Teck to raise gold-mining profile

Although Teck (TEK-T) has been a gold miner for 85 years, its diversification into copper, zinc, niobium and coal, has prompted recent concerns with analysts that the company is not realizing the full value of its gold assets.

“The visibility is not as good as it should be,” agreed President Norman Keevil during a conference call to analysts. He said Teck is taking steps to unlock that value. “We are looking at putting in a CEO of the Teck gold unit as a prelude to probably taking the thing public in some form in a couple of years.” But, he cautioned, “it’s not going to happen over night.”

Keevil later reiterated these comments to a group of journalists following the company’s annual meeting in Vancouver.

With both the high-grade Pogo deposit in Alaska and the Carosue Dam project in Western Australia being advanced to feasibility, Teck would appear to have the greatest potential for internal growth of any gold mining company.

The company owns a 50% interest in the David Bell and Williams mines in the Hemlo gold camp in northern Ontario, and a 100% interest in the Tarmoola gold mine in Western Australia through its 73.2%-owned Australian subsidiary, PacMin Mining. In 1999, Teck is forecast to produce 500,000 oz. gold to its account.

The gold unit turned in its best results yet during the first quarter, generating an operating profit, before depreciation, of $20.9 million, or 48% of the company’s total operating profit of $43.4 million, compared with $10.6 million a year ago, or 24%, of $44.2 million.

Gold production was up substantially in the recent 3-month period: 126,000 oz., compared with 93,000 oz. in the first quarter of 1998. The Tarmoola mine produced a record 49,000 oz. at a cash cost of US$191 per oz., compared with 25,000 oz. a year ago, while the two Hemlo mines contributed 73,000 oz. at US$213 per oz., up 7,000 oz. from the previous first quarter. Teck is spending $2 million to expand the Williams mill circuit so that it will be able to handle ore from the nearby David Bell mine. The mill at David Bell is slated to close in the second quarter, and the changeover is expected to reduce annual operating costs by $3-4 million.

A 2-stage crushing plant was commissioned at Tarmoola during the quarter, increasing annual mill throughput to 3.2 million from 2.7 million tonnes. This represents an expansion of 15-20%. Gold production is expected to rise to 200,000 oz. per year, compared with an earlier forecast of 180,000 oz.

A new zone of higher-grade gold mineralization was discovered last year along the eastern flank of the Tarmoola pit, within 200 metres of surface. Recent drilling has defined the zone over a strike length of 1.1 km. Recent results include: 17 metres of 11.06 grams gold per tonne (including 7 metres of 24.51 grams); 4 metres of 53.9 grams; 25 metres of 4.4 grams; and 8 metres of 9.65 grams.

The new zone has the potential to expand the Tarmoola resource significantly and can be redesigned into the current pit. An updated reserve and pit design are expected to be completed by August. Tarmoola’s year-end reserves stood at 18.9 million tonnes grading 2 grams, equivalent to 1.2 million contained ounces.

A new resource estimate for PacMin’s Carosue Dam gold project, 60 km from Kalgoorlie-Boulder, is expected by the end of May. The project contains a geological resource of 1.2 million oz. contained in 13.3 million tonnes grading 2.8 grams. Drill crews are attempting to get a better handle on the resource, having, to date, completed more than 20,000 metres of reverse-circulation and 1,000 metres of core drilling.

John Morganti, vice-president responsible for the gold group and evaluations, said the resource was “severely underestimated by the previous owners of the property” and that “we’re looking for a significant upgrade.”

Morganti added that drilling has increased the potential of Carosue Dam at depth and along strike. The coarse gold tends to be upgraded by infill drilling, and there is supergene gold in the laterites overlying the bedrock in parts of the deposit.

If the results hold up, Teck will conduct a feasibility study in the second half of the year, leading to the start of construction early next year. A scoping study shows Carosue Dam has the potential to produce 130,000-150,000 oz. per year at a capital cost in the order of A$40 million.

At the Pogo gold project in Alaska, Teck received the necessary permits to begin an underground exploration program. A 1,600-metre-long adit will be driven under Pogo Ridge to intersect the main L1 zone, the objectives being to obtain geotechnical data, confirm the continuity of the quartz body, and obtain a bulk sample for metallurgical testing. A 7,600-metre surface drilling program is to start towards the end of May.

The project hosts a resource conservatively estimated at 9.1 million tonnes grading 17.8 grams, equivalent to 5.2 million oz. A prefeasibility study will be conducted in the fall, and a final feasibility is scheduled for the end of 2000. Teck is earning a 40% interest in the Pogo project from Japan’s Sumitomo Metal Mining.

Teck realized a gold price, including hedging gains, of US$325 per oz. during the quarter, compared with US$327 per oz. a year ago. The company has hedged 177,000 oz. of Canadian gold production over the next four years at US$385 per oz., plus 1.2 million oz. of Australian production over nine years at A$552 per oz. A small position of copper has been sold forward, totalling 43 million lbs. at US81 cents per lb.

Teck reported first-quarter net earnings of $1.8 million (or 2 cents per share) on sales of $163.6 million, compared with $1.1 million (1 cents per share) on $164.1 million in the corresponding period of 1998. Teck’s stake in Cominco (CLT-T) accounted for $1 million in earnings, versus a loss of $1.4 million a year ago. Cash flow from operations slipped to $24 million from $28 million between the two periods.

Cash profits from the base metal and niobium unit amounted to $12.9 million, or 30% of the total operating profit, down from $16.7 million in last year’s first quarter. Though production was up for zinc, copper and niobium, lower copper prices were responsible for the reduction in operating profits.

With lower sales volumes and lower prices, cash operating profits for the coal unit fell to $9.6 million from $16.9 million between the two periods, representing 22% of the total profit. Production rates from the Elkview and the 61%-owned Bullmoose mines in British Columbia were reduced as a result of high port inventory levels, which, in turn, were caused by slower shipments to Japanese steel mills. Coal prices also fell 5%, compared with last year’s quarter. The slowdown resulted in 68 layoffs at Bullmoose, shrinking the workforce there to 246.

A new 5-year rail agreement has been negotiated for the Bullmoose mine, whereas rail rates for Elkview are still under discussion. Teck expects both mines to remain profitable for the balance of the year.

Teck has closed a $150-million exchangeable debenture issue, enabling it to acquire an additional 1.5 million shares of Cominco at a cost of $34 million, thereby increasing its holdings to 40.4%. Also, the company has increased its cash position (without incurring any new bank debt or issuing any equity) to $242 million, from $196 million at the start of the year, after investing $40 million in construction at the Antamina copper-zinc project in Peru during the quarter.

Currently, Antamina represents Teck’s biggest investment. Minable reserves stand at 494 million tonnes grading 1.3% copper, 1% zinc and 0.03% molybdenum, plus 12 grams silver per tonne, at a life-of-mine stripping ratio of 2.4-to-1. Capital costs are estimated at US$2.26 billion. Michael Lipkewich, senior vice-president of mining, said site development and engineering are well under way but that adverse weather over the past three months has caused some delays in road construction.

Teck owns a 25% interest in the project, with the balance divided equally between Rio Algom (ROM-T) and No
randa (NOR-T). An agreement by the partners to sell a 10% interest in the project to Mitsubishi Corp. for US$54 million is subject to certain conditions, including the settlement of definitive documentation and arranging US$1.26 billion in project financing. Commitment letters have been signed with a group of commercial banks for half this amount.

In connection with this sale, Mitsubishi Materials and other Japanese smelters are expected to buy, on an annual basis, 200,000 dry tonnes of copper concentrates and 80,000 tonnes of zinc concentrates from the mine. The Export-Import Bank of Japan has been requested to take down a significant portion in the project-financing syndicate.

John Taylor, senior vice-president finance and chief financial officer, said “the financing seems to be proceeding well, with the anticipated closing still scheduled for mid-year.”

Teck is responsible for funding its own share of the remaining US$1-billion equity component of the project’s capital cost.