Metal prices force Teck to take writedowns

Given the substantial decline in metal prices of late, Teck (TEK-T) has decided to take fourth-quarter, year-end writedowns totalling $175 million.

The largest single component of the writedown is $52 million on the Tarmoola gold mine in Australia. Teck’s offer to acquire Tarmoola was made about a year ago, when gold stood at US$375 per oz. From an operating perspective, Teck President Norman Keevil said, “Tarmoola has generally measured up to expectations, but at current gold prices, the purchase price is not justified and we decided to write it down.”

Teck also wrote down $22 million on its Inco VBN shares (acquired in Inco’s buyout of Diamond Fields Resources, in which Teck held shares), because of the recent drop in nickel prices and the uncertainty surrounding the development of the Voisey’s Bay project.

Writedowns to the tune of $67 million were taken against a number of undeveloped properties, along with $34 million against marketable securities.

In addition, Teck’s share of writedowns taken by Cominco (CLT-T), in which Teck holds a 34% interest, was $51 million.

Teck states that it is examining all capital expenditures, and looking to defer or eliminate any not deemed essential. Discretionary expenditures on exploration will also be reduced to about 60% of last year’s level. The company has laid off more than 50 people on the exploration side in one or two countries in South America.

Teck suffered a loss of $176 million (or $1.81 per share) on revenue of $688 million in 1997, compared with a profit of $255 million ($2.65 per share) on $702 million in revenue in 1996. The 1996 earnings included unusual gains of $191 million on the Diamond Fields transaction.

Increased gold revenue from the newly acquired Tarmoola mine was offset by lower gold prices. Copper revenue was lower than last year due to the closing of the Afton mine in British Columbia in May 1997, while coal revenue was similar to 1996 levels.

Excluding writedowns and unusual gains made in both years, net earnings were $50 million (51cents per share) in 1997, compared with $64 million (66cents per share) in 1996. Cash flow in 1997 totalled $140 million ($1.45 per share) compared with $158 million ($1.64 per share) in the previous year.

Gold production in 1997 reached 374,000 oz., compared with 360,000 oz. in 1996. Teck’s 50%-owned David Bell and Williams mines at Hemlo, Ont., accounted for 302,400 oz., or 81% of 1997 production, at a cash cost of US$210 per oz. The 70%-owned Tarmoola mine contributed 40,000 oz. for the year.

The company realized an average gold price of US$348 per oz. in 1997, significantly lower than the US$394 per oz. realized in 1996. Teck has sold forward 285,000 oz. over the next five years at an average price of US$399 per oz., including 215,000 oz. over the next two years.

Copper production in 1997 was 132 million lbs., compared with 143 million lbs. a year earlier. The drop was mainly due to the closure of the Afton mine. The average realized price for 1997 was US$1.03 per lb., though the price had fallen to US78cents per lb. by year-end. The company has sold forward 45 million lbs. copper over the next two years at US96cents per lb.

Metallurgical coal production from the Elkview mine in B.C. and Teck’s 61% share of the Bullmoose mine in B.C. was 3.9 million tonnes, unchanged from 1996. The average realized coal price from the two mines also held steady.

The current 15-year Bullmoose contract expires Apr. 1, 1999. A 5-year extension of that contract has been granted, but at a reduced throughput of 1.55 million tonnes, set at the world price. In contrast, the current contract is at a premium to the world price. Teck has begun negotiations to structure a package that would ensure the mine’s ongoing viability.

A reduction in coal sales at the Quintette coal mine in northeastern B.C.

resulted in a permanent layoff of 276 employees, effective April 1, 1998. As a result of a new 5-year contract, annual coal sales will be lowered to 3 million tonnes from the current level of 4.35 million tonnes.

Gold accounted for 30% of Teck’s total mine operating profit during 1997, while copper contributed 31% and coal 25%. Zinc and niobium were responsible for the remaining 14%.

Exploration highlights in 1997 included the acquisition of an option from the Sumitomo Group of Japan to earn a 40% interest in the Pogo gold deposit in Alaska. Teck can earn its interest by spending US$28 million on the project, producing a feasibility study by Dec. 31, 2000, and contributing the first US$33 million of capital costs. Teck is the operator of the joint venture and spent $10 million on exploration during 1997.

Geological reserves at year-end were estimated at 10.9 million tons grading 0.41 oz. gold per ton, equivalent to 4.5 million contained ounces.

Teck intends to fast-track Pogo; the company is going underground this year with a $28-million ramp development program. Further reserve delineation and expansion drilling is also planned.

With the help of its partner, Western Copper Holdings (WTC-T), Teck met with success in the grassroots discovery of the San Nicolas polymetallic deposit in Mexico’s Zacatecas state. Teck is currently drilling off the limits of the discovery on 100-metre centres and is starting metallurgical testwork on the various types of mineralization encountered to date.

In the South Voisey’s Bay area of Labrador, Teck and partner Donner Minerals (DRZ-V) completed 12,000 metres of drilling in 44 holes exploring for nickel. The 1997 program ended with a 15.7-metre intersection of massive sulphides in hole 96 averaging 1.13% nickel, 0.78% copper and 0.2% cobalt, starting at a depth of 184.3 metres. The hole was drilled on ground held equally by Donner and Northern Abitibi Mining (NAI-A). Teck can earn half of Donner’s interest in that property, as well as a number of Donner’s other joint-ventured properties in the area.

Teck is planning another drilling program at South Voisey’s Bay this year, for which its share of the cost is estimated at $5 million. William Meyer, vice-president of exploration, anticipates the program will begin in mid-May and will focus initially on the Northern Abitibi joint venture and the nearby 100%-held Donner ground. Targets to the south, on ground held by Cypress Minerals (CYP-V) and Major General Resources (MGJ-V), will also be followed up.

At year-end, Teck had a working capital of $324 million, including a cash position of $265 million. Long-term debt, excluding $185 million of convertible debentures, totalled $230 million, or 10% of total capitalization. Marketable investments and long-term receivables, excluding the company’s holdings in Cominco (CLT-T) and Inco, were worth an estimated $300 million. Teck’s 34% share of Cominco had a market value of $630 million.

Keevil said the company’s strong balance sheet “puts us in a good position to fund our own new projects, as well as to pursue new joint-venture development opportunities as they come up.

“We’re seeing more things come in the door every week now than even three months ago. I think there is a good chance of some fairly good opportunities to farm-in on projects, not to buy them.”