Writedown erodes Rio Algom’s bottom line

A writedown of four assets has closed the door to what would have been a profitable third quarter for diversified base metal producer Rio Algom (ROM-T).

During the three months ended Sept. 30, the major lost a hefty $203 million (or $3.44 per share) on revenue of $488 million, compared with earnings of $6 million (2 cents per share) on $515 million in the corresponding period of 1998. The loss reflects a one-time, non-cash, after-tax charge of $214 million ($3.53 per share); were it not for this charge, Rio would have earned $11 million in the quarter.

Early in the period, Rio decided to write down the carrying value of four projects:

• the 25%-owned Bajo de la Alumbrera copper-gold mine in Argentina;
• the 29.1%-owned Bullmoose coal mine in British Columbia;
• the wholly owned Smith Ranch uranium mine in Wyoming; and
• the wholly owned Nicolet zinc-copper deposit in Wisconsin.

The reduction, totalling $293 million before taxes (or $214 million after deferred tax gains), followed an across-the-board review that began in late 1998.

“In view of the volatility in commodity prices and our policy of conservative financial management, we think this is a prudent step for Rio Algom,” company president Patrick James noted at the time of the writedown. “We think we’ve thoroughly cleaned house here and do not foresee any need for additional writedowns at our other operations.”

The Alumbrera mine accounted for just over 42% of the amount, reflecting a 27% decline in reserves there, to 460 million tonnes. The Bullmoose and Nicolet projects no longer carry any value on Rio’s books, though Smith Ranch has retained a value of $22 million.

Rio does not expect to receive permits for Nicolet until 2002. In the meantime, expenditures will be charged against earnings, though these should be offset by changes in amortization charges against Smith Ranch and Bullmoose, both of which were written down to reflect the weakened coal and uranium markets.

Meanwhile, Rio’s share of output topped 79 million lbs. copper in the recent quarter, with cash costs averaging US47 cents per lb., compared with 93 million lbs. at US49 cents per lb. in the year-ago period. The temporary shutdown of the 33.6%-held Highland Valley copper mine in British Columbia accounts for the difference.

“The mine … is now operating at full production, and we expect to achieve close to a full quarter’s production in the fourth quarter,” says James.

The new labour agreement allows Highland Valley to remain profitable provided copper prices do not dip below US60 cents per lb. James adds that the reactivation of the mine should push the company beyond its 1999 target of 365 million lbs. copper at US47 cents per lb. By the end of the third quarter, 284 million lbs. had been produced for the year, with cash costs averaging US46 cents per lb.

At Alumbrera, cash costs fell 48% from a year ago, to US24 cents per lb. (net of byproduct credits), while throughput increased by 3%, to 82,000 tonnes per day. The results are better than expected and have prompted the mine’s management to forego a mill expansion. Says James: “Optimization of mining and processing methods, including greater use of fine blasting techniques, is expected to produce many of the same benefits of the expansion without the added capital.”

Rio now expects its share of annual output from Alumbrera to average 98 million lbs. copper and 148,000 oz. gold over the next 10 years. Attributable earnings for the recent quarter, when 26 million lbs. copper and 44,000 oz. gold were produced, totalled $10 million — up $13 million from a year ago.

Also operating cheaper these days is Rio’s metals distribution business, which chopped 8% from expenses, partly by scrapping 135 jobs. However, this was not enough to overcome the weakened aluminum and stainless steel markets, and, accordingly, third-quarter revenue and operating profits were each off 11% from the third quarter of 1998.

The wholly owned Cerro Colorado mine in Chile cranked out 53 million lbs. copper at US47 cents per lb., generating $6 million in profits. While production was one-third higher than a year ago (owing to the mine’s expansion), operating costs were virtually the same.

Cerro Colorado is expected to crank out nearly 220 million lbs. in 1999, at about US45 cents per lb., which is in keeping with the expanded capacity.

Rio continues to evaluate its Spence copper project in Chile, where an ongoing prefeasibility study has so far boosted resources by one-third. Annual output is now expected to be two-thirds higher than originally envisaged, at 500 million lbs. copper (T.N.M., July 12/99).

At Sept. 30, Rio had $59 million in cash. The bulk of the company’s $87 million in capital expenditures during the quarter was related to the Antamina base metal project, in which Rio Algom has a 33.75% interest. Future quarters should see less in this department, as Rio does not have to commit additional funds till the fourth quarter of 2002.

Antamina boasts proven and probable reserves of 494 million tonnes grading 1.3% copper, 1% zinc and 0.03% molybdenum, plus 12 grams silver per tonne. The mine is expected to reach commercial production in 2002.