Rio Algom polishes performance

Rising copper output and lower costs resulted in a strong first quarter for Rio Algom (ROM-T).

For the first three months of 2000, the Toronto-based company posted net earnings of $15 million (or 16 per share) on revenue of $570 million ($122 million from mining and $448 million from metals distribution). By comparison, earnings in the corresponding period of 1999 totalled $1 million (a loss of 9 per share) on revenue of $511 million ($100 million from mining and $411 million from metals distribution).

The improvement is attributed to a higher average realized copper price of US81 per lb., whereas, in the first quarter of 1999, the price was only US66.

As well, Rio Algom boosted its copper production by 10 million lbs., to 116 million lbs., while simultaneously reducing its average cash costs by 4, to US44 per lb.

The company’s copper operations include: the wholly owned Cerro Colorado mine in northern Chile; the 33.6%-owned Highland Valley Copper (HVC) mine in British Columbia, in which Cominco (CLT-T) has a 50% interest, Teck (TEK-T) 11.4%, and Highmont Mining 5%; and a 25% equity stake in the Alumbrera copper-gold mine in Argentina, in which two Australian companies, M.I.M. Holdings and North Ltd., have 50% and 25% interests, respectively.

Higher copper prices and an 11% increase in sales at Cerro Colorado more than offset lower sales at HVC, while earnings from Rio Algom’s interest in Alumbrera fell $1 million to nil as a result of lower grades, poor weather conditions and maintenance-related expenditures.

Regarding its remaining commodities, Rio Algom saw reduced first-quarter output across the board: 31,000 oz. gold (compared with 46,000 oz. in the first quarter of last year); 382,000 lbs. molybdenum (compared with 441,000 lbs.); 359,000 lbs. uranium (523,000 lbs.); and 79,000 tonnes of coal (129,000 tonnes).

Addressing shareholders at the annual meeting in Toronto, Rio Algom Chairman Gordon Gray acknowledged that recent returns in the mining industry have been disappointing to investors. “That is why we have a set a 15% return-on-equity target for the company, and we are very serious about achieving it.”

President Patrick James said the company’s objectives in 2000 include:

increasing annual copper production by 9% to 440 million lbs. with the help of a profitable HVC operation;

maintaining an average cash cost of US$46 per lb. copper;

advancing the engineering, procurement and construction process at the Antamina project in Peru;

completing a feasibility study of the Spence copper deposit in northern Chile; and

generating a minimum return on capital from the metals distribution business.

James noted that the Antamina project — co-owned 33.75% by Rio Algom, 33.75% by Noranda (NOR-T), 22.5% by Teck (TEK-T) and 10% by Mitsubishi Corp. of Japan — is almost 30% built and that access roads are in use and permanent power is available. Also, foundations for the mills are completed, and the copper and zinc flotation cells are in place.

Commenting on speculation that Rio Algom is the target of a takeover, James said only that his “crystal ball is no clearer than anyone else’s.”

Adding grist to the rumour mill is Noranda‘s (NOR-T) announcement that it has acquired 3.6 million Rio Algom shares, or a 6% stake. The major says it has no plans to make a takeover bid for Rio Algom, only that it hopes its investment will “enhance its opportunities” to participate in development projects with Rio Algom.

Currently, Noranda and Rio Algom have two major connections: they are partners at the Antamina project, and the Alumbrera mine has a long-term contract with Noranda’s Horne smelter in Quebec. Also, Rio Algom’s Spence deposit in Chile is near Noranda’s Altonorte copper smelter.

James said the future price of copper is critical to Rio Algom’s success and that last year’s improvement in prices was just the “first leg of a broadly based recovery.”

Rio Algom ended the quarter with $51 million in cash and equivalents and $382 million in long-term debt.