Vancouver — It seemed an odd pairing in 1986 when lean, entrepreneurial
Not anymore.
Having shared management and corporate philosophies for 15 years, “Teck Cominco” was a reality long before these historic companies formally decided to merge and become (based on market capitalization) the fourth-largest base metal company in North America, after Phelps Dodge, Inco and Noranda.
Teck will scoop up its 50%-owned subsidiary for a cool $1.5 billion, and, in the process, add a new chapter to mining industry consolidation. For each common share, Cominco shareholders will receive 1.8 class B subordinate voting shares of Teck plus $6 in cash. This represents a 21% premium over the 20-day average closing prices of the companies before the announcement, but Teck believes the premium will be more than offset through the elimination of a holding-company discount on Teck shares.
Norman Keevil will continue as chairman of Teck Cominco, and Cominco President David Thompson is expected to become deputy chairman and chief executive officer. Teck President Steven Dean and Chief Financial Officer John Taylor will hold similar positions in the merged entity.
The merged company will continue to be a leader in the zinc business, with interests in two of the three largest zinc properties in the world (plus refining operations). It will also own producing copper, gold and coal assets.
Once the merger is completed, three Teck directors will resign so that three of Cominco’s independent directors can be elected to the Teck Cominco board. The transaction is subject to the approval of a two-thirds majority of Cominco shareholders, as well as various regulatory and court approvals. Cominco’s independent committee has already obtained a fairness opinion from CIBC World Markets. A circular will likely be mailed to Cominco shareholders in June, to be followed by a meeting in July.
“This is a very exciting day for all of us here,” Teck Chairman Norman Keevil said during a conference call. “With a consolidating world industry, we have to be competitive, and this will get us there.”
He described the merger as the culmination of a long process that began in 1986 when Teck, along with two partners, bought a 32% interest in Cominco from Canadian Pacific.
At that time, Cominco’s Red Dog zinc mine in Alaska was undeveloped and unfinanced, and the Trail smelting and refining complex in British Columbia was only beginning a difficult, but ultimately successful, modernization process.
Following that initial purchase by Teck, the very first decision the new Cominco board made was to go ahead with Red Dog. Cominco then began to turn around: Red Dog was built and is today a cornerstone of the company.
“It took a while, including some difficult times in the early ’90s, but Cominco is now in exceptional shape,” beamed Keevil, “and at Teck we take pride in having been a part of it.”
He said that given Cominco’s situation in 1986, it was “only prudent” for Teck to limit its initial investment to 16%. Then, as the outlook improved, Teck bought out its two partners and, last year, the major increased its stake to 50%.
“However, the present parent-subsidiary relationship is not ideal, from either company’s viewpoint,” Keevil said, “and it’s time to complete the process. In doing so, we will create a single, strong company with a common focus, with good people in both working toward a common goal.”
He hastened to add that size is not an end in itself and that some of the “$30-billion giants” created recently may find it difficult to grow, given the limited number of opportunities available globally.
“We will occupy a middle ground — large enough to be fully competitive but not so large that a single, smart idea like a Diamond Fields or a single-hole discovery can’t make a real difference to shareholder value.”
Cominco President David Thompson said he believes the merger is “excellent” for both sets of shareholders, combining his company’s huge zinc output with Teck’s strong asset base in copper, coal and gold.
“Cominco has focused on zinc and become the most profitable zinc company in the world, but the zinc industry is not an easy one in which to earn a profit,” he said. “This merger is an opportunity to deal with the subsidiary relationship and get us all unified . . . without any of the hindrances of the past.”
Both Teck and Cominco reported strong earnings in the first quarter of 2001, helped by power sales from Cominco’s Waneta hydroelectric dam near Trail, B.C.
Teck earned $55 million, or 51 per share, on revenue of $672 million, compared with $7 million, or 6 per share, on revenue of $162 million a year earlier. The company’s gold mines contributed US$4 million, down from US$17 million last year, owing to weak prices and lower production at the Hemlo mines in Ontario and the Tarmoola mine in Australia. Production was 138,000 oz., or 1,000 oz. less than a year ago.
Teck’s British Columbia coal mines were buoyed by higher sales and prices. Operating profit was $14 million, compared with a $1-million loss last year. Teck also got a boost from base metal production, with the increase reflecting consolidation of Cominco’s interests in various operations.
Cominco, meanwhile, has been raking in profits by selling surplus power to energy-starved American consumers. Power sales from the Waneta dam helped boost net earnings to $83.2 million (or 97 per share) for the first three months of 2001. This represents a four-fold increase over the $19.5 million (23 per share) earned a year earlier.
Cominco curtailed zinc production at its Trail metallurgical complex in order to free-up surplus electricity for sale. Cutbacks this year are expected to total 115,000 tonnes, or 40% of design capacity, based on a recent announcement that a planned summer shutdown of Trail will be extended by one month (from early July to the end of September).
During the first quarter, Cominco’s power sales of 192,000 megawatt-hours (MWh) were nearly double those of last year. Power prices averaged US$446 per MWh, almost 18 times the more typical level of US$25 per MWh a year ago.
By optimizing surplus power and metal sales, operating profits at Trail rose to $117.8 million in the first quarter. Zinc production was 66% of design, or 42,000 tonnes, compared with 72,000 tonnes in the year-ago period. Cominco is buying zinc concentrate on the open market to meet commitments to its customers.
Thompson said the company has about 900 gigawatt-hours (GWh) available for sale during the next three quarters. About 25% has been sold forward (from April through September) to protect profits that would have flowed had Trail been operating flat-out.
The company is examining plans to increase capacity at the Waneta dam by replacing three of the four turbines with more efficient, modern ones. This could provide a further 150 GWh of capacity, though such an upgrade would probably not be completed until 2003.
Despite lower prices, Cominco’s other base metal assets generated an operating profit of $43 million in the first quarter, compared with $42 million a year ago. Red Dog generated earnings of $22 million, $12 million less than a year earlier. Mill modifications, designed to boost Red Dog’s zinc concentrate production to 1.1 million tonnes per year, are expected to be completed in the fourth quarter.
Operations at the Sullivan mine, near Kimberley, B.C., were suspended for two weeks in January to free up additional power. Zinc sales were down 44% for the quarter. Current plans are to operate Sullivan at full production until the mine is closed, later this year. Concentrate is now being stockpiled. The closure of Sullivan is expected to free up about 150 GWh of surplus power.
The Cajamarquilla zinc refinery, near Lima, Peru, produced 29,300 tonnes of refined zinc in the first quarter, 5% less than a year ago. The operating profit of $10 million was unchanged.
The 50%-owned Highland Valley Copper mine, near Kamloops, B.C., contributed $16.5 million in operating profit, or $13 million more than a year ago.
In addition to Red Dog, Teck Cominco’s other key assets include the Antamina copper-zinc project in Peru, which is on budget and two months ahead of schedule. It is one of the largest greenfields mining projects ever built, with a capital cost of US$2.3 billion, including the final purchase price to the Peruvian government.
Antamina is being developed by a consortium held 33.75% by each of
In Mexico, a feasibility study for the San Nicolas deposit is scheduled for completion shortly, to be followed by an environmental impact study. Teck holds a 74% interest in the project, along with 29% of partner
Preliminary open-pit modelling has outlined a resource at San Nicolas of 75 million tonnes grading 1.4% copper and 2.1% zinc, with an overall stripping ratio of 4.3-to-1 (including the initial removal of 67 million tonnes during prestripping) to a depth of 420 metres.
Meanwhile, permitting and feasibility work is continuing at the 40%-held, 5.6-million-oz. Pogo project in Alaska. The draft environmental impact statement, required for permitting, is expected to be completed by mid-year. Teck hopes to receive a final sign-off on permitting issues early next year, with a construction decision to follow. Pogo could be in production by 2004.
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