Teck tallies profitable quarter

Vancouver Despite feeling the impact of a rising Canadian dollar, a tax gain helped propel the world’s largest zinc producer to a higher profit in the second quarter of 2003.

Teck Cominco (TEK-T) earned $12 million (or 6 per share) on revenue of $502 million in the 3-month period, compared with a $8 million (4-per-share) profit on revenue of $521 million in the second quarter of 2002. Driving the earnings rise was $5 million tax gain from changes to the Canadian tax legislation affecting mining companies giving rise to a reduction in future income tax liability, while the revenue short fall came as a result of a falling US dollar. The Canadian dollar rose against the U.S. dollar during the second quarter, with an average spot rate of 1.4 compared with 1.55 in the same quarter last year. The major hedges about half its currency exposure, resulting in a realized rate of 1.47 for the quarter.

“The most signifcant change in the latest quarter was the appreciation of the Canadian dollar,” says CEO David Thompson. “The impact on earnings is $8 million after tax.”

The rising Canadian currency also impacted operating profit, which hit $40 million, down from $49 million a year ago.

Despite being highly leveraged to the zinc price, which averaged US35 per lb. during the first quarter, the major benefitted from a higher copper and gold price. Between the second quarter of 2002 and that of 2003, copper prices jumped to US76 from US73 per lb., gold prices soared to US$347 from US$318 per oz., while coal prices remained flat at US$42 per tonne. However, after translating the metal prices in Canadian dollars, the picture is less rosy.”After hedging and in Canadian dollars, zinc prices dropped 9%, copper was 1% lower, coal was down 5%, gold rose 3% and lead remained flat,” states Thompson.

Despite tepid commodity prices, cash flow from operations (before changes to non-cash working capital items) to $51 million, compared with $46 million in the corresponding period last year.

Demand for zinc in Europe was flat in the quarter, while in the United States demand was down from a year ago.

“But China is still extremely strong and this is having an impact on the surrounding countries,” adds Thompson. “Countries like Japan are selling huge quantities of galvanized product into China, so their demand for zinc is quite good despite a flat domestic market.”

According to Thompson, Chinese zinc exports are falling and that in the first six months of this year net exports (exports less imports) were, on an annualized basis, 200,000 tonnes lower than this time last year.

Going forward, Teck Cominco sees some signs of hope for rise in zinc prices.

“We see the industry straining itself out from the supply side and hopefully the demand side will pick up next year,” adds Thompson.

During the second quarter, Teck Cominco’s smelter and refinery operations posted an operating gain of $9 million, down from $10 million in the same period of 2002.

The Trail smelter tallied an operating profit of $6 million, compared with $9 million in the second quarter of 2002, while the 85%-owned Cajamarquilla zinc refinery, near Lima, Peru posted a $3-million operating profit, up from $1 million a year earlier.

Trail produced 72,500 tonnes zinc, 25,200 tonnes lead, 4.89 million oz. silver and 35,000 oz. gold during the quarter, compared with year-earlier output of 71,500 tonnes, 21,400 tonnes, 4.1 million oz. and 39,000 oz. Also, Trail sold 257 gigawatt-hours of surplus power, a 56% jump over last year. The average realized power price was US$31 per MW-hour in the second quarter, compared with US$15 per hour a year earlier. Power contributed $8 million in profit during the quarter.

At Cajamarquilla, production continued above its design capacity in the first quarter, turning out 31,200 tonnes of refined zinc, compared with the design rate of 30,000 tonnes. In April, the company boosted its stake in the operation to 85% from 82% after paying US$20 million to reduce the bank debt.

In Alaska, the Red Dog mine cranked out 142,100 tonnes zinc-in-concentrate, compared with 136,200 tonnes in the second quarter of 2002. Grades improved modestly and recovery rates remained little-changed at 21.5% and 84.2%, respectively. Low zinc prices pushed the operation to a loss of $3 million, from a $4-million shortfall in last year’s second quarter.

Teck Cominco’s 22.5% stake in the Antamina mine in Peru earned the company $4 million during the recent quarter, which is $1 million lower than a year earlier, reflecting lower recovery rates and output.Antamina produced 65,000 tonnes copper-in-concentrate and 99,500 tonnes zinc-in-concentrate during the quarter. Mill head grades were 1.09% copper and 1.97% zinc, with recoveries of 83.77% copper and 81.65% zinc.

Back in British Columbia, the 63.9%-owned Highland Valley copper mine produced 42,600 tonnes copper-in-concentrate, down from 47,400 in the second quarter of 2002. The average mill head grade between the two periods fell to 0.39% copper from 0.43%, while copper recovery slipped to 87.21% from 89.91%. The operating profit tallied $7 million, $2 million less than last year, reflecting lower sales volume.

At the Hemlo camp in Ontario, Teck Cominco produced 31,000 oz. gold at the David Bell mine. The mill head grade was 10.64 grams gold per tonne and the recovery was 94.5%, contributing to an operating profit of $2 million.

The nearby Williams mine produced 93,000 oz. gold from ore grading 3.98 grams gold per tonne, with mill recoveries of 94.5%. The operating profit there was $3 million, a marked improvement from the $2 profit tallied in last year’s second quarter. Driving the turnaround were slightly higher grades and recoveries, as well as a higher gold price.

“Costs for the combined operation rose from US$245 to US$255 (per oz) this year due to a 10% appreciation in the Canadian dollar,” says Thompson.

The Elk Valley coal partnership, in which Teck Cominco has a 35% direct stake, contributed $22 million in operating profit for the major during the quarter on production of 5.8 million tonnes. The partnership was formed in February, in a deal involving Fording, Westshore Terminals Income Fund (WTE.UN-T), Sherritt International (S-T) and the Ontario Teachers’ Pension Plan. Teck Cominco contributed $125 million and its metallurgical coal assets for a 35% interest in the partnership. The company’s interest in the partnership will increase by up to 5% should certain operational and marketing synergies be met by March 31, 2007. The miner also put down $150 million for a 9.1% interest in the Fording Canadian Coal Trust (FDG.UN-T), which owns the remaining 65% of the partnership. Accordingly, the company’s direct and indirect interest in the coal partnership is 41%.

At the end of the second quarter, Teck Cominco had a net debt (total debt less cash) of $924 million, or 28% of net debt plus equity, compared with $1.08 billion or 30% of net debt plus equity at the end of the first quarter (this figure excludes Inco exchangeable debentures).