Teck boosts stake in Cominco (March 07, 1994)

Companies heavily dependent on zinc operations have not fared well in recent years, and Cominco (TSE) is no exception. The major posted a loss of $113.2 million for 1993, which follows a loss of $30.2 million in the previous year.

But the prospect of better days ahead has prompted Teck (TSE) to increase its stake in the company to 36% from 22%. This will be achieved by buying the half interest in Nunachiaq (a jointly owned private company) held by MIM Canada (a wholly owned unit of MIM Holdings) for $209 million. MIM will continue to hold 8.6% of Cominco.

“We had wanted to buy out MIM’s interest for some time but could never agree on a price,” said Norman Keevil, chairman of both Teck and Cominco. “The picture changed when MIM took on financial commitments associated with its acquisition of the Bajo de la Alumbrera project in (east-central) Argentina.” The purchase also increases Teck’s interest in the Polaris zinc mine in Canada’s High Arctic, to 22.5% from 11.2%. Cominco holds a 77.5% stake in Polaris, the world’s northernmost base metals mine.

Another benefit, says Keevil, is increased autonomy in decision-making and direction for both Teck and Cominco. And, he says, the acquisition reflects Teck’s confidence in the improvements at Cominco’s major zinc operations. At the moment, however, most mining analysts seem bearish about zinc because of large increases in inventories on the London Metal Exchange (LME) and uncertainty about prospects for a global economic recovery this year. Not many mining companies are interested, either, as the current pursuit of copper projects worldwide would seem to indicate.

“Our strategy has always been to chase good opportunities, no matter what they are, and buy into a mix of assets at the bottom of the cycle,” Keevil explained.

“Zinc markets will turn, but over the long term,” said Raymond Goldie, a research analyst with Richardson Greenshields. He added that most producers would be happy if this year proves better than last.

Cominco’s losses are understandable in light of weak prices for base metals. In 1993, the average LME price was US44 cents per lb. for zinc, US18 cents per lb. for lead and US87 cents per lb. for copper — or 23%, 25% and 16%, respectively, below average prices for the prior year.

Keevil said Cominco’s losses also reflect problems at several key operations. “People might assume those losses are going to continue this year, but that isn’t going to be the case,” he said. “The recent improvements at Red Dog (the zinc-lead mine in northwestern Alaska) and Trail (the smelter complex in southeastern British Columbia) will allow us to break even this year, even at current metal prices. And it sets the stage for them to be significant earners for both Teck and Cominco when prices do improve.”

At Red Dog, significant production increases were realized during the fourth quarter of 1993. Production of zinc concentrate totaled 126,000 dry tonnes, 63% greater than the same period a year earlier.

Two recently installed 1,250-hp ball mills are now operational and further improvements in production and recovery are expected this year. At Trail, a restructuring program has resulted in a reduced workforce. During the 1993 fourth quarter, the operation managed to break even despite low metal prices.

Teck and Cominco have other common interests, including the recent purchase of the Cirque (formerly Stronsay) and Sa Dena Hes properties. The former, in northeastern British Columbia, was previously owned by a subsidiary of Curragh, whereas Sa Dena Hes, in the Yukon, was owned by Curragh and Hillsborough Resources. (Korea Zinc can acquire a half interest in both projects, subject to regulatory approvals.)

The total price of the Teck-Cominco acquisitions was $43 million. “Cirque is one of the best undeveloped zinc deposits,” Keevil said. “It is not economic now, but it is going to be needed in due course. Studies show that the world will need new zinc mines by the end of the decade.” Notwithstanding these acquisitions, Teck and Cominco are being careful not to put all their eggs in one zinc basket. The companies are jointly involved in two copper mines: Highland Valley, also in British Columbia, and Quebrada Blanca, which is being developed in Chile. A key initiative is a joint exploration program in Chile, which is focused on large, porphyry-copper deposits. More than 60 properties have been acquired, with drilling planned this year on some of them.