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October 27, 2005: Company's a gold mine -- and then some

B.C.

Company's a gold mine -- and then some

Zinc, copper, lead, gold, coal, molybdenum: money keeps pouring in to Teck Cominco's many divisions, and now it's in Alberta's oil sands

 

Scott Simpson

Vancouver Sun

Wednesday, October 26, 2005

 

A focus on long-term growth and long-life assets has been central to Teck Cominco's powerful financial performance, president and chief executive Don Lindsay says.

Soaring metal and mineral markets are bringing a steady flow of record profits to the venerable Vancouver mining company, which appears twice on this year's Top 100.

It's ranked No. 2 among B.C.'s strongest companies, and No. 8 for fastest growth -- and the money just keeps pouring in.

So much money in fact, that spending it has become one of the company's priorities. Teck made $38 million in 2002, $104 million in 2003, $617 million in 2004, and through two quarters of 2005 it has reported net income of $430 million.

Teck shares have risen from $8.97 in August 2000 to a recent trading range in excess of $50 -- with the company gaining recent momentum from an unprecedented venture into Alberta's oil sands.

For the purposes of the Top 100 list, the company recorded a market capitalization of $8.079 billion, and a 10.2-per-cent return on assets. From 2001-2004, revenue grew 44 per cent, rising from $2.379 billion in 2001 to $3.428 billion in 2004.

Lindsay, a former mining-sector analyst, succeeded David Thompson as president and CEO and credits his predecessor for the company's performance.

"When I accepted the job in November 2004, I had thought that the company would be net debt-free by April 2005. In fact it was net debt-free the next month," Lindsay said.

By mid-2005 Teck was sitting on a cash balance of $1.3 billion against long-term debt of $632 million -- a situation that Lindsay did not believe to be in the best interest of shareholders.

"To have a company operate with a large cash balance and no net debt -- that's very inefficient for the shareholders because you should have a normalized balance sheet with some proportion of debt to capital," Lindsay said. "Right now we don't have that. We have a highly inefficient balance sheet because we have cash building up -- and until our announcement on the Fort Hills [oil sands] project we had no particular place to reinvest that cash."

Teck is partnering with Petro-Canada and UTS Energy Corp. on an oil sands project in northeast Alberta, and doing what it does best -- running an open pit mining operation on a minimum 40-year asset that's as large or larger than most of its conventional mining operations.

The Fort Hills deal followed months of speculation in the financial markets about how Teck would spend the money it's making on sales of copper, zinc, molybdenum, coal, lead, gold and indium in a ravenous global commodity market.

Teck is committing $875 million to the project, over time, and gets a 15-per-cent share.

Teck's already in the energy business, more or less, through its Elk Valley coal partnership, but the Fort Hills venture is a dramatic shift for a company focused on conventional mining operations in North and South America.

Lindsay said Teck's cash-driven expansion plans were "one of the central questions that analysts would have about the company."

"Now we have partially answered that question, and I say partially because while it's a significant deal it still won't use up the total of that financial capacity."

Lindsay says it conforms to Teck's strategy of using diversified resources to smooth out the impact that volatile commodity markets have on the company's bottom line.

Part of that strategy is a recent announcement of an extension of operations at Highland Valley, Canada's largest open pit copper mine.

It will cost $40 million to extend mine life to 2013 -- and allows 900 union and non-union workers a greater measure of job security.

Simultaneous with that announcement in mid-September, Teck made a $1-billion US bond issue -- covering all costs at Fort Hills with money left over for other endeavours.

"Our strategy is designed to ensure that we don't fall back into the depths of the cycle," Lindsay said. "The way we achieve that is through diversification.

"We've announced to the world that we want to be the premier diversified metals and mining company. It sounds like an all-inclusive descriptive phrase but there is method in the madness there if you can build a collection of high-quality revenue streams and each makes the other stronger, and they tend not to be all in phase.

"For example if you look at our results for 2004, even though we are known as No. 1 in zinc and No. 2 in metallurgical coal, the bulk of our financial results came from copper and molybdenum.

"If you look at our results for 2005, it will likely be known as a year for copper and coal with molybdenum still very strong and indium, one of our specialty metals, starting to make an interesting contribution.

"If you go forward to 2006 I suspect it will be a coal and zinc year because zinc is starting to perform well. The world tends to think the copper price is going to fall off. I have no idea what moly will do. It could still be strong.

"The point is that we could have three solid years in a row but the contribution will come from different sources.

"What that does is take out the bottoms of the cycle and that diversification, and reducing that volatility, does three things for you.

"First the banks like it because those who lend you fairly low-cost capital on an immediate basis see that stability and are more comfortable. Second, the [bond] ratings agencies like it so access to the bond market is much better. The third thing it does is that the equity markets attribute a higher value because if you have lower volatility you get a higher P/E multiple or a higher multiple of cash flow."

The oil sands, Lindsay says, conform to those objectives.

"We already had 30-plus years in zinc reserves, 30-plus years in coal, and now we will have 40-plus years in oil sands."

- - -

STRONGEST RANK: 2

Teck Cominco

CEO: Don Lindsay

Based: Vancouver

Employees 2005: 6,927

+13% (% change 2002-2005)

Market capital: $8.079 billion

Invested capital $10.917 billion

Return on assets: 10.2%

Fastest rank: 8th

http://www.canada.com/vancouver/vancouvers...

Topic(s): mining news

Posted By ECOBC

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