TECK CORP. Tie Breaker

When Teck Corp. put together an international consortium to buy a controlling interest in Cominco Ltd., it was not so much a story of David toppling Goliath as one of David simply looking out for his own future. Giant Cominco, one of the world’s major resource companies, had what much smaller Teck prized — orebodies with potential. “Cominco’s undeveloped ore reserves are among the best in the world,” boasted that company’s 1985 annual report. And rightfully so. Its total mine assets include some 20 operating mines, but there are also numerous potential mines awaiting production. Several of these, such as the huge Red Dog zinc deposit in Alaska, could become major operations.

“Red Dog, like Cominco’s Sullivan mine, is the kind of cornerstone mine on which companies are built — just as Anglo American was built on the Witwatersrand and as Mount Isa and Broken Hill were built on their orebodies,” says Norman Keevil Jr, president of the company that effectively nailed down controlling interest in Cominco for a paltry $102.5 million. “These are rare, and it is rare indeed for a company to come across two in its history as Cominco has done.”

Such large, low-cost ore bodies have been Teck’s target for the past decade as it emerged from a history of small but highly profitable mine development. While the smaller mines have fuelled the company, they required a constant push to find new reserves before they were exhausted.

Teck’s controlling interest in Cominco’s ore reserves emphasizes its trend toward large-scale development. Added reserves enhance Teck’s already impressive roster of major ore bodies in just about every mineral commodity group and give the company a renewed lease on longevity.

Alaska-based Red Dog, the world’s largest and one of the highest-grade zinc deposits, has an estimated 50-year supply of ore. Another Cominco jewel is the Hellyer zinc-lead-silver discovery in Australia (a 47% joint venture with Aberfoyle Ltd.).

The Cominco acquisition also provides Teck with an increased interest in a joint venture in British Columbia’s copper-producing Highland Valley. Teck’s 50%-owned Highmont copper mine, in the same vicinity, had been left out when, in 1986, Lornex and Cominco combined two of the valley’s three major operations to form the joint venture, even though Teck owned 22% of Lornex. The Cominco and Lornex venture has resulted in a highly competitive copper mining operation.

Keevil Jr has said of Cominco’s Valley Copper: “It is an orebody that, in combination with existing milling assets in the vicinity, will become one of the lowest-cost producers of copper in the world, outside of Chile.”

In financial circles, the ripple effect of the acquisition has had greater impact than the acquisition itself. Analysts now realize how valuable a deal Teck has made. “You are talking about some of the major copper and zinc deposits in the world and Teck will have effective control,” says Ian Semple, mining analyst for Pemberton Houston Willoughby Bell Gouinlock. Semple, who did some rough calculations of orebody value when the takeover was proposed, estimates the value of Cominco’s share of ore reserves at $30 billion. Teck essentially gained control of this wealth of reserves for a mere $102.5 million. “I think this will turn out to be one of the greatest deals in mining history,” Semple says.

Norman Keevil Sr recalls how the acquisition started in the fall of 1985: “I was at a dinner with Bill Stinson (president and chief executive officer of Canadian Pacific). He dropped over after and asked about the possibility of us buying Cominco. There was so much debt and problems that it didn’t seem likely at the time.”

Cp, wanting to clear off some of its non-productive assets, had originally offered Teck its 53% interest in Cominco for $500 million. Teck found the offer inconsistent with its own goal of maintaining a strong balance sheet. It was Teck’s vice-president of finance, David Thompson, who pencil-scratched an alternative proposal.

The deal Teck decided on was $205 million for a 31% stake in Cominco, a consortium effort. Metallgesellschaft AG of West Germany, which already holds about a 21% voting interest and a 30% equity interest in Teck, and mim Holdings of Australia combined to put up half the amount ($102.5 million). Teck put up the other half. The consortium also agreed to pay cp a further $75 million, with a 4-year promissory note, and cp agreed to convert into preferred shares a $75-million loan to Cominco in order to help the company’s bottom line. The per-share purchase price was $14 — a 50 cents premium over the share price of the remaining cp shares sold on the open market. However, the Teck consortium gained the controlling block.

Prior to the acquisition, Teck had not been standing idle. It had accumulated significant coal reserves in northeastern British Columbia, it’s own copper venture in the Highland Valley and a 50% interest in one of the Hemlo gold mines. Recently Teck’s focus has shifted to gold. Semple estimates that by the end of the decade, Teck’s 60,000 oz of gold produced in 1985 (from the Afton mine in British Columbia) could swell to 300,000- 350,000 oz as a result of its 50% share of production from the Hemlo properties. That is, if an Ontario Supreme Court decision is upheld, awarding Teck’s Hemlo partner, Internatinal Corona Resources, the biggest of the three Hemlo mines.

“Teck’s future over the next few years shows growth, particularly in gold,” Semple says. The company’s ability to target the future and pull together the components for a glittering payday is now being implemented at Cominco, where several corporate and executive changes have occurred. Eighteen-year Teck veteran Robert Hallbauer became Cominco’s new president and chief executive officer while Keevil Jr became chairman.

Teck also plans to continue reducing Cominco’s $1-billion-plus debt (on an estimated $2 billion in assets). Previous management had got the debt down by selling Fording Coal to cp in February, 1986, for $87 million, the Con mine to Nerco Inc. (a 90%-owned subsidiary of Portland, Ore.-based Pacificorp) in November, 1986, for $64 million and West Kootenay Power for which there is a buyer, subject to B.C. Utilities Commission approval.

Cominco’s management “was doing a good job” in bringing the debt under control. Had the effects of in-house cost-cutting and divestitures been tallied by year-end (including West Kootenay Power), the debt would have been sliced to as low as $560 million, Semple concedes. “We hope to drop that a further $250 million this year through sale of assets that are not crucial to the company.”

Lopping off debt is not a new experience for Teck. During the 1981-82 period, when interest rates shot up to more than 20%, Teck reacted swiftly. Its long-term debt had peaked at $178.6 million in 1980 before the company began to bring it under control — a move other mining companies would follow, but not until years later. Teck was preparing itself for large capital infusions which would be required to finance Hemlo — an investment that has paid off, along with the Bullmoose coal project in northeastern British Columbia. These ventures, and others, later supplied the revenue that permitted Teck to acquire Cominco using cash on hand plus a small European underwriting.

“The combination of both these properties had put us into a profit position with our earnings,” Keevil Jr says.

The question that remains unresolved is: What assets will Cominco spin off? Analysts have suggested Cominco’s established fertilizer and chemical division has potential since it’s an area in which Teck has not been previously involved on a commercial scale. (Its research arm did contribute to the development of a slow-release fertilizer.) Or Teck may spin off some of Cominco’s smaller mine assets.

Both Hallbauer and Keevil Jr. are non-committal, although Keevil concedes one alternative is “to bring in a partner” in the fertilizer and chemicals division. Hallbauer notes that the division, responsible for about one- third of Cominco’s annual revenue, “has been a good business” for the company. “And, it has usually run counter to metals — except in recent times.”

Hallbauer maintains that, in the final analysis, spinning off Cominco’s assets may be a little like managing a hockey team — you can’t always trade the players you wish. “You sell what someone wants to buy,” he says.

Cominco has a received a lot of offers, though. Hallbauer has fielded calls from several national and international companies wanting the chance to bid if specific assets are made available.

Pulling Cominco’s feet out of a mire of debt goes beyond any corporate wish to clean up the balance sheet. It’s a strategy directly aimed at making Cominco mobile again. Cominco has several developing mines which will require new capital. “We will be adding new debt to build new income sources, but we look at that as positive debt,” Keevil Jr says.

One of the first acts of the newly- structured Cominco board of directors was to give Red Dog its run; production is slated to start in 1991. The decision will, however, cost Cominco more than $200 million. As well, a Cominco joint venture has the Australian Hellyer property on the brink of going into production. Keevil Jr says a mill decision may be made this year.

Add to that Teck’s decision to proceed with a $245-million lead smelter replacement at Trail, (half the cost of which will come from Cominco preferred shares being bought by the federal and provincial government) and it becomes clear why Cominco is undergoing a debt reduction plan.

Modernizing the smelter, though, has left Cominco — and Teck’s consortium — with some first-class assets. Cominco recently completed the construction of a new zinc smelter at Trail. These efforts, says Hallbauer, will leave the company with two of the most modern facilities in the industry, even though Cominco’s former management already enjoyed a good industry reputation for upgrading its facilities.

“They had spent a lot of dollars in past years on modernization. If you don’t, you can’t operate. That’s where Cominco had accumulated a lot of its debt — modernizing its smelter,” he says.

The acquisition of Cominco could also bring Teck closer to resolving its Highland Valley dilemma. Last year Teck was squeezed out of the deal that saw Lornex and Cominco combine assets in the valley with the net effect that copper could be produced for about 50 cents per lb. Teck, which also has its Highmont mine in the area, had understood Highmont would be included in such an arrangement as well.

The Cominco-Lornex partnership approached Teck last year, but negotiations are still going on to bring in the bypassed Highmont operation. According to Keevil Jr, there is the possibility of increasing the daily output by 35%-40% using the idle Highmont operation, should an agreement be reached.

“The people here in the mining division (at Cominco) are quite happy about it. Lornex has been the stumbling block,” Hallbaur says.

But, while new mine expansions, divestitures and re-adjustments are made, the degree to which Cominco will be reshaped will be a function of the marketplace and what management perceives as core assets. Hallbauer acknowledges that Teck is known for running lean on management (it built Bullmoose with no extra management hired at head office) and moving quickly to seize new — and sometimes risky — opportunities. He’s not sure this sprinter’s style is one that will be imposed on the ambling 80-year-old Cominco.

“Cominco is a bigger company, having a lot more people and complexes such as smelters,” Hallbauer says. “Once I understand the operations of the company, then we can address that.”

Teck’s caution is understandable. Cominco and Teck are two of the oldest, continuously operated mining companies in Canada. (They were founded in 1903 and 1913 respectively.) As Keevil Sr says of the acquisition: “I think it has surprised everyone in the mining industry — including ourselves.