A sharp drop in the price of power, combined with downward-spiraling metal prices, had a negative impact on
The company, which, as a result of its recent merger with
A comparison with year-ago results is not helpful as Teck began fully consolidating Cominco’s financial results in October 2000. Prior to that, Teck equity accounted for Cominco. The merger between Teck and Cominco was completed in July 2001, having been approved by 84% of the minority shareholders. Teck will hold a shareholders meeting in September to approve a name change to Teck Cominco.
Propelled by power sales from the Waneta hydroelectric dam, the Trail division recorded an operating profit of $62 million in the June quarter, compared with $117.8 million in the first quarter. Despite an increase in second-quarter power sales of 270,000 megawatt hours (MWh), against 192,000 MWh in the previous quarter, realized prices fell 48% to US$232 per MWh from a first-quarter average of US$446 per MWh.
“The unseasonably cool summer in California, combined with conservation and energy-use declines, has had a huge impact on power pricing, with current mid-Columbia pricing at around US$65 per MWh for on-peak power and US$40 per MWh for off-peak power,” states Haywood Securities analyst Kerry Smith in a recently published report. “The August futures contract is trading at only US$75 per MWh, indicating the substantial decline in energy prices.”
Power sales for the balance of the year are estimated at 350,000 MWh in the third quarter and 270,000 MWh in the fourth quarter. The company has sold forward some US$50 million of power sales for the third quarter. No power has been hedged in the fourth quarter.
Cominco curtailed zinc production at its Trail metallurgical complex in order to free-up surplus electricity for sale, to take advantage of higher power revenues in the western U.S. Cutbacks this year are expected to total 115,000 tonnes, or 40% of design capacity. A planned summer shutdown at Trail began in early July and will continue to the end of September. All customer obligations will be met, with zinc purchased on the open market.
For 2002, Teck estimates it will have 750,000 MWh of power available to sell, assuming there is no production curtailments at Trail.
Trail metals operations lost $16 million for the quarter, reflecting production cutbacks. Refined zinc production totalled 53,400 tonnes, against 68,000 tonnes last year. Sales, however, were less than 34,000 tonnes in the June-quarter as the company has been building up inventory for the third-quarter shutdown.
A labour contract with its unionized employees at Trail expired May 31. An initial mediation process failed, and both parties are currently awaiting some development to bring them back to the table. Teck has announced it intends to lay off 91 unionized employees at Trail effective Nov. 14, 2001. The company says these reductions are in response to the industry’s competitive environment and low metal prices. With reduced production at Trail, Teck has slowed down the construction of the $70-million Pend Oreille mine project in northeastern Washington state.
The reopening of the mine was designed to replace production from the Sullivan mine, which will close by year-end. Pend Oreille was originally planned to come on-stream in September 2002, producing 84,000 tonnes of zinc concentrate and 13,000 tonnes of lead concentrate annually. Completion of the project is now expected in 2003.
Teck has also deferred, until 2002, a development decision of the expansion of the 82%-owned Cajamarquilla zinc refinery, near Lima, Peru. “We would really like to see this [zinc] market show some renewed strength before we make a decision,” states Teck’s chief executive officer, David Thompson. The proposed expansion would double annual refined zinc production to 240,000 tonnes. Cajamarquilla contributed $5 million in operating profits in the second quarter.
Given the current metal prices, Teck is not in a rush to complete feasibility studies on the San Nicolas copper-zinc joint-venture project in Mexico’s Zacatecas state. Metallurgical tests were recently completed, and the company anticipates it will have finished much of the feasibility study by year-end, subject to the supply-demand outlook for zinc.
Teck’s other core business units, led by the coal division, generated an operating profit of $34 million in the second quarter. Metal prices were materially down in the quarter. Teck realized a zinc price of US42 per lb., compared with US51 a year ago. The company estimates the price impact for metals is $37 million lower than this time last year, with zinc accounting for a $35-million decline.
Coal profits from the wholly owned Elkview and 61%-owned Bullmoose mines in British Columbia were up strongly at $18 million, versus $14 million in the first quarter and $4 million in the year-ago period. Volumes were up, resulting in higher sales revenue of $103 million, compared with $55 million a year ago. Thompson says the full effect of price increases from the April 1 coal year should be seen in the third quarter. Coal prices were up about 8% over the second quarter of 2000.
Operating profits from the Red Dog mine in Alaska, one of the world’s lowest-cost zinc producers, were only $3 million for the quarter, versus $19 million a year ago. The fall in profit is mainly due to lower zinc prices. Work on Red Dog’s optimization mill project, designed to boost zinc concentrate production to 1.1 million tonnes per year, is on schedule for completion in the fourth quarter.
Gold had a better quarter, with related operating profits rising to $11 million from $4 million in the first quarter. Total production of 164,000 oz. included a record 84,000 oz. from the Australian Tarmoola and Carosue Dam mines. Prices were lower than a year ago, at US$281 per oz. (including hedging gains), versus US$295, while cash costs increased to US$190 per oz., compared with US$177 in the second quarter of 2000.
The Pogo project in Alaska is still in the permitting phase, which has slipped behind the original schedule by about six months.
Teck’s share of the Highland Valley Copper mine, near Kamloops, B.C., contributed $8 million in operating profit. The open-pit mine produced 27,800 tonnes of copper in the second quarter, off 8% from a year ago, mainly as a result of lower throughput caused by the processing of harder ore. Realized copper prices of US72 per lb. compare with US79 in the corresponding quarter of last year.
At the Antamina copper-zinc mine project in the Peruvian Andes, construction was completed in late May, some two and a half months ahead of schedule. Ramp-up is under way, and the mine has already achieved design throughput for copper-only type chalcopyrite ores. Senior Vice-President Michael Lipkewich says Teck is close to achieving predicted feasibility recoveries of 92-93%. The chalcopyrite ore accounts for nearly half of the Antamina deposit, which hosts proven and probable reserves of 559 million tonnes grading 1.24% copper, 1.03% zinc and 0.029% molybdenum, plus 13.71 grams silver per tonne, at a stripping ratio of 2.7-to-1.
The complexity of the ore in the skarn-hosted deposit is just one of the technical challenges facing the Antamina joint-venture partners. The orebody comprises several types of mineralization. Lipkewich says operators are now set to begin pushing through copper-zinc ore, and neither throughput nor recoveries are expected to be a problem as the mineralization is coarse-grained. Pilot plant results
indicate it is relatively easy to achieve good separation.
The full ramp-up period is budgeted at six months, and the partners still have to achieve predicted recoveries for the other ore types. “We believe this will be achieved a number of months ahead of schedule,” says Lipkewich. “We continue to make excellent progress at Antamina and have no reason to believe this will not continue.”
To date, well over 100,000 tonnes of concentrate have been pumped along a 302-km slurry pipeline to the port at the town of Huaraz. “The pipeline has operated flawlessly,” says Lipkewich, “and dewatering at the port has essentially been a non-event.” Two ships have sailed with concentrate, and another two are about to be loaded.
The Antamina project came under fire last month from residents of nearby Huarney, who temporarily blocked the main Pan American Highway to protest perceived pollution threats from the slurry pipeline.
At a predicted capital cost of $2.3 billion, including acquisition costs, the Antamina project is one of the largest greenfields mining projects ever built. Ownership is shared 22.5% by Teck, 33.75% by
At a design capacity of 70,000 tonnes per day, Antamina is scheduled to average 675 million lbs. copper and 625 million lbs. zinc in concentrate in the first 10 years of its 20-year life. Cash costs are expected to average less than US30 per lb. copper (net of byproduct credits) in the first 10 years and US35 per lb. over the life of the mine. The project was expected to generate a leveraged rate of return of at least 15%, based on copper and zinc prices of US95 and US55 per lb., respectively.
Exit Pasminco
In the meantime, Teck confirmed it is looking at the mining assets of Australian-listed Pasminco, particularly the Century zinc mine in northern Queensland, Australia. In July, Pasminco announced it was seeking bids for all of its mining and exploration assets, with the exception of those related to its Tennessee operations in the U.S. The sale comes as part of a restructuring designed to resolve financial difficulties. Pasminco intends to re-focus solely on zinc and lead smelting.
Pasminco acquired the Century project from Rio Tinto for A$325 million in September 1997 and spent A$788 million over a 2-year period of construction. The open-pit mine began operations March 1, 2000. Concentrate is pumped through a 304-km-long underground pipeline to the Karumba port facilities in the Gulf of Carpentaria.
“We thought their startup was good, but there is a gap between what the design recovery is and what they’ve achieved to date, and that can be a very difficult problem in this business, as we knew from Red Dog,” says Thompson.
During the June quarter, the Century mine treated 1.25 million tonnes of ore grading 11.6% zinc, 2.4% lead and 61 grams silver to produce 111,704 tonnes contained zinc and 24,057 tonnes contained lead. Design capacity was 89%. Pasminco is shooting for 100% capacity by December. Zinc recovery was 76%, against a targeted 82.5%.
For the year ended June 30, 2001, Century produced 416,880 tonnes of contained zinc and 53,770 tonnes of contained lead from 4.8 million tonnes of ore grading 11.7% zinc, 2.4% lead and 62 grams silver per tonne.
Proven and probable reserves at the end of 2000 were 96.9 million tonnes grading 11.6% zinc, 1.6% lead and 43 grams silver at a stripping ratio of 9.8-to-1.
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