Power sales drive Cominco (February 19, 2001)

Vancouver — Power sales to energy-strapped California have generated a financial windfall for Cominco (CLT-T). The company, now owned 50.1% by Teck (TEK-T), saw its profits double during 2000.

The stellar performance is a direct result of the power crisis in the southwestern U.S., which drove electricity prices through the roof. In December alone, the sale of excess power from Cominco’s Trail smelter in southeastern British Columbia generated $88 million in operating profit.

Cominco generates its own power from the Waneta Dam on the Pend Oreille River, near Trail. Under normal operating conditions, the refinery sucks an average of 1,785 Gwh (gigawatt-hours) per year. Cominco’s Sullivan operations, near Kimberley, B.C., drain an additional 160 Gwh per year. This leaves a surplus of 615 Gwh per year, which is sold to the market. The dam has four generating units that produce a total of 2,560 Gwh per year, which is enough power to light a 100-W bulb continuously in 3 million homes or supply electricity to a city of 250,000.

For the year, sales revenue from power hit $163 million, up from $25 million in 1999. Electricity prices during the latest quarter averaged US$271 per megawatt-hour (Mwh), compared with US$29 in the corresponding period of 1999.

Trail’s quarterly sales volumes of surplus power were similar to levels reported for the fourth quarter of 1999 (217,000 Mwh, compared with 201,000 Mwh last year), with no significant increases in related operating costs. During the last quarter, production and sales of refined zinc at Trail were curtailed by 11% and 8%, respectively, in order to take advantage of the higher energy prices. The surplus power was sold through B.C. Hydro’s export subsidiary, as well as an unnamed “financially strong” American company. As a result, Cominco does not expect any payment defaults from its power sales.

Cominco plans to cut back further on metal production at Trail in order to free up more of its power for sales. Over the next two months, zinc production at the Trail refinery will be cut by 25% to 12,000 tonnes. In addition, the metallurgical operations will be shut down during the months of August and September, which will result in a 48,000-tonne reduction in zinc production. These cuts are in addition to the 20,000-tonne reduction that occurred in December-January.

“We won’t leave our customers in the lurch,” says Cominco President David Thompson. “We will only cut back at Trail to the extent that we can, given the availability of metals to protect our markets in the U.S.”

Cominco has made arrangements with customers to meet its commitments through the purchase of metals and other products. Sufficient power has been sold to ensure Trail has the same level of profitability as if it were in full production during the 2-month summer shut-down. The month of August will be a vacation period for most employees at Trail, and annual maintenance work will be performed during September. As a result, there will be no layoffs.

“We still see ourselves as a zinc company,” says Thompson, who points out that regulations enable Cominco to sell excess power only because it is running an industrial complex. “If we divorce the power from the [industrial] complex, we lose all our rights [to sell power].”

The major posted net earnings of $170 million (or $1.99 per share) on revenue of $1.87 billion in 2000, compared with $159.2 million ($1.86 per share) on revenue of $1.6 billion in 1999. The increased earnings are the result of a $153-million pretax improvement in operating profit from Trail, of which $137 million came from surplus power sales.

Fourth-quarter earnings totalled $80.8 million (94 per share) on revenue of $555.7 million, compared with $131.3 million ($1.54 per share) on revenue of $527.5 million during the corresponding period of 1999. Total operating profits for the fourth quarter were $152 million, compared with $106.7 million in the year-ago period.

At December 31, 2000, working capital stood at $567 million, with net debt (total debt less cash and short-term investments) estimated at $346 million, or $284 million less than a year ago.

Trail’s metal operations accounted for a $9-million improvement in operating profit, thanks to higher production volumes of silver and gold. Trail cranked out 63,100 tonnes of refined zinc, 25,800 tonnes of refined lead, 4.1 million oz. silver, and 15,100 oz. gold during the recent fourth quarter. Year-ago production consisted of 70,700 tonnes of refined zinc, 18,800 tonnes of refined lead, 2.7 million oz. silver and 12,100 oz. gold.

The huge gain in power sales overshadowed a record-setting year for the company’s 50%-owned Highland Valley copper mine, near Kamloops, B.C. Highland Valley produced 24,800 tonnes copper concentrate for Cominco in the recent quarter, compared with 22,700 tonnes in the final three months of 1999. The mine also cranked out 63,100 tonnes of zinc concentrate, 15,100 oz. gold in concentrate and 297,300 oz. silver in concentrate, compared with 70,700 tonnes zinc concentrate, 12,100 oz. gold and 272,700 oz. silver in the 1999 fourth quarter.

Highland Valley contributed $7 million to Cominco’s operating profit during the three months ended Dec. 31, 2000, reflecting a 29% increase in copper sales, a higher average quarterly copper price and a 3% reduction in production costs per tonne of concentrate. Highland Valley Copper is a partnership controlled 50% by Cominco, 33.6% by Billiton, 13.9% by Teck and 2.5% by Highmont Mining.

Farther north, at the Red Dog operation in Alaska, fourth-quarter production totalled 231,900 tonnes of zinc concentrate and 33,000 tonnes of lead concentrate, compared with year-earlier output of 244,100 tonnes zinc and 33,300 tonnes lead. The operating profit was $29 million less than a year ago, owing to lower average zinc prices and a 19% reduction in zinc concentrate sales. The mine shipped 911,000 tonnes zinc and 132,000 tonnes lead during 2000. Improvements to the mill, scheduled for completion in the final quarter of this year, are expected to boost concentrate production to 1.1 million tonnes.

At the Sullivan mine, zinc and lead concentrate production slipped by 11% and 28%, respectively, between the two fourth quarters, to 36,500 tonnes and 10,400 tonnes. The decline reflects the suspension of operations in December, owing to the reduced demand for concentrates at Trail. Production resumed in mid-January. Sullivan’s operating loss tallied to $18 million during the recent fourth quarter, compared with a loss of $6 million a year earlier. This includes a $10 million increase in Cominco’s provision for reclamation costs.

The Cajamarquilla zinc refinery, near Lima, Peru, produced 30,900 tonnes of refined zinc during the fourth quarter, compared with 32,200 tonnes a year ago. A lower average zinc price and a 5,000-tonne reduction in refined zinc sales contributed to a $2-million reduction in the refinery’s contribution to Cominco’s quarterly operating profit, compared with last year’s $8-million operating profit.

At the 77.5%-owned Polaris mine, on Little Cornwallis Island, zinc and lead concentrate production during the fourth quarter tallied to 55,000 tonnes and 10,000 tonnes, respectively. This represents a 14% reduction, in both cases, over year-ago figures. These reductions were expected, given that the mine is nearing the end of its life. The final shutdown is likely to be in the summer of 2002. The mine added $13 million to Cominco’s operating profit during the quarter, down $6 million when compared with the fourth quarter of 1999.

The sale of the Quebrada Blanca mine, in northern Chile, to Aur Resources (AUR-T), added $14 million to Cominco’s coffers, while reducing net debt by $190 million.

Cominco also approved a US$70-million project to rebuild the mill and reopen the Pend Oreille zinc-lead mine in Washington state. Beginning in September 2002, the mine will begin cranking out 84,000 tonnes of zinc concentrate and 13,000 tonnes of lead concentrate per year