mines in B.C. and Alberta, which make it the world’s second-largest exporter of seaborne hard coking coal.

Teck’s machinations in 2009 reduced its whopping US$13.4-million debt load by half; the company paid back US$6.7 billion and still owes US$6.7 billion. The year of global economic recovery also left the company with $1.3 billion in the bank.

The year saw Teck sell its interests in two operating gold mines – a 40% stake in the Pogo gold mine in Alaska went to partners Sumitomo Metal Mining and Sumitomo Corporation for US$245 million while a 50% interest in the Hemlo gold mine in Ontario was sold to partner Barrick Gold (ABX-T, ABX-N) for US$65 million.

Teck also negotiated a US$218-million deal to sell a gold royalty from its commissioning-stage Andacollo copper-gold project in Chile to Royal Gold (RGL-T), sold its 60% stake in the Agi Dagi and Kirazli gold projects in Turkey to Alamos Gold (AGI-T) for US$24 million and 2.4 million shares, and traded its 78.8% share of the Morelos gold project in Mexico for US$150 million, 1.6 million shares, and 12.4 million warrants of Gleichen Resources (GRL-V).

Finally, Teck sold a 33% stake in its Waneta hydroelectric dam in B.C., which powers its Trail metallurgical complex, for $825 million.

Teck’s other key move in 2009 was to restructure its massive debt load. Under the original structure the company owed lenders US$6.27 billion during 2009, most of which would have been due in October. But in April, with credit markets and commodity prices starting to recover, Lindsay convinced lenders to sign onto a new agreement that reduced Teck’s 2009 payments by US$4.4 billion.

Teck’s debt commitments now stand at a reasonable US$440 in 2010, US$420 in 2011, and US$280 in 2012.

And things look promising for 2010. Development work at the aforementioned Andacolla project was completed in December and the mill saw its first ore in early January. Teck expects the operation to reach design capacity – 80,000 tonnes of copper and 55,000 oz. gold annually – during the first half of 2010. Andacolla’s contributions should lift Teck’s production levels to 340,000 tonnes of copper and 940,000 tonnes of zinc in 2010.

Teck is also ramping up its coal production, with a plan to increase output by 25 to 35% in 2010, which means producing 23.5 to 25 million tonnes.

In terms of spending, the company has earmarked just over $1 billion for capital expenditures in 2010, including $375 million in sustaining capital and $675 million in development projects. Teck says it may increase its spending during the year, based on commodity markets and its financial position.

Teck’s share price is hovering between $35 and $40. The company has 580 million shares outstanding.