Teck Cominco looks at bigger Australian footprint (August 20, 2006)

Kalgoorlie, Western Australia — There were a lot of people who thought Teck Cominco (TCK.B-T, TCK-N) chief executive Donald Lindsay should either be in New York or Toronto on Aug. 7. Instead, he was happy to be at the Diggers & Dealers Forum — Australia’s premier mining show.

For all of his previous seven visits to the forum, he had been a senior executive with broker CIBC World Markets, a key sponsor of Diggers & Dealers. This time, however, Lindsay was the centre of attention as his visit happened to coincide with news that Inco (N-T, N-N) was warming up to a possible marriage with Teck Cominco.

Teck has launched a hostile cash-and-share bid for Inco, which has already agreed to merge with Phelps Dodge (PD-N). Lindsay was having dinner in Kalgoorlie, soon after he arrived from Canada, when he heard the news that Inco rejected his company’s offer but was willing to negotiate a better one.

He was swamped by the big Diggers media contingent, but was coy on what Teck would do after its Aug. 16 deadline for the Inco bid.

Lindsay said there was no plan to raise Teck’s bid, as his board felt it was fair, particularly taking into consideration the strong position of Teck Cominco and its greater yield. Teck Cominco has offered $82.50 in a cash-and-share bid for Inco stock. At the time of his presentation, Inco’s share price was around $86.50-$87.00 — a price Lindsay felt was excessive and due to speculation.

Lindsay said the United Steelworkers union, which represents Inco workers, prefers Teck’s bid to Phelps Dodge’s, as do several major Inco shareholders. A roadshow involving 200 institutional groups in North America also saw solid support for Teck’s offer, he said.

Should Teck’s Inco deal not go through, the company may look a little closer at Australian acquisitions — adding to Teck Cominco’s growing footprint in Australia.

Teck Cominco currently holds a 4.9% interest in Inco, some of that equity going back to early trading deals on Voisey’s Bay.

Lindsay said Teck’s listing on the New York Stock Exchange in late June improved support for the bid by allowing American investors more flexibility in trading.

Synergies that would be produced by a Teck Cominco-Inco marriage include the use of Teck’s CESL hydromet process, which had been used to test Inco’s Voisey’s Bay ore, and has been chosen by Companhia Vale do Rio Doce (CVRD) (RIO-N) as the best process for its Salobo copper-gold project in the Brazilian Amazon.

A Voisey’s Bay relationship would mean that nickel and copper metal could be produced in Newfoundland and Labrador, producing savings on metal processing and making sense logistically, while also resolving provincial demands for value to be added locally.

Teck Cominco’s existing interests in Australia include redevelopment of the Mississippi Valley lead-zinc-silver deposits in the Lennard Shelf deposits in Western Australia’s (WA) Kimberleys that were acquired in the fire sale of Western Metals.

Teck Cominco and equal partner, Falconbridge (FAL-N, FAL-T), have spent two years exploring the Lennard Shelf, but have not been successful at adding much to reserves. The mine and concentrator, mothballed in 2003, are set to reopen next year, with 1 million tonnes per year of ore being processed — well short of the plant’s 3-million-tonne-per-year capacity. Lennard Shelf should be shipping 70,000 to 80,000 tonnes of zinc in concentrates per year by early 2007.

The project is estimated to cost $A23 million ($19.8 million) plus $A5 million ($4.3 million) in preproduction costs, and while Lindsay acknowledged that development cost hikes are common these days, he said his team had not informed him of any cost escalation.

The company has set aside A$5.07 million ($4.37 million) for exploration drilling at Lennard Shelf during the current dry season — including holes at Pillara Springs and surrounding areas and in the Emanuel Range.

Teck has had more positive results on its Carrapeteena copper-gold project in the far north of South Australia, in partnership with RMG Services, owned by South Australian entrepreneur Rudy Gomez. Gomez raised eyebrows in the exploration community around Australia two years ago with two deep diamond holes at Carrapeteena, supported by the South Australian government. One of the holes hit a wide copper-gold zone of similar importance to discovery holes at Olympic Dam and Prominent Hill in the same region.

Gomez was swamped with offers but Teck Cominco won a deal after its Australian executives camped on his doorstep and committed to a major drilling program.

Assays from the current drilling are still coming in, but Lindsay said results over about 800 metres of strike showed a system with up to 3% copper and 3 grams gold per tonne over a width of up to 400 metres. The system appears open to the north and south.

Outside of Lennard Shelf and Carrapateena, Teck Cominco is conducting grassroots exploration for gold in Western Australia (WA) and was a strategic shareholder in four Australian juniors — Avoca Resources (AVO-A), exploring for gold in WA; Copper Strike (CSE-A), exploring for copper in Queensland; Energy Metals (EME-A) looking for uranium in central Australia; and Jindalee Resources (JRL-A), exploring for nickel and gold in WA.

Teck Cominco also has partnerships with BHP Billiton (BHP-N) looking for zinc in the Northern Territory and with Sumitomo, exploring for copper in Queensland.

Lindsay said a strength of Teck Cominco was its diversity of metals, and that future deals may well include iron ore and diamonds. Teck Cominco would be interested in emerging iron ore projects that were not dependent on the big three — BHP Billiton, Rio Tinto (RTP-N) or CVRD — in Western Australia.

With $3.6 billion in cash and equity gold production of 450,000 oz. in 2007, Lindsay said that Teck Cominco would rank among the mid-tier North American gold producers if ranked as a standalone.

— The author is a Perth, Australia-based freelance writer specializing in mining issues.